[Senate Hearing 116-90]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 116-90                                                      
                                                         
 
                       LEGISLATIVE PROPOSALS ON CAPITAL 
                      FORMATION AND CORPORATE GOVERNANCE                                                     
 ======================================================================

                                HEARING

                               BEFORE THE

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

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING LEGISLATIVE PROPOSALS ON CAPITAL FORMATION AND CORPORATE 
                               GOVERNANCE

                               __________

                           FEBRUARY 28, 2019

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                Available at: https: //www.govinfo.gov /
 
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
38-477 PDF                  WASHINGTON : 2020                     
          
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director

                      Joe Carapiet, Chief Counsel

                  Jen Deci, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                 Elisha Tuku, Democratic Chief Counsel

                       Dawn Ratliff, Chief Clerk

                   Cameron Ricker, Deputy Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                      THURSDAY, FEBRUARY 28, 2019

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
        Prepared statement.......................................    31

                               WITNESSES

Catherine Mott, CEO, BlueTree Capital............................     4
    Prepared statement...........................................    33
    Responses to written questions of:
        Chairman Crapo...........................................   109
        Senator Sinema...........................................   109
Thomas Quaadman, Executive Vice President, Center for Capital 
  Markets Competitiveness, U.S. Chamber of Commerce..............     6
    Prepared statement...........................................    36
    Responses to written questions of:
        Chairman Crapo...........................................   111
        Senator Brown............................................   113
Heather Slavkin Corzo, Director of Capital Markets Policy, AFL-
  CIO, and Senior Fellow, Americans for Financial Reform.........     7
    Prepared statement...........................................    66
    Responses to written questions of:
        Senator Brown............................................   114

              Additional Material Supplied for the Record

Letters and statements to the Committee submitted by Chairman 
  Crapo and Senator Brown........................................   115

                                 (iii)

 
  LEGISLATIVE PROPOSALS ON CAPITAL FORMATION AND CORPORATE GOVERNANCE

                              ----------                              


                      THURSDAY, FEBRUARY 28, 2019

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 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. This hearing will come to order.
    Today's hearing will focus on a number of legislative 
proposals that encourage capital formation and improve 
corporate governance.
    It is my intent to collaborate with Senator Brown and other 
Senators on this Committee to identify and advance legislative 
proposals that achieve these goals.
    While there are bills for consideration today that I have 
previously expressed concerns with, as well as a number that 
Senator Brown has stated concerns with, I believe this is the 
fairest way to consider all of these legislative proposals that 
remain outstanding from last Congress.
    Last year, the Committee held three hearings on legislative 
proposals related to capital formation, corporate governance, 
and the proxy process.
    We are considering all of those bills again today, but in 
the context of identifying areas where we can find bipartisan 
consensus in the new Congress.
    A number of the bills previously considered had strong 
bipartisan support.
    For example, the HALOS Act, which allows more startups to 
access the capital and knowledge of angel investor groups that 
they need to grow, had seven bipartisan cosponsors, including 
Senators Schatz, Toomey, and Tillis.
    The Fair Investment Opportunities for Professional Experts 
Act, which expands the definition of an accredited investor for 
the purposes of participating in private offerings, had six 
bipartisan cosponsors, including Senators Tillis, Toomey, and 
Cortez Masto.
    Six Members of this Committee--three Republican and three 
Democrats--worked together to introduce the Corporate 
Governance Fairness Act, an important step in this Committee's 
discussion on the proxy process.
    Senators Toomey, Menendez, and Rounds introduced the 
Consumer Financial Choice and Capital Markets Protection Act, a 
bill that provides more financing options for State and local 
governments seeking to raise money.
    It is my hope that we can build off this type of previous 
momentum as we consider legislative action in this Congress.
    We will also consider a number of provisions included in 
last Congress' JOBS 3.0 bill, which passed the House of 
Representatives with over 400 votes. These nonprudential 
provisions largely passed out of the House Financial Services 
Committee and the House by voice vote, indicating their strong 
bipartisan support.
    Today's hearing provides the Committee with the opportunity 
to publicly discuss many of these JOBS Act provisions for the 
first time in the Senate.
    For example, the Family Office Technical Corrections Act 
passed the House with a voice vote. This bill provides that 
family offices and their family clients meeting certain 
thresholds can be considered accredited investors that qualify 
for various exemptions under the securities rules.
    Senators Rounds and Moran introduced a bipartisan Senate 
companion to the Options Markets Stability Act, which amends 
capital rules to more accurately reflect exposure for centrally 
cleared exchange-listed derivatives.
    These bills and their underlying aims of encouraging 
capital formation and improving corporate governance require 
collaboration between Congress and the SEC.
    I commend the SEC and Chairman Clayton for their ongoing 
work on a number of the issues we will discuss here today.
    For example, last fall, the SEC conducted a staff 
roundtable on the proxy process and rules, and I encourage them 
to take action with the information they gathered.
    It is time to re-examine the standards of inclusion of 
proposals pursuing environmental, social, or political agendas 
and ensure the fiduciary focus throughout the proxy process 
reflects the economic interest of retail investors.
    Last week, the SEC announced that it is considering 
expanding its ``test-the-waters'' process beyond emerging 
growth companies to all companies as they determine whether to 
seek an IPO.
    Senators Tillis and Van Hollen introduced the Encouraging 
Public Offerings Act last Congress which requires the SEC to do 
just that.
    I share Chairman Clayton's goal of making it easier and 
more appealing for companies to go public and will continue to 
work with the SEC to advance this effort.
    I look forward to hearing from our witnesses on these 
legislative proposals and working with Members of the Committee 
to identify areas where we can get bipartisan support.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, and welcome to all 
three of our witnesses. Thank you for joining us.
    We are discussing legislation that a number of Members, as 
Chairman Crapo said, worked on in the last Congress.
    We need to look at these bills--and any bills that come 
before this Committee--with one question in mind: Are they good 
for workers? Do they contribute to the dignity of work? Or are 
they just good for Wall Street?
    Last year when we considered many of these bills, I asked 
whether any of the previous efforts to roll back securities 
laws had boosted investment in workers or created more jobs, if 
our enforcement efforts were keeping up with fraud, and if 
shareholders' ability to hold management accountable was under 
attack. I still have those same questions.
    When I look at the list of today's bills, I see a lot of 
rollbacks and very little protection for ordinary investors. 
When I hear some people say we need these bills to facilitate 
capital formation, I am not really sure what problems they are 
attempting to solve.
    The capital markets worked pretty well last year: 2018 was 
the best year for IPOs since 2014; biotech IPOs reached an all-
time record; venture capital investment also hit a record.
    Market watchers expect 2019 to be even better. Household 
names like Uber, Lyft, Pinterest, and AirBnB are planning to go 
public.
    Our time would be better spent making sure workers at 
companies like Uber are getting the wages and the benefits they 
have earned and are treated like real employees rather than 
letting companies cut corners on their accounting controls.
    And if we want to support American businesses, these 
companies and the market overall would benefit more from 
avoiding another Trump Government shutdown that closes the SEC 
for a month than from passing all of these bills.
    There are other bills that seek to make changes that 
agencies are already working on. In one case, regulators 
addressed the issue over 5 years ago.
    A couple of the bills take controversial positions that 
would undermine critical post-crisis reforms that keep our 
financial system stable, and that would restrict the United 
States' participation in international insurance regulation 
discussions.
    It is always the same story. Congress and the 
Administration bend over backward to figure out how they can 
make life just a little bit easier for Wall Street.
    Instead, this Committee should look at how we can better 
protect ordinary American investors who save for retirement. We 
should be working on ideas to end Wall Street's shortsighted 
obsession with short-term stock prices so that when companies 
grow, their workers' wages actually grow along with them. A new 
phenomenon, perhaps.
    Earlier this month, 11 former SEC economists wrote to the 
agency to say its proposed best interest rule, they said, had 
``weak and incomplete'' economic analysis--that can have a real 
impact on American families. That warning should be a red flag 
for this Committee, and we should call on the SEC to explain.
    Meanwhile, corporations announce more billion dollar stock 
buybacks and cost-cutting that always have the same result: 
more money for corporate executives, less money in workers' 
paychecks--if they are lucky enough to keep their jobs at all.
    Companies would rather engage in financial engineering than 
they would investing in workers who make them successful. 
Earlier this week, in this room in this Committee, Jay Powell, 
the Chair of the Federal Reserve, told the Committee that 
increasing investment in worker skills and training are vital 
to our economy.
    But what are corporations doing instead? Spending money on 
buying their own stock back to line executives' pockets. The 
Committee stands by and either does nothing, or some days we 
make their work easier.
    Some of the proposals we will discuss today, in fact, do 
improve transparency. Senator Reed's bill would promote more 
disclosure on cybersecurity. Senator Van Hollen's proposal 
would require the SEC to consider ways to prevent trading 
abuses by corporate insiders. These are improvements that help 
investors and promote fairness--what this should be about.
    I want to hear from our witnesses other areas where 
transparency is possible, where we can do more to protect 
consumers in an increasingly complex market, and hear what 
risks are lurking out there that could cause another crisis and 
cause more devastation for American families.
    If we can focus on bills that make improvements in these 
areas, workers will benefit, investors will help companies 
grow, the financial system will be more stable, and the economy 
will expand.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Brown.
    Today's witnesses are: Ms. Catherine Mott, CEO of BlueTree 
Capital and BlueTree Allied Angles; Mr. Thomas Quaadman, 
Executive Vice President of the U.S. Chamber's Center for 
Capital Markets Competitiveness; and Ms. Heather Slavkin Corzo, 
Director of Capital Markets Policy of AFL-CIO and Senior Fellow 
at Americans for Financial Reform.
    To our witnesses, your written testimony has been entered 
into the record, and we encourage you each to pay attention to 
the 5-minute clock so we will have plenty of time for our 
questions. And, again, I remind our Members on the Committee to 
pay attention to your 5-minute clock as you do your questions.
    With that, let us proceed and we will go in the order that 
I introduced you.

       STATEMENT OF CATHERINE MOTT, CEO, BlueTree CAPITAL

    Ms. Mott. Good morning. Chairman Crapo, Ranking Member 
Brown, and Members of the Committee, thank you for the 
invitation to testify before you today. I am Catherine Mott, 
Founder and CEO of BlueTree Capital and its affiliates BlueTree 
Allied Angels and the BlueTree Venture Fund, all based in 
Pittsburgh, Pennsylvania. I am past Chairman of the Angel 
Capital Association, the Professional Association of Active 
Accredited Investors Across North America.
    I appreciate the opportunity to comment on legislative 
proposals that would make it easier for entrepreneurs and 
emerging companies to find the capital they need to maintain 
their role as the engine of American economic growth. I applaud 
the Committee for addressing these issues so early in this 
Congress and for recognizing your critical role in increasing 
economic growth.
    Angel investors are accredited individuals who invest their 
own money in early stage companies, helping them achieve 
success. Angel investors support promising companies in every 
State of the Nation. Angels invest approximately $25 billion 
each year in more than 70,000 startups. Compared to venture 
capitalists, angels invest in 15 times more businesses, albeit 
smaller amounts across a greater number of companies.
    Money, however, is not all angels invest. Angels provide 
human capital. We invest our time, our expertise, mentorship, 
and access to our networks.
    The BlueTree entities have invested more than $50 million 
in startup companies that meet our disciplined criteria. 
BlueTree Allied Angels has 76 members, and we are currently 
investing in a safety artificial intelligence company and a new 
antibiotic company.
    The Angel Capital Association represents more than 14,000 
accredited angel investors like me and 260 angel groups, 
individual angels, online platforms such as AngelList, and 
family offices.
    BlueTree and the other members of the Angel Capital 
Association are glad to see the Committee return to two bills 
that would clarify investment procedures and expand 
opportunities for entrepreneurs and investors. These are the 
Helping Angels Lead Our Startups Act and the Fair Investment 
Opportunities for Professional Experts Act. Both are 
bipartisan, commonsense proposals, and would produce immediate 
benefits with no real risk to investors or the economy.
    The HALOS Act would clarify that ``demo days'' are exempted 
from the definition of ``general solicitation,'' eliminating 
market confusion about these events and providing entrepreneurs 
with better access to capital. While the JOBS Act created 
general solicitation to allow entrepreneurs to raise capital 
publicly for Reg D offerings--called ``506(c) offerings''--with 
requirements for entrepreneurs to take additional steps to 
verify that investors are accredited, the SEC did not modernize 
its own definition of ``general solicitation.'' As a result, 
that definition now effectively includes ``demo days,'' the 
events in which entrepreneurs pitch their products and 
companies to potential investors, local economic development 
officials, academics, and other members of the startup 
ecosystem.
    The problem for entrepreneurs is that most accredited 
investors are not interested in investing in generally 
solicited offerings because the SEC ``safe harbors'' for 
verification is a costly and onerous process. Consequently, 
entrepreneurs are caught up in the legal conundrum, 
inadvertently losing their opportunity to raise the capital 
necessary to become a viable growing entity. Sophisticated 
investors will not invest in 506(c) offerings.
    On another note, the Fair Investment Opportunities for 
Professional Experts Act would modernize the definition of 
``accredited investor,'' which was last addressed in the Dodd-
Frank Act. The bill would codify the current income and net 
worth thresholds for being considered an accredited investor, 
eliminating regulatory discretion and providing much-needed 
certainty to angel investors. The bill would also allow certain 
people with other demonstrated expertise or credentials to 
become accredited even if they do not meet the financial 
thresholds.
    These changes are commonsense ways to grow the pool of 
accredited investors without risk or disruption. This is 
especially important in Middle America--Pittsburgh, Ohio, Utah, 
other areas--where the cost of living is lower and where 
entrepreneurial activity is desperately needed for job creation 
in areas devastated by losses in manufacturing.
    Thank you again for taking up these legislative proposals.
    Chairman Crapo. Thank you, Ms. Mott.
    Mr. Quaadman.

 STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER 
 FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairman Crapo, Ranking Member 
Brown, Members of the Committee. Thank you for the opportunity 
to testify before you today, and we appreciate the continued 
bipartisan efforts of this Committee to address obstacles to 
entrepreneurship and growth.
    Business growth is a dynamic engine of American economic 
prosperity and success. Launching a new business does not 
guarantee an outcome, but it provides an owner, employees, and 
their community with the chance to fulfill the American dream. 
Laws, regulation, and oversight provide the certainty for 
investors to provide the capital for those firms or, in other 
words, the gas for that engine to operate.
    If businesses are successful and can grow into a public 
company, we all benefit. When a business goes public, it 
reaches its apex for job creation, revenue growth, and wealth 
distribution.
    Of the 2,700 companies that went public between 1996 and 
2010, they created 2.2 million jobs, and their revenue 
increased by $1 trillion. Regional IPOs, which were predominant 
in the 1980s and 1990s, those IPOs below $100 million, 
distributed wealth to all the different pockets of our country. 
Change is also dynamic for the companies who were in the 
Fortune 500 in 2014--only 12 percent were listed there 50 years 
earlier.
    But, unfortunately, that engine is sputtering. Business 
creation and destruction ratios inverted for the first time in 
the 2008 financial crisis, stayed there for a protracted period 
of time. While business creation has bumped back up, it is only 
barely outpacing business destruction.
    Fifty percent of the businesses created in the first part 
of this decade were concentrated in 20 counties in the United 
States, representing 17 percent of the population. Three-fifths 
of the counties in the United States actually saw more 
businesses go out of business than being created.
    We have talked very often before about the fact that we 
only have half the number of public companies today than we did 
in 1996. The regional IPO does not exist anymore and, in fact, 
the number of IPOs last year represented only half the historic 
rate that we did in the 1980s and 1990s.
    We need to have both strong private and public capital 
markets in order to have our economy be successful, and they 
need to have the policies to back them up. Proxy advisory firm 
reform is needed so that investors have decision-useful 
information grounded in economic return that will ultimately 
benefit the American saver.
    We appreciate the legislation introduced by Senators Reed, 
Perdue, Tillis, Jones, and Kennedy. We have some suggested 
changes with that, and we think we can work to make that bill 
more effective.
    The JOBS Act was important in arresting the decline of 
public companies, but it has not produced a resurgence. 
Legislation is needed to spark entrepreneurship. We need to be 
able to tackle the continued vexing issues of limited liquidity 
as well as a lack of public research. The lack of both of these 
issues being addressed harms investment in emerging growth 
companies.
    We also agree that cybersecurity is a very important issue, 
both for management and boards in public companies. We may 
differ on some of the means in achieving that goal, but we look 
forward to working with Senator Reed to find the common ground 
to do just that.
    Strong consumer protections are also needed. Unpaid FINRA 
arbitration cases, while they are small in number, should be 
addressed, and we think that SIPC is a better area to do that.
    We also have concerns about insider trading. Insider 
trading has no place in our capital markets. However, we are 
concerned with a very broad remit to regulatory agencies to 
address legal vagueness. We think that is actually a job for 
Congress to tackle.
    While competition was a good thing, we are losing our 
ability to address these policy issues. Chinese venture capital 
is now larger than American venture capital. The Hong Kong 
Stock Exchange last year had more IPO activity than individual 
U.S. exchanges. And, furthermore, the EU MiFID II rules have 
now set the standard for research globally. In other words, our 
international competitors are solving the issues of limited 
liquidity as well as a lack of research.
    In conclusion, let me just say that we need to address 
these issues in order for our economy to be able to provide for 
this and succeeding generations. The imperative to act is 
critical now more than ever as we are losing the luxury of time 
as well as a limiting of options to address these issues.
    Thank you, and I am happy to take any questions you have.
     Chairman Crapo. Thank you, Mr. Quaadman.
    Ms. Slavkin Corzo.

STATEMENT OF HEATHER SLAVKIN CORZO, DIRECTOR OF CAPITAL MARKETS 
  POLICY, AFL-CIO, AND SENIOR FELLOW, AMERICANS FOR FINANCIAL 
                             REFORM

    Ms. Slavkin Corzo. Chairman Crapo, Ranking Member Brown, 
and Members of the Committee, thank you for the opportunity to 
testify today. My name is Heather Slavkin Corzo, and I am the 
Director of Capital Markets Policy for the AFL-CIO and a Senior 
Fellow at Americans for Financial Reform.
    The AFL-CIO and AFR work on behalf of millions of people to 
promote policies that create a safe, sound, and stable economy 
that helps all Americans achieve economic stability.
    Today the Committee will consider dozens of bills. It would 
be impossible to discuss each one. Instead, I will say that, as 
a general principle, public policy should promote fair, 
transparent, and stable markets; facilitate regulatory 
enforcement; and encourage shareholder engagement. One set of 
bills being considered today moves away from that standard, a 
few are neutral, and a handful are positive steps.
    None of the pieces of legislation under consideration, 
however, represents the type of material change that is needed 
to create an economy that works for working people. This 
Committee can move policies to end financial activities that 
undermine the well-being of everyday Americans. Today I will 
discuss a handful of opportunities.
    Private equity. Working people are exposed to private 
equity as employees, investors, and participants in the 
American economy. PE-owned companies employ nearly 5 million 
Americans. When these companies fail, workers often lose their 
jobs, benefits, and retirement plans.
    In addition, U.S. pension funds collectively have more than 
$800 billion invested in private equity. Unfortunately, the 
opacity, illiquidity, and high fees associated with PE add to 
the risks of the investment and make it difficult to achieve 
returns that justify those risks. The minimum reporting and 
examination requirements instituted by Dodd-Frank revealed an 
industry where abusive practices toward investors were 
commonplace.
    Finally, in the past 5 years, the value of outstanding 
leverages loans has nearly doubled to $1.5 trillion. Regulators 
in the United States and around the world have begun raising 
alarms that the market could create systemic risk. The private 
equity model exists and is remarkably profitable due to a 
series of loopholes and carveouts in securities, bankruptcy, 
and tax law. There is no public interest reason to provide 
these benefits. In fact, I would argue that the public interest 
demands that policymakers eliminate regulatory and legal 
privileges that feed abusive LBOs and encouraged the Committee 
to consider this set of issues.
    Short-termism. Increasing public attention has focused on 
how financial markets actors pressure businesses to focus on 
short-term returns and financial engineering instead of long-
term competitiveness and contribution to the real economy. 
Short-termism also disincentivizes attention to long-term but 
potentially catastrophic implications of their activities such 
as climate change and economic inequality which are, in fact, 
key to long-term economic performance. Stock buybacks are a 
prime example. The 2017 Tax Cuts and Jobs Act hyper-charged the 
already worrisome practice of stock buybacks, and in 2018, 
companies spent more than $1 trillion buying back their own 
stock. Multiple policy changes have been put forward to limit 
buybacks, and I encourage the Committee to dedicate more 
attention to these issues.
    And, finally, too big to fail. The largest banks in the 
United States have gotten larger since the 2008 financial 
crisis. Now these banks have a combined $10.6 trillion in 
assets. Aspects of Dodd-Frank were aimed at limiting risks 
within these institutions and preventing the need for future 
bailouts. Unfortunately, it remains very difficult to envision 
how one or more of these institutions could fail without 
threatening U.S. and global economic stability. It does not 
have to be this way. Congress must pass legislation to reduce 
the size and complexity of our largest banks so that they could 
fail without threatening economic stability.
    In conclusion, I urge this Committee to advance policies 
that will end financial activities that undermine the well-
being of working Americans, and to ensure sound implementation 
of Congress' mandates, the Committee must fill the empty 
commission slots at the SEC and other regulatory agencies to 
bring credibility to the regulatory process. I encourage you 
all to turn your attention to these priorities.
    Thank you, and I look forward to questions.
    Senator Brown. [Presiding.] Thank you, Ms. Slavkin Corzo. 
Thank you to all three of you.
    Ms. Slavkin Corzo, I would like to start with you. The Wall 
Street Reform Act required private equity fund managers to 
register with the SEC. The agency found widespread conflicts of 
interest, excessive fees and other abuses. Companies and 
workers clearly have paid the price.
    The question is: What more can be done to increase 
transparency into private equity funds and the companies they 
own so that pension funds and other large investors and workers 
in communities can better understand how funds and companies 
are run and the risks that they pose?
    Ms. Slavkin Corzo. Thank you, Senator. I agree it is a 
travesty that there are private investment funds in this market 
that control trillions of dollars in assets and employ millions 
of workers, but there is no transparency into the activities 
that would allow the investors and the employees to understand 
the risks that they are exposed to as a result of this 
strategy. I am really eager for the opportunity to talk to you 
all in more detail about policies that could be promoted to 
address these issues.
    One thing that immediately comes to mind is currently 
private equity funds, as you indicated, are required to 
register with the Securities and Exchange Commission. There are 
two types of disclosure that they provide on Form PF and 
through the Form ADV. And the SEC has the opportunity to expand 
those disclosure obligations in ways that would provide more 
information to regulators and investors.
    Senator Brown. Thank you. And if you would provide to the 
Committee any other thoughts you have on supporting legislation 
out there, ideas that you have on increasing transparency, in 
writing to the Committee, if you could do that.
    Another question for you. You mentioned stock buyback 
announcements setting a record, exceeding $1 trillion. Bank of 
America says this year companies are on track for another 
record. Could you explain why companies choose buybacks instead 
of investing in workers or investing in business expansion?
    Ms. Slavkin Corzo. We have seen a move in our economy 
toward an excessive focus on short-term financial performance 
as opposed to long-term economic growth and growth of the 
company. This has happened in concert with a dramatic increase 
in the extent to which executive compensation is paid in the 
form of stock. So there is certainly a personal interest on 
behalf of the people who are making decisions to engage in 
stock buybacks in creating short-term boosts in stock prices.
    This is something that is a serious concern from the 
investor perspective and from the worker perspective. If we 
think about the typical investor, the typical retail investor 
is someone who is saving for their retirement. We are 
diversified, long-term investors who are not really invested in 
the performance of a single company. We are invested in the 
broader economy. And when we see individual companies engaging 
in practices that undermine their ability to perform and create 
products and services over the long term that will allow the 
business and the economy to grow, we are undermining the 
ability of investors to save for their retirement in a way that 
will be able to achieve the returns that we need.
    In addition to that, it has dramatic negative implications 
for workers. One example of this is Walmart. There was an 
analysis that if Walmart had dedicated the $10 million that it 
had dedicated last year to stock buybacks instead to increases 
in workers' wage, the typical Walmart worker would have made an 
additional $5.66 an hour. So this is a direct negative impact 
on the income of American workers.
    Senator Brown. Five dollars and sixty-six an hour is the 
equivalent of $10 billion in stock buybacks?
    Ms. Slavkin Corzo. Ten billion, yes, spread evenly across 
the company.
    Senator Brown. Thank you.
    Mr. Quaadman, do you think the Trump shutdown that closed 
the SEC for 5 weeks was a negative for IPO markets?
    Mr. Quaadman. Well, we were expecting a very active IPO 
market this year. Obviously, those 30 days did not allow for 
companies to get the regulatory certainty or questions answered 
that they needed to, so that does create a little bit of a blip 
in that IPO market, and I believe there were no IPOs in 
January.
    Senator Brown. So it sounds like a little more than a blip. 
I mean, it clearly--Government doing that during the Trump 
shutdown was bad for investor confidence and hurts enforcement 
efforts. It should not put savers at risk. I think it also 
speaks to the issue of how important it is to make the SEC and 
the CFTC self-funded so that the watchdogs are always on the 
job. Comments on that?
    Mr. Quaadman. We have concerns about self-funding. We do 
agree that there should not have been a shutdown, and we do 
believe that there should be increased funding for both of 
those agencies as well.
    Senator Brown. Well, one way to ensure that would be self-
funding.
    Senator Toomey.
    Senator Toomey. Thank you very much, Mr. Ranking Member. 
Welcome, witnesses.
    First, Mr. Quaadman, just a couple of thoughts on stock 
buybacks. Isn't it true that in the last year or so, we have 
seen an increase in stock buybacks, and we have also at the 
same time seen a very big increase in capital expenditures by 
business?
    Mr. Quaadman. Capital expenditures have gone up. We are 
seeing R&D spending last year being the highest that it had 
ever been. Additionally, companies also gave workers bonuses as 
well.
    Senator Toomey. Right. And isn't it also true that while 
stock buybacks have been occurring, we have seen an 
acceleration in wage growth and that that acceleration in wage 
growth has been more pronounced at the low end of the wage 
spectrum than any other part of the wage spectrum?
    Mr. Quaadman. That is correct. There are retailers, 
including Walmart, that increased hourly wages for their 
employees. And I would also just say, too, just in terms of 
stock buybacks, if you do not like stock buybacks, you do not 
like dividends. They are both providing return to their 
investors.
    Senator Toomey. Fundamentally, if a management team does 
not believe it has attractive investment opportunities, doesn't 
it have an obligation to return excess capital to the people 
who own that company, who then typically invest in another 
opportunity to grow the economy, to make more investments, to 
hire more workers?
    Mr. Quaadman. It provides for a more efficient allocation 
of capital. That is correct.
    Senator Toomey. Thank you.
    I want to make a quick comment. First of all, I want to 
thank the Chairman in absentia for having this hearing and for 
working on a number of really constructive regulatory reform 
measures, I think every one of which or certainly most of which 
passed the House and were not even controversial. A bipartisan 
bill that I have with Senators Menendez, Peters, and Rounds 
from the last Congress that I intend to reintroduce deals with 
the regulatory treatment of money market funds. I would just 
remind my colleagues money market funds are a critical source 
of short-term financing from municipalities, States, business, 
attractive both to investors and borrowers.
    The SEC imposed a very stringent wave of regulations in 
2010, another entire wave of regulations in 2014, and one of 
those regulations in 2014 is particularly problematic, 
forbidding institutional prime and tax-exempt money market 
funds from having a stable net asset value. So our bipartisan 
legislation, which had companion legislation in the House, 
would remedy that. We heard testimony at this Committee last 
year from Christopher Daniel, the CIO of Albuquerque, New 
Mexico, that tax-exempt money market fund assets are down 
nearly 50 percent as a result of this regulation, and the 
result of that is municipalities are forced to issue more 
expensive debt. It has raised the cost of financing America's 
municipalities.
    So I am looking forward to working with my colleagues on 
both sides of the aisle who have been supportive of this really 
sensible regulatory reform.
    I want to quickly mention an adverse effect of the SEC's 
acquired fund fees expenses rule on BDCs. BDCs, of course, have 
become a really important source of capital for small and 
growing companies, and it is my view that the application of 
the SEC's acquired fund fees has a particularly adverse impact 
on BDCs that is inappropriate.
    Mr. Quaadman, a quick question for you. The way that this 
rule affects BDCs strikes me as inappropriate because the share 
trading price of the BDC already reflects the expenses that are 
paid. And it is my understanding that there has been a negative 
implication on institutional ownership of BDCs as a result.
    Is that your view? And do you think this is something we 
should address?
    Mr. Quaadman. Senator Toomey, we share your concerns and do 
think that this needs to be addressed. BDCs primarily, 
especially since the financial crisis, have become a very 
important source of funding for new businesses as well as 
existing businesses. The AFFE proposal we think is a good one, 
but there has been a mismatch between--with BDCs not being 
exempt from that rule because, as you said, there is already 
transparency as to what those costs are.
    This has actually also caused BDCs to be removed from some 
indexes, which have actually hurt their ability to provide for 
investors and to provide capital formation funding as well. So 
we think this should be addressed by the SEC.
    Senator Toomey. Thank you very much. I look forward to 
working with you on that.
    My last point is on the HALOS Act, again, bipartisan 
legislation in the last Congress that I introduced with 
Senators Murphy, Thune, Schatz, Heitkamp. I expect to introduce 
it again. I look forward to working with Senator Sinema, who 
was a champion of this legislation in the House.
    I would like to pose a quick question to my constituent, 
Ms. Mott. Welcome. Great to see you. I am so glad you could 
join us. I just would like for you to clarify this, if you 
could. Isn't it true that there is nothing in the HALOS Act 
that would allow non-accredited investors to invest in 
companies that participate in demo days? Isn't it true that you 
would still have to be an accredited investor in order to make 
an investment?
    Ms. Mott. Thank you, Senator. Yes, it is true. And if I 
have a minute here to talk as a practitioner that has been in 
the market for about 15 years, prior to the JOBS Act and 
506(c), demo days were an ordinary part of the ecosystem. 
506(c) was created, and, you know, it became--a lot of 
confusion occurred because of the term ``general 
solicitation.'' And so to continue demo days, legal counsel 
post-506(c) started advising entrepreneurs to register as 
506(c) offering just to be safe, and that meant that, just in 
case, because this may fall into general solicitation, this 
will default to 506(c).
    Sophisticated investors have trouble with that because 
506(c) offerings require the entrepreneurs to confirm that the 
investors are accredited, and it only lasts for 3 months. 
Sophisticated angel investors are working on establishing a 
portfolio of startup companies. All the principles you apply to 
your public portfolio you apply to your private portfolio as 
well. And so that would require sophisticated investors who are 
looking at acquiring 18 to 36 companies in their portfolio to 
go through this process four times a year for approximately 5 
years.
    So investors pulled back. When they did that, legal counsel 
started advising demo days, saying, OK, do not talk about your 
financials, do not talk about the financial terms, do not talk 
about your financial strategy. Once again, entrepreneurs are 
disadvantaged because investors are evaluating the business and 
the growth strategy. And if they do not have the opportunity to 
talk about the financials, there is no way that can be 
assessed. So they have one arm tied behind their back. And this 
becomes, you know, inefficient. And what the HALOS Act does is 
it now makes the market an effective market, and they can still 
raise money. But they are only going to raise money with people 
who are accredited.
    Senator Brown. OK. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you all 
for your testimony.
    Corporate America has a diversity problem. Boards and 
executive offices across the United States do not look like the 
people of this country. I have conducted four surveys focused 
on Fortune 100 companies since 2010. My latest survey revealed 
that, since 2010, women and people of color have only made 
marginal gains in representation on corporate boards.
    Women have made the greatest gains, but only by about a 5-
percent increase in the number of board seats they occupy. And 
to put that in perspective, in 2017 I found that women 
represented 24.5 percent of corporate board members, and yet 
they are half of the population.
    People of color represent fewer than 21 percent of 
corporate directors, with women of color representing only 5.6 
percent of those directors. This lack of representation is 
simply unacceptable.
    I was originally hopeful that the SEC would help address 
this problem through its 2009 Diversity Disclosure Rule. 
Unfortunately, the 2009 rule failed to even define diversity, 
and it gives companies far too much discretion on what they 
report.
    That is why I am pleased to introduce a bill with 
Representative Meeks to improve the SEC rule earlier this year. 
My legislation, S. 360, the Improving Corporate Governance 
through Diversity Act, requires public companies to disclose 
specific information related to the racial, gender, ethnic 
makeup, and veteran status of corporate boards and senior 
management to the SEC. My bill will increase corporate 
transparency, allow investors to gain better insight into board 
makeup, and any policies in place to promote diversity among 
the board and senior management.
    Now, from my view, corporate diversity is not just morally 
right. Corporate diversity makes financial sense. McKinsey & 
Company studies have consistently found that greater diversity 
on executive teams has led to greater profitability. The need 
for increased corporate diversity is not an act of benevolence 
but a necessity for businesses looking to compete in a diverse 
21st century America.
    So with that as a predicate, Ms. Slavkin Corzo, how does 
disclosing specific details about corporate board diversity, 
racial, gender, and otherwise, help investors in making 
informed investment and voting decisions?
    Ms. Slavkin Corzo. Thank you, Senator. You know, from an 
investor perspective, we look at U.S. businesses, and we know 
that they operate in complex and very diverse ecosystems. And 
in order for senior management to be able to respond to 
consumer demand and to manage their very diverse workforces, 
they need to be led by people who understand the interests of 
those populations.
    And so from an investor perspective, when we see a lack of 
diversity in the corporate boardroom, we understand that the 
leadership is not bringing a complete understanding of the 
markets in which they operate and the employees that they are 
trying to manage into their day-to-day decisionmaking. And as 
you referenced, there is emerging data that we are seeing come 
out regularly that shows that more diversity actually 
contributes to better investment performance. So it makes 
financial sense.
    Senator Menendez. Mr. Quaadman, I am pleased to have the 
endorsement of the U.S. Chamber of Commerce on my legislation, 
and that is maybe a first for me. But we are always happy to 
find ways to work together on that 360.
    Mr. Quaadman. Sure.
    Senator Menendez. Can you talk about the benefits of--and I 
know Senator Warner's ears perked up--enhanced transparency 
regarding the specific makeup of corporate boards and how 
companies select board members and senior management?
    Mr. Quaadman. Sure. Thank you, Senator Menendez, for your 
leadership on this issue, and we appreciate the bill and our 
ability to work with you on that.
    We believe it is very important for boards as well as 
senior management to reflect their employee base, their 
consumer base, and that it is also very important to have a 
diversity of background and thought within the boardroom.
    We do believe that business has been--some businesses have 
done a very good job in addressing these issues. Others have 
been very slow. We actually worked with Carolyn Maloney back in 
2016 on her gender diversity bill and strongly supported that.
    We also think that your bill in terms of collecting of best 
practices as well as some of the transparency and disclosure 
procedures not only will allow investors to better understand 
what is going on but also to help ensure that other companies 
that have been maybe a little slower in addressing these 
problems can be put on a track to solving these issues.
    Senator Menendez. Well, I appreciate that. Just taking one 
dimension of this, with the Hispanic community the largest 
minority in the Nation, a trillion-plus domestic marketplace 
spending, younger by a decade than the rest of the American 
population, more brand-loyal than any other group in America, I 
would like to be on them like white on rice if I was selling a 
product or a service, not because of my, you know, desires to 
do the right thing, but it is just the right economic thing. 
And you know how to penetrate those markets better when, in 
fact, you have people diverse on the board who can give you 
insights into that market.
    Last, on a separate note, I would just like to briefly 
state that I am concerned about one of the bills under 
consideration today, H.R. 4537. The bill's language dilutes our 
U.S. negotiators' ability to work in international settings to 
support and defend our State-based system of regulation as 
international insurance standards are being developed. We 
should be at the negotiating table in as strong a stance as 
possible, so I would not support language restricting any 
leverage we might have without other international players.
    Thank you, Mr. Chairman.
    Senator Brown. Senator Rounds.
    Senator Rounds. Thank you, sir.
    First, I would like to acknowledge and thank the Chairman 
for holding this hearing. I think it is critical for us to do 
everything in our power to enable America's entrepreneurs and 
job creators to succeed.
    Before I begin my questions, I wanted to take a moment to 
address two bills that I think would have been appropriate to 
address at today's hearing but that are not on the agenda at 
this time.
    First is the Financial Stability Oversight Council 
Improvement Act. I am proud to be reintroducing this 
legislation today with Senators Jones, Sinema, and Tillis. It 
makes a small addition to the SIFI designation process by 
giving companies the opportunity to submit a written mitigation 
plan before designation.
    The second item is the Alleviating Stress Test Burdens to 
Help Investors Act. This legislation would make commonsense 
changes to the stress testing process for nonbank financial 
companies. Last Congress, it received near unanimous support in 
the House, with 395 votes, including the entire House 
Democratic leadership.
    With that said, I would like to turn to one of the current 
bills under consideration: the Options Market Stability Act. 
Mr. Quaadman, as you are aware, the goal of the legislation is 
to promote liquidity in options markets by making capital 
requirements risk-sensitive. Options are a critical tool used 
to balance risk, and liquidity in option markets is an 
important protection for all investors, particularly during 
times of turbulence.
    What are the drawbacks to not moving to a risk-weighted 
system, in your opinion, sir?
    Mr. Quaadman. Senator Rounds, first off, thank you for both 
your leadership on the FSOC and stress test issues. Those are 
very important for capital markets.
    I would say that the options legislation is extremely 
important. One is because it allows for netting, which will 
actually provide for more transparency and insight as to the 
positions of financial institutions with options and other 
instruments. So we actually think that will provide investors 
with a greater insight as to those positions and risks and to 
be able to make better informed decisions on them.
    Senator Rounds. Thank you.
    Once again, Mr. Quaadman, unfortunately, my time is going 
to be limited, so I am wondering if you could briefly address 
four other bills that we sponsored: the Modernizing Disclosures 
for Investors Act, the Developing and Empowering Our Aspiring 
Leaders Act, the Improving Investment Research for Small and 
Emerging Issuers Act, and the Investment Advisory Regulatory 
Flexibility Improvement Act. Each of these bills would make a 
small yet meaningful change in how the investors choose where 
to allocate capital or how small companies raise money and 
provide investment advice.
    How important are the kinds of investors and institutions 
that are impacted by each of these bills to our broader 
economy? And how important is the relief that we are seeking to 
provide to them?
    Mr. Quaadman. So in the interest of time, let me treat them 
globally. I think these are four bills that provide for tweaks 
to different provisions that will effectively allow for more 
efficient deployment of capital, allow for investors who can 
invest--allow for more investors to invest in companies that 
maybe they cannot do so far, and also allow for companies to 
have a better way of interacting with their investors.
    So each of these are very small tweaks. I think there has 
been frustration in the past on some of these issues where the 
SEC could have proactively addressed some of these issues. I 
would actually say that Jay Clayton and his leadership of the 
SEC has been very much in the forefront on this. But I do think 
particularly here it is very important for Congress to set the 
policy parameters and then have the SEC fill in the details 
later on. So these are very important provisions.
    Senator Rounds. Thank you.
    Can you also speak to the costs and benefits associated 
with modifying short-selling regulations if legislation like 
the Brokaw Act was to be signed into law?
    Mr. Quaadman. We have some very significant concerns there 
that the costs could actually outweigh the benefits. We have 
strongly supported disclosures around short selling, 
particularly with naked short selling that the SEC moved on in 
2010. However, we also have to understand, too, that short 
selling is a very important part of an efficient capital 
market. You can take a short position because you think a 
company is not doing well. You can take a short position in 
order to hedge a long position. But there are some who actually 
take a short position then to also engage in distortion to 
drive the company to the place where they want to.
    What I think the Brokaw Act does, which I think is well 
intentioned, is it does not allow for an understanding of what 
the intent is of that short seller, so that it can actually 
create dislocations in the market that can be helpful to the 
overall investor community.
    So we think that it is probably better off if the SEC were 
to do a study of what some of the problems are, report back to 
Congress, and then we can see moving forward what the right 
solutions are to those problems.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. [Presiding.] Thank you, Senator Rounds. And 
before I go to Senator Cortez Masto, I want to just explain to 
the witnesses. I apologize. I had to step out. I had a critical 
vote in the Judiciary Committee that I had to be there for, so 
I apologize I missed some of your--the finish of your 
testimony, Ms. Slavkin Corzo, and then some of the answers to 
the questions.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Thank you, Mr. Chair. 
Thank you all for being here. I really appreciate the 
conversation this morning.
    Let me start with Ms. Corzo because I am hoping you are 
going to help me clarify this. I, too, have concerns about 
private equity firm acquisitions by utilizing LBOs and what we 
are seeing in the increase of that debt. But you make this 
statement that these private equity firms employ millions of 
workers. Let us put that in perspective, because I know in 
Nevada we have lost a number of businesses from leveraged 
buyout. That is Mervyn's, Toys ``R'' Us. You talked a little 
bit about Toys ``R'' Us in your statement. If you could help 
us, put that in perspective what that means when there is high 
debt, a leveraged buyout comes out. What does that mean for 
workers? And how do workers potentially lose their jobs? And we 
are talking about the workers at these companies, not workers 
that actually work for the private equity firm, but we are 
talking about workers at Toys ``R'' Us or Mervyn's where these 
companies are acquired by the private equity firm. So do you 
mind kind of talking about those concerns?
    Ms. Slavkin Corzo. Sure, thank you. So the way that private 
equity firms typically operate is that they have money that 
they raise from outside investors, and they collect money that 
is pooled to be the fund, the ``dry powder,'' as it is 
sometimes called. And then once that money is raised, they go 
out and identify portfolio companies which are operating 
companies that have millions, 5 million employees aggregated 
throughout the economy.
    The way that the leveraged buyout then works is they use a 
little bit of cash that comes from investors and an even 
smaller amount, on average 1 to 3 percent, from the general 
partners to purchase a company, and then a bunch of debt, up to 
70 percent, sometimes higher, that sits on the books of the 
operating company, the portfolio company.
    So with Toys ``R'' Us as an example, the company was bought 
using a little bit of outside money and then debt that Toys 
``R'' Us was responsible for servicing, for paying back over 
time.
    Senator Cortez Masto. So its typical--and in your 
statement, you talk about this excessive leverage. Its typical 
buyout, around 30 percent of the purchase price is paid as 
equity or cash and 70 percent is debt financing, right?
    Ms. Slavkin Corzo. Yes.
    Senator Cortez Masto. And so then that company, say Toys 
``R'' Us, is now responsible for starting to pay down that 
debt. The private equity company does not have to worry about 
it. Now the burden is on the company. And does that then start 
a cycle of now that money going toward debt, a decrease in 
maybe wages to employees to pay for it, a decrease now in money 
coming in for profit to allow the company to continue to 
operate, and now we are looking toward potential bankruptcy for 
that company.
    Ms. Slavkin Corzo. Exactly.
    Senator Cortez Masto. Now, is that consistent, is that what 
you are seeing more of in the marketplace now?
    Ms. Slavkin Corzo. That is what we are seeing, and, you 
know, we are in a relatively easy credit environment right now. 
One of the things that my testimony does talk about is some 
analysis that has been done that is specific to the supermarket 
industry, where they found that, I believe it was, seven 
supermarket chains that have failed in the last few years, all 
of them private equity owned. And when you compare that to the 
performance of nonprivate-equity-owned businesses, they tend to 
be doing quite a bit better.
    We are, though, as I said, in a pretty easy credit market, 
and so one of the things that we are starting to see regulators 
around the world--and Janet Yellen was actually quoted last 
fall talking about this--is this concern that while--as is the 
case with all businesses, it is a lot easier to maintain your 
debt payments when the economy is doing well. But if we see an 
economic downturn happen, it becomes much more difficult, and 
now you have got $1.15 trillion in outstanding leveraged loan 
that can go back, causing potentially systemic consequences. 
And then from the perspective of the employees of the 
individual business, if your employer goes bankrupt, you are 
out of work.
    Senator Cortez Masto. Right.
    Ms. Slavkin Corzo. And we often see employers using that 
bankruptcy process as a way to shed pension liabilities and 
other benefits that the workers had counted on and put in many 
years of service in order to earn.
    Senator Cortez Masto. Do any of the bills that are before 
us today address this issue and bring transparency or 
accountability or disclosure of what is going on here?
    Ms. Slavkin Corzo. They do not.
    Senator Cortez Masto. And to that matter, should the SEC 
require disclosure of all fees that are paid to private equity 
firms that are by the firms--by the firms that the PE owns? In 
other words, private equity firms own some companies, and some 
of those fees are being paid out to those companies owned by 
the PEs, and investors do not even know about that. Is that 
correct?
    Ms. Slavkin Corzo. Yeah, there is a large array of 
transparency failures that exist within the private equity 
market, and particularly in terms of fees and expenses that are 
paid by the portfolio companies to the management companies, 
and also by the investors to the general partners. And so one 
of the things that is extremely challenging for investors is 
that, first of all, there is not adequate disclosure of fees. 
It is not being disclosed in a uniform format so they are able 
to compare it. And the same goes for the performance of the 
fund. And so it is very difficult to get clear, accurate data 
on what the performance is net of fees, which is something that 
an investor needs in order to make an informed investment 
decision.
    Senator Cortez Masto. Thank you. I notice my time is up. 
Thank you all for being here.
    Chairman Crapo. Thank you.
    Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman. Thank you all for 
being here.
    Mr. Quaadman, I want to actually start with something 
that--we have put forth a bill--or there was a bill put forth 
last year, the Corporate Governance Fairness Act, that did not 
make it into law, but we took action within our office on some 
of the no-action letters with the SEC. I know that you have 
written about that. Why do you think that was a good idea?
    Mr. Quaadman. So, first, the SEC historically has not 
provided any oversight over proxy advisory firms. They did 
issue guidance in 2014. The withdrawal of the no-action letters 
was important because those two no-action letters which date 
back to 2005 effectively did two things. One is they told the 
proxy advisory firms, ``You do not have to disclose any 
conflicts of interest to your clients.'' The second letter 
effectively said to the clients, ``You do not have to ask about 
conflicts of interest, and you can really on that advice 
anyway.''
    Senator Tillis. What would be the case for allowing that? 
We just thought it did not make any sense. That is why we took 
action with the SEC. But what would be the rational basis for 
the no-action letters?
    Mr. Quaadman. We agree with your position that it does not 
make sense. However, the thinking was----
    Senator Tillis. I am trying to figure out what the argument 
would be for the other side, how you would get there.
    Mr. Quaadman. The argument for the other side was that you 
have--you only have effectively two advisory firms, but you 
have institutional investors that are invested in thousands of 
companies and, therefore, they are really going to have to rely 
on the advisory firms to do so.
    Now, if you take a look at Vanguard, BlackRock, et cetera, 
they actually have independent analyses units that do that, but 
some of the smaller ones do not. And that has actually provided 
a portal for those smaller institutional investors just to do 
what is known as robo-voting, which they just follow blindly 
what ISS and Glass Lewis come up with.
    Senator Tillis. Just briefly, I know that the legislative 
fix, the Corporate Governance Fairness Act, you did express 
some concern--you like the direction, but I believe you 
expressed some concern over changes that you would suggest. Can 
you briefly describe those? Then I want to go to Ms. Mott.
    Mr. Quaadman. Yeah, very quickly, we think that there 
should be some language in there specifically about regulation 
of conflicts. We also think that there should be some 
recognition of linking the fiduciary duty--the advice to the 
fiduciary duty of the investors as well, as well as a process 
to allow for not only companies but others to be able to have 
some transparency as to how the recommendations are made.
    Senator Tillis. Thank you.
    Ms. Mott, we had the bill Fair Investment Opportunities for 
Professional Experts Act in the last Congress, and we are 
trying to work to get bipartisan support to reintroduce that 
bill. Can you briefly explain to me why you think that is a 
good idea?
    Ms. Mott. Thank you, Senator, for asking that. I guess 
primarily because this impacts Middle America more than it does 
the west coast or the east coast, there is plentiful money in 
the Silicon Valley and Boston and New York. Primarily startups 
are being funded by angel investors, and an angel investor 
making $200,000 a year, which is the current standard, is 
equivalent to making 450 in New York. If your net worth is a 
million in Middle America, it is probably 2.3 or 3 million in 
New York or Boston. So raising the accreditation standards or 
the accredited criteria only hurts Middle America where we need 
the jobs the most. It is a lower cost of living so our money 
goes further. We can withstand the losses, so it only makes 
common sense, let us not hurt Middle America where we need the 
jobs the most.
    Senator Tillis. Thank you.
    Mr. Quaadman, in my remaining time, first, I want to thank 
Senator Van Hollen for going on the Encouraging Public 
Offerings Act. I appreciated it the last Congress and re-upping 
this Congress. I would like in my remaining time and within the 
time limits with respect to the Chair, give me an idea why you 
think that is a good idea.
    Mr. Quaadman. We think that is important legislation, that 
it will allow for businesses to have more opportunities to 
attract capital. We think that--again, as I was mentioning with 
Senator Rounds, I think it is one of those that it is a very 
small tweak but I think a very beneficial tweak to achieve that 
goal. And I think it is important, again, for the Senate and 
for Congress to set that policy parameter to also ensure, 
number one, that it is codified; but, number two, to give clear 
direction to the SEC to move forward.
    Senator Tillis. Thank you. I yield back my 3 seconds.
    Chairman Crapo. Duly noted. Thank you.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. And thank you for 
holding these hearings. I think this is an area where there is 
a lot of fertile ground for improvement.
    I want to step back on a slightly broader topic for a 
moment. You know, one of the things I have been looking at a 
lot is the fundamental change between the 20th century and the 
21st century. I would argue the 20th century we had a shortage 
of capital and an abundance of labor. The 21st century, we have 
got capital floating all over, but we have got a shortage of 
qualified labor. And I have heard companies and some estimates 
say as much as 70 percent of a company's assets may be in their 
workforce, the intellectual property they handle or they have. 
And yet, candidly, nothing in our Tax Code, nothing in our 
public reporting system, nothing in our accounting system 
reflects that value on human capital and the folks who make up 
companies.
    I have got legislation, for example, that would take one of 
the most effective tools, I think, post-World War II that we 
created in the Tax Code, an R&D tax credit, and create the 
equivalent for a human growth tax credit so that, again, I 
would argue, businesses more often than government have the 
notion of where we ought to be doing some of this training, 
because currently you make that--you spend $10,000 on a piece 
of equipment that gets an R&D tax credit, you have got an asset 
you can put on a balance sheet, you spend $10,000 on your 
workforce training and human investment, you get a deduction. 
But there is no place to reflect that on your balance sheet or 
in your accounting system.
    So one of the areas that I think SEC Chairman Jay Clayton 
has been, I think, very good at, he has been working with us 
and others about should there be--if we can take out some of 
the perhaps existing non-essential traditional reporting 
requirements, can we increase or could we put in place a 
reporting requirement for public companies to indicate that 
investment in human capital? Right now a public company 
reflects the number of employees, median pay, compensation, but 
actually the training or upscaling or nature of their workforce 
is not reflected in any way. And I think this would not add a 
new burden. Harvard Law School has indicated a majority of 
companies have already put in place these metrics.
    So, Ms. Slavkin Corzo, I would like to start with you 
because I know you have been doing some work in this area, and 
I would like to hear from the other panelists as well. Do you 
think giving some guidance to public companies about human 
capital investment training, upscaling, would be valuable for 
the investing public and, frankly, valuable in terms of how we 
assess the value of these companies?
    Ms. Slavkin Corzo. Thank you, Senator. I think you raise a 
really important question. From an investor perspective, we 
hear management and senior executives say all the time things 
like, ``Our workforce is our most valuable asset.'' Yet we get 
no information or almost no information in financial reports 
about what the businesses are doing to cultivate those assets.
    And so I think it would be extremely valuable for public 
companies to be required to disclose additional information 
about what they are doing to invest in their workforce and to 
make sure that they are developing a workforce that can be 
competitive in the 21st century.
    Senator Warner. Others on the panel?
    Mr. Quaadman. Senator Warner, first off, the only other 
thing I would add to your analysis is, unlike the 20th century, 
capital is also now global. It can move in any direction.
    What I would say, too, is last year we did a very deep dive 
on a lot of these issues and talked with people all over the 
world for about 6 months. I think that is an appropriate way to 
look at it. We need to look at those issues which are linked to 
the return and success of a company. What is sometimes 
happening when we talk about this very broad ESG discussion is 
we get involved in a lot of extraneous issues that really are 
not linked with return.
    So during one of the conversations we had during this 
discussion, an institutional investor, who is extremely 
involved in these issues, said, ``Look, let us understand one 
thing. We are not an NGO, and those that we invest in are not 
NGO's.'' So I think when you take a look at human capital or 
human talent, depending on the industry or the business, it can 
be a very critical issue.
    So I think we need to really think through those issues. We 
have been doing a lot of thinking on them. I should also say, 
too, 85 percent of the S&P 500 do some form of an extra report 
or extra reporting.
    The other issue I would just put on the other side of that 
equation, too, is we also have to think as to who the recipient 
of that information is, because under our current system, our 
securities laws have a very clear, defined channel for how we 
are communicating with investors, but some of this information 
is also being used to communicate to employees, consumer base, 
it is used for vendor management and others. So I think we also 
need to think through some of those ramifications as well, but 
we would love to have further discussions with you on it.
    Senator Warner. Ms. Mott, if you want to add anything, 
because I would like to get, Mr. Chairman, 10 seconds for a 
closing comment.
    Well, I think it is critically important, because if you 
look particularly in terms of business investment in workforce 
training for low- and moderate-skilled people, it is a steady 
decline. And, frankly, I do not agree with that as a 
policymaker, but I agree with that from a business--I 
understand why from a business standpoint, because those are 
the jobs that are most subject to automation, and that is even 
before we get to AI. Those are the jobs that are most subject 
to the ability to be moved abroad. Those are the jobs that are 
most subject to, you know, if you invest in that individual, 
low- and moderate-skilled, they may become more valuable and 
could move around. And I just think from a fundamental basis in 
this world--and, Mr. Quaadman, I am interested in the ESG 
stuff, but I think there are some things that are extraneous. I 
think that is why if we focus on workforce, we can make a more 
targeted investment. And my fear is that, you know, from kind 
of a macro standpoint, we ought to at least treat investing in 
people as valuable on a tax and accounting system and reporting 
system as investment in tangible items.
    This is not going to reverse the move toward AI and robots, 
but it might at least slightly rebalance where I think the 21st 
century economy is at, because the rules we had for the 20th 
century economy might have worked then, but we have a very, 
very different mix and match between human capital and 
traditional capital in this 21st century.
    Thank you for giving me the extra time, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman.
    I want to take advantage of your experience and expertise 
to ask you a few general questions, if I could. Before the 
meltdown in 2008, did you think community banks--I am defining 
a community bank as $10 billion or less. Did you think 
community banks were overregulated, underregulated, or just 
about right? I need just kind of quick answers.
    Mr. Quaadman. Community banks probably had an appropriate 
level of regulation. What we did after the financial crisis is 
we started to impose larger bank regulations on----
    Senator Kennedy. Right. I am sorry for interrupting, but I 
have just got 5 minutes. Do you all agree with that?
    Ms. Slavkin Corzo. I have not spent much time thinking 
about community bank regulation.
    Senator Kennedy. OK.
    Ms. Mott. I am also not familiar with the community banking 
regulations.
    Senator Kennedy. Well, you are capital experts, aren't you?
    Ms. Mott. I am a practitioner investing my own money in 
startup companies, but I am not a banker, and I do not----
    Senator Kennedy. That is OK. I am not a banker either. It 
just seems to me our businesswomen and businessmen need 
capital, right? We can agree on that. One place to start is 
community banks.
    Now, I know community banks, by their definition, they are 
not going to finance some of the sophisticated deals. But they 
provide capital, and one of the problems with Dodd-Frank was 
that they made the community banks spend all their money on 
compliance. They were hiring compliance officers instead of 
loan officers. So it would just seem to me that before we get 
all fancy here, we ought to at least talk about saying Dodd-
Frank does not apply to community banks. I mean, if a $10 
billion bank goes under, it is not going to take the U.S. 
economy with it, is it?
    Mr. Quaadman. No. And, Senator, I would also state, too, 
2155 is a very important step in that direction. We had also 
hoped that the regulators--they are getting there, but we would 
hope that they would be quicker in implementing some of that as 
well.
    Senator Kennedy. Sorry, I am really not trying to be rude, 
but we only have 5 minutes. Look, honestly, I mean, I try to 
see this from both sides. I just do not see why Dodd-Frank 
needs to apply to community banks.
    Now, on the other hand, I read where five of our largest 
financial institutions have about 50 percent of the banking 
assets. Does that sound about right to you all? This is not a 
test.
    Mr. Quaadman. Give or take. It is probably somewhere around 
there.
    Senator Kennedy. All right. If one of them called the 
Secretary of Treasury tomorrow and said, ``Look, I hate to tell 
you this, but I am about to go belly up,'' do you think 
Congress would bail them out?
    Mr. Quaadman. Senator, Title II of Dodd-Frank creates the 
liquidation authority to deal with that. It has been used 
actually in Europe, a very similar system, to handle some of 
the Italian banking issues. So we do think----
    Senator Kennedy. Yes, but here is another way to ask this: 
Do you think our banks are still too big to fail, five of them?
    Ms. Slavkin Corzo. I certainly do.
    Senator Kennedy. Do you? OK.
    How about you, sir?
    Mr. Quaadman. No, sir.
    Senator Kennedy. Ma'am?
    Ms. Mott. I am not familiar enough to comment.
    Senator Kennedy. OK. Let me ask you this about FINRA. Gosh, 
this time goes so fast. A lot of awards by FINRA--you know what 
FINRA is, right? OK. The brokers regulate themselves. It is 
supposed to be a level playing field. A lot of the awards, 
arbitration awards, when they actually find in favor of an 
investor, go unpaid. About 25 percent, I think. Are you 
familiar with that? I do not want to ask----
    Mr. Quaadman. I believe it is actually around 2 percent.
    Senator Kennedy. No, I think it is more than that. I mean, 
you might be right, but I do not think you are.
    Do you have any thoughts about what we ought to do about 
that?
    Mr. Quaadman. Senator, as we put in our testimony, for the 
unpaid arbitration awards with FINRA, we think that SIPC should 
be used as a way to help compensate with that. We think that 
some of the legislation that is before us today could create a 
situation where the good actors in the industry are subsidizing 
the bad actors, and that the bad actors then are not going to 
have to pay a price for that. But we do think that those unpaid 
awards need to be paid, and SIPC might be the right mechanism 
to do that.
    Senator Kennedy. Yeah. SIPC is not getting the job done. 
Otherwise, we would not have so many unpaid claims.
    Ms. Slavkin Corzo. We support the legislation on the agenda 
today. We think it is critically important to make investors 
whole when they lose out as a result of fraud.
    Senator Kennedy. Can I ask one more quickly? Teeny-weeny.
    Chairman Crapo. And quick answers, too.
    Senator Kennedy. Do you think it is right to have just two 
proxy advisory firms dictating corporate governance in America?
    Mr. Quaadman. No, but I think there are others that have 
tried such as PGI and Proxy Mosaic, and there have been 
barriers to entry. And, therefore, as we have done in other 
areas such as credit reporting agencies, if there are not going 
to be more that are going to be entering there, that field, 
then there should be a level of oversight to make sure that 
there is a level playing field and proper rules for the road.
    Senator Kennedy. Thank you, Mr. Chairman.
    Chairman Crapo. All right. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. I thank all of 
you for your testimony today.
    Senator Tillis mentioned a piece of legislation that we 
have introduced, the Encouraging Public Offerings Act 
legislation. Mr. Quaadman, thank you for your testimony on 
that. And, Ms. Slavkin Corzo, I understand that we addressed 
some of the early concerns that you and others may have had 
with that bill and you do not object to that piece of 
legislation. Am I right about that?
    Ms. Slavkin Corzo. I would need to go back and look at my 
notes and confirm.
    Senator Van Hollen. OK. That was my understanding. It ended 
up passing the House with a big vote, and a big bipartisan vote 
as well.
    Another bill that was just introduced on a bipartisan basis 
was one I joined with Senator Fischer to introduce yesterday 
called the ``Promoting Transparent Standards for Corporate 
Insiders Act.'' We all know that 10b-5 trading plans are 
designed to make sure that folks inside the company can trade 
and do so without trading on inside information.
    There has also been a lot of evidence recently that some 
folks who are using those trading plans are using them in very 
creative ways and are trading on insider information. And so 
the purpose of the legislation is to ask the SEC to take a look 
at it and then move forward on rules.
    If you could talk, Ms. Slavkin Corzo, briefly about that 
legislation, whether you support it, and if so, why.
    Ms. Slavkin Corzo. Sure. Thank you. Yes, we definitely 
support that legislation. I think that insider trading is a 
serious concern from an investor perspective. Capital 
formation, investor protection relies on a sense that the 
markets are fair, and when insiders have the ability to profit 
off of inside information that investors do not have access to, 
then it undermines investor protection, investor confidence, 
and capital formation.
    Senator Van Hollen. Thank you. And could you mention some 
of the examples that we have seen recently that may point to 
abuse in this area?
    Ms. Slavkin Corzo. There was a Wall Street Journal study, I 
believe, a few years ago that discussed it, and there was some 
recent analysis from some Harvard economists that found that 
when they looked at the trading that was conducted under 10b5-1 
plans, there was outperformance that seemed fishy.
    Senator Van Hollen. So, Mr. Quaadman, I see the statement 
that you and the Chamber have made on this piece of 
legislation, raising some concerns, and also indicating that 
you are open to engaging with Members of the Committee to 
address the alternatives.
    One issue you raise is that we are asking the SEC to look 
into this issue and at the same time asking them--or giving 
them the authority to promulgate regulations. If we were to 
amend that slightly to indicate that if their study found and 
there was evidence that the 10b-5 trading plans were not 
working as intended and that, indeed, needed to be--we needed 
to close some of the loopholes to make sure they were working 
as intended, meaning that people are not cheating, if we made 
that link in the legislation between a finding of evidence of 
wrongdoing or abuse and linking the authority to that, would 
you have any objection?
    Mr. Quaadman. No, I would look forward to having a further 
discussion with you on that because I think we can find common 
ground. 10b-5 plans should be blind. There should not be 
anything there.
    One of the concerns that we had--and this is maybe where we 
should also have a further discussion--is with insider trading, 
there have been a lot of concerns about some of the vagueness--
and this has been expressed by courts as well on that. And so 
some of the issues we think ultimately need to be addressed by 
Congress rather than a regulatory agency because of the 
criminal penalties that can attach to them.
    Senator Van Hollen. Well, I am happy to work with you on 
refining that together because we all agree on the premise and 
the goal here, right? Which is to make sure that folks who are 
on the inside, when they engage in trading, that they are not 
taking advantage of inside information, right? I mean, that is 
the key thing to making sure we have a transparent and honest 
system. Right?
    Mr. Quaadman. Insider trading hurts everybody.
    Senator Van Hollen. So I would just, Mr. Chairman, point to 
the fact--and Ms. Slavkin Corzo mentioned some of the studies 
that have been done. There have also been some very visible 
examples where it appears that people made very creative use of 
their ability to amend their 10b-5 trading plans just in time 
to take advantage of inside information that only they had 
access to. So I look forward to working with all of you, and I 
hope this is something--it passed the House by something like 
400-3, or something. So I gather, Mr. Quaadman, that--did you 
raise concerns about this bill in the House?
    Mr. Quaadman. We did not send a letter to the House or the 
Committee on that, but as this has been moving forward in the 
process, we have taken a closer look at it, and that is why we 
thought there were a couple things there we had some concerns 
with, which we would like to engage on.
    Senator Van Hollen. OK. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman. I 
want to thank you for holding the hearing today. There are two 
pieces of legislation which you have allowed to be brought 
forward today for discussion: the Corporate Governance Fairness 
Act, which I have sponsored along with Senators Perdue, Jones, 
Tillis, and Kennedy; and S. 592, which was just introduced 
today, the Cybersecurity Disclosure Act, with Senators Collins, 
Warner, Kennedy, and Jones. And I want to thank the witnesses 
for being here.
    I am just going to make a few comments about Senate bill 
592 and then yield back to the Chairman for his questions. But 
592 is designed to confront what I am hearing from most 
business people is one of the most serious problems they face 
every day, and that is cybersecurity. Financial institutions, 
and seemingly every enterprise in the United States, is 
worrying more and more about being hacked, having their data 
stolen, having their intellectual property stolen. And I see 
this from a perspective not only as a Banking Committee Member 
but as the ranking Democrat on the Armed Services Committee.
    One point I want to make about the bill is there has been 
some kind of response that it is overbearing in some respects, 
and Professor John Coates of Harvard Law School points out very 
clearly that the bill simply asks for a publicly held company 
to either have a cybersecurity expert on the board or indicate 
why that is not necessary, that there is no requirement for a 
cybersecurity expert on the board. We are trying not to dictate 
the composition of publicly held boards.
    And I think it is critical because, again, I come at it 
from the perspective not only of financial institutions. And, 
again, as I speak to leaders, particularly major firms, they 
are spending hundreds of millions of dollars a year on 
cybersecurity, and they are just trying to stay one step ahead 
of an increasingly dangerous risk.
    But what was particularly disturbing to me is, in my armed 
forces capacity, listening to the former head of the 
Transportation Command, General Darren McDew, talk about his 
challenges. In order for us to confront any threat across the 
globe, we have to project power from the United States. We can 
only do it with civilian aircraft, civilian ships, et cetera. 
He is trying to organize this, and he said, In his view:

        Cyber is the number one threat to U.S. Transportation Command, 
        but I believe it is the number one threat to the Nation . . . 
        in our headquarters, cyber is the commander's business, but not 
        everywhere across our country is cyber a CEO's business. In our 
        cyber roundtables, which is one of the things we are doing to 
        raise our level of awareness, some of the CEOs' chief security 
        officers cannot . . . even get to see the board, they cannot 
        even see the CEO. So that is a problem.

    So we have a situation now where in private companies, from 
the perspective of this very astute observer, it is not a 
priority. And what we want to do in this legislation is make it 
a priority by forcing the companies, publicly held companies, 
each year to say either we have someone on the board 
responsible or we do not need it because we have outside 
experts, we have annual review with scrutiny. That is all 
appropriate. And, again, my concern is--and it is the concern 
particularly of all my dealings with anyone connected to the 
military--that we have a lot of companies, private companies 
particularly, that are vulnerable today, that already probably 
have been intruded upon and waiting literally for the flag to 
go up and they will see the consequence of that.
    That is why I thank the Chairman for holding the hearing, 
and that is why I hope we can move forward this year and get 
what I think is just a commonsense piece of legislation 
completed that will help everyone.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Reed. We look forward to 
working with you on these and some of the other bills in this 
package to make sure we can get a good wholesome and beneficial 
package put together.
    Senator Reed. Thank you.
    Chairman Crapo. Well, I had to leave the hearing earlier, 
but now I have the dais all to myself. But I am going to try to 
stick to my 5 minutes, too, and, again, I appreciate the 
witnesses being here. I said I am going to try to stick to my 5 
minutes. I do have a number of questions, and I know I will not 
get through those, so I will submit to you in writing for your 
response.
    The first thing I wanted to get at is in the hearing today 
some issues have been raised about whether the legislation we 
have, particularly the capital formation legislation that we 
have put forward, is beneficial or whether it is just a nod to 
Wall Street or what have you.
    It seems to me that safe access to capital is a critical 
benefit to our economy and to workers for their jobs and the 
wages and benefits, as well as to retail investors. So I do not 
see the issue there.
    Now, if the issue is with some piece of the legislation in 
terms of whether it really does facilitate safe access to 
capital, I understand that. But just on the broader question of 
whether this Committee's focus on increasing access to safe 
capital in this country is a bad thing, could I ask each of you 
to just quickly respond to that? Ms. Mott.
    Ms. Mott. Thank you. I am so glad you asked that, Senator. 
First of all, the SBA Business Dynamics Statistics Report last 
demonstrated I think the data since 1980, that all net new jobs 
come from companies 5 years old or less, and the people funding 
those companies and that are taking the risk on those companies 
are early stage investors. Friends and family, angel investors, 
they are taking the first step.
    The other thing is they are investing in their backyard. 
This is Middle America. You are investing in your town. You are 
creating the jobs, and nothing makes you feel better than to 
drive by and see a company that started out with 5 people now 
has 150 people employed.
    Now, that is a do-good in your neighborhood. That is a 
byproduct, I know. But at the end of the day, we take our 
money, once we get a liquidity event, and we put it right back 
to work.
    So there is a circular system, and nothing benefits more 
than your local economies, and particularly as you heard my 
passionate voice today about Middle America.
    Chairman Crapo. Middle America.
    Ms. Mott. We are overlooked. There is lots of money on the 
coasts, but not in the middle of America, and it relies on us. 
And a lot of times we are investing companies' first round, 
second round, third round. We are continuing to give them a 
lifeline, and to a point where they get handed off to a venture 
capital firm or, fortunately, if we are lucky enough, the 
company gets acquired or--you know, we do not see IPOs. There 
is a liquidity but we do not----
    Chairman Crapo. Let me follow up with you quickly before I 
go on to the other two witnesses. But there was a point made by 
one of the Senators earlier today, I believe, that our capital 
system is working fine, there is not a problem. Is access to 
capital just fine in America? Or do we have some issues there 
where we need to make improvements?
    Ms. Mott. I do not have the data in front of me. I wish I 
had that. But we are seeing a decline, and perhaps Tom has, a 
decline in business startups in the United States. And, you 
know, I live in that world, and, again, I am co-investing with 
my colleagues in Cleveland, Columbus, Indianapolis. You know, 
we are all putting our money together to syndicate, to make 
these things happen.
    You know, without us, I will tell you, there would be 
negative, very, very negative job creation without us.
    Chairman Crapo. Thank you.
    Mr. Quaadman?
    Mr. Quaadman. I would just add quickly, Mr. Chairman, 80 
percent of business financing in the United States is nonbank. 
So what we also have to recognize as well is that while we 
still have the deepest, most liquid markets in the world, we 
are now competing with Hong Kong and Singapore and Dubai and 
other places around the world where capital can now go. So we 
are seeing where investors are willing to deploy capital 
outside the United States, and, consequently, we are also 
seeing a decline in the number of startups, and it is more 
difficult--primarily where businesses are going to be more 
dependent on private financing, it is more difficult for 
businesses to grow because they do not necessarily have that 
availability of capital. And I think the package of bills here 
allows for tweaks. This is not a rollback or anything like 
that. This allows for tweaks to, one, address a changing 
ecosystem; and, number two, it is going to make our businesses 
and our financial systems competitive in that global 
environment.
    Chairman Crapo. Thank you. And, again, I want to follow up 
with you, Mr. Quaadman, before I go on to Ms. Slavkin Corzo. I 
think it was you, but one of you mentioned earlier that China 
is attracting more capital in certain parts of its economy than 
we are.
    Mr. Quaadman. Yeah.
    Chairman Crapo. And I would like you to comment on that 
because it seems to me that one of the issues that we face--and 
this is not all just because of access to capital. It is our 
immigration laws and other things like that. But 
entrepreneurial activity is being pushed offshore from the 
United States because of a number of our policies, and it seems 
to me that increasing access to capital for entrepreneurs here 
in the United States could address that trend. But, anyway, 
would you comment on that?
    Mr. Quaadman. I did raise that point earlier, and I also 
mentioned the Hong Kong Stock Exchange being the leader in IPOs 
last year. So we are pushing--those activities are being pushed 
offshore, and, frankly, our international competitors are more 
than happy to take that activity on board.
    I would also think, too, that as Brexit comes online, 
London is going to try and position itself to be an 
entrepreneurial center. So we have greater headwinds coming, 
and we have a chance, we still have a chance to correct the 
situation. But the time window is narrowing.
    Chairman Crapo. And just to make sure that this point is 
made, if we push an entrepreneur to London or to Hong Kong, 
then the business that that entrepreneur creates is going to be 
in London or Hong Kong.
    Mr. Quaadman. That is correct, and we are actually seeing 
that with both FinTech and blockchain, where London is trying 
to create the regulatory structure to provide the certainty; 
they have the funding to do it. And to your point, you have 
American businesses now saying, ``We want to be in the United 
States, but if they win that race, we are going to have to go 
over there.''
    Chairman Crapo. Yeah, all right.
    Ms. Slavkin Corzo, would you please comment on all of this 
issue we have been talking about?
    Ms. Slavkin Corzo. Sure. So, clearly, capital formation is 
extremely important for outcome economy. To the extent that I 
have raised concerns about the legislation that is being 
presented today, it is because I am concerned about investor 
protection and systemic economic stability.
    Chairman Crapo. OK.
    Ms. Slavkin Corzo. What we have seen is that we had a move 
toward additional regulation after Dodd-Frank, and pretty much 
immediately after that, there was a shift in attention on 
Capitol toward tweaks; and tweaks built upon tweaks and built 
upon tweaks, until we end up in a situation where we have large 
gaping loopholes in our financial regulatory system that come 
to light when we have an economic downturn.
    And so right now our stock market is doing fantastic, and 
people think that--they forget what we have seen so many times 
in the past during a downturn, that the loopholes or the tweaks 
that we thought were minor are oftentimes the causes of that 
crisis that we could have prevented had we left the regulatory 
system in place.
    Chairman Crapo. All right. Thank you. And the message I 
take from what you have said is that the notion of trying to 
increase safe access to capital is not a bad notion and not an 
improper thing for this Committee to be focused on, but that we 
have got to be sure that it is safe.
    Ms. Slavkin Corzo. Exactly.
    Chairman Crapo. That we do not create risk either to our 
economy overall or to investors or to employees as we move 
forward. And I agree with that, too.
    I will submit the rest of my questions to you. I had 
questions on the proxy system and on a number of other things, 
so I will submit those questions to you.
    Chairman Crapo. I really do appreciate the attention that 
you have brought, the help that you have brought to us here on 
these issues. I hope that you will work with us to help address 
concerns that are there in this legislation and then to promote 
and support this legislation moving forward into law. I think 
it is a big deal for the country.
    With that, let me just say that other Senators will have 
questions to submit, too, and for those Senators, the questions 
are due to our witnesses by Thursday, March 7th, and I ask you 
to please respond to those questions as quickly as you can so 
that we can get the maximum information into the Committee as 
we possibly can.
    Again, thank you all for taking the time and making the 
effort to present us your views and to help us gain your 
insight and expertise in this hearing.
    With that, this hearing is concluded.
    [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 a number of legislative proposals 
that encourage capital formation and improve corporate governance.
    It is my intent to collaborate with Senator Brown and other 
Senators on this Committee to identify and advance legislative 
proposals that achieve these goals.
    While there are bills for consideration today that I have 
previously expressed concerns with, as well as a number that Senator 
Brown has stated concerns with, I believe this is the fairest way to 
consider all of the legislative proposals that remain outstanding from 
last Congress.
    Last year, the Committee held three hearings on legislative 
proposals related to capital formation, corporate governance and the 
proxy process.
    We are considering all of those bills again today, in the context 
of identifying areas where we can find bipartisan consensus in the new 
Congress.
    A number of the bills previously considered had strong bipartisan 
support.
    For example, the HALOS Act, which would allow more startups to 
access the capital and knowledge of angel investor groups that they 
need to grow, had seven bipartisan cosponsors, including Senators 
Schatz, Toomey, and Tillis.
    The Fair Investment Opportunities for Professional Experts Act, 
which expands the definition of an accredited investor for the purposes 
of participating in private offerings, had six bipartisan co-sponsors, 
including Senators Tillis, Toomey, and Cortez Masto.
    Six Members of this Committee--three Republican and three 
Democrats--worked together to introduce the Corporate Governance 
Fairness Act, an important step in this Committee's discussion on the 
proxy process.
    Senators Toomey, Menendez, and Rounds introduced the Consumer 
Financial Choice and Capital Markets Protection Act, a bill that would 
provide more financing options for State and local governments seeking 
to raise money.
    It is my hope that we can build off this previous momentum as we 
consider legislative action this Congress.
    We will also consider a number of provisions included in last 
Congress' JOBS 3.0 bill, which passed the House of Representatives with 
over 400 votes.
    These nonprudential provisions largely passed out of the House 
Financial Services Committee and the House by voice vote, indicating 
their strong bipartisan support.
    Today's hearing provides the Committee with the opportunity to 
publicly discuss many of these JOBS Act provisions for the first time 
in the Senate.
    For example, the Family Office Technical Correction Act passed the 
House by voice vote. This bill provides that family offices and their 
family clients meeting certain thresholds can be considered accredited 
investors that qualify for various exemptions under Federal securities 
rules.
    Senators Rounds and Moran introduced a bipartisan Senate companion 
to the Options Markets Stability Act, which amends capital rules to 
more accurately reflect exposure for centrally cleared exchange-listed 
derivatives.
    These bills and their underlying aims of encouraging capital 
formation and improving corporate governance require collaboration 
between Congress and the SEC.
    I commend the SEC and Chairman Clayton for their ongoing work on a 
number of the issues we will discuss today.
    For example, last fall, the SEC conducted a staff roundtable on the 
proxy process and rules, and I encourage them to take action with the 
information they gathered.
    It is time to re-examine the standards of inclusion of proposals 
pursuing environmental, social or political agendas and ensure the 
fiduciary focus throughout the proxy process reflects the economic 
interest of the retail investors.
    Last week, the SEC announced that it is considering expanding its 
``test-the-waters'' process beyond emerging growth companies to all 
companies as they determine whether to seek an IPO.
    Senators Tillis and Van Hollen introduced the Encouraging Public 
Offerings Act last Congress which requires the SEC to do just that.
    I share Chairman Clayton's goal of making it easier and more 
appealing for companies to go public and will continue to work with the 
SEC to advance this effort.
    I look forward to hearing from our witnesses on these legislative 
proposals and working with Members of the Committee to identify bills 
with bipartisan support.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you Chairman Crapo, and welcome to our witnesses.
    Today's hearing allows Committee Members to discuss legislation 
they worked on in the last Congress.
    We need to look at these bills--and any bills that come before this 
Committee--with one question in mind: are they good for workers, or 
just good for Wall Street?
    Last year when we considered many of these bills, I asked whether 
any of the previous efforts to roll back securities laws had boosted 
investment in workers or created more jobs, if our enforcement efforts 
were keeping up with fraud, and if shareholders' ability to hold 
management accountable was under attack. I still have those questions.
    When I look at the list of today's bill, I see a lot of roll backs 
and very little protection for ordinary investors. In fact, when I hear 
some people say we need these bills to facilitate capital formation, 
I'm not sure what problem they are trying to solve.
    The capital markets seemed to work just fine last year----

    2018 was the best year for IPOs since 2014;

    Biotech IPOs reached an all-time record; and

    Venture capital investment also hit a record.

Market watchers expect 2019 to be even better. Household names like 
Uber, Lyft, Pinterest, and AirBnB, just to name a few, are planning to 
go public.
    Our time would be better spent making sure the workers at companies 
like Uber are getting the wages and benefits they've earned and are 
treated like real employees, rather than letting companies cut corners 
on their accounting controls.
    And if we want to support American businesses, those companies and 
the market overall would benefit more from avoiding another Trump 
shutdown that closes the SEC for a month than from passing all of these 
bills.
    There are other bills that seek to make changes that agencies are 
already working on. In one case, regulators addressed the issue over 5 
years ago.
    A couple of the bills take controversial positions that would 
undermine critical post-crisis reforms that keep our financial system 
stable, and that would restrict the United State's participation in 
international insurance regulation discussions.
    It's always the same story--Congress and this Administration 
bending over backward to figure out how they can make life a little 
easier for Wall Street.
    Instead, this Committee should look at how we can better protect 
ordinary American investors who are saving for retirement. We should be 
working on ideas to end Wall Street's shortsighted obsession with 
short-term stock prices, so that when companies grow, their workers' 
wages actually grow along with them.
    Earlier this month, 11 former senior SEC economists wrote to the 
agency to say its proposed best interest rule had ``weak and 
incomplete'' economic analysis--that can have a real impact on American 
families. That warning should be a red flag for this Committee, and we 
should call on the SEC to explain.
    Meanwhile, corporations announce more billion dollar stock buybacks 
and cost-cutting that always have the same result--more money for 
corporate executives, less money in workers' paychecks--if they're 
lucky enough to keep their jobs.
    Companies would rather engage in financial engineering than 
investing in the workers who make them successful. Earlier this week, 
Fed Chair Powell told this Committee that increasing investment in 
worker skills and training are vital to our economy.
    But what are corporations doing instead? Spending money on buying 
back their own stock to line executives' pockets. And the Committee 
stands by and either does nothing, or makes their work easier.
    Some of the proposals we will discuss today improve transparency. 
Senator Reed's bill would promote more disclosure on cybersecurity. 
Senator Van Hollen's proposal would require the SEC to consider ways to 
prevent trading abuses by corporate insiders. These are improvements 
that help investors and promote fairness.
    I want to hear from our witnesses other areas where transparency is 
possible, where we can do more to protect consumers in an increasingly 
complex market, and what risks are lurking out there that could cause 
another crisis or devastate working families.
    If we can focus on bills that make improvements in those areas, 
workers will benefit, investors will help companies grow, and the 
economy will expand.
    Thank you, Mr. Chairman.
                                 ______
                                 
                  PREPARED STATEMENT OF CATHERINE MOTT
                         CEO, BlueTree Capital
                           February 28, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the invitation to testify before you today. I am 
Catherine Mott, founder and CEO of BlueTree Capital and its affiliates, 
BlueTree Allied Angels and the BlueTree Venture Fund, all based in 
Pittsburgh, Pennsylvania. I am past Chairman of the Angel Capital 
Association (ACA), the professional association of active accredited 
investors across North America.
    I appreciate the opportunity to comment on legislative proposals 
that would make it easier for entrepreneurs and emerging companies to 
find the capital they need to maintain their role as the engine of 
American economic growth. I applaud the Committee for addressing these 
issues so early in this Congress, and for recognizing its critical role 
in increasing economic growth by removing barriers to capital 
formation.
The Role of Angel Investors
    ``Angel'' investors are accredited individuals who invest their own 
money in early stage companies, helping them achieve success. Angel 
investors support promising companies in every State of the union. 
Angels invest approximately $25 billion each year in more than 70,000 
startups. Compared to venture capitalists, angels invest in 15 times 
more businesses, albeit smaller amounts across a greater number of 
companies.
    Angel investors are private individuals writing personal checks. 
After friends and family, they are the primary source of equity capital 
for most startup companies, supplying critical funding to companies 
that are too early and too risky for bank loans, and too small or new 
for venture capital firms. Without angel funding, these businesses 
would never get off the ground.
    The median angel investment in a startup company is about $850,000, 
but investments range from $50,000 to $2,000,000. In most cases, 
multiple angels participate in these investments, with each angel 
contributing between $5,000 and $50,000.
    Money, however, is not all angels invest. Angels provide not only 
financial capital but human capital--time, expertise, mentorship, and 
access to our networks of experts, service providers, and potential 
customers. We tend to invest in companies based in or near our own 
communities, to support local economic development and make the best 
use of our specific resources.
    Startup companies typically go through several levels of private 
equity funding. The first layer is ``bootstrapping,'' or the investment 
of the entrepreneur's own money. The second is capital from friends and 
family. Angels and angel groups follow (often in multiple rounds of 
funding), and if the business succeeds, the next stage is venture 
capital. Angels are often the bridge to venture capital, and angels may 
build relationships with venture capital firms to help with this 
transition.
    Angel investing is not a low-risk activity. Looking at a typical 
set of 10 angel investments, three to four break even, five may fail, 
and one--just one--delivers high-yield results. It is worthwhile, 
however, because of the opportunities these investments provide for 
mentoring and making a difference at the ground level of the American 
economy.
    The BlueTree entities have invested more than $50 million in 
startup companies that meet a list of 10 criteria, including an 
experienced and talented management team; a clear path to cash-flow 
breakeven; a clear strategy for exiting angel funding; and primary 
operations in targeted, high-growth industries. Our BlueTree Allied 
Angels network is a group of accredited investors that meets regularly 
in Pittsburgh to evaluate potential investments. BlueTree Allied Angels 
has 76 member investors, and we are currently accepting new investors.
    The Angel Capital Association, our national trade support 
organization, comprises more than 14,000 accredited angel investors 
like me, and 260 angel groups, individual angels, online platforms for 
accredited investors such as AngelList, and family offices. Our 
investment portfolios include more than 20,000 entrepreneurial 
companies, including some of the most iconic names in America, which 
got their initial startup funding from angel investors. Even 
Pittsburgh-based Alcoa owes its start to two angel investors, back in 
1888. I have attached a short list of successful companies BlueTree 
angels have helped to fund, to give you some idea of the range of these 
businesses and industries.
Legislative Proposals to Promote Capital Formation
    BlueTree and the other members of the Angel Capital Association are 
glad to see the Committee return to two bills considered in the last 
Congress that would clarify investment procedures and expand 
opportunities for entrepreneurs and investors. These are the Helping 
Angels Lead Our Startups Act, or HALOS Act, and the Fair Investment 
Opportunities for Professional Experts Act. Both are bipartisan, 
commonsense proposals that should not be controversial, and would 
produce immediate benefits with no real risk to investors or the 
economy.
    Senator Sinema has been a champion of the HALOS Act during her 
service in the House, and ACA looks forward to working with her and 
Senator Toomey in this Congress to see it become law.
    The HALOS Act would clarify that ``demo days'' are exempted from 
the definition of ``general solicitation,'' eliminating market 
confusion about these events and providing entrepreneurs with better 
access to capital. While the JOBS Act created general solicitation to 
allow entrepreneurs to raise capital publicly for Regulation D 
offerings (called 506(c) offerings), with requirements for issuers to 
take additional steps to verify that investors are accredited, the SEC 
did not change or modernize its own definition of general solicitation. 
As a result, that definition now effectively includes ``demo days,'' 
the events in which entrepreneurs pitch their products and companies to 
potential investors, local economic development officials, academics 
and other members of the startup ecosystem.
    The problem for entrepreneurs is that most accredited investors are 
not interested in investing in generally solicited offerings because 
the SEC ``safe harbors'' for verification require certifications from 
third parties such as CPAs that are costly, and these certifications 
last only for 3 months. Because angels build portfolios for 
diversification, they would have to be certified 4x a year every year. 
Accredited investors prefer to avoid this additional burden and instead 
invest in private (506(b)) offerings that allow them to self-certify 
their accredited investor status in significant legal documents.
    Demo days have been an essential part of America's startup culture 
for more than 30 years with thousands of events every year without 
problem. Some current name brand companies, such as Airbnb and Dropbox, 
started their journeys in accelerators that hold demo days at the end 
of their programs. These events have always included the full spectrum 
of the innovation ecosystem, from university students to seasoned angel 
investors, venture capitalists, accelerators and incubators, government 
economic development agencies, and professionals who support 
entrepreneurs. Demo days have traditionally offered valuable education 
in entrepreneurship to students, would-be entrepreneurs, new investors 
and economic development leaders. Entrepreneurs pitch their ideas to a 
general audience, but engage in capital raising only with accredited 
investors. The SEC's rules on general solicitation have had the 
unintended consequence of creating confusion among investors, potential 
legal liability for entrepreneurs, and a reduction in funding 
opportunities for startups.
    I receive hundreds of invitations for demo days in Pennsylvania 
every year, and work with my BlueTree colleagues to assign someone to 
attend as many as possible. Many Pennsylvania demo days have followed 
local legal advice to remove not only information about the offering, 
but also descriptions of the companies' business models from pitches. 
This reduces educational effectiveness--as most investors evaluate 
companies on how they will create, build and capture value--and it also 
makes it more difficult for entrepreneurs to get their best information 
to potential investors.
    The Fair Investment Opportunities for Professional Experts Act 
would modernize the definition of ``accredited investor,'' which was 
last addressed in the Dodd-Frank Act. ACA applauds the work of Senators 
Tillis and Cortez Masto in building bipartisan consensus to grow the 
pool of capital available for new businesses. The bill would codify the 
current income ($200,000 for an individual/$300,000 for a couple) and 
net worth ($1,000,000 excluding the primary residence) thresholds for 
being considered an accredited investor, eliminating regulatory 
discretion and providing much-needed certainty to angel investors. The 
bill would also allow certain people with other demonstrated expertise 
or credentials, such as demonstrated financial sophistication via 
education or experience of profit and loss responsibility in 
businesses, to become accredited even if they do not meet these 
financial minimum
requirements.
    These changes are commonsense ways to grow the pool of accredited 
investors without excessive risk or disruption. This is especially 
important in Middle America, where the cost of living is lower and 
where entrepreneurial activity is desperately needed in areas 
devastated by losses in manufacturing jobs.
    The bill's proposal to index the numerical thresholds for 
accredited investor status to inflation, with adjustments every 3 
years, raises some concerns. While we recognize the intent to protect 
accredited investors against potential losses, we fear that raising 
these thresholds too quickly or too often may shrink the pool of 
capital available to startup companies. If Congress decides to add 
these inflationary increases to the financial thresholds, the Committee 
may want to ensure that any changes allow accredited investors to 
retain their accreditation through a hold-harmless or 
``grandfathering'' provision. The risk is that the higher thresholds 
may push accredited investors out of the income or asset minimums, 
stripping their accredited status and preventing them from continuing 
to invest in the high-growth startup companies that create innovation 
and jobs in the United States--and that could help boost investors' 
returns.
    I also see people who are financially sophisticated but don't meet 
the wealth or income thresholds, who could help new businesses start 
and grow. Some of the young attorneys who develop the deal terms and 
investment documents for Pittsburgh angels, for example, are not 
currently accredited investors but know a lot about the companies and 
investment opportunities. Enhancing the pool of angel investors by a 
sophistication criteria (i.e., education or profession) can help fund 
many more companies that are left behind but, given a financial life-
line, could deliver meaningful results for the American economy.
    Thank you again for taking up these legislative proposals. Your 
bipartisan commitment to improving access to capital for early stage 
startup companies will produce long-term benefits to our economy at 
both local and national levels. The members of the Angel Capital 
Association support these efforts and stands ready to provide 
assistance and expertise as needed toward our common goals of economic 
opportunity and job creation. Please call on me as a resource as you 
continue this work.
    I would be happy to answer any questions the Committee may have.
                    Successful Angel Funded Companies

Pittsburgh:

    Wombat Security (acquired by Proofpoint Systems, Inc.--remains in 
Pittsburgh)
    Shoefitr (acquired by Amazon)
    Fore Systems (IPO, then acquired by Marconi, Inc.--remains in 
Pittsburgh)
    GiftCards.com (acquired by BlackHawk Network Holdings, Inc.)
    DuoLingo (Unicorn Status)
    Pineapple Payments, Inc.

Older and notable:

    Free Markets (IPO, then acquired by Ariba, Inc.)
    Alcoa, Inc.

Others around the country:

    Home Depot
    RedHat (acquired by IBM)
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

 RESPONSE TO WRITTEN QUESTION OF CHAIRMAN CRAPO FROM CATHERINE 
                              MOTT

Q.1. Ms. Mott, angel investor groups provide much needed 
capital to startups that may not otherwise be able to obtain 
the funding they need to grow their ideas into successful 
businesses.
    Do you believe that the HALOS Act and the Fair Investment 
Opportunities for Professional Experts Act will be helpful 
tools to create additional opportunities for startups to access 
capital?

A.1. Yes, indeed I do. The resulting split of Reg D between 
506(c) and 506(b) offerings has created market confusion. This 
confusion around the definition of ``general solicitation'' has 
hampered ``demo days,'' which in turn cripples entrepreneurs' 
ability to raise significant capital. Demo days are a mainstay 
of the ecosystem; this is an introductory process between 
investors and entrepreneurs. To avoid defaulting to 506(c), 
entrepreneurs have been advised to withhold financial terms, 
financial projections, and go to market strategies. Without the 
ability to clearly communicate how a company builds value for 
customers and how the company communicates its own enterprise 
value, investors will pass on investing.
    We know that America is falling behind China in startup 
creation. This is not a time to limit the ability of 
entrepreneurs to raise capital; we should be supporting startup 
companies with capital formation and drive our economy to 
``raise up'' our leadership in new company creation and 
meaningful new job creation. Most of the startups are ``tech 
related' and the resulting job creation leans toward higher 
paying jobs that drive greater tax revenue, a by-product of 
such activity.
    Additionally, I believe that the Fair Investment 
Opportunities for Professional Experts Act starts an important 
discussion about how to ensure that most current angel 
investors remain accredited and safely and responsibly bring 
more investors into the angel space. It is important that the 
current pool of early stage capital remains available to 
startups by implementing inflationary increases to financial 
thresholds only going forward. The numeric thresholds currently 
in place in SEC regulations are not the only way to judge 
whether someone has the expertise or resources to help support 
our startup ecosystem. The Fair Investment Opportunities for 
Professional Experts Act will open the door to other types of 
sophisticated investors, which is critically important in 
Middle America where net worth and incomes may not be as high, 
while also putting the existing numeric thresholds in statute 
to reduce regulatory risk.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM CATHERINE 
                              MOTT

Q.1. As you know, we've worked for years to champion the HALOS 
Act, a bipartisan proposal which provides commonsense 
regulatory clarity and improves access to capital for startups, 
universities, and the broader innovation economy.
    In addition to growing Arizona's economy, university-hosted 
``demo days'' allow students to see entrepreneurs pitch ideas 
to investors. Given your experience with demo days, can you 
elaborate more on the educational value these events offer 
students who are looking to turn a great idea into an 
innovative startup?

A.1. Thank you for asking this question--and thank you for your 
previous work on the HALOS Act. Prior to the confusion about 
the definition of general solicitation, demo days were well-
attended by more than investors. Academics, university students 
(aspiring entrepreneurs), and economic development 
professionals would be in the audience.
    For the aspiring entrepreneurs, observing good pitches and 
bad pitches--and the questions the companies are asked--are the 
best lesson for preparing to succeed. A pitch is limited in 
time and in order to attract capital, the entrepreneur must 
communicate the ``business'' (not just the unique technology) 
and how it creates market value and how it appeals to 
customers. This is no easy task when one is limited to 
typically less than 15-20 minutes.
    For academics who are teaching entrepreneurship (many of 
whom never ran a business), they are seeing how the real world 
operates. Business books often don't cover the practical points 
of raising capital and particularly how to communicate business 
value in less than 20 minutes.
    For economic development professionals, this is an 
introduction to the real world of trying to raise capital and 
like investors, they are evaluating the ``business'' 
opportunity to consider how to assist the companies and drive 
job creation.
    If we can no longer include the students, professors, and 
economic development professionals, we limit the market of 
``net new job creation'' for America. As I mentioned in my 
response to Senator Crapo, this is not a time to continue 
falling behind China.

Q.2.a. Your testimony alludes to local legal advice in 
Pennsylvania that pushes demo days to reduce information about 
offerings, which makes it difficult to get the best information 
to potential investors.
    Will passing the HALOS Act and the Fair Investment 
Opportunities for Professional Experts Act, both of which we 
have supported, fully ensure that demo days can get the best 
information possible to potential investors?

A.2.a. Yes, indeed. The HALOS Act will eliminate confusion and 
avoid causing an entrepreneur to default to a 506(c) offering. 
Sophisticated investors (sophisticated angels and VCs) will not 
invest in 506(c) offerings. It's too onerous to comply over the 
5-10 years' timeframe for which investors are creating a 
portfolio of 18-36 companies.
    The Fair Investment Opportunities for Professional Experts 
is so very important for Middle America. (As opposed to 
California, Boston, and NYC that are rich in a plethora of risk 
capital.) Regions in between the coasts and in the south rely 
on angel investors to fund their startups; there is not a 
plethora of VCs or PE firms in Middle America. Job creation in 
Middle America is even more
critical; these areas are still trying to recover from the loss 
of manufacturing since the mid-80s. One only needs to drive 
across the center of America to observe; and we see how the 
hopelessness of the lack of meaningful employment has fueled 
the opioid crisis. Angel investors have been filling the risk-
capital void in Middle America investing in multiple rounds to 
help extend the runway for startup companies.
    The Dodd-Frank Act had the GAO study the impact of raising 
financial thresholds for inflation going back to 1982 would 
have when it first considered raising the criteria for 
accredited investors. Close to 60 percent of accredited 
investors would have been eliminated if the criteria for 
accredited investors was raised. The Angel Capital Association 
did another study and found that 30 percent of its existing 
check-writing members would no longer qualify, mostly due to 
increased net worth criteria. Of course, there would have been 
less impact in NYC or San Francisco, but it would have 
decimated the number of active investors in Middle America.
    Another point to consider: The cost of living is much lower 
in Middle America; earning $200,000 annually is like earning 
$450-$500,000 in NYC, LA, San Francisco, and Boston. And a 
million-dollar net worth outside the coasts and the poorer 
areas of the south, is equivalent to $2.5 million on the 
coasts. One size does not fit all.

Q.2.b. If not, what other recommendations would you make to 
ensure a regulatory climate that better facilitates angel 
investment?

A.2.b. Middle America would be well-served if the criteria for 
accredited investors could be expanded to include a 
``sophistication'' standard to include Registered Investment 
Brokers, CPA's, Attorneys, and MBA's. This would expand the 
pool of investors who understand the nuances of business and 
key financial terms, and the importance of a ``portfolio 
strategy'' for private stock.
    Also: Many angel groups raise small funds because we need 
to support the runway of many companies in our portfolio. We 
typically are challenged when we need to invest more capital in 
3 to 5 follow-on rounds. This could be more easily accomplished 
by raising small angel funds. The increase to 249 investors 
passed by the last Congress is great in terms of increasing the 
number of investors in small funds, but it would be helpful if 
the rules also increased the capacity to raise meaningful 
funds. The amount these funds can raise is capped at 
$10,000,000. Later rounds of investment capital require much 
larger dollar sizes ($3-$5 million per company); in order to 
have meaningful impact for scaling a company, a fund size of 
$50,000,000 would have a much greater impact; it would allow 
for larger rounds across 15-20 companies.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM THOMAS 
                            QUAADMAN

Q.1. Mr. Quaadman, as I mentioned in my opening statement, last 
Congress the SEC and this Committee discussed the need for 
reforms to the proxy process. Senators Reed, Purdue, Tillis, 
Jones and Kennedy introduced S. 3614, the Corporate Governance 
Fairness Act which I see as an encouraging bipartisan first 
step in the direction of making these much needed changes.
    As the Committee looks to move beyond consideration and 
toward action in this Congress, what changes to the existing 
proxy process do your members believe are necessary in order to 
ensure that the process and voting decisions of fiduciaries 
reflect the clear economic interests of the retail investors?

A.1. We believe that reforms and greater oversight of the proxy 
process are needed to ensure that voting recommendations 
reflect the economic interest of retail and long-term 
shareholders. As Chairman Clayton has iterated, voting advice 
and research should be company and industry-specific and not 
one-size-fits-all. Additionally, conflicts of interest of proxy 
advisory firms should be at the least disclosed, such as when a 
shareholder proponent is a proxy advisor firm client, and where 
possible mitigated. Also, in order to ensure that voting 
recommendations are based on accurate information, proxy 
advisory firms should consult with issuers and provide an 
opportunity for feedback on recommendations.

Q.2. Mr. Quaadman, the Compensation for Cheated Investors Act 
requires FINRA to create a relief fund which would be funded 
first by penalties paid by brokers and then from sources 
determined by FINRA. While I am sympathetic to finding remedies 
for unpaid arbitration, this approach requires the entire 
industry to bear the burden of bad actors.
    Does the Chamber believe that the Compensation for Cheated 
Investors Act is the correct approach to addressing arbitration 
awards? If not, are there approaches that the Chamber believes 
will be effective in remedying unpaid arbitration awards more 
fairly?

A.2. We do not believe that the Compensation for Cheated 
Investors Act is the correct approach, as it would effectively 
allow FINRA to assess firms that have done nothing wrong in 
order to pay out arbitration awards that have been awarded due 
to the
activities of bad actors. The legislation would also empower 
bad actors by providing a backstop in place for them, paid for 
by somebody else, to compensate investors they have cheated. 
FINRA's customer code also states that unless a brokerage firm 
has a bona fide reason for nonpayment of an arbitration award, 
the firm must pay the award within 30 days. Firms that do not 
pay within 30 days risk being penalized or suspended by FINRA. 
Given the existing protections in place and the likelihood that 
the Compensation for Cheated Investors Act would embolden bad 
actors, we think that policymakers should contemplate and take 
into account the existing Securities Investor Protection 
Corporation (SIPC) regime that was created to compensate 
investors in the event of a broker liquidation.

Q.3. John Bogle, the creator of the index fund, warned last 
year that ``if historical trends continue, a handful of giant 
institutional investors will one day hold voting control of 
virtually every large U.S. corporation.'' Chairman Clayton has 
also expressed concerns that the ``voices of long-term retail 
investors may be underrepresented or selectively represented in 
corporate governance.''
    What is the best way to make sure that the voting decisions 
of fiduciaries reflect the clear economic interests of the 
retail investors on whose behalf these institutional investors 
engage?

A.3. In addition to reforms and changes to proxy advisory firms 
and the way they produce voting recommendations, the SEC should 
also clarify how investment advisers can satisfy their 
fiduciary duty in voting proxy decisions, particularly 
following the withdrawal of the 2004 no-action letters. Staff 
Legal Bulletin 20 went a long way in articulating that an 
investment adviser must exercise proper oversight over a proxy 
advisory firm when an adviser uses such firm's recommendations 
in deciding how to vote. Further issues regarding investment 
adviser compliance could be clarified, such as whether it is 
necessary to vote every proxy in order to satisfy an adviser's 
fiduciary duty, and providing further guidance around the 
definition of an ``independent'' third party, such as a proxy 
advisory firm.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM THOMAS 
                            QUAADMAN

Q.1. At the hearing, in response to a question, you stated, 
``We are seeing R&D spending last year being the highest that 
it has ever been.''
    Please compare 2018 R&D spending by public companies to 
stock buybacks.

A.1. While stock buybacks overall have seen a recent spike 
following the passage of the tax cut bill, S&P 500 firms have 
increased their spending on both R&D and capital expenditures 
as a percentage of revenue over recent years, and R&D spending 
in fact is at a record high.\1\ We believe the idea that stock 
buybacks precludes spending on R&D and other reinvestments in 
the company is misguided. Businesses make the most productive 
decisions they can based on the capital they have. For those 
businesses that decide stock buybacks are the most productive 
decision, that returned capital can then be redeployed 
throughout the economy in innovative public and private 
companies that need the funding in order to grow their business 
and expand their operations.
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    \1\ https://taxfoundation.org/economics-stock-buybacks/
?utm_source=Corporate&utm_cam-
paign=2c6c9faa58-EMAIL_CAMPAIGN_2018_08_16_01_36_COPY_01&utm_medium
=email&utm_term=0_94e6588ff2-2c6c9faa58-
429053753&mc_cid=2c6c9faa58&mc_eid=70da
02528d.

Q.2. At the hearing, in response to a question, you stated, ``I 
also mentioned the Hong Kong Stock Exchange being the leader in 
IPOs last year.''
    Please compare 2018 IPOs, both by proceeds and number of 
offerings, between the (i) Hong Kong Stock Exchange and (ii) 
the New York Stock Exchange and Nasdaq.

A.2. In 2018, Hong Kong led the number of IPOs with 197, 
compared to 142 by Nasdaq and 63 by NYSE. By proceeds, Hong 
Kong again led with $35.4 billion, compared to $29.7 billion by 
NYSE and $23.1 billion by Nasdaq.\2\ Listing reforms that Hong 
Kong has recently implemented such as allowing dual-class 
shares and pre-revenue biotech firms to list have made their 
exchange much more competitive in the global IPO landscape. 
That is why it is critical for the SEC and Congress to continue 
to advocate for capital formation reforms to make it easier for 
companies to go public and continue to make the U.S. capital 
markets an attractive destination to list.
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    \2\ https://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-
report-q4-2018/$FILE/ey-global-ipo-trends-report-q4-2018.pdf.
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 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM HEATHER 
                         SLAVKIN CORZO

Q.1. At the hearing, in response to a question, Mr. Quaadman 
stated, ``We are seeing R&D spending last year being the 
highest that it has ever been.''
    Please compare 2018 R&D spending by public companies to 
stock buybacks.

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

Q.2. At the hearing, in response to a question, Mr. Quaadman 
stated, ``I also mentioned the Hong Kong Stock Exchange being 
the leader in IPOs last year.''
    Please compare 2018 IPOs, both by proceeds and number of 
offerings, between the (i) Hong Kong Stock Exchange and (ii) 
the New York Stock Exchange and Nasdaq.

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

Q.3. At the hearing, in response to a question, Mr. Quaadman 
discussed the SEC's repeal of the two proxy advisor no-action 
letters and the content of the letters. He stated the 
following:

    ``The withdrawal of the no-action letters was important 
because those two no-action letters which date back to 2005 
effectively did two things. One is they told the proxy advisory 
firms, ``You do not have to disclose any conflicts of interest 
to your clients.'' The second letter effectively said to the 
clients, ``You do not have to ask about conflicts of interest, 
and you can really on that advice anyway.''

   LDo you agree with his characterization of the 
        letters?

   LDo you have any concerns with the SEC's withdrawal 
        of the no-action letters without providing comparable 
        guidance?

A.3. Response not received in time for publication.

Q.4. In discussing stock buybacks with Mr. Quaadman, Senator 
Toomey stated:

        if a management team does not believe it has attractive 
        investment opportunities, doesn't it have an obligation 
        to return excess capital to the people who own that 
        company, who then typically invest in another 
        opportunity to grow the economy, to make more 
        investments, to hire more workers?

To which Mr. Quaadman responded, ``It provides for a more 
efficient allocation of capital. That is correct.''

    Do you agree with the characterization of options available 
to management? In addition, do stock buybacks provide 
shareholders with a ``return of excess capital'' that is 
directly investable elsewhere?

A.4. Response not received in time for publication.

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