[Senate Hearing 117-756]
[From the U.S. Government Publishing Office]
S. Hrg. 117-756
EXAMINING HOW CAPITAL MARKETS SERVE DIVERSE ENTREPRENEURS AND INVESTORS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
SECURITIES, INSURANCE, AND INVESTMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE DIVERSITY OF PUBLICLY TRADED COMPANIES AND
HOW CAPITAL MARKETS CAN BETTER SERVE ALL AMERICANS
__________
DECEMBER 13, 2022
__________
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
53-745 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
______
Subcommittee on Securities, Insurance, and Investment
ROBERT MENENDEZ, New Jersey, Chairman
TIM SCOTT, South Carolina, Ranking Republican Member
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
MARK R. WARNER, Virginia MIKE CRAPO, Idaho
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CATHERINE CORTEZ MASTO, Nevada THOM TILLIS, North Carolina
TINA SMITH, Minnesota JOHN KENNEDY, Louisiana
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
RAPHAEL WARNOCK, Georgia JERRY MORAN, Kansas
Jonathan Tsentas, Subcommittee Staff Director
Sarah Brown, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
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TUESDAY, DECEMBER 13, 2022
Page
Opening statement of Chairman Menendez........................... 1
Prepared statement....................................... 17
Opening statements, comments, or prepared statements of:
Senator Scott................................................ 3
Prepared statement....................................... 18
WITNESSES
Gilbert Andrew Garcia, CFA, Managing Partner, Garcia Hamilton &
Associates, L.P................................................ 5
Prepared statement........................................... 19
Responses to written questions of:
Senator Cortez Masto..................................... 31
Senator Warnock.......................................... 32
Thomas Quaadman, Executive Vice President, Center for Capital
Markets Competitiveness, U.S. Chamber of Commerce.............. 7
Prepared statement........................................... 21
Responses to written questions of:
Senator Scott............................................ 33
Senator Cortez Masto..................................... 34
Additional Material Supplied for the Record
Letter from NASAA................................................ 36
(iii)
EXAMINING HOW CAPITAL MARKETS SERVE DIVERSE ENTREPRENEURS AND INVESTORS
----------
TUESDAY, DECEMBER 13, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Securities, Insurance, and Investment,
Washington, DC.
The Subcommittee met at 2:39 p.m., in room SD-538, Dirksen
Senate Office Building, Hon. Robert Menendez, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ
Chairman Menendez. This hybrid hearing of the Senate
Subcommittee on Securities, Insurance, and Investment will come
to order. Thank you for being here today.
A few reminders before we begin. For those who are
participating virtually, once you start speaking there will be
a slight delay before you are displayed on the screen, so do
not get terrorized thinking we will not see you. We will. Also,
to minimize any background noise please make sure you remain
muted until it is your turn to speak.
Turning now to the subject of today's hearing, we are here
because our economy has a fundamental problem. Across corporate
America, those in charge are overwhelmingly White and
disproportionately male. In a recent analysis of over 3,000
United States firms listed on either the New York Stock
Exchange or the NASDAQ, researchers at Cornell found that
racial minorities held only about 12 percent of board seats in
2019, with over 40 percent of all U.S. boards composed of only
White directors.
In asset management we see a similar story. Of the $70
trillion in global financial assets under management, less than
1 percent are managed by women- or minority-owned firms.
Now some may wonder why is this a problem. Why should the
Federal Government have an interest in the diversity of
publicly traded companies? The answer to me is simple. It is
because it is material information that investors should have
when deciding where to put the money, and in study after study,
including those conducted by the consulting firm McKinsey,
researchers have found that a diverse workforce leads to a more
productive and profitable company. The reasons for this are
varied, but whether it is because of smarter and more inclusive
decisionmaking, increased creativity and problem-solving, or
greater recruitment and retention, the bottom line is this: a
company whose governing structure looks like America is a
company that can compete on the global market.
Which brings us to this hearing. The current lack of
diversity in capital markets, businesses, and financial
institutions creates a ripple effect across the financial
ecosystem. It negatively affects entrepreneurs and investors,
it makes companies less competitive, and stalls our Nation's
progress toward a truly equitable marketplace. In short, a lack
of diversity means that American companies are fighting to
compete with one hand tied behind their backs.
It is an issue that I have been personally following for
years, and in the past my office has issued corporate diversity
surveys of Fortune 100 companies. And what we have found is
that while many of these companies believe in the idea of
increasing diversity among their senior leadership, very few
have made any real progress on the matter.
So I introduced the bill, the Improving Corporate
Governance through Diversity Act of 2021. My legislation would
promote greater transparency in corporate America by requiring
public companies to disclose specific information related to
the racial, gender, ethnic makeup and veteran status of
corporate boards and senior management, and whether they have
policies in place to promote diversity in their leadership. It
is a bill that I am proud to say has strong support across the
ideological spectrum, from the U.S. Chamber of Commerce to the
National Urban League.
And it goes hand-in-hand with what SEC's Asset Management
Advisory Committee has urged the asset management industry to
adopt. The AMAC Subcommittee on Diversity and Inclusion has
pushed for greater disclosure of the gender and racial makeup
of firms. This increased transparency would not only improve
performance to the benefit of investors, it would also further
the SEC's diversity and inclusion goals and its mandate to
facilitate fair and open markets. It is my hope that the SEC
soon enacts all of these recommendations and that we can pass
my Improving Corporate Governance Through Diversity Act.
Last, I would just like to note what greater diversity
means for investors and entrepreneurs in minority communities.
I say this because I know it is of particular interest to both
Ranking Member Scott and myself. The fact of the matter is that
underrepresentation has a trickle-down effect. When corporate
leadership at the top is not diverse, unsurprisingly, the firms
that manage their pensions are also not diverse. When corporate
leadership only reflects one thin slice of the population,
their decisions will only benefit one slice of the population.
And despite contributing trillions of dollars to the economy,
being among the most likely to start a small business, many
minorities across the country still lack access to the capital
they need to thrive. We all saw this firsthand during COVID
when minority business owners struggled to access the PPP
program.
So the goal of today's hearing is to explore these issues
further, to discuss solutions that work for women and minority
communities who are too often neglected by traditional
financial services and in the capital markets.
And with that I want to thank our witnesses for appearing,
for sharing their testimony with us today. And I am pleased to
turn it over now for his remarks to my friend, the
distinguished Ranking Member, Senator Scott, for his opening
remarks.
STATEMENT OF SENATOR TIM SCOTT
Senator Scott. Thank you, Mr. Chairman, for holding this
very important Committee hearing, and thank you to the
witnesses, both here with us and joining us virtually, for
being a part of this process and part of the conversation as
well.
As a young man growing up in an at-risk world, I was
blessed to meet a mentor, a guy named John Moniz [phonetic], a
Chick-fil-A operator who really taught me the power of
opportunity, the power of free markets and capitalism. It was a
great lesson that I needed to learn, and I learned it at a very
ripe age of 15 years old.
I also learned along the way, after a few years in the
insurance industry, that there are basically three ways to
create wealth in America. The first way is really real estate,
and for most of us that real estate means home ownership. The
American dream, for so many people, the epitome of the American
dream really is that sense of owning your own home, equity in
the real estate market.
The second way to create wealth is owning your own
business, and through the lessons of John Moniz, learning that
profits were better than wages, 1 day I opened my own business,
and thank God that I did. It changed not only my life
economically but my mother's life and frankly, members of my
community.
The third way of being able to create wealth in America is
having an equity position in the marketplace. Making sure that
everyday Americans have access to the market is so critically
important. It does not matter whether you are Black or White,
male or female, where you live in rural South Carolina or
inner-city Chicago, the truth is that those three ways--home
ownership, entrepreneurship, and having an equity position in
the marketplace--are the ways that we create wealth, and it is
one of the ways that we find a more fair path in what seems
like an unfair world.
Millions of Americans have discovered the magic that is
made when we, in fact, understand and appreciate opportunity
and opportunity for all. No matter your color, your creed,
opportunity exists for all of us.
To be clear, all Americans have not always had equal access
to these wealth-building opportunities that their peers have.
However, I believe that there is more opportunity today in the
United States than at any other time in American history.
Founders and entrepreneurs of diverse backgrounds, minorities,
women, veterans, and those who live outside of Boston, New
York, and the Bay Area, where at once almost completely unable
to access the same early stage and growth funding opportunities
as their peers. Today, these groups are now receiving a growing
share of investment capital to start and scale their
businesses.
In 1989, less than a third of American families owned any
stocks or bonds. Now over half of U.S. households have access
to these U.S. capital markets, and they are taking advantage of
this very powerful and transformative tool to create economic
growth, job creation, and wealth accumulation. Even better, the
most rapid growth in the share of stock ownership has occurred
among lower- and middle-income households. Now, 4 in 10
households that own stock have annual family incomes of less
than $74,000. That is something we should celebrate.
During this hearing, I look forward to hearing more about
the key challenges that diverse founders and entrepreneurs,
including women and minorities, veterans, and rural residents,
face in accessing seed capital, whether it is angel, public
capital relative to their peers outside of these groups,
potential approaches to mitigate any existing barriers to enter
such markets for these diverse entrepreneurial groups.
I would also like to hear about the challenges associated
with low- and moderate-income individuals--women, active-duty
military, and veterans, and ethnic minorities--as it relates to
accessing investment opportunities. I would also enjoy hearing
about the possible frameworks to improve the scale and scope of
investment opportunities for retail investors and whether there
are any existing legislative or regulatory threats that may
curb market participation for investors.
I appreciate all of today's witnesses for joining the
Subcommittee and to examine the most important issues that are
relevant to our investors. Thank you.
Chairman Menendez. Thank you, Senator Scott.
So let me introduce today's witnesses. Testifying before us
today is Mr. Gilbert Garcia, Managing Partner of Garcia
Hamilton & Associates. Since joining the firm in 2002, Mr.
Garcia has been consistently recognized for his advocacy to
diversify the asset management industry. He was named
Outstanding Diversity Champion by the Houston Business Journal
this year, and in 2020, received the Maynard Holbrook Jackson,
Jr., Award from the National Association of Securities
Professionals.
Mr. Garcia currently serves on the SEC's Asset Management
Advisory Committee, where he leads a Diversity and Inclusion
Subcommittee. In addition, he serves on the
Department of Treasury's Advisory Committee on Racial
Equity. He is from Houston, Texas, and a graduate of Yale
University.
Also testifying is Mr. Thomas Quaadman, Executive Vice
President for the Center for Capital Markets Competitiveness at
the U.S. Chamber of Commerce. He has been with the Chamber here
in Washington since 2008, where he advocates for policies in
the capital market that protect investors, promote capital
formation, and ensure U.S. leadership in the global markets. He
is also the Executive Vice President of the Chamber Technology
Engagement Center and the Global Innovation Policy Center.
Mr. Quaadman graduated cum laude from New York Law School
and he earned his bachelor's degree from the College of Staten
Island.
Thank you both for being here. We will start off with Mr.
Garcia. Both of your statements will be fully included in the
record, without objection. I am going to ask you to try to
summarize it in about 5 minutes or so, so that Senator Scott,
I, and when other Members come, can have an engagement with you
back and forth. And I will start off by recognizing you, Mr.
Garcia.
STATEMENT OF GILBERT ANDREW GARCIA, CFA, MANAGING PARTNER,
GARCIA HAMILTON & ASSOCIATES, L.P.
Mr. Garcia. Thank you very much. My statement is there for
all of you Senators, and Chairman Menendez, Ranking Member
Scott, and other Members of the Committee, thank you.
I will not go through my background because the Senator
went through my background. I am product of public schools. I
am a first-generation college. Financial services was something
that was not even on the table for me as a young Latino in
Corpus Christi, Texas, until I found an organization called
SEO, which is called Sponsors for Educational Opportunity,
which places minority undergraduates on Wall Street. Had it not
been for that program in the summer of 1983, I would have never
been in this field. And, of course, Salomon Brothers was the
prince of capitalism, and I flourished.
And I moved back to Texas in 1990, and started managing
money, and I joined our firm in January of 2002, when we had
only $200 million in fixed income assets, and now we are just
at $18 billion, making us the largest Hispanic-owned money
manager in the country.
In 2019, I had the honor to serve on a FACA committee for
the SEC, called AMAC, the Asset Management Advisory Committee.
So that is why I am here. I want to share with you a few
challenges that our firm has faced, I want to tell you my
experience on the Diversity and Inclusion Subcommittee as the
chairman, and I want to talk about our recommendations and
where they are today.
And of course, please know that diversity can be a
difficult topic to talk about, just because some people can be
uncomfortable. But at the end of the day we need to talk about
it.
So I am going to go to AMAC, and if you are following I am
near the bottom of my first page. AMAC consisted of 22
professionals, all leaders in their firms, from some of the
industry giants such as Goldman Sachs, Schwab, Morningstar, and
the like. I was the only Hispanic on the committee, and there
was only one African-American member, and we went on a 2-year
journey, and we had many different panels and had many
different experts testify or give expert testimony, and also
received many research papers.
And we started with data, and that is when we discovered
that data is very limited. We even discovered that the SEC's
own Diversity Demographic Survey has a poor response rate,
probably because it is voluntary.
But talent in the diverse community is undeniable, and
there is numerous research out there, that Senator Menendez
already reference. But at the end of the day, if you look, and
no matter what studies you find, there is roughly $70 trillion
in investable assets, and whether you look at 2017 or 2019 or
even now, the amount of assets managed by diverse firms--women-
owned, minority-owned--is less than 1.1 to 1.3 percent.
Now one key area that I believe could move the needle
greatly, and it was part of our testimony that we received over
our 2-year period, was the investment consultant industry. Many
of them are SEC registrants. They are often the allocators of
the asset management industry, and are the gatekeepers for many
foundations and endowments and pension funds. So they are the
ones that recommend money managers for hire. Some, though,
receive economic benefit for managers without clear disclosure,
and the concentration is very clear.
If you look at the latest consultants, according to the
2020 report from P&I Magazine, the largest 10 have $36
trillion, or 85 percent market share. So the largest 10 control
85 percent of the assets. The largest 20 are 94 percent. So you
have a semi-closed system where the largest consultants
recommend the largest managers. But see, if the consultants
only recommend large managers there is virtually no opportunity
for diverse firms to compete, since they, by definition, are
smaller in size.
And what has happened is many of the consultants have now
started these arbitrary and unnecessary barriers of entry, such
as length of track record, firm asset size, amount of
insurance, or other factors that indirectly exclude almost all
minority firms from participating. And then, of course, there
is direct exclusion, and I will just give you one example. A
colleague of mine and I were the focus of a very hostile and
unprofessional meeting by one of the largest 10 consultants.
They advise over $1 trillion. And they rudely proclaimed that
they would never recommend our firm to any of their clients and
would never put us in a new business search. The reason, they
boldly stated, was because we did not have enough White male
partners in our firm, and we did not have enough White male
portfolio managers.
Now this was not the '40s and '50s, like the stories of my
grandfather, or the '60s and '70s, like the stories of my
father. This was just a few years ago. And if they say that to
us, the best in class, what do they say to the newer, smaller
diverse firms? And if they say that to our face, imagine what
they say in the deliberations behind our back. And sadly, that
is just one example.
Clearly, many consultants, the large ones that are the most
guilty culprits, realize that the greater transparency is
inevitable. But instead of trying to improve their numbers,
they are just simply moving the goalpost, and how they are
doing it, they are circumventing established Federal and State
laws and practices which use a 50 percent ownership threshold
to define diverse-owned. How? They have created a new term
called ``substantially diverse,'' some as low as 25 percent
diverse ownership.
Now the entire recommendations are summarized for you. I
will just hit the highlights. The first, we suggest two
additional goals to the SEC's strategic plan, one, that
diversity and inclusion should be elevated to a core value and
a material fact for all SEC activities. Second, they should
promote diversity practices among all registrants. Second, we
suggest that the SEC issues guidance and bulletins, and we
suggest that they issue one that clearly discourages the use of
parameters for manager selection that have the impact of
excluding minority-owned firms.
And what is very interesting is even Commissioner Uyeda, on
September 29, 2022, in some of his remarks from a keynote
luncheon speech, said that one specific AMAC recommendation
that deserves attention is that when fiduciaries select asset
managers, their selection criteria should not exclude managers
simply based on a minimum level of AUM, or minimal length of
track record. Selection criteria tend to result in the
elimination of women- and minority-owned firms from further
consideration. Rather, fiduciaries should consider using
relevant factors that do not involve automatic exclusion of
managers.
Those are his comments.
On number 3, the SEC already has a registration process
called the ADV. We suggest that the SEC starts including
diversity data already on their ADV. That way there is not a
new process. They already have information that they request on
their voluntary form, such as transparency of ownership,
transparency of workforce, demographics of ownership, and the
like.
Next, we suggest enhancing the ADV for consultants and
asset allocators to provide sunlight on the selection process
of registered investment advisors.
Next, and I will be quick, there----
Chairman Menendez. I would like you to try to--Mr. Garcia,
I would like you to try to wrap up because we are 2 minutes
over the 5 minutes, so we are at 7 minutes.
Mr. Garcia. Very good. The other are pay-to-play practices
laws where even Commissioner Peirce has suggested that they are
outdated. And the next relates to other pay-to-play practices.
Let me just say this. There are already statements by
Commissioners Lizarraga and Crenshaw suggesting the support of
all the AMAC recommendations, and they themselves, and I will
just quote them quickly, have said, ``I believe it is our
responsibility to the public to explain why the AMAC's four
recommendations cannot be fully implemented.''
Chairman Menendez. Thank you.
Mr. Garcia. And that is simply what we are asking here
today.
Chairman Menendez. Thank you very much.
Mr. Garcia. Because right now, Senator, there has been
virtually only two items that have been implemented, and they
are the least impactful. I will stop there.
Chairman Menendez. Thank you very much. I am sure we will
get into more questions.
Mr. Quaadman, thank you for appearing. Your testimony.
STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER
FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE
Mr. Quaadman. Thank you, Chairman Menendez and Ranking
Member Scott and Members of the Subcommittee.
Main Street businesses need to access diverse forms of
capital in order to start and grow. Democratized marketplaces
allow for retail investors to have more opportunities for
wealth creation. Historically, this Subcommittee has led in
those issues in a bipartisan basis.
Ten years ago, many members of the House and Senate took a
look at the landscape and decided that there were problems,
including the persistent decline of public companies within the
United States, that were harming the American economy. What
they did is they took a series of recommendations that had been
languishing within SEC advisory committees for years and put
them together to create the JOBS Act. As a result of that
initiative, we have a new class of emerging growth companies.
We have balanced progrowth policies with regulatory mandates.
We have also liberalized private and public financing rules.
The JOBS Act was a success. In the years before the JOBS Act,
the average number of IPOs was 121. In the years since the JOBS
Act passed, the average number of IPOs is 344. Innovative
industries in the United States as a global leader have
benefited most. Forty percent of IPOs have been with biotech
firms. Those firms, within 3 years of their IPO, have expanded
their workforce by 150 percent. In fact, it is not an
understatement to say we would not have had COVID vaccines or
mRNA technology without the JOBS Act.
However, history is repeating itself, and unfortunately we
find ourselves in an eroding competitive environment. The
number of public companies within the United States is flat.
Chinese venture capital now rivals the United States venture
capital. Financial centers around the world, such as London,
Dublin, Frankfurt, Singapore, Dubai, Hong Kong are now vying
for capital that normally would have gone to American
companies.
Earlier this year the ACCF released a report that showed
that as a result of obstacles to growth we have 800 fewer
public companies in the United States. There is a steep cost to
those lost companies. We have 500,000 less jobs, we have $250
billion less in corporate revenue, and we have $600 billion
less in market capitalization.
Now the SEC, through its legal mandates of investor
protection, competition, and capital formation, actually can
address these issues on its own. However, with the 53 rule
proposals that are on the SEC's docket, not one of them deals
with either capital formation or competition. Therefore, it is
imperative that Congress act.
In our 2021 capital formation letter to Senator Toomey, who
has been a leader on these issues, we outlined 27
recommendations to reverse this trend. We believe that the
following bills that are before the Subcommittee can help
create a new JOBS Act. The bipartisan Helping Startups Continue
to Grow Act would extend the minimum period for EGC status to
10 years. Equal Opportunity For All Investors Act helps
businesses access new sources of capital by expanding the
accelerated investor qualification. The Seed Act would allow
for micro-offering safe harbors, allowing for small businesses
and entrepreneurs to raise small amounts of capital.
The Gig Worker Equity Compensation Act would allow
companies to give their employees equity compensation without
triggering a registration incident. The Expanding American
Entrepreneurs Act would allow angel funds to better raise
capital as well as to deploy capital to startup firms. The
bipartisan Empowering States to Protect Seniors from Bad Actors
Act moves the responsibility for administering the Senior
Investor Protection Grant Program to the SEC, whose mandate
they have for investor protection.
Additionally, we must address the needs of minority
entrepreneurs who have traditionally been underserved by the
financial ecosystem. A 2018 Kellogg Foundation study showed
that closing the racial equity gap would add $8 trillion to the
economy.
In November 2020, the Chamber made several recommendations
to promote minority access to capital. Congress should direct
the SEC's small business advocate to analyze the needs of
minority-owned businesses and entrepreneurs and make
recommendations for improving their access to capital.
Policymakers should encourage the use of alternative data for
underwriting and other business purposes, when appropriate.
Congress should expand and strengthen both community
development financial institutions as well as minority
depository institutions.
We have also worked with the NACD to create a pipeline to
identify Black candidates and Hispanic candidates for board
seats as well.
So, Mr. Chairman, Mr. Ranking Member, we want this to be a
dialogue to start the process for a new JOBS Act, and we are
willing to work with both sides of the aisle to get there.
Chairman Menendez. Well, great. Thank you, Mr. Quaadman. We
will start a round of 5-minute discussions, and then depending
on attendance we can extend that.
Let me start off with you, Mr. Garcia. The Diversity and
Inclusion Subcommittee submitted their recommendations on July
7, 2021. That is after the long, 2-year period you described.
It has been about a year since then, and wanted to get your
thoughts on the progress that has been made.
In your view, what, if anything, has changed about the
overall state of diversity in asset management since you
released these recommendations, and how would you rate the
SEC's progress in responding to your recommendations?
Mr. Garcia. Sure. Thank you, Senator. First, it is
remarkable that the AMAC--there are only two minority members
on the whole committee--unanimously supported all of these
efforts, and many of them come from the biggest institutions in
this country. It has been extremely disappointing that here we
are today, Senator, and only the two least impactful items have
been implemented.
If I were a teacher I would give it an ``I'' for
incomplete, because not only did they do the two least
impactful with very little fanfare, but there have already been
comments by the other commissioners that suggest that they want
to have a discussion and a dialogue, and it sounds like, from
their own comments, that they are supportive of most, if not
all, of them.
And I believe the public deserves, and we, on the AMAC,
deserve if they are not going to be implementing them, why not?
We spent hundreds of hours under the guise that this FACA
committee was relevant and important, and we sure would like to
see a conclusion, one way or the other, Senator.
Chairman Menendez. Yeah. Let me ask you, I think it is
important to note that using the excuse of fiduciary duty to
exclude women- and minority-led firms runs contrary to the
actual data. There is a large and growing body of evidence,
including AMAC study, that shows diversely led firms outperform
their nondiverse counterparts. So this is about the bottom
line, not even talking about any societal benefit. I am just
talking about the bottom line.
Given this data, do you agree that a firm's diversity,
particularly at the management level, is material information
that investment advisors should be able to consider when making
recommendations to their clients?
Mr. Garcia. Absolutely. Senator, I would go a step further.
I would suggest that the elimination of women- and minority-
owned firms that have already been proven to perform just as
well, if not better, than the nondiverse firms, by excluding
them you might very well be in violation of your fiduciary
duty. Because after all, your duty is to source good managers,
regardless of who they are.
And so my view is by casting a very narrow net on purpose
to bring up barriers of entry to exclude these firms is not
right, and is costing your clients.
Chairman Menendez. And last question to you. Do you believe
the SEC currently has the authority to implement these enhanced
disclosures?
Mr. Garcia. Yes, sir. In fact, we worked very closely with
many of the SEC staff, legal staff, and one of the members of
our subcommittee was a former SEC legal staffer. And we were
very careful to make sure that everything that we recommended
is within their lane of their authority. So that has already
gone through the process or we would not have even recommended
it.
I would even suggest that one of the items, which is the
pay-to-play rules, all we asked was to reevaluate it and to
study it. My own view is it should be discarded entirely,
because all it does is favor other industries to the disfavor
of the financial community, and as a person who has worked very
hard, it just does not feel good to suggest that there are more
people in my industry doing things they should not do than any
others.
And Commissioner Peirce said it best when she said there
are already laws on the books.
Chairman Menendez. Yeah. So I think about this question as
a question of improving the bottom line, right, and there are
many elements of it. For example, years ago Chevrolet tried to
sell the Chevy Nova in Latin America. ``Nova,'' in Spanish
means it will not move. I do not care how good a marketing plan
you have, if you are trying to sell a car that is called ``it
will not move'' is not going to do very well.
That is just a simple example of language, but
understanding language, business customs, culture, in the C
suite and senior executive management is helpful to the bottom
line. I think about the Hispanic community that has $2 trillion
domestic marketplace, younger by a decade than the rest of the
population, growing exponentially. For bottom line reasons, I
would want to be on them like white on rice, which means having
individuals who understand the nature of how you get greater
market share, and in doing so there is a ripple effect, a
benefit to those communities that if I can help my company make
better investment decisions that would inure to the benefit of
places in the country that they might otherwise look like, the
would have opportunities for enhancement of economic
opportunity for people there.
So that is how, in part, I look at this. Senator Scott.
Senator Scott. Thank you, Mr. Chairman.
Strong, competitive, and perhaps most importantly
accessible capital markets are essential to fostering a healthy
entrepreneurial ecosystem and the U.S. economy. That is why the
passage of the JOBS Act, Mr. Quaadman, as you said, 10 years
ago was a game-changer, a game-changer. Lawmakers recognized
that there was nothing partisan about making it easier for our
country's companies to spur innovation, hire new workers,
invest in their communities, and power U.S. economic growth,
and work together on a bipartisan basis to pass commonsense
legislation aimed at doing just that.
And now, as our economy looks to complete its rebound from
the impacts of the pandemic, this body is present with an
opportunity to build on the enormous success of the JOBS Act,
and once again, to jumpstart capital formation and the creation
of good jobs by companies that serve as the life blood of the
American economy. The JOBS Act's creating of emerging growth
company, or EGC, status to provide a flexible regulatory regime
for small companies that are still working to scale their
businesses has been a resounding success. Case in point: since
2014, roughly 90 percent of companies have gone public using
the EGC status.
Mr. Quaadman, EGC designation has made IPOs more attractive
for low-revenue, high-growth companies by smoothing the
transition to the public markets without compromising investor
protection. However, some companies, like biotech firms, have
long product development timelines, reach the end of their 5-
year exemption limit, and still are not generating enough
revenue to support the much steeper compliance costs that come
with a loss of EGC status.
How would my legislation extending the EGC scaled
regulatory regime to 10 years benefit companies and the broader
economy?
Mr. Quaadman. It does two very important things, Senator
Scott. Number one, it allows regulations to be tailored to that
company. So if you take a biotech firm as an example, they have
very heavy capital needs, but they are not necessarily selling
anything yet. So if you take a look at, let us say, all the
controls around revenue, they just create costs with no
meaning. And, in fact, what those extra dollars do for
regulatory compliance, which is meaningless, actually takes
money away from research as well as job creation.
Number two, what it does is it allows those companies
actually to grow into the appropriate levels of controls and
process that are needed to have the certainty that they do need
when they do reach their full-bloom public company status. So
it allows for a greater ramp-up because, quite frankly, with
those innovative firms, 5 years is not long enough and 10 years
is a better timeframe.
Senator Scott. Thank you, sir. I look forward to working
with my colleagues to build bipartisan support for this
commonsense legislation. U.S. capital markets are the gold
standard globally and help make the American economy the envy
of the world. They provide a system where the average American
working family can invest their savings into projects and earn
a tangible economic reward, enabling their dreams of buying a
house, sending their children to college, and retiring with
economic security.
A little over a year ago, I sat right here and had a
conversation with SEC Chair Gary Gensler about the significant
ways the retail investment landscape has evolved over the last
couple decades, and discovered that we both strongly agree on
one point in particular--increased retail investment market
participation is a good thing for America.
Now, it is not that often that Gary Gensler and I find
common ground, and that point would be supported by Chairman
Brown if he were here. So it was encouraging that we both
seemed to see eye-to-eye about the benefits of more people
finally beginning to gain access to this powerful wealth-
building engine.
Do you agree with that statement, and is more Main Street
investors getting involved in the market a positive thing?
Mr. Quaadman. It is a very positive thing. So allowing Main
Street investors to enter into the marketplace creates wealth
on Main Street, right. So the problem that we have seen over
the last 20 years or so, many of the capital-raising measures
that are happening are only happening in 20 counties in the
United States. So we have actually seen a calcification, to
some degree, of our marketplace.
What the JOBS Act and one of the reasons why we think it is
important to do additional amendments to it, so let us say with
crowdfunding, the credit investor rules expanding those, it
will actually allow for retail investors to have more
opportunities to create wealth, and it can be done in a
particular way that will actually strengthen investor
protections. And frankly, if the SEC is on the job, that should
not be a problem.
Senator Scott. Thank you, sir.
Chairman Menendez. OK. Well, we look forward to working
with Senator Scott on some of these issues.
Mr. Quaadman, let me ask you some final questions. I think
it is important to understand, as I suggested at the close of
my comments, that diversity is not just a fanciful idea but
rather a goal that can improve a company's bottom line and our
country's economic competitiveness.
Why is it necessary for public companies to disclose the
diversity within their senior management to investors?
Mr. Quaadman. So first off, Mr. Chairman, we appreciate the
partnership that we have had working with you in terms of
gender and racial diversity on corporate boards. It is
important for boards and management to look like their consumer
base, to look like their employee base, and to be able to make
decisions that are impactful for both. So we think that it is
important to have a multistakeholder approach to address these
issues, and it is important for investors to have that
information as well.
What I would also say, working with you as well as with
Congresswoman Maloney and with Congressman Meeks over the years
on these issues, even just the introduction of those bills I
think have changed the landscape as well as have pushed forward
in terms of having more minorities and women on boards, and
quite frankly, the reason why I discussed the pipeline we
created with the NACD, we not only want to support those
positions, we actually want to actually do it as well.
Chairman Menendez. I appreciate that. And let me ask you
one other question. Why should disclosure be uniform across all
public companies' reporting?
Mr. Quaadman. Well, I believe for the boards themselves,
you want to have comparable information that investors can have
and to be able to look at and make their decisions moving
forward from there.
Chairman Menendez. Yeah. That is why I introduced that
Improving Corporate Governance Through Diversity Act, and we
certainly thank the Chamber for their enforcement to it.
I want to turn briefly to a corollary issue. Access to
capital is a persistent issue for minority-owned businesses.
According to the Chamber of Commerce's Equality of Opportunity
Agenda, Black-owned businesses are less than half as likely to
get financing as White-owned firms, and nearly three times more
likely to have profits negatively impacted by a lack of
capital. The Agenda further states that lower family wealth
exacerbates these disparities.
Can you expand on the Chamber's research in this area, and
in particular, how the racial wealth gap contributes to the
divide in access to credit?
Mr. Quaadman. So what it does, it simply does this, right,
where by having less access to capital, what often happens is
Black entrepreneurs then have to actually start businesses that
have a higher failure rate. So it creates a very vicious cycle
that does not allow them to break out of it. The reason why we
worked on these minority access to capital issues is if we can
actually help minority entrepreneurs get better access to
capital they are going to have a better success rate.
Now what I would also say--and this is one of the reasons
why I think a multistakeholder approach is very important
here--there are companies who are members of ours that we have
worked with. They have actually dedicated more of their cash
deposits with minority bank depository institutions to ensure
that those institutions actually have a better ability to
deploy money to minority entrepreneurs.
The second is there is one corporate Fortune 250 company
that we have worked with as well, and what they have done is
they have actually put a consortium together of Black financial
firms to help them with bond issuances. Now obviously one is to
make sure that they have more business, but number two, and
this is the real reason for doing it, I to ensure that those
firms buildup the muscle and expertise that they can then use
to help ensure that minority entrepreneurs have better access
to capital.
Chairman Menendez. Yeah. And obviously we want to see that
because that contributes not only to a declining disparity in
the wealth gap but it also leads to more prosperous economic
communities, beyond the racial community that might benefit
from it.
Mr. Quaadman. That is true, and that is why I cited that
Kellogg study in our report because it has been an $8 trillion
addition to the American economy. That is a lot.
Chairman Menendez. That is a lot. One final question to
you. One of the ways that Congress can most efficiently expand
access to credit for minorities is to fund community
development financial institutions and minority deposit
institutions. We have ample evidence from the pandemic
demonstrating how these institutions serve to provide credit
and other financial services to underserved communities. Can
you talk about the critical role that CDFIs and MDIs play in
supporting minority small business as we are tackling the
difficult problem like the racial credit access gap?
Mr. Quaadman. They are a cornerstone of the financial
ecosystem that minority entrepreneurs rely on. However, they
have either been underfunded or there are not enough of them,
and it is very important for Congress to act, which is why we
made that recommendation in our growth engine report. It is
important for Congress to act to strengthen them and to make
sure we have more MDIs as well in order to help with that.
But as I said, this is an ecosystem, so we need many
different pieces of this to work. But they are a critical part
of it.
Chairman Menendez. Thank you.
Mr. Garcia, one last question to you. The Thrift Savings
Plan is the world's largest defined contribution retirement
plan, with approximately $735 billion in assets. The Federal
Retirement Thrift Investment Board internally manages a portion
of the TSP funds while the rest is managed by BlackRock and
State Street Global Advisors. Unfortunately, all three of these
entities significantly underrepresent minorities and women at
the executive level.
The Federal Retirement Reform Act of 2009 granted the board
the authority to establish a mutual fund window for the TSP,
which provides participants with more self-directed investment
options. However, the board has yet to use this authority to
make more women- and minority-owned firms available for Federal
workers and retirees to invest in.
So given what we know about the link between diversity and
performance, would it not make sense to give Federal workers
the options to investment in women- and minority-owned asset
management firms?
Mr. Garcia. Senator, it makes incredible sense. It is so
obviously that by not doing it--and forget about desires and
people who may want to hire people like themselves; just forget
all that--at the end of the day if they are performing better
it should be an option for the retirees and for the workforce,
and by not having it as an option you are preventing them from
really having the most robust returns that are out there
available to them.
On a sidebar, it is just a natural that I think many of
those people are people of color, and I think they already are
sensitive to opportunity for people of color. So I do think
that is an element as well.
You should know, Senator, that it is not just in your
example but many of the other large pots of Federal monies have
virtually no minority representation in their management
roster.
Chairman Menendez. OK. Well, I agree with you, which is why
I led a letter with my colleagues to the board calling on them
to do just that. I think Federal workers are retirees who
deserve an alternative that both aligns with their values, and
it is also good for their investments, and this is one simple
step the Federal Government can make to create a more inclusive
economy. We will continue to call upon the board to make that a
reality.
Let me just turn to Mr. Quaadman. Anything that we have not
asked you, that you did not testify to--I am going to give you
a black opportunity here--that you want to speak to in terms of
the subject matter of our hearing? I will give you that
opportunity and then I will turn to Mr. Garcia and give him the
same opportunity.
Mr. Quaadman. Chairman Menendez, I appreciate that a lot.
What I would say, and that is why I talked about a dialogue
here, is that it is important that we do some form of a JOBS
Act. Many of the issues that I was raising in terms of either
crowdfunding amendments or credit investor qualifications help
all investors. They would also help minority entrepreneurs as
well. So I think it is really important to do that.
And I would just leave with this one last thought. Very
often--and Senator Menendez, I know you have been involved in
these issues for many, many years--we always talk about the
United States having the most liquid, deep financial markets.
And that is true, but the fact of the matter is we have a lot
of global competition we have never had before, and there are
different parts that we could lose, and if we do that we are
going to lose our competitive edge.
So this is much more than some of the issues we have talked
about in the past. This is about the future of our economy.
Chairman Menendez. We look forward to having that
continuing engagement with you and others, and making sure that
we continue to be at the apex of our opportunities. I do not
like losing anything to anybody, so we will work with you.
Mr. Garcia, final comments?
Mr. Garcia. Yes, sir, Senator. I will give you one more
example and then I will give a final comment, and I will go
fast.
You know, on your comments you talked about language. I
just want to give you another example of some of the inherent
bias, whether it is sort of underneath or over. At the end of
the day, another very large consultant--again, the
intermediaries of money and allocators--was at our office doing
a due diligence, which is a very serious process, Senator, that
took almost 4 hours, and we really displayed a showcase of all
parts of our firm.
And when we completed, the first thing out of their mouths
was not that they never realized our staff was strong, nor that
our outperformance was excellent nor that our resources were
robust. No. The first thing out of their mouth was, ``Golly,
you talk a lot about being a Hispanic firm, and we have been
here almost all day, and we have not seen any Hispanics.''
Senator, that should be irrelevant. And what is even worse
is in that meeting we were all so dumbfounded, one by one we
raised our hands and said, ``I am Hispanic.'' ``I am
Hispanic.'' ``I am Hispanic.'' See, they have an image of us,
whether it is having a large mustache, a big hat and bullets
across our chest. At the end of the day, those are the biases
that exist out there, that we are trying to dispel.
So my final comment is we have spent an extraordinary
amount of time on these recommendations. The SEC has it handed
to them, right here. We have a very long track record, a very
long record of comments and expert testimony. The AMAC of
industry leaders themselves unanimously supported all of these
recommendations.
So the SEC, in my opinion, it is all there. They should
either, in my view, opine as to why they are not going to do
them, or we should implement them all right away. It is clear
it would do a lot in furtherance of meeting those objectives,
which are both material and in the interest of the investors,
to ensure that they are getting the best performance and the
best transparency possible.
Chairman Menendez. Well, thank you. I am sorry that there
are those that went to visit you that could not identify
someone as Hispanic simply because they did not wear a sombrero
and a serape. That is a sad statement in the year 2022. But we
will continue onwards.
I will say that when we have the SEC before us, and the
Committee will, we will continue to press them, because getting
an absolute unanimous recommendation is rare in any of the
processes, much less in this process, and after 2 years of
study I cannot imagine that a unanimous set of recommendations
cannot be ultimately pursued. So we will continue to ask the
SEC's leadership why.
This concludes today's hearing on diversity in the U.S.
capital markets. Let me thank the witnesses again, and my
Ranking Member for a productive discussion on this issue in
terms of diversity in our markets, the challenges it poses for
women and minorities, as well as some other elements of capital
formation and possible solutions to achieving the challenges
that we have. I look forward to continuing the conversation in
the future.
For Senators who wish to submit questions for the record,
those questions are due at the close of business 1 week from
today, Tuesday, the 20th. To the witnesses, we ask you to
please submit your responses to questions you may receive for
the record as promptly and as thoroughly as possible.
Again, with the thanks of the Committee, this hearing is
adjourned.
[Whereupon, at 3:30 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN ROBERT MENENDEZ
Turning now to the subject of today's hearing, we are here because
our economy has a fundamental problem.
Across corporate America, those in charge are overwhelmingly White
and disproportionately male.
In a recent analysis of over 3,000 U.S. firms listed on either the
New York Stock Exchange or the NASDAQ, researchers at Cornell found
that racial minorities held only about 12 percent of board seats in
2019--with over 40 percent of all U.S. boards composed of only White
directors. \1\
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\1\ https://corpgov.law.harvard.edu/2022/01/17/what-drives-racial-
diversity-on-u-s-corporate-boards/
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In asset management we see a similar story.
Of the $70 trillion in global financial assets under management,
less than 1 percent of are managed by women- or minority-owned firms.
Now some may wonder why this a problem.
Why should the Federal Government have an interest in the diversity
of publicly traded companies?
The answer is simple--it's because it is material information that
investors should have when deciding where to put their money.
In study after study--including those conducted by the consulting
firm McKinsey--researchers have found that a diverse workforce leads to
a more productive and profitable company.
The reasons for this are varied, but whether it's because of
smarter and more inclusive decision making, increased creativity and
problem solving, or greater recruitment and retention, the bottom line
is this:
A company whose governing structure looks like America is a company
that can compete on the global market.
Which brings us to this hearing.
The current lack of diversity in capital markets, businesses, and
financial institutions creates a ripple effect across the ecosystem.
It negatively affects entrepreneurs and investors, makes companies
less competitive, and stalls our Nation's progress towards a truly
equitable marketplace.
In short, a lack of diversity means that American companies are
fighting to compete with one hand tied behind their backs.
It's an issue that I have been following personally for years--and
in the past, my office has issued corporate diversity surveys of
Fortune 100 companies.
What we have found is that, while many of these companies believe
in the idea of increasing diversity among their senior leadership, very
few have made real progress on the matter.
It is why I introduced a bill, the Improving Corporate Governance
Through Diversity Act of 2021.
My legislation would promote greater transparency in corporate
America by requiring public companies to disclose specific information
related to the racial, gender, ethnic makeup and veteran status of
corporate boards and senior management and whether they have policies
in place to promote diversity in their leadership.
It's a bill that I'm proud to say has strong support across the
ideological spectrum--from the U.S. Chamber of Commerce to the National
Urban League.
And it goes hand in hand with what SEC's Asset Management Advisory
Committee has urged the asset management industry to adopt.
The AMAC Subcommittee on Diversity and Inclusion has pushed for
greater disclosure of the gender and racial makeup of firms.
This increased transparency would not only improve performance to
the benefit of investors, it would also further the SEC's diversity and
inclusion goals and its mandate to facilitate fair and open markets.
It is my hope that the SEC soon enacts all of these recommendations
and that we can pass my Improving Corporate Governance Through
Diversity Act.
Lastly, I'd just like to note what greater diversity means for
investors and entrepreneurs in minority communities, and I say this
because I know it's of particular interest to both Ranking Member Scott
and me.
The fact of the matter is that underrepresentation has a trickle-
down effect.
When corporate leadership at the top is not diverse,
unsurprisingly, the firms that manage their pensions are also not
diverse.
When corporate leadership only reflects one thin slice of the
population, their decisions will only benefit one slice of the
population.
And despite contributing trillions of dollars to the economy--being
among the most likely to start a small business--many minorities across
the country still lack access to the capital they need to thrive.
We all saw this firsthand during COVID when minority business
owners struggled to access the PPP program.
So the goal of today's hearing is to explore these issues further--
to discuss solutions that work for women and minority communities who
are too often neglected by traditional financial services and in the
capital markets.
And with that I want to thank our witnesses for appearing and for
sharing their testimony with us today.
I now turn it over to Ranking Member Scott for his opening remarks.
______
PREPARED STATEMENT OF SENATOR TIM SCOTT
As a young man at risk of being left behind in the world, I was
blessed to meet to meet a man who would go on to change the path of my
life: my mentor, John Moniz.
John taught me a lot of important lessons but I'm going to share
one of the most valuable ones with you right now.
There are three paths to accumulate wealth in America:
First--Home ownership; this is often the biggest and most important
purchase a person will make in their life.
Second--Owning a business; John taught me early on that PROFITS are
better than any paycheck and that having a job is a good thing but
CREATING jobs is an even better thing.
Third--Having an equity position in the market; helping to grow
your wealth and the economy at the same time.
It does not matter whether you are Black or White, a man or woman,
or living in rural South Carolina or downtown Charleston; these three
tools--home ownership, entrepreneurship, and investing in markets--are
the great equalizer.
In a sometimes unjust and unfair world, millions of Americans have
discovered the magic that made--and makes--our country so great:
opportunity.
For all!
No matter your color or creed, opportunity exists for you.
To be clear, all Americans have not always had equal access to
these wealth-building opportunities that their peers have. However, I
believe that there is more opportunity today in the United States than
at any time in our history.
Founders and entrepreneurs of diverse backgrounds--minorities,
women, veterans, and those who live outside of Boston, New York, and
the Bay Area--were once almost completely unable to access the same
early stage and growth funding opportunities as their peers.
Today, these groups are now receiving a growing share of investment
capital to start and scale their businesses.
In 1989, less than one-third of American families owned any stocks
or bonds.
Now, over half of U.S. families are accessing the U.S. capital
markets--one of the most powerful and transformative drivers of
economic growth, job creation, and wealth accumulation in the world.
Even better: the most rapid growth in the share of stock ownership
has occurred among lower- and middle-income households. Now, 4 in 10
households that own stock have annual family incomes of less than
$74,000. During this hearing, I look forward to hearing more about:
The key challenges that diverse founders and entrepreneurs,
including women, ethnic minorities, veterans, and rural/exurban
residents, face in accessing seed, angel, growth, and public
capital relative to their peers outside of these groups;
Potential approaches to mitigate any existing barriers to
enter such markets for these diverse entrepreneur groups;
The challenges associated with low- and moderate-income
(LMI) individuals, women, active duty military and veterans,
and ethnic minorities accessing investment opportunities;
Possible frameworks to improve the scale and scope of
investment opportunities for retail investors; and
Whether there are any existing legislative or regulatory
threats that may curb market participation for investors.
I appreciate all of today's witnesses for joining the Subcommittee
this morning to examine this very important issue and look forward to
our discussions.
______
PREPARED STATEMENT OF GILBERT ANDREW GARCIA
CFA, Managing Partner, Garcia Hamilton & Associates, L.P.
December 13, 2022
Chairman Menendez, Ranking Member Scott, and Subcommittee Members:
Thank you, Senators.
My name is Gilbert Andrew Garcia, and I am the Managing Partner of
Garcia Hamilton & Associates.
I am a native Texan, product of public schools, first-generation
college, and a graduate of Yale University. The financial services
industry was foreign to me until I went through a program called SEO
that places minority undergraduates on Wall Street for summer
internships. It changed my life.
In the summer of 1983, SEO placed me at Salomon Brothers, the
prince of capitalism, and I ultimately flourished as a full-time
employee starting in 1985. With time, I returned home to Texas in late
1990 to start a fixed income money management firm. In early 2002, I
joined Garcia Hamilton and we had only $200 million in bond assets. We
crossed $18 billion early this year, making us the largest Hispanic-
owned firm in the country and the largest independent bond firm in
Texas. We are almost 90 percent minority and women-owned and almost 65
percent minority-owned. Furthermore, 75 percent of our employees are
women, and almost 70 percent are Black and Brown. We have received
numerous awards for performance, leadership, and diversity. We are
extremely proud of the firm. However, relative to many mainstream
trillion-dollar firms, we are hardly a monthly cash flow.
In October 2019, I had the honor to serve on a FACA committee for
the SEC called AMAC (Asset Management Advisory Committee). As stated in
the Federal Advisory Committee Act (FACA), under Findings and Purpose,
(paraphrasing), ``the Congress finds that there are numerous committees
which have been established to advise officers and agencies in the
Executive branch of the Federal Government and that are frequently a
useful and beneficial means of furnishing expert advice, ideas, and
diverse opinions to the Federal Government.'' So, this is largely why I
am here today as I wish to share some challenges my firm has faced, my
experience serving as Chair of the Diversity and Inclusion (D&I)
subcommittee of AMAC, our recommendations to the SEC and their current
status.
The topic of Diversity can be challenging to talk about openly. It
often uses terminology and facts that can make some people
uncomfortable. However, the conversation must take place as the vast
income inequality in our country among demographic groups has clearly
led to disparities in wealth, access to health care, access to
education and the like. This wealth gap has grown considerably the past
30 years and has only exasperated the great division and social unrest
we have experienced the past few years in our country. President Biden
signed an Executive order on Racial Equity and said, ``We need to make
the issue of racial equity not just an issue for any one department of
Government; it has to be the business of the whole Government. Every
White House component and every agency will be involved in this work
because advancing equity has to be everyone's job.''
AMAC consisted of 22 industry professionals, all leaders in their
firms. The members came from such prestigious firms as Goldman Sachs,
Charles Schwab Corp, Morningstar Research Services, T. Rowe Price,
Apollo Global Management, and Fidelity Institutional. I was the only
Hispanic member and we had only one African-American member. We had a
2-year journey and my D&I subcommittee held three panels of expert
testimony from industry leaders and reviewed several research papers.
We started with data. We soon learned that data is limited as many
have been unwilling to disclose demographic information or have not
tracked such information in the past. Even the SEC's own diversity
demographic survey has a poor response rate, probably because it's
voluntary.
Talent in the diverse community is undeniable, including in the
asset management industry. One of my panelists presented research by
the Bella Research Group in 2017 and 2019. The studies looked at what
percentage of assets were managed by diverse-owned firms within the
U.S. based asset management field. The 2017 results showed 1.1 percent
of $71.4 trillion in assets were managed by diverse-owned firms. The
2019 results showed 1.3 percent managed by diverse-owned firms. The
results also revealed that diverse managers performed on par with
nondiverse firms, and in many cases outperformed mainstream firms. Keep
in mind that the Washington Post reported that 69 percent of the U.S.
population are women and minorities. In a system where 69 percent of
the population are unable to reach their full potential because of
institutional barriers of entry or outright bias, then talent is not
being fully realized to the detriment of the investing public and the
Nation.
One key area that the testimony showed would improve these
statistics considerably is the Investment Consultant industry, many of
whom are SEC registrants. They are often the allocators to the asset
management industry, and they are the gatekeepers for many foundations,
endowments, and pension funds by recommending money managers to them
for hire. While notable efforts are now being made, most consultants
lack diversity both internally and externally in their manager
recommendations. Some even receive economic benefit from managers
without clear public disclosure. Pensions & Investments Magazine (P&I)
publishes an annual list of the largest consultants and, according to
the 2020 report, they advise $42.7 trillion in assets. The
concentration of assets is notable as the largest 10 advise $36
trillion or over 85 percent of the assets.
The largest 20 consultants have 94 percent market share. Likewise,
the concentration of assets in the asset management industry is
similar. As an example, according to P&I, as of December 31, 2019,
there were 148 Active Domestic Fixed Income Money Managers that have
approximately $2.2 trillion in assets under management. The largest 10
have 69 percent market share and the largest 20 have 84 percent of the
market share.
Thus, one sees a semi-closed system where the largest consultants
appear to be recommending the largest money managers. If consultants
only recommend large managers, there is little to no opportunity for
diverse firms to compete since diverse firms are still smaller in size.
Many consultants avoid consideration of minority-owned firms by setting
arbitrary and unnecessary barriers such as length of track record, firm
asset size, amount of insurance, and other factors that indirectly
exclude nearly all minority-owned firms. Then, there is direct
exclusion. A colleague and I were the focus of a very hostile and
unprofessional meeting by one of the largest ten consultants advising
over $1 trillion. They rudely proclaimed that they would never
recommend our firm to any of their clients and would never put us in a
new business search. The reason they boldly stated was because we did
not have enough White male partners in our firm, and we did not have
enough White male portfolio managers. This was not the 40s and 50s like
the stories my grandfather shared, nor the 60s and 70s like the stories
my father shared, this was just a few years ago. And if they say it to
us, the best in class, what do they say to the newer, smaller firm? And
if they say it to our face, what do they say when they deliberate
behind our back? Sadly, this is just one example.
Many in the consultant community and others realize that greater
transparency is inevitable. Instead of greater effort to improve, some
are simply moving the goal post to improve their abysmal diversity
statistics. How? They are circumventing established Federal and State
laws and practices which use a 50 percent ownership threshold to define
diverse-owned and are creating a new term called ``substantially
diverse'', some as low as 25 percent diverse ownership.
After great discussion, the D&I subcommittee produced a series of
recommendations that are material and in the interest of the investing
public. The entire list of recommendations was reviewed publicly and
was unanimously passed by the full AMAC committee on July 7, 2021.
I will summarize them here:
1. The SEC has a Diversity and Inclusion Strategic Plan. We suggest
two additional goals. The first, that Diversity and Inclusion
is elevated to a core value and a material fact for
consideration through all SEC activities. The second, to
promote business diversity practices among SEC registrants.
2. The SEC issues guidance and bulletins regularly for clarification
or to address new initiatives. We suggest that the SEC issues
guidance clearly discouraging the use of parameters for manager
selection that have the impact of exclusion of minority-owned
firms, and that the inclusion of diverse firms in a manager
search is not a violation of one's fiduciary duty. The
importance of this cannot be overstated as many of the same
participates who foster a closed financial system often do so
under the shield of violating fiduciary duty.
3. Another recommendation relates to transparency where the SEC has
clear authority-through ADV Disclosures (Uniform Application
for Investment Adviser Registration). We suggest requiring
additional demographic data of the work force of SEC-Registered
Investment Advisers including (1) transparency of ownership;
(2) transparency of workforce demographics that provide a
window into gender and racial diversity at four levels: (a)
ownership; (b) board level; (c) officer level; and (d) all
employees.
4. We suggest enhancing the ADV Disclosure for consultants and asset
allocators to provide sunlight on the consulting and selection
process for RIAs (Registered Investment Advisor) with services
or products including: (a) consulting on asset manager; (b)
managing fund-of-funds; (c) services as manager-of-managers;
and (d) RIAs providing trustee services, where trustee
responsibilities include selecting other managers/funds.
5. Despite stringent pay-to-play regulations currently, large assets
managers have incredible access to policymakers providing the
appearance of unfair bias particularly as it relates to
managing Federal monies. Clearer guidance and better
transparency would be helpful to all, including the investing
public. At a minimum, we suggest to study whether modern
political contribution practices have evolved to permissibly do
indirectly, through mediums such as PACs and lobbyists, what
pay-to-pay rules sought to prohibit directly. We suggest a
thorough review of pay-to-play rules to ensure that they have
not disadvantaged small firms, including diverse firms.
6. Presently, there is no avenue for a firm to bring forward
discriminatory business practices by financial services
companies, like the one I described earlier. We suggest the SEC
develop a forum for complaints to be shuttled through the SEC
to other appropriate Federal agencies.
After the recommendations passed unanimously by AMAC, I thought
action would be taken quickly as a FACA committee was represented to
all of us to be important. Our expectations were high since my
committee, my staff and I personally spent hundreds of hours on this
project creating a large record over 2 years of expert testimony,
letters of support, research and the like. In fact, many of the
individual commissioners have expressed support publicly in speeches
and other comments on the record. Regrettably, after nearly 2 years,
only two items were recently implemented and with minimal fanfare. The
two are listed above as item 2, clarification that consideration of a
diverse manager is not a violation of one's fiduciary duty, and item 6,
where the SEC website will now allow discriminatory complaints to be
shared on their website.
I have been extremely disappointed to date. As a reminder, the
diverse community is not calling for any quotas nor any thumb to be
paced on a scale. We just want a fair chance to compete and deliver
superior performance to the investing public. All the remaining
recommendations are material and relevant to the investing public. They
are also part of today's modern-day civil rights movement, or what some
of us call the financial civil rights movement. With the growing
population of the minority community, the future of our Nation is
intimately intertwined with the financial success of the minority
community. All of us here have an incredible opportunity and history is
on our side. Justice, transparency and the facts are on our side. So, I
please urge you to support these recommendations and to unequivocally
call for their immediate adoption. At a minimum, we deserve an open and
transparent discussion by the SEC Commissioners as to why they are not
being implemented.
Congressman John Lewis said ``When you see something that is not
right, not just, not fair, you have a moral obligation to say
something. To do something. Our children will ask us `What did you do?
What did you say?' '' We need to act so when our children ask us the
questions in the future, we can tell them that we did THE RIGHT THING!
______
PREPARED STATEMENT OF THOMAS QUAADMAN
Executive Vice President, Center for Capital Markets Competitiveness,
U.S. Chamber of Commerce
December 13, 2022
Chairman Menendez, Ranking Member Scott, and Members of the
Subcommittee on Securities, Insurance, and Investment: my name is Tom
Quaadman, executive vice president of the U.S. Chamber's Center for
Capital Markets Competitiveness. Thank you for the opportunity to
testify today regarding progrowth legislation and the importance of
helping small businesses and entrepreneurs raise capital.
Over a decade ago, Members of this Committee and the House
Financial Services Committee began working on a bipartisan basis on a
series of capital formation initiatives intended to lower barriers to
capital access for young businesses and improve the regulatory
framework for businesses considering an initial public offering (IPO).
These efforts eventually culminated in passage of the Jumpstart Our
Business Startups (JOBS) Act, a bill that President Obama accurately
described as a ``game changer.''
By just about any measure, the JOBS Act has been a success. The
JOBS Act revived U.S. public listings and encouraged more companies to
enter the public markets. In the 5 years preceding the JOBS Act, there
were roughly 121 IPOs per year in the United States; from 2013-2021,
the annual average was 344 per year. \1\ The majority of these
companies filed as emerging growth companies (EGCs) under Title I of
the JOBS Act. In 2021, the IPO market in the U.S. hit an all-time high
in terms of offerings, including roughly 400 traditional IPOs completed
during that year. \2\
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\1\ ``Ten Years of the Jumpstart Our Business Startups (JOBS) Act
of 2012: How the Law Spurred Capital Formation, and How Congress Can
Build on Its Success''. House Financial Services Committee Republican
Staff Report, April 2022. Available at https://republicans-
financialservices.house.gov/uploadedfiles/jobs-act-at-10-report-
final.pdf.
\2\ ``A Record Year for IPOs in 2021''. Phil Mackintosh (Nasdaq)
Available at https://www.nasdaq.com/articles/a-record-year-for-ipos-in-
2021.
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The JOBS Act also created opportunities for private and startup
businesses to connect with investors. While some of these provisions--
for example crowdfunding rules under Title III and the general
solicitation rules under Title II--could benefit from further
improvement, many businesses have been able to avail themselves of
these new capital raising methods. Additionally, Title IV of the JOBS
Act increased the threshold for companies to raise under Regulation A
(Reg A) offerings. Since the initial JOBS Act was passed, Congress has
subsequently passed (again on a bipartisan basis) further capital
formation reforms, including provisions of the 2015 FAST Act \3\ and
the 2018 Economic Growth, Regulatory Relief, and Consumer Protection
Act. \4\
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\3\ Division G-2015 Fixing America's Surface Transportation Act
(Pub. L. 114-94).
\4\ Title V-2018 Economic Growth, Regulatory Relief, and Consumer
Protection Act (Pub. L. 115-174).
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It is important to keep in mind the context in which the JOBS Act
was passed and draw parallels to today. Congress was concerned that a
lack of capital access would have negative short and long-term
consequences for our economy, and that job creation would suffer as a
result. The report of the 2011 IPO Task Force--whose work contributed
significantly to the JOBS Act--stated that: ``The dearth of emerging
growth IPOs and the diversion of global capital away from the U.S.
markets--once the international destination of choice--have stagnated
American job growth and threatened to undermine U.S. economic primacy
for decades to come.'' The U.S. economy is again at a precarious
moment, necessitating the need for Congress to prioritize progrowth
legislation that will help create jobs and maintain the competitive
edge of the United States in global capital markets.
Congress was compelled to pass the JOBS Act because the Securities
and Exchange Commission (SEC) for years demonstrated a benign neglect
towards its statutory mandate to ``facilitate capital formation.''
Regrettably, the benign neglect once shown by the SEC has today become
outright avoidance. Of the 53 items on the SEC's current rulemaking
agenda, not a single one could conceivably be considered a capital
formation initiative. Indeed, many of the rule proposals the SEC has
issued over the last 18 months would impose new burdens on the economy
and likely make it more difficult for small businesses to raise
capital.
The SEC has also actively sought to undermine recent reforms that
would have improved the regulatory environment for companies to go and
stay public. For example, the SEC recently finalized a rulemaking that
cripples reforms to the proxy advisory system the SEC adopted just 2
years ago. The SEC has also proposed rules to undermine reforms to the
shareholder proposal system under Rule 14a-8 that were designed to
protect investors from abusive practices by special interests. There is
again an opportunity--and a need--for Members to work on a bipartisan
basis to make capital formation a priority for the next Congress.
Much has been learned in the 10+ years since the JOBS Act was
signed into law. We've learned that the JOBS Act boosted job creation
and helped hundreds of businesses access the capital markets that
otherwise may have stayed private or sold themselves to larger
companies. We've learned that businesses and entrepreneurs have engaged
with the SEC and Congress regarding capital formation ideas on a level
not seen before. And perhaps most importantly, despite some of the dire
predictions made 10 years ago, we've learned that barriers to capital
can be lowered without compromising critical investor protections.
There's another reason why it's imperative for Congress to act on
the capital formation agenda. It is well known that the United States
capital markets are the deepest and most liquid in the world, creating
a crucial advantage for our economy and contributing to its success.
The competitive edge that the U.S. has in its capital markets cannot
and must not be taken for granted. It is important, therefore, for
Congress to act in a bipartisan fashion to address growing competition
from other major markets around the globe to ensure we maintain that
edge and the U.S. remains the premier location to pursue ideas and
create jobs.
The Importance of Public Companies to Job Growth and Investor
Opportunity
The Chamber has long held concerns about the secular decline in
U.S. public companies over the last 25 years. When more companies
access public markets, more jobs are created and overall economic
growth increases. Past research has shown the vast majority of a
company's job creation occurs after an IPO, while a recent study
estimates that companies that go public double their employment by the
second post-IPO year relative to firms that withdraw an offering and
remain private. \5\
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\5\ ``Access to Public Capital Markets and Employment Growth'' (A.
Borisov, A. Ellul, M. Sevilir) May 2021. Available at https://
papers.ssrn.com/sol3/papers.cfm?abstract-id=2178101.
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The report accompanying the initial House version of the JOBS Act
noted:
The President's Council on Jobs and Competitiveness found that
if the U.S. had maintained its 2007 level of start-up activity,
nearly two million more Americans would be working today.
Research indicates that 90 percent of the jobs that companies
create are created after their IPO . . . Small companies are
critical to economic growth in the United States. In order to
grow and create jobs, small companies must have access to
capital. \6\
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\6\ H. Rept. 112-406--``Reopening American Capital Markets to
Emerging Growth Companies Act of 2011'', available at https://
www.congress.gov/congressional-report/112th-congress/house-report/406/
1.
Another recent study estimated the positive impact that the JOBS
Act has had on the biotechnology industry and its workers. The study
found that from 2012 to 2018, biotechs made up roughly 40 percent of
all U.S. IPOs, and that these companies expanded their workforce by an
average of 150 percent in the first 3 years following the IPO. The
relationship between IPOs and job creation is incontrovertible. \7\
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\7\ ``Deregulating Innovation Capital: The Effects of the JOBS Act
on Biotech Startups'', Vanderbilt Owen Graduate School of Management
Research Paper (C. Lewis, J. White) December 7, 2021, available at
https://ssrn.com/abstract=3640852.
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Increasing the number of public companies also benefits the
millions of households in America who depend on robust public markets
to make investments for retirement, higher education, or other
financial goals. Since the SEC's accredited investor rules restrict the
vast majority of Americans from participating in private offerings, the
public markets are typically the only way for individuals to invest
their savings. When options in these markets are limited and companies
are disincentivized from going public due to regulatory costs, Main
Street investors can be harmed.
A 2022 report from the American Council for Capital Formation
(ACCF) estimated that there are currently roughly 800 fewer companies
traded on U.S. exchanges due to the high regulatory cost of going
public. \8\ This public company ``gap'' has hurt job creation in
particular. Specifically, the ACCF report found:
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\8\ ``The Declining Number of Public Companies and Mandatory
Reporting Requirements''. Ernst & Young, prepared for the American
Council for Capital Formation (June 2022) Available at EY-ACCF-The-
declining-number-of-public-companies-and-mandatory-reporting-
requirements-June-2022.pdf.
There were at least 800 fewer U.S. companies traded on
major U.S. exchanges at the end of 2019 because of mandatory
reporting requirements. Because they have a significant initial
fixed cost, mandatory reporting requirements primarily
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contribute to a reduction in IPOs.
The median U.S. company that would have been public--but is
now, instead, private--is estimated to have 650 workers. Across
the approximately 800 fewer public companies in 2019, this
amounts to more than 500,000 workers.
The median U.S. company that would have been public--but is
now, instead, private--is estimated to have nearly $300 million
in revenue. Across the approximately 800 fewer public companies
in 2019, this amounts to upwards of $250 billion in revenue.
The median U.S. company that would have been public--but is
now, instead, private--is estimated to have over $750 million
in market capitalization. Across the approximately 800 fewer
public companies in 2019, this amounts to nearly $600 billion
in market capitalization.
More costly reporting requirements could be expected to
reduce the number of public companies. The ACCF analysis
estimates that a 10 percent increase in reporting requirement
cost over the 2000-2019 period would have reduced the number of
U.S. companies traded on major exchanges further by 80
companies, with a combined 51,000 employees, $60 billion in
revenue, and over $23 billion of market capitalization.
Other recent research looked at the relationship between financial
reporting directives in the European Union and innovation by small
businesses. This research--conducted by Matthias Breuer (Columbia
Business School), Christian Leuz (Chicago Booth School of Business) and
Steven Vanhaverbeke (Erasmus University)--found that the more
businesses spent to comply with financial reporting mandates, the less
they spent on innovation. \9\ The researchers noted that compliance
burdens also disproportionately impact small business, ``thereby
concentrating innovation spending among a few large firms.'' Congress
would be wise to heed this evidence from Europe as the SEC pursues new
and unprecedented corporate reporting requirements.
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\9\ ``Mandated Financial Disclosure Leads to Fewer Innovative
Companies''. Martin Daks, Chicago Booth Review (June 6, 2022) Available
at https://www.chicagobooth.edu/review/mandated-financial-disclosure-
leads-fewer-innovative-companies.
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The Need for a ``JOBS Act 4.0''
For several years, the Chamber has been at the forefront of the
policy conversation regarding the JOBS Act and further capital
formation proposals. In 2018, the Chamber led a joint organizational
effort to produce 22 recommendations to build upon the success of the
JOBS Act--a number of which have already been signed into law or
implemented by the SEC. \10\ The Chamber also released our ``Growth
Engine'' report in November 2020, which includes additional proposals
and is our roadmap for broadly revitalizing financial markets. \11\
That report includes recommendations for policies related to closing
the racial wealth gap, corporate governance reforms, financial
stability requirements, consumer credit, and capital formation for
small businesses.
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\10\ ``Expanding the On-Ramp: Recommendations To Help More
Companies Go and Stay Public''. Joint report from U.S. Chamber,
Biotechnology Innovation Organization, American Securities Association,
National Venture Capital Association, Securities Industry and Financial
Markets Association, TechNet, Nasdaq. Available at IPO-Report--
EXPANDING-THE-ON-RAMP.pdf (centerforcapitalmarkets.com).
\11\ Available at https://www.uschamber.com/assets/documents/ccmc-
growthengine-final.pdf.
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The Chamber commends the many Members of the Senate Banking
Committee whose efforts are included as part of the ``JOBS Act 4.0''
package that was released earlier this year. As we noted in a June 2022
letter, we support several of the provisions contained in that
legislation and urge the House and Senate to take them up in the new
Congress. As with the initial JOBS Act and subsequent iterations, we
believe many of these proposals can be taken up with strong bipartisan
support.
Additionally, the Chamber also commends the work of Sen. Scott--
along with Sen. Booker, Rep. Kind, and Rep. Kelly, and other bipartisan
members--for introducing the Opportunity Zones Transparency, Extension,
and Improvement Act earlier this year. The investments made through
opportunity zones are critical to help many underserved communities
bounce back from the pandemic and to navigate through an uncertain
economic period. The Opportunity Zones Transparency, Extension, and
Improvement Act is an important step towards progress on these goals
and the Chamber looks forward to working with members on both sides of
the aisle to get the bill signed into law.
Securities Litigation Reform
As noted in our June 2022 letter to the Banking Committee, the
Chamber hopes that, in addition to the provisions currently included in
JOBS Act 4.0, Congress will take up long overdue reforms to securities
litigation. The frequent filing of frivolous and questionable
securities fraud claims harms investors and undermines the integrity
and reliability of the U.S. capital markets.
In 1995, Congress moved to crack down on repeat, professional
plaintiffs that filed frivolous securities fraud class actions, often
for cash kickbacks, by adopting the Private Securities Litigation
Reform Act (PSLRA). In 1998, Congress subsequently made additional
reforms in the Securities Litigation Uniform Standards Act (SLUSA).
Unfortunately, research has shown that professional plaintiffs, both
individual and institutional, are still taking advantage of loopholes
in Congress' securities litigation reform regime, including the PSLRA
and SLUSA. \12\ This harms shareholders on both sides of the lawsuits:
those that ultimately pay for the litigation costs and lawyers' fees,
and those that receive little or no benefit when the lawsuit ends.
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\12\ U.S. Chamber Institute for Legal Reform: Frequent Filers
Revisited: Professional Plaintiffs in Securities Class Actions (April
2022), available at: https://instituteforlegalreform.com/research/
frequent-filers-revisited-professional-plaintiffs-in-securities-class-
actions/.
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Building off the discussion in our June 2022 letter, to close off
these loopholes, Congress could craft legislation to:
Ensure cases are heard in Federal court. Congress should
make clear that actions filed under the Securities Act of 1933
are required to be heard in Federal court just like cases filed
under the 1934 Act.
Broaden limits on repeat filers. Much of filed securities
litigation is brought by serial plaintiffs that are usually
dismissed and result in no benefits to shareholders, just a
payment to the plaintiff and their attorneys. The PSLRA
prohibits individual shareholders from acting as lead
plaintiffs in more than five class actions in a 3-year period,
yet this limitation is avoided when claims are settled or
dismissed before appointment of a lead plaintiff or by filing
as an individual action. The prohibition should instead prevent
shareholders from filing more than five lawsuits in a 3-year
period. Any waivers of this limit in the class action context,
such as for large institutional investors, should also be based
on demonstrated results for class members in previously filed
suits, rather than the de facto automatic waiver that typically
occurs in most of these cases.
Correct the mechanism for determining lead plaintiffs and
determining attorney's fees. Rather than allowing lawyers to
control cases at the expense of class members, courts should be
required to disqualify lawyers who provide payments or legal
services that would give the lawyers leverage over their
clients. Furthermore, courts should look at fee agreements with
plaintiff's counsel and how much of the recovery would go to
attorneys' fees and then making clear that unjustified or
excessive fee requests should be rejected.
Increase Transparency. The PSLRA should also be improved by
requiring disclosure of (1) any attorney payments to plaintiffs
outside of their pro rata share of the recovery so any
incentive payments will come to light, (2) the nature of the
attorney's representation of the plaintiff outside of the
current lawsuit before a court to reveal collaboration between
serial filers and the law firms that enable this practice, (3)
the presence of any third party litigation funding in the case,
and (4) any contributions to elected officials with authority
to retain counsel in these cases.
JOBS Act 4.0 Recommendations
The Chamber is pleased to support the following bills, a number of
which have already been considered in the House or Senate in previous
Congresses. While this is not an exhaustive list of ideas and
legislation that the Chamber supports, it represents some of the
priorities that the Chamber has worked closely on with policymakers for
several years.
Improvements to the JOBS Act
Helping Startups Continue to Grow Act--S. 4992/H.R. 3448
This bill would allow emerging growth companies (EGCs) to continue
operating under certain JOBS Act exemptions for an additional 5 years.
The vast majority of EGCs have taken advantage of the options to (1)
Streamline financial disclosure; (2) Confidential reviews of
registration statements by SEC staff; and (3) An exemption from certain
executive compensation requirements. Extending the IPO ``on-ramp'' an
additional 5 years would allow these businesses to dedicate further
resources towards hiring and growth.
The Crowdfunding Amendments Act (H.R. 4860-116th Congress)
The legislation would address some of the unnecessary compliance
burdens that currently exist under the SEC's crowdfunding rules by
allowing for the use of ``crowdfunding vehicles'' and also exempting
securities issued in crowdfunding offerings from registration
requirements under the Securities Exchange Act of 1934.
Improving Crowdfunding Opportunities Act (S. 3967)
This bill would create legal certainty for businesses looking to
crowdfund by preempting State regulation of secondary transactions
involving crowdfunding vehicles and also clarifies the legal liability
that applies to crowdfunding portals. These changes would help Title
III of the JOBS Act achieve its intent and make crowdfunding a more a
more viable path to capital-raising for certain businesses.
Public Company Registration Threshold Act (H.R. 5051-115th
Congress)
The legislation would increase from 500 to 2,000 the number of
nonaccredited shareholders a company may have before being required to
register with the SEC. This legislation would build on the 2012 JOBS
Act, and would help many companies, including companies that raise
money through crowdfunding and the private markets, avoid having to
undergo costly registration with the SEC.
The SEC should continue to examine develop recommendations for how
to increase research coverage of pre-IPO companies and small
capitalization companies. Congress should pass S. 3965, the Increasing
Access to Adviser Information Act.
In 2020, Congress passed legislation requiring the SEC to examine
and report on the reasons why there is an ongoing dearth of research
coverage for small public companies. The SEC was also required to
produce recommendations to increase research coverage. However, when
the SEC staff issued its report in February 2022, its only tangible
recommendation was to study the issue further.
Obtaining research coverage is critical to enhance institutional
and retail investor interest in a company. Studies have shown that
nearly two-thirds of companies with less than $100 million do not have
any research coverage at all. \13\ The Global Research Analyst
Settlement, the EU's Markets in Financial Instruments Directive II
(MiFID II), and certain aspects of JOBS Act implementation have all
contributed to a decline in analyst coverage. Additionally, while
changes made to the Securities Act to liberalize the ``gun-jumping''
rules to permit investment banks to publish pre-IPO research on EGCs
(Sec 2(a)(3)), very few investment banks have published any pre-IPO
research.
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\13\ ``Capital Formation, Smaller Companies, and the Declining
Number of Initial Public Offerings''--Jeffrey Solomon, President of
Cowen. (Presentation before the SEC Investor Advisory Committee) June
22, 2017, available at https://www.sec.gov/spotlight/investor-advisory-
committee-2012/jeffrey-solomon-presentation.pdf.
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At a minimum, Congress should pass S. 3965, the Increasing Access
to Adviser Information Act which would allow brokers to receive ``soft
dollar'' payments for research without having to register as investment
advisers. This bill is even more necessary given the sudden decision by
SEC staff this past summer to terminate a no-action position the SEC
has taken for several years regarding MiFID II and soft dollar
payments.
Corporate Governance
Reestablish effective oversight of proxy advisory firms and reforms
to the shareholder proposal system
Despite being plagued by conflicts of interest, a lack of
transparency, and significant errors in voting recommendations, proxy
advisory firms continue to carry a significant amount of influence over
corporate governance at America's public companies. The two dominant
proxy firms--Institutional Shareholder Services (ISS) and Glass Lewis--
control roughly 97 percent of the proxy advisory industry, constituting
a duopoly that has become the de facto standard setter for corporate
governance in the U.S. without any meaningful input from shareholders
or issuers. The status quo has created distortions in the capital
markets and has made it more difficult for companies to go and stay
public.
In July 2020, the SEC adopted a rule that provided investors using
proxy voting advice more transparent, accurate, and complete
information, along with supplemental guidance regarding proxy voting
responsibilities of investment advisers. The rule codified the SEC's
longstanding position that proxy advice is generally a ``solicitation''
under SEC rules and reaffirms that the antifraud provisions under
Exchange Act Rule 14a-9 apply to proxy advisory firms. Findings from
previous Chamber/Nasdaq proxy season surveys show public welcomed
several aspects of the 2020 reforms, specifically the ability to
``review and comment'' on draft proxy advisory firm recommendations.
The SEC also adopted meaningful reforms to the shareholder proposal
process under Rule 14a-8 in 2020. The SEC reforms raised the
``resubmission thresholds'' that determine when a proposal which
previously garnered low submitted can be submitted in a subsequent year
and required greater transparency and disclosure from shareholder
proponents. These reforms were well-calibrated to preserve the ability
of shareholders to submit proposals while protecting against some of
the abuses that have increasingly plagued this system.
Unfortunately, the SEC recently decided to gut the 2020 proxy
advisor reforms before those rules even went into effect. The SEC has
also proposed changes to Rule 14a-8 that will likely lead to an
increase in proposals that deal with immaterial social and political
matters and will do little or nothing to enhance shareholder value.
These efforts by the SEC will create further disincentives for
companies considering an IPO.
The Chamber welcomes the inclusion of S. 3945, the Restoring
Shareholder Transparency Act as part of the JOBS Act 4.0 package. This
bill would restore some of the important guardrails of the 2020 Rule
14a-8 SEC reforms and allow businesses to focus on long-term strategy
and shareholder value rather than getting bogged down in social and
political debates that are pushed by special interests.
Modernizing Corporate Disclosure
Repealing immaterial and harmful disclosure mandates/Dodd-Frank
Material Disclosure Improvement Act (S. 3923)
For more than eight decades, materiality has been the lodestar of
the public company disclosure regime under the Federal securities laws.
The longstanding materiality standard--namely, what is important to a
reasonable investor focused on investment returns--has instilled in
investors and issuers alike a confidence in the accuracy and integrity
of information that promotes market efficiency, competition, liquidity,
and price discovery.
In 1975, the SEC described its views on materiality, noting: ``As a
practical matter, it is impossible to provide every item of information
that might be of interest to some investor in making investment and
voting decisions. [C]ertain types of disclosure might be so voluminous
as to render disclosure documents as a whole significantly less
readable and, thus, less-useful to investors generally. In addition,
disclosure to serve the needs or desires of limited segments of the
investing public, even if otherwise desirable, may be inappropriate,
since the cost to registrants, which must ultimately be borne by their
shareholders, would be likely to outweigh the resulting benefits to
most investors.''
In recent years, however, a variety of groups have zeroed in on SEC
disclosures by pressing for new mandatory disclosure requirements to
advocate for social and political change. While these may be important
causes, they are not material to investors and their voting decisions.
Unfortunately, the Dodd-Frank Act included a number of nonmaterial
disclosure requirements for public companies and new legislation is
often introduced in Congress requiring public companies to disclose
information that is not material to investors.
Congress should pass S. 3923, which would repeal costly and
immaterial disclosures mandates under the Dodd-Frank Act, including the
conflict minerals, pay ratio, mine safety, and resource extraction
disclosures.
Mandatory Materiality Requirement Act of 2022 (S. 5005/H.R. 9408)
This bill would codify the materiality standard expressed by the
Supreme Court in 1976 into law and prohibit the SEC from mandating
disclosure requirements that are outside the scope of the securities
laws or are intended to promote objectives which are at odds with the
interests of the vast majority of investors. This legislation is
especially important given the unprecedented nature of the SEC's
current agenda and efforts to prescriptively expand corporate
disclosure on several topics including climate change, cybersecurity,
human capital management, and others. The Chamber is hopeful that this
bill will be included as part of JOBS Act 4.0 discussions in the coming
months.
Simplify quarterly reporting requirements for public companies/
Modernizing Disclosures for Investors Act (S. 3919 / H.R. 3454)
According to the 2011 report of the IPO Task Force, 92 percent of
public company CEOs said that the ``administrative burden of public
reporting'' was a significant challenge to completing an IPO and
becoming a public company. As annual (10-K) and quarterly(10-Q) reports
have grown in size and complexity over the years, companies find it
increasingly difficult and costly to maintain compliance with a 1930's-
style disclosure system. The length of annual and quarterly reports
also has the potential to make it more difficult for investors to
determine the most salient information about a business.
H.R. 3454 (Modernizing Disclosures for Investors Act) and S. 3919
(Reporting Requirements Reduction Act) would provide alternative means
for public company quarterly reporting. H.R. 3454 would allow for
quarterly reports to be issued through alternative methods (e.g., a
press release) while S. 3919 would allow issuers to elect to report
results semi-annually rather than quarterly. These approaches would
reduce the overall cost of corporate reporting for investors while
still requiring that material information be made public.
Improving Access to Capital for Businesses
Developing and Empowering our Aspiring Leaders (DEAL) Act of 2022
(S. 3914/H.R. 4227)
Registered Investment Adviser (RIA) rules promulgated by the SEC
have disincentivized some venture capital funds from investing in
Emerging Growth Companies (EGCs). The 2010 Dodd-Frank Act sought to
exempt venture capital funds from the costs and challenges associated
with becoming an RIA. However, the definition of ``venture capital
fund'' promulgated by the SEC pursuant to Dodd-Frank was too narrow and
did not meet the Dodd-Frank statutory obligations of a full venture
capital exemption. The current definition ignores critical elements and
developments related to the venture capital industry, including growth
equity firms which can often be investors in EGCs around the time they
are considering a public offering. Shares of EGCs, including the
purchase of EGC shares on the secondary market, should be considered
qualifying investments. Creating a more accurate venture capital
exemption definition--which the DEAL Act would do--will expand the pool
of possible investors for EGCs.
Access to Small Business Investor Capital Act (S. 3961/H.R. 5598)
The legislation would permit funds that invest in businesses
development companies (BDCs) to disclose their acquired fund fees and
expenses (AFFE) as a footnote to their prospectus fee table. The SEC
adopted the AFFE rule in 2006 as a means to provide greater
transparency regarding fund expenses, but in practice it has become a
fundamentally misleading disclosure for funds that invest in BDCs. The
AFFE rule has led to the exclusion of BDCs from certain indices which
in turn has caused an outflow of investment dollars by institutions.
Passage of this bill will increase institutional investment in BDCs,
which are a critical source of nonbank financing for small and middle
market companies throughout the country.
Small Entrepreneurs' Empowerment and Development (SEED) Act of 2022
(S. 3939)
This legislation would provide an exemption from State and Federal
registration requirements for ``micro'' offerings that do not exceed
$500,000 in the aggregate. This would benefit entrepreneurs who are
looking to raise relatively small amounts of capital and cannot afford
costly legal and registration requirements. Importantly, this bill also
contains provision that would prevent bad actors from participating in
such offerings.
Expanding American Entrepreneurship Act (S. 3976)
This bill would increase the number of investors and assets an
angel fund may have without having to comply with costly SEC
regulations. Funds would be permitted to have up to 500 investors and
$50 million in assets (Up from 250 investors and $10 million
currently). This bill would expand the pool of potential investors and
capital available for early-stage angel investments and help provide
funding for the next generation of innovative American businesses.
Equal Opportunity for All Investors Act (S. 3921)
An accredited investor is an individual who is permitted to trade
securities that may not be registered with the SEC. Securities in
early-stage, nonpublic companies, have a significant potential for
growth, but are also considered to be higher-risk. The accredited
investor definition is intended to limit investors from participating
in this market.
Traditionally, the accredited investor threshold has been
determined through asset and income tests, which have resulted in both
an under- and over-inclusive outcomes. The definition leaves out
sophisticated and savvy investors who may not meet financial thresholds
while including a wealthy person with no experience in financial
markets.
In August 2020, the SEC finalized a rule expanding the definition
of ``accredited investor'' to include more individual investors, such
as those with professional qualifications in the financial industry. S.
3921 would further expand the definition of accredited by allowing an
individual to become accredited regardless of income status, and also
allowing any individual to invest up to 10 percent of their income in a
Reg D offering. The bill would also allow for self-certification of
accredited status under Rule 506(c) which would improve the likelihood
that businesses conduct ``general solicitation'' offerings that were
permitted by the JOBS Act.
Small Business Audit Correction Act (Sec. 301 of JOBS Act 4.0)
The legislation would exempt privately held noncustodial brokerage
firms from a requirement to have a Public Company Accounting Oversight
Board (PCAOB)-registered firm conduct their annual audit. Small broker-
dealers are often important sources of capital for startups or small
businesses around the country, and there is no compelling reason to
subject them to an audit process that is more fitting of a large
company.
Amend Form S-3 to eliminate baby-shelf restrictions and allow all
issuers to use Form S-3 (Accelerating Access to Capital Act, H.R. 4529,
115th Congress)
Forms S-3 and F-3--commonly referred to as ``shelf registration''
forms--are the most simplified registration forms that a company can
file with the SEC, and typically bring significant cost savings for
those companies that are eligible to use one or the other. However,
EGCs and many small issuers are prohibited from using these forms which
leads to increased reporting and compliance costs that do not promote
investor protection. The SEC's Annual Government-Business Forum on
Small Business Capital Formation has recommended over the past several
years that all issuers become eligible for use of Forms S-3 and F-3.
The Accelerating Access to Capital Act would permit all companies to
use a shelf registration statement without a limit on the amount they
can raise, which would significantly improve the capital formation
process for small public companies.
The Expanding Access to Capital for Rural Job Creators Act (S.
3503/H.R. 5128)
The legislation would expand the focus of the Office of the
Advocate for Small Business Capital Formation at the SEC to include
ways to increase capital access for rural small businesses. The
legislation would help ensure that rural areas receive due
consideration during any future SEC rulemaking process.
Gig Worker Equity Compensation Act (S. 3931/H.R. 2990)
The legislation would expand the pool of workers who can receive
equity compensation under the SEC's Rule 701 to include independent
contractors and ``gig'' economy workers. Rule 701 exempts certain sales
of securities made to compensate employees, consultants, and advisors.
On November 24, 2020, the SEC proposed temporary rules that would
permit an issuer to provide equity compensation in certain ``platform
workers'' who provide services available through the issuer's
technology-based platform or system. This proposed rule was a step in
the right direction, given it recognized the challenges for the gig
economy, but was never finalized. The Chamber looks forward to working
with members on both the House and Senate version of these bills in the
next Congress.
A 2016 report from the Economic Innovation Group found that half of
all post-recession business creation in the U.S. occurred across only
20 counties, and that many rural areas have not seen expected economic
growth since the 2008 financial crisis. This bill is an incremental but
important step that would focus the SEC on the needs of businesses in
rural communities.
Congress should direct the SEC small business advocate to develop
recommendations for how to help minority-owned businesses raise capital
Black entrepreneurs are nearly three times more likely than White
entrepreneurs to have business growth and profitability negatively
impacted by a lack of financial capital. Congress should initiate a
formal process through the SEC to develop recommendations for changes
in existing law and regulations that would improve access to capital
for minority-owned businesses. This process could be conducted through
the SEC's Office of the Advocate for Small Business Capital Formation
by prioritizing outreach to minority-owned businesses to understand
their financial needs and by working with financial companies to
understand what public policy barriers stand in the way of providing
capital.
Small Business Mergers Acquisitions, Sales, and Brokerage
Simplification Act (S. 3391 / H.R. 935)
The legislation would simplify SEC registration requirements and
provide a safe harbor for certain financial professionals who assist
small and mid-size businesses that are looking to transfer corporate
ownership. Importantly, the legislation also includes strong investor
protections such as requiring the disclosure of relevant information to
clients as well as the owners of eligible privately held companies. The
bill does not impede in any way on the ability of the SEC to crack down
on bad actors, or to prohibit past securities law violators from taking
advantage of the exemption.
Secondary Market Trading Reforms
Main Street Growth Act (S. 3097/H.R. 5795)
While the JOBS Act did a great deal to help EGCs raise capital in
primary offerings, it did comparatively little to address the secondary
market trading in these companies. The Main Street Growth Act provides
the legal framework for the establishment of venture exchanges, which
would remedy this issue by providing a tailored trading platform for
EGCs and stocks with distressed liquidity. Companies that choose to
list on a venture exchange would have their shares traded on a single
venue, thereby concentrating liquidity and exempting these shares from
rules that are more appropriate for deeply liquid and highly valued
stocks. Venture exchanges would also be afforded the flexibility to
develop intelligent ``tick sizes'' that could help incentivize market
makers to trade in the shares of companies listed on the exchange.
Importantly, both the creation of the venture exchange and the decision
to list on such an exchange should be completely optional--companies
should be allowed to choose whether not to list on a venture exchange.
The Chamber also welcomes S. 3947, the Intelligent Tick Study Act,
as part of JOBS Act 4.0 This legislation would require the SEC produce
a study and recommendations related to the widening of ``tick sizes''
for small issuers in order to improve liquidity and trading efficiency
for investors.
Restoring Due Process
Right of removal to an Article III court/S. 3930, Administrative
Enforcement Fairness Act of 2022
Since passage of the Dodd-Frank Act, the SEC has been permitted to
bring a greater number of enforcement cases before through
administrative proceedings as opposed to Article III courts.
Administrative proceedings lack the fundamental due process and
Constitutional protections of the Federal court system and not subject
to the Federal Rules of Evidence or the Federal Rules of Civil
Procedure.
The Chamber has supported for several the right of respondents in
SEC cases to have their cases heard before a Federal court. We have
supported legislation in the House (Due Process Restoration Act, and
appreciate the inclusion of S. 3930 in JOBS Act 4.0) Businesses and
investors must have confidence that the SEC operates in a fair manner
when bringing enforcement actions--this legislation will help provide
that confidence by reinforcing the due process rights of respondents.
Stress Test Reforms
Alleviating Stress Test Burdens To Help Investors Act (Sec. 407 of
JOBS Act 4.0)
The Chamber has long argued against the misguided application of
bank-centric regulation and supervision of nonbank companies. The
professional staff of the Securities and Exchange Commission has
concurred. In 2016, the SEC Chief Economist described how the
application of stress tests to asset managers was premised on a ``false
parallel.'' This legislation would remove that misguided regulation and
reduce unnecessary regulatory cost.
Conclusion
Thank you again for the opportunity to testify on these critical
issues and legislative proposals. The Chamber looks forward to working
with both Republicans and Democrats on capital formation and progrowth
initiatives in the coming months.
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM GILBERT ANDREW GARCIA
Q.1. Federal Tax Incentives Incent DEI Investments--How have
Federal investments such as the New Markets Tax Credit and the
Opportunity Zones tax credit provided incentives to investors
to consider businesses and communities that are frequently
overlooked by the investment market?
A.1. Senator, I am not familiar with these credits and am
unable to comment.
Q.2. Do you have information on Opportunity Zones investment in
Nevada? If so, please provide it.
A.2. No, I do not have any information on Opportunity Zones
investment in Nevada.
Q.3. Franchise Businesses--Last year, I published a report
raising concerns about some franchise business practices. \1\
My report found numerous deceptive practices that harmed
immigrants and veterans.
---------------------------------------------------------------------------
\1\ ``Strategies To Improve the Franchise Model: Preventing Unfair
and Deceptive Franchise Practices''. April 2021. https://
www.cortezmasto.senate.gov/imo/media/doc/Franchise
%20Report%20from%20the%20Office%20of%20Senator%20Cortez%20Masto.pdf
---------------------------------------------------------------------------
What actions do you recommend franchise corporations,
Congress, the Federal Trade Commission, the Small Business
Administration, and State governments take to increase investor
protections for franchise owners?
A.3. I am not familiar with franchise corporation business
practices; however, more transparency is always beneficial.
Q.4. Discrimination in Opportunity--Do you think some women and
people of color have decided to mask their identities when
trying to access capital and business opportunities?
A.4. Yes. Regrettably, many women and people of color mask
their identities in various ways while attempting to access
capital and business opportunities. Some alter, change, or use
a generic, vanilla name in order to hide their minority/gender
status. Others often refuse to apply for an MWBE certification
to prevent being ``boxed in'' or labeled out of concern that an
MWBE certification will limit their growth.
Also, many certification processes are extremely time
consuming, highly intrusive personally and incredibly
bureaucratic. It would be great if we had one Federal
certification process that would have reciprocity with State
and local agencies.
Q.5. Do you have any insight into how prevalent these practices
to avoid discrimination are?
A.5. I only have anecdotal experience that it is widespread.
Q.6. State business laws has not historically accounted for
gendered discrimination. Instead, it tends to rely on gender-
neutral fiduciary principles. Do you agree with Ann Lipton's
paper at Tulane University, alleging that gender-neutral
fiduciary principles can result in substantial inequity? \2\
---------------------------------------------------------------------------
\2\ https://papers.ssrn.com/sol3/papers.cfm?abstract--id=3882274
A.6. I am unfamiliar with Ann Lipton's paper.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM GILBERT ANDREW GARCIA
Q.1. In your testimony, you referenced a study that analyzed
the percentage of assets that were managed by diverse-owned
firms within the U.S. based asset management field, which found
that only 1.1 percent of the $71.4 trillion in assets were
managed by diverse-owned firms. I find that number shockingly
low and demonstrates that while there may be efforts to hire
diverse candidates at junior level positions, a majority of the
power in the industry still severely lacks diversity. Do you
believe programs like Seizing Every Opportunity (SEO) help with
this issue, specifically when it comes to pushing diverse
candidates into more senior roles? Why do you believe barriers
continue to exist between diverse candidates and more senior
roles?
A.1. SEO has singlehandedly changed the face of Wall Street. As
you may know Senator, I am an SEO alum (1983) and am the
longest serving member of the Board of Directors (1988).
Despite our great work, it has been extremely difficult for
minorities, including our alums, to reach the upper levels
management. Large financial institutions have no incentive to
increase transparency nor to make Diversity & Inclusion a core
value, a measurable statistic to track, nor a key component to
senior management compensation. Barriers exist because of
outright ignorance and overt racism. Furthermore, barriers
exist to achieve and justify desired end results. Our firm has
experienced many degrees of racism.
Q.2. There are many studies that show firm diversity is not
only the right thing to do, but also good for business. For
example, a Boston Consulting Group study found that ``diverse
management teams have 19 percent higher revenues due to
innovation.'' \1\ If there are such clear benefits to firm
diversity, why do we see such a lack of progress? What can
Congress do to address this issue?
---------------------------------------------------------------------------
\1\ https://www.bcg.com/publications/2018/how-diverse-leadership-
teams-boost-innovation
A.2. Please see my above answer for some of the reasons.
As I mentioned in my testimony, we could accelerate
transparency, increase opportunities for people of color, begin
closing the wealth gap in our country, while providing better
returns to the investing public. This could all be accomplished
if the SEC would openly discuss and successfully vote on the
AMAC Committee's (and Diversity & Inclusion Sub-Committee's)
recommendations.
We spent over 2 years interviewing expert witnesses,
reviewing research papers and developing a clear track record
and roadmap for the Commissioners to consider. We were careful
to work with SEC legal staff to prevent any challenges from
developing that would prohibit the implementation of our final
recommendations. We also made sure we stayed within the SEC's
purview by highlighting that the recommendations were both
material and, in the public's best interest. We urge the
Congress to insist that the SEC adopt all recommendations or at
least shine transparency as to why they object to their
implementation.
Q.3. Do you believe shareholders are widely aware of the
financial advantages of diversity? If not, would further
educating the public and investors on this issue encourage more
firms to prioritize diversity?
A.3. No, I do not believe shareholders are widely aware of the
financial advantages of diversity.
Educating the public would be helpful but it would be an
extremely slow process before any meaningful results would be
felt. The Country cannot wait!
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM THOMAS QUAADMAN
Q.1. As you know, strong, competitive, and accessible capital
markets are essential for a healthy U.S. economy. They make it
easier for companies to spur innovation, hire new workers, and
invest in their communities.
Just over 30 years ago, less than one-third of American
families owned any stocks. Today, over half of U.S. families
are actively participating in and accessing U.S. capital
markets. These markets are one of the most powerful and
transformative drivers of economic growth, job creation, and
wealth accumulation. They are the gold standard and envy of the
world.
What are your recommendations for lawmakers to build upon
the progress achieved in recent decades to further broaden
retail investment opportunities and facilitate capital
formation?
A.1. The Chamber deeply appreciates Congress' work to address
barriers to economic growth. In 2012, Jumpstart Our Businesses
(JOBS) became law. Congress was concerned that a lack of
capital access would have negative short and long-term
consequences for our economy, and that job creation would
suffer as a result. The U.S. economy is again at a precarious
moment, necessitating Congress to prioritize progrowth
legislation that would help create jobs and maintain the
competitive edge of the United States in global capital
markets.
These markets are key for economic stability and mobility
for Americans, and the Chamber agrees that the power of these
markets can be unleashed to drive opportunity for those who
have traditionally been underrepresented.
To help address these challenges, the Chamber has a series
of recommendations that lawmakers and policymakers can follow.
In 2018, the Chamber released a report with extensive
recommendations to Congress--many on a bipartisan basis--that
would help more companies go and stay public. \1\ Additionally,
we recently sent a letter to the Securities and Exchange
Commission (SEC) detailing how the agency could complement
Congress's efforts to examine these issues. \2\ As provided in
written testimony, the Chamber has also identified a number of
commonsense reforms to securities litigation that would help
strengthen the integrity and reliability of U.S. capital
markets. \3\
---------------------------------------------------------------------------
\1\ https://www.centerforcapitalmarkets.com/wp-content/uploads/
2018/04/IPO-Report-EXPANDING-THE-ON-RAMP.pdf
\2\ https://www.uschamber.com/co/start/strategy/types-of-
franchise-businesses
\3\ https://www.centerforcapitalmarkets.com/wp-content/uploads/
2023/01/20221209-Testimony-CapitalMarketsDiversity-SenateBanking-PDF-
Final-1.pdf?#
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM THOMAS QUAADMAN
Q.1. Federal Tax Incentives Incent DEI Investments--How have
Federal investments such as the New Markets Tax Credit and the
Opportunity Zones tax credit provided incentives to investors
to consider businesses and communities that are frequently
overlooked by the investment market?
A.1. The New Markets Tax Credit and Opportunity Zones both
lower the cost of investing in certain areas. They do so by
lowering the effective tax rate investors pay on the returns
they earn for investing in those areas. A lower tax rate lowers
the cost of the investment and thereby raises the after-tax
return. Higher returns will lead to more investment than would
have occurred without the tax incentives in the areas that
qualify for them. The New Markets Tax Credit and Opportunity
Zones, by their design, lower taxes for investment in diverse
communities, leading to more investment in those places. While
it is highly likely more investment is flowing to these areas
because of the incentives, the size of the effect is up for
debate. It can be measured through an economic analysis.
Congress can conduct such an analysis to determine how much
these incentives are increasing investment in targeted areas.
Q.2. Do you have information on Opportunity Zones investment in
Nevada? If so, please provide it.
A.2. The Economic Innovation Group has been and continues to be
one of the best resources for data on Opportunity Zones.
Q.3. Franchise Businesses--Last year, I published a report
raising concerns about some franchise business practices. \1\
My report found numerous deceptive practices that harmed
immigrants and veterans.
---------------------------------------------------------------------------
\1\ Strategies To Improve the Franchise Model: Prevent Unfair and
Deceptive Franchise Practices. April 2021. https://
www.cortezmasto.senate.gov/imo/media/doc/Franchise
%20Report%20from%20the%20Office%20of%20Senator%20Cortez%20Masto.pdf
---------------------------------------------------------------------------
What actions do you recommend franchise corporations,
Congress, and the Federal Trade Commission, the Small Business
Administration, and State governments take to increase investor
protections for franchise owners?
A.3. The U.S. Chamber of Commerce appreciates the work of
Senator Cortez Masto's staff to produce such a report and would
be pleased to engage with the Senator and staff to discuss the
issues identified. We have created resources to help
entrepreneurs understand the franchise model and make informed
choices. \2\ \3\
---------------------------------------------------------------------------
\2\ https://www.uschamber.com/co/start/strategy/how-to-choose-a-
franchise
\3\ https://www.uschamber.com/co/start/strategy/types-of-
franchise-businesses
Q.4. Discrimination in Opportunity--Do you think some women and
people of color have decided to mask their identities when
---------------------------------------------------------------------------
trying to access capital and business opportunities?
A.4. Lack of access to capital is a significant problem for
many entrepreneurs but is especially acute for entrepreneurs of
color and women. Following the model of the successful 2012
JOBS Act, Congress should initiate a formal process through the
SEC to develop recommendations for changes in existing law and
regulations that would improve access to capital for Black-
owned businesses, particularly.
To provide Black and other underrepresented communities
with greater exposure to potential funding opportunities,
local, State, and national business associations should create
``pitch'' competitions that provide Black and other
underrepresented communities with opportunities to solicit
private investment.
Q.5. Do you have any insight into how prevalent these practices
to avoid discrimination are?
A.5. Access to capital can be a catalyst for economic mobility.
However, a recent study found that if the number of firms owned
by people of color were proportional to their labor force
participation, the U.S. would add more than 1.1 million
businesses, supporting an estimated 9 million additional jobs
and adding nearly $300 billion in workers' income. \4\ However,
time and again, studies show that opportunities to access
capital are not equal in the United States.
---------------------------------------------------------------------------
\4\ http://globalpolicysolutions.org/report/color-
entrepreneurship-racial-gap-among-firms-costs-u-s-billions/
---------------------------------------------------------------------------
For example, research indicates that Black-owned
entrepreneurs are half as likely to get financing as their
White-owned competitors, \5\ and that Black business owners
have been shown to be more likely to rely on alternative forms
of credit for their financing needs. \6\
---------------------------------------------------------------------------
\5\ https://www.federalreserve.gov/publications/2017-september-
availability-of-credit-to-small-businesses.htm
\6\ https://www.cbcfinc.org/wp-content/uploads/2019/05/CPAR-
Report-Black-Entrepreneurship-in-America.pdf
---------------------------------------------------------------------------
The U.S. Chamber of Commerce is committed to addressing
systemic racism in America and removing barriers that make it
more difficult to move up the economic ladder. In December of
2021, the Chamber released a report \7\ that included 11
recommendations--including endorsements for existing bipartisan
legislation--that would help drive economic equality and create
solutions that could serve as building blocks of success
through improved access to capital for entrepreneurs of color.
---------------------------------------------------------------------------
\7\ U.S. Chamber of Commerce. ``Improving Access to Capital for
Minority-Owned Businesses''. December 15, 2021. Available at: https://
www.uschamber.com/assets/documents/CCMC-EOIreport-v3.pdf.
Q.6. State business law has not historically accounted for
gendered discrimination. Instead, it tends to rely on gender-
neutral fiduciary principles. Do you agree with Ann Lipton's
paper at Tulane University, alleging that gender-neutral
fiduciary principles can result in substantial inequity? \8\
---------------------------------------------------------------------------
\8\ https://papers.ssrn.com/sol3/papers.cfm?abstract-id=3882274
A.6. In our 2021 report entitled ``Improving Access to Capital
for Minority-Owned Businesses'', we endorsed several
recommendations to help drive economic equality. Those include
a bill from Senator Tim Scott to encourage the use of
alternative data for underwriting and supporting initiatives at
the Securities and Exchange Commission.
The Chamber is committed to working with Congress to
identify and right inequity in our economy.
Additional Material Supplied for the Record
LETTER FROM NASAA
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