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91–159 PDF 2015

OVERSIGHT OF THE SEC’S DIVISION 

OF CORPORATION FINANCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JULY 24, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–95 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

SPENCER BACHUS, Alabama 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

LYNN A. WESTMORELAND, Georgia 

BILL HUIZENGA, Michigan 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 24, 2014 ..................................................................................................... 1 

Appendix: 

July 24, 2014 ..................................................................................................... 39 

WITNESSES 

THURSDAY, JULY 24, 2014 

Higgins, Keith F., Director, Division of Corporation Finance, U.S. Securities 

and Exchange Commission .................................................................................. 8 

APPENDIX 

Prepared statements: 

Higgins, Keith F. .............................................................................................. 40 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Lynch, Hon. Stephen, and Perlmutter, Hon. Ed: 

Written statement of the Council of Institutional Investors ........................ 45 

Higgins, Keith F.: 

Written responses to questions submitted by Representative Hurt ............. 51 

Written response to a question posed by Representative Stivers during 

the hearing .................................................................................................... 52 

(1) 

OVERSIGHT OF THE SEC’S DIVISION 

OF CORPORATION FINANCE 

Thursday, July 24, 2014 

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 10:07 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Hurt, Royce, Neugebauer, Huizenga, Stivers, Fincher, Mulvaney, Hultgren, Ross, Wagner, Messer; Maloney, Sherman, Lynch, Perlmutter, Scott, Himes, 

Peters, Foster, Carney, and Kildee. 

Ex officio present: Representative Hensarling. 

Chairman GARRETT. Good morning, and welcome. This hearing of 

the Capital Markets and Government Sponsored Enterprises Subcommittee entitled, ‘‘Oversight of the SEC’s Division of Corporation 

Finance’’ is hereby called to order. Welcome, Mr. Higgins. We will 

begin with opening statements up here, and then go to you for your 

testimony. 

I yield myself 7 minutes. 

Today’s hearing will focus on oversight of the SEC’s Division of 

Corporation Finance. Corporation Finance Director Higgins, thank 

you for agreeing to join us today and for all your hard work that 

you are doing over at the SEC. 

I want to start off today’s hearing by commending Chair White, 

the other SEC Commissioners, and Dr. Higgins for your recent decision to move a potential corporate political disclosure rulemaking, 

the SEC’s Red Flags Agenda. 

Far too often during the span of this Administration, it appears 

that supposedly independent regulators use their position to carry 

out heavy-handed partisan political attacks. Whether it is the targeting of specific political groups by the IRS, the armed raiding of 

Gibson Guitar by the Justice Department, the abusing of the law 

by the National Mediation Board, the bullying of fellow Commissioners by the former head of the Nuclear Regulatory Agency, the 

obstructing of an investigation of the chemical safety board, the 

lying about delays by the VA Department, or the illegal implementation of ObamaCare by Health and Human Services, and the list 

goes on. 

The Obama Administration officials and their appointed regulatory cheerleaders need to stop putting political politics above the 

2 

rule of law. It is not appropriate to abuse government-granted 

power to threaten, cajole, intimidate or pressure any opposition 

into submission. 

So I want to thank Chair White for not letting the SEC fall victim to this and for standing up for the SEC’s political independence 

from the White House. I am pleased that the SEC is not joining 

in this conga line of partisan regulatory abuses and is not turning 

the disclosure process into a political pinata. After all, the SEC is 

a disclosure-based agency, and ensuring the appropriate disclosures 

of material information to investors is at the heart of what the SEC 

does. And the staff of the Division of Corporation Finance is at the 

forefront of this important work. 

I also want to thank Chair White and Director Higgins and the 

staff of Corporation Finance for their ongoing work to refocus 

SEC’s disclosure regime on its original purpose. Specifically, I commend them on attempting to address the problems of disclosure 

overload and for looking at ways to streamline and modernize the 

integrated SEC disclosure regulatory regime. 

If the disclosure process is to be useful to investors, the information required to be contained in the disclosures must be material 

to the investors and formatted in a way that can be easily utilized 

by the reader. Over time, more and more requirements have been 

added to disclosures, rendering them almost useless to the average 

retail investor. 

So we must prioritize reforming this regime to ensure the investors have the appropriate information to make informed investment decisions. By getting what I would say back to the basics of 

disclosure, I believe we will unlock additional investment capital in 

our public markets. 

Another area where I would like to commend Chair White and 

Director Higgins again is your recent work on proxy advisors. The 

guidance the Commission put out several weeks ago is a very good 

first step in addressing the growing and outside influence being 

wielded by the proxy advisory industry. 

So by clarifying that investment advisors are not required to vote 

every share of stock they hold for their clients and not every recommendation of the proxy advisers must be followed, the SEC reduced the importance of the proxy advisors and the proxy process. 

While these steps taken are very positive, there is still more that 

should be done. Similar to the worries regarding the extraneous 

corporate disclosure requirements, there is also a concern about the 

irrelevant and unnecessary shareholder proxy proposals being 

brought by activist corporate gadflies. 

In a recent speech, Commissioner Dan Gallagher stated, ‘‘Taking 

money out of the pocket of someone investing for retirement or for 

their child’s education and using it instead to subsidize activist 

agendas is simply inexcusable. It is incumbent upon the Commission to create a regulatory environment that promotes shareholder 

value over special interest agendas.’’ 

I could not agree more with Commissioner Gallagher. 

The SEC must take action to limit the abuses being committed 

by superfluous activist proposals that run counter to and promoting 

actual shareholder value for the actual investor, the average investor. Specifically, the SEC should amend a number of the rules of 

3 

government which investors can afford, offer, what shareholder 

proposals including four things: increasing the current percentage 

ownership threshold; lengthening the holding requirement time; 

providing more specifics around what constitutes ordinary business 

operations and significant policy issues; and strengthening the resubmission thresholds. 

Like the disclosure process, we must also refocus the shareholder 

proposal so that proposals to address and promote shareholder 

value receive the attention and consideration they are due. I have 

highlighted a number of initiatives of the Commission with which 

I am pleased. Let me turn to several with which I have a number 

of concerns. 

The first is the implementation of the JOBS Act. It is unfortunate indeed that the SEC still does not embrace its mission to promote capital formation with as much zeal and enthusiasm as it 

does with the Dodd-Frank Act. Our markets and economy are 

worse for it. This committee recently passed legislation that I sponsored entitled, ‘‘The Private Placement Improvement Act.’’ 

The purpose of this legislation is to ensure that issuers and investors in certain private offerings under Regulation D (Reg D) do 

not face overly complex and burdensome regulatory obstacles. So 

last year, the SEC adopted a rule lifting a ban on general solicitation and advertising private offering under Rule 506 of Reg D as 

mandated by Title II of the JOBS Act. 

Unfortunately, the SEC did not stop there. Instead of simply removing the ban as intended and opening up this market to new potential investors, the SEC decided, for some reason, to issue a separate rule proposal, not called for at all by Congress. That proposal 

would impose a number of new burdensome regulatory requirements on issuers seeking to use Rule 506. As one commenter put 

it, the JOBS Act on its base is not authorizing the Commission to 

attach new and additional conditions to the use of the exemption. 

It is not for the Commission to rely on its general rulemaking authorities bringing Congress and the President back in line by adding conditions that it believes may enhance investor protection. 

However, that is exactly what the Commission did in that case. 

I believe that many of the additional requirements of the SEC’s 

Reg D proposal will, if ultimately adopted, make Rule 506 a less 

attractive avenue for small business capital formation. This then is 

clearly at odds with the goals, let alone the text of the JOBS Act. 

And finally, I would like to raise the ongoing view by the SEC 

of the accredited investor definition, and let me be clear on this 

point. At a time when small businesses continue to struggle to 

raise capital, and investors are having difficulty earning a return 

on their investment, the SEC should not harm small business job 

creators or the investing public by reducing the amount of participants in this field eligible for private placement. 

I know there is a long-held understanding that not all investments are appropriate for all investors, I find it difficult to believe 

that the SEC will know where to draw the line better than each 

individual investor. If the SEC decides to act on this, I do encourage it to err more on the side of allowing for investor choice and 

additional investment options rather than telling more investors 

whether they can and they can’t invest their own money. 

4 

With that, I want to thank you again, Mr. Higgins and I now recognize Mr. Scott. 

Mr. SCOTT. Thank you very much, Chairman Garrett. 

And I want to thank Mr. Keith Higgins, who is the Director of 

the Securities Exchange Commission’s Division of Corporation Finance for testifying before our subcommittee today. 

The Securities and Exchange Commission has a good and necessary mission and that mission is to protect the investors, to 

maintain fair and orderly and efficient markets, and to facilitate 

capital formation, and any reorganization of the SEC should be 

made in mind to increase its effectiveness in achieving its mission 

and in streamlining the corporation with other permanent Federal 

agencies. 

In support of the Commission’s mission to protect investors, 

maintain fair and orderly and efficient markets, and facilitate capital formation, the Division of Corporation Finance seeks to ensure 

that investors are provided with material information in order to 

make informed investment decisions, both when a company initially offers their securities to the public and on an ongoing basis 

as it continues to give information to the marketplace. The Division 

also provides interpretive assistance to companies with respect to 

the SEC rules and forms and makes recommendations to the Commission regarding new rules and revisions to existing rules. 

I am interested in finding out what changes have been made 

since the implementation of Dodd-Frank, whose fourth anniversary 

we celebrate today. And if the SEC is able to conduct any additional reforms in order to improve the Commission’s effectiveness, 

well, I would certainly welcome such reforms. 

Furthermore, I anticipate the opportunity to discuss rulemaking 

and implementation emanating from Dodd-Frank as well as to 

jumpstart our business startups or the JOBS Act. We need to make 

sure that in this legislation and subsequent rulemaking, we still 

allow the Securities and Exchange Commission to evolve with market changes, and that we are not preventing the Securities and Exchange Commission from conducting its intended purpose. 

Also, I am very much interested in working and getting an update on how the SEC is progressing with the Commodity Futures 

Trading Commission (CFTC) and their joint rulemaking for crossborder harmonization and derivatives and swaps dealing. As you 

know, this comes under Title VII of the Dodd-Frank Act. It is imperative that the Securities and Exchange Commission get together 

and do this joint rulemaking. 

The delay causes confusion in our international markets and failure to come up with harmonization for our cross border, and dealing with our swaps activity puts our business community working 

on international stage at a very serious competitive disadvantage 

and could very well allow for a possible reimportation of risk. 

May I conclude, Mr. Chairman with this—the key to this cross 

border is to make sure that the top eight foreign jurisdictions who 

engage in swaps activity have equal robust regimes to ours, and in 

order for us to facilitate that, it is you and the CFTC that will determine that to report back to Congress within 30 days if one of 

these jurisdictions does not meet our robust regimes. 

5 

So there is a lot to do there. I would be very interested to know 

how quickly the CFTC and the SEC will come together in harmony 

on rulemaking for cross-border swaps and derivatives activities. 

With that, Mr. Chairman, I yield back the balance my time. 

Chairman GARRETT. Thank you. And the gentleman yields back. 

The vice chairman of the subcommittee, Mr. Hurt, is now recognized for 2 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. Chairman, thank you for holding today’s subcommittee hearing to conduct oversight over the SEC’s Division of Corporation Finance. 

The Division has a number of consequential initiatives on its 

agenda including the review of our corporate disclosure system and 

finalizing key pieces of the JOBS Act, and I am looking forward to 

hearing your testimony today. 

I am encouraged by Chair White’s comments on the need for the 

Commission to conduct a review of its corporate disclosure system. 

She and other Commissioners noted disclosure overload is having 

negative impacts on investors, public companies, and the SEC 

itself. Fostering capital formation in our capital markets requires 

consistently reliable information on public companies. However, too 

much information for the sake of information can create inefficiencies and confusion. 

Streamlining our disclosure regime to better reflect the SEC’s 

mission of protecting the investors, maintaining fair, orderly, and 

efficient markets, and facilitating capital formation will lead to 

benefits for both business and investors. I also want to emphasize 

that it is imperative that the SEC not lose sight of its third important and sometimes neglected mission, again, facilitating capital 

formation. 

Congress has provided the SEC with broad discretion to amend 

securities laws and regulations without sacrificing key investor protections. However, the JOBS Act, and the numerous bipartisan 

bills that have passed out of this committee highlight the fact that 

the SEC needs to do more to promote capital formation through 

common-sense updates to its regulations. 

One such bill that Representative Sewell and I have introduced 

passed this committee with strong bipartisan support to provide relief to small issuers from the disproportionate cause of XBRL compliance. The SEC should recommit itself to promoting capital formation that will spur growth and opportunity, beginning with a 

full implementation of the JOBS Act as well as other recommendations from the SEC’s forum on small business capital formation. 

I would like to thank Mr. Higgins for appearing before our subcommittee today. I look forward to your testimony. 

Thank you, Mr. Chairman. I yield back the balance my time. 

Chairman GARRETT. I thank the gentleman, and the gentleman 

yields back. 

The gentleman from California is recognized for 4 minutes. 

Mr. SHERMAN. Four minutes, thank you. 

There are a number of issues I would like to discuss. One of 

those is the Financial Accounting Standards Board (FASB) lease 

accounting project that I realize comes not directly under your purview but you are, to some extent, responsible for the need for total 

6 

disclosure—for a full disclosure, and leases are being properly disclosed now. Since it is not broke, the folks in Norwalk, Connecticut, 

feel they need to fix it. The effect will be to add $2 trillion to the 

balance—to the liabilities of the balance sheet of American business because many tens of thousands, I would say many hundreds 

of thousands will be in violation of their loan covenants and perhaps cut our GDP by about half a point. 

Others on this committee have heard me talk about this, and I 

hope that you would realize as your chairman has stated here that 

while you can say you designated—you have delegated everything 

to the Financial Accounting Standards Board, that this is an SEC 

responsibility. 

Second, you are about 2 years behind on issuing regulations 

under the Franken-Sherman amendment to deal with credit rating 

agencies. They gave AAA to Alt-A, and the economy tanked. All of 

the same pressures are there now. That is to say, the issuer of the 

bond selects the credit rating agency. 

If I had been able to select the people who graded my tests in 

college and been able to pay them an average of $1 million per test 

they graded, I would have done better in college. 

Day trading and now minute trading, second trading, millisecond 

trading, is an issue that comes up. It makes people think that they 

can’t invest in a fair market if they don’t have a computer that is 

specially wired to the market to beat somebody else’s computer, let 

alone any human making the decision. It used to be that if there 

was a tiny spread, sometimes that went to the buyer, and sometimes that went to the seller. Now, all of it is scooped up by those 

engaged in this computerized trading. 

And it is also very hard to see what benefit it has provided by 

having some of our smartest young people sit at home all day, 

avoid shaving, and spend the whole day buying and selling stocks 

and being out of the market at the end of the day. I think there 

is a role for people to make money in our capitalist system but it 

usually should be tied to something socially productive. 

And finally, Mr. Higgins, I hope you will discuss either in your 

opening statement or in questions the fact that the British and others have transactions taxes. How can we establish a per transactions tax that is low enough, that it doesn’t push business offshore—I think London is doing pretty well—and it would have the 

effect of raising some revenue because I am sure you are here to 

tell us that the SEC doesn’t have sufficient revenue to do its job 

such as writing the regulations under the Franken-Sherman 

amendment that you are 2 years late on. just in case I didn’t mention that. 

And it would also have the effect of discouraging meaningless 

trades where people are in and out of a stock in a minute or a second. So I hope you will address those issues in your opening statement. 

I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Royce is recognized for 2 minutes. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

7 

First, let me welcome Mr. Higgins, and say thank you. To date, 

your office has been very professional and forthright in their interactions with me and with my staff. 

And I would also praise the Commission because over the last 5 

years, it has been very active in the pursuit of insider trading. I 

think you have charged now over 570 defendants in civil insider 

trading cases for that period of time. It is easy for our constituents 

to understand insider trading when it involves a group of friends 

sharing information maybe over the golf course or through an 

email exchange between them. It becomes a little murkier for investors, and I assume for the SEC, when the exchange of information is shrouded in contracts and it doesn’t look like something that 

you have seen before. 

I am very interested in the Commission’s process for looking at 

novel and creative deals to ensure that they are robustly reviewed 

to ensure strong investor protection and market transparency in 

places where people would try to use insider trading as part of a 

scheme, and I look forward to your answers to some questions on 

these issues this morning. 

And again, I thank the chairman for holding this hearing, and 

I yield back. 

Chairman GARRETT. The gentleman yields back? Okay. 

The gentlelady from New York is now recognized for 3 minutes, 

or as much time as she is going to consume. 

Mrs. MALONEY. First of all, I thank you, Mr. Chairman, for holding this important hearing, and I welcome Mr. Higgins. 

There has been a great deal of discussion lately on maintaining 

confidence in our markets, and I have always said markets run 

more on confidence than on capital, and it is important that we 

maintain it. But one of the most important and most underappreciated sources of confidence is the accuracy and transparency of the 

financial statements that public companies are required to file, and 

this is where the SEC’s Division of Corporation Finance plays such 

an important role. 

As an investor, if you are going to commit your capital to a company, you need to know at a minimum how much money the company already has, how much it is expected to make every quarter, 

what its normal day-to-day operating costs are, and how much it 

already owes to other creditors. This is the information that public 

companies are required to disclose every quarter in their financial 

statements. 

If an investor cannot have a basic level of confidence in these financial statements, that the numbers are accurate and any major 

caveats are disclosed, then the investor won’t commit his capital to 

this company, period. The fact that investors around the world are 

so willing to invest in our companies and our markets is a testimony to the professionalism and dedication of the SEC staff who 

review those financial statements, and it is difficult work, sometimes tedious, often frustrating, and always complex. 

The confidence that investors place in these financial statements 

has been hard won over several decades, but it is truly the grease 

that keeps the wheels of commerce spinning. 

So I look forward to hearing from our witnesses today, and I 

yield back the balance of my time. 

8 

Chairman GARRETT. The gentlelady also yields back. 

At this point, we return to our panel, our witness, for his opening 

statement. Mr. Higgins, you are recognized for 5 minutes. Obviously, your written statement will be made a part of the record, 

and, as with every witness, we remind you to pull the microphone 

as close as you can, if that is not inconvenient to you. And again, 

we welcome you here and you are recognized for 5 minutes. Mr. 

Higgins? 

STATEMENT OF KEITH F. HIGGINS, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE 

COMMISSION 

Mr. HIGGINS. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. My name is Keith 

Higgins, and I am the Director of the Division of Corporation Finance at the Securities and Exchange Commission. 

I appreciate the opportunity to testify today on behalf of the 

Commission about the Division’s activities and responsibilities. As 

has been said already, the mission of the Commission is to protect 

investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The Division promotes this mission by overseeing the agency’s review of company disclosures to the investing 

public, seeking to ensure that investors have access to materially 

complete and accurate information upon which to make voting and 

investment decisions. 

The Division generally carries out its mission by selectively reviewing company filings by providing interpretative guidance about 

the securities laws and by making rulemaking recommendations to 

the Commission in the areas of company disclosure and securities 

offerings. 

Through our filing review program, the Division reviews the disclosures and financial statements of reporting companies to monitor and enhance compliance with our disclosure and accounting requirements. The Sarbanes-Oxley Act of 2002 requires the Commission to review companies’ disclosures at least once every 3 years, 

and more frequently where circumstances warrant. 

In addition to these mandated reviews, the Division selectively 

reviews registration statements and other filings relating to public 

offerings, business combination transactions, and proxy solicitations. During fiscal 2013, the Division reviewed the filings of more 

than 4,500 reporting companies, and I expect our reporting company review of statistics will be similar for fiscal 2014. 

The Division also provides guidance to market participants and 

the public through, among other things, no-action and staff interpretative letters and staff and accounting legal and accounting bulletins. Most recently, as the chairman mentioned, the Division, together with the Commission’s Division of Investment Management, 

issued a staff legal bulletin on proxy advisory firms that provided 

guidance on the availability of exemptions under our Federal proxy 

rules upon which these firms typically rely. 

It also provided guidance to the investment advisors about their 

responsibilities in voting client proxies and in retaining and overseeing proxy advisory firms. As to our rulemaking effort, the Division has been focused on implementing the mandatory rulemaking 

9 

provisions of the Dodd-Frank and JOBS Acts. Under Dodd-Frank, 

the Division has been involved in numerous completed rulemakings 

including say-on-pay and say-on-frequency votes for executive compensation, disclosures about representations and warranties and 

asset level review of asset-backed securities offerings, compensation 

committee listing standards and disclosure, disqualification of bad 

actors under Rule 506, specialized disclosures relating to mine safety and conflict minerals, as well as removing a person’s primary 

residence from the network calculation in the accredited investor 

definition. 

The Division is currently developing recommendations for final 

rules on the following: disclosure of asset level data and offering of 

asset-backed securities; risk retention for securitizers of assetbacked securities; and CEO pay ratio. We are also working to implement the remaining Dodd-Frank executive compensation rules 

and payments by resource extraction issuers as well as working on 

the mandated review of the accredited investor definition. 

The Division has also been leading a number of the rulemakings 

under the JOBS Act. As the chairman mentioned, last year we 

adopted final rules on general solicitation in the Rule 506 offerings, 

and at the same time issued a rule proposal to amend Regulation 

D to enhance the Commission’s ability to assess the development 

of the private offering market. 

In October of 2013, the Commission published a proposal to implement the crowdfunding rules under the JOBS Act. And in December of 2013, the Commission proposed rules to enable companies to offer up to $50 million in any 12-month period under a new 

and expanded Regulation A. 

The Division is preparing recommendations for final rules on the 

Regulation D, crowdfunding, and Regulation A proposals, and we 

are also working on proposals to implement the Title V and VI 

changes to the 12(g) standards under the Exchange Act. 

Finally, the Division, as the chairman has mentioned, is leading 

the Commission staff’s effort to comprehensively review our disclosure system to review the rules, specify what companies must disclose in their filings and to make recommendations on how to update them to facilitate timely, material, and more effective disclosure. Initially, the Division is focusing its efforts on the business 

and financial disclosures that are included in periodic and current 

reports. After which, we will focus on the governance and compensation information provided in proxy statements. 

The staff is seeking input from a broad range of companies, investors, and other market participants on how to modernize and 

update the disclosure so we can make it both more meaningful for 

investors and less burdensome for companies. 

Thank you again for inviting me to testify today. I am happy to 

answer any questions you may have. 

[The prepared statement of Director Higgins can be found on 

page 40 of the appendix.] 

Chairman GARRETT. Thank you, again, for your testimony. 

At this point, I recognize myself for 5 minutes, and I just have 

a few matters to go over. 

You went through a whole series of things as far as what has 

been done and the listing of things that are on the plate still, I 

10 

guess. One that I touched upon in my opening statement was with 

regard to proxy advisor firms. And as you indicated, you recently 

issued guidance, and as I said in my opening statements that they 

seem to address the concerns raised by me and also raised by investors and businesses also at the past SEC roundtables and also 

at the hearings that we held here in this committee last year. 

From a reading of it, the guidance appears to require the advisory firms to disclose, for one thing, conflict of interest. Also, it requires them to put a system in place to address those conflicts of 

interest and also to try to ensure accuracy that correlates advice 

to the goals of the client fund and clarifies when institutional investors must vote shares and how they must engage in advisory 

firms. I think I touched upon that in my opening statement as well. 

So all those things are important steps, I think, forward in creating oversight over these firms and ensuring a fair, and what we 

call an even-handed shareholding voting process. But there are a 

couple of points just to dig in to a little bit. How is the SEC going 

to—not that they have done this—oversee the implementation of 

all these with regard to the advisory firms? 

Mr. HIGGINS. Mr. Chairman, we keep our eye on—we monitor 

the market, the guidance is out— 

Chairman GARRETT. Yes. 

Mr. HIGGINS. The proxy season really is typically the first 4 

months of the year so we are sort of in a lull in the proxy season, 

but we would expect to watch to see what happens. We get feedback from market participants as to how it is working, but we don’t 

yet have a work plan on how we are going to test how well the 

guidance did. We expect—because market participants haven’t 

been bashful in letting us know where the problems are, so we are 

hoping that we continue to get feedback from all sides of the question. 

Chairman GARRETT. Okay. So just to go down on one point, as 

far as the complex, there is not going to be a reporting requirement 

on the conflict for each particular one that they identify then, for 

example? 

Mr. HIGGINS. What the guidance said is that the proxy advisory 

firm has the obligation, if there is a significant relationship that 

has to be addressed— 

Chairman GARRETT. Right. 

Mr. HIGGINS. —the guidance said that the proxy advisory firm 

must provide that to the client on or about the time that it delivers 

the report, and we are confident that the proxy advisory firms can 

implement that. 

Chairman GARRETT. Okay. 

Mr. HIGGINS. There is no one-size-fits-all. 

Chairman GARRETT. Right. Okay. So we are in a lull because it 

just passes now, so when we get through the next period, the next 

season of proxy advisors, will you be reporting back to us? Will you 

be issuing a report? How do we know as far as the success or not 

in this area? 

Mr. HIGGINS. Right. We don’t have any current plans to issue a 

report, but it is something we will give some thought to. As far as 

how you measure success, it will be hard. There will be some 

things that won’t be particularly transparent to us. You mentioned 

11 

the guidance provides some guidance on how clients can agree with 

their investment advisors when and how to vote shares. 

Those are the agreements that we might not be privy to; if they 

are registered investment advisors, our Office of Compliance Inspections and Examinations could take a look at that and add that 

to the list of things that they look out for when they come in to 

do their exams. 

Chairman GARRETT. All right. Let me—my time is going by. 

Moving on to shareholder proposals and what have you, do you 

agree with me that the SEC should amend a number of the rules 

that govern which investors can offer what and what shareholder 

proposals—I won’t go down it—but just in general in that area? 

Mr. HIGGINS. There has certainly been a lot of angst on the 

shareholder proposal process. The one thing about it is that nobody 

is completely happy with the process. 

Chairman GARRETT. Right. 

Mr. HIGGINS. We understand that. I think that we have a shareholder—yes, rulemaking position in on resubmission thresholds, 

Commissioner Gallagher has given speeches on— 

Chairman GARRETT. Yes, I have heard that. 

Mr. HIGGINS. —thresholds. All of those are issues on which there 

is widespread debate. I don’t think the staff has a view on what 

should be done. I think the only observation I would make is that 

any proposal will need to try to find a consensus. 

Chairman GARRETT. So let me just—my time is almost out here. 

Will you commit to proactively monitor the proxy voting process to 

ensure that it is not abused? Because there are allegations, I am 

sure you know, from the stakeholders that certain activist shareholders are trying to do things through these methods that they 

maybe cannot accomplish in another means. So will it be your goal 

to try to proactively monitor what they are doing? The proxy voting 

process to ensure that it is not abused by just this small class of 

what we call activist shareholders and special interest groups who 

are looking to advance their own particular goals that may not be 

to the detriment overall of the other investors and other shareholders? 

Mr. HIGGINS. This is on the 14A shareholder proposal process. 

We devote a substantial amount of staff resources every year during the 3 months of the proxy season on reviewing shareholder proposals on calling balls and strikes, if you will, on what proposals 

can be included and excluded. 

Chairman GARRETT. Okay. 

Mr. HIGGINS. So we are actively involved in watching that. 

Chairman GARRETT. All right. I appreciate it. 

The gentlelady from New York is now recognized for— 

Mrs. MALONEY. Thank you. 

Mr. Higgins, earlier this year the New York State Common Retirement Fund, which is overseen by our State Comptroller Tom 

Dinapoli, tried to get a shareholder vote at the annual meeting of 

two large financial institutions on a resolution concerning the disclosure of incentive-based compensation for employees who take 

high risks for these institutions. Unfortunately, both of the financial institutions decided to exclude the comptroller’s resolution from 

their proxy materials and the staff in the Division of Corporation 

12 

Finance sided with these institutions in this dispute saying that 

the financial institutions could exclude the resolution because it 

dealt with so-called ‘‘ordinary business operations.’’ 

This seems to be contrary to the SEC’s previous statement that 

incentive-based compensation for bank employees who take material risks is in fact a significant policy issue and does not merely 

concern so-called ‘‘ordinary business operations.’’ Because the 

staff’s decision appeared to be based on a simple misreading of the 

resolution, the comptroller tried to appeal the decision to the full 

Commission, but the staff refused to even present the appeal to the 

Commissioners. And this was very troubling to me. I know that 

throughout the hearings on Dodd-Frank, the incentives were talked 

about, that the incentives were there to increase risk as opposed 

to sound financial practices. 

This was troubling to me. Can you please explain to me how this 

happened? 

Mr. HIGGINS. Right. Well, the proposal of which you speak, the 

reason that the staff concluded that it could be excluded was that 

the proposal was drafted to focus on employees who could expose 

the institution to material risk, that was the first cut that needed 

to be made. The second was then to look at any incentive compensation those persons might be paid. The significant policy issue, 

and these are technical issues that maybe only a lawyer can love, 

had to do with incentive compensation paid to individuals who expose the institution to material risk. The proposal as drafted talked 

about employees who could expose the institution to risk whether 

or not they receive any incentive compensation. On that basis, and 

again a very technical area, the staff did not believe the proposal 

met the significant policy issue standard, and as a result agreed 

with the company that it could be excluded. 

Mrs. MALONEY. Okay. Will you commit to working with the New 

York State Common Retirement Fund next year ahead of time so 

that we can prevent this situation from happening again? 

Mr. HIGGINS. The one thing about the shareholder proposal process is that we stand in the middle. We provide informal advice to 

people who ask us about what we believe can be excluded and what 

can be included. We try to be scrupulously fair and stand in the 

middle and not appear to aid either side. I believe it would be problematic for us to either get together with companies or with proponents in advance because it would seem as if we would have already decided the issue before it is presented. We have to let each 

side advocate for their respective positions. 

Mrs. MALONEY. Yes, but giving them the guidelines of how their 

proposal could be— 

Mr. HIGGINS. We hope our letter was clear on how they might 

revise it. 

Mrs. MALONEY. Thank you. 

I am a big advocate of your XBRL system which companies file 

their financial statements in the standardized structure data format, and I believe it is the way of the future, and I must say that 

many of the companies that I am privileged to represent are really 

thrilled that they can have a standard format and get the materials done each month and get the information back. And I think 

13 

that you should be moving toward a structured computer-readable 

financial statements. 

Where does this stand right now? My time is almost up. Are you 

doing an RFP? Are you developing this in-house? What data elements are you capturing in the XBRL system? And basically, what 

they are trying to—what they are required by law to report to you, 

you are putting in a standardized form so it is easier for companies 

and easier for you to understand and for the public to understand? 

Mr. HIGGINS. Correct. 

Mrs. MALONEY. Where does it stand right now? 

Mr. HIGGINS. That is what is required right now, the financial 

statements are required to be in XBRL. There is a separate schedule that needs to be filed in XBRL that has the financial statements and the financial statement footnotes tagged so that there 

is— 

Mrs. MALONEY. Is it computerized and available now to companies and is it available online to members of the public— 

Mr. HIGGINS. It is. 

Mrs. MALONEY. —who want to study it? 

Mr. HIGGINS. The XBRL data is available to anybody who wants 

to go online. Companies have to file it and all companies have— 

Mrs. MALONEY. Did you develop it in-house? 

Mr. HIGGINS. It was before my time. It was several years ago. 

XBRL is a relatively well-known computer technology that— 

Mrs. MALONEY. But the standardized form, from what I am being 

told by some companies, seems to be new. They feel that this cuts 

their paperwork and makes it easier for them to file, the changes 

that you have made. Anyway, thank you. 

Chairman GARRETT. That was an improvement. Great. Thank 

you. The gentlelady yields back. 

The vice chairman of the subcommittee is recognized for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

Again, Mr. Higgins, thank you for appearing before our committee and for your testimony. 

As we discussed prior to your testimony, I represent Virginia’s 

Fifth District. It is a rural district. We have the University of Virginia, which I know you are familiar with, in our district. 

Access to capital is an extremely important subject for me as a 

Representative of a district where in some places we have unemployment as high as nearly 10%. Job creation is the order of the 

day. That seems to me to be the most important thing facing my 

constituents, and capital formation, obviously, is an important part 

of that. 

Because of the University of Virginia, we have emerging growth 

companies that are coming out of the research that takes place 

there at the University of Virginia. And I am glad that Mrs. Maloney mentioned XBRL, because that is something—constituents that 

I have talked to who have had to deal with that system find it less 

than satisfactory and have real concerns about the cost and ultimately whether or not it benefits the investor in any way, shape 

or form. 

So from the people that I talked to and from my constituents, we 

believe that it is not ready for primetime, although hoping that at 

14 

some point that it will be useful to investors but at this point that 

it is not and so we have introduced—so Representative Sewell and 

I have introduced legislation that would exempt emerging growth 

companies from those requirements, certainly until that time that 

it is a more useful program. 

But with that said, I know that the JOBS Act required the SEC 

to study the Reg S-K. You all came back with a report and it 

sounds like Chair White has asked for follow-up. I think there was 

probable—there were some who were disappointed that there was 

not more meat in the original report. It was presented, it was 

based on that. 

My question in terms of the disclosure issue and XBRL was very 

much a part of that regime—I guess my question is as you all go 

forward, looking at corporate disclosure, what are your goals and 

what are the timelines? This is very important because I think 

there is a lot of concern about the pace at which these JOBS Act 

proposals have been implemented. What is the goal in your mind 

of this corporate disclosure project and when can we see some results? 

Mr. HIGGINS. It is hard to predict when we will see results. What 

the Division is doing right now is, as the Chair asked, preparing 

recommendations. We would expect that those recommendations 

would likely take the form of some sort of a release that could be 

exposed to the public because although within the Division we 

know disclosure pretty well, we need to hear from companies, investors, market participants as to what it is they want, what it is 

that is burdensome, what it is that could be added to. There is a 

whole host of things on which we need public input. 

So we are moving on that. The next step would be to get— 

Mr. HURT. How would you articulate the goals of—what were the 

goals? And again, if you could— 

Mr. HIGGINS. Our goal— 

Mr. HURT. Go ahead. 

Mr. HIGGINS. —always is to provide investors with material information with which they can make voting and investment decisions, and to make it as less burdensome on companies as possible 

to provide that information. We know there are examples of information that is now required, the historical stock price chart. People 

don’t go to the 10-K to get a company’s stock price, they go on 

Yahoo Finance or Google or something. 

So these are things that could be cut out. There will be small 

steps. There may be bigger steps that can be taken. 

But our goal is effective disclosure. The phrase ‘‘disclosure overload,’’ to the extent that there is more disclosure than investors 

need, we don’t think that is right. In the process, we may find out 

that investors are looking for more and we have already heard 

from some investors that they think disclosure can be enhanced on 

issues like short-term borrowings. So our goal is to find the balance. 

Mr. HURT. And I would ask you to also consider that obviously 

these disclosure requirements, in addition to—in many instances 

not providing useful information, efficient information to investors, 

they cost companies a lot of money for an emerging growth company. Those dollars could be put into research and development as 

15 

opposed to something that is useless to investors and it is not helping them at all. So I would ask you to, obviously, consider that as 

part of your goal. 

Thank you, sir. 

Mr. HIGGINS. Thank you. 

Chairman GARRETT. The gentleman yields back. 

Mr. Perlmutter? Welcome to the committee. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. Good morning. 

Chairman GARRETT. Good morning. 

Mr. PERLMUTTER. I would like to first, if I could, ask unanimous 

consent to make a letter to you and to Congresswoman Maloney 

dated July 23rd from the Council of Institutional Investors a part 

of the record. 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. PERLMUTTER. And then I would like to yield the balance of 

my time to Mr. Scott. 

Chairman GARRETT. Mr. Scott is recognized. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Let me ask you—I have a couple of points I want to ask you. But 

first, now under Section 953(b), corporate governance, the SEC is 

to come back with the rulemaking regarding compensation for top 

executive pay. And you have an October deadline of coming up with 

that rule, how are you progressing with that? 

Mr. HIGGINS. Well, the 953— 

Mr. SCOTT. Yes. 

Mr. HIGGINS. The CEO pay ratio? 

Mr. SCOTT. Yes, 953(b), the Wall Street Reform Act requires the 

SEC to issue a regulation mandating that companies disclose a 

ratio pay between the CEO and their median employees and we 

trying to get at this—the whole issue now is fairness and equality 

in pay. 

Mr. HIGGINS. The Commission issued a rule proposal last September on which we have received over 128,000 comment letters, 

950 of which are unique. It is on the regulatory rulemaking agenda 

of the Commission for this fiscal year which, as you know, has an 

October deadline. 

Mr. SCOTT. Right. 

Mr. HIGGINS. But that was set back at the time, it is—what the 

Commission thought it could get accomplished in that timeframe. 

There is no strict deadline on that but it is the goal that the Chair 

has indicated. She would like to get a final rule done on that this 

year and we are working to develop recommendations for the Commission to make that happen. 

Mr. SCOTT. Yes. But do you feel right now you will be able to 

meet that deadline or will it be an extension? I know there has 

been some discussion. 

Mr. HIGGINS. Right. We are working hard on a recommendation 

for the Commission which they could act upon during the course 

of this year, but I can’t promise that the Commission—I can’t 

speak for the Commission. They set their agenda. I can’t speak for 

what their deadline will be on acting on that proposal. 

Mr. SCOTT. Have you gotten tangible research as to how wide 

this gap is? Do you feel that this disparity is a crucial factor in the 

governance or corporate governance in your role? I guess what I am 

16 

asking is does the SEC feel the sense of this wide gap within what 

top CEOs are making? 

And I don’t, at all, deny people for making money. They should, 

certainly. But there is an issue is is this grasp for this money way 

at the top of the corporate structure detrimental to this disappearing of the middleclass. 

Mr. HIGGINS. I am not sure that the Commission has a view on 

that. I think what the Commission has a view on is that Congress 

enacted 953(b), directed the Commission to adopt rules. We are 

working to get those rules done as we are with all of the mandated 

rulemakings that we have been— 

Mr. SCOTT. And so you are—what I mean is the part of the law 

is there and we can expect the SEC to come forth with that rulemaking? 

Mr. HIGGINS. It is a mandate of Congress and we take it seriously. 

Mr. SCOTT. In my opening remarks, I did touch upon the cross 

border. 

Mr. HIGGINS. Right. 

Mr. SCOTT. And I want to rectify my comments on that. My understanding is that the—we just passed the bill which is the SEC 

reauthorization that does require you and the SEC to issue a joint 

rule. This is very critical as we move forward because it involves 

an international situation. 

Swaps and derivatives are now a growing part of the world economy, $800 trillion of the world economy. So in that light, could you 

just tell me if there have been any discussions going forward within the SEC in reaction to House Resolution 1256 where we incorporated that requirement that you and the CFTC come up with a 

harmonization for cross border and the reauthorization? 

Mr. HIGGINS. The cross-border swap area is not part of what the 

Division of Corporation Finance does—that is trading and— 

Mr. SCOTT. Yes, I understand that but— 

Mr. HIGGINS. I would be happy to have someone get back— 

Mr. SCOTT. Yes. 

Mr. HIGGINS. —to you on that but it is not anything of which I 

can speak because I simply don’t know. 

Mr. SCOTT. Okay. I would—I just want to clear that up because 

I might have misspoken in thinking that you did qualify that but 

that is a great concern to many of us on both the Financial Services Committee and the Agriculture Committee, and we haven’t 

heard anything from the SEC— 

Chairman GARRETT. So can we follow that up maybe in your next 

round? 

Mr. SCOTT. Thank you. 

Chairman GARRETT. Mr. Royce is now recognized for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Again, as it relates to insider trading as I mentioned in my opening, take for example a company that seeks to purchase another 

firm. We call the other firm the target. The company enters into 

a contractual relationship with a hedge fund to purchase the 

shares of the target for the benefit of the company before the announcement of the intent to acquire the target. 

17 

The company and the hedge fund basically call their agreement 

a joint venture or they call it a partnership. Does the existence of 

the contract somehow make what would otherwise be illegal trading by the hedge fund in the target companies’ stock legal insider 

trading? 

Mr. HIGGINS. Congressman, I obviously can’t speak to any particular situations, but in general, there is—and I would also say 

that it is really the Division of Enforcement that handles insider 

trading but I am familiar with the law in that area. There are two 

rules under the Commission’s jurisdiction that address insider 

trading. The first, Rule 10b-5, requires—in order for someone to be 

liable for insider trading under 10b-5 based on Supreme Court 

precedent, there must be a breach of some duty owed by the person 

trading to the source of the information. 

In the instance that you cite, if one company brought another 

company in and said, let’s work together, I want to take this company over, I will let you in on it, that wouldn’t be any breach of 

any duty. 

Mr. ROYCE. But let me throw in one other factor for your consideration before we get to the other caveat. 

Mr. HIGGINS. Okay. 

Mr. ROYCE. What if the company had taken steps towards a hostile deal before entering into the agreement and the company and 

the hedge fund’s interest were not aligned under the terms of the 

agreement? 

Mr. HIGGINS. Right. Taking substantial steps, the other insider 

trading rule is 14e-3— 

Mr. ROYCE. Okay. 

Mr. HIGGINS. —which deals with tender offers and when a bidder 

has taken substantial steps to commence a tender offer, anyone 

who gets material nonpublic information from that bidder who 

trades on it is liable for insider trading irrespective of any breach 

of a duty. So that is how 10b-5 and 14e-3 work differently. 

I am not sure I completely understood the—where the one person 

might be working counter to the purposes to— 

Mr. ROYCE. Why they wouldn’t be aligned? In my view, they 

wouldn’t be aligned because one party can walk away from the 

transaction at any time. The other party, the hedge fund, clearly 

is now tied in to the agreement, is benefiting from the rise in the 

stock price as a result of the rumor being driven of the hostile takeover, right? So these interests are not, in fact, aligned. And I am 

also confused as to how this is any different than a couple of buddies out on a golf course—something we have seen a lot, and something that you have seen a lot—exchanging information are not 

sellers of the target shares subject to the same imbalance of information as investors in the stock that is victim to a traditional insider trading scheme? I would assume the fraud is the same regardless of the structure, and does this somehow labeling this buying scheme a joint bid insulate it from insider trading charges? 

That is my concern. 

Mr. HIGGINS. And that is a question that I don’t think that either 

the Commission or the courts has answered on whether two parties 

getting together counts on co-bidders and— 

18 

Mr. ROYCE. And I would also like to know what the SEC’s process is for examining a novel or a creative deal structure and what 

are the SEC’s options to investigate conduct related to these types 

of transactions? 

Mr. HIGGINS. If a filing comes in to the Division, it would come 

in, typically, to us either through a proxy solicitation or a tender 

offer or a merger, we have criteria that we use to screen. If it 

meets the criteria and we look at it and typically hostile deals tend 

to meet our criteria for screening. We would look at it. We would 

provide comments. We would review it against the applicable disclosure requirements as well as the anti-fraud provisions of our 

laws, make comments to the participants and work through those, 

the goal always being that investors get clear, accurate material information. 

Mr. ROYCE. Thank you. 

Thank you, Mr. Chairman. 

Chairman GARRETT. I thank the gentleman. 

Mr. Scott is recognized for his second 5— 

Mr. HIMES. Thank you, Mr. Chairman. I yield my time. Do you 

want my time? 

Chairman GARRETT. No, actually it is— 

Mr. HIMES. Okay. 

Chairman GARRETT. We are just going down the row. You have 

not had your time, I don’t believe or— 

Mr. HIMES. Do you want my time? 

Mr. Chairman, I yield my time to Mr. Peters. 

Chairman GARRETT. Okay. So, here we go. Mr. Himes is recognized, and yields his time to Mr. Peters. 

Mr. Peters, you are recognized. 

Mr. PETERS. Thank you, Mr. Himes, and thank you, Mr. Chairman, for that. I appreciate it. 

Hi, Director Higgins. It is great to have you here. I would like 

to briefly discuss some legislation that I introduced last year and 

ask you a couple of questions following that, that would amend financial disclosures of publicly traded companies. As you know, publicly traded companies must disclose certain information in registration statements, prospectuses, and other periodic mandatory 

filings including a general description of the company’s business, a 

description of the company’s principal products and services, and a 

description of the company’s subsidiaries. 

Companies must also disclose the total number of employees that 

they have and anticipated changes in the number of employees 

working in various corporate departments. While corporations must 

disclose their total number of employees, they do not need to disclose where they are based. Elimination of 700 jobs in the United 

States, for example, and the creation of 1,000 jobs abroad, in China 

perhaps, would register only as a net gain of 300 jobs. 

I believe responsible investors have a right to know how publicly 

traded corporations are spending their money and whether they 

are hiring and investing in the United States or sending earnings 

overseas, where companies are hiring or laying off employees could 

be determinative, and it could be material information, certainly, 

for potential investors. 

19 

My bill, the Outsourcing Accountability Act, will simply add location of employees to the annual SEC disclosure requirements. 

These reports would need to disclose the total number of employees 

in the United States broken out by State as well as the total number of employees abroad, broken out by country. The SEC would be 

given the authority to issue regulations to implement this measure. 

And finally, the bill would harmonize with the JOBS Act by exempting companies for the first 5 years after their IPO to avoid increasing compliance burdens on newly public employees. 

So, Mr. Higgins, although I have introduced this legislation to require this disclosure, do you believe that the SEC currently has the 

authority to implement those proposals through rulemaking and 

without congressional action? 

Mr. HIGGINS. Does the Commission have a—I believe the Commission would have authority to implement—to adopt a rule such 

as that even absent a congressional mandate. 

Mr. PETERS. Okay. Good. 

Do you believe that the disclosing of the physical location of employees would impose less of a burden on companies than disclosing 

the median of the annual total compensation of all employees of the 

company and the ratio of that median to the annual total compensation of the CEO, which was a rule proposed by the Commission just last year as you know? 

Mr. HIGGINS. I don’t really have any sense of—we don’t have information on what it might cost to do it. Just off the top of my 

head, it seems less burdensome, but without actually getting information from participants, from the companies that actually have to 

prepare this information, it would be hard for me to speculate. 

Mr. PETERS. Obviously, the calculations involved in the rule that 

you did last year are fairly involved, and it would certainly be reasonable to think that a company—it would be very easy for them 

to know where they send their paychecks every month. That is information that is probably just a push of a button away. 

Mr. HIGGINS. Right. 

Mr. PETERS. Is that an accurate statement, sir? 

Mr. HIGGINS. It seems—that seems right to me. Yes. 

Mr. PETERS. Right. 

And given the changes are straightforward and certainly not particularly complex, I think given the fact that the company certainly 

should know where they send their paychecks every month or however often they pay, do you believe the SEC has the capacity to implement this proposal without difficulty? 

Mr. HIGGINS. If Congress passes a law, and the President signs 

it mandating that the Commission adopt rules, the Commission 

will proceed to do that. What we would do in that and as we do 

with any rulemaking is that we would have our economists looking 

at the cost and benefits of such a rule. We put it out for a noticeand-comment rulemaking so that we could get public input from 

companies, from investors, and from other market participants as 

to their views on the rule, and we would take that all together in 

fashioning final rules. 

But I don’t see any structural or other impediments to adopting 

a rule such as that just as long as we have enough time and ability 

to attend to it and we have a pretty full rulemaking calendar. 

20 

Mr. PETERS. Right. I realize that. Thank you, Director Higgins. 

I appreciate that. 

Mr. Chairman, I yield back. 

Chairman GARRETT. The gentlemen yields back. Mrs. Wagner is 

recognized for 5 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

I thank Mr. Higgins for being here also. 

In your testimony, sir, you indicated that you all are seeking 

input from a broad range of companies, investors, and other market participants. What does the Division plan to do to address the 

43 remaining recommendations of the SEC’s forum on small business capital formation? 

Mr. HIGGINS. We do every year have a government business 

forum on small business capital formation. We get input from the 

participants so they put together recommendations. We, as you 

know, received 43 recommendations this year. 

It was interesting to us that none of them had a high priority 

attached to them. All were either medium or low priority. Obviously, the ones that were medium were the ones we should be looking at first. 

Of the top 10, I think about 8 or 9 of them dealt principally with 

the existing rulemaking proposals that the Commission has already—mostly either a crowdfunding or Reg A plus and so with 

those, we are taking those into account as we work through to get 

a final rule proposal on those rules. 

Mrs. WAGNER. In the past, Congress has had, I think, very little 

insight into the SEC’s process. And here, I am talking really about 

the process for evaluating the small business forums, recommendations. Do you, in fact, have a process and would you be willing to 

work with the committee to make your process a little more open 

or transparent? 

Mr. HIGGINS. We do have a process. We work with the forum and 

we get their recommendations. We put a report together on what 

the recommendations are and to the extent that we have the opportunity to talk to the Commission to see if they want us to pursue 

those, we would—something that we would— 

Mrs. WAGNER. As I have said, we would love to be brought into 

the process more. I think it is a little more transparent and I am 

wondering if you are willing to allow us to do that. It might help 

in prioritizing some of the legislation and policy we put forward. 

Mr. HIGGINS. We are happy to work with the committee on any 

matter. 

Mrs. WAGNER. Great. 

Mr. Higgins, angel investors such as St. Louis Archangels in my 

district are creating jobs across the Nation with your investment 

in startups. What is the Division doing to make sure that any rules 

under consideration do not hurt angel groups or harm the prospects for high potential startups across America? 

Mr. HIGGINS. We don’t single out angel groups as a favored 

group, but we look at how our rules or our proposals affect all 

groups. And angels in particular, what we have attempted to do is, 

we realized that after the general solicitation rules came out, there 

were questions that came up about how that affected angel investVerDate Nov 24 2008 16:44 Mar 11, 2015 Jkt 091159 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\91159.TXT TERRI
21 

ing, and what we have attempted to do is, we put out staff guidance on issues that we think can be helpful— 

Mrs. WAGNER. And have you received feedback on your report or 

your guidance that has— 

Mr. HIGGINS. We have. And I think it has been favorable. I spoke 

last fall at an angel convention here in Washington, D.C. I spoke 

to the group about the things that we were doing, and I think we 

got very positive feedback and— 

Mrs. WAGNER. So, again, regarding the JOBS Act, an unfortunate oversight left savings and loans out of these provisions. To fix 

these, I introduced the Holding Company Registration Threshold 

Equalization Act of 2013, along with Representatives Womack, 

Himes, and Delaney. It passed the House by an overwhelming majority of 417–4. Mr. Higgins, what is the SEC doing to fix this 

issue? 

Mr. HIGGINS. We are currently working on the 12(g) Title V, 

Title VI rulemakings right now and that is an issue that is among 

the issues that— 

Mrs. WAGNER. Any timeframe, sir? 

Mr. HIGGINS. We are hoping to have a proposal out this year 

but— 

Mrs. WAGNER. Okay. Great. Thank you. 

Question, since 2008, the small business capital formation forum 

has recommended that the SEC change its rules to permit forward 

incorporation by reference in registration statements on Form S-1 

by all companies. The forum said that the current rules are an impediment to capital formation and add little or nothing to the availability or quality of subsequent public information. We have had 

witnesses come before the committee who have crossed the ideological spectrum who have said the same thing and that change is 

long overdue. 

What is the Division doing to remove this unnecessary impediment that adds little or nothing to investor protection? 

Mr. HIGGINS. Right. We don’t have any current rulemaking 

project on that right now. If we were to look at the question, I 

think what we would want to look at is forward incorporation has 

historically been available for companies that have had a market 

following for some period of time. 

And so, we would want our economists to take a look at how information gets disseminated by companies that don’t have as big 

a market following as some others. But it is an issue that we do 

understand. 

Mrs. WAGNER. And take very seriously. I have introduced the 

Small Business Freedom to Grow Act which includes this recommendation and it passed our committee by a large bipartisan 

vote, so I am hoping it will be coming to your attention very soon. 

I thank you, Mr. Chairman, for your indulgence, and I yield 

back. 

Chairman GARRETT. I thank the gentlelady. 

And now, the Chair recognizes Mr. Foster for 5 minutes. 

Mr. FOSTER. Thank you. 

I would like to ask a few questions about the conflict mineral disclosure rules. Although Section 1502 requires mandating disclosures by publicly traded companies of the origins of listed conflict 

22 

minerals, because of complex products and complex supply chains, 

many private companies that supply components to these publicly 

held companies are also effectively covered under the rule. 

In fact, there is a private company in my district that has been 

grappling with the cost associated with conducting due diligence as 

required by this rule, and in correspondence with my office, they 

noted that they had been soliciting mineral information from their 

suppliers, both in the United States and the United Kingdom, but 

they have received very low response rates, and this has led them 

to expend many hours of employee time and many resources trying 

to follow up with the suppliers. 

So I have several questions related to this. First, in light of the 

D.C. Circuit striking down a portion of the rules requiring issuers 

to describe certain products as having been, ‘‘not found to be conflict-free,’’ is there a clear definition of what would satisfy the due 

diligence requirements on the Form SD? Should they simply rely 

on their suppliers and their responses as truthful? 

Is there a de minimis level of component value at which they can 

say, okay, we will just take your response to that phase value and 

not have to delve further in? 

Mr. HIGGINS. The rule does not have a de minimis— 

Mr. FOSTER. Okay. So that—all the way down— 

Mr. HIGGINS. —aspect to— 

Mr. FOSTER. And so, microscopic components in the sub-assembly 

have to be documented as being conflict mineral free? 

Mr. HIGGINS. That is correct. It is the obligation of the public 

company to conduct due diligence under an internationally recognized due diligence framework to try to assess where that mineral 

came from. 

Mr. FOSTER. Do you think that might be a useful addition to 

this? 

Mr. HIGGINS. I am not sure. What would— 

Mr. FOSTER. Just say that any component that costs less than 

one penny or is less than a tenth of a percent of the total value 

of what it is that you are supplying to a publicly held company, I— 

Mr. HIGGINS. Congressman, I wasn’t at the Commission when 

the conflict mineral rule was being developed and adopted but I do 

know that there was a lot of comment back and forth on the de 

minimis—on whether there should be a de minimis exception and 

the Commission concluded at that time that there would not be 

consistent and that was consistent with what they believed, I 

think, congressional intent to be on that. So, whether that is an 

issue that should be revisited, I don’t really have a view. 

Mr. FOSTER. Okay. Yes. And so, that is it. 

And the other thing is at what point do you just take your supplier’s word for it? You could easily imagine that you got in a situation where you go down your suppliers list until you find the first 

one willing to lie and then that is it. What are the requirements, 

for example, for a privately held corporation to look behind the 

scenes on each one of their suppliers? 

Mr. HIGGINS. Right. 

Mr. FOSTER. I am calling for some clarity as to what is the definition of due diligence. At least, the companies in my district that 

23 

have contacted us on this don’t feel that they know what the real 

definition is. 

Mr. HIGGINS. Right. Well, the rule is new. Obviously, this was 

the first year that it was mandated, and as with any new rulemaking, perhaps we will get feedback from suppliers like the other 

one in your district as well as other companies that will inform our 

taking a look at whether something can be done to provide better 

guidance. 

Mr. FOSTER. And what are the SEC’s plans for enforcement 

against companies whose reports are deemed to be incomplete on 

this? 

Mr. HIGGINS. As with any new rulemaking, what we typically do 

is we will look at the forms, the reports that have been filed to determine whether there is any general problem, whether companies 

are generally not getting the rule correct, and if that is the case, 

we typically would issue guidance of general applicability. As to the 

review of individual filings if in the course of a company’s Sarbanes-Oxley 3-year review, if the staff were to determine that the 

company had a materially incomplete filing, it would likely issue 

a comment. 

Mr. FOSTER. Right. So you would only be acting against the publicly held company and not their private subcontractor? 

Mr. HIGGINS. Correct. That is the only company which is subject 

to the rule. 

Mr. FOSTER. Okay. I am in my last 15 seconds. 

Just a quick question that you may have to follow up with me 

on is this issue of the calculating of the ratio of CEO pay to median 

income, a lot of the complexity is just—if calculating the exact median salary is in principle a pretty complicated and computer-intensive job, you need a list of all salaries which may or may not be 

a big issue, but if there was a—if you could get back with some 

other simplification, for example, that you have an answer which 

was accurate enough to 10 per cent in the median, if that would 

be a significant simplification, I would be very interested and 

maybe the Congress would take action there. 

Mr. HIGGINS. We could get back to you on that. 

Chairman GARRETT. Thank you. 

Mr. Huizenga is now recognized for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. I appreciate that and 

I actually want to continue to explore a little bit what my colleague 

from Illinois was talking about because I, too, am running into 

manufacturers that are very much struggling with what to do and 

how to handle the conflict minerals part of the requirements in 

Dodd-Frank. And I actually would love to work with Mr. Foster 

and others if we can find some legislative resolution to this because, as I think he had mentioned, the D.C. Circuit Court of Appeals ruling certainly adds a fog to this whole issue. 

And I am curious, in your opinion, do companies need to comply 

with the conflict minerals rule in light of that ruling? 

Mr. HIGGINS. We think they do. A portion of the rule was struck 

down but a substantial portion of the rule was upheld and the 

Commission’s process in adopting the rule was upheld. And so, the 

Commission made the determination that the rule which Congress 

24 

had mandated that we adopt was upheld and we needed to go forward with implementing. 

Mr. HUIZENGA. I, like you, wasn’t here when they wrote DoddFrank. I am just dealing with the echo effects of it and this is a 

rather large echo effect that I think is obviously well-intentioned. 

Nobody wants to see atrocities anywhere and this was specifically 

geared towards the Democratic Republic of Congo (DRC). 

Will you all review the guidance and clarify it for these companies? 

Mr. HIGGINS. If there is a way that we can clarify what the private suppliers’ due diligence obligations are, we would be happy to 

take a look at that. This is the first time that I have personally 

heard of the issue. Again, it is the first year of implementation and 

we will be happy to— 

Mr. HUIZENGA. And I am concerned, I guess philosophically. We 

are on a little bit of a slippery slope here as well using securities 

laws to battle societal ills here. Even Chair White had a couple of 

‘‘series of questions’’ whether, ‘‘using the securities loss and the 

SEC’s powers of mandatory disclosure’’ to accomplish what many 

deemed laudable goals such as improving mine safety in those 

kinds of things and the human rights atrocities that are there. 

Is it the proper role of the SEC to go in and try to correct these 

things or is that—philosophically, what do you think the role is? 

Mr. HIGGINS. My philosophical answer is it sort of goes back to 

my junior high civics class and that is when Congress passes a law, 

and the President signs it into law and directs an agency to adopt 

the rules, that agency should adopt the rule. 

Mr. HUIZENGA. I got it. Okay. So you are executing your job as 

instructed. I understand that. I guess it is up to us and I am—in 

fact, I have mentioned this to the chairman as well, I think it 

would behoove us on this committee and I am happy to be Vice 

Chair of the Monetary Policy and Trade Subcommittee to go see it 

for ourselves. 

We have had some hearings here with folks from the Congo with 

mixed reports, at best, as to the effectiveness of this and as to 

whether we are actually maybe even causing more harm to the localized economy, and I am not talking about the warlords and others who may be controlling the area. I am talking about the real 

people who are dependent upon those jobs and on the mining that 

is there. 

I have not quite a minute left, and I know another one of my colleagues is talking a little bit about the pay ratio and I think that 

was—the quote was getting at the fairness issue. Do you believe 

that anywhere in this 953(b)—does it fit within the SEC’s threepart mission of protecting investors, maintaining fair, orderly, and 

efficient markets, and facilitating capital information? Is that the 

job of the SEC? 

Mr. HIGGINS. That is the mission of the SEC, as many people 

have said here today. I guess I would turn again to 953(b) as Congress directed the Commission to implement— 

Mr. HUIZENGA. I know you were directed to do that but the question is, does publishing pay ratios where there is no guidance as 

to whether it is part-time, foreign, or contracted out to get the 

bathrooms clean really going to maintain fair, orderly, and efficient 

25 

markets? Facilitate capital formation? Protect investors? I am lost 

as to how that actually happens? 

Mr. HIGGINS. I think my personal view on it, I am sorry to say, 

is irrelevant; the mission of the Commission is to follow the law. 

Mr. HUIZENGA. I get it. And you are doing that well, and we 

could keep talking until the chairman notices that I am over my 

time. But I am rather enjoying this. 

I guess I would express to my colleagues that we have a role 

here, and the SEC has a role here, and I am not sure that the SEC 

is executing that. 

So thank you, Mr. Chairman. I appreciate the additional time. 

Chairman GARRETT. It was such a very important discussion that 

was going on by the gentleman, and I believe both sides were being 

receptive to it, so I wanted to give you the latitude there to go on. 

So, thank you. 

And with those extra seconds in mind, the gentleman from California is recognized. We will be looking for equally insightful comments to— 

Mr. SHERMAN. One insight is that the job of the SEC is to carry 

out the statutory mandates that we pass in Congress that we impose on the SEC. It is not just their job to protect investors. We 

have assigned them through statute an effort to try to diminish the 

harm done by conflict minerals, for example, or to try to illuminate 

for this country the growing gap between CEOs and medium pay. 

If tomorrow we passed a statute that because we conclude there 

is a surplus of green paint in this country, everything at the SEC 

has to be painted with green paint, then that also becomes part of 

their mission. Let’s hope we don’t have such an enormous surplus. 

Speaking of the pay disclosures, when are you going to get the 

job done? 

Mr. HIGGINS. Right. We have active rulemaking projects on all 

of them. With CEO pay ratio, we have a proposal out. The other 

ones, we are working on— 

Mr. SHERMAN. When are you going to get it done? 

Mr. HIGGINS. Unfortunately, I don’t control the agenda. The 

Commission has a lot— 

Mr. SHERMAN. What is your best estimate as to when it will be 

done? 

Mr. HIGGINS. I just don’t really have an estimate. We would like 

to get it done—I would like to get this done— 

Mr. SHERMAN. You are— 

Mr. HIGGINS. It is a mandate that we need to get done. 

Mr. SHERMAN. Will it be done a year from now? 

Mr. HIGGINS. I can’t predict— 

Mr. SHERMAN. Will it be done 2 years from now? 

Mr. HIGGINS. I just can’t predict. 

Mr. SHERMAN. Ten years from now? 

Mr. HIGGINS. I won’t be in the job then, but I don’t— 

Mr. SHERMAN. But sitting where you are now is the best person 

to predict whether it will be done 10 years from now. Will it be 

done 10 years from now? 

Mr. HIGGINS. Yes. I am confident of that. 

Mr. SHERMAN. Nine? 

26 

Let’s see. I have—well, let’s focus on the accounting issue. Has 

your Division or the SEC in general looked at the economic harm 

and unfairness of the lease accounting proposal pending at the Financial Accounting Standards Board? 

Mr. HIGGINS. Dealing with the FASB is the role of the Commission’s Chief Accountant— 

Mr. SHERMAN. Right. 

Mr. HIGGINS. And the Chief Accountant doesn’t report to me but 

I would be happy to have the Chief Accountant get back to you on 

what they have done on the lease accounting standards. 

Mr. SHERMAN. Do you have a Chief Accountant? 

Mr. HIGGINS. He has announced that he is leaving, but we still 

have a Chief Accountant. 

Mr. SHERMAN. I know. I called over there and he wouldn’t talk 

to me, and the reason was that he was packing his bags. So your 

optimism that the Chief Accountant will get back to me on that— 

Mr. HIGGINS. I am sure that someone could get back to you. 

Mr. SHERMAN. They did. They didn’t say anything, but they did 

call back. The box was checked. 

Okay. What happens under the conflict mineral rules if a nonpublic company simply lies when it is a supplier to a public company? Are they subject to any criminal penalties or anything else? 

Mr. HIGGINS. Criminal penalties? I don’t know the answer to 

that. 

Mr. SHERMAN. Is there any—assuming you are really good at 

lying, is there any reason for a supplier not to lie and just say, no 

conflict minerals here? 

Mr. HIGGINS. Well— 

Mr. SHERMAN. If they do that, what penalties do they face— 

Mr. HIGGINS. The public— 

Mr. SHERMAN. —if they are non-public? 

Mr. HIGGINS. The public company has an obligation to conduct 

a reasonable due diligence and if there are no red flags around 

that, I would assume the public company could— 

Mr. SHERMAN. So you have to lie— 

Mr. HIGGINS. —rely on that information. 

Mr. SHERMAN. So if the supplier is able to lie with the effectiveness sufficient to fool the duly diligent, they are home free. 

Mr. HIGGINS. I don’t know what the consequences are of a private supplier lying to a public company in satisfying its diligence 

obligations. I can look into it, but I just don’t know the answer off 

the top of my head. 

Mr. SHERMAN. Okay. Finally, as to computerized trading, they 

are taking money off the table. They are not performing any service 

to the economy that I can ascertain. We got a flash crash, why do— 

what is the benefit to our society and to our markets to not having—to taking any one of several steps that would minimize this 

computerized trading? 

Mr. HIGGINS. I don’t know whether you were here for the hearing 

where Mr. Luparello, who is the head of the Trading and Markets 

Division testified, and whatever answer he gave you would be my 

answer because that is—it is really is in his area and not mine. I 

just don’t—our Division doesn’t deal with high frequency trading. 

27 

Mr. SHERMAN. I am looking at the SEC chart, and you are one 

of like 30 boxes. So it is hard to know which one of the 30 at the 

SEC’s responsibility we are addressing here today, but it is nice to 

know that my part of addressing it is concluded. Thank you. 

Chairman GARRETT. Indeed. Mr. Mulvaney is now recognized for 

5 minutes. 

Mr. MULVANEY. Thank you, and I appreciate the questions by 

Mr. Foster from Illinois, and Mr. Huizenga from Michigan, for taking that opportunity to remind us all that the SEC is in charge of 

regulating conflict minerals. 

As someone who is still fairly new to the committee, and still 

fairly new to Congress, I hope that still strikes some people in addition to myself, that it is just patently absurd that the Securities 

and Exchange Commission is in charge of regulating conflict minerals. 

That an entity that is supposed to protect investors, maintain 

fair, orderly, and efficient markets, and facilitate capital formation 

is in charge of making sure stuff doesn’t come from Congo, a country, by the way, just ironically, that also receives taxpayer subsidies from the Export-Import Bank, another topic that we will be 

taking up shortly. 

And for folks who follow the markets and who rightly will ask 

the next time that an investor is damaged or injured that markets 

are not fair, orderly, and efficient, or the capital formation has 

been somehow impaired and they ask a very reasonable question, 

where was the SEC, why weren’t they doing their job? 

The answer will be, well, they were doing their job, they were 

making sure that we didn’t have stuff coming in from Congo. And 

they are doing that job because we told them that is their job, and 

I hope that I am not the only person who thinks that is just one 

of the craziest things I have heard since I have been in Congress. 

It is relevant to what I want to talk to about, Mr. Higgins, because I have to take the opportunity, if I can, to talk about the 

JOBS Act, to talk about especially crowdfunding. It continues to 

sort of stick in my craw that we have rules on conflict minerals. 

We got those in a very timely fashion but we are now 18 months 

late on some of the crowdfunding rules. The Reg A-plus rules are 

also late and it seems like at least for some of us, the priorities are 

out of whack. Again, I am not blaming you, but to have conflict 

minerals rules before we have crowdfunding rules seems to me to 

be a case of misplaced priorities. 

So I am going to ask you about some of the proposed rules because the SEC does have some proposed rules floating out regarding crowdfunding. And I want to dig down on some of the places 

where I want your opinion, sir, as to whether or not how do you 

think these proposals will affect capital formation; specifically it is 

the rule that if I am going to try and raise more than $500,000 

through crowdfunding, I have to get an audit, have those audited 

financial statements. 

I used to run a small company. Audit and financial statements 

are very, very expensive. In fact, we were rarely audited and we 

had reviews up on audited financial statements. Do you think, sir, 

that requirement will positively or negatively impact the ability of 

small businesses to access capital through crowdfunding? 

28 

Mr. HIGGINS. It is a question that the Commission has asked in the rule proposal. Congress set the $500,000 threshold for audited 

financial statements but gave the Commission the ability to change 

that and raise it up to a million dollars. The Commission stopped with the $500,000 in the proposal but 

asked for comment and we received comments from a variety of 

people—some saying, yes, $500,000. Some people want it lowered, 

other people want it raised. So these are comments that we are 

considering as we prepare a final rule proposal. 

Mr. MULVANEY. But I think you would agree with me that it 

would make it less likely that businesses would access 

crowdfunding if they have to go to the additional cost in time of 

having audited financial statements. 

Mr. HIGGINS. I don’t know that, but I do know that audited financial statements cost more than reviewed financial statements. 

Mr. MULVANEY. Got it. Also, one of the proposals is that these 

businesses follow the generally accepted accounting principles 

(GAAP). Is there a similar impact there to the audited financial 

statements requirements? 

Mr. HIGGINS. We are getting comment on that as well. I guess 

GAAP is now establishing a private company financial statement 

regime which would be different than GAAP. We are getting comment on that. I think our office Chief Accountant is helping us 

think through and analyze that issue. But GAAP is pretty wellknown, I guess as opposed to what—the cash method or income tax 

or something like that, although at the lower levels, I think some 

of those suffice. 

Mr. MULVANEY. And finally, Mr. Higgins, on the rule—the proposed rule regarding only using a single intermediary, is that 

something you all continue to look at as opposed to allowing businesses to use multiple intermediaries? 

Mr. HIGGINS. We are getting comments on both sides of that. 

Some people are saying that a single intermediary focuses the protection better. Others think that it might limit the ability for companies to be able to raise money. 

Mr. MULVANEY. Thank you. Since we mentioned GAAP, let me 

change gears on you for just a second because we had Chair White 

in May giving a speech explaining that she wanted to use international financial reporting standards (IFRS) more aggressively in 

the future, and I wonder if you have an opinion, sir, as to whether 

or not using the IFRS in our capital markets might create confusing situations where we sort of have two competing systems at 

the same time, a double GAAP so to speak. 

Mr. HIGGINS. I believe the Chair’s position on IFRS is that she 

would like to get a sense of the path forward by the end of this 

year, I think is what she has said publicly. And whether it causes 

confusion currently, foreign issuers are allowed to file under IFRS. 

There is no GAAP reconciliation required. 

I think the Commission is committed to a high quality set of 

global accounting standards. If IFRS turns out to be that, I think 

that would probably be the direction to go. On the other hand, 

there is a lot of debate going on and whether that is the right direction, and I think the Commission is trying to sort through what 

the path forward will be for U.S. companies. 

29 

Mr. MULVANEY. Thanks, Mr. Higgins. Thanks, Mr. Chairman. 

Mr. HIGGINS. Sure. 

Chairman GARRETT. Mr. Lynch is recognized for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I appreciate that. Thank 

you, Mr. Higgins, for helping the committee with this work. 

I would like to ask unanimous consent to put in the record a 

statement by the Council of Institutional Investors relative to the 

oversight of the SEC’s Division of Corporation Finance. 

Chairman GARRETT. I understand that has already been entered. 

Mr. LYNCH. I’m sorry? 

Chairman GARRETT. It has already been entered into the record. 

Mr. LYNCH. Thank you. 

Chairman GARRETT. But with the unanimous consent, we will do 

it a second time. 

Mr. LYNCH. Thank you, sir. 

Mr. Higgins, I would like to talk a bit about the well-known seasoned issuer (WKSI) waivers. As you know, a WKSI waiver is 

something that the Division of Corporation Finance controls, the 

Director controls that. 

And just to clarify, the WKSI label enables a well-known seasoned investor to use automatic shelf filing rather than going 

through the whole detailed filing with the SEC; automatic shelf 

registration, I think is what it is called. But what is problematic 

is that the SEC in Congress through regulation and through the 

laws have basically prohibited, in certain instances, companies 

from using that label or designation if they have been found guilty 

of serious felonies or in some cases misdemeanors. 

And those measures are intended to protect the investors and the 

markets from bad actors. As I said under the Federal securities law 

and regulation, issuers are automatically disqualified by Congress 

or the SEC from claiming WKSI status when they or their subsidiaries among other factors convicted of certain felonies or misdemeanors are determined to have violated the anti-fraud provisions of the securities law. 

However, in practice, the SEC frequently waives these disqualifications allowing issuers to claim the benefit of WKSI status. Since 

2010, the Commission has granted at least 30 WKSI waivers, and 

I guess not surprisingly, 29 of those waivers went to very large financial institutions and broker-dealers. 

In many cases, these issuers are receiving their second, third, 

even fourth WKSI waiver in less than 4 years. As SEC Commissioner Kara Stein notes in her recent dissent from the SEC’s waiver for the Royal Bank of Scotland, some large firms have received 

more than a dozen waivers over the past several years. 

One large financial firm alone in a 10-year period received 22 different waivers from the SEC. So that is problematic. I agree with 

Commissioner Stein’s remarks that nearly every factor in the Division of Corporation Finance’s revised statement on well-known seasoned issuer waivers weigh strongly, I think especially in the case 

of a waiver for the Royal Bank of Scotland. 

The egregious conduct by the Royal Bank of Scotland was part 

of a widespread scheme undertaken by a number of large banks to 

manipulate the LIBOR rate for their own profit and the LIBOR 

30 

rate is determinant for about $350 trillion in derivatives. It basically underpins the entire U.S. derivatives market. 

So by manipulating the LIBOR, those banks were manipulating 

the entire U.S. derivatives market. And the manipulation of LIBOR 

by the Royal Bank of Scotland harmed millions of Americans, and 

this was at a time when our Nation was facing its worst financial 

crisis since the Great Depression. 

We didn’t get much action here in Congress over this whole scandal. I don’t know how that happened. But we had very, very little 

attention on this committee with respect to the manipulation of the 

LIBOR rate. 

In such situations, the SEC needs to ensure that the American 

people are protected from egregious conduct by financial institutions and the SEC should be penalizing the Royal Bank of Scotland 

for its conduct instead of granting them a waiver. And I just want 

you to persuade me that I am wrong here. 

Mr. HIGGINS. The WKSI status that you refer to, when an issuer 

is convicted of a crime or an anti-fraud violation, it automatically 

disqualifies them from WKSI status. 

The rules that the Commission adopted built in a waiver process 

if for good cause shown the issuer shows good cause why the waiver shouldn’t apply. The focus of the inquiry is whether the conduct 

for which the issuer has already been punished, I mean, it is not 

a question that— 

Mr. LYNCH. How are they punished? 

Mr. HIGGINS. I think they paid a multibillion dollar—it was a 

significant—no, it was hundred— 

Mr. LYNCH. So we can pay out of— 

Mr. HIGGINS. That is what the Justice Department— 

Mr. LYNCH. That is being paid in many cases by the investors. 

So the people who perpetuated this are not getting penalized. The 

investors are getting penalized with the fine and that is it? 

Mr. HIGGINS. The WKSI disqualification was never considered by 

the Commission to be a penalty for the underlying conduct. What 

it was is an automatic disqualification because it called into question whether the issuer could produce reliable and accurate disclosure. It might. If the issuer could show with good cause that it 

didn’t affect that and that conduct was unrelated to their disclosure— 

Mr. LYNCH. But you have one company here 22 times. At one 

point, I know you are going to say it is annecdotal, but at some 

point, it becomes a pattern and practice. 

Chairman GARRETT. And with that— 

Mr. LYNCH. Thanks for your indulgence, Mr. Chairman. 

And thank you, Mr. Higgins. 

Mr. HIGGINS. Thanks. 

Chairman GARRETT. Mr. Stivers is recognized for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. Thank you for being 

here, Mr. Higgins. 

I was just looking at some speeches by some of the members of 

the SEC and in October of 2013, Chair White essentially talked 

about how increasing the disclosure regime can lead to information 

overload. 

31 

I looked at another speech that Commissioner Gallagher gave in 

July of 2013 that talked about when you require too much disclosure, it really is becoming a regulatory creep and doesn’t provide 

real value to investors. And then a speech by Commissioner 

Piwowar in January of 2014 where he again expressed concerns 

about the continual growing disclosures and how it leads to information overload. 

And then I looked at the speech you made in February maybe, 

or April that says, and I will quote a little bit of it, ‘‘While it may 

be called disclosure overload or cutting the clutter, losing the excess baggage, we can all probably agree on the need to reduce the 

material disclosures.’’ 

However, essentially you say that one person’s meat is another 

person’s fat. I guess my first question is, you do work for the Commissioners, right? 

Mr. HIGGINS. I do. 

Mr. STIVERS. Okay. So you do share their belief that there could 

be some information overload in the disclosure or not? 

Mr. HIGGINS. I believe that there could be disclosures that investors don’t find useful and the companies find burdensome. I also 

believe that it could go the other way. There could be information 

that isn’t there that investors would find useful and companies 

may find burdensome. And the job of the Commission is to balance 

that. 

Mr. STIVERS. Right. And so my next question is, what are you 

doing about it? 

Mr. HIGGINS. Right. 

Mr. STIVERS. How are you reaching out to figure out what disclosures are overly burdensome to companies and not useful to investors? And even to find information that would be useful to investors that is not included in disclosures, although if everybody is 

talking about disclosure overload and mission creep, my guess is 

there is a lot more that you might be requiring today that is not 

useful to investors as opposed to stepping this up. But what are 

you doing about it? How are you fixing that problem and seeking 

information? 

Mr. HIGGINS. Right. We have reached out to a lot of—first of all, 

people can send an email to disclosure@SEC.gov. They can send in 

their recommendations, their comments, and their thoughts about 

how we can get better, more effective disclosure. 

We have gone out, and we have met with interested groups of investors and companies. I spent some time at a large mutual fund 

complex speaking with portfolio managers and equity analysts 

about information that they find to be useful. 

And it is eye-opening, really these folks at big financial institutions want more information. They would like to see companies— 

Mr. STIVERS. And big institutions have a lot of means to get their 

own information. Your job isn’t to work for big financial institutions. Your job is to protect the investors. And so, is it your job to 

substitute for their own due diligence? 

Mr. HIGGINS. Not at all. Our job is to make sure that investors 

have the accurate material information necessary to make voting 

and investment decisions and that is the input we are seeking. 

32 

Mr. STIVERS. Great. Keep seeking comment and information and 

then act. Because I do find the SEC seeks information a lot, sometimes acting slowly, and I share that frustration with—and I know 

you are a Commission, it is not like there is one person directing 

you, I get it. There is a variety of opinion but I just read three of 

the five Commissioners who have a fairly similar position. 

But keep seeking information but then at some point, please act. 

I am running out of time. I do want to ask you about every year 

you get recommendations on capital formation from your small 

business capital formation commission. Tell me, how many of those 

have you acted on? 

Mr. HIGGINS. Right. If you are referring to the small business— 

the government small business forum. 

Mr. STIVERS. Yes, the small business forum. So have you acted 

on any of their recommendations? 

Mr. HIGGINS. We have acted on recommendations. 

Mr. STIVERS. Do you have any idea how many? Do you know the 

percentage? 

Mr. HIGGINS. I don’t, but I can— 

Mr. STIVERS. You have to get back to me on that because— 

Mr. HIGGINS. And a lot of those recommendations became part 

of the JOBS act and— 

Mr. STIVERS. Right. And do you know why it became part of the 

JOBS act? Because the SEC didn’t act on them. So, that is my 

push here and I have 8 seconds left. But, you have a great advisory 

council of small business people who are telling you the things they 

need and the burdensome things that are weighing on them. 

Please, listen to them. That is my plea to you. 

Mr. HIGGINS. Right. Thank you. 

Mr. STIVERS. I yield back, Mr. Chairman. 

[The SEC’s written response to the above question can be found 

on page 52 of the appendix.] 

Chairman GARRETT. The gentleman yields back. Mr. Carney is 

recognized for 5 minutes. 

Mr. CARNEY. Thank you very much, Mr. Chairman, for having 

this hearing. And thank you, Mr. Higgins, for coming in and helping us do our important business. 

Yesterday, we had a hearing before the full Financial Services 

Committee with a great panel which included our former chairman 

and ranking member, Barney Frank. And we had a lengthy discussion about risk retention and mortgage lending securitization and 

mortgage lending under Section 941 of Dodd-Frank where there 

was a requirement at the SEC, along with the banking regulators, 

with HUD and with the FHFA-prescribed rules about risk retention, not less than 5 per cent of an economic interest in a material 

portion of that credit risk for any asset that a bank might transfer. 

And, of course, you came out with a rule, the agency came out 

with a proposed rule in March of 2011, and then a reproposal in 

August of 2013. And the issue that former Chairman Frank complained about was the fact that the original statute that he described, and I have his testimony here, said that there are three 

categories of mortgages: those that fell below QM standards which 

were subject to certain legal constraints; QM mortgages which were 

33 

the minimum standards; and then QRM which were the super good 

quality mortgages. 

And that in the reproposed rule that the Commission—the agencies I should say came out basically where QM and QRM were essentially the same. Thereby, according to former Chairman Frank, 

taking out the risk retention provision because some of those QRM 

mortgages are not subject to that. 

What was the thinking from the SEC’s perspective of that reproposed vis-a-vis risk retention in the mortgage lending space? 

Mr. HIGGINS. The reproposed rule proposed that QRM equal QM 

as the preferred approach but also offered an alternative approach 

which added additional features to QM in order to get to QRM, 

seeking comment recognizing that it was an issue of substantial 

concern. 

Mr. CARNEY. How would you respond to former Financial Services Committee Chairman Frank’s objection that the clear statutory 

intent was to have three categories, if you will: the non-QM lower 

standard; the QM minimum standard; and the QRM super quality 

standard? And therefore, is QRM subject to certain exceptions 

under the Act or under the regulation? 

Mr. HIGGINS. That is a view that has been expressed not only by 

former Chairman Frank but by many commenters who have written in on the joint agency rule proposals. We are working through 

those comments. Joint agency rulemaking is an interesting process. 

Mr. CARNEY. Difficult, for sure. 

Mr. HIGGINS. Because they are different agencies with different 

missions. The Fed’s mission is different than HUD’s mission, which 

is different than the SEC’s mission, and so on. 

Mr. CARNEY. We will see what happens from there based on public comment. 

And lastly, in my last minute-and-a-half, my friend and colleague 

Mr. Fincher and I worked in the last Congress on the IPO OnRamp. It may be familiar but it was part of the JOBS act. It didn’t 

require any rulemaking I don’t think, a minimum maybe. 

I wonder if you could comment on the successor or what you 

have heard about some of the On-Ramp provisions. But the one I 

am most interested in is the quiet period, if you will, prior to an 

emerging growth company deciding whether to go public or not. 

They are able to issue reports to potential investors to gauge interest confidentially publicly and whether or not—what I have 

heard from companies is that it is very helpful because they don’t 

have— 

Mr. HIGGINS. Testing the water—this is the testing the waters 

provision? 

Mr. CARNEY. Right. That is correct. 

Mr. HIGGINS. Okay. Yes. This was an area that I practiced in. 

I was in private practice for 30 years prior to coming to the Commission. 

Mr. CARNEY. Great. So you are the perfect person. 

Mr. HIGGINS. So, I did lot of IPOs. Before the JOBS Act or right 

after the JOBS Act came in. But testing the waters started off, 

right, we understand people were a little skittish about it. I think 

part of it was that investors only have so much time and they 

34 

wanted to deal with deals that were real deals, not works in 

progress. 

However, we have heard anecdotally that the process is being 

used in a lot of deals. Initially, it was used in the biotech industries 

but I think now it is across-the-board. And we haven’t seen any 

problems with it and to the extent it is helpful, we think that is 

great. 

Mr. CARNEY. And in my remaining 15 seconds, any other feedback with respect to IPO On-Ramp? 

Mr. HIGGINS. The confidential filing process has worked very 

well. 

Mr. CARNEY. Right. 

Mr. HIGGINS. Companies like it, and it has worked well for us— 

things are working well. 

Mr. CARNEY. Great. Thanks very much. Keep up the good work. 

Chairman GARRETT. Thank you. The gentleman yields back. Mr. 

Hultgren is now recognized for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. I do want to thank 

Director Higgins for being here. 

First, I would like to focus on the lineup questions that Representative Lynch brought up, and I wonder if you can help me understand this a little bit more. Director Higgins, as you know, in 

2005 the SEC undertook securities offering reforms which among 

other things created a new category of issuers known as the wellknown seasoned issuer or WKSI. 

The main purpose of creating of WKSI was to enhance flexibility 

in accessing capital markets. As I understand that, there are certain instances, however, where issuers that would otherwise be 

considered WKSI can become ineligible and request that the Commission review their applications to grant a waiver so that the entity can once again gain WKSI status. Is this correct? 

Mr. HIGGINS. Correct. 

Mr. HULTGREN. Once the request is made for a waiver, does the 

Commission just rubberstamp an approval on the request and call 

it a day? 

Mr. HIGGINS. Not at all. 

Mr. HULTGREN. Conversely, does the Commission just categorically deny all waiver requests? 

Mr. HIGGINS. The Commission doesn’t—typically, they come in to 

the Division of Corporation Finance. We have been delegated authority from the Commission to act on the waivers. 

And they come in, we talk informally with companies. Companies 

that we talk to informally that we don’t believe would qualify for 

a waiver because they haven’t shown good cause, they may not 

even come in and make a request. 

Mr. HULTGREN. So it sounds to me like there is a process in place 

through which the Commission can consider on a case-by-case basis 

whether to approve or deny a waiver request. I wonder if you could 

walk through in a little more detail what that process is once the 

waiver request is received by you and your staff. What considerations do you give that request? 

Mr. HIGGINS. What typically happens is there is a phone call first 

that comes in. Our Office of Enforcement Liaison speaks with the 

company about the particular facts and circumstances. And to unVerDate Nov 24 2008 16:44 Mar 11, 2015 Jkt 091159 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\91159.TXT TERRI
35 

derstand better whether it is totally out of the question that they 

would get a waiver or whether they would present a plausible case. 

If they think it is worth presenting a case, the company would 

submit a letter where they would focus on the factors that we lay 

out in our public guidance when we will grant WKSI waivers and 

they will put their case forward. At that point, we will go back and 

forth on the letter with them, ask them questions about it. 

And if we are satisfied that they have made the case, we would 

recommend granting a waiver. The Commission can always decide 

to take the authority—to decide it on its own and a case where 

they have done that, the Royal Bank of Scotland is a good example. 

But we do have delegated authority, and we would grant the waiver if we believe they met the applicable standard. 

Mr. HULTGREN. Thank you. So it sounds like it is a thoughtful 

process and not something—to me it seems it was being characterized to something different because I hear more sounds like it is 

a process that does work. 

Switching gears a little bit, the SEC has had an important threepart core mission: to protect the investors; to maintain fair, orderly, 

and efficient markets; and to facilitate capital formation. Certainly, 

a key component of this mission is ensuring that investors can access a wide variety of transparent investment options. 

I would like to talk about the SEC’s definition of accredited investor. This determines which investors, those deemed sophisticated, have access to a wider variety of investment options. Unfortunately, I think this definition has not been significantly updated 

since it was first promulgated back in 1982. 

While this issue may be decided in Washington, it has a very significant impact on Main Street. A newer definition of accredited investor will not only hurt potential investors in my district but it 

will also cut off small businesses in my district for much needed 

potential sources of capital. 

Thankfully, the SEC is reviewing the definition of accredited investor, and I am hopeful it will take the opportunity to expand this 

definition. While I am thankful that the SEC takes its mission to 

protect investors very seriously, I am also hopeful that it will recognize that today’s investor has access to a wider variety of information that was not even available 10 years ago. 

So my question, Director Higgins, is as follows: Linking the definition of accredited investor purely to income network is an antiquated and counterproductive measurement. As you may be aware, 

the United Kingdom recently added two additional ways that 

maybe an accredited investor, whereby a person who does not meet 

the income network requirements, will take a test or show through 

education or advanced degree that they would be able to assume 

the risk involved in investing a non-public securities. 

I wonder, is the Division considering an educational component 

as you begin to update the definition of an accredited investor? 

Mr. HIGGINS. We are, as part of our review of the accredited investor definition. 

Mr. HULTGREN. So you are looking at that; you expect there will 

be some changes there? 

36 

Mr. HIGGINS. It is up to the Commission to make changes, but 

we are definitely looking at it and it will be part of our discussion 

that will be part of our report. 

Mr. HULTGREN. Good. And there is an understanding or recognition of how this does impact Main Street and our constituents as 

well, and how very different access information is now than it has 

ever been before? 

Mr. HIGGINS. Again, we will get comments, I am sure, on both 

sides of the issue, but we do understand the importance. 

Mr. HULTGREN. Again, thank you for being here. My time has expired. I yield back. 

Chairman GARRETT. Thanks. The gentleman yields back. 

Mr. Fincher is now recognized. 

Mr. FINCHER. Thank you. 

Chairman GARRETT. The gentleman will have the last word. 

Mr. FINCHER. Thank you, Mr. Chairman. I appreciate the willingness of the chairman to allow me to participate in today’s hearing. 

Just a couple of questions to wrap up—I am going to echo what 

my good friend, Mr. Carney talked about. He and I did have in the 

JOBS Act the last time, the On-Ramp Provision in that bill. JOBS, 

J–O–B–S, which is what is super important in getting the economy 

running again, people working, that is how we produce revenue in 

this country. 

And just a few minutes ago, my good friend, I am glad he 

brought up Ex-Im Bank that is a key part of the process and reforming it, making it more transparent accountable and it is all 

about jobs in our districts is what is important. 

But back to specific questions, former SEC Chairman Schapiro 

attempted to water down the JOBS Act that was passed in the 

House in 2012, and the President ultimately signed into law. I hear 

many SEC staffers do not like the JOBS Act possibly because it 

was not invented at the SEC. 

And because Congress had to act to help small companies and 

entrepreneurs access the capital markets more effectively, do you 

believe that the SEC should exhibit the same zeal, sustained effort, 

and enthusiasm when implementing the JOBS Act that it has done 

with Dodd-Frank? 

Mr. HIGGINS. I think that we should implement it faithfully in 

accordance with our mission. Absolutely. 

Mr. FINCHER. Do you feel that some staffers have taken the opinion that they really turn the cold shoulder to the JOBS Act? 

Mr. HIGGINS. None have expressed it to me, Congressman. 

Mr. FINCHER. Okay. And then lastly, what is the SEC’s capital 

formation agenda outside of the JOBS Act? Are there specific rule 

changes the SEC is considering that would be helpful to small companies looking to raise capital and that would distinguish them 

from larger companies? 

Mr. HIGGINS. As we are often reminded, we still have some wood 

to chop on the JOBS Act front. We are focused on getting that 

done. Our Office on Small Business Policy in the Division is open 

for business. We answer more than a thousand requests each year 

from small businesses and other market participants who are interested in small business capital raising. 

37 

So we are available to try to provide guidance on the rules that 

have already been adopted so that people can have some certainty 

in how they are applied and make it easier and more cost-effective 

to do. So, the Division is committed to this small business capital 

formation. 

Mr. FINCHER. With that, I yield back, Mr. Chairman. Thank you 

again for your patience. 

Chairman GARRETT. It was well worth the wait. I think everyone 

would agree with that. No one is commenting. 

Seriously though, Mr. Higgins, we do appreciate your time and 

your work at the Commission. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place his responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

And with that, there being no further business before the subcommittee, I thank you once again, and this hearing is now adjourned. Thank you. 

[Whereupon, at 11:59 a.m., the hearing was adjourned.] 

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