[House Hearing, 114 Congress] [From the U.S. Government Publishing Office] LEGISLATIVE PROPOSALS TO ENHANCE CAPITAL FORMATION AND REDUCE REGULATORY BURDENS ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTEENTH CONGRESS FIRST SESSION __________ APRIL 29, 2015 __________ Printed for the use of the Committee on Financial Services Serial No. 114-18 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PUBLISHING OFFICE 95-062 PDF WASHINGTON : 2015 _______________________________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: http://bookstore.gpo.gov Phone toll free (866)512-1800; DC area (202)512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking Vice Chairman Member PETER T. KING, New York CAROLYN B. MALONEY, New York EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas BILL POSEY, Florida WM. LACY CLAY, Missouri MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts Pennsylvania DAVID SCOTT, Georgia LYNN A. WESTMORELAND, Georgia AL GREEN, Texas BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota ROBERT HURT, Virginia ED PERLMUTTER, Colorado STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama MICK MULVANEY, South Carolina BILL FOSTER, Illinois RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan DENNIS A. ROSS, Florida PATRICK MURPHY, Florida ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona ANDY BARR, Kentucky JOYCE BEATTY, Ohio KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington LUKE MESSER, Indiana JUAN VARGAS, California DAVID SCHWEIKERT, Arizona FRANK GUINTA, New Hampshire SCOTT TIPTON, Colorado ROGER WILLIAMS, Texas BRUCE POLIQUIN, Maine MIA LOVE, Utah FRENCH HILL, Arkansas Shannon McGahn, Staff Director James H. Clinger, Chief Counsel Subcommittee on Capital Markets and Government Sponsored Enterprises SCOTT GARRETT, New Jersey, Chairman ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York, Chairman Ranking Member PETER T. KING, New York BRAD SHERMAN, California EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas RANDY NEUGEBAUER, Texas STEPHEN F. LYNCH, Massachusetts PATRICK T. McHENRY, North Carolina ED PERLMUTTER, Colorado BILL HUIZENGA, Michigan DAVID SCOTT, Georgia SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut STEVE STIVERS, Ohio KEITH ELLISON, Minnesota STEPHEN LEE FINCHER, Tennessee BILL FOSTER, Illinois RANDY HULTGREN, Illinois GREGORY W. MEEKS, New York DENNIS A. ROSS, Florida JOHN C. CARNEY, Jr., Delaware ANN WAGNER, Missouri TERRI A. SEWELL, Alabama LUKE MESSER, Indiana PATRICK MURPHY, Florida DAVID SCHWEIKERT, Arizona BRUCE POLIQUIN, Maine FRENCH HILL, Arkansas C O N T E N T S ---------- Page Hearing held on: April 29, 2015............................................... 1 Appendix: April 29, 2015............................................... 39 WITNESSES Wednesday, April 29, 2015 Deas, Thomas C., Jr., Vice President and Treasurer, FMC Corporation, on behalf of the Coalition for Derivatives End- Users.......................................................... 3 Gabaldon, Theresa A., Lyle T. Alverson Professor of Law, the George Washington University Law School........................ 5 Hughes, Gayle G., Partner & Founder, Merion Investment Partners, on behalf of the Small Business Investor Alliance (SBIA)....... 7 Kovacs, Shane, Executive Vice President and Chief Financial Officer, PTC Therapeutics, Inc., on behalf of the Biotechnology Industry Organization (BIO).................................... 8 Quaadman, Thomas, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce...................... 10 APPENDIX Prepared statements: Luetkemeyer, Hon. Blaine..................................... 40 Deas, Thomas C., Jr.......................................... 42 Gabaldon, Theresa A.......................................... 47 Hughes, Gayle G.............................................. 62 Kovacs, Shane................................................ 83 Quaadman, Thomas............................................. 92 Additional Material Submitted for the Record Garrett, Hon. Scott: Letter from the American Bankers Association................. 104 Letter from Americans for Financial Reform................... 105 Letter from The Depository Trust & Clearing Corporation...... 109 Letter from the Food Marketing Institute..................... 113 Summary and No-action Letter from Warner Norcross & Judd..... 115 Letter from the Independent Community Bankers of America..... 121 Letters to Chairman Hensarling from Hon. Darrell Issa, a Representative in Congress from the State of California.... 122 Letter from the M&A Source................................... 127 Written statement of the North American Securities Administrators Association, Inc............................ 130 Written statement of XBRL US................................. 140 Huizenga, Hon. Bill: Letter from the Association for Corporate Growth............. 148 Letter from the Alliance of Merger and Acquisition Advisors.. 150 Letter from the Business Brokers of Florida.................. 157 Letter from the International Business Brokers Association, Inc........................................................ 158 Letter from the Nevada Business Brokers...................... 162 Letter from the Small Business & Entrepreneurship Council.... 164 Hultgren, Hon. Randy: Written statement of John C. Partigan........................ 165 LEGISLATIVE PROPOSALS TO ENHANCE CAPITAL FORMATION AND REDUCE REGULATORY BURDENS ---------- Wednesday, April 29, 2015 U.S. House of Representatives, Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 2:28 p.m., in room HVC-210, Capitol Visitor Center, Hon. Scott Garrett [chairman of the subcommittee] presiding. Members present: Representatives Garrett, Hurt, King, Neugebauer, McHenry, Huizenga, Duffy, Fincher, Hultgren, Ross, Wagner, Messer, Schweikert, Poliquin, Hill; Maloney, Hinojosa, Scott, Himes, Ellison, Foster, Carney, Sewell, and Murphy. Ex officio present: Representative Waters. Also present: Representative Moore. Chairman Garrett. Good afternoon, and welcome. The Subcommittee on Capital Markets and Government Sponsored Enterprises is hereby called to order. Today's hearing is entitled, ``Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens.'' I thank the members of the subcommittee for being here, and I thank the witnesses on the panel, as well. Forgive me if my voice is a little bit off today. I am either suffering from a little head cold or some allergies. Again, thanks to the panel. We will begin as we do normally. I know most of the panel is new to the testifying process. Some of them are not so new, and have been around here before. So, we will begin with opening statements, and I will yield myself 3 minutes. Since 2011, this subcommittee has held almost a dozen of these hearings, basically to explore ways to do what? To facilitate capital formation, and make the U.S. capital markets more attractive to companies, and to try to increase investment opportunities for all investors. Most notably, this subcommittee led the charge, if you will, to implement one of the most meaningful updates to our securities laws in recent history, in recent memory, and that was the Jobs Act, Jobs 1.0. And we are seeing the positive impacts of the Jobs Act as more and more smaller companies are accessing the capital markets and they are doing so at a lower cost. But I think most agree that more needs to be done. Therefore, it is incumbent upon this committee and this Congress to provide sensible improvements to our securities laws to help small companies and startups access the capital markets and access capital they need to create jobs and to grow. The United States has the most fair, most efficient, and deepest capital markets in the world. And the primary function of the capital markets that we have is to do what? It is like I say, it is to help facilitate the appropriate flow of capital from investors to companies which need those funds to create jobs, to grow the companies, to grow the economy, and for prosperity in America. So today, America's startups and small businesses continue to encounter difficulty, unfortunately, accessing the U.S. capital markets to finance operations. Moreover, the costs of these companies of going and staying public remain unacceptably high. So this afternoon, the subcommittee continues its capital formation agenda by considering a dozen bills. And I want to thank all of the cosponsors of the legislation that will be coming before this subcommittee. During the 113th Congress, this committee and the House considered many of the bills that are before us today. We approved them, and we approved them overwhelmingly with large, in some cases unanimous, votes, which is a great thing. One of those bills is H.R. 1525, the Disclosure Modernization and Simplification Act, my bill. This legislation is one that I introduced. I was pleased that this legislation was able to pass by this committee on a 59-0 vote, and by the House with a voice vote last year. And what would that bill do? It would direct the SEC to tailor regulations, S-K disclosure rules, as they apply to emerging growth companies and smaller issuers to eliminate other duplicate, outdated, and unnecessary rules and regulations. Now, although these bills that we are talking about are modest, they are not insignificant to our fellow citizens back home or to the entrepreneur or small company that our fellow citizen depends upon in order to get his job. So in all of this, it is important to remember that capital formation and investment protection is not an either/or proposition. When investors have additional investment options to earn a return and they invest their money, that additional choice is a significant protection. So, I want to thank again--where I began--all of the witnesses for their appearance at this hearing and also for their very relevant and helpful written testimony that they have all submitted. And I look forward to advancing all of the bills under discussion at the committee markup, and then to the full House at the earliest opportunity so we can move things along. And with that, I yield 2 minutes to the vice chairman of the subcommittee, Mr. Hurt. Mr. Hurt. Thank you, Mr. Chairman. Thank you for holding today's hearing, and I am pleased that this subcommittee is moving forward with ideas to increase access to capital for our small businesses and startups. At a time when unemployment remains high, and my constituents are struggling to find employment, it is incumbent upon us to do everything we can to reduce the regulatory burden on such entities that are so vital to job creation in Virginia's 5th District and across this great Nation. The bipartisan Jobs Act was one successful example of identifying and remedying regulatory burdens that restrict economic growth, and we need to build upon that success. We must do more to remove or refine costly regulations, particularly those that are disproportionately affecting smaller public companies who are considering accessing capital in the public markets. While a single regulation may seem insignificant, the combined effects of our regulatory regime can be insurmountable. One such requirement is the eXtensible Business Reporting Language, or XBRL, which was mandated by the SEC in 2009. While the SEC's rule is well-intended, this requirement has become another example of a regulation where the costs outweigh the potential benefits. I put forth a proposal that would offer small companies relief from the burdens of XBRL: H.R. 1965, the Small Company Disclosure Simplification Act, provides a voluntary exemption for all emerging growth companies (EGCs) and other small public companies from the SEC's requirements to file their financial statements via XBRL. I believe this proposal is a measured step forward, and during the 113th Congress identical legislation was passed by this committee by a bipartisan vote of 51-5. I look forward to the testimony of our distinguished witnesses and thank them for their appearance before the subcommittee today. I thank you, Mr. Chairman, and I yield back the balance of my time. Chairman Garrett. The gentleman yields back. I don't believe there are any other opening statements, so at this point we will turn to our panel. And just as a refresher for our new panelists, your entire written statement will be made a part of the record, and you will be recognized now for 5 minutes for a summary of your testimony. We will begin with Mr. Deas, vice president and treasurer of FMC Corporation. Welcome to the panel, and thank you. You are recognized for 5 minutes. STATEMENT OF THOMAS C. DEAS, JR., VICE PRESIDENT AND TREASURER, FMC CORPORATION, ON BEHALF OF THE COALITION FOR DERIVATIVES END-USERS Mr. Deas. Thank you, Mr. Chairman, and thanks to the members of this subcommittee. I am Tom Deas, vice president and treasurer of FMC Corporation, and immediate past chairman of the National Association of Corporate Treasurers (NACT). FMC and NACT are members of the Coalition for Derivatives End- Users, representing hundreds of companies across the country that employ derivatives to manage day-to-day business risk. First, let me sincerely thank you, Mr. Chairman, and the ranking member, and also the members of the subcommittee for doing so much to protect derivatives end-users from the burdens of unnecessary regulation. When it comes to the needs of Main Street companies, the members of this committee have worked together to get things done. You drove the end-user margin bill to enactment and have led the charge on the centralized Treasury unit bill sponsored by Representatives Moore and Stivers. As you oversee the implementation of the Dodd-Frank Act, I want to assure you that in my experience, end-users comprising less than 10 percent of the derivatives market do not engage in the kind of risky, speculative derivatives trading activity that became evident during the financial crisis. We use derivatives to hedge risks in our day-to-day business activities. We are offsetting risks, not creating new ones. FMC Corporation has been a proud American innovator since our founding some 130 years ago. This is our 84th year of listing on the New York Stock Exchange (NYSE). When we first listed in 1931, the NYSE was the largest pool of capital available to us to grow our business. Today, the over-the-counter derivatives market represents an additional and even larger pool of funds available to us, and is a flexible and cheap way to hedge everyday business risk such as changes in foreign exchange rates, interest rates, and also global energy and commodity prices. We support the transparency in the derivatives market that the Dodd-Frank Act attempts to achieve. We also believe it is sound policy and consistent with the law to exempt end-users from provisions intended to reduce the inherent riskiness of swap dealers activities. However, at this point--4\1/2\ years after passage of the Act--there are several areas where regulatory uncertainty compels end-users to appeal for legislative relief. First, centralized Treasury units. The Coalition recognizes the efforts of the Commodity Futures Trading Commission (CFTC) to provide relief on centralized Treasury units, but their actions have not addressed the fundamental concern that companies must operate at all times in strict compliance with the law. End user treasurers have long used widely accepted risk reduction techniques to net exposures within our corporate group so that we can reduce derivatives outstanding with banks. However, the internal centralized Treasury units we use have been viewed as financial entities subject to mandatory clearing and margining even though they are acting on behalf of non- financial end-user companies otherwise eligible for relief from these burdens. The Coalition strongly supports H.R. 1317, which would clarify that certain swaps with CTUs of non-financial end-users are eligible for the end-user exception for mandatory clearing and the requirement to post margin for their derivatives positions. With your help, however, we could successfully navigate the complex regulatory issues I have described today, only to find that the uncleared over-the-counter derivatives we use have become too costly because of much higher capital requirements imposed on our banks. U.S. bank regulators are implementing significantly increased capital requirements on all derivatives. However, European regulators have concluded that end-users hedging activities are risk-reducing and should attract less capital than swap dealers trades. They have exempted non-financial end- users from these additional capital requirements. This could put FMC and other American companies at an economic disadvantage relative to our European counterparts. Although I have focused here on two main issues, end-users are concerned about the web of, at times, conflicting rules from U.S. as well as foreign regulators that will determine whether we can continue to manage business risk through derivatives. Our fear is that cross-border regulatory uncertainty could conflict, and put FMC and other American companies at an economic disadvantage. End user exemptions for margining and clearing we thought would apply are still uncertain as they affect our risk-reducing centralized Treasury units, confronting us with potentially competitive burdens that could limit growth and, ultimately, hamper our ability to grow and create jobs. Thank you for your attention, Mr. Chairman. [The prepared statement of Mr. Deas can be found on page 42 of the appendix.] Chairman Garrett. I thank you for your testimony. Professor Gabaldon from George Washington University Law School, welcome to the panel. You are recognized for 5 minutes. STATEMENT OF THERESA A. GABALDON, LYLE T. ALVERSON PROFESSOR OF LAW, THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL Ms. Gabaldon. I do thank Chairman Garrett, Ranking Member Maloney, and the other members of the subcommittee for inviting me. I am Theresa Gabaldon from George Washington University. I have comments on eight of the proposed bills. I have a few general remarks before addressing specific bills, as time allows. First, although the bills can be broadly characterized as deregulatory, deregulation that is not well-thought-out does not assist capital formation. I believe the bills generally were prepared without appropriate regard to the opportunities for abuse, and without regard to the way the proposals would interact with other recent deregulations. The proposed rules, in the wrong hands, essentially could render registration under one or both of the 1933 and 1934 Acts optional. I also am concerned that some of the proposals don't work coherently together, pushing for modernization on one hand and fighting it on another. Overall, the proposed changes would adversely affect the quality and availability of the information investors need. I will move on to the specifics of the bills, in view of the time, starting with the ones I believe are most flawed and create the most opportunity for mischief. First, with respect to the M&A Brokers bill, I will align myself with Oliver Wendell Holmes and say that to know what a law is you must look at it as a bad man--updating to include a bad woman. As this bill is drafted, it literally would permit someone banned from the securities industry to publicly offer the securities of shell companies to what could be hundreds of people who will, in 1 year, be permitted to resell the securities without any limit whatsoever. I don't suppose that is what is intended, but that is how it could and, in my opinion, would operate if allowed to pass in exactly its current form. Some of the defects can be remedied with bad- actor provisions, exclusion of the involvement of most shell companies, and limiting public offering activity. The SEC's M&A no-action letter of early 2014 outlines necessary conditions that would be improvements. And that letter also makes this legislation unnecessary. Even if improved, what you are left with is a bill to allow unlicensed and federally unregulated brokers to compete with those who are willing to submit to inspection and other controls. The argument for deregulation supposes that this will bring down M&A costs for smaller companies. I have a few responses to that. One, the cutoffs for eligible privately held companies who supposedly need cut rate service are extremely high. This relates to a concern that the provision, even if improved, has the potential for exploitation by large private equity firms who already are pressing the envelope as far as avoiding registration is concerned. I don't doubt their ingenuity in structuring transactions that could capitalize on this exemption. Two, the resales to accredited investors, or Section 4[a](1\1/2\) bill. I started my evaluation of this bill with a proposition that the common law Section 4[a](1\1/2\) exemption is not broken and does not need to be fixed. This is particularly true in light of the relaxation over Rule 144. As written, the new exemption would be a perilously easy way for affiliates to flip securities either on their own or on the issuer's behalf, providing only that separate compensation for that service is not received. In addition, first tier and subsequent purchasers would assume no real holding risk and could be expected to evaluate their purchases less carefully. There are other problems with the bill, particularly its failure to propose the types of protection associated with private placements under Rule 506 and/or the existing resale rule of Rule 144A. The latter is especially startling since Rule 144A allows resales only to qualified institutional buyers, generally institutions with portfolios of $100 million or more with issuer-sponsored disclosure. Moving to the compensatory benefit, or Rule 701 bill, for reasons amplified in my written testimony, doubling the limit before disclosure to prospective employee investors is triggered can't be justified simply by talking about inflation. Things have changed since 1999 in addition to the value of a dollar. We now have an amendment to Section 12G of the 1934 Act that says purchasers under 701 don't count for triggering registration requirements. The proposal then would allow large issuers, year after year, to place $10 million worth of securities with employees who would never receive the benefit of disclosure under either Act. Finally, I will close with a comment on the XBRL bill, stating my conviction that it may well have the effect of reducing access to capital and provide very little savings in regulatory burden, all while lagging behind a number of other countries. Thank you once again for permitting me to speak today. [The prepared statement of Professor Gabaldon can be found on page 47 of the appendix.] Chairman Garrett. Thank you, Professor. Ms. Hughes, you are recognized for 5 minutes. STATEMENT OF GAYLE G. HUGHES, PARTNER & FOUNDER, MERION INVESTMENT PARTNERS, ON BEHALF OF THE SMALL BUSINESS INVESTOR ALLIANCE (SBIA) Ms. Hughes. Good afternoon, Chairman Garrett, Ranking Member Maloney, and members of the subcommittee. My name is Gayle Hughes, and I am a founder and partner of Merion Investment Partners, a family of private equity funds licensed by the Small Business Administration as small business investment companies (SBICs). Merion was founded in 2003, is based just outside Philadelphia, and is involved in providing subordinated debt and equity to small businesses that have significant growth potential. Merion advises two SBIC funds. I am here today representing the Small Business Investor Alliance (SBIA), which is a trade association of lower middle market private equity funds. SBIA members provide vital capital to small businesses across the country. Over my 30-year career in the financial industry, I have worked with companies from small entrepreneurial firms to members of the Fortune 500, and found working with small businesses most rewarding. For the last 20 years my partners and I have focused on investing in and managing small businesses. We work closely with management teams to help them achieve their growth objectives. The core of our strategy is to invest in small firms and provide them with the financial wherewithal and management expertise to realize their growth objectives. Merion's first SBIC license was approved in August 2003. We sought a second license, which was approved in January 2010. And we plan to seek a third license later this year. Since receiving our first SBIC license, we have invested nearly $190 million in 35 small businesses, and have been examined 14 times by Federal examiners. A large percentage of our investments are made directly with business owners, with Merion as the only institutional capital. Despite our small size, I am pleased to tell you that of the 23 different States represented by members of the committee, Merion has made investments that are either headquartered in or have significant operations in 78 percent of those States. For example, we provided financing to fund a growth opportunity for an IT services company in northern New Jersey that tripled its revenues, expanded its footprint, and nearly doubled its employees. In a second example, Merion provided the capital for a central Virginia firm that grew revenues at a 23 percent compounded annual growth rate and its employment base grew by 67 percent. We helped other businesses grow from small business to global business with hundreds of employees. As an SBIC, we are highly regulated and regularly examined by a regime designed for private equity and small businesses. The cost and time associated with duplicative regulatory burdens would materially reduce our ability to focus on finding and growing small businesses. Dodd-Frank recognized this issue and attempted to address it in the statute, but we know now that a few technical corrections are needed to provide relief. The SBIC Advisors Relief Act is a common-sense, bipartisan, and effective clarification of the investment advisor regulation that will enhance the ability of small business investors to concentrate on making investments rather than filling out forms. It concentrates on three targeted changes to current law. First, the legislation prevents venture funds from losing their exemption from SEC registration when entering the SBIC program. Having two exemptions should not be worse than having one. Second, the legislation helps advisors to both private equity funds and SBICs by removing the SBIC capital, which is already regulated by the SBA from the calculation for SEC registration. This would help my fund and many other funds that regularly face this problem of having more than one type of small business fund. Third, the legislation prevents the duplicative registration of SBICs by Federal and State securities regulators and returns SBICs to their original, sole Federal regulator. Smaller funds have a lower threshold for regulatory pain, and one regulator is enough. Our SBIC funds exceed the registration trigger, and our fund in wind-down will eventually cease to be an SBIC, triggering SEC registration and all the associated costs and burdens. This does not make sense and does not add investor protections. It would create very significant and ongoing costs for all of our small business funds. My written testimony explains in more detail the elements of this legislation and why the solutions and clarifications it makes to the Dodd-Frank Act are necessary to ensure that smaller funds will be able to continue focusing on small business investing rather than filling out regulatory paperwork. I would like to thank the subcommittee for examining this bill today, and I especially want to thank the sponsors of the legislation. In addition to H.R. 432, the SBIA generally supports other legislation that is the subject of today's hearing. These include H.R. 686, H.R. 1525 and H.R. 1659. These bills will contribute to improving access to capital and reducing associated regulatory burdens in the capital raising and deal-sourcing process. Thank you very much for allowing me to present this testimony. [The prepared statement of Ms. Hughes can be found on page 62 of the appendix.] Chairman Garrett. Thank you for your testimony. Next, Mr. Kovacs, welcome to Washington, and welcome to the panel. Mr. Kovacs. Thank you. Chairman Garrett. You are recognized for 5 minutes. STATEMENT OF SHANE KOVACS, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, PTC THERAPEUTICS, INC., ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO) Mr. Kovacs. Good afternoon, Chairman Garrett, Ranking Member Maloney, and members of the subcommittee. My name is Shane Kovacs, and I am the CFO of PTC Therapeutics, a biotech company based in South Plainfield, New Jersey. We are a growing company with 250 employees to date, up from about 125 at the time of our initial public offering less than 2 years ago. And we plan to grow to 400 employees by the end of this year. PTC is developing a portfolio of treatments for ultra-rare genetic disorders that mostly impact children, and capital formation is a key to that lifesaving research and development. PTC has spent approximately $800 million in R&D over the past 17 years, and we are just now on the precipice of our first FDA-approved product. Our story is common in the biotech industry. BIO represents over 1,100 companies, and the vast majority of them are pre-revenue small businesses. Because biotech R&D is typically supported only by investment capital, not product revenue, our investors emphasize the importance of resource efficiency. Every dollar spent on regulatory burdens is a dollar that we are not spending in the lab or in the clinic. Yet, a one-size-fits-all regulatory regime often prevails, bringing with it damaging diversion of capital from science to compliance. In my experience, there are three financial metrics that biotech investors focus on and understand. It is pretty simple: one, how much cash does the company have on its balance sheet; two, what is the company's cash burn rate; and three, how much time is there until that company needs to go to the markets to raise more capital. These high-level metrics are not the focus of the existing regulatory regime, which includes high-cost regulatory standards like XBRL and SOX 404(b), yet we must spend time and dollars preparing the mandated reports instead of talking to our investors about a cash position and key non- financial metrics like our science and our regulatory pathway. The Jobs Act has supported over 140 biotech IPOs because it strikes a nice balance between capital formation incentives and appropriately tailored regulations. And I am encouraged by the fact that the subcommittee is considering legislation today that will build on the Jobs Act's successes. The Jobs Act was a boon to PTC's IPO, and we have created 125 new jobs since our offering, with more on the way. Clearly, smart policymaking can support job growth and innovative R&D. And particularly, I strongly support Congressman Hurt's Small Company Disclosure Simplification Act. We spend nearly $50,000 annually complying with XBRL, all to pay for reporting that doesn't include key information on our company which is important for investors to evaluate an opportunity in PTC. For PTC and other small biotechs, an informed investor is a good one. The Jobs Act, including testing-the-waters meetings, was critical to our successful IPO because we could share more information with investors prior to our offering. But XBRL relies on standardized financial metrics better suited to comparing financials on much larger companies. So, it does not paint a true picture of the opportunity of investing in small biotech companies. I worked as an investment banker with Credit Suisse for 12 years on Wall Street before joining PTC, and I can say with confidence that investors need to understand the scientific foundation of biotech, the clinical progress, and the regulatory pathway before really trying to evaluate metrics enabled by XBRL. Congressman Hurt's bill gives the SEC a chance to improve the compliance mechanism to enhance transparency and decrease costs, and removes the cost burden from small companies while the SEC does its work. I want to thank him for introducing this important legislation, and I urge the subcommittee to support it. I also encourage the subcommittee to take a discerning look at any and all regulations governing public company disclosures, with the goal of achieving a common-sense, right- sized regulatory environment, a spirit embodied by Chairman Garrett's Reg S-K bill. This spirit also applies to Congresswoman Wagner's proposed reforms to Form S-1, which I believe represent an important change for SRCs, and I believe can go further by extending forwarding corporation by reference to EGCs. Emerging biotechs like PTC highly value capital formation and capital efficiency, and I strongly support your efforts to enhance the capital formation ecosystem by reducing regulatory burdens. Enhancing the secondary market for Reg-A offerings, reforming Rule 701, and enhancing the IPO on-ramp are all important steps toward a common-sense disclosure regime. Thank you for considering legislation to support the search of next-generation medical advances, and I look forward to answering any questions you may have. [The prepared statement of Mr. Kovacs can be found on page 83 of the appendix.] Chairman Garrett. And, again, I thank you. And finally, last but not least, Mr. Quaadman, once again, welcome back, and you are recognized for 5 minutes. STATEMENT OF THOMAS QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE Mr. Quaadman. Thank you, Chairman Garrett, Ranking Member Maloney, and members of the subcommittee. Thank you again for the opportunity to testify as well and, more importantly, for this committee's bipartisan leadership on issues of importance to capital formation and business creation. Businesses need the ability and the tools to expand from small to large, and they must be able to engage in the reasonable risk-taking needed to stimulate economic growth and job creation. The Jobs Act was an important piece of legislation to help further those goals. Since the turn of the century, we have had 14 years of consecutive declines in public companies in the United States. But since we have had the partial implementation of the Jobs Act, we have actually seen a dramatic uptick in IPO activity, and last year, we actually saw the number of public companies in the United States rise for the first time. However, when Michael Dell says that he will never operate a public company again, we are still in perilous territory. Indeed, the long-term trends are not good. We are still seeing a large outflow of public companies as well as a series of reports that have been released recently, including the Census Bureau, that business formation in the United States is at its lowest point since numbers were kept, since 1977, and that we have had a steady decline in the number of overall businesses in the United States since 2008. So the package of legislation that we are discussing here is important to build on that foundation of the Jobs Act as well as to overcome the reluctance of the SEC to modernize its rules. One doesn't have to look any further than the Reg A example from the Jobs Act to understand how tortuous that can be. So with the Swap Data Repository and Clearinghouse Indemnification Correction Act, this is an important clarification needed to bridge international differences in law to facilitate better cross-border coordination amongst regulators. The Holding Company Registration Threshold Equalization Act and the SBIC Advisers Relief Act both codified congressional intent of the Jobs Act as well as the Dodd-Frank Act. The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act is an important bill because we have an atmosphere where businesses are increasingly looking to be acquired. Younger business owners are no longer willing to go down the path of the public company, and for older business owners, where the business is their largest asset, that is what they need to sell in order to retire. So we need to have certainty to allow that activity to flourish. And unfortunately, while the SEC no-action letter does provide relief, we have recently seen, in an unrelated area, where the SEC revoked a no-action letter that overturned a decades-long process on a Friday night without any SEC Commissioners being consulted. With the improving access to capital for emerging growth companies, this is a needed change to help emerging growth companies get financing-simplified disclosures that are material to investors. The Disclosure Modernization and Simplification Act, the Small Company Disclosure Simplification Act, and the Small Company Simple Registration Act, taken together, these bills are an important step forward to change the 1930s paper-based disclosure model and create one for 21st Century markets using tools that investors use to acquire information. I also want to thank Chair White and Corporation Finance Director Keith Higgins for their leadership in trying to modernize disclosures. But these bills are important to help save those efforts from inertia. The Encouraging Employee Ownership Act is an important change to make the Jobs Act effective. This will change the threshold, based on inflation, which hasn't been changed since 1988. And these tools are used for employee retention and reward and not for capital-raising. The RAISE Act is an important piece of legislation as well because courts have allowed for the sales of certain securities. The RAISE Act will help set parameters around an emerging market, ensure liquidity and, most importantly, provide for investor protection. The treatment of affiliates of non-financial firms that use a central Treasury unit is a narrowly tailored bill. It codifies congressional intent of the Dodd-Frank Act, and allows a non-financial company to use derivatives without clearing, to mitigate commercial risk, and lock in prices. The bill to amend the Securities and Exchange Act of 1934 to require the SEC to refund or credit excessive Section 31 fees is in keeping with the bipartisan spirit of the Investors Capital Market Fee Relief Act. This actually creates a mechanism to pass back to investors overcharges. So, again, Mr. Chairman, these bills are important to build upon the foundation of the Jobs Act, and I am happy to answer any questions you may have. [The prepared statement of Mr. Quaadman can be found on page 92 of the appendix.] Chairman Garrett. Thanks. I appreciate your testimony, and the testimony of the entire panel. So let us look at maybe the most fundamental and most important piece of legislation that is up here. Oh, it happens to be right in front of me--H.R. 1525, the Garrett bill. If you look at the--I will just throw this out to the professor and then move on to some other bills. If you look at what has happened in the history, here, Professor, it was back at the end of 2013 when the SEC did their review and said that maybe more review wasn't necessary. But I think Chair White and Commissioner Gallagher said, hey, maybe so, but there are certain areas that--they didn't use the term, ``low-hanging fruit'' or what you say that can be done for simplification in this area. Can you spend just 10 seconds, so to speak, on where those areas are that we could have appropriate scaling that this would provide for in the legislation? Ms. Gabaldon. I am familiar with the concept of low-hanging fruit. And to my mind, I would like someone else to identify it for me. Because it isn't obvious to me, looking at Regulation S-K, exactly what it is that the SEC could be expected to act on quickly. I do know that--and we all know that--they have an ongoing initiative. This is the fifth, I believe, either task force or initiative that has been under way in the last 2 decades. Chairman Garrett. So there is nothing that should be done now, even after all that time? Ms. Gabaldon. I certainly would not say that there is nothing to be done. Chairman Garrett. Okay. Ms. Gabaldon. And I do think that, as a matter of fact, the scaling that we see coming out of the Regulation A-Plus process may very well lead the way. I am skeptical of the idea that it is of any kind of benefit to put the SEC on a tight timeframe. We saw how that worked out as far as Dodd-Frank legislation was concerned. Chairman Garrett. Yes, right. Ms. Gabaldon. And I don't see any particular need to replicate that experiment, given that they do seem to be working on it and do seem to be making progress with a template of the Reg A-Plus. Chairman Garrett. Let us ask the other people who are in the field. I will jump down to Mr. Quaadman. Can we, on this and on a number of other issues that are here before us, simply wait on the SEC, on where they say there is additional study that needs to be done? And also, on the second area that you raise, which is the area of saying there are guidance letters that they do, which they can repeal back? Is there a need for us to intercede in these areas, or should we just allow the SEC to go its course, however long that course may be? Mr. Quaadman. I think it is important that Congress acts in order to push the SEC forward. All of the issues that were encompassed in the Jobs Act, the SEC could have done on its own and didn't do it. And even where the Congress mandated that the SEC do it, it took them a long time. I do want to take issue with something the professor said. We issued a report last summer where we identified 15 regulations that are low-hanging fruit. So the issue here is that the SEC is now talking about the potential of a concept release, but if you take a look at, as an example, the SEC issued a concept release to update proxy voting systems in 2010 and hasn't done anything. Chairman Garrett. Let me just stop you there, sorry to interrupt, but that just brings me to another point. The SEC has various small business advisories on these areas, right? And I guess they meet, and year after year they come up with these recommendations, right? What is the track record on them actually coming up with ideas, and then following suit with them and implementing them? Mr. Quaadman. That group does come up with a series of recommendations. Again, those recommendations became the core of the Jobs Act. And the SEC does not follow through-- Chairman Garrett. We did the Jobs Act. Mr. Quaadman. Correct. Chairman Garrett. Right, so in other words-- Mr. Quaadman. That is correct. Chairman Garrett. --the SEC didn't take the initiative. Mr. Quaadman. No, Congress acted on the recommendations of that group, and not the SEC. Chairman Garrett. Right. Thanks. Mr. Kovacs, you mentioned a couple of bills, mine and also Mrs. Wagner's. She is here, and she will probably bring it up as well. But it is a great bill, so let us give credit where credit is due. What is the significance and the importance of that? And you also talked about the EGCs, as far as the reform in those areas. Let me just give you some time to flesh that out a little bit. Mr. Kovacs. I think anything that will reduce the burden, keep adequate disclosure but reduce the burden on companies, can be helpful. Chairman Garrett. Okay, I appreciate that. Mr. Deas, can you walk me through, in the brief time that we have here, as far as the netting arrangement that you were referring to, I guess about two-thirds of the way through your testimony, with regard to the net derivative units as it actually happens for a company? Mr. Deas. Yes, Mr. Chairman. The concept of a centralized Treasury unit is to net exposures within a corporate group and then trade one smaller amount of derivative transaction with a bank. And unfortunately, the original language in Title VII provided for the central Treasury unit to work only if it were an agent--acting on behalf of the other companies, and it didn't include, really, the more common way in which it operates, which is netting. And so-- Chairman Garrett. Was there a risk there if you don't treat it that way? Mr. Deas. There is actually a risk-reducing activity. And, in fact, the risk is higher when it acts as an agent. Because the volume of derivatives that the group is doing with banks is great. And, of course, it is everyone's aim to accomplish netting. Chairman Garrett. Right. Mr. Deas. That was a major goal of Dodd-Frank. So it was a drafting glitch, really, that everyone agreed--in fact, there were colloquies entered in July of 2010 saying that, in general, there would be these kinds of technical corrections fixed promptly. And this is one which has taken 4\1/2\ years. Chairman Garrett. Yes. So, I will close on that. My time is up. But I guess that is the overall message that I think these bills got when they received near unanimity in the past is that this is not what we are talking--we are not talking about deregulation here, we are just simply talking about re- regulation or smart regulation to--fixing some of those problems that were created in a 2,000-page bill that moved very quickly. So with that, I now recognize the ranking member of the full Financial Services Committee, Ms. Waters, for 5 minutes. Ms. Waters. Thank you very much. I would like to start with, I think it is Mr. Quaadman. When an entrepreneur wants to finance an idea, and she is not independently wealthy, she must approach an outside investor, possibly a friend, an angel investor, a venture capitalist, or another institution, right? Now, how does this entrepreneur convince more sophisticated investors that her project, her idea, is worth financing? Later, as her business takes off, it seems she will need to attract a deeper pool of investors, many of whom may not have the benefit of having known about the project from the beginning. How does she convince these investors to commit their funds? She uses various information about her company, including financial information, right? It seems that it is in the best interest of this budding entrepreneur to provide her investors with as much information as possible. If they do not receive this information, would you expect them to impose a premium to cover the uncertainty about the project? This is an additional cost to the company, correct? Have you studied this cost? So could you just tell me yes or no? Mr. Quaadman. Let me answer it in two parts, Ranking Member Waters. Number one is, if you are talking about a private company, we were part of a blue ribbon panel that looked at financial reporting for private companies. And when investors to private companies said financial reports for private companies was not as important as what the idea was that the company was trying to sell, that is what angel investors were worried about. And GAAP accounting doesn't fit with private company accounting. Cash flow or cash burn is more important. So public company disclosures don't fit there. In terms of public company disclosures, I think a study that sort of crystallizes it best is a study by Professor Larcker out of Stanford University. He just released a study of large institutional investors who have trillions of dollars in the market. According to the study, 55 percent of them said the current disclosure regime is too cluttered, and 48 percent said they don't have the time to go through those disclosures. So this is a matter of, let us figure out how to make it easier to have investors access the information, and then also let them sort through the information that they find most material. Because materiality, for both private companies where disclosure is needed, and public companies where we have decided that large amounts of disclosure is important, that is the key threshold for how information should be disclosed. Ms. Waters. Professor Gabaldon, do you have any thoughts about the importance of information to an investor's funding decision? In your opinion, what happens when investors have less information, less confidence in the information they have, or find it harder to compare the information to other companies? Who bears the cost of invester uncertainty? How do some of the bills being considered today affect investor confidence in American issuers, especially small businesses? Ms. Gabaldon. It seems clear to me that to the extent several of the bills head in the direction of reducing disclosure to investors, that does come at a cost to the entities that are trying to raise capital. Reduced disclosure increases investor risk. Without a doubt, the investor will be interested in seeking a higher return. And therefore, to the extent disclosure is reduced or there is less time made available for contemplation of what is disclosed, or to the extent that what is disclosed is not comparable to what is being disclosed by other entities, it may reduce regulatory burden. But in my view, it does nothing to assist capital formation. Ms. Waters. Thank you very much. I yield back the balance of my time. Chairman Garrett. The gentlelady yields back. I now recognize the vice chairman of the subcommittee, Mr. Hurt. Mr. Hurt. Thank you, Mr. Chairman. I want to thank each of the panelists for appearing today. And I want to start with Professor Gabaldon. First of all, just to set the stage for the piece of legislation that we have introduced now for the second Congress in a row, would you admit that what we are talking about here is not whether or not the information is disclosed through financial statements? Wouldn't you agree that the issue here with XBRL is the format in which it is reported? Would you agree with that? Ms. Gabaldon. Yes. Mr. Hurt. Would you also agree that the format in which it is presented has been criticized for perhaps distorting the information and really affecting the quality of the information, as I think Mr. Kovacs testified or made clear in his testimony. Would you agree with that? Ms. Gabaldon. I agree that--I heard what Mr. Kovacs said, but I would also point out that regulators in the United Kingdom, in Japan, in China, and in Israel have all come to the conclusion that XBRL reporting is appropriate and not distortive. Mr. Hurt. And that is right, and that is from the regulators' standpoint, right? That is what you just said. Ms. Gabaldon. Correct. Mr. Hurt. That is why I was curious. In looking at your testimony, you say that you believe that this bill, if passed, would put investors and analysts at a disadvantage. I guess my question is, who is in the best position to know whether this information is useful and puts them at an advantage? The regulators or the investors themselves? Ms. Gabaldon. I believe that the regulators are experienced. I believe that the regulators also need to rely on, or are helped in their analysis, by the existence of XBRL. And that helps them make better judgments about the regulations that they devise, which is ultimately-- Mr. Hurt. But wouldn't you agree that certain--certainly, the regulators have experience, and many of them have been in the investing world and have been analysts. But I guess my question is, at the end of the day, who is in the best position to know? And I guess the reason I am asking that question--and you didn't really answer it--is because if you look at a 2012 study that Columbia published, it says that only 10 percent of investors use this format, or found it in any way, shape or form useful. Doesn't that tell you something? Ms. Gabaldon. It tells me that there is a learning curve, and that the more XBRL is utilized, the more useful it will probably become. Mr. Hurt. What about the cost-benefit part of this? Don't you think it is appropriate for the regulators to be looking at the cost of things? And that would be--I think Mr. Kovacs testified that it costs his company $50,000 to pay an XBRL contractor to do this work. And he also testified that investors aren't interested in it, analysts aren't interested in it. Doesn't that mean something to you? Ms. Gabaldon. What it means to me is that I suspect that his company may be an unfortunate outlier, from what I have read. Mr. Hurt. Well, 90 percent of investors and analysts didn't think it was useful in the 2012 study. I wouldn't call that an outlier. But anyway, thank you for your answers. Mr. Kovacs, I just wonder if you could talk a little bit more about the idea that investors and analysts somehow would be put at a disadvantage. And what I thought was most remarkable about what Professor Gabaldon said was that emerging growth companies would be put at a disadvantage by this bill. And that this would actually restrict capital in a pretty sophisticated marketplace. I was wondering if you could comment on that? Mr. Kovacs. It is interesting--in preparation for today's meeting, I actually reached out to a number of the Wall Street analysts who cover our company and cover the industry, and a couple of the large institutional investors, and asked them, ``Do you know what XBRL is? And if so, do you think it is important to your assessment in investing, at least, in biotech?'' And the response I got was that they didn't even know what XBRL was, and, from at least investing in small biotech companies, the critical information in evaluating an investment in us or one of our peers is really to understand our data, our science, and what is going on in terms of our future as opposed to looking at the historical financial detail. By the way, XBRL is really just a way of quickly getting the financial information to compare costs to other companies. Our 10Ks and 10Qs kind of lay out financials that are pretty straightforward to be able to go on EDGAR and pull that information and get it pretty quickly. Mr. Hurt. Right. Mr. Kovacs. I don't think people are using XBRL. Mr. Hurt. Thank you. I yield back. Chairman Garrett. Thank you. Very good. The gentlelady from New York is recognized. Mrs. Maloney. The analysts and investors that I have talked to say the more information they get in an easy, understandable form, the better. All of us can find information if we go on the Internet and spend hours looking for it and researching it. But if it is in a format that is usable, then it is much, much better to use. Now, I believe in testimony, Professor Gabaldon--by the way, thank you all for being here, and I thank the chairman and my colleagues for bringing these bills forward--you testified that over time the cost will continue to go down. And there was one study from the CPAs, the American Institute of CPAs, that estimated the median cost of doing XBRL for a company would be roughly $8,000. I don't see that as onerous. And I am concerned. I am all for small companies, but the more information you have easily attainable, the more investors will be likely to invest in it. And I would like to ask Professor Gabaldon, do you think people are more likely to invest in a company that has data they understand or in a dark pool where they don't understand it and it is not out there? Ms. Gabaldon. I most definitely think they are more willing to invest in companies about which there is easily accessible information. Mrs. Maloney. I agree. And this debate reminds me somewhat of our debate on Sarbanes-Oxley, where everyone was opposed to it, industry was opposed to it. It had gotten to the point-- when major companies crashed overnight, losing their pensions, going bankrupt, dragging this country down--that there wasn't faith in the system. So we brought all the dark money back onto the balance sheets. The cost of complying keeps going down every year, and now no one is complaining about it. And hopefully, we won't have an example of a company that crashes with a grade A rating overnight, losing jobs and disrupting the economy. Now I would like to ask Professor Gabaldon--I would like to ask you, really, about the XBRL. I think this is an important debate. In your testimony you noted that H.R. 1965, which exempts a large number of public companies from the requirement to use XBRL, would be a step backwards. Why do you see it as a step backwards? Could you elaborate a little bit? Ms. Gabaldon. That would basically permit 60 percent of the publicly traded companies in America not to use this tool which, I believe, is an important research tool for investors and certainly also useful for the SEC as it evaluates filers and also goes through the exercise of considering its own regulations. In addition to the figure that you mentioned earlier, it appears that of small reporting companies, 69 percent incur annual costs of $10,000 or less annually. In the U.K., where they have some experience with this, some filings have come down to approximately 100 pounds per filing, or-- Mrs. Maloney. Now, I have another question. This bill before us is intended to help small companies. But in my opinion, I believe that it hurts small companies. Because if small companies aren't included in the data set that analysts and investors use to analyze industries and make investments, then they are unlikely to attract much attention from the markets. Investing in any--I think most people, investors large and small, want as much information as possible. So my question is, in addition to putting investors, analysts, regulators, and researchers at a disadvantage, do you think the bill would even put small companies at a disadvantage? And again, back to the professor. Ms. Gabaldon. I do, and I think that could happen on an individual basis as well as on a composite basis. If the United States has a reputation for permitting 60 percent of its companies not to provide this information, whereas other countries do provide this information in a readily accessible form, the number of overseas investors whom might be interested in looking at American investment opportunities is going to decline. Mrs. Maloney. Okay. I have always said that markets run more on trust than on capital. And one of the things that our economies had is more trust than other economies. People want to invest in America because they trust our regulation, they trust our markets, they trust our workers. I think we have a responsibility to keep that standard. And I feel that excluding 60 percent of the companies from disclosure is not the right way to go. My time has expired, so thank you very much. Chairman Garrett. The gentlelady's time has expired. Just moving down the row, the gentleman from Texas, Mr. Neugebauer, is recognized for 5 minutes. Mr. Neugebauer. Thank you, Chairman Garrett, and thank you for calling this important hearing. I look forward to reviewing these legislative proposals to enhance capital formation for small and emerging growth companies. I think nearly everyone can agree that these unnecessary regulations are a burden both to individuals and the economy. But they are even a greater burden for our smaller businesses and startups. I was extremely pleased that in my TRIA legislation we were able to include some relief for end-users in using derivatives to hedge their risks. And we are examining some additional proposals in that same vein today. Mr. Deas, one of the questions I have is, how much capital would end-users have to set aside for inter-affiliate swap transactions to comply with the requirements imposed by Title VII of the Dodd-Frank Act? Mr. Deas. Congressman, we don't have that number specifically for central Treasury units. But in a survey that we have done, the amount of capital if the end-user exemption from clearing and margining is not fully implemented, could be $260 million for the average non-financial member of the business roundtable. Mr. Neugebauer. That is a big number. Mr. Deas. Yes, sir. Mr. Neugebauer. What kind of problems did this Title VII create for the inter-affiliate derivative trading? How does that impact the trading? Mr. Deas. Yes, sir. There was an explicit exemption in the bill as originally passed for centralized Treasury units, but only those that act as an agent. We believe there is consensus that it was a drafting error, that a more common way in which we all operate these units as netting out these exposures and thereby producing that risk reduction of a lower volume of derivatives was omitted. And the proposed fix in H.R. 1317 would remedy that. Mr. Neugebauer. So the regulators really haven't been able to resolve that? It is going to take a legislative fix? Mr. Deas. Yes, sir. The CFTC issued a no-action letter in 2013, and amended it last year. But the fundamental difference is that for companies that operate as Dodd-Frank insists, and make boards of directors declare every year that they are in strict compliance with the Act, that no-action letter doesn't get to that fundamental issue. It merely says that the staff won't take an enforcement action. It skirts the issue of whether it is actually in compliance with the law or not. And by a plain reading, it would not be in compliance. Mr. Neugebauer. Mr. Quaadman, in the subcommittee that I Chair, the Financial Institutions Subcommittee, we have seen consolidation in our community banking area by almost 1,000; we have lost 1,000 community banks. And the primary reason, not just according to community bankers but according to some studies, has been the fact that this regulatory environment makes it very difficult for smaller institutions to be in compliance and to have a business model that is economic. One of the things that I struggle with is that when we are trying to talk about providing capital formation for smaller companies and startups is people assume that everybody who is starting up a company or who operates a small business is a crook and is trying to take advantage of potential investors out here. And so what we do is, we make the environment so burdensome out there that it is difficult to be in compliance and, more importantly, there is the cost of trying to navigate through that. And so at what point in time do we say, we have to at some point in time have some rules that make sense and some disclosure and some transparency, but yet allows these smaller startups to find it economic to access the capital market? Because otherwise, you are just going to see more and more and more private activity and not much public activity. Mr. Quaadman. Chairman Neugebauer, I think you really hit it on the head, and that is why I raised that Census Bureau report earlier. Because ultimately what is going to happen is, the bigger companies are going to be able to spend the money and engineer their way out of it. What we are seeing with these reports is, we are seeing that it is on the lower end. With the smaller businesses, they are no longer being created. And we all acknowledge that the employee participation rates are at the lowest they have ever been. We have seen sluggish job creation. And the reason for that is, if you take a look at SBA studies and the like, coming out of a recession, 90 percent of job creation happens in firms with 100 employees or less. That is exactly where we are not seeing the job creation. And so we need to have rules that are going to help build from the bottom up, because that is what we have always done. Mr. McHenry [presiding]. The gentleman's time has expired. And for Members' knowledge, there are 8\1/2\ minutes left on sustaining the ruling of the Chair, a procedural motion on the House Floor. It is the Chair's intention to keep the hearing going, and people can depart and return in order to ask questions. We will now recognize Mr. Hinojosa for 5 minutes. Mr. Hinojosa. Okay, thank you. Thank you, Mr. Chairman. I would also like to thank the distinguished panel members for sharing their insights on this issue. When it comes to our economy and capital markets, the United States is the envy of the world. We are so not only because our economy values and rewards entrepreneurship and innovation, but because our markets are transparent, safe, and liquid. My first question is going to be for Mr. Shane Kovacs and for Mr. Tom Quaadman. H.R. 1675 revises the SEC's Rule 701 by both raising and then indexing for inflation the permissible aggregate sales threshold of securities sold without certain disclosures to employees and to other parties as part of their compensation from $5 million to $10 million. Does raising the threshold to $10 million increase the risk that employees will not receive vital information about the company employees which they need to make informed decisions? Mr. Kovacs? Mr. Kovacs. For companies like PTC, biotech emerging growth companies, we are in a position where we need to attract talent. We need to attract talent from other companies that may be larger and better capitalized, and able to compensate with cash more than maybe we could afford as a small, growing company. And therefore, we have to incentivize employees with stock and options in the company which has growth potential. And certainly as a private company or public companies we need to do that. And for a private company, I can imagine that raising the threshold from $5 million to $10 million, in terms of the value that you are going to give to employees, without having to put together some large disclosure statement on the company and all those incremental costs, I don't foresee that raising that bar from $5 million to $10 million would really have any real impact as to putting the employees at risk. In fact, I would almost think the employees would applaud that because it would enable the companies to give more equity in the company to them in the form of compensation. Mr. Hinojosa. Okay. Mr. Quaadman? Mr. Quaadman. Yes, thank you, Mr. Hinojosa. Number one, the Jobs Act raised the number of employees who would be eligible for this, but we didn't change the threshold dollar level. Number two, with private companies--proprietary information--we are trying to look at this through the lens of a public company. These are private companies. By allowing proprietary information to get out into the public, which this could very well happen, that will destroy a company. That will destroy their ability to grow. So these are employees who are incentivized to succeed. It will allow firms to get the talent that they need. And, I am just reminded that there is a gentleman by the name of Eddie Antar, who was known as ``Crazy Eddie'' in New York, who did everything possible to destroy his company, which he did. And he is now a consultant to go out there and tell regulators and people what you can do. Rule 701 is never anything that he has ever raised. Mr. Hinojosa. Thank you. My next question is for Tom Deas. H.R. 1317 would exempt certain Treasury affiliates from clearing and margin rules. Are you concerned that said exemption would undermine transparency in the derivatives market by allowing some Wall Street banks to avoid clearing requirements for swaps if they are affiliated with a non-financial end-user? Mr. Deas. Congressman, I don't believe that the bill provides for that. From the inception of Dodd-Frank, it has been permitted for an operating subsidiary of a financial company that is engaged in commercial business activity to avail itself of the end-user exemption. And we are talking about a central Treasury unit that has the risk-reducing activities of netting out these exposures which is to the benefit of the--lowering the systemic risk in the system. And it should be what we would all want. And there are very extensive anti-abuse provisions in the bill that are utilized by the regulators that would stop any company from exceeding what is permitted under the law. Mr. Hinojosa. Your response helps me a great deal. I think that my time has expired, and I yield back. Mr. McHenry. I thank the gentleman from Texas. I will now recognize myself for 5 minutes. I just want to ask more broadly about capital formation and secondary markets. Mr. Quaadman, there is existing case law on the sale in secondary markets of restricted securities, right? And some would argue that you don't actually need to have congressional action for that to occur, and that would be correct, right? But as it now exists, there is friction and cost associated with that friction in the resale of those securities. Is that correct? Mr. Quaadman. That is correct. And because we are talking about case law, we don't have a uniform set of standards. That is why I think the RAISE Act which you have proposed--you allow for the SEC to actually put in place a set of rules that will allow for those markets to function, to allow businesses to have liquidity. But most importantly, to actually create investor protections. Which, if we are talking about a hodge- podge of case law, there is a lot that can slip through the cracks. Mr. McHenry. So greater investor protection with clarity. Mr. Quaadman. Correct. Mr. McHenry. Okay. But you talked about liquidity in the secondary markets. And so that question of liquidity, it does provide liquidity in the secondary markets for this resale. Why is that? First of all, is that important, and-- Mr. Quaadman. Yes, because what we are-- Mr. McHenry. --if so, why? Mr. Quaadman. Yes, what we are seeing is as a lot of the different regulatory initiatives are coming online--so Basel III, Dodd-Frank, other things are coming online--we are increasingly seeing: one, liquidity crunches; and two, a lack of market-making activity. Now, that gets even worse as you go down to the lower scale of business formation because you have traditional actors--let us say a community bank or whomever else--are being shut out of an ability to provide assistance to startups and people who are looking to create a business. So this type of liquidity is an important piece because there is a market demand for it. Mr. McHenry. Okay. Market demand--so the RAISE Act will make it easier for private companies to raise capital? Mr. Quaadman. Correct. Mr. McHenry. Is that the case? Mr. Quaadman. Yes, that is correct. Mr. McHenry. Okay. So explain that functionality one more time here just so it is clear on the record. Mr. Quaadman. Sure. What we need to have is--as I said, we have seen a tremendous drop-off in business creation. We are seeing a large drop-off in businesses overall. And we are seeing a lack of capital formation because of a number of different regulatory initiatives. What the RAISE Act does is, it builds out what the courts have allowed in terms of these secondary markets. And it will inject liquidity but, most importantly, investor protections which help provide the trust and confidence that was mentioned before that markets operate on. Mr. McHenry. Okay, so the ability to take that initial group of folks, for them to sell their securities, that actually provides that clarity and broadening that market a bit, right? Mr. Quaadman. Yes. Mr. McHenry. It will create better, basically, establishment of price, right? Mr. Quaadman. Right. Mr. McHenry. And with codified rules, it basically--a larger game plan, more folks can have assurances that they are participating in something that is safe and effective and legal? Mr. Quaadman. Right. Because you are going to provide the information, you are going to provide the price discovery, and you are going to lower costs. Mr. McHenry. So what about community banks as private issuers? Mr. Quaadman. Again, community banks, as I said, are being shut out of providing help to startups. And community banks traditionally have provided that help because they know the businesses or they know the individuals who are trying to start a business. This allows for another way for community banks to provide that capital formation operation that they traditionally have through another means. Mr. McHenry. Okay. So Mr. Kovacs, in your experience in the world of biotech, is enhanced liquidity in the secondary markets important in biotech? And if so, why? Mr. Kovacs. Absolutely. I think that is true, at least from my experience as a banker. Liquidity is always important in terms of attracting capital. There is all sorts of capital out there and it has restrictions on it. And restrictions are often driven both by the--mainly often by the liquidity and whether or not there is a resale market so some can get in and out of that investment. Mr. McHenry. So something like the RAISE Act, would that help stimulate private avenues of financing? Mr. Kovacs. I am less familiar with the intricacies of the RAISE Act proposal, but I can comment on liquidity being a good source to attract additional capital. Mr. McHenry. Okay. I certainly appreciate it. I appreciate all of your answers to my questions. And with that, my time has expired. I will now recognize Mr. Carney for 5 minutes. Mr. Carney. Thank you, Mr. Acting Chairman, and thank you to the panelists for coming. I want to recognize and thank my colleagues on both sides of the aisle for working together on these bills. These are bills that we passed in the last Congress overwhelmingly. We are here again to consider them, to maybe improve them, and to get your feedback. Mr. Deas, there is an FMC operation in the State of Delaware. We appreciate that presence there, and it is nice to see you this morning. As you may know, Delaware is a center of excellence for corporate formation, corporate governance, and corporate law. Most of that is because of the expertise and the nature of our Delaware chancery court, where Delaware-based domiciled companies can get their disputes litigated quickly and by expert judges. We spend a lot of time focusing on the issues here that we are talking about today. Some of my friends that work in the Division of Corporation alerted me to a problem that we were having in this country with IPOs, which led to my cosponsoring the IPO on-ramp bill with my friend, Mr. Fincher from Tennessee, whom I notice is not here. So I would like to ask a couple of questions about that. I have been told by the folks in Corporations that IPO numbers are way up. And at least anecdotal feedback is that the IPO on- ramp bill was instrumental in the decisions that some of those emerging growth companies made to go public. Mr. Kovacs, one of the things we have heard is that for bio companies and pharmaceutical companies, maybe the on-ramp isn't long enough. It is 5 years, as you may know, with different stages. Could you comment on whether that is an issue for bio and pharmaceutical companies, and whether we ought to look at that question? Mr. Kovacs. Yes, I think what is interesting from the on- ramp, 5 years is actually, I think, an interesting and good runway. But it is some of the other limitations for emerging growth companies, when you are successful, that reduce that on- ramp. For instance, we have been the benefit of a strong capital market and a lot of interest in biotech, which has brought our stock price and our market cap above this $700 million threshold. And so now this year we will lose our ability of that 5-year runway, then we will have to become SOX- compliant under Section 404(b), which will incur additional burdens and cost to our company in--north of a million dollars. So-- Mr. Carney. So that would be helpful. Mr. Kovacs. Yes. Mr. Carney. And one of the things we hear, again somewhat anecdotally, from the people that I have talked to is that the blackout period, for want of a better term, where emerging growth companies can keep their information confidential as they explore the potential of going public, has been the most significant thing. Actually, not the 404(b) audit thing, which we thought would be the big incentive. Do you have any comments on how that might be improved and enhanced? Mr. Kovacs. Yes. Investing, at least in biotech where I think there has been a huge boon in terms of the number of IPOs as a result of the Jobs Act, is complicated. Because the investors have to spend a lot of time going through pre- clinical data, thinking about--talks and issues. It is a complicated investment. And so to be on a roadshow, where you get a 30-minute interview, effectively, with all these investors isn't enough time to evaluate. And therefore, being able to go and do test-the-waters meetings while you are on file is important, as well as many companies like the idea of being able to file confidentially because the biotech market can swing positively and negatively pretty quickly. And it is always sort of the tainted company if the market went away when you are on file and say, well, you couldn't get your deal done. So this allows companies to file and just be on file publicly for 30 days before you launch your deal. So both of those have been positive. Mr. Carney. Any other panelists with comments, positive or negative? Please? Ms. Gabaldon. I would comment very positively with respect to the Jobs Act and the benefits that it has bestowed. I definitely think that there have been some huge advantages as far as the on-ramps. And I know that a lot of companies have been taking advantage of that, and we are seeing the results. There are a couple of bills that affect the on-ramp and the EGCs, and I am a little concerned, particularly about the follow-on provision having to do with EGCs. I am not sure of its status right now, whether it is still part of the bill or not, but I think that specifically is quite problematic insofar as it would allow public filing 2 days before stock is to be issued, which seems to me to be an unworkably short period for the public to evaluate anything. In addition, the idea of shortening the period between public filing and the roadshows from 21 to 15 days strikes me as a bad idea, and unnecessary, because right now the average is something like 40 days before the roadshow takes place. And the justification that, oh, this will allow a company to dive through a market window before the market goes down is, to my mind, just a way of saying that it is a way to take money from investors who immediately are going to experience a diminution in value. Mr. Carney. Thank you very much. I see my time has expired. I yield back. Chairman Garrett. Thank you. The gentleman yields back. I now recognize Mr. Hultgren. Mr. Hultgren. Thank you, Chairman Garrett. And thank you all so much for being here. I want to start by saying that I am grateful that the Financial Services Committee is going to be considering a bill I have introduced, H.R. 1675, the Encouraging Employee Ownership Act of 2015. This bipartisan, common-sense law will make it easier for companies in Illinois and nationwide to offer their hardworking employees a stake in their own businesses. My constituents in the 14th District in Illinois have shown me the value of employee ownership. For example, when you walk into Scot Forge, a locally employee-owned manufacturer, you notice their employees' energy from upper management on down to the shop floor. They are proud of their work because it contributes to their share in the business. Companies like Scot Forge have an easier time hiring and retaining talented employees, and this is true in other industries such as the biotech field. Brian Hahn, chief financial officer of a biotech company, GlycoMimetics, Incorporated, testified that expanding opportunities for employee ownership would help innovative biotechs to attract talented workers and compensate them competitively without incurring additional compliance burdens. Unfortunately, some companies are not offering employee ownership because regulations limit how much ownership they can safely offer. SEC Rule 701 mandates various disclosures for privately held companies that sell more than $5 million worth of securities for employee compensation. This information includes business-sensitive information like financials, capital expenditures, and risk factors within the company. Businesses that want to offer their employees more ownership have to decide if they want to make these confidential disclosures that would greatly damage future innovations and put them into the wrong hands. In 1999, an American Bar Association subcommittee expressed concerns with these disclosures, stating in a letter that these disclosures risked having this information come into the possession of a company's competitors. The letter continues that they could result in serious injury to the company. One would be naive to think this could be avoided with a confidentiality agreement. And this is not to mention the cost of preparing these disclosures. The Encouraging Employee Ownership Act (EEOA) addresses this problem and opens up more opportunities for employees to share in the companies they work for every day. My bill is a simple, bipartisan fix that amends SEC Rule 701 to raise this disclosure threshold from $5 million to $10 million and adjusts the threshold for inflation every 5 years. Last year's version of the bill set the threshold at $20 million, but as a bipartisan show of good faith we lowered it to $10 million. This won't put employees at risk of fraud. The SEC said, in their 1999 rulemaking, that there haven't been any major allegations of abuse of Rule 701, and this hasn't changed since. They also noted that employees know a lot about the businesses and they don't need as much disclosure as the typical investor with no particular connection to the company. What's more, companies will have to comply with all pertinent anti-fraud and civil liability requirements. This means that every investor will receive information that a reasonable investor would need before making an investment decision. So I believe the EEOA will empower all levels of a business and help create a stronger working middle class. We should applaud employee ownership from the shop floor to the boardroom. I welcome your support for the Encouraging Employee Ownership Act of 2015, and I thank our generous cosponsors, Representatives Fitzpatrick, Stivers, Delaney, Polis, Higgins, and Sinema. The first question I wanted to ask was to Mr. Quaadman. I have read and heard from several sources that companies are worried about the required disclosures containing confidential, business-sensitive information that could be harmful. I wonder if you could elaborate on the danger that these disclosures pose to private companies, especially if they were provided to former employees and got into the hands of competitors. Are there costs associated with these disclosures? Mr. Quaadman. Yes, thank you, Mr. Hultgren, and thank you for introducing this bill. It is an important step forward also to implement the Jobs Act. So I think with your statement, with your question, you sort of hit it on the head, right? Because number one is, there has been no history of abuse with Rule 701. But number two, and more importantly, you are dealing with start-up companies that are trying to grow and are using a proprietary model in order to grow and effectuate the next great idea. And the problem is, if that information leaks out, it could either hamper the ability of that company to be successful or it could actually destroy them. So, again, the opponents of this bill are trying to impose a public company disclosure model on a private startup and it is apples and oranges. Or it is North Pole-South Pole; it is that diametric. So, again, companies, employees are incentivized to help the company be successful. Because if they are, that stock is going to be worth a lot of money. At the same time, they have a good idea of what they are trying to do and how they are trying to get there. And, at the same time, owners of the company are trying to make sure that they have the talent to be successful. So this bill is a win- win. Mr. Hultgren. Thank you for that. I see my time has expired. I yield back, Mr. Chairman. Chairman Garrett. The gentleman yields back. I now recognize Mrs. Wagner. Mrs. Wagner. Great. Thank you, Mr. Chairman, and thank you all for joining us today to discuss important legislation that will help empower small businesses to raise more funding and which will allow them to grow and create more jobs, my favorite, favorite topic. Small businesses create more jobs than any other business sector in America, and are leading the way on exciting new products and technologies. In fact, studies have shown that startups create an average of 3 million jobs annually. Ensuring that small businesses are able to raise capital is absolutely essential to getting our economy back on track while we are still recovering from the financial crisis. For that reason, I have introduced legislation, along with my colleague on the other side of the aisle, Representative Terri Sewell, H.R. 1723, the Small Company Simple Registration Act, which would streamline how small businesses file additional registration documents in order to continue offering securities to willing investors. In fact, this common-sense idea was originally proposed by the SEC's own working group on capital formation. Mr. Kovacs, how are small issuers harmed by not allowing forward incorporation by reference for Form S-1 registration statements? Mr. Kovacs. It is interesting. The friction costs associated with raising capital can be quite high. And any way that you can reduce those costs yields more capital to the companies that need it. By allowing forward incorporation on an S-1, per se, means that you don't have to be continually--if there is some delay in the offering, you are continually updating those statements. You just reference your Q when you are next filing. We do that all the time as a public company. We reference forward aspects of our proxy when we file our K. So this is just allowing less costs in terms of updating an S-1 if there is, for some reason, a delay or you are doing a follow-on offering inside of a year after your initial IPO. Mrs. Wagner. You may have answered my next question somewhat here. But how would allowing forward incorporation by reference for Form S-1 registration reduce and simplify disclosure burdens for smaller issues? Obviously, you talked about the cost factor, but there must be compliance issues and simplification of the process, correct? Mr. Kovacs. Yes. I mean, there are time aspects, too. Companies that want to do another follow-on offering inside of a year of the IPO use S-1. We did it. We went public in June of 2013, we did a follow-on offering in February of 2014. We had to go and update the entire S-1. It required a couple of visits, a few weeks of time and outside legal counsel and-- Mrs. Wagner. Weeks. Mr. Kovacs. Yes, of going to get things done and updated. Whereas if we could have referenced our K, which was going to get filed about 2 weeks later, it would have been much simpler. Mrs. Wagner. In your opinion, would it be appropriate to also extend this provision to emerging growth companies? Mr. Kovacs. Yes, I think so. We were an emerging growth company at the time, and it certainly would have been helpful. Mrs. Wagner. Mr. Quaadman, how else does the current SEC registration process make it more difficult for smaller issuers to raise capital? Mr. Quaadman. First of all, just to answer your last question, I also would welcome an extension to emerging growth companies, as well. Part of the issue is, and I think what your bill is getting at, is that if you create a company file can use incorporation as a way to streamline disclosures and get the information out to investors without repetitive disclosures. So what we are faced with here is that the explosion of disclosures, particularly for smaller companies, isn't providing material information to investors. So what we need to do is to determine, and press on the SEC to determine, what are material disclosures, how can it be disclosed effectively? Because this will actually help investors get the information, it will help smaller companies communicate that information. And your bill is an important step forward in that. Mrs. Wagner. What are some of the other filing and disclosure burdens that disproportionately affect small business issuers? Mr. Quaadman. So you start to look at things like historic stock price, disclosures about the public reading room at the SEC that individually sound like small things. But you start to add them up and add them up and they are costly and they are burdensome and there is a time opportunity cost. I was talking to a company that we were doing some regulatory meetings with who is also an emerging growth company. And he was talking about the fact that he has a choice right now: he can hire two compliance people to deal with more disclosures that are not going to give more information to investors; or he can hire scientists. He asks, ``Which do you think I would rather do?'' Mrs. Wagner. We hear it all the time. We hear it in every industry, not just the financial services sector--businesses that want to hire people to grow their business as opposed to hiring compliance officers, lawyers, people who are going through all of this red tape. I appreciate your indulgence, Mr. Chairman. My time has expired, and I thank the panel very much. Chairman Garrett. Absolutely. Thank you. The gentlelady's time has expired. Mr. Ellison, welcome back, and you are recognized for 5 minutes. Mr. Ellison. Yes, and I thank the chairman for the time. I originally voted for H.R. 1965 last session. But after digging into the issue of XBRL, I have come to really wonder whether or not I cast the right vote. You don't hear Members of Congress admit that maybe they didn't vote the right way often, but I have to admit that I am not sure that I was right. And the reason has to do with some research I have done which shows that XBRL filing costs are lower than expected, according to some writers. And so, I actually think that it is probably a good idea to move toward a 21st Century searchable electronic database, and probably not a good idea to move away from it. So I am wondering. Dr. Gabaldon, in February 2015 the investor advocate at the SEC, Rick Fleming, said H.R. 1965 would be harmful to disclosure. If we exempt more than two- thirds of the issuers, approximately 6,000 companies, from using XBRL-formatted reporting, do you think that this would be harmful to firms and markets? Ms. Gabaldon. It seems clear to me that it would. The United States would have a reputation as being not very technologically hospitable as far as would-be investors and would-be analysts are concerned. And I find that very concerning. And I also think that in light of the fact that, frankly, the SEC's relationship with technology thus far has been anything but overwhelmingly impressive. EDGAR is a very difficult tool to use. Allowing them to move forward with something that does have some promise, that has been pioneered successfully in other countries and appears to be very useful and cost-effective in those countries seems to me to be the clear way to go. Mr. Ellison. Okay. So have you had a chance to look at this article that I am holding in my hand? I don't know if they have given you a copy. Ms. Gabaldon. I believe so, yes. Mr. Ellison. Do you have any off-the-cuff sort of reflections on it? Ms. Gabaldon. I think that it really-- Mr. Ellison. Just for the record, for clarity--sorry for interrupting--it says it is AICPA-XRL.US and then it is styled: ``Research Shows XBRL Filing Costs Lower Than Expected.'' Ms. Gabaldon. Correct. And it does make it clear that 69 percent of small reporting companies experience an annual XBRL expenditure of $10,000 or less. There is a large number who are paying as little as $2,000 a year. To my mind, that is a very small amount. And I mentioned earlier as well that in the U.K., it has gone as low as 100 pounds for some types of filings. And I don't see any reason that couldn't be replicated here. Mr. Ellison. Okay. Some say that the cost of compliance is too high. That is their view. And as you just pointed out, this article indicates the costs are going in the downward direction. Do you think that the compliance costs are appropriate? Do you think that they are exorbitant? Do you think the trend is headed in the right direction? Ms. Gabaldon. The trend is encouraging as far as it really seems to come in under budget, so to speak, less than people were fearing would be the costs. And they do seem to be declining. And I do believe that the SEC gets a lot of benefit out of being able to run the numbers easily when it can check to see if one company is out of line. In addition, they can make use of it as a tool to evaluate their own regulations, which seems to me to promise very clear benefits that are well worth the steadily declining costs. Mr. Ellison. So what do other countries do, say like Britain, Israel, Japan? What do they do? Ms. Gabaldon. They use XBRL. And in addition, the European Union in general is working towards something like XBRL if not XBRL itself. Mr. Ellison. I read that in June 2013 the European parliament approved a proposal that would assign European securities and markets authority the task of developing a single electronic format for financial statements filed with European exchanges. Any kind of reflections on that? Ms. Gabaldon. It seems that we will be a genuine outlier if we don't step into the 21st Century. Mr. Ellison. Okay. So if H.R. 1965 became law, would the United States run the risk of being behind foreign jurisdictions in terms of the sophistication of and ease of use for information contained in public filings? I think I know what your answer is, but I would like to give you a chance to elaborate. Ms. Gabaldon. It wouldn't just be running the risk, it would be a fait accompli at that point. We would be behind. Mr. Ellison. Okay. Thank you for your time, ma'am, and thank you to all our guests. Chairman Garrett. The gentleman's time has expired . Mr. Poliquin, you are recognized for 5 minutes. Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very much. And I want to thank everybody for being here today, and for addressing how we can have small businesses that really are the engine of growth in this economy and in hiring and providing our families with more opportunity. So I appreciate everyone taking the time to come here and be here today. I represent Maine's 2nd District. If you haven't been there to vacation, you really should. It is a great place to go, and you can spend money. We are a State that needs that. So I invite all of you to come up when you have a chance. I represent a highly rural part of our State, where in the last year alone, we lost 3 paper mills, 1,000 jobs, in Bucksport, East Millinocket, and in Old Town. And the reason for that, in part, is because in New England, and in particular in Maine, we have converted burning oil and coal to burning natural gas in order to produce electricity. And the electricity, of course, is used to run our machines to make our paper. We are the greatest papermakers in the world, and we are surrounded by all these trees in Maine. But we have a real problem with this. So not only do we need to produce more product and get that product up to Maine by increasing the pipeline capacity and drive down the cost so we can be more competitive and keep these jobs going, we also need to make sure we have an opportunity for our paper mills--many of which are owned by other companies; they are subsidiaries of larger companies--to hedge their bets and be able to secure long-term natural gas and other commodity prices such that they can keep these mills open. So doesn't it make sense--and Mr. Deas, I will ask you this question, if you don't mind, sir--that we can allow a parent company to be able to execute those financial transactions on behalf of their subsidiaries in order to make sure the entire enterprise is able to secure, in this case, natural gas or whatever they are trying to secure for the entire enterprise to make sure you keep the risk down, keep the cost down, be more competitive and keep these companies growing and creating jobs? Mr. Deas. Congressman, yes. And the first 18 years of my career was at Scott Paper Company and S.D. Warren Company in your State in the-- Mr. Poliquin. Sure. Thank you. Mr. Deas. --in the mills that you mentioned. And energy, of course, is a big part of that business and my business. And hedging those activities at the lowest cost involves netting out opposite-way trades. That happens in the foreign exchange market and other examples of exposure. And doing one trade with a financial counterparty, a bank--and a smaller amount--lowers costs and, ultimately, makes us more competitive. Mr. Poliquin. And with no risk to the secondary market. Mr. Deas. No, sir. It actually reduces your systemic risk in the market by reducing the amount of external derivatives outstanding. Mr. Poliquin. I would like to move on to another question if I can, and Ms. Hughes, I will direct this to you if I may, please. I support Congressman Hultgren's bill, H.R. 1675, that he just mentioned a moment ago, when it talks about how you can incent small businesses that are just starting up. And all the challenges and all the excitement you have with small businesses taking off, especially in your space, Mr. Kovacs. But often, these companies are strapped for cash or have no cash. And as you mentioned earlier, sir, they have no product, they have no revenue stream. And so how in the dickens do you attract the capital that you want to make sure you grow your business and you can be successful for the investors and for those who are hired by the enterprise? So Ms. Hughes, with your experience in this space and the number of companies that you folks get involved with, give us an idea of opportunities you might have run into in the past where you want to incent people, but you don't want to take on debt and maybe you can't borrow money because the company is so small. Why not offer them a piece of the action, and why not offer them stock in the company? Doesn't that create an exciting environment for folks to really want to dig in, make the company successful, grow, produce products we want in this country, and hire more people? Ms. Hughes. I can say yes, absolutely. Every single time we have employees involved in the ownership of the company they are much more committed and much more interested in what is going on, improving the production and efficiencies within the businesses themselves. I don't have a tremendous amount of experience in the start-up market, unfortunately. We deal with very small businesses, but most of the businesses we are involved with have revenues of about $10 million, and we are helping them through the next phase of growth. But absolutely, employee ownership is a real driver when trying to create value and growth over time. Mr. Poliquin. And Mr. Kovacs, therefore, doesn't it make a lot of sense to support H.R. 1675 that Mr. Hultgren was talking about a little bit before? Doesn't that make a lot of sense? Mr. Kovacs. I think it does. Mr. Poliquin. Yes. Thank you very much. I appreciate it. Chairman Garrett. Thank you. The gentleman yields back. Mr. Hill is recognized for 5 minutes. Mr. Hill. Thank you, Mr. Chairman, and I thank the panel for your patience and indulgence this afternoon. Thanks for being with us. Ms. Hughes, I want to start with you, and tell you I was impressed by looking at Mr. Luetkemeyer's and Mrs. Maloney's bill on this SBIC simplification process. Having been a community banker and investor in SBICs, I certainly know a lot about duplicated regulation. We had the Fed and the State and the FDIC and the State insurance commissioner, the State securities commissioner, the SEC, and FINRA, and I am sure I am leaving someone out and we will get a letter from them. But I have a lot of empathy for this issue of duplication. And hasn't the SBA had exclusive regulatory oversight over SBICs since the late 1950s? Ms. Hughes. Yes, 1958. Mr. Hill. So, did the Dodd-Frank Act tell us to just inadvertently step on it in the private equity space, as they now have opened the door for duplicate regulation of SBIC managers or SBIC advisors? Ms. Hughes. Actually, I think that Dodd-Frank tried to get it right in that they recognized that SBICs were already regulated by a Federal regulator and they were excluding them. I think the catch was really that it is the solely commentary. So if you solely invest in SBICs, then you are exempt from registration. But I don't think anybody really thought through the fact that multiple licensees often get to a point where they have a very small piece of a fund left. And at that point in time, typically, when the debentures are repaid, you would hand back your SBIC license. At that point, I now manage a dollar beyond a non-SBIC so my other SBIC monies prompt registration with the SEC. And that would prompt duplicate registration and cost and burden. So I think the idea is to streamline it so that it-- focus on the SBA has done a good job, they have done this for a long time, we are very closely regulated from the beginning to the end as they vet the management teams coming in. And we are not opposed to regulation, we appreciate their insights, but we just don't want it to be from multiple sources, I think is the point. Mr. Hill. Yes, and I think it is good for the record to show the SBA has a long track record here, including a disciplinary action against bad actors who have SBIC funds that don't need another one. But it certainly should not result in duplicate oversight. I think they do a good job. And no one knows the SBIC space better than the SBA. And the cost of getting an SBIC approved is extensive. It is months and months--9 months, 12 months--and very expensive to fill out the highly specialized forms that are required there. Ms. Hughes. It is. We have become expert in that. Mr. Hill. What would you say it costs to register to have an SBIC-- Ms. Hughes. To get an-- Mr. Hill. I know it is the best bargain in Washington in legal prices. What would you say to that? Ms. Hughes. Through the fund-raising process, on average I would venture a guess that you are spending somewhere between $100,000 and $200,000, all in start-up costs, but certainly not all paid to the government. But certainly attorneys back and forth as everything is approved, all of the paperwork associated with checking the boxes, completely vetting your track record and those kinds of components, as well as the importance of being able to fundraise in the marketplace and bring private capital to the mix. To be able to invest in those small businesses is critical. Mr. Hill. I know our State has really benefited over the years by an expansion of SBIC opportunities. And so, thank you for your comments. I certainly support the effort to streamline this and remove the duplication. Mr. Kovacs, you mentioned Section 404 in kind of a sidebar in your testimony. Can you catch me up on--I thought small filers were exempt under 404 at a lower level of scrutiny. Can you talk to me about why you keep that on your list, please-- Mr. Kovacs. Yes, for emerging growth companies, you have 5 years before you become SOX 404(b)-compliant, which is where myself and my CEO sign off saying that we have internal controls. But that is when the auditors sign off, and therefore there are all sorts of additional SOPs and outside the auditors there is a lot more regulation around 404(b). Normally, we would expect we would have 5 years to be 404(b)-compliant, but there are a few things that take that away from you. One is if you had a billion dollars of revenue. We are clearly far from a billion dollars of revenue; it is a small biotech. We have, really, no revenue today. But our market cap has done well because people see that our drug is getting close to market and there is enthusiasm for the long-term potential in our company. And so our stock prices have performed and our stock has gone through the $700 million threshold. And now we are losing our emerging growth company status, even though we still really are an emerging growth company. And so now I have to become SOX-compliant by next year. And I have to hire more people, I have to bring in outside consultants, and I have to pay my auditor more money to get ready for that. Mr. Hill. Thanks for that clarification. And, Mr. Chairman, I yield back. Thank you. Chairman Garrett. Thank you. The gentleman yields back. Mr. Huizenga is recognized for 5 minutes. Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that, and it is my pleasure to have a bill that we are discussing today, as well. And I know some of you had referenced it, H.R. 686, the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015. It was interesting earlier, the chairman, towards the beginning, had talked a little bit about the recommendations that the SEC has developed and then not acted upon. This was one of those. It was 7 years running. A gentleman from our district or right near our district, Shane Hansen--a partner at Warner Norcross & Judd-- who chaired the M&A section of the bar, approached me and said, ``Look, we have been trying to move them along here, and we just simply cannot get this done. This makes a tremendous amount of sense.'' And what it is, is under the current system there is a one- size-fit-all approach to SEC registration for brokers. And I felt that we needed to have a more tailored registration system for these smaller, family-owned, oftentimes privately-held mergers and acquisitions for these brokers. I know, Mr. Quaadman, you have talked a little bit about this previously. I don't know if you care to comment on why you believe the SEC should have this more tailored registration, and maybe Ms. Hughes, as well? Mr. Quaadman. Sure. Thank you, Mr. Huizenga, and thank you for reintroducing the bill. As I said before, we support the bill. And I made reference in my opening remarks about the no-action letter with the SEC. I think that was welcome. I frankly only think that they issued that no-action letter because you introduced the bill in the last Congress. Because the SEC has just not been willing to move on ideas that the emerging growth committee has been coming out with. But more importantly, what the regulator can giveth, the regulator can taketh away. So we saw earlier this year, in January, on the Friday night before the Martin Luther King weekend, where on a corporate governance issue that the Chair issued guidance overturning a decision staff had made in what is known as the Whole Foods decision that had overturned decades of practice in terms of shareholder proposals. So our concern here is that if it is just left to a no- action letter, you can get a new chairman next year, and a no- action can go away and we are right back to where we started. Mr. Huizenga. Or a Chair could change his or her mind. Mr. Quaadman. Correct. So we think that your bill is a sensible way to get the parameters out there, get it set in stone, get this done. And so we are not going to have any give and take that can make this go away. Mr. Huizenga. And, Mr. Chairman, I would like to--and I will get to you, Ms. Hughes, or somebody else who was starting to speak. But I would like to submit for the record letters of support for H.R. 686 from: the Small Business & Entrepreneurship Council; the Business Brokers of Florida; the Nevada Business Brokers Association; the International Business Brokers Association; the Alliance of Merger and Acquisition Advisors; and the Association for Corporate Growth. Chairman Garrett. Without objection, it is so ordered. Mr. Huizenga. Thank you. And I will note that this committee passed this bill last Congress on voice vote, where it hit the Floor. And as I try to tell constituents back home, yes, things actually do pass Congress. And, in fact, they are all shocked that this one passed unanimously, 422-0. Most don't believe that Congress can actually work that way, but we are hoping that we are going to have a similar action here in this term, as well. But I don't know, Ms. Hughes, if you wanted to comment? Ms. Hughes. Sure. We do a lot of business with small M&A and business brokers who are transacting mostly small private companies. They truly add value. A lot of those companies are very interested in dealing with the smaller firms. They are a little bit afraid of the larger, bigger houses and would far rather deal with the guy down the street whom they have known for 20 years as they bring their company to market because it is their baby for which they are transacting, or they are trying to raise money to generate fine growth capital. Ms. Gabaldon. Could I quickly-- Mr. Huizenga. Yes. Ms. Gabaldon. I just wanted to say I think that in many cases, the guy down the street may be registered at this point in time. But in addition, I think it is critical to note that the SEC no-action letter has a number of protections that are built into it that I think are very important and that the committee should seriously consider. Mr. Huizenga. And we just hope to codify a number of those things. So with that, Mr. Chairman, I will yield back the balance of my time. Chairman Garrett. The gentleman yields back 9 seconds. Ms. Moore, welcome to the subcommittee. Ms. Moore. Thank you so much, Mr. Chairman. And I want to thank you for your indulgence. I am not a member of this subcommittee so I am very grateful that you yielded the time. I want to apologize to the witnesses. I just cannot see any of your names from over here, from this vantage point, I have no idea with whom I am speaking. So, just indulge me. I have a couple of bills that are under the jurisdiction of this subcommittee, and I want to talk about H.R. 1317, the End- User Affiliate Clearing Exception. I listened very carefully to Mr. Quaadman, on the end there, when you talked about the importance of legislating, even though the regulators sometimes issue these no-action letters. So I think this question is for Mr. Deas, about the no-action letter of the CFTC that really endorsed the idea that commercial businesses ought to be able to aggregate their swaps into a SCTU, as they indicated in their no-action letter which is similar to my bill. So I guess I want to know, do you think that it is important to pass H.R. 1317? And can you just briefly address the notion that this bill could permit a large swap-dealing bank to buy a commercial business selling widgets, and then transact their entire swap business using this subsection of the end-user exception? Mr. Deas. Yes, thank you for that question. The basis of a no-action letter is that the action covered by the letter is probably not in compliance with law. But the staff, in this case the CFTC Division staff, is committing, for so long as that letter is outstanding, not to take an enforcement action. We all feel so strongly about compliance with law and that there is a special provision in Dodd-Frank that requires boards of directors of companies that avail themselves of the end-user exception for clearing and margining to affirm, every year, that they are in compliance with the law in order to use that end-user exception. So it puts treasurers and other officers of the company in a very awkward position. And there has been broad, bipartisan support for this fix that is to just the drafting to make the intent clear and which everyone wants to achieve. The second part of your question, this idea that there could be this kind of loophole. First of all, I would say that from the beginning, from the passage of Dodd-Frank, it has always been the case that an operating company engaged in appropriate end-user commercial activity that happens to be owned by a financial parent can avail itself--it was in the law--of the end-user exemption. What we are talking about is permitting other companies in that group to trade through a centralized Treasury unit and reduce the risk by reducing the amount, the volume, of derivatives outstanding through netting them in the central Treasury unit. So this just clarifies what was really, we believe, the intent of the drafters. And we urge continued consideration for this bill. Ms. Moore. Thank you so much. And just briefly, can you explain the credit support language in the bill, and what that accomplished, and how it protects the system and provides regulators with the flexibility to tailor the regs? Mr. Deas. The credit support language is meant to assure that there wouldn't be some separate derivative activity outstanding that doesn't ultimately come back within the group, the parent company in the group. And so there is a provision providing for that kind of credit support for the inter-company derivative transactions. Ms. Moore. Thank you so much. Thank you, Mr. Chairman, and I yield back the balance of my time. Chairman Garrett. The gentlelady yields back. The vice chairman of the subcommittee requests recognition. Mr. Hurt. Thank you, Mr. Chairman. I just have a couple of follow-up questions for Ms. Gabaldon. Were you familiar with the article that was circulated earlier and referred to in questioning? Ms. Gabaldon. Yes. Mr. Hurt. Who published that? Ms. Gabaldon. I don't know who-- Mr. Hurt. AICPA. Ms. Gabaldon. AICPA and XBRL. Mr. Hurt. XBRL US? Ms. Gabaldon. Yes. Mr. Hurt. Mr. Kovacs, in his testimony, talked about XBRL contractors. So obviously, you have to do--if you are going to have to pay to have this work done because you can't do it in- house, you would get an XBRL contractor. Is that correct? Ms. Gabaldon. Yes. Mr. Hurt. And who do AICPA and XBRL US represent? They represent folks who are looking for--who are investing and who are in the analyst business? Ms. Gabaldon. The AICPA is an association for certified public accountants, and-- Mr. Hurt. XBRL US-- Ms. Gabaldon. That is a non-profit organization. Mr. Hurt. Okay, because in the list-- Ms. Gabaldon. It is definitely an-- Mr. Hurt. In the list of all of the different folks who were going to be disadvantaged by this proposal, you said investors would be disadvantaged, analysts would be disadvantaged. You said emerging growth companies would be disadvantaged. But you didn't say the folks in the XBRL contracting business would be disadvantaged. You think they would? Ms. Gabaldon. I think they have employees, too. Mr. Hurt. Okay. So I guess my last question for you is, is you understand this would be a voluntary--the bill would make this filing voluntary. Ms. Gabaldon. I do understand that, and I do also want to make the point that I don't think that the AICPA has any particular dog in the fight. And I think that is noteworthy, but-- Mr. Hurt. Okay. Well, they have their name on this article. It doesn't say exactly where this came from. But I guess they have that much of a dog in the fight they published an article about it, correct? Ms. Gabaldon. I think that, in general, the AICPA engages in a lot of studies. I get the newsletter from them, as a law professor, that just talks about studies they have conducted that they think are going to be helpful to the readers. Mr. Hurt. All right. Turning to Mr. Kovacs, do you understand that our proposal is voluntary? Mr. Kovacs. Yes. Mr. Hurt. Then I guess my second question is, if you look at this article it says--it may be that a company pays $10,000, it may be that a company pays $20,000, or it may be that a company pays $50,000. Why would would any company pay $1 if the information is not something that they believe is useful to investors and analysts? Why would you pay even $1? Mr. Kovacs. I can only speak for us; I think we would probably opt to not pay it. Mr. Hurt. Let me ask you this: If this were made law, would you all opt out of having to file XBRL? Mr. Kovacs. Yes, at this point in time I think that would probably be the direction we would take. We would rather probably hire somebody as opposed to paying that to a third party. Mr. Hurt. Okay. Mr. Kovacs. The hiring. Mr. Hurt. Even? Okay. Mr. Kovacs. A scientist or someone like that. Mr. Hurt. I just have a few minutes. Mr. Quaadman? Mr. Quaadman. Yes. Mr. Hurt, so yes it is voluntary. Number two, what is important here is that XBRL is a delivery system, right? And that has been a very problematic system that 90 percent of investors aren't using. And people who have been involved with it acknowledge that there have been problems with it. So the issue here is, can we get a better delivery system that uses electronics to get the information out there? But can we do it in such a way that if an emerging growth company doesn't want to be a guinea pig they don't have to be, so they can save their money? The third part of your bill, about the cost-benefit analysis, actually provides that lever on the SEC to continue to improve the delivery system. So I think this provides the additional legislative pressure to get us into a 21st Century delivery system. So the information is still going to be there for investors, the delivery system here is going to--you can volunteer in and out. And one thing I just want to note, as well--as far as the United States being an outlier, I had a meeting with the European commission, with the people who are dealing with their shareholder directive, last November. And they said, ``You know what? A Latvian investor who invests in a U.K. company can put their money there, but they can't vote in the governance of that U.K. company. So tell us how you guys do it.'' So if we are going to have a voluntary XBRL exemption for U.S. investors, we are still going to have the most sophisticated information and corporate governance system by far, and that is why we have the deepest capital markets. And actually, we think your bill helps us get into the 21st Century. Mr. Hurt. Thank you. I yield back. Chairman Garrett. The gentleman yields back. And looking around, I think that is all that we have as far as Members. Without objection, I seek unanimous consent to make the following written statements a part of the record: the Honorable Darrell Issa; the American Bankers Association; Americans for Financial Reform; the Depository Trust & Clearing Corporation; the Food Marketing Institute; the Independent Community Bankers of America; the M&A Source; the North American Securities Administrators Association; Shane Hansen, a partner at Warner Norcross & Judd; and XBRL US. With that, we bring to a close today's Capital Markets Subcommittee hearing. As always, I thank the members of the panel. The Chair notes that some Members may have additional questions for this panel, 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 these witnesses and to place their 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. So with that, I again thank the panel, and this hearing is adjourned. [Whereupon, at 4:26 p.m., the hearing was adjourned.] A P P E N D I X April 29, 2015 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]