[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE SEC'S FAILURE TO
IMPLEMENT TITLE II OF THE JOBS ACT
AND ITS IMPACT ON ECONOMIC GROWTH
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
APRIL 17, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-15
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80-881 PDF WASHINGTON : 2013
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Oversight and Investigations
PATRICK T. McHENRY, North Carolina, Chairman
MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member
Pennsylvania, Vice Chairman EMANUEL CLEAVER, Missouri
PETER T. KING, New York KEITH ELLISON, Minnesota
MICHELE BACHMANN, Minnesota ED PERLMUTTER, Colorado
SEAN P. DUFFY, Wisconsin CAROLYN B. MALONEY, New York
MICHAEL G. GRIMM, New York JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona
RANDY HULTGREN, Illinois JOYCE BEATTY, Ohio
DENNIS A. ROSS, Florida DENNY HECK, Washington
ANN WAGNER, Missouri
ANDY BARR, Kentucky
C O N T E N T S
----------
Page
Hearing held on:
April 17, 2013............................................... 1
Appendix:
April 17, 2013............................................... 41
WITNESSES
Wednesday, April 17, 2013
Walter, Hon. Elisse B., Commissioner, U.S. Securities and
Exchange Commission............................................ 7
APPENDIX
Prepared statements:
Walter, Hon. Elisse B........................................ 42
Additional Material Submitted for the Record
McHenry, Hon. Patrick:
Chairman's Exhibits for this hearing......................... 48
Section 619 of Public Law 111-203 regarding the
implementation deadline for the Volcker Rule............... 57
Federal Reserve System press release entitled, ``Volcker Rule
Conformance Period Clarified,'' dated April 19, 2012....... 60
Green, Hon. Al:
Letter to Fed Chairman Bernanke, FDIC Chairman Gruenberg,
CFTC Chairman Gensler, SEC Chairman Schapiro, and
Comptroller of the Currency Curry from Financial Services
Committee Chairman Bachus and Vice Chairman Hensarling,
dated November 29, 2012.................................... 62
EXAMINING THE SEC'S FAILURE TO
IMPLEMENT TITLE II OF THE JOBS ACT
AND ITS IMPACT ON ECONOMIC GROWTH
----------
Wednesday, April 17, 2013
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:17 p.m., in
room 2128, Rayburn House Office Building, Hon. Patrick T.
McHenry [chairman of the subcommittee] presiding.
Members present: Representatives McHenry, Fitzpatrick,
Duffy, Grimm, Fincher, Hultgren, Ross, Wagner, Barr; Green,
Cleaver, Maloney, Sinema, Beatty, and Heck.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representative Rothfus.
Chairman McHenry. The subcommittee will come to order.
This is the Subcommittee on Oversight and Investigations of
the Financial Services Committee, and our hearing today is
entitled, ``Examining the SEC's Failure to Implement Title II
of the JOBS Act and its Impact on Economic Growth.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. The Chair notes that
Members have before them a packet of materials labeled the
``Chairman's Exhibits,'' which some Members may wish to refer
to when questioning the witness today. The packets containing
Chairman's Exhibits 1 through 7 are labeled accordingly. Our
witness, Commissioner Walter, has these exhibits in a binder
before her. These, in essence, were what we provided the
Commission last week.
Without objection, members of the full Financial Services
Committee who are not members of the subcommittee may sit on
the dais and participate in today's hearing.
We will now turn to the subject matter of today's hearing.
We will have 10 minutes of opening statements per side.
Commissioner Walter, I know you are well-versed at
testifying before Congress, so I hope you enjoy the show here.
But with that, I will recognize myself for 7 minutes.
In April of last year, with overwhelming bipartisan support
from Congress, the JOBS Act was signed into law by President
Obama. I was at the Rose Garden that day. Recognizing the
difficult economic times, the new law provided hope for an
economic recovery. And now, 1 year later, unfortunately very
little has been completed, due to the SEC's delay. In
particular, the lifting of the ban on general solicitation
under Title II, which would enable private issuers to advertise
for investors, continues to linger as a proposed rule.
In August of last year, I sought internal communication
from the SEC to understand the delay to Title II of the JOBS
Act. Emails provided to the Oversight Subcommittee revealed
that the SEC disregarded the law in response to concerns
expressed by a single lobbyist. An internal SEC email dated May
9, 2012, reveals that the Office of the General Counsel (OGC)
advised the Division of Corporation Finance that due to the
implementation deadline for Title II, the SEC should issue an
interim final rule without notice and comment. The OGC was
dubious that the SEC could enforce the ban on general
solicitation against those that comply with Title II of the
JOBS Act.
The email indicates that in Rule 506, private issuers
advertising for accredited investors, the Commission would
likely lose a legal challenge. Specifically, Thomas Kim, Chief
Counsel of the Division of Corporation Finance, wrote, ``We met
with Rich Levine and Aseel Rabie this morning to discuss OGC's
comments on the term sheet that we received yesterday. Their
biggest comment, which they conveyed more fully at our meeting,
is on process. As you know, they have been concerned about what
happens on Day 91. Can the SEC enforce the ban on general
solicitation in Rule 506 offerings after it fails to meet the
deadline Congress has imposed for lifting the ban on general
solicitation in Rule 506 offerings? I think they're dubious as
to whether we could.'' That is an important phrase.
Thus, Mr. Kim relayed OGC's concerns to the then-Director
of Corporation Finance, Meredith Cross. On May 23rd, Ms. Cross
emailed a term sheet which recommended that the SEC proceed
with the interim final rules to Commissioners on May 23rd.
On August 7th, an email from a lobbyist with the Consumer
Federation of America expressed strong reservations regarding
the SEC's plans to adopt an interim final rule without notice
and comment. The email stated that the affected groups ``are
prepared to be quite aggressive in voicing our concerns.''
Shortly thereafter, then-Chairman Mary Schapiro emailed
Director Cross with the subject line, ``Please don't forward.''
She certainly didn't forward it, but we did get the documents
as a matter of public record.
The content said, ``I have 2 worries--one is that if these
guys (CFA, et al) feel this strongly, it seems like we should
give them a comment period. Its not really asking for much. The
other is that I don't want to be tagged with an Anti-Investor
legacy. In light of all that's been accomplished, that wouldn't
be fair but it is what will be said given how high emotions run
on anything related to the JOBS Act. Doesn't seem worth it for
an extra 45 days of process...''
In August, Chairman Schapiro informed the remaining
Commissioners of her decision to dispense with an interim final
rule and proceed with a proposed rule.
Consequently, on August 8th, Commissioner Gallagher emailed
Chairman Schapiro with the subject line, ``I am furious.'' The
email stated, ``I just got word about the latest change to
general solicitation. It is not acceptable. I have been
operating in good faith, reviewing the multiple proposals sent
to me for consideration this month, and I continue to find
shifting sands. A `proposal' on general solicitation could have
been done months ago, and indeed should have been done years
ago. Meredith and Lona made it crystal clear to me on Monday
that there is no need for a proposal because we know what the
comments will be. And so, I spent hours working on how to
accommodate your desire for a study within an interim final
rule, and we did so--just to find out now that you have changed
your mind again.''
It is clear that Chairman Schapiro prioritized special
interest groups over the law. This is entirely unacceptable.
Commissioner Walter, Title II of the JOBS Act is clear in
its purpose. There is no debate that Congress imposed this law
precisely to eliminate the ban on general solicitation for Rule
506 private offerings to accredited investors.
Applying the most basic Chevron analysis, the SEC's current
broad ban on general solicitation is not authorized by statute,
specifically Title II of the JOBS Act. While the contents of
Title II may not please some, that does not provide the SEC
authority to deny the law nor deny the reality that the law was
passed by a wide bipartisan majority.
As of July 4, 2012, due to the expiration of the
implementation deadline, Title II of the JOBS Act has changed
the law.
It would appear to me that with this change, the SEC lost
the authority to enforce its ban on general solicitation
against issuers which abide by Title II. I understand the SEC
is under new leadership, and with new leadership comes changes,
obviously, and you as a Commissioner are certainly working with
the new Chairman to set that agenda and hopefully to work
together to come to some accord. And I hope the SEC finalizes
the rules under Title II of the JOBS Act as well as a few other
provisions that I have talked to Commissioner Walter about over
the last year or so.
As promised in that Rose Garden ceremony 1 year ago this
month, the JOBS Act can have a major impact and help get this
economy moving again, and help small businesses, even large
small businesses get access to the capital that they need.
Commissioner Walter, I want to thank you for your service
to our government. You have been a faithful public servant. As
I said to you, I have high esteem for your intellectual
capacity, and even though we at times may disagree on different
ideas and different laws and different regulations, I certainly
appreciate your willingness to be here today, and I want to
thank you for your time.
With that, I will recognize the ranking member of the
subcommittee, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman, and I thank you for
holding this hearing today. I would also like to thank
Commissioner Walter for appearing today. I know that you have a
very busy schedule, and there is much you are attending to. In
fact, I have made some notes as to some of the things that you
are doing.
According to the information that I have, the SEC oversees
approximately 35,000 entities, 11,000 investment advisers,
9,700 mutual fund and exchange trade funds, 4,600 broker
dealers with more than 160,000 branch offices, approximately
9,500 reporting companies, approximately 460 transfer agents,
17 national security exchanges, 8 active clearing agencies, 10
nationally recognized statistical rating organizations, and the
list goes on, as we say. But I do want you to know that we
appreciate the stellar job that the SEC does.
As a matter of fact, we seem to think that the SEC can do a
lot more with less. We have not funded the SEC at the levels
that have been requested, and my hope is that we will be able
to help you get fully funded so that you will have adequate
resources to do all of the many things that we inundate you
with.
I would also like to take a moment and congratulate the new
Chairman. I am told that this is a statutory title, and as
such, I want to make sure that I honor what the law requires.
But I want to congratulate Chairman White and I look forward to
visiting with her. And I assure you that I will keep her in my
prayers as well.
I would like to also mention that Chairman McHenry and I
have demonstrated some bipartisanship as it relates to the JOBS
Act. While it is not in Title II of the JOBS Act, Chairman
McHenry and I were able to accomplish something that I thought
was significant. He led the effort to create a framework for
crowdfunding and a reporting exemption in capital markets. I
was honored to offer an amendment that would disqualify
individuals convicted of securities fraud from participating in
crowdfunding. And I am honored to say, Mr. Chairman, that I
think that you and I are still working together well and I am
looking forward to producing similar legislation with you in
the future.
I want to mention one more thing as I move through rather
quickly, and I will probably give back some time to the
chairman. We in Congress have demanded much from the SEC over
the last 3 years, all while asking you to meet goals with less
money than you have asked for. We should not trivialize in any
way the responsibility that you have in regulating our capital
markets and protecting our investors. Not only do you regulate
the markets, but you do have as a mandate protecting investors
as well.
More importantly, the SEC should not set aside its
rulemaking responsibilities under the Dodd-Frank Act to
implement some other legislation. I believe that you are trying
to do both as expeditiously as you can, and I appreciate your
hard work.
Both of these pieces of legislation, Dodd-Frank and the
JOBS Act, are important, and we would hope that as we move
forward, we will get them all done as quickly and expeditiously
as possible.
Again, welcome to the committee. I look forward to hearing
your testimony. I have had a chance to peruse it. I also look
forward to presenting some questions about some of the things
that I believe to be relevant.
Thank you, Mr. Chairman, for the time, and I will yield
back the balance of my time.
Chairman McHenry. I thank the gentleman, and I certainly
thank him for his willingness to work with me on that
provision. And as a former judge, you know a lot of criminal
law quite well.
Mr. Green. Thank you, Mr. Chairman.
Chairman McHenry. At this point, I will recognize the lead
sponsor of the JOBS Act, which was signed just over a year ago
today, actually 13 months ago now, the gentleman from
Tennessee, Mr. Fincher, for 1\1/2\ minutes.
Mr. Fincher. Thank you very much, Mr. Chairman, for holding
this hearing. As a lead sponsor of the JOBS Act, the gentleman
from Delaware, Mr. Carney, and I believe that something had to
be done to help small business and entrepreneurs create more
jobs on Main Street. It is no surprise that Main Street
continues to feel the brunt of a lagging economy.
In my home State of Tennessee, the unemployment rate is 7.8
percent, yet when you look at the individual counties in my
district, the unemployment rates are a lot higher: A staggering
12.4 percent in Obion County; 11.6 percent in my home County of
Crockett; and 9.3 percent in Shelby County, our State's most
populous county of nearly 1 million people.
These numbers are reflective of the frustrations I hear
from my constituents all the time: ``What are you doing to help
create an environment where new ideas and companies can
succeed, grow, and create more jobs?''
While it has been nearly a year since the JOBS Act was
enacted into law, not all sections of the bill have been
implemented. Mr. Chairman, a car runs best when every component
of the engine is in good working order and works together. In
this case, if all sections are not enacted and working
together, the full benefit of the JOBS Act to our economy won't
be realized.
I look forward to hearing Commissioner Walter's testimony
about how she plans to support implementation of the remaining
sections of the JOBS Act. And I yield back.
Chairman McHenry. I thank the gentleman.
Mrs. Maloney is recognized for 2\1/2\ minutes.
Mrs. Maloney. Thank you, Mr. Chairman, and Mr. Ranking
Member, and welcome, Commissioner, and thank you for your very
hard work for all of us.
I supported the JOBS Act and worked with the chairman of
the subcommittee and others to strengthen the investor
protections and the overcrowding title of the bill. And we also
worked together on the--and I believe in the on-ramp that we
created for small companies so that they can go public with
less burden and so that these small companies can create
capital, that they are more able to handle the compliance that
larger companies to relieve it for the smaller ones.
Part of it was to allow them to focus their growing
businesses on raising private capital in the markets and to be
able to go to the public markets.
And that is why I believe that fully funding the SEC is so
critically important. We put a great deal of burden on the SEC
with the enactment of Dodd-Frank, covering whole areas which
were not regulated, bringing them into regulation. Now, with
the JOBS Act, that needs to be implemented, and they are a very
important continuation of focusing on and working on investor
protection.
I strongly support the efforts of the ranking member of the
full committee and the ranking member of this subcommittee, and
he mentioned it in his opening statement, to have full funding
for the SEC in the 2014 budget.
I don't see how the SEC can take on these new burdens
without the staff to implement it. So at the very least, we
should give them full funding.
I also support the work of the ranking member of the full
Financial Services Committee and the ranking member of this
subcommittee and the minority budget views which also urge full
funding. I believe that the public and investors should have
the opportunity to comment and present arguments and input on
the rules that they will be implementing for the JOBS Act. And
I believe the Commissioner was correct in allowing more time--
not that you want to delay anything--but it is important to get
the rules right, and if the public and others are demanding and
wanting comment time, it is appropriate to allow their voices
to be heard.
So I look forward to hearing your testimony today, and I
thank you again, Mr. Chairman and Mr. Ranking Member, for
calling this hearing. Thank you.
Chairman McHenry. I thank my colleague, and I thank her for
working with me on the crowdfunding provision in the JOBS Act
as well.
With that, I will recognize Mrs. Wagner of Missouri for
1\1/2\ minutes.
Mrs. Wagner. Thank you very much, Mr. Chairman. Ever since
the JOBS Act was passed a little over a year ago, the mood
amongst entrepreneurs and investors in the St. Louis area, an
area which I am proud to represent, has gone from excitement
and anticipation to one of frustration and bewilderment at the
SEC's inability to implement vital portions of the bill, in
particular Title II.
Adding insult to injury, it appears that the SEC's inaction
on Title II certainly is not due to the complexity of the issue
itself. Indeed, it is both ironic and unfortunate that a
bipartisan success such as the JOBS Act has been held up at the
SEC for what appear to be political reasons.
The JOBS Act was a success not just because of the policy
it put in place, but because of the bill's implicit recognition
that it is entrepreneurs and risk takers and fresh ideas which
power the American economy.
The idea that one Federal agency would put all of this on
hold for no valid reason is, quite frankly, part of the reason
why so many people have lost faith in Washington.
With this in mind, Mr. Chairman, I look forward to hearing
today about when exactly we can expect the JOBS Act to be fully
implemented.
Thank you. I yield back.
Chairman McHenry. I thank my colleague. I now recognize
Mrs. Beatty for 2\1/2\ minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member, for holding this hearing. And certainly, Ms. Walters, I
thank you for being here today, and of equal importance, I
thank you for your service to the American people.
We are eager to hear your comments about the SEC's role in
the implementation of Title II of the JOBS Act. So let me start
with telling you what I hope to hear today.
I hope that this hearing sheds light on three important
concerns of mine: one, making sure that the SEC has the
necessary funds to achieve its mission in regulating markets;
two, getting new rules right rather than simply getting them
done; and three, ensuring that the investors are protected.
We know that since the Great Recession, the SEC has been
under intense pressure to increase its regulatory oversight of
financial firms in an effort to combat both core risk
management within financial markets and also to detect and
prosecute investor fraud. And frankly, as we have heard from
several of my colleagues, in this environment, the Commission
has also been charged with implementing a number of additional
rules and regulations under the comprehensive Dodd-Frank Wall
Street Reform and Consumer Protection Act. And now, with the
enactment of the JOBS Act last year, the SEC has been
instructed to conduct further studies, rulemaking and oversight
functions.
So I would like to make it clear that there does seem to be
some inconsistencies as to the expectation of the Commission
with respect to its rulemaking authority. Specifically, given
that there are a number of final rules yet to be issued under
Dodd-Frank, which in large part is designed to increase
investor protection, while the JOBS Act wasn't signed into law
until nearly 2 years later and is designed to relax security.
So hopefully, we will be able to address some of these issues,
and I just simply want to say thank you, and I yield back.
Chairman McHenry. I thank the gentlelady.
We will now recognize our distinguished witness. Ms. Elisse
Walter is a Commissioner with the U.S. Securities and Exchange
Commission. She served as the Acting Chairman of the SEC from
December 2012 to April 2013, actually until last Friday.
Before the SEC, the Commissioner held several positions,
including with the CFTC and with FINRA. Commissioner Walter
received a B.A. from Yale and her J.D. from Harvard Law School,
a few small institutions which have more than a regional name.
So thank you for your willingness to testify today. You
will be recognized for 5 minutes to summarize your opening
statement. And without objection, your written statement will
be made a part of the record. With that, we will now recognize
Commissioner Walter
STATEMENT OF THE HONORABLE ELISSE B. WALTER, COMMISSIONER, U.S.
SECURITIES AND EXCHANGE COMMISSION
Ms. Walter. Chairman McHenry, Ranking Member Green, and
members of the subcommittee, thank you for the opportunity to
testify today regarding our implementation of Title II of the
Jumpstart Our Business Startups Act (JOBS Act). Implementing
Title II and the other provisions of the JOBS Act is a top
priority for the Commission.
As you know, Title II requires the Commission to revise
Rule 506 of our Regulation D to allow general solicitation or
general advertising for certain offers and sales of securities
provided that all purchasers are accredited investors. The
rules the Commission adopts must require issuers to take
reasonable steps to verify that purchasers of the securities
are accredited investors using such methods as determined by
the Commission.
The Title II rulemaking was required to be completed within
90 days of enactment of the JOBS Act, and I am committed to
finalizing these rules and working closely with my colleagues
to do so expeditiously.
Prior to enactment, a rule-writing team was formed
consisting of staff from across the Commission, including
economists from the Division of Risk Strategy and Financial
Innovation. And in August, the Commission issued for public
comment proposed rules to implement Title II.
Under the proposed rules, companies issuing securities in
an offering conducted under Rule 506 of Regulation D would be
permitted to use general solicitation or general advertising so
long as the issuer takes reasonable steps to verify that the
purchasers of the securities are accredited investors.
The proposal explains that in determining such
reasonableness, issuers should consider the facts and
circumstances of the transaction. Meanwhile, the proposed rules
would preserve the existing portions of Rule 506 as a separate
exemption so that companies conducting Rule 506 offerings
without the use of general solicitation or general advertising
would not be subject to the new verification requirement.
To aid the rulemaking process and to increase the
opportunity for public comment, the Commission permitted
interested parties to submit comments regarding this provision
even prior to issuing its proposal. These pre-proposal
commenters expressed a variety of views, including how the
verification process should work. Some focused on the capital
formation benefits they believed the rulemaking could provide,
while others raised serious investor protection concerns that
would arise if general solicitation was permitted without
additional safeguards.
The comment period for the proposal, which ended in
October, resulted in more than 220 letters. Those letters have
generated meaningful discussion regarding the issues and have
been very useful in our consideration of how to implement Title
II.
As with the pre-proposal stage, commenters on a proposal
were sharply divided in their views. On the one hand, a number
of commenters expressed general support for the proposals, with
many stating that eliminating the ban on general solicitation
and general advertising would facilitate capital formation.
In addition, several supporters recommended that the
proposed framework for verifying accredited investor status be
supplemented by including a nonexclusive list of specific
verification methods that could be relied upon by issuers.
On the other hand, a number of commenters expressed general
opposition to the Commission's proposal, with some stating that
the proposed rules, if adopted, would result in an increase in
fraudulent offerings.
A number also recommended that the Commission consider
additional safeguards such as those recommended in certain pre-
proposing release comment letters.
Currently, staff in the Divisions of Corporation Finance
and Risk Strategy and Financial Innovation are developing
recommendations for the Commission's consideration as to how
best to move forward with the implementation of Title II.
Although the Commission and the staff continue to work on
implementing Title II, I fully recognize the need to move
forward on this rule quickly, and I can assure you that I am
committed to doing that.
Implementing the JOBS Act is a top priority for the
Commission, and getting this particular rulemaking done is a
matter on which I believe we need to be acutely focused.
Thank you again for inviting me to appear before you today.
I would be pleased to answer any questions you may have.
[The prepared statement of Commissioner Walter can be found
on page 42 of the appendix.]
Chairman McHenry. I thank the Commissioner, and I thank you
for your service to your government.
I will now recognize myself for 5 minutes. If you look at
the first exhibit in the exhibit book, the last two sentences
of the first paragraph, ``Can the SEC enforce the ban on
general solicitation in Rule 506 offerings after it fails to
meet the deadline Congress has imposed for lifting the ban on
general solicitation in Rule 506 offerings? I think they're
dubious as to whether we could.''
So the sentence before those two, though, says that legal
counsel ``have been concerned about what happens on Day 91.''
What were the SEC lawyers concerned about on Day 91?
Ms. Walter. As the JOBS Act was written, the ban on general
solicitation was not automatically lifted. There was a
determination by Congress to mandate that the SEC conduct
rulemaking to lift it. So on Day 91, the ban on general
solicitation would remain in effect. However, there was an
expression of congressional policy that on a going-forward
basis, the Commission should lift the ban.
So as I understand it, what they were concerned about is if
we were to find a situation where general solicitation was
being conducted and bring a case against that person for
violating the law, in the absence of another exemption from
registration, there was concern that a court or other tribunal
might not be willing to impose relief because of the
congressional policy determination.
Chairman McHenry. So, the enforceability of said ban is
questionable?
Ms. Walter. The question of enforceability in the sense of
whether we would be able to obtain relief in that instance.
Chairman McHenry. Okay. So you agree with the SEC lawyers'
approach here?
Ms. Walter. I agree that there was an issue. I personally
was not that troubled by this issue.
Chairman McHenry. Okay. The next exhibit is an email which
states that, ``Meredith supported going straight to a final
rule...'' In this context, and we provided these emails to you
last week, is ``Meredith'' in reference here to Meredith Cross?
Ms. Walter. Yes.
Chairman McHenry. Okay. Do you concur with her assessment?
Ms. Walter. My preference was always to have notice and
comment. The Division of Corporation Finance determined to
recommend at one point that we go without notice and comment
for the rule.
As I understood it, their primary reasoning was that they
didn't believe we would obtain very much information in the
comments that were made given what we had heard already. I
believe that the over 200 comment letters, which were quite
substantive and interesting to me and my colleagues that we did
receive, showed that in fact was not the case.
Chairman McHenry. So if you look at Exhibit 3--we are just
going to walk through this process--dated May 23, 2012, the
implementation deadline was July 4th for this provision of the
JOBS Act. That would have given you 90 days. So Exhibit 3 is
dated before the implementation deadline.
This is an email you are included on as a Commissioner, and
it comes from Meredith Cross stating that, ``As you will see,
we are recommending that the Commission proceed with an interim
final rule.'' There are a number of other pieces of information
there, obviously.
So almost a year ago, you had a draft in good enough
condition to circulate among all Commissioners, isn't that
right?
Ms. Walter. This was a draft term sheet, and let me explain
a little bit about our term sheet process, which has been quite
valuable for us. It is one of the earlier steps in rulemaking
in that it outlines what the rule would do. It is not a draft
of the actual text of the rule accompanied by the release which
would be issued if a rule was proposed or adopted.
Chairman McHenry. Okay. But you did have this term sheet?
Ms. Walter. We did.
Chairman McHenry. Okay. How long does it normally take from
that point to actually have a rule?
Ms. Walter. There really is no--
Chairman McHenry. Apparently pretty long.
Ms. Walter. There really is no standard length of time.
What the term sheet is meant to start is the discussion process
and to get an initial feeling from each of the individual
Commissioners of where they stand on the major issues in a
rulemaking process.
Chairman McHenry. Okay, not to interrupt, but I only have
20 seconds left.
But at that point, the Commission had intended to meet its
statutory deadline?
Ms. Walter. Certainly, we always intended to try to meet
the statutory deadline.
Chairman McHenry. Apparently not very consistently, since
we are now approaching almost 11 months after this email with
the term sheet.
So the question here is that the staff recommended a final
rule, and yet there was a pullback. Did you think a pullback at
that point was appropriate?
Ms. Walter. I would point out, too, before this, the staff
had recommended a proposal. So this was a very fluid process.
Staff first recommended a proposal, then recommended a final
rule, and then it was changed back to a proposal. As I said,
throughout that process my preference was to go with a proposed
rule.
Chairman McHenry. I now recognize Ranking Member Waters of
the full Financial Services Committee for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I have a
question about SEC resources and the agency's ability to ferret
out fraud given the expanded ability of securities issuers to
use general advertising and solicitation under Title II of the
JOBS Act.
Will the SEC need to expand the number of enforcement staff
looking for fraud under Rule 506 offerings, given the expansion
of rule Rule 506 under the Act?
Ms. Walter. Thank you, Ranking Member Waters. It is
imperative, and I have believed all along and worked with the
staff very closely, that when this rule is enacted, as with
many rules, but this rule in particular because we have
received serious comments that this rule may increase the
opportunity for fraud, that there be an intensive review
program to determine what impact the rule has. Does it lead to
offerings being sold to the wrong people? Does it lead to
increased fraud, of course, compared to the situation with
respect to other private placements? And I do believe that we
will need to expend both examination and enforcement resources
that we would not otherwise have to expend.
Ms. Waters. The JOBS Act removes certain investor
protections for all offerings made under Rule 506 by
eliminating the ban on general solicitation and advertising so
long as only accredited investors are purchasers. Given the
updates made under the JOBS Act, is it appropriate for the
Commission to perhaps reexamine the definition of accredited
investor?
Ms. Walter. Yes, I believe it is. I have often said in this
process that I agree with both sides of this debate. I believe
we should lift the ban on general solicitation and focus on
those who purchase in private offerings, not those to whom the
offer is made. But I also believe that we have to be careful
about who those people are. It is my view that the accredited
investor definition is outdated, at least the numerical
standards need to be looked at, but in fact my preference would
be to change the criteria entirely as to how we attempt to
measure sophistication and access to information. And I think
that would be a significant investor protection effort well
worth undertaking.
Ms. Waters. Is the Commission applying the same standards
to the rulemakings under the JOBS Act as what they have applied
to rulemakings under the Wall Street Reform Act? For instance,
under the general solicitation rulemaking, did the Commission
consider the losses that might be sustained by allowing
investors to purchase investments that are marketable under the
newly expanded Rule 506 but would never have been so successful
in a registered offering that required full disclosure?
Ms. Walter. As we were required to do, we did conduct an
economic analysis which is contained in the proposal release.
Of course, we have not yet issued an adopting release, and part
of our responsibility in reviewing the comments is to determine
what we have heard about the impact of the rule and to explain
the economic impact of the decisions that we make when we
adopt.
Ms. Waters. Thank you very much.
I yield back the balance of my time.
Chairman McHenry. We will now recognize the vice chair of
the subcommittee, Mr. Fitzpatrick of Pennsylvania.
Mr. Fitzpatrick. Thank you, Mr. Chairman. Commissioner,
thank you for your testimony and your time before the committee
today.
The JOBS Act passed the Congress over a year ago, passed
the House of Representatives on March 8, 2012. The vote was
390-23, a pretty significant bipartisan effort. Two weeks
later, it sailed through the Senate. The vote was 73-26, and it
was signed, of course, by the President on April 5th. So the
rules were supposed to be promulgated within 90 days, or by
July 4th.
I would ask you to refer to exhibits 2 and 3 if they could
go up on the screen. Exhibit 2 is an email from Thomas Kim. In
the first paragraph he said, ``Meredith supported going
straight to a final rule, as we could then have a pilot period
where we could assess how issuers are verifying accredited
investors and whether or not these investors are, in fact,
accredited, after which point we could decide whether to adopt
final final rules or amend the rule to address any concerns.
She was more comfortable doing this as an interim final
temporary rule, which means it would sunset at some future
date.''
Exhibit 3 is Meredith Cross' email of May 23rd: ``Attached
for your review is a draft term sheet for the rulemaking to
remove the ban on general solicitation...''
It appears from the emails, Commissioner, contained in
exhibits 2 and 3 that Meredith Cross, the Director of the
Division of Corporation Finance at the SEC, agreed that the
best course of action was to go to a final rule.
Do you recall her support for an interim final rule prior
to implementing Section 201?
Ms. Walter. I am sorry, I couldn't hear the last part of
your question, her support for the rule.
Mr. Fitzpatrick. Do you recall her support for an interim
final rule to implement Section 201?
Ms. Walter. Yes, I do.
Mr. Fitzpatrick. Was she the most knowledgeable person
within the organization?
Ms. Walter. She was the head of the division in charge of
implementing the rule as a matter of substance, and a very
knowledgeable person.
Mr. Fitzpatrick. Was her support based on concerns over the
enforceability of the ban on general solicitation?
Ms. Walter. As I understand from talking to her at the
time, her support was more based on the fact that she felt that
there wasn't a great deal of benefit to be gained from the
comment process. And as I said earlier, I believe the comments
that have come in have shown that there was a great deal of
benefit to be gained. And my colleagues in the Division of
Corporation Finance agree with that.
Mr. Fitzpatrick. Commissioner, to what extent were you an
active participant in the discussions and negotiations
pertaining to the implementation of Title II of the JOBS Act?
Ms. Walter. I was an active participant in the sense that I
was to vote as well as the other four Commissioners.
Mr. Fitzpatrick. Do you agree that Title II of the JOBS Act
is a relatively straightforward and simple set of provisions
that provide only limited discretion to the SEC with regard to
implementation?
Ms. Walter. I agree that the statute itself is
straightforward, but it also raises serious investor protection
concerns that do not impact necessarily whether one moves
ahead. We have a congressional directive to move ahead with
lifting the ban. I agree with lifting the ban. I also believe
that as the Federal agency which is charged with protecting the
markets, facilitating capital formation, and protecting
investors, it is important that we look at those investor
protection concerns as well.
I also believe that although it is sometimes posed as a
balance between investor protection and capital formation, the
two go hand in hand, and they are really dependent on each
other. If we don't take care of investors they will have no
confidence in the markets, they will not invest, entrepreneurs
will not be able to build businesses, and we won't be able to
have sufficient capital formation.
Mr. Fitzpatrick. So what was the problem in getting the
rule implemented within 90 days as the law required?
Ms. Walter. First, I will say the rulemaking process--I
don't know that I have ever seen a rule proposed and adopted in
90 days. If I have, they are rare, few, and far between. The
rulemaking process generally takes longer than that. There are
of course exceptions where it takes less time than that. The
answer here is that responsible people, and I will particularly
cite which influenced me in the comment process, that our
Investor Advisory Committee which if you look at the
constituency of it is rather broad, wide and deep, people from
all walks of life, from institutional investors, representing
retail investors, from businesses as well, came unanimously to
us with recommendations saying you should not move ahead with
this without addressing the following investor protection
problems.
Our mandate is to lift the ban. Our mandate is also to
consider investor protection. That made it more complicated
than it seems on its face.
Chairman McHenry. Mr. Cleaver is recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Madam Chairwoman, my concern is that the things that were
principally intended or the ones that are not being implemented
and the things that we probably didn't think would happen are
the ones getting the most attention. Would you agree that the
one part of the JOBS Act which is being used more than anything
else is the one which allows companies to avoid the executive
pay rule?
Ms. Walter. The part of the JOBS Act that is now in effect
is Title I, which basically is the IPO on-ramp, and it does
create a category of smaller companies which among other
things, do not have to comply with the executive pay rule.
Mr. Cleaver. So you are saying ``yes?''
Ms. Walter. Yes.
Mr. Cleaver. Thank you. The SEC was created after the Great
Depression in part as a reaction to all of the fraudulent
practices that had gone on that probably contributed to the
Great Depression. So if we begin to relax any of the
regulations in the JOBS Act, do you think that it would lead to
any additional jump in fraudulent activity?
Ms. Walter. I don't know the answer to that. And that is
why from the beginning of consideration of Title II, I asked
the staff to develop a review program so that we could monitor
that. That doesn't necessarily have to be the case. It doesn't
have to be true that lifting the ban would lead to greater
fraud. If I had thought that was inevitable, I would not have
been in favor of it. I still would have done it because
Congress told me to.
So I think the important thing to do here is to analyze the
investor protection issues that are present, see if some of
them can be addressed and they really do revolve mostly around
who the investors are rather than how they are solicited, and
then put in place a review program so that we can make sure
that these offerings are not being sold to the wrong people and
that there isn't an increase in fraud. And if there is a
notable increase in fraud, we should come back and tell you
because this was a congressional determination.
Mr. Cleaver. Is there any kind of way in which you can
detect the increase early on so that it would be brought back
to Congress for us to hopefully make some immediate
alterations?
Ms. Walter. We will be able to monitor certain of the
offerings fairly easily. There is a form that gets filed and
that form, if it goes through as proposed, would have a box
that would check whether people were using general
solicitation. But although people are required to file the
form, it is not a condition of the exemption, so not everyone
does. So if those people don't file, we are going to have to
rely on other efforts such as surfing the Internet and the like
to try to identify what offerings are going on.
That is why one of the suggestions that was made in the
course of the comment process was to make the form a condition.
There are pros and cons to that which I would be happy to
address if you like.
Mr. Cleaver. Thank you. Let me move over to another area.
The whole IPOs, I think, giving ordinary citizens the
opportunity to become investors, sounds good except that for
the most part when we are talking about investors, we are
talking about some very sophisticated people, people who
understand, they are venture capitalists and so they understand
it.
Is there anything that the SEC can do or is there anything
that we need to do to make sure that the start-up community
understands and appreciates the risk involved?
Ms. Walter. I believe that some of that happens in the
course of the process of doing a standard IPO, because they
generally involve investment professionals who provide advice
and counsel about that. It also involves filing a public
document with the Commission, going through the Commission
review process, responding to the Commission's comments. There
is less education about that, I believe, in the private
offering market. People don't really understand that.
Certainly, there are educational efforts that could be
launched. There are some that we are doing, and there are some
that are done by the private sector as well, which would be
quite helpful to businesses as well as to investors.
Chairman McHenry. The gentleman's time has expired.
We will now recognize Mr. Ross for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman.
Commissioner, thank you for being here. I appreciate your
acknowledging in your opening statement the significance of the
JOBS Act, specifically with regard to Title II in that you
agree that it was intended to lift the ban on general
solicitations for Regulation D, Rule 506 that seek only
investment from accredited investors. That was pretty clear
wasn't it? That is fairly direct, straightforward, and
unambiguous?
Ms. Walter. Absolutely.
Mr. Ross. And it was relatively clear and unambiguous also
in the JOBS Act that this was to be done within 90 days,
correct?
Ms. Walter. Yes. That is correct.
Mr. Ross. So my question is, in your opinion, what would
cause a regulator to deviate from clear and unambiguous
language mandated by Congress in the promulgation of a
particular rule?
Ms. Walter. There are other statutes that we are compelled
to comply with, including the Administrative Procedure Act.
Mr. Ross. I agree. The leading case of Chevron v. Natural
Resources, the Supreme Court case in 1984, really set forth the
only criteria in this two-step process by which there may be
great deference given to a regulator in trying to interpret or
otherwise implement a statutory requirement.
And if I could just have Exhibit 4 up there for just a
second, in Exhibit 4, which, I guess this was the interim rule
that was being proposed, the interim final rule, and it says
there that, and this was prepared by the lawyers, ``First, we
believe that the statutory language in Section 201(a) is clear
and straightforward as to how to amend Rules 506 and
144A(d)(1), such that prior notice and comment are
unnecessary.''
It appears as though, and this is the theme I keep coming
back to, it was clear and unambiguous what the requirement was
for the SEC to do with regard to implementation of Title II. Do
you disagree with that?
Ms. Walter. I believe I disagree with your interpretation
of what the governing statutes are in terms of process. Yes,
what Congress wanted us to do was clear. Congress'
determination that there be a 90-day deadline was clear. But in
order to dispense with notice and comment, we had to have good
cause, that is intended to be a narrow exemption--
Mr. Ross. And wouldn't the good cause have been the final
interim rule? In fact, in the exhibits here before us, it
indicates on advice of counsel that if the SEC implemented the
interim final rule, it would allow for this process to engage
for a couple of years, so that you could then reevaluate and
issue a final rule.
Now, that was suggested in June of 2012, 29 days before the
deadline of 90 days.
What happened in the interim? Did it have to do with Ms.
Roper?
Ms. Walter. What happened is that there were concerns--
actually, I can't speak for exactly what happened.
Mr. Ross. But something happened.
Ms. Walter. For what happened in my own mind, there were
concerns expressed by others outside the agency about the
process that was being followed. First I should make clear, we
never got legal advice from our lawyers that this was the way
we had to go. We were told--
Mr. Ross. Who prepared the interim rule?
Ms. Walter. The Division of Corporation Finance.
Mr. Ross. Your Office of General Counsel had nothing to do
with that?
Ms. Walter. They were consulted. They did not prepare it.
Mr. Ross. Okay, and you have no evidence or otherwise have
any reason to believe that they objected to that?
Ms. Walter. They advised us that it would be possible to do
an interim final rule, not that it would be without risk, but
that it was one possible avenue.
Our rulemaking division first recommended that it be done
by proposal, then it recommended that it be done by interim
final, and then a determination was made that it be done by
proposal. We were never told that we had to do an interim
final, and it is very difficult to conceive of an instance in
which that would be true.
Mr. Ross. But you knew you had to do it within 90 days, and
then in the interim Ms. Roper does an email to Ms. Schapiro and
suddenly things change, the 90 days is expired. Do you not
believe that even based on the recommendations or advice of
your Office of General Counsel that this will lead to
litigation unnecessary and totally unavoidable had it been
promulgated within the 90 days?
Ms. Walter. I believed that it could have led to litigation
if it had been promulgated within the 90 days. It may also
lead--
Mr. Ross. Because it had ambiguities, because it wasn't
specific?
Ms. Walter. Because it didn't--
Mr. Ross. The elimination of general solicitations.
Ms. Walter. Because an argument was likely to be made that
we didn't thoroughly analyze and consider alternatives to the
rule, which is what we do in our economic analysis, and the
implications of the rule.
Mr. Ross. And in light of the 90 days being expired, now
there might not even be authority for the SEC to implement this
particular requirement.
Ms. Walter. Oh, no. That authority does not cease simply
because the deadline passes. We still have authority to
implement the requirements. We believe it is our job to do so,
and we are going to.
Mr. Ross. Even contrary to what your attorneys have advised
you?
Ms. Walter. Our attorneys did not advise us that our
authority expired after 90 days. They have never suggested
that.
Mr. Ross. I yield back.
Chairman McHenry. We will now recognize Ms. Beatty for 5
minutes.
Mrs. Beatty. Thank you very much, Mr. Chairman, and thank
you, Mr. Ranking Member.
Again Commissioner, thank you for being here and taking
your time to address our many questions. We have spent a lot of
time in the last few minutes asking you about the processes
that relate to rulemaking from the proposal to your last
response to the question.
In that same light, but shifting it a little bit, can you
please speak to how SEC's funding and resource level impacts
its ability to properly complete its rulemaking authority?
Ms. Walter. Of course, there are two questions. One was the
fact that I think even before the Dodd-Frank Act was passed in
2010, the SEC was underresourced. And I mean that both in terms
of personnel, and in particular in terms of technology. There
was a substantial gap in our capacity compared to the private
sector that we regulated.
When the Dodd-Frank Act was passed and followed by the JOBS
Act, I will conflate them, we had serious additional
responsibilities that were given to us, first, to promulgate a
large number of rules, close to 100 new rules, to do a number
of studies. That is work which is continuing. We have not
finished our work under the Dodd-Frank Act, and we have not
finished our work under the JOBS Act.
Even more significant than that, however, when all of these
rules are done and all of them go into effect, those rules will
be meaningless unless they are administered and enforced, and
we need the resources and again both on the people level and
the technology to do that right, and that is why we have
continued to ask for additional resources.
Mrs. Beatty. Mr. Chairman, Mr. Ranking Member, let me ask
you another question. Does the SEC believe that the criteria
for qualifications as an accredited investor, are they
significantly restrictive as to protect unsophisticated
investors with moderately high salaries from unregistered
security or should there be a revision of the qualifying
standards?
Ms. Walter. Of course, I cannot speak for all of my
colleagues, but I believe very strongly that there should be a
revision of the qualifying standards. I believe that the
definition of ``accredited investor'' as it stands today does a
poor job of screening out people who are unsophisticated and
people who do not have the wherewithal to demand access to
information, and includes many unsophisticated investors.
Mrs. Beatty. Thank you very much. I yield back.
Chairman McHenry. We will now recognize Ms. Wagner for 5
minutes.
Mrs. Wagner. Thank you, Mr. Chairman, and thank you,
Commissioner Walter.
I am as dismayed as anyone that the SEC has put what I
consider a lid on innovation and investment in their inaction
surrounding Title II. So I want to highlight some of the
entrepreneurs, real life examples, you get out of the process
weeds here perhaps, in the St. Louis region that are doing just
great things and stand to help our economy even more if only
the SEC would do what Congress has directed them to do
regarding Title II. And these are just a couple of the
companies, just a couple, looking for growth capital. Global
Velocity, this company provides the world's first data loss
prevention solutions that have been built for the Cloud. They
are the cutting edge of providing cybersecurity solutions which
is absolutely critical in our economy today. And in 2011, the
company was named a finalist for Forbes Magazine list of
America's most promising companies.
Next, would be Big Event Mobile. Big Event has developed a
mobile app that allows trade show producers to build and better
capitalize events that they have put on.
Commissioner Walter, the bottom line here is that there are
endless, I think, examples of companies such as this around the
country that are innovating and looking to expand, looking to
hire, and really it just seems unacceptable to me that the SEC
continues to drag its feet here. There is, I think, a direct
link between SEC inaction regarding Title II and decreased
economic activity around the country. And I think it needs to
be one of the key takeaways today.
So Commissioner, I would ask that the SEC Title II rule
proposal pointed out that the market for Reg D offerings, and
this is of course pre-JOBS Act in 2010 and 2011, was larger
than all other private offerings, public debt and public equity
offerings combined.
The same SEC analysis clearly has high expectations that
lifting the solicitation ban could further increase such
capital formation.
Do you agree with the SEC's analysis?
Ms. Walter. I believe that is likely.
Mrs. Wagner. Likely or--the analysis was very specific here
in terms of post a trillion dollars, this is even pre that
could be there.
Ms. Walter. Clearly, there is a large amount of money that
is raised in the private offering market. And I am saying it is
quite likely that when the general solicitation ban is lifted,
that amount will go up significantly.
Mrs. Wagner. So then if the Reg D market pre-JOBS Act was
nearly a trillion dollars, wouldn't you agree that if the SEC
finally implemented Title II to allow for solicitation, the
economic benefits could just be enormous?
Ms. Walter. I don't know what the impact will be. And the
overall net economic benefits will depend in part, again, on
how we implement it. For example, in the course of the comment
process, even from supporters of the proposal, they did not
like the way we decided to treat reasonable steps to verify.
They wanted us to do something different. They wanted further
comfort. So if in fact we had gone forward with an adoption,
many of the supporters of this rule, many of the people who
wanted to use it would not have been happy about how we had
implemented one of the key provisions.
Mrs. Wagner. And why was that?
Ms. Walter. Because they felt they wanted more specific
guidance. We put out a proposal that was extremely flexible
about what reasonable steps to verify would be, and in fact we
were surprised the supporters of the rule wanted a safe harbor
in terms of specific things that they would be able to do. And
we heard that. The impact of the rule will also vary depending
on what happens, as we track it, to see whether in fact it ends
up being used, perhaps not by the honorable and upright
companies that you are citing, but other companies to use it as
a vehicle for fraud.
Mrs. Wagner. Let me ask about that in terms of risk and
risk-taking. These are all accredited investors that would be
involved in these kinds of offerings. Is that correct?
Ms. Walter. They are accredited investors. I, frankly,
believe that the definition of accredited investor is too
broad. In any event--
Mrs. Wagner. And why is that?
Ms. Walter. Because it covers any number of people who
neither have the wherewithal to lose the money that they could
lose, the sophistication to evaluate the investment
opportunities--
Mrs. Wagner. These are investors who can afford advice and
who can, I think, better afford the kind of risk taking that is
out there. And certainly--
Ms. Walter. Not necessarily, particularly not if an
offering is done by general solicitation over the Internet. All
it has to be is someone who has the right financial numbers who
answers an Internet solicitation. And you don't have to have an
adviser at all. So there are risks there. That does not mean to
me that we should not go forward with this. We should. But we
have an obligation to look at the investor protection concerns
as well.
Mrs. Wagner. I yield back.
Chairman McHenry. I will now recognize Mr. Heck.
Mr. Heck. Thank you, Mr. Chairman.
Commissioner Walter, thank you very much for your presence
and your testimony today. I want to follow up, as we keep
butting up against this issue of the definition of an
accredited investor. Am I correct that Dodd-Frank permitted the
SEC to review that definition? And if so, is there one under
way?
Ms. Walter. Dodd-Frank did several things in this area. It
mandated that in determining net worth, you not consider your
primary residence. And it said that the SEC could move forward
in reviewing the definition, but was not permitted to change
the net worth standard until the middle of 2014.
Mr. Heck. Has a review been initiated?
Ms. Walter. We have started to look at those issues.
Mr. Heck. And you have said several times that you don't
think that the definition is adequate. As I recall, and I could
be mistaken, the principal pillars of the definition are a net
worth threshold and an annual income level. So, obviously, you
have a strength of conviction here, having heard you respond in
that fashion 3 times now. How would you change it? Or what
kinds of things would you add to get at this objective of
ensuring that an accredited investor was sufficiently capable
of evaluating an investment opportunity above and beyond income
and/or net worth?
Ms. Walter. Some of the things that we could consider, and
I wouldn't rule out others, would be of course raising the
numbers that are in the definition. Alternatively, we could use
a different criterion. I tend to think that if we were to look
at the amount an individual had invested--and we are really
talking about natural person accredited investors here, we are
not talking about entities--but if we were to look at a
standard of a person having so much already invested, that
prior experience wouldn't be perfect, but would be nonetheless
an objective indicator that perhaps would be better.
We could also look to criteria that are not specifically
with respect to the definition. Borrowing from Title III of the
JOBS Act, if you look at the crowdfunding provision, there is a
provision in there that someone who is going to invest through
a crowdfunding site has to go through a process of
demonstrating that they understand basic concepts, essentially
an online--it would end up being probably an online learning
module where you would have to keep going through until you got
the answers right. So it would demonstrate a certain degree of
knowledge. And we could perhaps consider something like that as
well.
Mr. Heck. In addition to requiring an accredited investor
to meet some threshold of invested funds, would you personally
favor increasing either or both the annual income level or the
net worth level?
Ms. Walter. I would probably, sitting here today--and I
don't have a fixed judgment; I would like to go through the
process--prefer to do away with the income and net worth levels
and go to an amount invested, unless we can find a different
objective criteria that will work. I do think it is important
that this be relatively simple and objective so it is
administerable.
Mr. Heck. And what range of invested amount would you
think--I am asking for a range, and I am obviously not asking
for some kind of an enduring commitment here--but I am just
trying to get a sense of at what level do you think people are
demonstrating some level of sophistication sufficient to
warrant this?
Ms. Walter. To me, it would have to be relatively high. We
could either use one of our existing standards or we could do
something like $500,000. I fear for hard-working people who
haven't made very much in their lives, who have accumulated
money in a retirement account and are nearing retirement, so
that they are at the high point of their asset accumulation
level and are just rife targets for fraud, and that money is
going to have to last them for the rest of their lives. So I
would think it would have to be relatively high, but I don't
know the right number right now.
Mr. Heck. Lastly, do you have the authority to in any way
limit the manner in which the general solicitation and
advertising is done, or does by definition, general
solicitation preclude you from prohibiting certain kinds of
venues or channels for appeal?
Ms. Walter. That has been a matter of some controversy.
Some have said we do, and some have said we don't. I believe
that we do. We, of course, would have to propose that.
Mr. Heck. Very good.
Mr. Chairman, thank you. I yield back the balance of my
time.
Chairman McHenry. I certainly appreciate that. Very
interesting line of questions and interesting comments as well.
We will now go to Mr. Hultgren of Illinois for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you, Commissioner Walter. I appreciate you being
here. I do apologize. There are several things going on at
once. I have had to step out a little bit. So I know you have
maybe brushed on some of these things, but I do want to--I have
some questions I wanted to ask. The proposed rule to implement
Title II, which proposes a solution to accredited investor
verification, passed the Commission on August 29, 2012, and the
comment period, as you know, ended on October 5, 2012. It is
now April 17, 2013. I wondered if you could explain why during
your tenure as Chairman, you haven't voted on a final rule to
implement Title II?
Ms. Walter. I believed that my job as Chairman was to try
to chart a way forward that took into account the comments on
both sides and tried to come out with a way to go forward in
what I considered to be a responsible fashion, and
significantly a way to go forward that would garner three votes
among the four Commissioners we had at that point in time.
We didn't reach that point. I didn't reach an answer that I
felt met that standard. I regret that it has taken longer than
we had expected. We now have a new Chairman. We are at full
strength as a Commission, so I am hopeful that we can move
forward expeditiously. And I certainly am fully committed to
doing that. It is one among many projects that have been
pending that led me to decide to stay on as a Commissioner.
Mr. Hultgren. So there were discussions, but there wasn't
agreement on it. There was never a full vote on a proposal? Is
that correct?
Ms. Walter. I never had the staff put a formal proposal
back to the Commission. My fellow Commissioners came at this
from very different points of view. And I was in the process of
trying to figure out how to walk the line to come up with a
proposal--I don't mean a proposed rule--I mean a proposed
solution to this problem that would satisfy my concerns and
garner at least two additional votes.
Mr. Hultgren. We are just past the 1-year anniversary of
the passage of the JOBS Act, and are approaching the 1-year
anniversary of the 90-day implementation deadline for Title II.
Looking back during this time, I see that the SEC deployed
resources to consider political contribution regulation, an
area of law that the SEC has little expertise over and
questionable jurisdiction. The SEC also found time to work on
money market fund regulation despite no legislative mandate to
do so. At the same time, the SEC failed to implement Title II
of the JOBS Act, a two-page part of a highly bipartisan law
with limited discretion.
Based on the time the Commission found to pursue money
market reform and political contribution regulation, is it
reasonable to believe that the Commission could not manage to
implement Title II, a two-page section of the JOBS Act, with
limited discretion?
Ms. Walter. First, I should say very little time was spent
on political contributions. And the question of whether or not
there should be corporate disclosure of political
contributions, I do think is in the Commission's mandate.
Second, with respect to money market reform, although there
was no statute, there was quite a hue and cry from all aspects
of the public and all around government for us to address that.
And that is done by entirely different staff than the staff who
are working on this.
Mr. Hultgren. It appears that there should have been plenty
of time to get this done.
Ms. Walter. It is not a question of time. We did not come
out with the resolution, and we were sitting with a four-member
Commission. We now have a five-member Commission, and we will
move forward on this as expeditiously as possible. We had
Commissioners with decidedly different views on this. And a
Chairman does not get to decide what the answer is. The
Chairman is one vote.
Mr. Hultgren. I also believe a Chairman is given direction
and needs to follow that direction. There clearly was
congressional direction here. I wonder if you are aware of
other cases where a regulator ignored a direct command of
Congress through obvious delay tactics. At least, that is how
it appears to us.
Ms. Walter. There were no delay tactics involved here. I
can assure you of that. I have never in 1 second during this
period of time engaged in any delay tactics. There certainly
have been other instances in which congressional deadlines for
rulemaking were not met. The rulemaking process is not as easy
a one as it appears to be. Until you sit down and engage in it,
it has a lot of complexities, and it takes time. But there were
no delaying tactics here.
Mr. Hultgren. The appearance to us, again, and even you
said in the previous question, that other things didn't take
that much time. This isn't a matter of time. So you could take
forever to get this done. And yet this is a clear command,
basically a direction by Congress, a law that was passed, a
bipartisan law, again, through the House and the Senate, agreed
to by the President, signed by the President, and yet we have
seen, from our perspective, no action on this.
Again, I just see that as unacceptable. Even if there is
action and not agreement, at least there is activity. And from
our perspective, there is no activity. That is the frustration
I think that many of us are feeling, and many of our
constituents are feeling as well.
With that, I see my time has expired. I yield back.
Chairman McHenry. Thank you.
I will now recognize the ranking member of the subcommittee
for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. And I thank the witness
again for appearing today.
I do want to give you an opportunity to restate your
position with reference to moving expeditiously. You have been
very clear that you are not refusing to do this, but I think
that you should have the opportunity to make the record as
clear as possible on this issue.
Ms. Walter. Thank you. I appreciate that. My position is
twofold. One, I believe that Congress has given us a mandate.
We need to fulfill it. I am committed to moving forward with it
as expeditiously as we can. And two, I will say on the
substance, since the 1980s I have been in favor of lifting this
ban. So this is not something that I personally oppose. I do
think that there are other considerations that need to be taken
into account, and we are looking at those.
Mr. Green. There seems to be a good deal of consternation
with reference to the comment period. Is it the norm to have a
comment period or is it the exception to have a comment period?
Ms. Walter. It is absolutely the norm. The lack of a
comment period is quite rare. And it is generally done either
in exigent market circumstances or where some external event
causes an obligation to kick in unexpectedly that people aren't
prepared for. And in our case, even in the midst of the market
crisis, it happened on average 2 or 3 times a year.
Mr. Green. And have you received comments on this piece of
legislation?
Ms. Walter. Yes. We received over 220 comments, which were
mixed. A little less than half of them were in support of the
proposal. A little more than half opposed the proposal as it
was put out for comment.
Mr. Green. Let's talk for just a moment about your budget,
because it has been mentioned--I mentioned it earlier, and I
have heard other Members mention it as well. While I have your
2012 numbers, I will focus on 2013. My evidence indicates that
you requested $1.56 billion. The House passed $1.371 billion.
And the actual budget was $1.321 billion, decidedly less than
what you were asking for. Did you ask for that $1.56 billion
because you actually needed the $1.56 billion to perform
efficaciously?
Ms. Walter. Absolutely. As I mentioned before, even prior
to the passage of these two major pieces of legislation, we had
certain very pressing needs. In particular, I would highlight
the fact that we don't have sufficient resources to do a good
enough job examining the investment adviser population. We
examine 8 percent of the investment adviser population a year
and that simply isn't sufficient. So one of the things that we
intend to do is to try to beef up that program.
In addition to that, we are way behind the outside world we
regulate in terms of the technological tools we use, both to
examine the entities that we regulate, and in even as simple a
case as when we litigate cases in court. And that is another
area where we really need the funds to catch up.
Mr. Green. You have 35,000 entities that you oversee, which
is a huge number.
Ms. Walter. Yes, it is.
Mr. Green. And 11,000 investment advisers. Can you in any
way put these things aside to make sure that you get other
things done, or do you have to try to do everything?
Ms. Walter. You have to try to do everything. And what you
do is try to develop techniques to get to be as efficient as
possible. For example, in our examination program we have taken
many steps over the last few years to try to enhance our risk
assessment and the analytics we use in determining which
entities we examine. But in the end, when you have to do
everything and you don't have enough, you don't do anything
quite as well as you should.
Mr. Green. Quickly, on the question of the money market
fund, did FSOC have anything to do with the reason you
endeavored to deal with the money market fund?
Ms. Walter. I think that answer might differ depending on
who at the Commission you spoke with. If you may recall, before
the FSOC got involved we had made some changes in money market
fund regulation, in 2010, I believe, and we said at the time
that there was going to be a second step where we were going to
analyze whether further changes were needed.
Our Chairman was working on that. There was opposition from
other Commission members. And she decided not to present it to
the Commission. At that point, the FSOC stepped in and made a
request of us that we look at these issues. So they definitely
have been playing a role.
Mr. Green. Thank you, Mr. Chairman, for the extra time. I
yield back.
Chairman McHenry. We will now recognize Mr. Grimm for 5
minutes.
Mr. Grimm. Thank you, Mr. Chairman.
And thank you, Commissioner. I appreciate you being here
today. I want to just go back, the ranking member of the full
committee and the ranking member of this subcommittee had
mentioned the budgets and funding. You were asked basically if
you had the resources to deal with an expansion in fraud that
lifting this ban could lead to. But I want to ask a different
question. Regardless of any potential increase in fraud,
implementing this part of the JOBS Act, do you have the
resources to do that?
Ms. Walter. Yes, we do. We obviously have to set
priorities. And one of the things that happened with the
passage of Dodd-Frank and the JOBS Act is those priorities took
the place of other, more discretionary, voluntary initiatives
that we would like to pursue. We do not have the resources to
do everything we would like to do, but we obviously prioritize
congressional mandates.
Mr. Grimm. Okay. Taking a step back, the ranking member
just asked about those priorities, and you did I think just
testify that you do try to do everything. And I understand that
is hard, especially with 35,000 entities out there that you are
regulating.
Ms. Walter. That is correct. There are certain things;
certain types of rulemaking are discretionary. Most of our job
is not discretionary. We have an examination program. When we
review public company filings, we are under a mandate to do a
third of the public companies every year. So it really depends
on the particular aspect of the job, the manner in which it is
discretionary or mandatory, but we have many things that we
must do.
Mr. Grimm. How about enforcement of the existing rules
prior to even Dodd-Frank changes? Would you say that you are
capable of doing that?
Ms. Walter. We are. But again, we choose our cases. You
probably could not give us enough resources so that we could
bring every case that is out there. And that is appropriate.
When you run an enforcement program you have to decide what to
prioritize, what types of cases to look for, how to use your
resources. And that, of course, is done.
Mr. Grimm. It is a little off the topic of today, but since
I went down this road I would like to ask you, where would you
say the priority of illegal shorting, the ban against naked
shorting? I see that as a huge issue. Is that a priority?
Ms. Walter. I believe it is. We have set up over the last
few years a tips and complaint system, a TCR system. And what
we do is we gather in all of the complaints that we get from
the outside world and we perform triage on them. We are able to
determine who is complaining about what to try to decide what
to pursue.
Mr. Grimm. Have you ever looked at the fall of Lehman
Brothers?
Ms. Walter. Yes, our agency did do that. And I will say
personally, I was recused from Lehman matters, so I can't speak
to it personally.
Mr. Grimm. The shorts were 17 times the actual float. There
is only one way that could happen, and that is if they were
illegally trading. It happened with Lehman Brothers; it
happened with Bear Stearns; and Overstock.com always has this
issue. It just seems from what I have seen, the SEC turns a
blind eye to naked shorting.
Ms. Walter. I believe that we do enforce the rules we have
on the books.
Mr. Grimm. Lehman Brothers would disagree. Well, they can't
disagree any more.
Okay. With that, I will yield back.
Chairman McHenry. Will the gentleman yield to the--
Mr. Grimm. I will yield to the chairman.
Chairman McHenry. Thank you.
Commissioner Walter, you stated that you wanted to open up
the proposal to comments. Is that correct? On lifting the ban
on general solicitation?
Ms. Walter. Yes. That is correct. I have found--
Chairman McHenry. Okay. And as a matter of policy and
procedure at the SEC, when you go to an interim final rule, is
that a rule that is final, or can it then be adjusted after it
is up and running?
Ms. Walter. Both interim final rules and normal final rules
can be adjusted.
Chairman McHenry. So, people can comment on interim final
rules as a matter of process?
Ms. Walter. However--
Chairman McHenry. Is that correct?
Ms. Walter. Yes, that is correct.
Chairman McHenry. Yes, okay. Now, you wanted to answer. Go
right ahead.
Ms. Walter. Thank you. I appreciate that. One thing I have
learned in many years of doing rulemaking is, first of all,
comments are more robust--our post-proposal comments were more
helpful than the pre-proposal comments because there was a
specific proposal out there.
Second, it is often difficult to go ahead and adopt a rule,
have people set up systems, for example systems for
verification in this particular case, and then accept comment
and then modify them. It can subject people to undue costs. It
is better, if you can, to have a system set up the way you want
it to be in the first instance.
Chairman McHenry. Yes, counter to the law existent, though.
That is the reason why we are having this hearing.
So with that, we will now recognize Mr. Duffy for 5
minutes.
Mr. Duffy. Thank you, Mr. Chairman.
I missed a little bit of this hearing, so I hope I am not
repetitive. But again, I want to bring up my concern about the
chain of emails that has been reviewed today and the fact that
the SEC had come out with an agreement, an internal agreement
that you were going to introduce an interim final rule. And
when the Chairman got an email notice from an outside lobby
group expressing a concern, she was willing to change course
from an interim final rule to go to a proposed rule.
And to think that this institution which has had, frankly,
a pretty rough couple of years, and that you were able to get
Democrats and Republicans, House Members and Senators, to agree
to the JOBS Act, and to get the President to sign that bill,
and then to see these emails from an outside lobby group which
was able to prevent the implementation, or a portion of the
implementation of the JOBS Act is outrageous. I guess I would
like to hear your comment on why an outside lobby group can
impact the SEC more than this institution.
Ms. Walter. I don't believe that is the case. And I will
say that--
Mr. Duffy. Did you read the emails, by chance?
Ms. Walter. Yes, I have read the emails.
Mr. Duffy. And you come to a different conclusion from
these emails?
Ms. Walter. Yes, I do.
Mr. Duffy. And what is that?
Ms. Walter. First of all, there was no agreement reached
that it was the proper way to proceed. The staff who were
working on the rulemaking switched from recommending a proposed
rule at one point to recommending an interim final rule at
another point. One thing that is true in rulemaking is that
nothing is final until the vote is taken, and the vote had not
been taken. Throughout this process, we heard from investor
groups, we heard from industry groups, and we meet with
everyone who comes in.
Mr. Duffy. And you heard from an outside lobby group. And
it was after that email that the Chairman expressed her concern
about the pressure that was going to be put on the agency. And
it was after that that you then went to a proposed rule from an
interim rule. How could the conclusion be any different?
Ms. Walter. We always talk to all sides of the issue, and
we listen to their views. And frequently, very frequently in
the course of a rulemaking project, we change our minds about
basic issues, peripheral issues, the approach which we are
going to take. This was--
Mr. Duffy. Reclaiming my time, we don't always have email
chains from the Chairman expressing concern about comments made
by an outside lobby group. We have that. And it was after that
concern was expressed, that the course changed within the SEC
to go from an interim rule to a proposed rule. And that doesn't
concern you?
Ms. Walter. It doesn't concern me because I believe--I
cannot speak for Chairman Schapiro, but quite frankly, as I
have said several times during the course of this hearing, I
always thought the better course of action was to propose a
rule from the beginning. And I thought that was the better way
to go. We also are always concerned when we are told by outside
groups, in essence, that if you go a different way, we will sue
you. We don't want to adopt rules--
Mr. Duffy. I want to reclaim my time.
Ms. Walter. --and then have them invalidated or stayed.
Mr. Duffy. If I could direct your attention to the screen,
it is an email from Chairman Schapiro. And it says, ``I have 2
worries--one is that if these guys (CFA, et al) feel this
strongly, it seems like we should give them a comment period.
Its not really asking for much.'' So that means she is saying
they have asked for a comment period, which means they have
asked for a proposed rule instead of the interim final rule.
And she says they have asked for it, so we should give it to
them. Isn't that what she is saying?
Ms. Walter. Yes. And you have to keep in mind that a
comment period is the norm. It is the way rulemaking is
traditionally and overwhelmingly done. The question here was--
Mr. Duffy. Then how did you ever get to the point where you
were going to go with an interim final rule?
Ms. Walter. The suggestion was made that in this case,
there was an adequate basis to do an interim final rule. The
suggestion was never made that giving a comment period, which
is a more informed way to do rulemaking--
Mr. Duffy. I want to reclaim my time. This lobby group, the
Consumer Federation of America, who sent this email which
persuaded the Chairman to change direction, how many of those
lobbyists are Members of Congress or Senators? How many?
Ms. Walter. I would assume none.
Mr. Duffy. Not one. That is right. But it was their
influence that changed the course and will of this institution.
I yield back.
Chairman McHenry. We will now go to Mr. Barr of Kentucky.
Mr. Barr. Thank you, Mr. Chairman.
Commissioner, thank you for your testimony today. Is it
your position that Section 201(a) is in conflict with the
notice and comment requirement of the Administrative Procedure
Act?
Ms. Walter. No, it is not.
Mr. Barr. Okay. What is your position with respect to the
interface between notice and comment requirements under the APA
and the JOBS Act 90-day provision?
Ms. Walter. You have to look--we were required, if at all
possible, to comply with both. We did not make the deadline.
But in order to dispense with the notice and comment provision,
we would have to have a justification and just cause. Our
General Counsel's Office suggested that might be possible here
and was one way of dealing with the risk of our perhaps not
being able to obtain relief in the general solicitation case.
But the fact that there is a congressional deadline does not in
and of itself change the obligations under the APA.
Mr. Barr. And you said in addition to that, agencies never
meet congressional deadlines, or rarely meet the 90-day
deadline.
Ms. Walter. No--
Mr. Barr. Was that your testimony?
Ms. Walter. No. I said that 90 days is a very short
deadline for rulemaking.
Mr. Barr. Is it your opinion--
Ms. Walter. What I said, if I may, is that rarely, if ever,
have I seen a rule, mandated or not, go through the process in
that short a period of time.
Mr. Barr. I understand that. And I understand your
testimony with Mr. Duffy that notice and comment on a longer
period of time is traditionally done. The question here,
though, is the 90-day directive from the Congress under the
JOBS Act. And my follow-on question would be, is it your
opinion that it is impossible for administrative agencies to
meet a 90-day deadline on rulemaking such as was dictated in
this case?
Ms. Walter. It would have been extraordinarily difficult.
Mr. Barr. Okay. Does the Administrative Procedure Act (APA)
permit rulemaking within a 90-day window?
Ms. Walter. Yes, it does.
Mr. Barr. Okay. Do you agree that an interim final
rulemaking would enable compliance with a 90-day deadline?
Ms. Walter. Assuming that the standard was met, and I
wasn't convinced that the standard was met, I think that is a
litigable question.
Mr. Barr. Okay. So why was a proposed rule decided upon in
lieu of an interim rule, an interim final rule, in light of the
fact that only an interim final rule would have been consistent
with the 90-day statutory deadline?
Ms. Walter. I can only speak for why I favored a proposed
rule and preferred one. It was the only proposal that was put
before the Commission for a vote. And I favored a proposed rule
because I wanted to hear what people said both about how the
ban should be implemented in terms of verification and--
Mr. Barr. To reclaim my time, I understand your preference
from your previous testimony. But my question to you really is,
did Congress speak directly to the precise question, which is
the 90-day deadline?
Ms. Walter. Congress spoke directly to the 90-day deadline.
It did not speak to the Administrative Procedure Act.
Mr. Barr. Is the JOBS Act Section 201(a) more specific in
its directive to Congress than the more general notice and
comment of rulemaking direction under the Administrative
Procedure Act?
Ms. Walter. I believe that they are both specific
directives, and that if we don't meet the standards of the APA,
we have an invalid rule.
Mr. Barr. Is the intent of Congress on 90 days clear to
you?
Ms. Walter. Yes, it is.
Mr. Barr. Is the expressed intent of Congress on the 90-day
deadline in any way ambiguous to you?
Ms. Walter. No, it is not.
Mr. Barr. Okay. Then under Chevron, and you comply with the
Administrative Procedure Act regularly, you understand the
requirements of the Supreme Court's interpretation of the law
under Chevron, and under step one of Chevron, it is pretty
clear what an administrative agency's obligations are. Always
when Congress has spoken directly to the precise question at
issue, if the intent of Congress is clear, that is the end of
the matter for the court, as well as the agency must give
effect to the unambiguously expressed intent of Congress. You
just testified that you agreed that the unambiguous expressed
intent of Congress was 90 days. Why did you not comply with
that directive under the Chevron mandate?
Chairman McHenry. The gentleman's time has expired, but the
witness may answer.
Ms. Walter. Thank you. Because I do not believe it
overrides the Administrative Procedure Act, nor do I believe it
overrides our job. We also have an obligation to consider the
economic analysis, and we have an obligation to consider how it
impacts the protection of investors and our mission. And I
think we are supposed to do all of those things. We did not
meet the 90-day deadline, as I have said. We regret that. I am
committed to moving forward with the rule. And I do believe
that what we are talking about in terms of the unambiguity
really relates to the substance of the statute, not the timing.
Mr. Fitzpatrick [presiding]. The Chair will recognize
himself for 5 minutes.
Commissioner, I just want to go back over those lines of
questions we had about Meredith Cross. She was proposing a
scenario where you were going to be able to comply with the 90-
day requirement. She wanted to go to interim rule or interim
final rule. And you indicated that she was the staff person
with the most knowledge with respect to the rule, correct?
Ms. Walter. That is correct.
Mr. Fitzpatrick. And there were other staff members at SEC
who were concerned that there might be a number of comments
that she was unaware of, and so they decided to overrule her?
Is that what happened?
Ms. Walter. No, she didn't have the decision-making
authority. Understand that the divisions work on
recommendations to the Commission. Those recommendations are
presented to the Commission. And it is the five voting
Commissioners who have the decision-making authority.
Mr. Fitzpatrick. But she, the person with the most
knowledge within the agency, had actually provided a mechanism
or a path where the Commission could both comply with the law,
the 90-day requirement, and consider comments or suggestions or
revisions going forward. I just refer to Exhibit 2, if we could
put that up on the screen. That is the email from Thomas Kim.
It says, ``Meredith supported going straight to a final rule,
as we could then have a pilot period where we could assess how
issuers are verifying...'' He goes on to say, ``She was more
comfortable doing this as an interim final temporary rule,
which means it would sunset at some future date. Two years was
tossed around as a possible sunset date.''
So didn't she provide a mechanism where you could both
comply with the 90-day time period, comply with the law as
passed by Congress, the House and the Senate, and signed by the
President, be able to comply with the law, and consider
suggestions going forward?
Ms. Walter. She provided a possible way to go forward. She
never said she was opposed to doing a proposal.
Mr. Fitzpatrick. But it was possible to comply with the
law. Correct?
Ms. Walter. It was possible to meet the deadline.
Mr. Fitzpatrick. I want to refer to Chairman's Exhibit 6,
which is the email from Chairman Schapiro, the third sentence,
which states, ``Its not really asking for much. The other is
that I don't want to be tagged with an Anti-Investor legacy.''
Do you agree that asking for a comment period was not asking
for much?
Ms. Walter. Yes, I do, because I think the law generally
provides for it. It is a right. It is the essence of
rulemaking. And you have to have an exceedingly good reason to
dispense with it. So, yes, I do agree with that statement.
Mr. Fitzpatrick. Is breaking the law not asking for much?
The law did require that this occur within 90 days, correct?
Ms. Walter. Congress set that deadline. We tried to meet
it. We did not meet it. There have been other instances in
which we have not met deadlines. There are deadlines that we
meet. We always try to meet them. We don't always meet them. I
don't think, and I will repeat, I never felt comfortable with
dispensing with the comment period, because you look at the 220
comment letters we have gotten and tell me that they are not
valuable in determining how to go forward with this rule.
We have an obligation to do this and to do it right. This
is a rule you told us to do. You told us to go and do the
rulemaking. We have to do it in accordance with our
responsibilities. I wish that we had been able to do it while
meeting the 90-day comment period, but we did not.
Mr. Fitzpatrick. But there was a way to do it within the 90
days and consider the comments. Correct?
Ms. Walter. There was a way to adopt a rule. Would it have
been the right rule? Would it have been a responsible rule? I
am not so certain of that.
Mr. Fitzpatrick. I recognize Mr. Cleaver for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Ms. Walter, I served as the mayor of Kansas City for 8
years, and as I was leaving office, I was asked to support
various members of the city council and even people running to
succeed me. One of the things I said to them was that I have
been able to recreate two projects: one, Union Station; and
two, the 18th and Vine Jazz District. And I said, that is my
legacy. My concern is that you support my legacy.
Now, everybody wants to be remembered. But the other part
of it is we had invested about $250 million. So I wanted that
legacy protected. And I am not sure that there was anything
sinister in asking that my legacy be protected because it also
had something to do with the city and the investment of the
city. So if somebody wants their legacy to protect investors
protected, what is wrong with that?
Ms. Walter. There certainly is nothing wrong with it. I
hope that in my short term as Chairman, I will be remembered as
someone who protected investors.
Mr. Cleaver. I yield back my time to the ranking member.
Mr. Green. Thank you, Mr. Cleaver.
I am assuming the remainder of Mr. Cleaver's time. Okay,
thank you.
First, let me compliment you for being such a person with
great dignity and composure. Much has been said about the 90-
day window. You have never refused to come to Congress to give
testimony when required or requested, have you?
Ms. Walter. Of course not.
Mr. Green. And did you receive any request from Congress as
to your appearing and giving testimony as to whether or not 90
days was the appropriate amount of time to perform this task?
Ms. Walter. I was asked to come up to speak about Title II
and how the process ran and why it wasn't done.
Mr. Green. And has Congress ever made an inquiry of you as
to whether or not 90 days was a sufficient amount of time prior
to today?
Ms. Walter. Not that I am aware of.
Mr. Green. And are you aware that other persons do come and
testify, I am sure, but do you have any knowledge of Congress
performing any due diligence to come to a conclusion that
surely 90 days is the amount of time that is needed to get this
done?
Ms. Walter. No, I don't know of any such due diligence
being performed.
Mr. Green. The 90-day window, did Congress mandate that you
do it in 90 days, and that in doing it, you avoid the comment
period?
Ms. Walter. No.
Mr. Green. So the comment period is something that is
codified in the law?
Ms. Walter. That is correct.
Mr. Green. And the comment period is what is generally done
so that you will do things that are reasonable, that are
prudent, and that will protect investors in the process.
Ms. Walter. Absolutely.
Mr. Green. Have comment periods been beneficial in the
past?
Ms. Walter. In my experience, I always learn things through
the comment period.
Mr. Green. So we have a circumstance now where Congress
gave you 90 days, did not indicate that you should avoid the
comment period, and what you have done thus far is what would
typically be done under normal circumstances, and we did not
indicate that these circumstances were so exigent that you
should avoid the comment period. Correct?
Ms. Walter. Correct.
Mr. Green. With the use of the comment period, you
indicated that you received more than 200 comments. I don't
remember the exact number. What was that number again?
Ms. Walter. Two hundred and twenty, I believe.
Mr. Green. Two hundred and twenty. And within what period
of time, if you recall, did you receive the 220 comments?
Ms. Walter. My recollection is, and I may need to be
corrected, that the comment period expired in October.
Generally speaking, comments come in through the comment
period, a little bit after the comment period. I think in this
particular case, given the amount of interest in it and the
decidedly different views, we have continued to receive
information from time to time. We always try to consider what
comes in even if it is after the deadline.
Mr. Green. And were these comments beneficial in this
process?
Ms. Walter. Yes, they have been very beneficial.
Mr. Green. Have you acquired intelligence by way of the
comment period that you would not have acquired but for the
comment period?
Ms. Walter. Yes. I believe we have.
Mr. Green. Finally, this: Do you know of any rule or law
that mandates that you have a certain amount of time to act on
a given mandate from Congress with reference to developing a
rule?
Ms. Walter. No, I am not aware of any.
Mr. Green. So Congress could have selected 60 days?
Ms. Walter. Yes, I believe that is correct.
Mr. Green. We could have selected 30 days. And we chose 90
days. I won't say that is arbitrary and capricious, but I don't
see a record that indicates that 90 days was the prudent thing
to do.
I yield back, Mr. Chairman.
Mr. Fitzpatrick. Ms. Wagner is recognized for 5 minutes.
Mrs. Wagner. Thank you. Mr. Chairman, I am also reminded
that we are well beyond the 90-day enactment period.
Commissioner Walter, the SEC has recently lost a series of
high-profile cases in which it was determined that the SEC had
acted beyond its authority. I am reminded of the Business
Roundtable proxy access, I am reminded of Gabelli. You have
acknowledged, Commissioner, that the enforcement concerns
associated with the ban, you have acknowledged the clarity of
Title II and its clear purpose. We have also heard repeatedly
about the SEC's scarce resources. Additionally, the Commission
has had a poor track record, I think obviously, as I stated, in
court as of late. And given all of this, would the SEC use its
scarce resources to enforce the ban against those that abide by
Title II?
Ms. Walter. I don't know that it would. That would have to
be made in an individual case, and we would have to look at the
facts surrounding it and seeing what the other circumstances
were. For example, many times when there is a registration
violation, there is also a fraud violation. They sometimes go
hand in glove.
Mrs. Wagner. Let me go back, if I can. I am a little
troubled, going back to the accredited investors discussion
here and your wanting to somehow change the way that it is
determined. Explain that in a little broader sense, if you
could. How is it that you would like to change the way that it
is determined?
Ms. Walter. The theory behind the private placement
exemption, and these are all forms of private placement
exemptions that we are talking about, is that there are
categories of investors who don't need the protections that the
law ordinarily brings in a registered offering. It is my
concern that as accredited investors are defined today, and
that same definition has been on our books, and it is a rule,
not a statute, that hasn't been changed in decades, that it
includes people who do need the protections of the securities
laws.
Mrs. Wagner. I am looking at this, and the rule, $200,000
minimum income, $1 million in assets. Are you suggesting that
only the wealthier and the wealthier should have access to
these kinds of investments and capital markets?
Ms. Walter. The theory of having a registration system is
that there are protections given to investors by having
information be made publicly available and subject to review by
a government agency.
Mrs. Wagner. But what specifically is the determination of
an accredited investor? I think I just laid out what that is.
Ms. Walter. That is what we decided it was in the early
1980s. It is now 2013. And it is--
Mrs. Wagner. You don't think hard-working families and
middle-class families, my goodness, a $200,000 minimum income,
a million dollars in assets, excluding their home. Why should
only the wealthier and wealthier have access to this?
Ms. Walter. The determination in the Federal securities
laws enacted by Congress was the presumption that when you make
an offering of securities to the public, it should be
registered, and it should be subject to these protections. The
private offering exemptions, the safe harbor included in Rule
506, are for those people who don't need the protections the
law applies. Congress could decide it doesn't like the
registration system. That is not the determination Congress
made. It said there would be a registration system, offerings
would be made with these protections. And they are particularly
concerned about protections against fraud.
And we go through a comment process when we get a public
offering, and we have a back-and-forth with an issuer to try to
make sure that their disclosures are robust and full. That
process is missing in the private offering process. So the
theory is that there are certain people--and it is not really
so much wealth, it is sophistication. What we are looking for
is sophistication and the ability, the wherewithal to look at
the issuer and say, I want to know more about your financial
condition, tell me, there is not enough on this piece of paper.
We now have these offerings being made to people who don't have
the ability to demand that information and don't have the
sophistication to make those decisions--
Mrs. Wagner. And why is that? Why do they not have that
ability?
Ms. Walter. Because financial literacy in this country,
even among people who are quite well-educated and who have a
fair amount of money, is not what it should be. But there are
lots of unsophisticated people.
But I think your analysis really, if I may, stands the law
on its head. The private placement is the exception. Your
question suggests that the private placement should be the rule
and one should have to justify needing the protections of the
registration system. That is not the way the law is written.
And that is the predicate on which the securities laws have
been built since the 1930s.
Mr. Fitzpatrick. The gentlelady's time has expired. Mr.
Heck is recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman. With your permission, I
would like to yield my time to the ranking member of the
subcommittee.
Mr. Fitzpatrick. Without objection, it is so ordered.
Mr. Green. Thank you very much, Mr. Chairman.
Madam Commissioner, let's talk for a moment about the
Volcker Rule. You are familiar with the Volcker Rule?
Ms. Walter. I am.
Mr. Green. Is it true that this rule was to be perfected by
July 2012 or thereabouts?
Ms. Walter. Yes, that is correct.
Mr. Green. And I think it is safe to say that we have
exceeded July 2012.
Ms. Walter. I believe that is true.
Mr. Green. We are approaching July 2013. The Volcker Rule
was to be implemented around the same time as the JOBS Act. Is
that a fair statement?
Ms. Walter. I believe that is true.
Mr. Green. Do you have any indication as to why the Volcker
Rule has not been implemented? Have you been quizzed as to why
you haven't implemented the Volcker Rule? Have we had a hearing
comparable to this to ascertain why you haven't implemented the
Volcker Rule?
Ms. Walter. We have not. We have had correspondence, both
from people who wanted to see it implemented faster and people
on the Hill who don't want to see it implemented for quite a
long time.
Mr. Green. I am going to take just a moment to read a
paragraph from a letter. This letter is addressed to the
Honorable Ben Bernanke, Chairman, Board of Governors, Federal
Reserve, and a host of other persons, including the Honorable
Mary Schapiro, Chairman, U.S. Securities and Exchange
Commission. It is a rather lengthy letter.
So as to not exceed the time, permit me to read the next to
the last paragraph. It reads, ``Given the time that it will
take for you to agree on one version of the Volcker Rule as
well as the tremendous uncertainty that market participants
face in trying to anticipate what the final rule will look
like, we respectfully suggest that the Federal Reserve Board
delay the Volcker Rule''--some things bear repeating--``we
respectfully suggest that the Federal Reserve Board delay the
Volcker Rule's effective date until two years after the date on
which the final rule is promulgated.''
Now, I don't think that the persons who made this request
are asking you to break the law. Listening to some of the
comments today, I might conclude that some people think that
what you have done has been a breach of the law because you
have exceeded the 90-day window that Congress accorded you. But
I, quite frankly, don't think that this is a breach of the law,
and I certainly don't think that the persons who codified this
letter and sent this letter to the Honorable Mary Schapiro and
the Honorable Ben Bernanke, among others, I don't think that
these persons broke the law, and I am going to stand up for
them today. Because I have great respect for both of these
persons who asked that you delay what was mandated by Congress.
That is the way I read this letter, that you delay what was
mandated by Congress. And I find that this letter has been
signed by two people that I highly respect, and they are both
friends of mine.
I only introduce it because I want to make the point--I
think it has to be made--that you are doing the best that you
can under the circumstances existing, and that you are not
doing this with malice aforethought, and that this is not the
first time that we have exceeded a timeline that has been
accorded you, that, in fact, Congress will ask that you take
your time and make sure you get it right, which is not an
unreasonable thing for Congress to ask.
So, Mr. Chairman, I ask unanimous consent that I be allowed
to place in the record this letter from my very good friend,
the Honorable Spencer Bachus, and my very good friend, the
Honorable Jeb Hensarling: Mr. Bachus as chairman; and Mr.
Hensarling as vice chairman.
Chairman McHenry. Without objection, it will be entered
into the record.
I ask unanimous consent that it also be noted in the record
that the Volcker Rule did not have an implementation deadline
of 90 days, as did Section 2 of the JOBS Act. Without
objection, it is so ordered.
With that, we will now recognize Mr. Grimm for 5--I am
sorry, Mr. Duffy. I guess the two handsome men at the end of
the dais get confused here. Sorry. Mr. Duffy is recognized for
5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
Ms. Walter, I would like to direct your attention to an
email that was sent from Chairman Schapiro on August 7th. It is
an email that you were CC'd on. And in that email, the first
line from Chairman Schapiro says, ``I know we spent an hour
discussing this yesterday but they are making me very
worried.'' And when she is saying ``they,'' there is an
attached email from the lobby group we discussed in the last 5
minutes I had with you.
I am a bit concerned that Chairman Schapiro or the SEC is
worried about a lobby group and their opinion; they are not
worried about the law set forth by this institution. But that
is not my question. You were CC'd on that email. Obviously, it
is clear that Ms. Schapiro was expressing her worries about the
position of a lobby group, so much so that she changed--or the
SEC changed their position from going from an interim final
rule to a proposed rule. What did you do to push back on Ms.
Schapiro and others in the analysis that was being used in
changing course and using the input from a lobby group and not
the internal conversation of the SEC? Did you push back on
that? Did you send emails out pushing back on this email from
Ms. Schapiro?
Ms. Walter. First, I will say I think it is entirely
appropriate for public servants to consider views that are
expressed both externally and internally within the agency in
making their decisions.
Second, I will say I have always said that I was not
comfortable with dispensing with the comment period. And so,
when she started to express more concern about dispensing with
the comment period, that was closer to my views than vice
versa.
Mr. Duffy. And how about if the lobby group is expressing a
position that is contrary to the will of the American people as
spoken through Congress? Then do you have a concern?
Ms. Walter. I do not believe that was the case. As I have
said, I think there are a number of statutes that we need to
comply with. And we need to do our rulemaking responsibly.
Frankly, it would not save a rule--
Chairman McHenry. If our witness would pull the microphone
closer. It is hard to hear.
Ms. Walter. I am sorry. I am height-challenged.
Chairman McHenry. I can relate.
Ms. Walter. It would not save our rule from scrutiny and
perhaps being overturned by a court.
Mr. Duffy. So you did nothing to push back on the comments
made by Ms. Schapiro to say that she was worried about the
comments made by this lobby group on the course of the--
Ms. Walter. I, too, was worried about dispensing with
notice and comment. So, no, I did not push back.
Mr. Duffy. Okay. Changing course a little bit, would you
agree that the purpose of the JOBS Act and the purpose of Title
II was to actually expand and grow the economy, create more
jobs within our communities? That was the purpose of this Act,
right, including Title II, yes?
Ms. Walter. Yes, that is correct.
Mr. Duffy. Why didn't you have then the rule completed
within 90 days?
Ms. Walter. As I have said, we determined that we would put
a rule out for comment and see what the commenters had to say,
because we were given an obligation to lift the ban, we thought
we also needed to explore how that was going to be done, the
alternatives to different ways to do it, and whether there were
additional issues that needed to be considered.
Mr. Duffy. Okay. I am going to reclaim my time. You admit
that this is a law that will create jobs within our society.
Ms. Walter. No, I said I believe that is the intent. I hope
when this law is implemented, either this law or other laws
will create jobs. It is not my job to analyze whether it will
carry out its purpose or not.
Mr. Duffy. That is right. But it is your job to follow the
will and intent of Congress, which is to get a rule out within
90 days. And so you have come in and testified and said,
listen, 90 days wasn't enough time for us. I will accept that.
I think that is a good point. I am willing to accept that. I am
concerned about these emails. I have expressed that to you.
But we are well beyond 90 days. We are over a year and we
are not done. Are you telling this institution that a year is
not enough time for you to have this issue resolved and to have
a rule out?
Ms. Walter. The only thing I can say to you, Congressman,
is that I regret we did not meet the deadline. I regret--
Mr. Duffy. Is a year not enough time?
Ms. Walter. It has turned out that we have not gotten it
done. Could we have gotten it done?
Mr. Duffy. Did you need more time than a year?
Ms. Walter. We had rules that take far longer than a year
to do. I am committed to trying to get this one done--
Mr. Duffy. Is this one of them?
Ms. Walter. --as expeditiously as possible. Yes, this was
highly controversial, and we heard a lot of heavy comment from
a lot of different people on both sides.
Mr. Duffy. Can I ask one question? You took a little of my
time with your height comment. Can I ask just one quick
question? It is not on this, but on--
Chairman McHenry. I ask unanimous consent that the
gentleman has an additional minute.
Mr. Duffy. Thank you. I am going to change topics on you
quickly. There has been some conversation about a pilot program
to increase tick sizes. It was discussed in the JOBS Act. There
are quite a few people who support it. Ms. White has expressed
some interest, I think. I don't know if in a pilot program. She
has indicated that she agrees that a one-size strategy doesn't
fit all. Is that something that you would agree with, exploring
some modification to tick sizes for small companies?
Ms. Walter. I don't yet have a formed position on that, but
I do agree that it is a serious issue, and we should explore
it.
Mr. Duffy. Thank you. I yield back.
Chairman McHenry. And with that, I will now recognize the
ranking member of the subcommittee for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
My assumption is that you don't get letters from industry.
We have talked about a letter today. You don't get letters from
industry, do you?
Ms. Walter. We certainly do.
Mr. Green. Is it unusual to get letters from industry?
Ms. Walter. Not at all. We get letters and visits from
industry all the time on a very wide range of subjects. And I
believe that as public servants it is my duty and my pleasure
to meet with these people, read the letters no matter who is
sending them, no matter who is coming in to meet with me.
Mr. Green. Do you assume that because you get a letter from
industry that somehow industry is doing something that is
inappropriate and somehow exerting undue influence?
Ms. Walter. No, I do not.
Mr. Green. Do you find that it is helpful to have
industry's point of view when you are promulgating rules?
Ms. Walter. Yes, I do.
Mr. Green. Have you, in fact, because you have received
requests from industry, specific requests, have you honored
some of those requests in the orderly rulemaking fashion?
Ms. Walter. Yes.
Mr. Green. Is it unusual to take seriously what industry
ask of you?
Ms. Walter. Not at all.
Mr. Green. Do you find it unusual that persons who
represent investors will ask that you give consideration to
certain aspects of your rulemaking parameters?
Ms. Walter. It is not unusual, but it happens with less
frequency than it does with industry.
Mr. Green. Some things bear repeating. Are you saying that
you get more input by way of request from industry, which is
not bad, but more from industry than you do from consumer
entities?
Ms. Walter. Yes. That is correct.
Mr. Green. Are you offended by this?
Ms. Walter. I am not offended by it, but I do wish that we
had better means of communicating with the investing public,
whom I consider to be our primary constituency, and we have
been working on improving that.
Mr. Green. Let's go back to the Volcker Rule for just a
moment. You have now gone beyond the timeline to implement it,
which was July of 2012, I believe, and we are beyond July 2012.
Ms. Walter. Yes.
Mr. Green. Probably about the same amount of time as before
the JOBS Act.
And it is true, for clarity purposes, that you have not
been called before Congress to explain why you have gone beyond
the timeline for the Volcker Rule; is this true?
Ms. Walter. I have not.
Mr. Green. And the Volcker Rule is designed to protect
investors, is it not?
Ms. Walter. Yes, it is.
Mr. Green. Under the Volcker Rule, my suspicion is that you
have received some letters from investors or people
representing investors as well as from industry; is this a fair
statement?
Ms. Walter. I believe it is.
Mr. Green. And would you give those your considered thought
before you implement your new rule?
Ms. Walter. Absolutely.
Mr. Green. So with the Volcker Rule, as with the JOBS Act,
we find ourselves being reasonable, prudent, and judicious as
we move forward. I say ``we'' because quite frankly, we have a
lot of input into what you do. But is that a fair statement?
Ms. Walter. Yes, it is.
Mr. Green. And you are not giving one less attention than
the other?
Ms. Walter. No.
Mr. Green. You believe them both to be important?
Ms. Walter. Yes.
Mr. Green. Now, let's do something else. Let's talk about
sequestration for just a moment. We talked about your budget
earlier and we have talked about how you have been underfunded.
Sequestration is going to have an impact on a good many
agencies. Is your agency one of the agencies that will be
impacted by sequestration?
Ms. Walter. Yes, it is.
Mr. Green. Do you have any sense of how this impact will
have an effect on what you will be doing?
Ms. Walter. For one thing, it is going to curtail our
hiring. And we are going to have to parcel out those people who
get to refill positions when people leave. It is also going to
affect how much we are able to spend on technology and how much
we are going to be able to progress on our second technological
plans. Those are the two main issues but those are--our budget
is largely a people budget given the nature of what we do, not
surprisingly, so it will have an impact in both of those areas.
Mr. Green. And you are expected to be the cop on the beat
to make sure that the streets are safe for investors, is that
correct?
Ms. Walter. Yes, that is correct.
Mr. Green. And it appears to me that you are also expected
to do a lot more with a lot less.
I yield back.
Chairman McHenry. The gentleman yields back, and I will
recognize myself for the final round, for the final question, I
should say. This will be the last question of the day.
I will put up Exhibit 6 on the board just to reiterate my
opening statement.
It is an email from Mary Schapiro, then the Chairman of the
SEC, to Meredith Cross. The subject line is, ``Please don't
forward.'' And the email states, ``I look forward to talking
tomorrow. I have 2 worries--one is that if these guys (CFA, et
al) feel this strongly, it seems like we should give them a
comment period. Its not really asking for much. The other is
that I don't want to be tagged with an Anti-Investor legacy. In
light of all that's been accomplished,'' blah, blah, blah.
So, not asking for much, anti-investor legacy.
It is this email that should raise concern for you and for
your agency, and it seems like this should be in some way
upsetting and in some way a concern, right?
And I don't see any outrage, any concern in your testimony,
your comments today.
Now, there was concern expressed and we will go to Exhibit
7 on this, and Mary Schapiro forwarded an email to Meredith
Cross and two others entitled, in the forward, ``I am
furious.'' It comes from Dan Gallagher, a fellow Commissioner
of yours. And he says, ``I just got word about the latest
change to general solicitation. It is not acceptable. I have
been operating in good faith, reviewing the multiple proposals
sent to me for consideration this month, and I continue to find
shifting sands. A `proposal' on general solicitation could have
been done months ago, and indeed should have been done years
ago. Meredith and Lona made it crystal clear to me on Monday
that there is no need for a proposal because we know what the
comments will be. And so, I spent hours working on how to
accommodate your desire for a study within an interim final
rule, and we did so--just to find out now that you have changed
your mind again.''
Now, Mary Schapiro forwards this on to others and says,
``This did not go well.'' That was her only comment.
So that is a concern, and that is why we have hearings,
when we see an agency which has that type of disorder.
I am hopeful that with a new Chairman, we can actually
right this ship. And I certainly believe, as I said in the
beginning, in your capacity, in your intellectual capacity and
your understanding of securities laws to take this on.
If you wish to respond, go right ahead.
Ms. Walter. I would say that I don't see in these emails an
agency that is in disarray. I see in these emails--I can't
speak for what Mary Schapiro was seeing at the time--a concern
that there is a constituency interested in our rulemaking, and
as the ranking member points out, in this case it is an
investor group, someone speaking for investors, it could have
been industry saying we want a comment period so that we have a
chance to see a specific proposal and to make comments on it,
which is the essence of the rulemaking process, and I see a
Chairman being concerned about that. I do not think that is a
cause for outrage.
Chairman McHenry. Yes. But the comment I am concerned about
is ``an Anti-Investor legacy'' as she is leaving the agency.
That is a concern I see.
And so, why I bring this up is I am hopeful that we can
take this on, that your agency can take on the JOBS Act
implementation, and I would hope, I think the takeaways from
this hearing is that the agency put those concerns over
actually letting capital flow. And that is the reason why the
JOBS Act even occurs as we see the SEC stifling the flow of
capital and at the same time not protecting investors as well
as they should.
And so my concern is that you have prioritized that
inaction over the will of Congress and the law.
We have a two-page bill, the discretion is very limited,
within 3 weeks you had a proposed rule at the staff level, we
don't want any further excuses, and I am very hopeful that in
the future, we will have some movement on this.
I certainly appreciate your willingness to testify before
Congress. The origin of this hearing was a request for a member
of the staff, and you offered yourself when you were Acting
Chairman. That was very kind of you, and I certainly appreciate
your willingness to engage in the discussion today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place her responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
And without objection, this hearing is adjourned.
[Whereupon, at 4:25 p.m., the hearing was adjourned.]
A P P E N D I X
April 17, 2013
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