[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





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                               ______
                                 

                 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

                              ----------                              

                       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\
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
     \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 
---------------------------------------------------------------------------
        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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \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/.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]