LEGISLATIVE PROPOSALS TO INCREASE ACCESS TO CAPITAL 

S. HRG. 115–354 

LEGISLATIVE PROPOSALS TO INCREASE ACCESS 

TO CAPITAL 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING LEGISLATIVE PROPOSALS ON CAPITAL FORMATION 

JUNE 26, 2018 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

U.S. GOVERNMENT PUBLISHING OFFICE

32–415 PDF WASHINGTON : 2019

S. HRG. 115–354 

LEGISLATIVE PROPOSALS TO INCREASE ACCESS 

TO CAPITAL 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING LEGISLATIVE PROPOSALS ON CAPITAL FORMATION 

JUNE 26, 2018 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: https://www.govinfo.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

JONATHAN GOULD, Deputy Chief Counsel 

ELISHA TUKU, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

TUESDAY, JUNE 26, 2018 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Prepared statement .......................................................................................... 31 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 1 

WITNESSES 

Raymond J. Keating, Chief Economist, Small Business and Entrepreneurship 

Council .................................................................................................................. 3 

Prepared statement .......................................................................................... 31 

Responses to written questions of: 

Senator Brown ........................................................................................... 73 

Senator Sasse ............................................................................................ 74 

Senator Cotton ........................................................................................... 77 

Senator Rounds ......................................................................................... 78 

Senator Cortez Masto ................................................................................ 79 

Mercer E. Bullard, Butler Snow Lecturer and Professor of Law, University 

of Mississippi School of Law ............................................................................... 5 

Prepared statement .......................................................................................... 40 

Responses to written questions of: 

Senator Brown ........................................................................................... 80 

Senator Sasse ............................................................................................ 80 

Senator Cotton ........................................................................................... 81 

Senator Menendez ..................................................................................... 82 

Senator Cortez Masto ................................................................................ 83 

Christopher H. Daniel, Chief Investment Officer, City of Albuquerque, New 

Mexico, on behalf of the Government Finance Officers Association ................ 6 

Prepared statement .......................................................................................... 71 

Responses to written questions of: 

Senate Banking Committee ...................................................................... 85 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letters and statements submitted by Chairman Crapo ....................................... 150 

Letters and statements submitted by Senator Brown .......................................... 178 

Letters submitted by Senator Toomey ................................................................... 344 

Letters submitted by Senator Scott ....................................................................... 351 

Letters submitted by Senator Cotton ..................................................................... 355 

Letters submitted by Senator Tillis ....................................................................... 377 

Letters submitted by Senator Menendez ............................................................... 385 

(III)

(1) 

LEGISLATIVE PROPOSALS TO INCREASE 

ACCESS TO CAPITAL 

TUESDAY, JUNE 26, 2018 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The Committee will come to order. 

Today’s hearing will focus on several legislative proposals that 

will encourage capital formation and reduce burdens for smaller 

businesses and communities. 

My goal is to work with Senator Brown and other Members on 

this Committee to identify and move legislative proposals that 

achieve these aims. 

Senators Schatz, Toomey, Heitkamp, and Tillis, among others, 

have cosponsored a bill that would make it easier for startup companies to tap the expertise and capital of angel investor groups. 

Senators Toomey, Rounds, and Menendez, among others, introduced a bill that would provide more financing options for State 

and local governments seeking to raise money. 

Senator Tillis has introduced a bipartisan bill that exempts 

emerging growth companies from certain auditor attestation requirements. 

Senators Van Hollen and Tillis have cosponsored a bill that 

would encourage more public offerings by allowing all companies to 

‘‘test the waters’’ prior to filing an IPO. 

A bill introduced by Senators Kennedy and Jones would make it 

easier for investment advisers to focus on rural business investment companies. 

Finally, Senators Cotton and Jones recently introduced a bill 

that will cut audit costs for noncustodial brokers. 

These bills will improve companies’ access to our capital markets 

and their ability to invest in the United States, in turn growing 

and creating jobs. 

I look forward to hearing from our witnesses on these legislative 

proposals, and I now turn to Senator Brown. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, and welcome to our 

witnesses. 
2 

I want to thank the Chairman for holding today’s hearing and 

providing Members of this Committee the opportunity to discuss 

legislation that a number of my colleagues have worked on in this 

Congress. 

Unfortunately, some of the bills we will discuss today, and at 

Thursday’s hearing, undermine investor protections and transparency, and they potentially create risks to financial stability. 

The ink is barely dry on S. 2155, the bill that rolls back many 

of the banking system protections developed following the financial 

crisis. And while Congress was working on that bill, the banking 

regulators, the newly installed banking regulators, many of them 

coming from Wall Street, began several efforts to weaken postcrisis 

safeguards. Now this Committee wants to work on bills that will 

undercut investor protections and market practices that have 

served to promote transparency. Lobbyists in this town just never 

get enough. 

Several of today’s bills have their roots in the JOBS Act and look 

to make changes that will supposedly increase capital formation or 

balance the number of IPOS back to levels from the 1990s—I am 

sorry, to boost the number of IPOs back to levels from the 1990s. 

I am concerned that more time is spent thinking about a JOBS Act 

2.0 or 3.0 and finding laws that should be scaled back instead of 

trying to understand if the original JOBS Act actually created jobs. 

I am sure we will hear about how each of today’s bills is vital 

to help small companies grow and allow investors to participate in 

that growth. What we should also talk about is how Congress and 

the SEC can do more for investor protection and for market stability. 

We do not spend enough time working to increase the public’s 

trust in markets, but those efforts would benefit small companies 

and the jobs they create. 

Earlier this year we heard from the SEC and the CFTC that 

keeping up with virtual currencies and related fraud was a tall 

order. But we know that low-tech fraud still exists. 

Just yesterday, the Wall Street Journal reported that securities 

firms with high numbers of brokers with disciplinary records are 

selling tens of billions of dollars in private placements, specifically 

targeting seniors. We will hear more on Thursday about customers 

who are defrauded by their brokers, but the Journal’s findings indicate a serious problem facing savers: the allure of deals that are 

just too good to be true. 

The SEC’s recent settlement with Theranos shows how even sophisticated investors can have wool pulled over their eyes for years, 

and you read some of those names in the business section of the 

Times and the Wall Street Journal or any other papers, the Financial Times, and all over the last couple of years. 

While the SEC continues to pursue fraud cases, the fact is enforcement cases and related penalties are down dramatically. Last 

week I sent SEC Chair Clayton a letter expressing my frustrations 

with the recent trends in enforcement. Yesterday’s article shows 

that risks to investors are increasing in these good economic times. 

The potential risks and potential negative consequences arising 

from today’s bills are easily predictable. For example, a number of 

studies have shown that companies exempted from accounting re-
3 

quirements and auditor oversight of internal controls have higher 

rates of accounting restatements. It does not take a lot of imagination as to how that happens. 

Maybe if we focused on passing laws that enhance investor confidence instead of undermining it, if we did that, this would end 

up helping businesses, too. After all, the more confident investors 

are, the easier it is for companies to raise money. 

I have said before that protecting investors and strengthening 

the integrity of the markets is necessary for successful capital formation. And yet here we continue to consider bills that unwind 

many important safeguards, I think another example of collective 

amnesia that set in to this Congress. Slowly but surely, we will 

find that adding more exemptions and more carveouts has not had 

the desired result of more IPOs, but it has had a predictable result 

of denying investors key protections and eroding trust in the markets. 

I look forward to hearing from our witnesses. 

Chairman CRAPO. Thank you, Senator Brown. 

Today’s witnesses are Mr. Raymond J. Keating, chief economist 

of the Small Business and Entrepreneurship Council; Professor 

Mercer E. Bullard, Butler Snow Lecturer and professor of law at 

the University of Mississippi School of Law; and Mr. Chris Daniel, 

chief investment officer of the city of Albuquerque, New Mexico, on 

behalf of the Government Finance Officers Association. 

We welcome all of you here. As I think you have been advised, 

your written testimony has been entered into the record, and we 

encourage you each to try to be very aware of the clock that is in 

front of you. We ask you to keep your initial remarks to 5 minutes, 

if you can, and then each of the Senators will have a 5-minute opportunity to engage you with questions. And at that point you can 

get out a lot that you did not get out in your other statements. 

Also, I would ask you to recognize that the clock also runs on 

Senators, and when their questioning time is up, please try to 

bring your responses to an end promptly so we can get to the next 

Senator. 

Mr. Keating, you may proceed. 

STATEMENT OF RAYMOND J. KEATING, CHIEF ECONOMIST, 

SMALL BUSINESS AND ENTREPRENEURSHIP COUNCIL 

Mr. KEATING. Chairman Crapo and Members of the Committee, 

thank you for hosting this important hearing today on the issue of 

access to capital. My name is Raymond Keating. I serve as chief 

economist for the Small Business and Entrepreneurship Council, a 

nonprofit, nonpartisan advocacy, research, and education organization dedicated to protecting small business and promoting entrepreneurship. 

Throughout SBE Council’s history, access to financial capital has 

been a core issue as it stands out as a foundational matter for entrepreneurs who are starting up, operating, or expanding businesses. However, for many entrepreneurs, gaining access to capital 

is a serious challenge. 

During the financial crisis, the Great Recession, and an underperforming recovery, capital became difficult to access from institutional banks and various capital market players. And while mat-
4 

ters have improved in recent years, many entrepreneurs continue 

to face challenges. For example, while growing since the recent low 

hit in 2013, the value of small business loans outstanding remains 

below the high hit in 2008. In effect, small business loan value has 

experienced no growth for more than a decade. 

A similar trend and shortfall is seen in the number of small business loans with the level at the end of 2017 still below the 2008 

level. 

On the equity side, angel investment stands out as a critical 

source for funding startups in early stage businesses, but here the 

numbers have been disappointing in recent years. Postrecession 

growth was underwhelming, and since 2014, angel investment has, 

in effect, stagnated. And while not an option for most startups or 

very young firms, venture capital investment is an important avenue for innovative firms to raise capital for growth and expansion. 

The trend on the venture capital front after the recession thankfully tends to show more robust growth. Finally, there has been 

growth in online lending and crowdfunding for entrepreneurs as 

well. 

So long after the financial crisis hit in late 2008 and the recession came to an official end in mid-2009, the financial capital story 

for the small business community has been mixed. While having 

recovered some, small business loans are still well off from where 

they should be. Angel investment in recent years largely seems 

stuck. Meanwhile, venture capital has shown, again, solid growth, 

while online lending and crowdfunding have opened new doors for 

many entrepreneurs seeking funding. 

Assorted factors contribute to these trends, including the underperforming recovery—excuse me, underperforming economy over a 

period of a decade and a general decline in entrepreneurial activity. 

Challenges among small community banks also have come into 

play given the important role that these institutions play in lending to small businesses. And community banking woes also tie back 

to the state of the economy, but to Government regulation as well, 

which always falls heaviest on small businesses. 

Reform and relief efforts to clear away obstacles and reduce costs 

for lenders, investors, entrepreneurs and small businesses on the 

financial capital front are most welcome. SBE Council supports 

most of the measure being discussed today, namely, the HALOS 

Act, the Fostering Innovation Act, the Encouraging Public Offerings Act, the Small Business Audit Correction Act, and RBIC Advisers Relief Act, along with a host of other reform and relief measures mentioned in my written testimony. 

Finally, when it comes to boosting access to capital for the entrepreneurial sector and thereby enhancing economic, income, and employment growth, SBE Council also looks in other areas such as 

taxation, and we favor, for example, reducing the capital gains tax 

and indexing gains for inflation. These measures, these other deregulation measures, enhance the returns on and incentives for investment and entrepreneurship. 

Thank you for your time and attention, and I look forward to 

your questions and further discussion. 

Chairman CRAPO. Thank you. 

Professor Bullard. 
5 

STATEMENT OF MERCER E. BULLARD, BUTLER SNOW LECTURER AND PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI SCHOOL OF LAW 

Mr. BULLARD. Thank you, Chairman Crapo, Ranking Member 

Brown, and Members of the Committee. It is an honor and privilege to appear before you again here today. I appreciate the opportunity. 

This hearing will address a number of bills. At the moment I 

want to focus on those that relate to capital raising by U.S. companies. I would like to first address the premises underlying these 

bills and a fair amount of legislation over the last few years. 

Capital market reforms have repeatedly been posed as solutions 

to the perceived problem of the decline in the number of U.S. IPOs 

and the number of U.S. public companies, and supporters often 

blame the decline on legislation that was enacted following two of 

the three worst downturns in U.S. markets since the Great Depression. 

I have significant doubts about both premises. First, it is not possible to make a statistically meaningful connection between the 

Sarbanes–Oxley and Dodd–Frank Acts on the one hand and 

changes in the number of IPOs in U.S. companies on the other. The 

factors are too many and too diverse. Even if one could establish 

a relationship, the relationship would demonstrate that each act 

was followed by an increase in total capital represented by U.S. 

listed companies. The gross proceeds from IPOs during this century 

have substantially exceeded the amount raised in preceding periods, and 2018 is on pace to set a new record. 

There is nothing inherently wrong with fewer IPOs and fewer 

public companies. In my opinion, these are the wrong measures. If 

Congress is concerned about the amount of capital raised in U.S. 

public markets, then it should consider the amount of capital 

raised in U.S. public markets, and in a century, the amount of capital raised in U.S. public markets represented by public companies 

has been a success story. The only short-term downturns have followed the Internet bubble and the Enron–WorldCom scandals and 

the financial crisis. The upward trend in total capital restored after 

the Sarbanes–Oxley and Dodd–Frank Acts became law. A U.S. listing is still the preferred worldwide standard. Among non-U.S. companies that choose to list outside their home country, U.S. exchanges are the overwhelming favorite. 

In my opinion, capitalism is about increasing capital, not ensuring that regardless of the amount of capital raised, the capital will 

be more widely distributed. Capitalism is about the efficient allocation of capital, not ensuring that everyone gets a share regardless 

of the value of their enterprise. 

I am also concerned about the continuing salt on the distinction 

between registered and unregistered offerings on which the Securities Act is based. The HALOS Act would allow virtually any type 

of public entity to advertise and host a public event that can be attended by any person for the purpose of any issuer pitching an unregistered securities offering. The act would permit public notices 

that specifically advertise the event as a forum for marketing securities. Congress calls this a clarification of what does not constitute 
6 

a general solicitation, but a general solicitation is precisely what 

the event would be. 

The HALOS Act effectively repeals offering regulation in the 

United States if that has not already occurred relative to the JOBS 

Act’s permitting general solicitation and advertising in private offerings and $50 million Reg D offerings freed of State oversight. 

The effective recent legislation in bills pending today is to make 

retail investors an informational underclass. Issuers are allowed to 

file confidential registration statements while distributing information to large investors in road shows for months, with the initial 

public registration statement being made available to retail investors just 15 days before the IPO. Issuers can raise capital from retail investors through crowdfunding, interstate, and Reg A offerings based on one set of information while they provide additional 

nonpublic information to wealthy investors under Reg D under 

terms that may dilute retail investors’ interests. If information can 

be broadly and publicly disseminated to anyone and all offerings 

are essentially public in nature, then the terms of all offerings 

should be publicly available. If all offerings are to be public, then 

all private issuers should be required to make certain information 

publicly available on an ongoing basis, such as the terms in which 

past and current offers are made to investors and the amount of 

distributions made to investors. Instead, issuers of unregistered securities routinely ignore the minimal disclosure requirements to 

which they are subject. Many if not most Reg D issuers do not file 

Form D, and even that form is only a one-time filing that provides 

little useful information. 

If ultimately any investor will be able to buy any security but 

only wealthy investors will be able to see confidential information 

and have far longer to consider an investment’s prospects, Congress 

should consider what form of investor protection will take the place 

of the protections that have been and continue to be discarded. 

I look forward to taking your questions. 

Chairman CRAPO. Thank you. 

Mr. Daniel. 

STATEMENT OF CHRISTOPHER H. DANIEL, CHIEF INVESTMENT OFFICER, CITY OF ALBUQUERQUE, NEW MEXICO, ON 

BEHALF OF THE GOVERNMENT FINANCE OFFICERS ASSOCIATION 

Mr. DANIEL. Chairman Crapo, Ranking Member Brown, and distinguished Members of the Committee, I am honored to be here 

today on behalf of the Government Finance Officers Association, 

GFOA, to share with you our comments in support of S. 1117, the 

Consumer Financial Choice and Capital Markets Protection Act of 

2017, and its importance to public finance. My name is Chris Daniel, and I am the chief investment officer for the city of Albuquerque, New Mexico. I also serve on the Treasury and Investment 

Management Committee of the GFOA. 

GFOA represents nearly 20,000 public finance officers from State 

and local governments, schools, and special districts throughout the 

United States. We appreciate this Committee’s continued support 

for efforts to strengthen the municipal bond market, especially the 

recent enactment of legislation designating municipal securities as 
7 

high-quality liquid assets. Such actions help States, local governments, and other governmental entities maintain access to low-cost 

capital, which is vital to infrastructure investment across the 

United States and contributes to a healthy and vibrant economy. 

Likewise, money market funds are used by Governments as our 

leading vehicle for short-term investment of public funds. The 

SEC’s change of net asset value, or NAV, accounting methodology 

from stable to floating negatively impacts our ability to use them. 

S. 1117 would restore the ability of State and local governments to 

safely invest in funds that meet the parameters of investment policies as determined by our own State and local elected officials, not 

by the SEC. 

Let me provide the Committee with key concerns of Government 

finance officers as you consider this legislation to improve access to 

capital. 

First, money market funds are used effectively to manage safety 

and liquidity for public sector investments. According to Federal 

Reserve data, State and local governments hold over $190 billion 

of assets in money market funds. Traditionally, Governments have 

used these funds to safely invest public monies as dictated within 

an entity’s own investment policy. It is my experience that governing bodies approve a Government’s investment policy based on 

industry best practices such as the GFOA’s and the specific needs 

of the entity. Most Governments have policies demanding that the 

products used in their short-term investment portfolios have a stable NAV to maintain adequate levels of liquidity and safety 

through principal preservation. Requiring a floating NAV creates 

an unnecessary obstacle that has steered State and local governments into very low yielding U.S. Government-backed funds or 

other alternatives from what was already a safe and highly liquid 

market. 

Second, money market funds provide access to working capital to 

fund public services and finance infrastructure investment. Money 

market funds are key purchasers of municipal securities. Historically, they have been the largest purchasers of short-term tax-exempt debt. The original objectives of the floating NAV rule change 

were to protect investors from runs on money market funds, but 

those concerns were already effectively addressed with the 2010 

amendments to Rule 2a-7 following the financial crisis. GFOA and 

other State and local government issuer groups supported those 

amendments. 

Despite the positive impact of the 2010 amendments, the SEC 

moved forward in adopting additional amendments to the rule in 

July 2014. Throughout that process, GFOA and public finance officers all over the country submitted analysis showing that a floating 

NAV would do little to deter heavy redemptions during a financial 

crisis and would instead impose substantial costs on State and 

local governments. That is exactly what happened. Between January 2016 and April 2018, tax-exempt money market fund assets 

under management fell by nearly 50 percent, from $254 billion to 

$135 billion, a dramatic shrinking of an important market for municipal debt. At the same time, municipalities issuing variable rate 

demand notes saw their borrowing costs increase significantly 

above the Federal Reserve’s rate increases over the same period. 
8 

Many State and local governments opted to issue higher-cost fixedrate bonds because issuing variable rate debt to money market 

funds has become impractical. In both cases, higher costs are being 

shouldered by taxpayers and ratepayers. 

Public finance officers are encouraged by and support initiatives 

like S. 1117 which allow us to better serve our communities and 

provide important public services in a cost-effective way. 

Thank you for the opportunity to speak to you today. I will be 

happy to answer any questions. 

Chairman CRAPO. Thank you, Mr. Daniel. And I will start with 

you today. 

Last week Ron Crane, who is Idaho’s State treasurer, wrote 

about the additional costs and reduced incomes that the SEC’s 

money market and mutual fund rule is imposing on State and local 

governments. He notes that the SEC’s rule has caused more than 

$1 trillion of private sector liquidity to shift away from funds that 

invest in the economic infrastructure of our communities and into 

funds that invest strictly in the U.S. Government debt. 

First of all, could you confirm that? And, second, can you talk 

about how S. 1117 will address those concerns? 

Mr. DANIEL. Mr. Chairman, I can confirm that. State and local 

governments have a fiduciary obligation to taxpayers and ratepayers to preserve the public fisc. Rule 2a-7 hit local governments 

in two costly ways: 

First, by floating the NAV, our statutes and policies restrict investment in these instruments, and we were forced out of the municipal money market and prime funds into very low yielding U.S. 

Government funds. 

Second, by depleting these funds, short-term borrowing costs or 

rates on variable rate demand notes raised dramatically. Municipal 

governments like Albuquerque were forced into higher-cost fixedrate debt in order to satisfy our working capital requirements. This 

solution is simply unsustainable. 

S. 1117 will open back up the opportunity for investment in 

these financing and investment instruments. It will put another 

tool in the toolkit, if you will, for local governments to invest in a 

safe and adequately yielding instrument while providing a low-cost 

financing mechanism for short-term borrowing needs. S. 1117 will 

permit local governments to have the adequate and appropriate 

tools for local governments, both and small communities alike, to 

invest in infrastructure and maintain a healthy and vibrant economy. 

Chairman CRAPO. And do you think that the outcome will increase risk in any aspect of this sector? 

Mr. DANIEL. Mr. Chairman, I do not. The 2010 amendments to 

Rule 2a-7 dramatically increased the requirements for quality, maturity, and the like for municipal money market funds. Since 2010 

there have been no dislocations of the capital markets until the 

SEC announced the 2014 amendments, which went into effect in 

October 2016. At that time over $1 trillion shifted out of primeand tax-exempt funds to the Government funds. This is a market 

dislocation, but more important to us as medium and small local 

governments, it dried up access to short-term capital and caused us 

as investment officers to accept much lower return on our invest-
9 

ments, as much as 30 basis points, which collectively amounts to 

$500 million in investment income we had lost that could be reinvested in our communities for public services. 

Chairman CRAPO. Well, I thank you for that. 

Mr. Keating, in your testimony you discussed trends regarding 

the availability of capital to small businesses. You note that small 

business lending has not recovered from the precrisis levels and 

angel investment has largely stagnated while venture capital has 

increased. S. 2155’s commonsense reforms are intended to address 

some of this decline in small business lending postcrisis. What 

feedback have you received from your members about their access 

to capital and how it is impacting their ability to hire, grow, and 

innovate? 

Mr. KEATING. Well, it depends on, again, the company, the industry, geographic location, and so on. But I think from what we have 

heard and from what you see in some of the polls, certainly small 

businesses are in a better position now than they were, say, you 

know, 4 or 5 years ago. However, there are still difficulties, and we 

certainly hear from members that are having problems in terms of 

getting small business loans, what other avenues can they go, can 

they go online, et cetera, et cetera. 

So I think that, you know, the bill that you are talking about 

that was passed and signed into law makes sense because it deals 

with—when you are talking about community banks, small community banks, roughly half of small business loans come from those 

institutions. So when you look at the costs that a whole host of— 

that these regulations have hit these banks with—and I cite a couple of studies; I can give you more—any movement toward reining 

back excessive regulatory burdens and costs is not only good for 

those small banks, but it is good for the small business community 

in general. 

Chairman CRAPO. Thank you. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

I think it is important to point out that, you know, loans were 

down from 10 years ago, but up from 9 years ago as the economy 

climbed back. So it is not entirely intellectually honest, I do not 

think, to only compare to what the economy looked like 10 years 

ago, because we know we have been fighting back. We also know 

we have had economic growth every quarter, every month, job 

growth every month since the auto rescue in 2010, and even 

though we had fewer jobs created in the private sector in 2017 

than we did in previous Obama years, it is important to note that, 

I think. 

Professor Bullard, your testimony explains the incoherence of the 

capital formation policies that Congress advanced in the past and 

now seems to be considering. I would like to focus on the risks to 

investors. What happens when companies use scaled-back auditing 

procedures? 

Mr. BULLARD. Well, we have a lot literature on that, and it 

shows what you would expect. Companies that do not have the 

same level of auditing procedures have more restatements, but 

they also pay for it in the form of less reliable earnings, predictions, higher cost of private and public debt. There are studies 
10 

that show that they have—that the auditors develop better information than management does internally. They also impose a higher standard for significant deficiencies and a higher standard for 

material misstatements. We know that the rate of intentional 

misstatements is higher for those low audit standards. And I think 

we would all understand intuitively obviously when you have got 

a cop on the watch, you are going to have better compliance going 

in, and you will detect a lot more miscompliance going forward. 

And that is what the data has pretty consistently shown. 

Senator BROWN. So what does that mean? What are the risks of 

broadly advertising speculative early stage companies, as contemplated in the HALOS Act? 

Mr. BULLARD. Well, we know very well not just from the Wall 

Street Journal article that came out the other day that private offerings have always been one of the favorites for brokers looking 

to maximize their compensation and in some cases committing 

fraud with respect to investors. And what we have seen over the 

years is the class of so-called accredited investors has increased exponentially. We have not really seen any catching up, in fact, a restriction, if anything, on the ability of States to enforce restrictions 

on offerings. And the key structure in the Securities Act when it 

was formed back in 1933 was based on the idea of offers being regulated because, as a practical matter, that is really the only way 

to regulate securities offerings before they have already been sold 

and investors have lost their money. 

We have gone so far down the road through the JOBS Act that 

there really is not much left of offering regulation in that 1930s 

sense, and I think that if Congress is going to continue down that 

road, it really needs to think about a different way of looking at 

securities offering regulation. If it is going to be democratized in 

the sense of any issuer, any security, any investor, then, you know, 

what I see is this growing informational disadvantage that retail 

investors have, and that what we need is to have broader 

publicization of offerings to make them available at the retail—— 

Senator BROWN. That informational disadvantage is growing, 

and HALOS and other legislation Congress might be considering 

and rules from the Administration would accelerate that? 

Mr. BULLARD. Yes. It is growing the private market because you 

have Reg A filings and crowdfunding filings that are publicly made 

and filed with the SEC. And then you have contemporaneous Reg 

D offerings where the investors and the crowdfunding and Reg A 

offerings, which are the retail investors, have no access to that information, and particularly do not have access to the terms being 

offered. So while in crowdfunding, for example, the SEC is allowing 

issuers to sell something that is called a ‘‘SAFE,’’ when I think everyone in the rooms knows that crowdfunding securities are anything but safe, at the same time that issuer can offer better terms, 

not SAFEs, to Reg D investors. 

On the public front, you really have a very extreme informational 

disadvantage. We saw this in connection with the Facebook offering 

when significant information came out 9 days before their IPO, and 

broker-dealers reportedly saw their institutional purchase base 

shrink as a result, and a bigger piece of that pie was provided to 

retail investors. And what Congress has done is essentially for-
11 

malize that process by allowing those institutional investors, the 

wealthy investors, to receive information typically for months while 

the SEC peruses a confidential registration statement, and then 

that is put up on the SEC’s site 15 days before the offering, and 

that is the entire amount of time that retail investors have to review it, which is pretty strikingly contrary to the fundamental relationship between information and public offerings in the Securities 

Act. 

Senator BROWN. Mr. Daniel, I want to ask you a question—but 

my time has expired—about money market funds. I will submit it, 

and I hope you will respond to it quickly. 

Thank you. 

Chairman CRAPO. Thank you. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Good morning to the 

panel. Thank you all for taking your time and making the investment to be here this morning. 

In 1996, the American economy peaked with over 8,000 publicly 

traded company. As of today, that number is less than 4,300, about 

a 50 percent drop. In 2016, we saw just 112 public offerings, the 

lowest number since the financial crisis. 

Some have suggested there is no reason to be alarmed for the demise of the IPO. These companies now tap private sources of capital, and all is well that ends well. But that may not be the case 

for those investors who are investing through their 401(k)s. Mr. 

and Mrs. 401(k) are the folks that I am thinking about. 

Think about the lost opportunities for everyday Americans to create wealth if the next Boeing, Walmart, or Allstate do not go public, or go public later in their life cycles than they would have decades ago. The more expensive or burdensome the Government 

makes it for a company to go public, the less we will see folks take 

the risk. That has a negative impact on individual investors, retirees, and those saving for a rainy day. 

Mr. Keating, how has the dramatic drop in companies going public hurt Mr. and Mrs. 401(k)? 

Mr. KEATING. Well, I think you summarized it well in terms of 

not having access to being able to invest in a whole host of companies, especially earlier on in the process. And I think when you 

look at—there are a whole host of things going on in the economy 

that contribute to this, you know, a recession, a poor recovery. We 

have grave concerns about the level of entrepreneurship in this 

country and why it is off. 

Senator SCOTT. Yes. 

Mr. KEATING. So these are all factors in the equation. But I think 

also the regulatory costs, the signals, what it takes to go public 

today is very different from not that long ago, and I think those 

costs are real and significant. You know, again, there are studies 

that will back that up, and I think Economics 101 kind of backs 

it up. 

Senator SCOTT. How will the HALOS Act and other bills we are 

debating today reverse that trend? 

Mr. KEATING. Well, I think when you go down the list, these are 

moves in a positive direction. In terms of—you know, the problems 

with regulation are multiple. You know, these efforts are trying to 
12 

clarify regulations. They are trying to get more resources toward 

innovation and investment rather than unnecessary regulatory 

compliance, trying to streamline the process, for example, in terms 

of IPOs, reduce unnecessary costs, et cetera. So these are the types 

of move, while still obviously protecting investors and consumers 

and so on, that are needed to kind of bring some regulatory balance 

back into the equation. 

Senator SCOTT. Thank you. One last set of questions for you, Mr. 

Keating. In tax reform, it included my signature legislation, the Investing in Opportunity Act, the IIOA, that has created the opportunity zones around the country that so many folks were pretty excited about. 

The good news is that this legislation was championed on both 

sides of the aisle. So often we hear folks in Washington and other 

countries talk about the fact that there is no bipartisanship. I cannot say they are not always wrong. However, the IIOA is truly a 

bipartisan effort where folks on both sides of the aisle see the wisdom of bringing private sector capital back into the distressed communities where more than 50 million Americans live. 

My question to you is: Can you expand on how the capital gains 

tax deferral, which is the real motivating factor for folks to take 

a second look at those opportunity zone areas, how that deferral for 

investments made in opportunity zones will jump-start capital formation where it is needed the most? 

Mr. KEATING. When you talk capital gains tax, you are talking 

my language. And, also, opportunity zones are—you know, I am an 

old disciple of Jack Kemp and Ronald Reagan, OK? 

Senator SCOTT. Yes. 

Mr. KEATING. So I love the idea that the message here is reduce 

these burdens, reduce these costs, and let the private sector flourish. And when you are talking about capital gains, what is a capital gains tax? It is a tax on the return on entrepreneurship and 

investment. The more you tax it, the less of it you get. Economics 

101. So these types of efforts like you are talking about with opportunity zones, other things that we are advocating—we regret that 

the overall tax reform bill did not reduce the capital gains tax rate. 

We are a big advocate of that. So these types of measures I think 

are crucial just to incentivize. I am economist. It is a bad incentive, 

and you want incentives for entrepreneurship and investment to 

flourish in these areas where it has not before. 

Senator SCOTT. I just wish we had more time. Thank you, Mr. 

Chairman. 

Chairman CRAPO. Thank you. 

Senator Heitkamp. 

Senator HEITKAMP. Mr. Keating, just not to belabor the point, 

there are two different perspectives on taxation of capital gains. 

Mr. KEATING. Well, there are many perspectives. 

Senator HEITKAMP. Well, I think it is difficult for someone like 

me to explain to a worker at Bobcat who puts on a shirt every day 

and gets dirty that he pays more than people living on trust funds. 

So I think it is important that we kind of talk about who is that 

person who has made these investments and what is their longterm contribution. I think we all want to give contributions to people who are actually increasing the productivity of this country. 
13 

Unfortunately, in many cases capital gains—the people who are 

wealthy enough to have capital gains are the people who where the 

money makes the money and not the productivity. You know, we 

can get into long economic—— 

Mr. KEATING. I would like to have a chat—— 

Senator HEITKAMP. ——argument—— 

Mr. KEATING. ——sit down in your office and have a good chat. 

Senator HEITKAMP. I do not want to take up my time. I would 

love to have that debate because I think that I do not disagree with 

the conversation you just had with Senator Scott, that there has 

got to be some way to incentivize investment and entrepreneurship. 

Mr. KEATING. To get the productivity you are talking about. 

Senator HEITKAMP. I might argue that one of the reasons why 

you see a decline is the increasing interest rates and burden put 

on young entrepreneurs by the challenges that they have, which includes student debt. 

I want to know in your numbers, when you are looking at investment, which is fascinating because I think it tells a story that is 

not well understood in the American public, do we have a differential—have you broken it out by rural communities or rural counties 

versus urban counties? 

Mr. KEATING. I have not, but others have, and I can get you that 

information. 

Senator HEITKAMP. That would be great. 

Mr. KEATING. The rural, that is where we are suffering in terms 

of entrepreneurship and investment, without a doubt, and certain 

inner-city communities. But those are the areas that are being hit 

hardest that are still kind of, if you will, stuck in the recession. 

Senator HEITKAMP. What I always tell people is—I do something 

that a lot of people here do not do, which is represent rural America, and I know Senator Rounds and I have joined on a lot of this, 

but rural America is—if you want to at rural poverty, if you want 

to look at stagnation in growth, we can talk about why that is happening. But, obviously, investment in rural America was a bit 

motivator for S. 2155. We think that that may bring some investment back, but I think we need to jump-start that investment. And 

so I am interested in your perspectives, and maybe you can come 

in and just talk with me. We will have a debate. 

Mr. KEATING. I would agree with that, and also things like 

broadband in rural communities, these are all vital things that 

we—— 

Senator HEITKAMP. Right. We are going to debate a farm bill 

that has rural economic development. 

I want to turn to money market reforms in S. 1117. Mr. Daniel, 

I was taken by your analysis of what the SEC rules have cost State 

and local entities that live off investment income, and, you know, 

obviously the SEC has disagreed. That has long been the debate 

here. And I am wondering, when the SEC adopted the floating 

NAV rule in 2014, their analysis suggested that the impact on the 

market would be minimal. They just did not see that that would 

have a big impact. And I think you are arguing the market has 

moved since implementation of this rule and left some people behind that they did not think would be left behind, right? 
14 

Mr. DANIEL. Senator Heitkamp, that is correct. At the city of Albuquerque, like many of our medium- and small-size peers, we provide a plethora of services. We provide airport services, refuse, 

transit, cultural services, family and community services, and a 

host of other things, and some of our peers provide even more than 

that. We as finance officers consider ourselves enablers of those 

types of services. 

With capital being limited, it is vital for us to be able to gain as 

much safe investment income and to be able to finance through 

short-term debt offerings at as low a rate as possible to help finance these services. What has happened is that the decreased income from us having to shift into Government funds for investments by 25 basis points or more and the increased cost of us having to move to fixed-rate debt has squeezed our ability to fund 

these types of services. 

Senator HEITKAMP. Are there other factors in this shift when you 

analyze what that—when you look at it, obviously, there is a concern that we have in this Committee or we would not be hearing 

this bill, to analyze this. But have you seen other factors that may 

have driven that shift like tax reform, like—— 

Mr. DANIEL. Senator Heitkamp, from my perspective the cause 

is primarily from the floating NAV rule. The 2010 amendments to 

Rule 2a-7, as stated previously, provided higher quality, lower maturity, and the ability to stabilize money market funds. From 2008 

until 2016, when these amendments went into effect, the industry 

was very stable. The prime funds which we were investing in, we 

consider a very safe vehicle for public funds investment. And so 

with us not having access to those, it has really squeezed our ability to provide public services and infrastructure. 

Senator HEITKAMP. Obviously, we want to be good partners with 

State and local government, want to better understand this issue, 

and so thank you so much for your testimony, thank you all for appearing on these bills. 

And thank you, Mr. Chairman and Ranking Member, for holding 

this hearing. 

Senator BROWN [presiding]. Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. I want to thank 

Senator Rounds and Senator Toomey for letting me jump the line 

here. I have got to go preside. 

Professor Bullard, I listened to your testimony very carefully and 

was very impressed. Let me ask you sort of a 30,000-foot question. 

Do you think most Americans who work in the financial services 

industry cheat their customers? 

Mr. BULLARD. No, I do not think so. 

Senator KENNEDY. But some do? 

Mr. BULLARD. Absolutely. 

Senator KENNEDY. So our job is to try to draft legislation to catch 

the cheaters and prohibit them from cheating while at the same 

time not undermining the work that the honest people do in financial services which is vital to our free enterprise system. Is that 

about it? 

Mr. BULLARD. I agree. 
15 

Senator KENNEDY. OK. Mr. Keating, let me ask you a quick 

question about SBICs and rural investment companies. You know 

what an SBIC is, obviously. 

Mr. KEATING. Yes. 

Senator KENNEDY. It provides capital to small businesses, often 

in suburban and rural areas, regulated by SBA. We also have an 

investment vehicle called ‘‘rural business investment companies,’’ 

do we not? 

Mr. KEATING. Yes. 

Senator KENNEDY. Regulated by USDA. 

Mr. KEATING. I believe so, yes. 

Senator KENNEDY. Dodd–Frank Act regulated both SBICs and 

RBICs. Is that right? 

Mr. KEATING. Yeah. 

Senator KENNEDY. In 2015, Senator Kirk and Senator Manchin, 

with President Obama’s support, passed a law by the name of— 

well, I do not have it here now, but it is—here it is—no, it is not. 

Its purpose was to give some relief to the SBIC advisers, right? 

Mr. KEATING. Yes. 

Senator KENNEDY. But they did not include RBICs. Why was 

that? 

Mr. KEATING. I do not know because it would seem like it would 

be a natural coupling. 

Senator KENNEDY. Well, Senator Jones and I have a bill. It is 

called the ‘‘Rural Business Investment Company Advisers Relief 

Act of 2018’’, and basically it would say that we are going to treat 

advisers to SBICs, which were given some relief by President 

Obama in 2015, the same as the financial advisers to these RBICs 

because both advisers are kind of small-time. What do you think 

about that bill? 

Mr. KEATING. This is one of the bills that we support here. The 

SBE Council has stated its support, and it makes perfect sense in 

terms of providing basic relief from unnecessary costs and burdens 

that these regulations should not apply to these small folks. 

Senator KENNEDY. And I want to thank Senator Jones for all his 

hard work on this bill. If our bill passes, it is not going to do anything to preclude or prohibit the requirement of registration by 

most advisers to private equity funds, is it? 

Mr. KEATING. As far as I know, no. 

Senator KENNEDY. OK. We are just carving a little bitty small 

niche for advisers to these rural investment funds, and we are 

treating them the same way that President Obama and Senator 

Manchin and Senator Kirk and the entire U.S. Congress treated 

the advisers to the SBICs in 2015. Is that right? 

Mr. KEATING. Correct. 

Senator KENNEDY. OK. Have you got any other thoughts about 

this wonderful piece of legislation? 

[Laughter.] 

Mr. KEATING. Well, I would echo that it is a wonderful piece of 

legislation. It goes along with what our emphasis at SBE Council 

is; let us make regulation rational across the board, and let us not 

place excessive undue burdens on small businesses, including rural 

investment advisers. 
16 

Senator KENNEDY. And I agree with you, but it is also about 

equal treatment, is it not? 

Mr. KEATING. Yeah, well, I mean, that is—— 

Senator KENNEDY. If you and I are in similarly situated circumstances, the law ought to treat us the same. 

Mr. KEATING. You are absolutely right, and that is one of those 

unfortunate things when you get into regulation and politics, that 

you and I might sit here and say, well, why was the rural community left out here, and, you know, that is one of those things that 

we economists would go back to public choice theory and say, well, 

who was lobbying and who was doing this and who was doing that, 

unfortunately. So I think equal treatment across the board where 

it makes sense here is perfectly logical. 

Senator KENNEDY. OK. I found the name of the bill. It is called 

the ‘‘SBIC Advisers Relief Act’’. My staff had it right here all the 

time. 

Thank you, Mr. Chairman. 

Senator BROWN. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

As a former mayor, one of my primary concerns on this Committee has been ensuring access to capital for New Jersey’s towns 

and cities, particularly to ensure that there are liquid capital markets to help finance infrastructure and economic development 

projects all across the State. And when communities in New Jersey 

thrive, the Nation thrives. New Jersey and other States in the 

Northeast corridor contribute nearly $4 trillion, or 20 percent of the 

entire Nation’s GDP. Over the last several years, I have heard from 

officials all across New Jersey with concerns about their access to 

capital, funding that they depend on to get the lowest-cost financing for public infrastructure projects, affordable housing properties, 

schools, hospitals. 

Money market funds are important to municipal governments for 

two primary reasons: one, they serve as a major source of investment in municipal debt, helping to finance key projects; and, second, local governments utilize money market funds themselves as 

both an investment and cash management option because of their 

safety and simplicity. 

The SEC’s new rules requiring certain money market funds to 

change the way in which they report their net asset value has led 

to both a decreased demand for municipal debt by certain funds 

and in turn higher borrowing costs, as well as serving to limit the 

utility of a key investment vehicle for State and local governments. 

And in response to the concerns that I have heard from New Jersey’s Association of County Administrators, the mayors, for example, of my State’s two biggest cities, Newark and Jersey City, 

among others, I cosponsored Senator Toomey’s legislation. Our legislation would both preserve money market funds as a source of liquidity and capital to meet the public infrastructure and investment needs of New Jersey’s communities, and it will preserve 

money market funds as an important cash management tool for 

State and local officials. So that is the focus in which I come to this 

particular legislation with. 

So let me ask, Mr. Daniel, can you walk us through how the 

SEC’s new rule has increased municipal borrowing costs and how 
17 

those increased costs affect local government public infrastructure, 

housing, education, health projects, for example? 

Mr. DANIEL. Senator Menendez, I would be happy to. The new 

rule has shifted investment in money market funds to Government 

funds and away from prime- and tax-exempt funds. This decreased 

demand for tax-exempt floating rate debt has forced Governments 

to either increase rates on these debt offerings, which still may not 

attract demand due to the floating NAV, or try to access highercost alternative financing. In either case, cost to taxpayers and 

ratepayers increases because expenditures in infrastructure, housing, education, and health projects may suffer diminishment. 

Senator MENENDEZ. Let me ask you this: Do those increased borrowing costs remain even when controlling for the current interest 

rate environment? 

Mr. DANIEL. Senator Menendez, yes, increases in the Fed funds 

rate and other money market rates necessarily rise concurrently, 

although not in tandem. Nonetheless, capital will still flow from 

floating NAV instruments, causing Government borrowers like ourselves to raise our issuance yields and borrowing costs or seek out 

other higher-cost financing. 

Senator MENENDEZ. For those municipal borrowers who can no 

longer rely on money market funds as a stable source of capital, 

where are they going to fund their projects? 

Mr. DANIEL. Senator Menendez, we will be forced either to issue 

higher fixed-cost bonds, which creates an asset/liability imbalance, 

or access bank capital. The problem with that is that we are often 

crowded out of low-cost bank financing. So it is vital that this floating NAV rule be reversed so that we can invest our funds at higher 

rates and have access to the tax-exempt floating rate debt market. 

Senator MENENDEZ. From a New Jersey perspective, according to 

one estimate, we have lost $2.7 billion in financing from certain 

money market funds. Financing infrastructure projects in New Jersey is a top priority, and this is one of our challenges. 

Do you think that investors who have left the municipal money 

market funds would come back to the funds if those funds were 

able to again report a fixed net asset value? 

Mr. DANIEL. Senator Menendez, absolutely. Over $1.2 trillion 

float out of prime- and tax-exempt funds to Government funds, beginning with the announcement of the 2014 amendments to Rule 

2a-7, even before it went into effect in October 2016. And most of 

that money has not come back. 

As an investment officer for a medium-size public entity, I feel 

absolutely that investment will come back to prime funds because 

we consider them a safe vehicle for investment and tax-exempt 

funds because we would consider ourselves investors in public infrastructure and public services. 

Senator MENENDEZ. All right. Thank you very much. 

Senator BROWN. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman—well, Mr. Ranking 

Member. I am glad we are having this hearing today. This is an 

important opportunity to continue the work this Committee has 

been doing, and I want to specifically encourage support for two 

bills that I have introduced with colleagues here. One is the 

HALOS Act, which is S. 588, and the other is the Consumer Finan-
18 

cial Choice and Capital Markets Protection Act, which we have 

been discussing. 

Very briefly, on the HALOS Act, I would just stress this is a bipartisan bill. Senators Murphy, Thune, Schatz, and Heitkamp as 

well as myself are cosponsor of this bill. It is a narrow fix related 

to the demo days and their treatment under the JOBS Act. Demo 

days, as I think we all understand, these are events that are sponsored often by universities or economic development officials, often 

to which angel investors are invited. Entrepreneurs make a broad 

pitch about an idea or a company, and these demo days existed for 

decades prior to the passage of the JOBS Act, and they were never 

considered general solicitations. It was only after the JOBS Act 

that the SEC decided to treat demo days as general solicitations. 

So this is a very narrowly tailored bill. It makes it clear that demo 

days should not be considered general solicitations. It would not 

allow nonaccredited investors to invest in nonpublic offerings, but 

what I think it would do is help entrepreneurs access capital and 

help promising businesses to grow. 

I want to spend most of my time on the Consumer Financial 

Choice and Capital Markets Protection Act. This is another bipartisan bill. As Senator Menendez pointed out, he and I have introduced this legislation together with Senators Peters and Rounds, 

and as we have discussed, it deals with the regulatory treatment 

of money market funds. 

We have heard once again what I think we all know to be true: 

Money market funds have been a critical source of short-term financing for businesses, for States, for municipalities. It is attractive to issuers. But it is also attractive as a place to manage surplus cash for municipalities and others. 

You know, the 2008 financial crisis obviously put enormous 

stress on our financial system. Hundreds of banks failed. Money 

market funds experienced some stress, yet only one broke the buck, 

and even then investors received 99 cents on every dollar. And despite that, in 2010 the SEC implemented major new regulations 

meant to enhance the safety and security of money market funds. 

There were stringent liquidity requirements, shorter maturity requirements, and then 2014 came along, and with no evidence that 

the 2010 reforms were somehow inadequate—there had been no 

problems in the interim—nevertheless, there was yet another wave 

of new regulations imposed on these instruments that had exhibited no problems whatsoever—more stress testing, diversification 

requirements, additional disclosures, and most problematic, as we 

have discussed, one category of money market funds, the institutional prime- and tax-exempt funds, were required for the first 

time to have what we call a ‘‘floating net asset value’’ to abandon 

the practice of over 40 years and that all other money market 

funds continue, which is to have a stable net asset value. 

As we have discussed, exactly as some of us predicted, well over 

$1 trillion promptly left the prime- and tax-exempt money market 

funds. The funds largely shifted to Government and agency funds. 

And the result of that, as Mr. Daniel has very persuasively argued, 

is higher cost of funds for municipalities and corporate borrowers, 

lower return on surplus cash that municipalities invest, and no 
19 

persuasive evidence at all that anything has been accomplished by 

way of safety and soundness. 

So what our bill does is it simply allows all money market funds 

to elect to operate with a stable net asset value, as most can today. 

It would not be required, but that option would be available. And 

it waives the mandatory liquidity fee. This is essentially a withholding on withdrawn money that went into effect in 2014. All the 

other myriad and very extensive regulations imposed in 2010 and 

in 2014 would remain in place. They would still be very, very heavily regulated, but there would be this important change that would 

allow these funds to go back to the way things had been for 40 

years. 

Mr. Daniel, here is my question for you. We have discussed various aspects of this. Could you just explain to us why having a stable net asset value is so important and why that is so much preferred by investors such as yourself and your colleagues over the 

floating net asset value? 

Mr. DANIEL. Senator Toomey, our statutes and investment policies as public investment officers prohibit us from investing in 

floating NAV vehicles. They also prohibit us from investing in a vehicle that would have a liquidity fee associated with it. Therefore, 

we are being forced into these Government funds as investments. 

Would you repeat the last part of your question, please? 

Senator TOOMEY. That was the main gist of it. I wanted to understand why you find a stable NAV more appealing, and I think 

your answer is you just do not have any choice in the matter, 

right? You are restricted and required to invest in something that 

does not have a liquidity fee and something that has a stable net 

asset value. 

Mr. DANIEL. Senator Toomey, that is correct. And, of course, we 

are more inclined to invest in prime funds rather than Government 

funds because of the higher yield, and we consider those prime 

funds to be very safe vehicles for investment. 

Senator TOOMEY. Thanks very much. I see my time has expired, 

Mr. Chairman. I would just remind my colleagues we have seen 

what has happened as a result of this misguided policy. Over $1 

trillion have left the nongovernment money funds. Borrowing costs 

are higher. Returns on surplus cash are lower. The time has come 

to pass this legislation. 

Thanks, Mr. Chairman. 

Chairman CRAPO [presiding]. Thank you. 

Senator Jones. 

Senator JONES. Thank you, Mr. Chairman, and thank you to the 

witnesses for your attendance here today. 

I want to kind of go back to a bill that Senator Kennedy talked 

about. Briefly, it is one that Senator Cotton and I have introduced 

concerning the small business—you know, it is the Small Business 

Audit Correction Act, and I think it is pretty clear that everyone 

on both sides of the aisle in Congress always take investor protection very seriously, and we should never take it lightly. But I also 

recognize that sometimes rules can kind of spread and have meanings that catch up small businesses when they were not intended. 

I think our bill is a perfect example of trying to give some relief 

to small businesses, small firms which are privately held, noncusto-
20 

dial broker-dealers who do not handle client funds, and that are in 

good standing, and going to exempt those firms from the rigorous 

PCOAB audits. 

So, first, I would like to ask you, Mr. Keating, it sometimes can 

seem like a small issue, but can you just give us a sense of what 

regulatory costs like that can mean for a small firm, especially, you 

know, a noncustodial type business? 

Mr. KEATING. Well, I think in general, you are right, it can seem 

small, but when you look at this type of requirement and you look 

at other regulations, this is one of the things that we have to fight 

on a constant basis, because it is not just the additional costs of 

this regulation, but it is on top of everything else along the way. 

So when you look at small firms, again, they do not have, you 

know, the legal department down the hall to handle these types of 

things. You are right, they often serve as a surprise because that 

legal department is not down the hall. So there are a whole host 

of things here. It is uncertainty, it is costs, and ultimately it is 

what would you be doing with those resources otherwise. 

Senator JONES. Right, and it is important to note, again, that 

these are noncustodial. They do not handle client money, so they 

are not auditing any kind of money coming through like that. 

Mr. KEATING. What is nice about all these bills that we are talking about that we support today is they are commonsense 

carveouts. That is why I think they are bipartisan, which is, again, 

a wonderful thing. Somebody mentioned before we do not see too 

much bipartisanship, but they are commonsense carveouts that 

small businesses certainly would—— 

Senator JONES. All right. Mr. Bullard, I would like to follow that 

up with you, though, and especially in light of earlier comments to 

Ranking Member Brown about the need for audits, and sometimes 

the problems that we see when we exempt and carve out industries 

and companies from having those. I recognize that. As a lawyer, I 

have seen that all too many times. 

I also know that the Accounting Institute, American Institute of 

CPAs, has kind of consistently said that this might not be needed 

for these firms, but I would like to get your thoughts on this particular bill if you are familiar with it and what you think about it. 

Mr. BULLARD. This is the exemption for broker without custody? 

Senator JONES. Yes. 

Mr. BULLARD. I think that there may be other reasons—there are 

a lot of reasons why an entity might be subject to public accountant 

oversight. But if they do not have custody, that resolves the securities law issue. And I agree that unless there is some other public 

policy concern, there is no reason to require that they have a public 

accountant. 

Senator JONES. All right. Great. Well, thank you for that, and I 

appreciate Senator Cotton’s work with me on that. And so let us 

go back to the one that Senator Kennedy talked about a little bit, 

Mr. Keating, you know, the bill on the RBIC Advisers Relief Act. 

Can you just kind of comment a little bit more broadly on the policy challenges for rural businesses looking for their capital to grow? 

Mr. KEATING. Well, I cannot—yes and no. I mean, in terms of 

rural businesses in general, when you are talking about access to 

capital, which is what this is ultimately for, there are just far fewer 
21 

options. When you look at—you know, we talked about banks briefly—the dropoff, dramatic, in the number of community banks, that 

has hit rural America very, very hard. And it is not just the dropoff 

in the number of existing banks, but there are very few banks coming in; new banks are not being developed. 

So all of these things come into play, and I think the rural community is just limited in terms of the realities of rural America, so 

why would we want to, you know, treat this particular issue differently in the rural community and leave those additional costs 

and burdens when we have dealt with it on other fronts? 

Senator JONES. Right. That is great. Well, thank you both for 

those answers. And, Mr. Chairman, I appreciate everyone being 

here. Thank you. 

Chairman CRAPO. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. First of all, let me 

say thank you to you for holding this meeting today. I think it is 

very important as we have a number of different ideas being discussed, that we have a public discussion like this and really vet it. 

I think there is an agreement among at least two of you, Mr. 

Keating and Mr. Daniel, as to the acceptability of the Consumer Financial Choice and Capital Markets Protection Act that Senator 

Toomey is sponsoring and I am a cosponsor of. 

Mr. Bullard, in reading your testimony, you identified first that 

when the original changes to this which was made back in—right 

after the recession, you had indicated that you thought that it was 

a mistake to have made the changes and the further regulations 

which restricted or made it more difficult for municipals to actually 

be able to access the money markets. But then you went through 

an analysis of the concerns that you had right now, and I think in 

all fairness, we have not really heard about those. I think this is 

a move in the right direction. 

But you had some suggestions out there about concerns that you 

felt were appropriate to lay out. Can you talk a little bit about 

these limitations or restrictions that you fear the bank regulators 

would put on that we should be aware of or that might very well 

be areas that should be addressed as well in other legislation? 

Then I am going to ask our other two members here their thoughts 

about other items that should also be addressed besides the bills 

that are here in front of us today, other ideas that you have that 

you are wondering either why we have not done it or that we 

should modify within the existing bills. Mr. Bullard, would you like 

to just talk about that for a minute. 

Mr. BULLARD. Sure. That is correct that I testified against the 

SEC rules primarily because money market funds had demonstrated an astonishing level of safety, especially having had two 

break a dollar, one not even a retail fund, over about 40 years, at 

the same time thousands of banks failed. But I think one of the 

concerns Vanguard and BlackRock have and one reason they are 

probably opposing this is, of course, that these rules were adopted 

in response to the Dodd–Frank Act, which gave banking regulators, 

in my view, far too much authority over what I would call riskbased markets. Banking regulation and banks are designed with 

the socialization of risk in mind, and when you put them in charge 

and the SEC realizes that FSOC is controlled by banking regu-
22 

lators, they will bend to banking regulators’ will. So I cannot even 

fully blame them for what happened. But it was, I think, inevitable 

that there would be massive dislocation and expense. That has already occurred. Since then I think that there have been mitigating 

effects on the municipal business, but I think that is probably a 

close call. But I am concerned about that BlackRock–Vanguard concern, which is if you reintroduce floating rate NAV funds, frankly 

Federated will roll out a lot of funds. That will be a competitive 

disadvantage for the large money market fund managers. They will 

have to go back into the business, and then the next time a money 

market fund breaks, the banking regulators will have a lot less 

power to save the industry and, frankly, I would expect Congress 

to go back and end up maybe taking the same steps that dislocates 

the industry again. 

I think the interesting point of view is we have been through this 

once. We do not want to go through it again. Just leave us alone. 

But, you know, the free market guy in me says there is more 

capital that is out there looking for purchasers in a demonstrated, 

successful way to create essentially a cash vehicle for retail investors, and that should be an available option. 

Another concern is really a specific SEC concern. One reason the 

Reserve Fund failed is the SEC was not monitoring the funds that 

had the greatest risk of failing. It also had this no-action process 

whereby a fund that was about to break a dollar, which had happened hundreds of times previously, was to call up an office in the 

SEC, and a guy picks up the phone and says, ‘‘OK, you are fine,’’ 

and because that process was fumbled by the staff, in my opinion, 

and because it was such an ad hoc system in the first place, that 

contributed to the Reserve Fund failure. It was a primary element 

of their defense when the founders were sued, and I think that has 

to be corrected. 

And then, finally, I think that it is a mistake—as much as you 

can tell, I am probably not the biggest friend of banking regulators—to overly hamstring their Depression era authority to emergency situations, use their lending authority for nonbanks. I think 

that this bill would further hamstring them, and I think that is a 

mistake. 

Senator ROUNDS. Thank you. And I am out of time, Mr. Chairman. I would just ask for the record if I could ask each of our other 

two gentlemen to respond. You have heard the discussion here on 

the part of Mr. Bullard, but I most certainly think it would be fair 

to ask you to respond to that and to point out your differing points 

of view to the argument that he has made. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. And as I will explain to the witnesses at the end of the hearing, there will be follow-on questions, 

and we ask you to respond to those, and you are welcome at that 

time to respond to this one and others. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. And thank you for 

holding this hearing. 

I want to talk a little bit about the HALOS Act that I know that 

a number of my colleagues have cosponsored. I am taken by some 

of Mr. Bullard’s comments. As a former venture capitalist, I have 
23 

thought of a lot of events that right now that have been prohibited 

that I did not feel at all fell into kind of the normal solicitation category. I even think about the fact that I think the effect of some 

of the regulations now—sitting on the Intelligence Committee, I 

look at the enormous threats we face in the cyberdomain and we 

are technically even holding hack-a-thons now where we try to explore different, better techniques on providing cybersolutions that 

could fall astray. 

And so what I am wondering—and this is directed to you, Mr. 

Bullard, and you, Mr. Keating, if you would like—is that there 

have been a couple of amendments added in the House, because I 

am not looking at something here to try to give an unfair advantage to one set of investors over retail investors. But there were 

two amendments added, one that would have required that 

attendees of demo days receive an SEC-prescribed risk disclosure 

that clarified that simply attending a demo day would not put 

them into that—would not mean that they passed the preexisting 

relationship test, that would still stand in terms of their ability to 

look at any of the companies or ideas that were put up; the other 

would have prohibited those who sponsor these so-called demo days 

from compensating companies and investors that were participating and making sure that none of the companies that were participating—making sure that all the companies that were participating were operating companies, that none of them were bankruptcy. Knowing your reluctance in this area, did that move it in 

the right direction? Are there other things that could be done? And 

I would like to hear from you as well on this, Mr. Keating. 

Mr. BULLARD. As I noted earlier, if we are going to move in that 

direction—and I think the JOBS Act already put us well down that 

path; the HALOS Act frankly simply extends that further—then we 

need to rethink what is the substitute for that central regulation 

of offerings that was really the basis of the Securities Act. And the 

obvious substitute would be something like you describe, which is 

if you are going to go out publicly and talk about raising capital, 

you need to make basic information available. And the first step 

would be what you describe, which is: Is this really an operating 

company? Does it have some kind of financial statement? And to 

make that, speaking partly as a researcher, publicly available in 

what I would hope would be a very efficient, cheap filing system 

so that we could get that data, and I—— 

Senator WARNER. So it is not giving the attendee some advantage over other potential investors. 

Mr. BULLARD. That is also part of the reason. The big informational disadvantage is, I think, more in the public market where 

you have got months-long road shows going on with institutional 

investors and mutual funds, and then 2 weeks before an offering, 

the retail investors get their first look at an IPO registration statement, and the SEC continues to let them make material amendments. I think they would let them do it up to the day before the 

offering. And we saw what happened with the Facebook fiasco, and 

I think that, you know, we need to think about how we are going 

to resolve that issue. But, again, that is assuming that we have 

moved to a different model, which I think we have done, but we 

continued to impose an irrational way of describing the model, 
24 

which is clarifying general solicitation as opposed to recognizing 

that general solicitation is what we have allowed, and to think 

about what the substitute would be. 

Senator WARNER. Mr. Keating. 

Mr. KEATING. I would have to take a closer look at those amendments, but in general, I would not have a problem with them. 

What we are talking about here is going to angel investors. I mean, 

that is in the title of the legislation. So I think when we are talking 

about understanding who we are going to and what the purpose of 

these demos are, I think it makes—-I think the legislation makes 

perfect sense. 

Senator WARNER. And as somebody who has been very active in 

trying to set up angel investor networks, particularly in rural and 

more disadvantaged communities, I think there is an enormous 

value there. I do think we need to consider some of Mr. Bullard’s 

concerns. I would point you to both of those amendments in the 

House that were included, and I would also make the point that 

I think no one would want to restrict, for example, the ability to 

have hack-a-thons that are advancing that may have as a secondary value some opportunity into investment. 

I have got 20 seconds left, and I just want to make this on a 

pitch basis. You know, Senator Heitkamp raised about capital 

gains. I would argue that some of the greatest abuses in our Tax 

Code are people converting ordinary income into capital gains on 

a short-term basis and that one of the greatest challenges that 

modern American capitalism faces right now is this enormous focus 

on short-term over long-term value creation. And I would hope, Mr. 

Chairman, we could come back at some point and hold a hearing 

that would examine a differential capital gains rate for longer-term 

holds that would look at different countries, their long-term stock 

exchanges, even look at additional voting power based upon holding 

shares, different reporting standards. I think this quest for shortterm quarterly based profits will ultimately destroy the kind of 

great American business paradigm that was created post– World 

War II. As a matter of fact, I would argue that we would not be 

able to create the same kind of economic growth engine in today’s 

market, and the examples of tech companies that still are able to 

do that are because there is a different class of stock for the founders that allow them not to have the pressures put on that are put 

on other corporate enterprises. 

Thank you for letting me go a little extra. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Warner. And I am aware 

of your work on the short-termism issues. I think it is a critical 

issue that we do need to pay more attention to. 

Senator Cotton. 

Senator COTTON. Thank you, Mr. Chairman. Thank you, gentlemen, for your appearance today. 

I would like to say a few words about the topic Senator Jones addressed, the bill that we have introduced, the Small Business Audit 

Correction Act. The bill would correct one of the unintended consequences of Dodd–Frank, specifically the massive increase in audit 

costs for small noncustodial broker-dealers. This is a big problem. 
25 

In hindsight, I think it is clear that Congress overshot the mark 

trying to prevent another Bernie Madoff-style scandal when it extended the Public Company Accounting Oversight Board audit requirements to these small noncustodial broker-dealers. As a result, 

public company audit rules for gigantic firms now apply to firms 

that do not hold customer assets and could not even pull off a 

Madoff scam if they wanted to in the first place. 

Now, this requirement might seem harmless or obscure, but, in 

fact, it has increased costs for small broker-dealers a lot. One Arkansas broker told me that his audit costs have gone from $6,000 

to $30,000, and he has only five employees, and his offices are 

much smaller than the room in which we now sit. 

That is not an isolated incident to Arkansas either. I would venture that every Member of the Banking Committee has constituents just like mine. And when you think about it, this is a classic 

square peg into a round hole problem. As one Board-registered 

audit firm wrote in a letter, ‘‘The Board audit requirement makes 

sense for public companies like Apple and broker-dealers that carry 

customer funds or securities like Morgan Stanley because the investing public and markets are potentially at much greater risk 

from these companies. Conversely, the Board requirements make 

no sense for privately held, small noncustodial firms that do not 

carry customer funds or securities, companies like mine. Currently 

a three-person small business is held to the same standards are 

Merrill Lynch. This is not right, fair, or reasonable.’’ 

As he wrote, ‘‘In other words, it is the big guys, the custodial 

firms that should be receiving the Public Company Accounting 

Board audit, not these little guys.’’ 

Both the SEC and the Board have said that they have no data 

to suggest that this requirement has created a healthier or safer 

investment environment. In fact, even Board-registered audit firms 

whom you would think would be in favor of this requirement are 

speaking out against it. But it should not be a surprise they are 

losing business as small brokers die out. 

That is why my legislation with Senator Jones would make a 

simple change. It would exempt the small privately held, noncustodial firms in good standing from this Board requirement and allow 

them to file their financial statements according to GAAS standards they used just a few years ago. 

It is true regulators like the SEC and FINRA could relieve some 

of this compliance burden themselves, but they could also reverse 

that decision later on. I think our small broker-dealers deserve the 

regulatory certainty that will only come from a change in the law. 

I think this is simply common sense, and I know it has widespread support. We have heard from many organizations who have 

sent letters of support, and as far as I know, there are no organized 

groups opposed. 

So, to sum up, I believe these unnecessary regulations are crushing our small broker-dealers and holding back economic growth, 

particularly in States like Arkansas. If we pass our bill, we can 

help lighten the load a little bit and allow more Americans to invest their money with small local broker-dealers if that is their 

choice. 
26 

I address the question first to you, Mr. Keating. Do you feel that 

these small noncustodial firms, perhaps more importantly their 

customers, would benefit from returning to this kind of rightsized 

audit standard? 

Mr. KEATING. Yeah, I would agree with you 100 percent. I think 

you laid it out very well, and I think this legislation makes sense, 

and I think any kind of scaling to fit the size of the business has 

to be thought about when we are moving ahead with legislation 

and when folks like the SEC are moving ahead with what they 

are—you know, in terms of the regulatory burdens they put on 

things. And that speaks of just a larger regulatory issue of can 

we—you know, we need some institutional reforms in addition to 

fixes like this so we do not have to come back and keep doing this, 

you know, cost–benefit analysis. There is a bill in the House, 78, 

where the SEC would be required to do cost–benefit analysis and 

look at the impact on small businesses and market liquidity and 

so on. 

So I think this makes perfect sense, and I think we need tot 

make the next step and say how do we stop the overshooting that 

you talk about. 

Senator COTTON. And, Professor Bullard, do you share that opinion? 

Mr. BULLARD. I share the opinion on the bill, yes. 

Senator COTTON. Thank you. My time has nearly expired. I do 

hope this Committee can mark up our legislation and then move 

it to the floor for a vote, as well as some of the other meritorious 

bills we have passed. As our witnesses have made clear today, too, 

I think this is another good example of working together in a bipartisan fashion. I know we do not have unanimous support for this 

legislation, but that is pretty rare around here. But we do have 

healthy support from both Democrats and Republicans, and I want 

to thank the Chairman and the Ranking Member for trying to 

move ahead with additional and important legislation in this Congress. 

Chairman CRAPO. Thank you. 

Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. Thank you for having this bipartisan hearing. I want to thank you for the way you 

conduct all of your hearings. You are a model for the regular order, 

and we really appreciate it. I will just add gently that we look forward to our hearing on credit bureaus and credit reporting agencies. Senator Kennedy and a number of Senators on both sides of 

this dais are anxious to dig into this issue, so we have several more 

months of legislative work to do, including during August. That 

would be an appropriate time to consider those issues. 

Mr. Keating, you know that startups have created around 20 percent of total job creation every year, and these demo days are really 

a critical aspect of it. There is some confusion in terms of how to 

maintain compliance, especially as you get further and further 

from centers where venture capital exists. 

Can you talk about the role of demo days for startups in terms 

of surviving their earliest moments? 

Mr. KEATING. Well, yes, in the sense that specifically I can talk 

about the importance of angel investment. You know, when you 
27 

look at the stages of a startup, you are going to your own savings 

first. Then you go to family and friends, and the natural next step 

are angel investors. Who are angel investors? Well, there are networks of them, of course, that have developed especially recently, 

which are wonderful, but they are usually, you know, professional 

people that are looking for investment opportunities. Perhaps they 

have started up their own businesses and are looking to help others as an investor–mentor scenario. This is not unusual in the 

angel community. And when you look at the numbers, they are a 

vital source, you know, because there are a whole host of companies that cannot go to banks. I taught MBA students entrepreneurship and innovation for 10 years, and you can talk about what you 

take to the bank. But you know what? More often than not, you 

have to be a little more established to get that bank loan. So angel 

investors are critical there, and any kind of ability to reach out and 

simply communicate to them—and, again, with all the safeguards 

in place, and I think Senator Toomey laid it out pretty well, that, 

you know, it is not like we are reinventing something new here 

with this legislation; we are going back to the way it was before— 

makes perfect sense. 

Senator SCHATZ. Can you just talk about the—it seems to me 

that part of the problem is this operational difficulty. If you are 

trying to set up a demo day or if you are trying to participate in 

a demo day, the SEC says that they will evaluate each one on a 

case-by-case basis, and that is difficult if you are a three-person 

startup because you have got to lawyer up and interact with the 

Securities and Exchange Commission when you are still sort of 

scaling your tech, figuring out your pitch, and all the rest of it. 

So can you talk about the importance of going away from a caseby-case analysis and to a sort of statutory framework that allows 

everybody to comply and to have confidence in the system, but not 

to disadvantage especially rural or sort of nontech hubs? 

Mr. KEATING. Well, maybe the others can put some meat on the 

bone, but you put it well in terms of when you are developing your 

business, the idea that you are going to go to a regulatory agency 

and it is going to be a case-by-case basis, you know, really? So the 

idea that you have a statutory set way of doing this obviously is 

preferable. 

Senator SCHATZ. Professor Bullard. 

Mr. BULLARD. I would like to correct one thing. This is not a traditional practice by any means whatsoever. You are not permitted, 

except under the already approved general solicitation private offering rule, to go do these offers of securities, to do a pitch, giving 

terms and price and number. And you are not allowed to publicly 

advertise it. I mean, let us be honest. That is a huge change in the 

law. But the JOBS Act went a long way down that road. 

Also, I hear references to HALOS, but there is nothing in the bill 

that prevents anyone from attending, and based on my experience 

at the University of Mississippi, they are attended by anyone who 

wants to. So there is no restriction to HALOS. This is not the 

HALOS Act. This is being able to have, you know, public demonstrations regarding both the operations of the business and its 

securities offerings. 
28 

Senator SCHATZ. Well, I will offer a thought, and then I will end 

with Mr. Daniel’s comments. You know, it is not just the ability to 

track investment, but if you are—say the island of Maui, right, the 

majority of the population in the State of Hawaii is in Honolulu, 

but Maui has a thriving tech community. But part of the reason 

that they would want to do something like a demo day is not just 

to officially solicit investment, but also to find partnerships, to find 

new business opportunities that sort of are outside of the Securities 

and Exchange Commission purview, and also just to communicate 

to the broader public that there are some pretty exciting things 

happening on Maui. So part of it is just give a permission structure 

to economic development organizations, universities, you know, 

dual-use companies to kind of get into this without thinking to 

themselves, ‘‘I am going to get sideways with the SEC before I even 

have a going concern.’’ 

Mr. Daniel. 

Mr. DANIEL. Senator Schatz, one of our critical missions at the 

city of Albuquerque is providing economic development for our community and our State without having to have taxpayers and ratepayers shoulder that additional economic development. That is why 

it is so key that we reverse the 2014 Rule 2a-7 reforms and return 

to a stable net asset value investment opportunity for prime- and 

tax-exempt money market funds. 

Senator SCHATZ. Thank you. 

Chairman CRAPO. Thank you. 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chairman. Thank you for holding this hearing. And I think if you listen to the comments of colleagues on both sides of the aisle, you have done a good job of putting together for consideration measures that generally have support from both Republicans and Democrats. 

I became a partner at Pricewaterhouse in 1996, and in 1996 we 

saw explosive growth because of Y2K. The world was going to end. 

You needed to prepare your systems and processes to deal with 

Y2K. 

And then came Enron and Sarbanes–Oxley, and I saw explosive 

growth again. Because of the additional audit requirements, the 

Big Four firms that I was with at the time, all the other 

accountancies, just exploded. On the one hand, that sounds good if 

you are a partner. But on the other hand, you know that is an expense of using other service areas within Pricewaterhouse who 

really want to invest in projects to grow improved productivity. So 

you are moving—if you are in the health care or sciences field, you 

go from science to compliance, moving money away from building 

the future value of your company, and to just making sure you do 

not get penalties. 

The banking reform act that the Chair did such a great job of 

getting through this Committee and getting to the President’s desk 

I think provided much-needed relief for the lower base of what I 

call the ‘‘banking ecosystem,’’ the community banks, the smaller regional banks. 

I think what we are trying to talk about today are what I would 

consider to be modest proposals to take regulatory burdens off of 

some of the newer companies, the smaller entities. That is why I 
29 

have sponsored the Encouraging Public Offerings Act and the Fostering Innovation Act that are being discussed today, having discussed today. And, Mr. Chair, without objection I would like to submit letters of support on the Fostering Innovation Act from organizations representing virtually everybody on this Committee. 

Chairman CRAPO. Without objection. 

Senator TILLIS. And we have bipartisan support for the bill. 

This is, I think, a fairly straightforward bill which provides a 

very narrowly tailored exemption for SOX 404(b) for emerging 

growth companies that are now in their 6- to 10-year phase. 

Mr. Keating, I do not know if you have had an opportunity to 

take a look at the bill, but do you have any concerns or comments 

you would like to make with respect to that bill? 

Mr. KEATING. Just simply that I think there is a certain—you 

know, when you are talking about the limited aspect of this, it does 

not surprise—limited aspect but limited market that we are talking 

about here, it makes perfect sense. So I think the exemption makes 

sense. I think, again, you are talking about—what did you use, 

compliance rather than science? I am going to steal that if that is 

OK. I am sure it has been around. 

Senator TILLIS. I stole it from my staff. 

Mr. KEATING. But the idea that, you know, we want these resources for innovation and growth. We do not want them for unnecessary—— 

Senator TILLIS. Well, you see it in the biotech industry, and it 

is one that is growing nationwide. In North Carolina, we clearly 

have a critical mass there. It does not make sense to me. And I 

think that the way we have drafted the bill that it is tailored in 

a way that we are just simply removing a regulatory burden, but 

we have clear insights in what is going on with the companies, and 

hopefully we are going to get support from that. I do appreciate 

Members on both sides of the aisle. 

On the Encouraging Public Offerings, that is actually two pieces. 

One is just codifying some of the administrative changes the SEC 

made last year, and then providing some other options for trying 

to—now I am going to the ecosystem. We do not have a very 

healthy flow of public offerings in the United States, and it is really counter to what we are seeing in most other, what we would consider to peer or near-peer economies. 

Do you believe that there is something beyond just the regulatory 

hurdles that are doing that? Or are their economic underpinnings 

that would make some countries doing relatively better with IPOs 

than what we are seeing in the United States? Mr. Daniel. 

Mr. DANIEL. Senator Tillis, I am not prepared to comment on 

that particular issue, but on behalf of GFOA, we will certainly get 

back to you with our response. 

Senator TILLIS. That is OK. I just want to give everybody a 

chance to talk at least once. 

[Laughter.] 

Senator TILLIS. Mr. Bullard. 

Mr. BULLARD. I guess I would take a different view that I articulated earlier, which is not only has there been steady and enormous growth in the amount of capital in our public markets, the 

proceeds raised in IPOs have zigzagged essentially the same way 
30 

since the mid-1990s, before which gross proceeds were very low. 

And I also note that if you look at the growth of capital among 

U.S.-listed companies, we have grown substantially more and been 

far more resilient since the crisis than the best comparison, which 

would be European markets. 

Senator TILLIS. So you think that it is structurally—the current 

state is structurally sound? 

Mr. BULLARD. I do. I think we have vibrant markets that are still 

the envy of the world. 

Senator TILLIS. I wonder why—or how does that square—and 

this is my final comment, but it may be Congress needs to be better educated. But if I am not mistaken, this bill got passed out of 

the House 60–0 in Committee and 419–0 in the House. So maybe 

we need to dig into that and understand why that looks like there 

is fairly broad—nothing gets passed out with a 0 on the other end 

of the vote. So it would be very interesting to maybe dig down on 

that, and we could possibly submit some questions for the record 

to get your insights on that. 

Thank you, Mr. Chair. 

Chairman CRAPO. Thank you, Senator Tillis. 

That concludes the questioning here today, and the hearing will 

come to a conclusion. I want to again thank our witnesses for 

bringing us your expertise and being willing to share it with us. 

As the discussion here showed today, there is a lot of intense interest in these issues. 

For Senators who wish to submit questions for the record, those 

questions are due on Tuesday, July 3, and I encourage the witnesses, if you receive questions, to please respond as promptly as 

you can. 

Again, I thank you all very much for being here. This hearing is 

adjourned. 

[Whereupon, at 11:34 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
31 

PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO 

Today’s hearing will focus on several legislative proposals that will encourage capital formation and reduce burdens for smaller businesses and communities. 

My goal is to work with Ranking Member Brown and other Senators on this Committee to identify and move legislative proposals that achieve these aims. 

Many of the bills we will discuss in today’s hearing have been considered in the 

House of Representatives earlier this Congress. 

Of those that the House has considered to date, all have passed the House Financial Services Committee with bipartisan support and some have passed the full 

House, including one with a vote of 419 to 0. 

Many of my colleagues on this Committee are also interested in these issues and 

have introduced Senate companions to many of these bills as well as taking the lead 

in introducing bipartisan bills in the Senate. 

Senators Schatz, Toomey, Heitkamp, and Tillis, among others, have cosponsored 

a bill that would make it easier for start-up companies to tap the expertise and capital of angel investor groups. 

Senators Toomey, Rounds, and Menendez, among others, introduced a bill that 

would provide more financing options for State and local governments seeking to 

raise money. 

Senator Tillis has introduced a bipartisan bill that exempts emerging growth companies from certain auditor attestation requirements. 

Senators Van Hollen and Tillis have cosponsored a bill that would encourage more 

public offerings by allowing all companies to ‘‘test the waters’’ prior to fling an IPO. 

A bill introduced by Senators Kennedy and Jones would make it easier for investment advisers to focus on rural business investment companies. 

Finally, Senators Cotton and Jones recently introduced a bill that will cut audit 

costs for noncustodial brokers. 

These bills will improve companies’ access to our capital markets and their ability 

to invest in the United States, in turn growing and creating jobs. 

I look forward to hearing from our witnesses on these legislative proposals. 

PREPARED STATEMENT OF RAYMOND J. KEATING 

CHIEF ECONOMIST, SMALL BUSINESS AND ENTREPRENEURSHIP COUNCIL

JUNE 26, 2018 

Chairman Crapo and Members of the Committee, thank you for hosting this important hearing today on the issue of access to capital. The Small Business and Entrepreneurship Council (SBE Council) is pleased to submit this testimony. 

My name is Raymond Keating and I serve as chief economist for the Small Business and Entrepreneurship Council (SBE Council), a nonprofit, nonpartisan advocacy, research, and education organization dedicated to protecting small business 

and promoting entrepreneurship. For nearly 25 years, SBE Council has worked on 

a range of private sector and public policy initiatives to strengthen the ecosystem 

for healthy startup activity and small business growth. 

Small Business and Access to Financial Capital 

Throughout SBE Council’s history, access to capital has been a core issue. Of 

course, financial capital—whether equity or debt—stands out as a foundational matter for entrepreneurs who are starting up, operating or expanding businesses. However, for many entrepreneurs, gaining access to capital has long been a challenge. 

During the financial crisis, the Great Recession and an underperforming recovery, 

capital became increasingly hard to access from institutional banks and various capital market players. And while matters have improved in recent years, many entrepreneurs continue to struggle with accessing the capital they need to compete and 

grow. 

Small Business Loans. Consider the trends in bank small business loans (less 

than $1 million) over the past decade or so, as displayed in Charts 1 and 2. 

Chart 1 shows that the value of small business loans outstanding hit a high of 

$711.5 billion in 2008, and subsequently fell for 5 straight years. Growth resumed 

in 2014, and has continued since. But recovery to the 2008 high is yet to occur, 

never mind factoring in any additional growth. In fact, the 2017 level of $623.1 billion came in at less than the 2006 level. So, small business loan value has experienced no growth for more than a decade, and consider that these numbers are nominal, so inflation is not even factored in, which would make the picture bleaker. 

The small business share of commercial and industrial loan value outstanding 

registered, for example, 33 percent in 1995, 35 percent in 2004, 30 percent in 2007, 
32 

and in early 2010, it registered 31 percent. However, the subsequent decline has 

been rather stark, falling to 20 percent by mid-2015 and remaining at that level 

since. Looking at nonfarm nonresidential loans, the small business share came in 

at 52 percent in 1995, and had declined to 39 percent in 2007. And at the end of 

2017, the small business share further declined to 20 percent. 

As for the number of small business loans, these rose steadily up to 2008 (hitting 

27.1 million in 2008 compared to 6.3 million in 1995), and subsequently declined 

into early 2011 (coming in at 21.3 million) and then working to recover, climbing 

back to 26.4 million in mid-2017. However, there was a falloff in the second half 

of 2017, retreating to just below 26 million. Again, the level at the end of 2017 remained below the 2008 level. 
33 

800,000 

700,000 

600,000 

!::! 

.. 

~ 500,000 

0 

0 400,000 

"' c: 

0 

= 300000 ~ . 

200,000 

100,000 

0 

Chart 1: Small Business Loans Outstanding- Value 

(in millions of nominal dollars) 

Data Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile 

Chart 2: Small Business Loans- Number 

30,000,000 

25,000,000 

20,000.000 

15,000,000 

10,000,000 

5,000,000 

0 IIIII I 

Data Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile 
34 

Angel Investment. On the equity side, angel investment stands out as a critical 

source of funding for start-ups and early-stage businesses. But here, the numbers 

have been disappointing in recent years. 

According to numbers from the Center for Venture Research at the University of 

New Hampshire (as seen in Chart 3), moving past a big drop in angel investment 

in 2002, coinciding with the aftermath of the 2001 recession (as well as the post– 

‘‘tech bubble’’), growth resumed from 2003 through 2007, with angel investments increasing from $15.7 billion in 2002 to $26 billion in 2007. Subsequently, though, 

there was a large decline in 2008 and 2009 during the recession. Postrecession 

growth was underwhelming, growing from $17.6 billion in 2009 to $24.8 billion in 

2013. Since then, however, angel investment has stagnated—in fact, actually declining some, coming in at $23.9 billion in 2017. 

As for the number of deals (again, according to the Center for Venture Research 

at the University of New Hampshire), they grew from 36,000 in 2002 to 57,120 in 

2007. After a brief falloff in 2008, growth then resumed, eventually rising to 73,400 

in 2014. So, while total angel investment dollars declined and then recovered some 

from 2007 to 2014, the number of deals grew robustly, pointing to angel investors 

being active in more deals at lower investment levels. Unfortunately, over the last 

2 years—during 2016 and 2017—angel investment dollars declined slightly, and 

over the last 3 years—2015, 2016, and 2017—the number of deals dropped notably, 

from 73,400 in 2014 to 61,560 in 2017. The 2017 deal level of 61,560 came in at 

about the same level as in 2010 (61,900 deals). 

Venture Capital. While not an option for most start-ups or very young firms, venture capital investment is an important avenue for innovative firms to raise capital 

for growth and expansion. The trend on the venture capital front after the Great 

Recession tends to show more robust growth, even with a decline from the second 

quarter of 2015 to the fourth quarter of 2016. Since then venture capital investment 

has bounced back nicely, and over the longer run, growth has been solid since the 

end of the recession—moving from $4.8 billion in the second quarter of 2009 to 

$21.2 billion in the first quarter of 2018. 
35 

Online Lending and Crowdfunding. Finally, the growth of online lending and 

crowdfunding for entrepreneurs must be highlighted. SBE Council President and 

CEO Karen Kerrigan noted the following in her recent testimony (June 21, 2018) 

before the U.S. House of Representative’s Committee on Financial Services: 

There’s been improvement in the online lending space as some of the Nation’s largest ‘‘FinTech’’ small business lending platforms are quietly helping many entrepreneurs with their capital needs. A May 31, 2018, study, 

‘‘The Economic Benefits of Online Lending to Small Businesses and the 

U.S. Economy’’ reported that just five of the largest lending platforms funded nearly $10 billion in online loans from 2015 to 2017, generating $37.7 

billion in gross output, creating 358,911 jobs and $12.6 billion in wages in 

U.S. communities. The study found that 24 percent of these borrowers are 

microbusinesses with less than $100,000 in annual sales and two-thirds 

have less than $500,000 in annual sales. So online lenders are definitely 

filling an important niche, and small business borrowers are becoming better educated about this type of financing. 

The Jumpstart Our Businesses Startup Act (JOBS Act) included solid reforms that have helped boost Initial Public Offerings (IPOs) and deliver 

many startups the funding they need through regulated crowdfunding (Title 

III crowdfunding). It took the Securities and Exchange Commission (SEC) 

four long years to develop and implement the rules around regulated 

crowdfunding, which is why it has taken longer than expected to get traction through this promising funding approach. Regulation crowdfunding is 

quietly funding companies and doing what its supporters, like us, hoped it 

would. To date, there are nearly 1,000 active campaigns (about 600 of those 

are fully funded), where $132 million has been committed from 133,883 

backers (investors). The average raise is $247,456. A wide array of sectors 

are represented, with application software companies leading the pack followed by beverages (alcoholic), computer hardware, entertainment, and the 

auto industry. 

To sum up, long after the financial crisis hit in late 2008 and the Great Recession 

came to an official end in mid-2009, the financial capital story for the small business 

community has been mixed. While having recovered some, small business loans are 

still well off from where they should be. Angel investment has largely stagnated. 
36 

Meanwhile, venture capital has shown solid growth, while online lending and 

crowdfunding have opened new doors for many entrepreneurs seeking funding. 

Regulatory Burdens 

Regarding the trends noted above, assorted factors have come into play, including 

the underperforming economy over a period of a decade and a decline in entrepreneurial activity. Challenges among small community banks also come into play 

given the important role these institutions play in lending to small businesses. And 

community banking woes also tie back to the state of the economy, but to Government regulation as well, which, again, always falls heaviest on small businesses, including small banks. 

In a May 2016 analysis, I noted the following: 

Consider key points from two recent reports on the state of community 

banks. A study published in February 2015 by the Harvard Kennedy 

School’s Mossavar–Rahmani Center for Business and Government, titled 

The State and Fate of Community Banking and authored by Marshall Lux 

and Robert Greene, looked at the role of community banking in the marketplace, as well as the impact of Dodd–Frank financial regulation law on 

these small banks. 

The authors note that ‘‘community banks provide 51 percent of small business loans,’’ and quote William Grant, then chairman of the Community 

Bankers Council of the American Bankers Association, pointing out, ‘‘The 

cost of regulatory compliance as a share of operating expenses is two-anda-half times greater for small banks than for large banks.’’ 

As for the Dodd–Frank impact, the authors note, ‘‘Community banks (defined as banks with less than $10 billion in assets) withstood the financial 

crisis of 2008—with sizeable but not major losses in market share—shedding 6 percent of their share of U.S. banking assets between the second 

quarter of 2006 and mid-2010 . . . But since the second quarter of 2010, 

around the time of the Dodd–Frank Wall Street Reform and Consumer Protection Act’s passage, we found community banks’ share of assets has 

shrunk drastically—over 12 percent.’’ They go on to observe: ‘‘Interestingly, 

community banks’ vitality has been challenged more in the years after 

Dodd–Frank than in the years during the crisis.’’ 

And at another point, they state: ‘‘[C]ommunity bank consolidation trends 

have almost doubled since the passage of Dodd–Frank, relative to the Q2 

2006 and Q2 2010 time frame, which includes the crisis period.’’ The authors added: ‘‘As the GAO reports, regulators, industry participants, and 

Fed studies all find that consolidation is likely driven by regulatory economies of scale—larger banks are better suited to handle heightened regulatory burdens than are smaller banks, causing the average costs of community banks to be higher.’’ 

As noted in a March 2015 report from the Federal Reserve Bank of Richmond, the sizeable decline in the number of community banks from 2007 

to 2013—shrinking by 41 percent—was not only about community bank 

failures, but about ‘‘an unprecedented collapse in new bank entry.’’ 

It is noted: ‘‘This collapse in new bank entry has no precedent during the 

past 50 years, and it could have significant economic repercussions. In particular, the decline in new bank entry disproportionately decreases the 

number of community banks because most new banks start small. Since 

small banks have a comparative advantage in lending to small businesses, 

their declining number could affect the allocation of credit to different sectors in the economy.’’ 

Potential issues include the state of the economy and Federal Reserve policymaking: ‘‘An important factor in bank profitability is the net interest 

margin, or the spread between deposit rates and lending rates. The Fed’s 

policy of keeping the Federal funds rate near zero since 2008 has pushed 

lending rates down, which has kept the net interest margin relatively 

small. Adams and Gramlich [of the Federal Reserve Board of Governors] estimate that this low interest rate environment coupled with weak demand 

for banking services accounts for as much as 80 percent of the decline in 

bank entry in recent years. However, a literal interpretation of their model 

would predict that even if the net interest margin and economic conditions 

recovered to 2006 levels, there still would be almost no new bank entry, 

suggesting that other factors are also important for explaining the recent 

decline.’’ 
37 

The authors write: ‘‘Banking scholars also have found that new entries are 

more likely when there are fewer regulatory restrictions. After the financial 

crisis, the number of new banking regulations increased with the passage 

of legislation such as the Dodd–Frank Act. Such regulations may be particularly burdensome for small banks that are just getting started.’’ 

The Richmond Fed report concludes: ‘‘If de novos [i.e., newly formed banks] 

are absent due to the low interest rate environment and weak economic recovery, then entry should increase as the economy improves and the Fed 

raises interest rates. If regulatory costs are the driving force behind low 

entry rates, then future entry will depend on how those costs change over 

time.’’ 

Writing in the American Banker in October 2017, Camden R. Fine, then-president 

and CEO of the Independent Community Bankers of America, echoed some of these 

points. He explained: 

Community banks are highly capitalized, so they’re better prepared than 

their larger competitors for economic crises. And as local institutions, they 

reinvest in their communities and channel loans to their depositors’ neighborhoods . . . promoting localized growth that radiates out to the broader 

economy. Community banks have been instrumental in helping the Nation 

recover from the financial crisis and economic downturn, yet their numbers 

continue to dwindle, declining by roughly 1,500 since 2009. As the only 

physical banking presence in nearly one in five of the Nation’s 3,000 counties, this lifeline to many American families is at risk. 

The mere trickle of de novo banks entering the market exacerbates the 

problem. The number of bank applications has plummeted from more than 

100 per year before the crisis to just a handful since 2009 . . . posing tangible risks to financial services access and economic growth in communities 

overlooked by larger institutions. 

Regulatory burden plays no small part in the growing consolidation. A new 

survey from the Federal Reserve and Conference of State Bank Supervisors 

found that community bank compliance costs have increased by nearly $1 

billion in the past 2 years to roughly $5.4 billion, or 24 percent of community bank net income. Of the respondents who said they considered an acquisition offer in the past year, virtually all (96.7 percent) said regulatory 

costs were a very important, important or moderately important reason. 

Further, the Federal Reserve Bank of Richmond has found that regulatory 

costs play a key role in the recent dearth of applications to form new community banks. 

Efforts To Expand Access to Financial Capital 

Reform and relief efforts to clear away obstacles and reduce costs for lenders, investors, entrepreneurs and small businesses on the financial capital front are most 

welcome. For example, SBE Council supports the following bills being discussed 

today: 

S. 588 Helping Angels Lead Our Startups Act or the HALOS Act—This bill clarifies that startups and entrepreneurs can showcase their ideas and businesses at 

events designed to connect them with potential investors. It clarifies the rules about 

‘‘demo days’’ and similar events hosted by universities, Government, accelerators 

and other entities that help entrepreneurs network, make connections, and identify 

funding for their enterprises. As noted in the joint statement released by the Senate 

bill’s sponsors: ‘‘In order for startups to secure capital and grow their businesses, 

entrepreneurs often attend ‘demo days.’ or conferences to showcase their business 

model in front of investors like ‘angel investors’ and venture capitalists. It is estimated that angel investors provide 90 percent of outside equity to help grow these 

young businesses. Unfortunately, recent regulations now require excessive hurdles 

for angel investors, deterring them from participating in demo days. The HALOS 

Act would preserve important investor vetting processes without forcing startups to 

jump through unnecessary hoops to get the investments they need to grow and create new jobs.’’ U.S. Senator Chris Murphy (D-CT) stated, ‘‘I’m reintroducing the 

HALOS Act because the most important thing we can do to help local entrepreneurs 

is knock down road blocks and make it easier for angel investors to put capital behind them.’’ 

S. 2126 Fostering Innovation Act of 2017—Sensibly extends an exemption allowed 

for in the JOBS Act to growing companies whose business models require more regulatory flexibility, and thus will enable greater success. Extends the JOBS Act’s 
38 

SOX 404(b) exemption for an additional 5 years for former emerging growth companies (EGCs) that maintain a public float below $700 million and average annual revenues below $50 million. As Senator Gary Peters (D-MI) has observed, ‘‘This bipartisan, commonsense legislation would cut red tape for emerging biotechnology companies so they can focus their resources on the critical research and development 

that will provide innovative treatments and save lives.’’ 

S. 2347 Encouraging Public Offerings Act of 2018—As U.S. Chris Van Hollen (DMD) has pointed out, ‘‘Many emerging businesses find that the process of going public is too complex and expensive.’’ Given that reality, this bill would streamline the 

process by allowing an issuer communicate with potential investors to ‘‘test the 

waters’’ in terms of gauging interest in a contemplated securities offering, either before or after the filing of a registration statement, and allowing an issuer to submit 

a confidential draft registration statement to the Securities and Exchange Commission for review prior to public filing or within one year after the initial public offering or registration. U.S. Senator Thom Tillis (R-NC) correctly observed, ‘‘IPOs give 

companies crucial access to our capital markets, and yield the potential to create 

thousands of jobs. When private companies consider going public, we should be 

doing everything possible to make this process easy and to encourage it, without 

jeopardizing investor protections.’’ 

S. 3004 Small Business Audit Correction Act of 2018—As is clear from the data 

and a wide array of studies, regulatory burdens fall heaviest and with greatest consequence on small businesses. This legislation would redress the Dodd–Frank requirement that all investment brokers and dealers, no matter their size, must hire 

a Public Company Accounting Oversight Board (PCAOB)-registered audit firm to 

conduct audits that use complex guidelines designed for larger, public companies. 

As noted in the statement from Senators Tom Cotton (R-AR) and Doug Jones (DAL), ‘‘This requirement is devastating for small investment firms . . . These firms 

are closing at an alarming rate, in part due to skyrocketing audit costs required by 

a rule that is illogical for firms that don’t hold customer assets. The Small Business 

Audit Correction Act would exempt privately held, small noncustodial brokers and 

dealers in good standing from the requirement to hire a Public Company Accounting 

Oversight Board (PCAOB)-registered audit firm to meet their annual SEA Rule 17a5 reporting obligation and would instead reinstate the previous regulatory audit requirements.’’ 

S. 2765 RBIC Advisers Relief Act of 2018—This bill would reduce unnecessary 

costs by amending the Investment Advisers Act of 1940 to exempt investment advisers who solely advise certain rural business investment companies. 

In addition to these pieces of legislation, several other measures would expand access to capital for entrepreneurs and small businesses. In SBE Council’s ‘‘2018 Policy Agenda for Entrepreneurs and Small Businesses—Issue Two: Access to Capital’’, 

assorted additional pro- small-business measures were highlighted, including: 

H.R. 477 Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2017—H.R. 477 reduces regulatory costs associated with the sale and 

purchase of small, privately held companies. Current law forces broker dealers to 

register with the Security and Exchange Commission (SEC), the Financial Industry 

Regulatory Authority (FINRA), and one or more States at substantial costs. This results in higher transaction costs for many entrepreneurs who want or need to sell 

their business. 

H.R. 2201 Micro Offering Safe Harbor Act—H.R. 2201 would exempt from registration requirements with the Securities and Exchange Commission (SEC) offerings made only to the entrepreneur’s friends and family, to less than 35 purchasers, 

and when $500,000 or less is raised. The offering would be exempt from State registration and qualification rules, thus reducing costs and complexity. H.R. 2201 

would appropriately scale SEC rules and regulatory compliance for our Nation’s 

small businesses, which in turn will provide another practical option for entrepreneurs to raise the capital they need to start or grow their firms. 

H.R. 78 SEC Regulatory Accountability Act—H.R. 78 requires the SEC to assess 

the costs and benefits of regulatory actions and the impacts on small businesses, 

investor choice, and market liquidity. The bill also requires an exploration of regulatory alternatives, including the option of not regulating, to maximize the net benefits of SEC rulemakings. Having SEC periodically review its regulations is critically 

important as cumulative and outdated regulation put U.S. capital markets at a competitive disadvantage. 

Other Bipartisan Proposals on the Move—There is movement in the U.S. House 

on several bipartisan bills that are also strongly supported by SBE Council. For ex-
39 

ample, the ‘‘Main Street Growth Act’’, H.R. 5877, would allow for the creation of 

venture exchanges, which would provide a tailored trading platform for small 

issuers and emerging growth companies (EGCs). The ‘‘Modernizing Disclosures for 

Investors Act’’, H.R. 5970, requires the SEC to provide a report to Congress with 

a cost–benefit analysis of EGCs’ use of SEC Form 10-Q and recommendations for 

decreasing costs, increasing transparency, and increasing efficiency of quarterly financial reporting by emerging growth companies. Both of these bills advanced out 

of the Financial Services Committee unanimously. Another bill also recently reported out of the committee, the ‘‘Helping Startups Continue to Grow Act’’, H.R. 

6130, would provide for a 5-year extension of certain Security Exchange Act exemptions and reduced disclosure requirements for companies designated as EGCs and 

will continue to remain as such but for the 5-year restriction on EGCs. Under Title 

I of the JOBS Act, the IPO ‘‘on-ramp’’ for EGCs provides exemptions and provisions 

that make sense given the size and development of these small firms. The scaling 

of rules and exemptions from certain disclosure requirements for EGCs have reduced compliance and regulatory burdens, which have benefited these promising 

small firms. Each of these bills work to modernize and streamline rules, or make 

important fixes, which will make the capital markets work better for small businesses and improve U.S. capital formation. 

Mobilizing More Capital to Startups and Small Businesses—As noted in my testimony, regulated (Title III) crowdfunding is beginning to gain traction in the marketplace. Refining some of rules would help many entrepreneurs tap into this promising funding option. Some of the reforms supported by SBE Council include raising 

the amount that can be raised (which is currently $1 million), allowing issuers to 

‘‘test the waters,’’ allowing for special (or single) purpose vehicles, providing simplified rules for advertising, legal clarity for platforms, and removing the caps for 

accredited investors, among other changes. 

Congress is updating thresholds across many areas of the law, and the same 

needs to be done with Section 1224 Small Business Stock, which allows investors 

to deduct losses taken on investments in C Corp startups. Qualified Small Business 

tax (loss) treatment under Section 1244 of the I.R.S. code (QSB 1244) was passed 

as part of the Small Business Investment Company Act of 1958, the spirit of which 

was to mobilize more capital into innovate startups. The current thresholds were 

last updated in 1978, which are: the first $1,000,000 of outside, individual taxpayer(s) (angel investors) capital receives 1244 treatment; $100,000 per year of 1244 

losses deductible against ordinary income (for joint tax returns); $50,000 per year 

of 1244 losses deductible against ordinary income (for single filers). The Consumer 

Price Index has risen 363 percent since 1978. If the above thresholds were inflation 

adjusted, the levels would be: $3,630,000 of outside investors’ capital would qualify 

for de-risking under 1244; $363,000 per year of 1244 losses could be deductible for 

joint filers: $181,500 per year for single filers. These changes would be consistent 

with the laudable changes recently made to the QSB 1202 laws, which now provide 

for the first $10M of profits that qualify under 1202 to be excluded from taxes. 

This change can help up-and-coming entrepreneurial ecosystems outside Silicon 

Valley as well as Opportunity Zones where many new investors and family offices 

are interested in impact investing. 

Capital Gains Tax Relief. Finally, it must be noted that capital gains tax relief 

is needed to boost access to capital for the entrepreneurial sector of our economy, 

and further enhance economic, income, and employment growth. One key measure 

would be reducing the capital gains tax rate—such as from the current rate on individuals of 23.8 percent to 10 percent or 15 percent—while also indexing gains for 

inflation so that the real capital gains tax rate does not climb higher than the stated 

nominal rate. In the end, the capital gains tax raises diminishes the returns on and 

disincentivizes investment and entrepreneurship. Reduce the capital gains tax substantially, and that would be good news for the risk taking that drives the economy 

forward. 

Thank you for your time and attention. I look forward to your questions and further discussion. 
40 

PREPARED STATEMENT OF MERCER E. BULLARD 

BUTLER SNOW LECTURER AND PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI

SCHOOL OF LAW

JUNE 26, 2018 
41 

information regarding an offeting of securities by the issuer !be] communic:ned or distributed by or 

on behalf of the issuer," and then creates an exception that co<-crs aU of the essential specific 

informacion that an issu~r would want to communicate regarding its offeting. The Act fits a pattern 

of designing the system of pril':lte and public offetings so as to give informational ad<·antages to 

large investors that are denied to retail in<-estors. If all offetings arc permitted to be public, all public 

offeting in formation provided to uwcstors should be publicly a1·ailable. 

The Encouragin,g Public Offerings Act ll·ould amend e.~emptions that will exacerbate the 

incoherent erosion of dte distinction between registered and unregistered offetings and 1\lfthcr 

disad1·antage of retail uwestors ,.js.His large inwstors. Expanding the category of issuers that are 

permitted to keep their registration statement secret while engaging in roadshows facilitateS the 

commwticarion of ftaudulent or inaccur.uc infonnarion prior to the filing of a registrarion stuemem and 

pfO\ides large investors with a dis<inct informational adl'>lltoge over remil inl'esrors. Current law 

pennirs an issuer to file a public registration smtement a mere 15 da)> before its !PO and to make 

materials am.,dment e~·en closer ro thar date. This already pro1·ides inadequate time for investors ro 

evalwue an issuer's registration statement The Ads shonening the rime period will make this problem 

worse. 

I testified before Congress in opposition to money m:u-ker fimd reforms before they were 

adopted b)' dte SEC. My 1iews ha1•e not changed, but circumstances ha~·e, and in light of those 

changed ciroJmsunces I cannot suppon the Consumer Financial Choice and Capital Markets 

Protection Actof2017. My position is based on four concerns. firSt, in my opinion, there has nor 

been a thorough empirical analysis of dte likely effect of dte Act. I recommend that Congress ask 

tbe SEC to conduct such an analysi~ Second, I do not hal'e faith in dte SEC's ability tO manage 

money market fund risk based on its actions before and after the Reserve Fund failed. Titird, I am 

concerned that banking tegubtors would seize upon anodter money marker fimd failure (albeit 

highly unlikely) as an excuse to impose new regulations on all funds that could cripple America's 

mutual fimd sector. F"mally, Congress has stripped banking regulators of powers necessary for them 

tO lllke appropriate emergency action in the et·em of another serere liquidity event, and the Act 

would impose e~·en greater restriction~ 

Table of Contents 

The M)'lh of the Regulation's Adverse Effect on lPOs and Public Companies ... 4 

ll. Fosteting lnnOI':ltion Act of2017 . .. . ....... . ... . ... • ... . . 14 

ln. Helping Angels Lead Our Sunups Act or the 1-W.OS Act .. .. ... . .. . 22 

IV. Encouraging Public Offerings Act of2018 .. . .. . . . ....... .. . .. 27 

V. Consumer F"mancL11 Choic.e and Capital Marl<ers Protection Act of2017 . .... 28 
42 

I. The Myrh of !he Regulation's Adverse Effect on IPOs and Public Companies 

One premise of the JOBS Act and some of rhe bills prescnred roday is dm cxcessi1·e 

regulation wrought by t~e Sarbancs-Oxley and Dodd-Frllnk Act's has dan1agcd U.S. capital markets 

by causing a dramatic dcdine in the number of U.S. IPOsand public companies. This is a myth.' 

The facts simply do not suppon this cbirn. F'I!St, the ana~tkal methods applied by those \1~10 make 

rhis c!rum ~re nor empirically valid. Second, even if the)' were empirically ntid, one could make an 

Cl'en more persuasive claim that regulation has improtrtl the market for public companies in the U.S. 

The market capitalization of U.S.-lisred companies bas foUowed a sreadr upward climb interrupted 

only br market Crllshes and scandal~ In both of the instances of shon-renn declines in market 

capitalization this cenrut)', ir was balanced, effecti1·e regulation-the Satbanes-Oxler Act of 2002 

and the Dodd·Ffllflk Aa of 2010-rhar helped restore in1·csror con6dence and rerum public market 

wealth to an upward path. 

The most hannful mph underlying some of today's bills is the apparent acceptu1ce of invalid 

methodologies. Dt\\\•ng a direct causal relationship between !he number of U.S. lPOs and regulation 

and the Sarbanes-Oxley and Dodd-Fmnk Acts are nor sratisrically 1-alid. The incidence of IPOs depends 

on a \\'de 1-aricl)· of factors, many of ~ich are generaUy unrelatedl There arc just as many reasonable 

arguments that regulation has resulted in m!Jft IPOs and moll! public companies than there olheruise 

would hal'e been 1 But these conclusions would be just as smtisrically inl'alid as conuary conclusions. 

E1·en if drawing such causal conclusions were statisticaUy ,-.lid, !he dara do not support !he 

conclusion that the Sarbanes-Oxley and Dodd-Frank Act:; harmed public markers. For example, !he 

bulk of the significant decline in U.S. IPOs from 1996 to the pmentocct•rrcd b!(/Jft the enactment of the 

Acts. The JOBS Act purponed to be designed to increase !he numbet of U.S. IPOs, but the number of 

U.S.lPOs is h•l'l'now mao it was when the JOBS Aa was passed. Critics conrend d1ar Section 404(b) 

of !he Sarbancs-Oxler Aet, the regulatory requirement most often cited as suppressing IPO acti,~ry. has 

made public compan)' status too <<pensive for small frnns, bur Section 404(b) has nercr applied 10 

1 Another influenti~ myth is the ouosi7~ conuibu<ion th:at snuD bu9n<s.«s m>!<e to job cmtion. Th~ topic is beyond 

tbe scope of my t,.timony other th:an 10 note th>t (I) the reb-ant mrawre of 1-.luc >hould be Ml job-m'arion, 1101 )obC!\'2Don, (2) man)· studies dm •ho.• th:at sm:ill ~are ltss <ff«tir< jot>< rea tOO> than are l•tt< ccmponics, and (J) 

componi<softeniocrtaSene<sociolun th~~ .. b)·prodiiCinggood.<and=·ioesatiol>l'f<OStSuidt 

feutt u<>rk<r$ (and dt< efficient allocaiioo of apit>l is IJC«$."')' for quick!)• derdoping dt< madt<t of rewlting n<.w job<, 

suoh u scnicingiObots). Stt; r,g., Rob<n .-llkin<OO and Midu<l Und, 8ig is Bc>utiful: Debunking the Myth ofSm:ill 

Bu.<iness (MIT Pre.. 201S); John Holtiwang<r, Ron S. Jarmin and )llicr ,lfi..,cb, ur;, Cn.uu J•M Sfl140 """' I.Af# _, 

y,.'\!. ?S The R.-·;.,.· of F.conomics and St~tistics 3-17 (May 2013) (finding no symmatic refati<>n,}tip betwcon fum si>:c 

and gtOI''h~ St.-·cn J. l);wi>,)ohn Haltill-ang<r, and Scou Sct..h, S~ttoiiBIIi""' •Ill fob (mm,.: Disl«ti11$tht MJ:O •d 

"''"""'ilz 1hr F«t~ NBER Welting Paper -l-1?2 (Ocrober 1993). $omed3ims are s<>ab5urd as 10 be offcnsi1-c, such as 

the "W'OOO th:at gtOI'ing inrom< gop bet~"'tn rich aod poor tlmericm< may be anribu,.bk to the tlmcrican in1·estOO> 

"being !hut our of dt< molt •nracri•~ offcri"!l'-" Stt Th< Pranisc of M.orl<ct Reform, NtiSDAQ at 2 (2017) ("illCOillC 

iOOjW!ity cooJd U'OI'SCO U "'C"fl< im-.,1"" bccom<iocrea.<ingly shut OUt of dt< lllO$I artnro\~ offerings") (!t:lltmtnl 

of NASDAQ P""<ident :rnd CEO Adena Friedman). 

> Stt, r~, Tom Braitbwaire. SECi p,..,.,, Rnirt 11'0 At.rlullimittJ 'litlMJ Rt:liat/Mr.,.ru, On \Vall Strttt ~lay 12, 

2017) ('Thcd\lindling numbctsof public componics - down from more dttn 9~ 20 )'Wl ago> to ftutr dttn 6,000 

t<>cbr- ~auo:d mort by an iocrea.., in mcrg<r>.") \SEO p..,,.,. Rnir< IPOMar.!tf');Arrusto CapitaJ • .JMarlul 

liq!IIJil). Di1ision of&onornk and Ri<k :lnal)·sl~ SEC at ~ (.~ugu." 2017) \SEC Gfital Amss R.-ptrf' ~t ~difficult !0 

di!<nt2nglt the many contributing facto,; dttt influeoce lPO dynamics."). 

' An SEC report sperilially·rejcaed the h)potbesi< dttt "tot21 primas)' madtet sccurity ilswnce l< '""w afttr the 

COOCIDlCOI of the Dodd-F .. nk Ac• • /l at 5. 

4 
43 

the !'liSt majotity ofU.S.IPOs or public companies because it bas net•er applied to non· 

accelerated issuers. 

The claim that the number of U.S. IPOs has declined reflects egregious cherry picking. 

Proponents of weakening rtgtdation in1'ari:tbly choose a rear between 1995 and 2000 from 1mich ro 

measure the change in the number of IPOs, but th" period repre;ents a significant depanure from the 

avcrnge. As the chan below show~ the only rear in which the numhcr oflPOs exceeded the 1996 rmal 

~·M/969. Using the rtaWning of critics of regulation, the chan demonstrateS that from 1974 to 2016 

there was an tightfold i"rrtaJ< in the number of anoua!IPOs (from 9 to 78) as a result of enhanced 

regulation under the Sarbanes.Oxlty and Dodd·Frnnk Acts. But this claim has no more empirial 

validity than the claim dmt these statutes ha~·e a used the number of U.S. lPOs ro decline. 

900 

BOO 

700 

600 

500 

400 

300 

200 

100 

Number of Offerings 

Additionally, the number of U.S. JPOs and me number of U.S. public companies are simply me wrong 

measures. Critics use these data to suggest that less apital is being raised in U.S. lPOs and less capital is 

repre;ented by companies listed on U.S. exchanges. Both claims are false. 

As the chan he low shows, gross I PO proceeds' hal'e followed a consistent zigzag pattern since 

dle early nineriC$, before which gross procteds were substantially lower than they are today. The 

aberrational high years of 1999 and 2000 included lPOs of Internet stod<s wim grossly inflated 

l'llluarions th" substantially comribmed the marker decline from 2000 ro 2002. The amounr in the ycm 

immediately before and immediately after rhc 2000- 2002 period was the same ('$34.4 and 34.2 billion, 

respccrirely) and, nombl}', those amounts are substantially lower than in the post-Dodd·Frnnk-Act of 

2014 ($47.0 billion).; Excluding the lntemet bubbles years of1999 and 2fJOO, 2014 set rhe a/1-rime 

'I reftr tOgtO$$ pnxctds in IPOs bccw.sc th2% is rhe daEtlhlt is tcc~bk, but it is niX'-" tO:Ut:litt I"'"'("<'SUK of the 

11110\1nt r:Us<d in IPOs. Groos proc«ds ar. ~pic211)· rubonmiallpnore ~n dtealllO\Im of capital nis<d by an;,..,,. 

The amoom of gross procteds of 1n IPO is re<lu<td bj·,'2Jioos expenses and, moresignif1<2ntly, by pro<t«lsdiYcrred 10 

,.Uing >lureholde"- An imperunt but gen<r>l~· ignored function of IPOs is the fn.'ting up of apital of eul)··st>g< 

;., • .,..,., th:t1 <1n be lte)~led back in co the stm·up nwk<L 

> S~tSrudr and R-ndations oo Sccrion 40l(b)of the s.th:tncs·Oxlcy Aa of200 for'"""" •ith Publi< Roo• 8<"..., S75 and $2i0 ~rnfion, Office of Chief Accoun11n1, SEC" 91 (2011) ("2011 SEC Rcpon') ("If 1999 and 2000 

21< diminocod 2S bubble l"N. the~ procttds ws<d b)' IPOs re<OI<ll.'d in 1001 and moinr:Uncd th:tt btl 

thtoogh 200i, d<spitt the drop in nu.mbctof the number JPOs compattd 10 the p«·2001cr.~."). 
44 

record for !PO gross proceeds. Recem dara suggests that that record will be brokcp this >·c:u; 

with IQJ8IPO proceeds totaling $15.6 bi/Jjon! and may evcp surpass the lntemet Bubble's 

highs. Critics assign inttinsic ,-aktc the nwnber of II'Os, which is an arbitr.UJ• function of a very dh·crsc 

set of facrors, in derogation of dte amount of capital actually raised. 1 submit that the success of our 

public nlillkers in raising capital should be measured by the anwunt of capital raised. 

Gross Proceeds (millions) 70000 

• Ryan \~ast<llica, IPO P!OCC«<s Hit3-Yeu High in First Quarter, Fucbl by Foreign Comp>.ni<s' Offerings, 

Mwtll'a~eb (Mar. 31, 201S) lllllihhkot hnp<://~\\w.ma.it~~>~tch.com/Sillf)'[tp<>proc«ds-hir-•-3'!'<" high in-d\e. 

ftts<-<juatter-boosr<d-by-fo!dgn-companics-2018-0.l-29. 
45 

The amount of capital represented by U.S.-listed companies tdls an even more compelling story. 

The rota! mlllker capirali.zarion of U.S.-Jisred companies increased from $8.5 ai})jon in 1996 ro 

$32.1 ai}jjon in 2017, as shown in the chart below. The largest shon-tenn declines in U.S.-Iisted 

company aggregate mark-et capit:Uization were conrurrem with the msh of the lmemet Bubble and the 

Enron/Worldcom group of accounting scandals in one case, and \\;m the Financial Crisis in me omer. 

Mukcr capit!lization 1111t in the wake of the Sarlllnes-Oxler and Dodd-Frank Acts. The decline in the 

numb-ct of listed companies ignores the f.tct that companies are simply much larger than ~vo decades 

ago, "nich likely reflects changes in optimal f1011 size and the probabili~· of a smaU company being 

acquired.l Acoording the logic of critics, me perceived problem wid! the number of listed companies 

would be son·ed just as weU by requiring that all listed companies be split into ~vo. 

Market Capittlilation of U.S.-I..isted Companies 

Source: World Bank~ 

1 Stt J•r R. Ritter, Xi:Klbui G.o lhlshi and Zhoog)-an Zhu, U?Mr Hm All til< lPOJ Gwu? (August 26, 2013) (publi!hcd 

11 ~ Joomal of FIJI2DCUI :111d Qumri12ri-. AJU!j-,is 1663 (2013)) (ck<line in listing<""' <ou"'d b)· n-gubrion; finding 

dcdinc is corrdat<d uidl the declining t<lali,·e profi~bili~· of 91l2llcr lirml and the higher incidence of acquisilions) 

•rdhbk ''"m.com abs~r.~e~ l9;.1 88. 

' ArdhWt •I ht!p!:} cht~u orldbonk01g/indicatcr C.ILMKT.LCAP.CD?.nd=201l&locarions=US&stan I9SO Qast 

,; t<Ojunc21 2018). 
46 

In comparison tO the market capimliution of European-Union-listed (EU-listed'? companies, 

the U.S. public company market has been an unmitigated success. As sho~" in the chan below, from 

1996 to ~17, the market capitalization of EU-listed companies rose from S4.2 to S8.2 uillion. In other 

words during the period in which critics claim that the U.S. public compan)' 1112tket has been a failure, 

rhe market capim!i?.arion of U.S. public companies rose 278% ($8.5 to $32. I trillion), while the market 

<apimliution of our most ad\'l!flced competitors' markers rose onlr 95% {$4.2 to $8.2 uillion). The 

Financial Crisis had 2 far more demsraring effect on EU-lisred than U.S.-listed companies, \lith the 

fonncr rtaching bcnom after a 61% drop and the U.S. mchis>gbonomafreronlr a 42% decline. After 

reaching their lows, the US market cap rose 136% (SI1.6 to $27.4 uillion), '~ile the EU market cap rose 

a relati<·e!y anemic 46% ($5.6 to S82 trillion). If the health of our listed companies is annbutable to 

regulation, then it appear; dtu the Dodd-Frank Act created a large ad\'l!lltage for U.S. public markers. 

Market Capitaliution of E.U.-Listed Companies 

Source: World Bank' 

ANihMu~ https;/ /cbt~"orldbW.o.g/indicwr/CM.MKT.LC.~P.CD:Ioauions;EU (bst ,;~~d June 21,:lll18). 

This chan docs not t<n<kr propedy on the World lbnk's ~tt; it omits the cbta point for2016and the tine from 2015 to 

2017 (the point at the &r right is for:lll17). 

8 
47 

Thus, EU-Iisted companies had a subsrantiaUy larger downrum and substantially weaker recovery after 

the !'inanc:ial Crisis.IO From 2/J()l to 2017, the EU m111ket cap declilled 43% ($14.4 to $8.2 rrifJion) 

while the U.S. m111ket cap rose 6/r. ($19.9 to $32.1 rriJJion), as iUusmued in the chw below.'1 

35 

30 

lS 

20 

15 

10 

Change in listed Company Market Cap· 2007 • 2017 

(trillions) 

, ' , ' .,.-. ...... , , ·· ... ,,, 

, 

···································································· 

2007 20011 2009 2010 lOll lOll lOll 2014 lOIS 2016 2017 

- - U.S.·I.istfd Marl<!t C.p ...... EU·I.isted Martel C.p 

As the chan shows, more dun 70% of the recovery in U.S. market cap during the four years stuting in 

'J!X)1 occurred duting the seven Y"'"' from 2011 to 2017-after the enacmtent of the Dodd-Frank 

Act)l If the Dodd-Fran:k Act could be IOelt'ed as ha1ing had an effecron confidence in public 

companies, its effect has been to rontobute to an extoordina!)· increase confidence in U.S. public 

companies relati"e to European public companies. 

,. A$ inc5c:lced in tbe cham, tht EU nwlret ap reached bottom in 2011, •i>ereas tht US. nud:et "P "'"bed bonom 

in2008. 

11 Due oothtg!p no<cd~l ha1't assumedC<Jilll i"'re>."" foom 2014to201; •nd 2015oo2016. Stt•"'Looking 

lkllind tht D«~ning Numbor of Public Companies, Ernst & Young at 2 (lib; 2017) C'Lool:ing ll<hiod tht Numbers') 

C'""""& the $!1l3lk-r number of forl'ign componi<& that do tist on an c.xcb>nge outside thtir home coullli)', tnict! as n>IUI)' chwse U.S. mnke<B as those th.r Jisr in 11/Jf other jun•diction'' (<mphasi> •ddcd)(EY l'tc< Chair l.cc 

Bnmcn); "forcign ""'W"'i<• !Oda)' 0\'ernilclmingly choose tht US. wbcn tht; list outside of tllcir home marl<m 

(.ompmics basal in tht U.S. rare~· doct ro lis! any•i>ere dse."). 

''The U.S. nwlremp""" $5.7 trillion from2008to 2010($11.6to$17.J aillion)•odSI4.8ttillion from2010to2017 

($173 10 Sl2.1trillion). s, Looking Behind Nu""""•"'~""> 012& l ('MOlt than lt2lf of the decline in tht number of 

public companies sin<e 1996 ""'be :utributed to tht post-dot-com bubble eo of business failures •nd dctistings that 

immediate~· fdi<>l'td an "~· number of 11'0>" (EY 'flee Chair l.cc Bnmcn); "deti!ling '"" m much lo•n than mm<di:uc~· the dol-<:orn boom); Caig Doidge, G. A..U.w Korolyi >nd R<11< Srulz, Tilt US. Vsli".! Cap, ~isher 

Colkgo of Business, ~1' 201 >m -07" I Oune 2016) (finding iol ~' dclisring ...,.,. aftetdo<-«>m boom and dctisting 

t>t< ioct<o.«<<aftttl996 "mosdy,. • resu~ of an un...,.lly lligh poe< of merger acmi~· """"S public firms"). 
48 

As shown in the chan below, the lalge decline in the number of U.S. public companies has been 

accompanied by a large iflcm.se in their a,·mge market capir.t!Uation.u 

7.<10:1.000000 J.CXIO 

6.0XIOOOIXlO ~CXIO 

~ /f lOCO 

S.OC:C«C.QO) 

------~ •oco 4®.000000 I.CXIO 

l.O:O.COl.OOO _____.// lOCO l.«<JJ#J.rs:IJ 

~oco 

t,OCO.COO.OOO lOCO 

J.~19t""'ri«~Cc~\M1 ~fi.IIQ.f'\t~<~ 

- [IQO'I.~J~Qt-vt(..-,:~(C:t.o'QW~S'Jl -·~~otiltH~~ 

Nonetheless, critics contend that it is not total wealth that martetS but the number of companies 

representing that wealth, appatend)' believing that the guiding principle of capitalism is to maximize the 

tliJftibu/i(JII if topildl acroS$ the lrugest number of companies rather d1an the greatest ITttllion of topitolby 

public comp<tnies." It is !lOt clear why these criticsll'ould mther that U.S. public markets be 

poorer u;th more public companies th:llln althier with fcner public companies. 

Another aspttt of the lPO/public company mph is that there is a objectively determiflablc 

number of lPOs and public companies that is optimal, and rect!lt levels arc lower than dm number. 

Rariooally :uguing for more ll'Os or public companies requires a rntional thoo!)' of how more lPOs 

and/or more public compAAics creates greater social wealth. In temlS of the actual rol•t of U.S. public 

companies, fen..,rpublic comp<tnies hos coadated with greater net social wealth. The only rntionale 

pro,idcd by critics of cuaent regulatO!)' requirements is that some prior larger number of I !'OS and 

public COmp<tnies over a cherry-pided period is what the number ~u/dbe- simply because the number 

was larger during that period. The average numberofiPOs from 1%0 to 2016 wasabout 227, yet the 

ubiquitous comparisons to IPOS in the late 19%$ implies dmt critics believe the ideal nwnber would be 

around twice the avernge \\ithout any rational basis for thar claim. 

Indeed, there has been a decline in the number ofl'POs beginning in 2001. The avc~e from 

2001 ro 11l16 'm 1141POs, less rhan half the averngcof272 from 1960 ro 1inl. f"•e of the six rca~ 

\\OUlthe lowest number of IPOs coincided with the marker down rums follo\\ong the bursting of the 

lnremet Bubble and scandals o£2001 - 2002, and the Financial Crisi& The drop-offfrom 2000 to 2001 

" Looting &bind die Number, mpm," ~-

11 S"Th: U.S.I.istingGap,mpm,or I Qf<he"opoimollitm si%<~ inm .. ,;,g.,a ~<sultofn:chnologic~ <lunges, ... <he 

drop in lisr<d fums lik<~· fw; noohing to douith th< b<ncfitsllld costs ofbcing• public: comp>ny 2nd mighte~-.n be• 

po>ith-e <b-.lopmem for d.: eronomy. "). 

10 
49 

akmc was £rom382 1P0s to 79 1POs. Howc,·cr, even Clcludillg the rem 2001,2002,2003,2008 and 

2009 )iclds an a1·enge of 140 IPOs -still barely half of the earlieJ period's 272 IPOs. 

There is no question that there has been a meaningful drop-off in the number of IPOs, bur the 

cause of this drop-off and the separate question of whether this is a positi1•e or negaa\'e de~·elopment are 

different matters. The total amount of gross IPO proceeds during the 16-year period \\1dt half the 

avcrnge number of I POs \\1S many multiples of th~ roral amount of gross proceeds r.tised in the 

preceding 41 yem, which means that we are raising much more capital bur fewer companies are doing it. 

The timing of the ups and do"11s ofiPOs seems to reflect market downtlll1ls and crises, but it does nor 

fir a theory of regulation-induced declines or increases. As noted above, the data suggest that the decline 

is due panly ro the facrs that companies arc larger, acquisitions are more frequenr, and pri1'litc capiml 

markers hal'e grown substantiaU)'· 

A more rational approach might consider the acnoal amount of wealth represented by the public 

company mad«~ that is, assuming that what we value is increasing the wealth of public companies rather 

than distributing wealth among a lruger number of public companies. As creatOrs and repo~rories of 

wealth, the modem hisro.ry of U.S.-lisred companies has been a ,-irtuaUy unmitigated success. The la.gtst 

shon-renn declines and the la.gtsr shon-renn increases in U.S.-lisrcd company '"'lue have occurred 

immediately before and immediately after the enactment of Ia"~ that crirics claim have had dte effect of 

reducing net social wealth. The JOBS Act and bills cumndy pending appear to rejecr the net creation of 

social wealth as a measur;e of the health of public company nmrl<ets, preferring instead ro apply the more 

socialist metric of the number of public companies across which public marl<et wealth is spread. 

A rational approach mighr olso consider that me essential difference between registered and 

unregiStered offerings is that the fonncr can be sold 11ithour qualifte~rion ro retUI invesrors. In my 

opution, the right number of I POs and public companies would be dte number naturaUy occurring in a 

free nud<er (Lc., as set br me forces of supply and demand, rather man being dcttnnincd by Congress, 

regulators, issuers or stock exchanges), consistent "'th jn,·cstor proteCtion Q.e., ensuring access ro, and 

the intEgrity of, infonnation about public offerings and public companies). In contr.lst, the JOBS Act 

and eunendy pendillg bills seek to increase the number of IPOS and public companies by reducing 

access to ond me intEgrity of infonnation pro1ided ro retail inrestors. (At the same time, Congress is 

undermining me premise mat Ullft!,iflmd offerings are /llJI made to retail investors.) 

The JOBS Act and the cutrtndy pending bills create the appearance that claims rcgatding me 

effect of me Saroaoes-OJdey and Dodd-Frank Acrs on the number of IPOs and public companies are 

di~ngenuous - nothing rrore than the product of interest group polities. Congress previously enacted 

and nOIV again proposes legislation rhar purporrs to be intended to increase the number of IPOs 

and public companies while pairing th.11legisJation nith laiV that oviD ineoirably reduce nlHI>bcr 

of IPOs and public companies Congress has s)~ttmarically made raising capital mrough unr~stcred 

offerings, which are the principal alremaciYe ro conduccing an IPO,o; sub$ranrially more attr:tcth·e," 

while also claiming a desire to incmse the number U.S. IPOs and public companies. For example, the 

" ~tilt Dtti~~<iRtlxN•IItimrfutld AllttrW• FinosMaum, The EconomiSt (Apr. 22,2017) \'Airbnb b.< ni!<d 

billions from pri'~" marl<cos :and b.< 26 '"""'"' in,.,.,.,.._ It oiD make gro<s op<llMg profits o($-l;()m thls yw .. .'~ 

anrilabk•th"P"II•-uw~/bu.<in<Ssl20l7/~/221why-the-<ledinc-in-the-1\1111lb<r-<>f-listal·am<rican

firms-manas. 

"s" Looking B<hind the Numb<r>,RfJW, " 2 (m 1\XCOI ) ....... ·-.~ find dtit • ··~in pm-ate apt~ :and tbe unique 

characl<1i.<ticsof man; o( toclay's 11<\t' companies ha'~ mack it <2sict ro grow outsick the public <quit)' mari<ct for Ionge< 

than historically ... [<2.<ibl<''). 

II 
50 

JOBS Act Crt:!ted a new ~'cmprion for c!Qwdfunding, ra~ed the limit for Reg A offerings from $5 ro 

SSO million and prcemprtd srare regulation, and permitted general solicitation and ad1•errising in pm<ue 

offerings,tl A reponing company is not allowed rouse Reg A, which owans that a smaU issuer 

contemplating raising $50 million in an 11'0 gives up the possibility of later raising that amount under 

Reg A IS In other words, a private company that seeks ro raise $50 million on the public mark em 

surrenders the ability ro l:ater raise $50 million in a Reg A offering, but me reverne does nOt hold. 

The JOBS Act also increased the threshold for the number of shareholders dm trigger 

registration h)' thousands," which has remo\'ed a common impetus for becoming a public company.:M 

" Saii "3 ("l.<tisbcionen2Cied 0\'tt the Wt 6\~ yem lw mode it easier fore~~ .. IJ) sur pm~ie 

longer b)• relaxing c=in n:gularo~· n:quitemcncs and e~ more pri'~" ftnancing, j . Th< SEC Chairman 

t<poniCd rb:.t, from'"' <bro of the'PPOO.blc Wl5 jOBS ACI >n..OOments through M:m:b 31,2CIS, $798 million""' 

t>ised under Reg A and $68.7 million throogh crou-dlimding under Rtg 0 ', •nd th.t SN7 billion •"-' r.oi>«< under Rule 

506 in 2017. S« 0\<<~ight of the U.S. S<curities and Exd~:~ngc Comrok<ion, Hearing before tht Commintt on 

Finm<W Set\im, U.S. HOU!C ofRcpresem•m·es" 5 Ounc 21, 2018) (ttscimonyofSEC Ch:lirnwljay Cla)1on) ani/41ft 

•r ht1J"'//u""'·=&""/"""''resrimonr/ t<Siimony-<>'<r>ight-us-.ccurities-and-e><:b.ngc<O!!UililOOn. If the SEC's 

RrgAestim>~e ~ba>«<on Fonn 1-U,irnu)· subswuial~ undcrs~te theamounr r.U>«<becau!< thcrtis.-ickncc th.t 

"""'R.gA ;....,. ignono the Form 1-U fding requirement (:dd>ough the difference '"'Y be due to longofftr periods). 

SttAmitSingh,A l'wE.JU..k<11 Eqllii)Cimf1111dif~t 2017, Stnd!ng:Attomeysat hw "~ (2018) finding~ l3 

Fonn I-Us flkd for 122 quiliftcd Reg A off< rings in 2017); SEC c.piM A""' f<Jp<tt, lltf!ll, at 6 (reporting amount roi>«< 

b)· 56 Reg A issucnduringp<rioduith97 qu.tif>«<offcrings). If theSECesrin~:~t< isbo.'Cdon Fonn D fding>;,it 

unde""'"""t" the :amount ,;.'Cd bcousc Rule 506 ~" ofirn igno« the Fonn D fding n:quitement1Rd. io '-")' asc, 

ther are not I«Juited ro repon the t~l •mount r.oil«<. S« iJ. a< 37- 38 (acknou-ledging un..fiabili~· of Fonn D d.~ 

but basing amount-r.oi>«< estimate on Form D~ Ba>«<on my 1<\i<.'W of c=·dfunding isrucrs th:tt ""'conducted a 

Rule 506 off<ring, i55U<n frt<juendy iw>oo: the Fonn D ftling 1\'qllio.'llltnL If the SEC estimatt of Reg CF offerings is 

bo.'Cd on Form CU filings, I an onest tlut, bo.«d on my t<lWth, the estima~e is not "'"""· S1tiJ. at n. 76 

(>cknou·lcdging th.t cstim>te of amount niS<d in Rrg CF offerings is bo.«d on Form C U). To ill"'<ttatt the problc'"' 

•ithSECd.co,in •2017 repon theSECs12ffu>«< Form C.U toesrimatcth:tt,,.ofjwu>ty 15,2017, FoonC.Us for 33 

offerings bad been 6lcd for crowdfunding lilings initi:u«< prior to De<. 31, Wi6, which sbou'-d on '!8"&1"""""'"t 

t>ised of"'l'Pro>imate~· SIO million." \~:tdimit h~001· and A11!hcla l<n)-m'-., U.S. S<curicies-Ba>«< ero,,~funding 

under Tit~ 111 of the JOBS Act, SEC J)i,ision of Ec011<11niC1nd Risl: A"'~' sat I Q'<b. 28, 2017). Mr ~'~ sliou• 

the tOI:d r.til<d forissuotSdnt filoo ' FoonC·U prio<rotheSEC'srutoff ofjamwy 15uzS9,239,6-18.30, •ilich' 

low<r th:tn the SEC's tot:d bca.use the tOI:d r.oi>«< is often adjUS<td OO.m..J •fter the Fonn C-U Ids been flkd. ~~· 

wl)·sis ""' sbm" th:tt'" •ddition:ll S9,6l:!,SOO.OO•"' IOi.«d br 30 6k<~ th:tt nem flied • Fonn C-U, and another 

$7,639,<WI.6hz r.oi>«< ~-filetS th:t1 fded • Fonn C.U 1ftet the SEC <bta cutoff ofjanull)' 15, Wl7. 

" This •ill no longotr be the as< when the SEC •doplll rules pul'!;uant ro Sooion 5(18 of the Ecooomi< Grou1h, 

RcgubtOI)' Rclicf and Consumer Protecrion Act umir<d ~ on Reg A+ offerings sbou> qu«rio.,ble perfornWlC< to 

date. S« Conic Driebuscb a:nd Jul!c• Chong, /PO Skttt1t# Pwl ~ .. /mil"' lflldi•liJJ 1WJ; Wall Sater joumal (Feb. 

6, 2018) aroihlle /11 bt1J"'//•"'"''·"*onVatticles ipo->honC\l!S put-burd<IKII>·in\'CSWtS-to-identi~·-risk-1517913000. 

u Jls a pr.tetic2l nwr<r, the oumbcr-of·slwtboldctS trigger lw nmr •pplicd to the 2etwl number of a """'""l'' shareboldcn<" bcause the SEC interpretS it to >pj>l)' tiret1il)• toslu:tehol<krs rfrr•mi(o;e,strett mme) wherthan tO 

acruol s~holdors. l'or e""'''le, I million Amctians coWd 01111 slutn of • private comp>ny through Mcnill Ly11Cb, 

but the)· "oold coonr "onlr I slu:teboldcr under the SEC's intetpretarion o( the shareholdtr trigger. Hisrorial~·, 

pri\"0 <Omp>ny silaRs ho\'C been held ctif<cl)', but tiUs mar hove changed •ith the C'Jl'n.<ioo of sccondlq• trading 

m:ul<t~. s, Tbt Fllhnr rfC:.;wM F~ Hearing lxfoo: tht Rcl"''>tnllri,·es Commiuee oo 0\~r>ight and 

Government Refonn, U.S. House of Reprcs<ntati,·es a< 10 ~by II, ~II) (testimony of SEC Chaimun Mil)' Schopiro) 

('sb:m:holdtr. of moot privve COO!p'llies, who gen<nllr bold lh<k slurcs <fin:cd)"). 

>l S~tSECsPmriORtrirtiPOMo&.ti,SSipi?J ('A•thenur&in.thel:~.<to~ttolOO$eniPOrulcsi<pott))' ~blc. 

As pan of the spra•lingjobs Act in 2CI2, lau'lTl:l!ocr. tifttd the level" which pm~re ~"'ore fooccd ro prO\ide 

public fiiWICi:al s~"'"""" from 500 to 2/)XJ slwtholdm Hitting the J»<'N timir ·~• • ca11~st to pmioos IPOs 

including Coogle ond Facebook, which decided that if the)· •<nt ro th< ttOOble of publishing occount> they might u ·~U 

enjor the •d\~"--l'' of being public. \lith the n<W rules, companies can g<t older •nd big&<r before focfu>g any 

12 
51 

These rcfonns are in addition to rhe eJ<Pansion of rhe amount of capital that can be accessed rhroogh 

unregistered offerings due ro: (I) the increase in accredited in•·esro~S since Reg D 111\S adopted in 1982, 

(2) rhe shift for retail in• esto~S from direct owneiShip to mun.~l funds, and (e) rhe shift for insrin•rional 

in••eston; to private investment companies (e.g., hedge funds and private equity) and Rule 144A 

im•estmeno:s.l1 Earlier this ;ear, Congress funher disadvantaged IPOs by eJ<P•nding the potential for (I) 

pri1'3te venture capital funding by raising the limit on the nwnber of im·esron; that trigger in•·estmem 

comp3n)' KgisErarion and (2) unKgisrered offerings rotmplorees b)' doubling rhe 12-momh dollar limit 

abo1·e which Rule 701 &closures must be pro1ided (as under Reg A, a company must surrender the 

abilil)· tO make offers ro emplo;ees under Rule 70 I if ir becomes a reporting company).u Congress has 

repeatedly provided for investment limits robe <aistd to match inflation, 1mile leaving rhe Sl million 

minimum net wonh for accredited investors and S5 million minimwn for qualified purchasers 

unchanged for dectdes. ln 2015, Congress subsr.mrially deregulated sccond31J· marketS in =egistered 

securiries,ll and dte size of rhcse markets has t.'j)lodcd, z• funher eroding rhc adl·antages enjoyed by 

public companies. Congress has been relentless in making IPOs more unattractive relam·e to 

unregistered offerings. 

The SEC has found that the excess capittlrnised in unregistered offerings over registered 

offerings is growing. h found that capittlrnised in equity and drot exempt securities offerings exceeded 

the amount rn~ed in registered offerings br 21.6% from 2009 ro 2011, which gap increased ro 26% from 

2012ro 201621 The total amoum raised in e.'empt offerings".., $1.16 trillion in 2009,$1.87 trillion in 

2015, and $1.68 trillion in 2016." An Emsr & Young biotech expen conmely answered the question of 

why more companies are staying pri\'ate as follow~ "Because tbey can.'~' 

J'f<"UUt."). Simibdy, d>t SEC pre,iou!ly p<nni1t1.-d i!!u<l'$ to exclude <OOIP'""'OIJ scock option< [rom bcing counttd 

unckrS<crioo 12(g). 17 C.F.R. 701. SttRule 12h·l. TheSECalropermi~ Reg A 6le1Sroexducle R<g ~ 

!<Qlril)'holclers (rom bcing ooun«<l. Stt Am<ndments ro R<gularion A: ,\ Small Enri~ Complianc:t Guide•, Sc:curiries 

and E"lungt Commi,;o, (June IS ll15, u modified Ma~ 16, ll16) .,.;~W.tm 

hnp<:l/uwu·>«.go-'fmfo/smollbus/!«g/"'gUiarion·t.....,ndmcncs~tml. Tl= ,·arious int<tprtoil-c !>O'itioo! 

•nd counting Nies Ju,., rendered d>t slweholder! ctst under Section 12 o( d>t «lunge Act •·inuoUy ~· 

' Stt I.AJOking lkhind d>t l\'umber:<, !Jf/W, at 3 (I"''"'"" uith luge •mountS of copiw ltl, .. rumod 10 d>t pm-.re marl<<r 

in ""!tho( in'wrn<m opponunities in higb·grou1h ~;The Promise of Marl:<t RcfO<m, "'fJJU. at 3 (pri, .... 

capiw a.<.«ts under nwrogcm:nt inmtltd from $3;6 billion in ll02 co $1.822 tiillion in ll15); Eliubeth cle Fon""'J, 

Ti>t Dmpthli>. c{Prir.k Cqikll, 6S H2Sring 1.) . .J.IS, <167 (:lplil2017) ("Ch~r lim<, Rogularioo D has P""~n 10 be d>t 

tl<ctprion thot S\\..IIou~ d>t rule''), 

" Section 76001 o( d>t f'oon.g Amcri<o.'s Surface Tr.tnlpOnation Act (1'AST Acr) permitted rebri•·dy uruosuicccd 

tr.tding o( !C<Ilriri<> held bj· ac=lin:d in•~stoiS pr01idcd U..c d>t issuer is noc a t<pO<ting compony (codl6cd at 

Securities Act Section 4(a)(7}, (d) & (<)). 

"Stt S«tJ"""J MarM /« Sl>ans i• PrrJI'O Umt.ro Is &.mi-g, R<ue<r.; (D«. 19, 2016) (cndabl< sh= of~ pm-.ce 

comporties~n:dfromS11roS35blltioo from2011ro2016;SI.4billi<>nin~ma<l:cttnn•actionsin2015, 

$11 biUion in 2016) .,WIW.t dl http<:/ /I·<Orurebcau:om/2016/12/19/sccon<h~··nurl<ec·fo sh=s·in·pre·ipo-uniroms· 

i>-booming/. 

" SnSECG!fis.IArms !Vp<;d,!Jf/l'd, at 5 • 6. 

" Snid.at5. 

" ProcctdingsofSECSmoJI and Em:tgingComponi<stldl'i!OI)' Commitreeat 120& 121 (Feb. IS, 2017) (mremcncof 

Gkn Gio\'>Mtai, EY Global Biole<hno!OI:)'). 

13 
52 

Toda)'S bills rtfl<ect the same conuadicuon between the as,sened purpose ofincte~Sing the 

number of IPOs and public companies willie making a funhcr reduction in TPOs and public companies 

far more likely. The HAJ.OS Act will necessarily trtiutt the number of JPOs and public companies by 

making it easier for sma[ businesses tO idenri~· accredited and non-:~ccredited inl'esrors for current and 

potential offerings. As one commentator has stated: 

ITJhc carrot for companies to go public had alwa)~ been access oo cheaper capital 

because the securities law regime gave public companies the exclus~ e right oo raise 

moner from the general public. Nevenhdess, dte regulatory thrust in recent decades has 

been to markedly loosen the restricrionson capital raising and tt~dingon the pm':lte 

side.18 

The claim that the Sarbanes·O~ley and Dodd. Frank Acts ha,·e hanned public markets is based on 

empirically in1-alid methodologies aod chell)··picked data and reflea the view th.1t is it not net capital 

crearion that matters, but !>ther the number of ll'Os and public companies. The fact that this claim is 

based on mere mythology is exposed by Congress's repeated enactment of legislation it cl1ims will 

increase the number of IPOs and public companies while enacting legislation that will likely have the 

effecr of reducing the number of both. 

II. Fostering lnno•':ltion Act of2017 

The Fosrering Jnnovarion Acrof20!7 ("F!A/404(1>) Act') is fundamenttUy inconsisrem with 

primary premise of the regulation of sales of seruriries to retail im·esrors, which is that inl'esrors will be 

pro1"ded ""th access to mareri:tl infonnarion about the offering and that the integrity of the infom>ation 

has beelt verified by an independent party. The Act will further fracture the meaning of "U.S. public 

compan(- the world's gold st~ndard- and continue to dilute the value of the U.S. fuuncial marl<et~ 

The Act's premise-that the addirional cost of a 404(1>) audit for companies 11;th up to a S699 miDion 

pub De Ooat is O\'edy burdensome- has no sound basis. 

The FJM 404(b) Act would extend, for up ro about fn·e years, the emerging growth company 

'EGC'~ exemption from Section 404(b)'s requirement of an auditor's attestation as to a pubtic 

company's assessment of the effectiveness of its internal controls.» An EGC's exemption would 

"An EGC iucompany rlnt lw k>stlwl SI.Ol billioningrossannualt<~'tnuc. mponygencrol~ remainsan F..GC 

until it lw mo« dun $1.01 billion in gross >nntl3l re>Tnue, d>e end of d>e 6S<2l )'"'in dt< )'<» of 6fth :tnnil·ersary of 

th< EGC's IPO, or- as is nlOJ< lilcdy-it lx<:omes a large >e«ler.att'<l lil<r Q.t, has a SlOO million Ooot as of d>e end of 

dt<l!C<Ond quanerofirs fL<ai <><~ Sttll C.I'.R.§24Q.l2b-2. 

" Scroon 461{a) of dt< Act requires an inrenul comrol repon rlnt includ<. an "''""""t of the effecri1-eness of a 

compon)'s 6nancUl rqxming inrenul cootrol suucruro and procoou""' Section .ull(b) "'l"in~ an auditor's >tttsurion 

as to this 461(a) a.<SCSSmcnt. 

SEC. -IQ.I. ~l..,'l iG t\'T tiSSE.SS.\lENT OF lt\'TERNAL COt\'TROLS. 

(a) RULES REQUJRED.-Th< mmi.~<ion !hall prescribe rule! o:quiring ta<h •Mual report required bysecrion 13(a) 

"' IS(d)of dt< Securitie! Excl\ante Act of 19J.I (15 U.S.C. iSm or i8o(d)) roconwn '" int<m21control .. ,..,, which 

shall14 
53 

nonnaUy expire no later me end of the f~cal year follol1ong me fifth anni1•ersaryofirslPO (a "five-year 

EGC''), but the Act would tempor:uil)' ¢Xtend the exemption for a non-large-acccler.ued-fi!cr, fi,·e·year 

EGC that has less than $50 million in 3-ycar 31•erage gross f~cal year revenue~ The temporary 

exemption would run unlil the earlier of the end of a fiscal year in which the comprul)'s 3-)·ear arerage 

gross revenues exceeds $50 million and the date that it beoomes a l:uge accelerated filer, but in no e~•enr 

later than the tenth annl\·emry of its !PO. 

It is not dear how the FIA/404{b) Act will facilitate capital formation or, more precisely, 

increase the number of public companies. Hm, it ill apply to on~· a narrow slim of companie~ The 

SEC and subsequend)' the Dodd·Fr.mk Act previously e.'empted non-accelerated filers from Section 

404(b). This exemption covers companies 11ith a public float of less than ~S million, 1\hlch means that 

fi1•e-year EGCs that have less than a ~S million float would be unaffected by the Act. The Act 11i1l 

exrend the 404(b) exemption only for EGCs that have a public floor of at least 575 million tmdha,·e 3· 

year a~·eragc gross annual m·enues of less than SSO million.!' The caregory of above-S7S-million-float, 

below-$50-million-uHevenues constitutes a narrow cross-section of companies. 

This na110w c!O!'S·secrion would be further reduced because the Act applies only to EGCs that 

conducted d1eir fPO in the preceding fwe years. There were about 750 IPOs over the last five calendar 

yearn, of which about 600 were EGCs.;z So it would be only the above-S75-million-float, below-$50-

million-in-m·enues companies in this subset of 600 EGCs that remained EGCs for which the Act would 

tempomrily extend the 404(b) exemption. h would not be surpriling if less than a few do•en of the 

4,000+ that are listed in the U.S. 6t these criteria. 

The CFO of aTyr Phanna reportedly testified that the AA/404(b) Act would affect about 

200 biotech companies," but the actual number could not be remotely dose to 200. Biotech 

(I) "'ce doe responsibi!i~· of managemen1 fo1 <>t~bfuhing and main12ilililg an adcqvoce incemal control 

SUUCI\llt 2nd p!OC<'dures for finwcial .. porting; 2nd 

(2) conuin an :~SS<ume ~ as of doe end of 1hc I110ll rettm fisc:al rear of doe im<r, of doe effocriv.,..,.of doe 

inremal conttOI SIJU<!Ure 2nd proctdutts of doe issuer for 6naod~ r~-poning. 

(b) INTERi'JAL COl\'TROL EVALUATION ANO REPORTING.- IVith "'~""' 10 doe imemal conttOI '""'mem 

roquired by :IVOOocrion (a), <a<h registered public accooming fum WI P"l""' or issues doe .udi1 "flO" for doe i=r 

<hall""" 10,200 report on. 1hc 2SS<>Sm<nl mode by doe managtrn<nl of !he is:<u<r. An an,.. lion mode under Ibis 

<~Vble<Oon !lull be made in ac<erdance uilh swmrds for '"""rion c~men~ issued or adopted b)· doe !loud. Any 

such oues12rion shaD not be die subjcc1 of al<JlW.re eng>gem<nl. 

Section~. Sarbane>·Ox!ey Aet of2002. 

" Coml"ni<s can Ol'oid ~<'Ching !he Si5 million cutoff bprro~ubring !beir public llo<u, in 10me ascs lllcg211)'. Sit 

2017 SEC Rq>orut 9~-95. Thus, !0111< comp:mieuvoid 1hc '"""'lion by eng>ging in 1hc kind of ac<OOnting abuses 

1ha1 an att<Siation •·oold derer or dere<t. Creuing a $50 million cutoff for a .&OI{b) cxemp<ion il lil<c~· uigger simibrly 

manipulam·ccondoc!. h •-oold be profcuble-ofure\'cr !hcauoffis- ro limi1 i1 10 a lingle mcuic 2..! 002 meuic to 

which G11AP are 1101 01•<dy susccp<ibk. As di><u.<><-d irifr• in l'oo!no<e 37, doe ai!S"r f<>< b<ooming"' ace< len ted fila 

isubGU21)'· 

"'Lit O.rM>tderosian,W171PO R<port ~lay2S,2017) (8S%ofiPOs tioi!I2QI2 toW16in,·oll-ed on EGC) aruihhb 

4/ hnps:/1 <OW" .law.hatnnl.c ... /2017/05/ 25/2017-ipo-ttpott/. 

ll Stt LA11111hrsAJhJ toB,.,,,.StJtfulltJ·Ox/g Stai#t4fJI(b) E.YiflfP/'1411. Reure!S Quly 19, ll11)('l.mlmdmAJkdto 

B,.,J,i) aruihMt 01 hnp,//u:<.dlOlllsonreu«"-<omim<dio-resoum:s/11('1-.·m<dio·mour<<1/chccl:point·ncu>/cbily· 

15 
54 

companies do, in fact, make up a la.ge percentage of lPOs, but there were onl)' about 200 biotech 

IPOs during the entire fh·e-year period from 2013 through 2017.ll It is ob1ious that not every one 

of these companies will have staned as EGCS and, five years after their IPOs, (I) have continued tO 

be EGCs, (2) not hare been acquired or gone bankrupt, (3) have a market rnp of between $75 and 

700 million, and (4) have 3-year average gross revenues of less than $50 million (an "FIA/40-I(b) 

company"). 

I rc1iewcd the c~ent stan•s of 25 biotech companies that conducted lPOs in the tim seven 

months of2013. ll These companies would or would have become fire-year EGCs around the date 

of this hearing, so this group provides a small sample of the number of companies that might be 

eligible if the FIA/404(b) had been law in the first half of this year. Of these 25 companies, 9 had 

become la.ge accelerated filers, 5 were acquired, 2 were non-accelerated filers, 2 had 3-year arerage 

gross m·enues in excess of$50 million, and I went bankrupt." Of the remaining 6, 2 had ceased to 

be EGCs, lea1>ing only 4 of the original25 (16%) for which the FIA/404(b) Act would pr01ide a 

tempornry 404(b) extension.ll Appl)ing this percentage to the 200 biotech IPOs implies that the 

Act would exempt 32, a far cry (rom 200. 

I><~Utand/la.lnlh"f>o"kcd-to-b!O:i<kn·S1rh>ncs-odey·S<.~oon·4i).lb<>"mpnon . The a <tick l' a bit ambiguous" tht 

purpose of the ttfeten«. 

llThero appru tobr '""Jingddinioionsof~iratconscinu<Sa biottch !PO. John Catroll, Tbt Brst-a.JlV'MtBiokf.biPOii• ibt Ckmrf201 7, Endpoin" NM (Aug. 22,:Wll) (22 biotech II'Os yro·to-dat<) mit.Mul 

hnps://mdpt<.<:om/d~t-bcsr-and-~<>m·biot«h·ipos·in-the-doss-of-2017/; lliot«h II'Os: Outlier.<, l'alueCrearioo, 

and the Di!p<l'!ion or R<tum~ Life Sci VC (Scp. 27, :Wil) (1;9 biotech I POs from :W13 1hrough 2016) a.-.ihbk 41 

hnps:/ /lifescil'c~om/2016/09/biot«h ipos-ootlicts·ralue<tt>lion·dispctsion·I<IUms/; Bt>d Loocar, Bioteeh IPO 

0a.'5 of :Wl7 (Ul<fi,idiUI in1-estor's blog reponing 40 biotech I PO. in :Wl7) .,..;/alk a1 

hnp://u"'"''.lonroblog.com./biotcch-ipo•·dm-of-:WI7; Mark Tmy, The :WI7 Biotech IPO \Vmne" and l.oo:r.<, 

BioSpa« (Do<. 21, :WI7) (44 biotech IPOs in 2017 inclutfing hcalthruc ilsuets) 

hup.<//~-. .. ·.biospm.C<>M/ uticle/ unique-the-biggest ·biotech-ipo-uiM<tS·and·IO!<..-in-2017/; Atlcn<: IVeint~:~ub, 1lt 

Biotul! IPO &em U'liU<Mii11~t<, Nl!lhq E."" Pmid, fotbes Q'/01·. 10, :WIS) (26 bioroch II'Os in :Wl6; 30 in :W17 to 

datc);JohnCatroll, Thtitip IO~kJJIP0srf201}, F~<n:eBioTcch(llll<bred)(39 biot«h li'Osin :Wl3)anzjhbka! 

hnps://""'"''.fiCrtebiolo:h.oom/'f"Ci>I·"'J'O'I/!Of>-10-biotcch-ipos-of-:Wll. 

» I includc<122 biolcch II'Os from: l.uk< Tlllllll<nnan, 1lt Bi•~tiJ /PO Stwmmi: IJ?M Up. U'hoi D••• i• 20/J, Exomc 

June 3, :W13) (li...Ong 22 biotech IPOs tO da«)•nzjhh/t IJI hnps://u'WII'.<Cooomy.cocn/naci0<121/:Wl3/06/0>/the-biorochipw<orc<ard-of·2013-whos-up-whos-doll-n/, and 3 biol«h II'Os from other !OUIC<S. Stt S<t~·tll Shore, RU! Lwm Filii 

!if i• BiNtti!J, Ausc, l'inancUI!kv., :W1311'L'I!R 21272812 (Aug. 28, 2013} (13 biotech IPO. in 2QI3, ~·hich m«<h 

numbcrin IQ13); Pameb Toulbcc,A T~~~~tto Tell Bi>~itl!l Stm~tb, The Dcai,:WI3 \VIl'IR 221663-11 (Aug. 23,2013)(16 

biotech IPOs ro doo:); Foil Tbtru{JIIdift J<i11s BiNtdJIPO ~ U",!Wd!i"!.for !69.11, Xconomy, :W13 IVI>.'IR :WISI374 

(Aug. 14, :W13) ('30 life sciences componic> hl<e sucrusru!Jy gone public, mote rb>n double the annu~ r:ue or biotech 

II'Os!WI in the wake or the 20011 financwcrisis'');Biotcchnology lnduiii)'O~nizacion Nco~ Rdeose,JOBSM BIWIJu 

N""lifi11108i«lll>, S..tt New S.nice(Aug.I4,:WI3)(23biotcch II'Osasof Augusc I); Da1idlbomas, Tbt&llmttfibt 

8iokf.b IPO. Biotcchnol1· (A'-'S"" ;, :W13) (11legiblc list of 22 biot«h I PO. to ®te)arai~-l!k 41 hnp://•"'"''-biotcch· 

1101''-oWburincw.tnd·inl·cHJn<1lts/insidc·bio-ia/:W13/f!O/rhc-rorum-of·tbo·biotcch·ipo. 

"The bankrup1 <Qmpony is.Kalohios (of Maron Shkreli fame), u-hich came oot ofbonl<ruptcy and chi~ i" rwnc 10 

Hununi&<IL Humani&<n is cwrenrlr a !mlllc:t "'J'Ofling componr ~ith 1 mark« <>p of approxim:uely $61 million;"' 

r«o<J$0ruted it•-ould $1ill be exempt fromSeccion40l(b). S<tHumanig<nilnniUI Rqx>n (Mar. 27,2018)anzjfalk"' 

hnps://\\uWS<C.'if11'/AIChiW:s/cdp;.r/dm/1293310/00012146;91WJ?..J97/pl1310010f:.htm. 

" A oompany '"-"' 10 be an EGC iri<s public Oo:u m-eeds SiOO million" the end or i~ 2" 6sc~ qll2ttCr, i~ .• on JW><: 

30. One of these c~ bo!cd on i~ 2Q outmnding shlttS reponed in its q=edy n.')lOn and i<> lr.lcfing price on 

Ythoo Hnancc, hid 1 publidloa1of approxima«lySiJO million in mid-June :WI4 th:11 dn>pp«< sharply to S702 million 

b) the end of the month. IJu,·e 1101bren abledettnninc whether thecompan)'s nw!."<tapat d>eendof2Q14-.s 

16 
55 

Approximately 85% of fPOs uwoh·e an EGC, so assuming about 7SO fPOs from 2013 

through 2017, about 600 would hare uwok•ed EGCs. Of these, about 200 were biotech companies 

~ ha,·e assumed that all biorech JPOs in,·oked an EGQ, which lea,·es 400 non-biotech lPOs. It is 

rery likely that a far lo\\l~r percentage of these companies than biotech companies would be 

AA/40-I{b) companies. The aTyr's CFO is correct thar biotech companies are far more likely ro 

benefit from the PIA/40-I(b) Act beClluse they ha,-e a long gesration peciod ducing which rhey may 

have zero or de minimis re<-enues and subsranuru R&D expenditures (and rhis is consistent wirh mr 

wiew of d1e filiogs discu.o;sed abo,·e). If non-biorech EGCs remain AA/40:1(b) Acr companies 

afrer five years ar one-half the rare of biotech companies (8%), auother 32 would benefit from the 

Acr, bringing the rota! to 64 - or/.5% of the 4,.336 U.S.-listed companies as of the end of 2017. 

If the non-biotech rare is one-founh of the biorech rare, d1e row would be 48. TI1cse escimares arc 

bener rhan back-of-the-c"'·elope numbers, but not b)' much. I submit rhar Congress should have a 

more precise estinme of the number of EGCs tim would acmaUy benefit from the AA/ 40-l{b) Act 

before making it law. 

Second, the Acr is likely to ha>·e no effecr on beha\oOr of businesses other than ro creare an 

incentive ro manage re,·enues so as ro remain below rhe SSO million cutoff and to enable improper 

accounting practices ro continue ro go undetected and undeterred. The mere possibility tim a 404(b) 

exemption mar continue to be av:lilable Ji~r 1"" nJitr its/PO is nor like~· to affect an EGC's decision 

whether to conduct an 1 PO. lr also su:Uns CJ"C<Iuliry that the availability of a temporal)· e.xemption under 

the Act would affect an EGC's decision, for example, about whether ro dc-lisr. The 4 companies cited 

I"" !han SiOO million. ~Or~. the coml"nl'' quom:dy rtpe>M shou> 29,738,391 ou""'nding sh1rcs at the eod of 

2QI~, and Yahoo Financt sholl> a clo!ingshare price ofs->..3.60 on June 30,2014, which uoold retkct a nwkctcapof 

$701,826,027.60. S«Oncon>ed Quaned)· Rcpon (Aug. 7,2014) ..-.il.hkm 

hnps:f/u-.. ... •Ji« f!""/ArdiJ<cs/edtgat/dm/1Ym73/fHJ11931251~29933-I/d736146diOq.han#tx7361-16_2.; Y.hoo 

FllWlC< Qunc 21, 2018)•Mihhk 111 https://fuunce.)~hoo.com/quore/O~IED?p•O~IED (Wt vi9ted June 21, 2018); 

"'""' o,_,J Pl!a1IJJd«fffiJots KttpJ Riling: Up IOJf.;., J D~s, Global Round Up Quly 2, 2014) ($725.5 million nwktr 

cap). HO\\"t\-er, a July 2 artick states that its clo!ing peke ns 523.30, which uoold bring i~ nwktt cap under SiOO 

miltion. StrO,...,Jf'm"""6"'1JSflf'St!Js 1,51YJSIMmojSIIx!, Am. Banking& ,Ill:< Nc•~Ou~ 1,2014)(52).30 

closing share price on Jllllt 30, 201 ~ .00 $688.6 mallon market ap). Tho company had a public fiO>t of apptO>imatc~· 

$766 minion in mid-June 2015 that dropped sharply 10 approximudy$640 nillion :as of June 29. A July I anide 

rtpe>M that iu slwt price .-.sS22.50on June.JO, Itt l.ogan Walbcc, 0""""4 P~llfif4/s JIP s,/1; 1.8()() SiMmojSt«k, 

Ttd:<r Report Quly I, 2015~ which, when multiplied by its repon«130,116,6JJ cnd-of-2Q1Soutstonding shares, uoold 

imp~ a '""""cap of$677,62~,24150. I ha,·e "'wncd that Oncomcd ~ • qualified EGC, although l also-that the 

S(C has found that compmies nunipulatt dlrir poblic float in onlcr to affm dlrir rtgubtory "'ru' Stt 2017 SEC 

Rtpon at 93-%. This monipolatioo '"'"Irs pard)· from the abili~· of L<ru<rs to llfect dlrir s<>rus b)- lll2Jlipol.ting their 

112ding prict one cbj· och year as a conscquc:nc< of an EGC's 11l2rlter cop being atilitnril)· 111<2sured as of a >ingle daythe la.<r <by of its sccood firoal quarter (a compan)· con sub«qu<ndy 1\'t\lm to being a non-l>rge=clmr<d filet ar the 

end of the fiscal )"tat, but thi:s does nor clunge the loss of EGC surus). This ari>ittary t~r produc<ll absurd """II>, 

such 2> allowing a<llmi""Y to rtmain an EGC <:l"tn ifi~ m~ nwlct cap coosistcndy ex<tt<ls SiOO millioo, or 

stripping a compmy of EGC surus if i~ 21'<rlg' nwktt ap is cons~t<ncly bdoo• $700 million. My .. ,-x,., of th< sro& 

priccsof2013 biotech EGC IPOs "'88""> that the efl<ct of this :ubihlr)' rri&<t ~ much8J<>t<r for such companies, 

pos!ibly bcouse, for example, the anno<mccmc:nt of approval or non-<ppro~·al of a drug or d<:l"ice can cause u~d suing> 

in market cap. 1.-oold be n>Ort of6cienl3nd &iter to fions such as aT)T to base acc~orated Stltus (ooly for EGC 

purp<>«>) on, for c~k, a coml"ny's rolling !\.month"~~ nwltt cap. which .-wid pn.'v<nt brieRy 2hcrnnt 

ll2ding from o:iggtring heightened regulatory re<jlJil<"""" or allo.ing coml"nies to <!cape applicable rtgubtion ~ 

also reducing the aMi I)" and incentive forcomp:anios to lll2Jlipulate their stock price to maintlin th<ir EGC mru• 

17 
56 

abore lt.we r.Used hundreds of millions of dollars; the addicional oost of a Secooo 4Q.I(b) anesmcion 

"'ould be 1-anishingly small in oomparison ro that amounL 38 

Third, empirical analysis has demonsuatcd the value of a 4Q.I(b) anesmtion at the same rime that 

the cosr of 404(b) oompliance has steadily declined. If anything, existing exemptions should be peeled 

back in order to begin restoring rhe coherence of public company regulation. The oost savings 

experienced by the small handful of companies thar al'ailrhemsell·es of the AA/404(1>) Act's tcmporuy 

exemption is likely to be far smaller than losses associated with acoounring rcsuuemenrs and the adrerse 

effect on d1e rcpumtion of U.S. financial mad<ers, the confidence of investors and the integri~· of 

fllUneial reponing. 

One incidenml benefit of the e.~ring Section 404(b) exemption for non-accelerated filers is that 

it has pro1•idcd ample dam "'ith which analyze the exemption's effec~ Srudics ha1·e found that firms 

subject to Section 404(b) have lower restuemem ratcsl'l-- abour2/3 that of non-404(b) firms.l!l Nonaccelerated filers ha1·e had a substtnrially higher incidence of adverse management reporrs." Section 

404(b) compliance oosrs have been dectining since an initial increase after the S.rbancs-Oxley Act 

became la1v.'! 

Congress has no =• ro mke the e~..Juarion of Section 404(bYs dc010nstrated efficiency away 

(rom regulators, as regularors hare demonstrated their anenril·cncss ro d1is issue and mke action as 

appropriate. It "~s the SEC, not Congress, that exempted non-accelerated fders prior ro the DoddFrank Ac~ Jn 2007,1he !'CAOB issued guidance on Audit Standard 5,41 which the SEC found has had 

the "intended effect of reducing rhc compliance burden and improving me implemcnt:ltion of Section 

404, including the requirementS of Section 4Q.I{b) for the srudied group of issuers."" In 2009, me SEC 

"The 2Udirlng <"}l<lll<S fO< aTyr were reponcdly $27~,"' IA•Mkm AlhJwllMII•, ""¢fa, and Sc<con -16l(b) on 

mragt ...Wos in an addico!UI cxp<nse of 35% of mar aniOUn' which~~ be S!»,iOO. Sa Hongmci )io, Hong Xie, 

•nd 0.1id A. Zkban, An ANI\ -.is of !he Cos~ and lknefios of -~udiiOI An=tiQn of lnt<mal Uinrrol 01~1 Fw.nciol 

Reponi~ (O<rober3ll4) ('A~ AW)'Sisof !he Cos~ and Bcne61S"}. 

"Stt A. I. Nag)·, St<tioo 41# c.mph"' allli Fi,.,.a.J &p.rli"ZQ..i!f, 24 Accoonoing Horiwns .J.II {3)10) ("'ll'm·e 

condarion between Sc<tiQn .JO.I(b) compliance and m>teOally misst:ltcd finmcial stattrnents~ Yuping Zhao, jean C. lktbtd and Rani Hoit>.<h,SOX 4/)I,A•iflw flwl, ..J/6t Prrmr6,.ojfi...a.J&port MiJJIIIIt..,u(SOX -16l, Auditor 

Effon, and !he Pm~ntion of Financi:ol R:port Milst~r<-ment> (2017) .mihWt"'""'·cont/absttlCF2693619. 

"Sn2011 SEC Rcpon.JKfW,al86 f'Section ~)<o plianr issuers rb.t reponedeffeai,~ ICFRcxperieoccd a 

finaocid """""""' ntr. of .5. 1%, w!We Sooion 404(•)-onlr """'"experienced • """"'"'nt n.te of7.4%" (qooring Audir Anoi)'lic.\ Rcsmremcnu Dio:lo!cd by rhe Two T)'P" of SOX 4Q.l I!$U<n: (I) Auditor Anemtions FikiS ond (2) 

Manag<ment.Qnl)' R<pon tilen(NOI'. 4,2009))). 

"SniJ. at87 & note 181 (ci<ingAuditAnol)'tic>,SOX4Q.llla>hboatd Yw6lipdam, Occ 2010,<>'2ilableat 

http://""'"-'Ompi;...,.-..lu:om/s/docu!OOits/AASOX-104fdf; "Audit AJUI)1ics "-'PO" rb.r odding this popubtion 

of 3,066 Sc<rion -104(a) ttpons 10th< 3,356 S<ctiQn -104(b) repor!!, th< acll·e"" !"""'""~of th< !OW popubtion of 

6,422disdosures becomes 14.6'/~'l 

o The "<Jq>r<s.«d purpos< o! !his guidance ·~• 10 "bclp andiror> opplr the P""'isions of 1-~S 5j to audits of smdler, kss 

complex po.oblic companies" and to ptlllidt: "dit<erion 10 :oudiroo; on srung rhe 0\lclil bo..<cd on a compony's m. and 

complexity." ld at 23 (quori.og Staff\'""'-:In Audit of Internal Uinrrol mat ;, lmegrao:d •ith an Audit of rhe 

F""""'l Suttrnem>: Guidance for AuditOO> ofSmalk< Public Companies Oan. 23, 2009)~ 

18 
57 

reponed on its findings of wi<kspretd support for Scclion 404(b) anesralion and the tangible benefi~ it 

pro1ided." 

In 201!, the SEC issued a repon on ways ro reduce the oosrsand burdens of 4().1{b) comptiance 

for aocelemred and large accelernred issuers. I~ conclusion is wonh quoting in full: 

The Srlfl" betieres thar the e:dsring inresror proreclions for accdcr.ued mers ro complr 

with the auditor anesmlion pro,isions of Sec lion 404(b) should be maintained Q.e., no 

new exempdons). There is srrong e1·idcnce that the auditor's role in auditing the 

effecm·eness of JCFR improves rhe rctiabiuty of internal control disclosures and 

financial reponing overall and is useful ro in1·csrors. The Staff did nor find aJl)' speciftc 

C\idence thar such porcnrial savings would justif)· the loss of inrcsror prorcctions and 

benefits ro issuers subjecr ro the srudr, given the auditor's obtigations ro perfom> 

procedures ro C\'2luare internal conrrob C\'Cil when the audiror is nor pcrfomting an 

inrcgmred audit Also, while the research regarding the reasons for tisting decisions is 

inconclusi,·e, the C\-idcnce does nor suggest that gran ling an e~emption ro issuers thar 

would e.<pcct to ba1·e S75-$?..50 million in public lloar following an IPO would, by itself, 

encournge oom~cs in the Unired States or abroad ro tisr thcir Jl'Os in the Unired 

Smte~<4 

This repon "~' requittd by the Dodd-Frank Act, ptesurnab~· because Congress wanted the SEC's 

expcn opinion. 

In 2013, a Genernl Accounting Office repon echoed the SEC's f111ding that tesmremen~ were 

higher among companies dut were exen>pt from Section 404(b).<l In 2016, the SEC propcsed 

liberali.>.ing the smndards for sealed disclosure by small public companies in order "to promote capital 

fonnarion and reduce compliance cos~ for slllaller registrants while maintaining invesror protmions'' 

and again eraluated the cost and burdens of compliance with Section 404(b) in light of more recent 

research.JS The proposal "4ll be voted on by the Commission in two da)~ " ]usr lasrweek, Chainnan 

Clayron srarcd rbar rbe Commission was "raking a fresh look ar rbe rbresbolds rbar rrigger rbe 

requitemenr conraincd in Secrion 4Q4(b) of rbe S!Ubanes-Oxley Acr 10 have an audiror provide 

an auesrarion report oo inrcmal conrrol o•·er financial reporting. » >J It is not dear why Congress 

feels the need to pull the rug out from under the SEC. 

•l Stt SEC S!ud)· of th< ~•r Act ol 2002 Se<tion 4011nremal Conorol o1·cr financial Reponing 

RC<JUH<menos, SEC Oflke of Economic A .. ~.,;, Ci<ptember 2009} •MildJ!< •J 

hnp://w.·.-s«.f!Y'/ neu•/SI1Jdies/:rol/sox-401_srudy.pdf. 

" 2011 SEC Rtpon, JJ?m, at s. 

" Stt lmemal Cootrols, GA0-13-582 Quly 2013). 

" ld at 10,2~. 

" O.'trsight of the U.S. S<curities and Exchange <Mnmi!Sion, Hearing before th< <Mnmi...: on Financi>l s.n;..., U.S. 

Houst ofRept<l<11eatil· .. at) Qunc 21, 2018) (testimony of SEC Chainnan JayCb.)1on). 

19 
58 

ln the meantime, rhe e\ideneeofSection 404(b)'s l'alue has continued ro mount A 2Jl14 srody 

found dtat Section 404(b) detr:cased companies' cost of debt ~~e increasing compliance modesdy and 

that Section 404(b) companies h.1d higher 1-aluation premiums and credit r:>cings.'' A 2016 stud)• fow1d 

that from 2007 10 2014 d1e cost of Section 404(b) noncompliance (S856 million in lower future eamu1gs) 

was more rhan t\lice rhecosr of compliance (S338 million) before mking intO account an additional $935 

million oost arising from rhe delay in aggregate market l'alue decline due to IUlOnl<l)' in1emal coniiOl 

disclosure}l 

The FIA/ 404(b) Act would undermine in1·estor confidence just as it has reached all-time highs. 

The U!mer for Audit Quali~· 2017 Main Street Jm·estor Survey found that 85% of inves10rs ha~·e 

confidence in U.S. Clpit!l markets and 83% had confidence in in1·escing in U.S, public~· rrnded 

companies- bodt all-cinle surl'ey records sinre d1e Financial Crisi&S; In the aftermath of the Crisi~ 

these confidence bcls 1vere only 61% and 70%, respecril'ely.>~ 

The CAQ's S\11'\'ey also found that 

• 78 pen:em of invesrors SO)' rhey are confident in audired financial infonnation released 

by publicly held companies, and 

• ln1·csrors regis1er exceptional degrees of confidence in the abili~· of external auditOrs, 

audir comminees, and Slock exchanges ro fulfill their in\'cstor prote«ion roles.SS 

While 85% of in1·estors bad confidence in U.S. Clpital markets, only 54% e:\'}lrtSSed confidence in ClpiDI 

markets outside rhe u.s. so- "'here Sarbancs-Oxley requirements do not apply. Further diluting the 

basis for inl'es!Or confidence in U.S. capit!l matters will weaken this global competiti<•e ad,·antlgC. 

Attacks on Section 404(b) are primarily based on rhe atgUmenr that sa\'ings on compliance costs 

can be inl'eSted in a compan)'S oore business, such as additional research and de\·elopmcnt That is rrue, 

" Stt An A"'lysl< of 11-t C.... wd Bene fir~ mpra. 

" Stt ll'cili Gc, tllfison K....,r wd Sarah McVay, Th: ll<ncfiiS and Cosrs of Sa!boncs-Ollky Sc<rioo 4()l(b) Exemption: 

E1icknce from Small rums' lmemal <Mluol DO<:Iosu"" (Sep~mber W16). Some commem110<S &il <o ackn011k<lge 

d121 an ancmrioo could havuny b<oc61. For <>ample one srudy conrend.s mar the "net complianre oosrs of S<cioo 

.u»(b) are n<gariw !><au.« fimlS' public floar is 2bnormally bwKhN jusr b<low the 515 million publi< n... <utoff, 011 

ti-t assumpri<>n d12rif the ncr dfe<r •~re positil·c,litms •wid choooc 10 be abOI·c the S7S millioo. Stt Dlwnmik> 

Dharmapola, Eo<timoling the CompliAnce Cosrs ofSe-c\Jriaes Regularion: A Bunching AnaiJ'!is ofSarlx>ncs·Oxle)· Sc<rion 

.(().l(b) (Ocrob<r 2016). This analysis pMides no mo>nillgful insigh1 intO the "net" effe<1 ofSc<rion 401(b). Th: 

benefit o( S<cioo 401(b) cornpli<ncc ~not oclr an premium on a company's StOCk price (and a prtmO.m bo.«d on 

tmpi<icala1121ysi~ not &""""by CEOs), il is also the <k1=nct wd dere<rlon of misreponing wd f=d. Srudits 

consi>tcnuy .00.· a higber inciden« of ..,..tcmr:nlll among oompani.,. <hat an: 1101 OJbjc<< ro Sctrion 401(b), bur the 

s<Ud)"• author 'f'P<'" 10 ''"""" dw rhis imposes 7.<rocosr on in''"''""- The Enron/ Worldcom sandals suggests 

(Kher~~ise. 

" SttCAQ Wl7 Maio Sto.'t< lnvcsrO< Sun·ey, Ctm<r for ~udil Qwli~· (Ocrob<r2017). 

ll!tl. 

" CAQar4. 

20 
59 

but ir is an argument equally applicable to the requirement ro provide audited financial tatcmen~. file 

quanedy rcpons, and meet other requirements of being a public company. lf the term "public 

compan{ is to mM• solllething, then the costs of a Secrion 40-l{b) e.'emprion must be weighed along 

with the bencftiS. Congress has recently made much of the importance of balancing the cos~ and 

benefits of regulation. Research genemlly sho11~ that the cost of higher audit fees is greatly exceeded by 

rhe operating losses and inflated ,,.)uarions rhat acoompany misstared fmanci2ls. The cost.s of 404(1>) 

compliance has steadily declined :md me SEC has deoonsmned a bal:mced, well·infonncd approach ro 

c'•aluaring the costs and benefits of rhe anesmrion requiremenr. 

Consider again aT)T Phanna, acompany that had a S75 million JPO in 20!5.S7 It is a good 

example of lhc kind of E.GC for which the Act might grant a 5-year extension - an R&D hea'1" finn 

11irh ''et)' ~nle re,·enue but fleering~·) sufficient float to quilly as an accelemred foler. aT)T went pub~c 

at $14/share, and quick!)' shot up 85% to $25.87 /share within a monolh Howe~·er, as shown below, the 

compan)'S stock price declined steadily thereafter, reaching $1.02/share as of eadr last week."' 

1day 5days 1 month 1 year Mox 

30 25.8/IJSI) """5. 2015 

20 

10 

~16 2017 2018 

There is nothing wrong with invesrotS betting on a long·sbot and losing - this is a necessary predicate 

for seeding great oompanies-bur a company should not be gran red the pmilege of using d1e ride of 

"pub~c compan)" and enjo)ing the presrige of trading on a narion:d srock exchange such as NASDAQ 

while claiming that the burden of an outside, independent audit of its inttrrutl ocnuols is roo much. 

Prior to its IPO, aT)T sucoessfully mised more rhan $170 million in the pm'l!te matketSS9 and $46 million 

" Th< company filed a Fonn D rhe monrh prior to rhe IPO ctisdosing th>r ir had ob<aincd S76 milli<>r> in Reg I) 

firunri~ aT)tPhamu FonnD(Apr. 2,~15 aJli.l:hka! 

h"P"fl~v.-. .>«.ffr''{ iir.hi•<s trlgar dm 13399 000!3.j99 01500'XXl2/lr..4FonnDXOI primaly_doc.xml. 

" I~ public floar is oppro:<imucly $30 million, which would .UO.• irro continue ,,.oiding rhe ••esr:arioo n:quiremenr 

inddinill.'~ · 

" S« The Om if&i"f. a Mft c..q.,..; i•ughi ifSarlimKJ.OxltJ<md lht FtJtm/kllfi<. lljCmpMr/t c-. H..nng before 

the Subcommiru:e on C.pitol Moder~ So<uriU.., and Jn,'tStmcnt, Commiru:e on Financial Sen;c., U.S. Hou.<t of 

R<p=nt:lci''tS Qui)· 18, 2017) (restimony of John llhle, CFO, • T)T Phamu) ('>T)t T "timon)"). 

21 
60 

under Reg D in 2017,60 in each case without ha1ing to complr with public companr requirements. It 

chose to be<:ome a listed, public company in order to benefit from that statuS, but it is unwilling to live 

up to the higher standatd that public companr smtus should enmil. 

Evaluations of the efficacy of Section 404(1>) should be based on a rariort.'ll evruuarion of irs 

actual cosrs and benefirs, not on gross, one·sided mischaracrerizarions. In 2016, aTrr's CFO resrified 

that 

Section 404(b) requires an exrernal auditor's attt:Sration of a compan)'S internal financial 

controls !hat pro1•ides /itr/e-ro-no insight into the health of an emerging biotech 

companJ•- but is VCIJ' costly for a pre·rcvenue inno1·arot." 

I disagree. And I submir that in1·esrors who bought aTyr u irs peak and lost 95% of their investment 

might have preferred thatthe company -· which spent $144 million on R&D from 2013 dlrough March 

2018 - ha1-e spent an additional $100,000 (llch )'(at to obmin an ourside auditor's auesmtion of 

effectkeness of its internal controls. 

Ill. Helping Angels Lead our Stanups Act ("HALOS Act") 

In order to e1•aluate the HALOS Act, we much consider changes in technology and markets 

01-er the last few decades. In 2000, l wrote an anicle that discussed what modem technology meant 

for securities regulation. The main point in the article, which is direccly relevant here, was as 

folio~>~: 

Technology has undennined the founclations of the U.S. securities regulatory regime. 

This regime has long relied on distinctions between private and public sales acmitics; 

personal and mass communications; loca~ iorersmre and international commerce; 

trade and settlement times; opening and closing prices; indi1iduallr tailored and 

impersonal ad,ic:e; written and spoken communications; and discretionary and 

nondiscretion:uy accounts. These distinctions dcpeod on the existence of 

computational, tempora~ and gecgraphic barriers that ha,·e been collapsed b) 

techno)Qgy." 

Since I wrote those words, the effect of technology on each of the listed distinctions has been 

scme, pauicularl) \loth respect to "printe and public sales acci1ities." 

The Securities Act's regisrrntion exemption for transactions "not io1•ohing any public 

offering" ("nonpublic offering') has been problematic from irs inception. What is ''public" is not 

defmed in the Act. Couns established a loose set of criteria in eraluating the availability of the 

"Th< '""'l""Y filed a Fonn Din ~17 di$dosing """ ir hod ob12in<O s.t6 million in R<g D filtln<int, .f« aTyr Ph>nno 

Form 0 (Sep.IS, 2fll7)aroihbltai 

hllp"//~v.-.·.>«.ffr''{ IIr.tu,·<s/tdgl.r/d2J:J/I339910/000J3.j99i011llOO:llt/"-4FonnDXOI/primaly_doc.xml. 

>T)TTtslimon)',SII}W(<"'!'~<is added). SttabJU.....tmAshlt•Bnaiktt,SII}W\1olm BW.C, tesd~ingon bch211 of 

the Biom:llno!osY 11100\~00n OrganiVJion, told l2\1'1112l;crs mot biom:h comp2llies du.t.,. sQll dei'Cioping drugs do 

not pr<Sellr the,.,. ,;,1: !hot .-es&~bli>b<d or bi!'S<r tomp>nic8lu1·e •ith rlt<ir fin:u>ci>J l<p0<1ing 'l"""" In h~ 

,iew, !her clcri,·e tittle bc11tfir from !he :wdi10r atttsration rtquio:mtflts for finan<W a'p<l<tingooorrols. "). 

22 
61 

exemption that were unpredictable and inefficient. E\'en after the SEC established a fairly 

predictable safe harbor under Rule 506, the meaning of "general solicitation and ad•·ertising" 

acri,iries, ~1ich were prohibited by the rule, was ne"er particularly clear. Nonelheless, !hese 

acri,iries in principle are dearly inconsistent \\ith !he statutory nonpublic offering exemption. 

Modem commnnicarions rechnololl)' has exacerbated the indeterminacy of rhe concept of 

"gene~ solicitation." Information no longer needs to be delivered; it can be made insranraneousl)', 

elccuonically accessible to billions by pushing a button. The practicability of immediate, universal 

access ro information renders !he idea of a "dcli'-e!)?' requirement somewhat quaint. As I wrote in 

2000, "technology has reminded us that lrcgularol)j disrioctions arc nor real, bur rather aJX 

metaphors we use to create, inteljlret and enforce rules.'"~ And these "metaphors no longer describe 

the war we do business."'' 

The declining utility of the concept of general solicitation as a JXgUiatO!)' distinction was 

ne1•er moJX ob<ious rha:n when it led, in 2011, to Facebook's cancelling the SSOO million U.S. leg of 

a $1 billion priv<ue offering . .s Faccbook reportedly cancelled d1e offering because a pril'atc email 

solicitation ro an accredited inl'esror was leaked ro and published by the Wall Srreer Journal. The 

SEC has declined to disclose what led ro Faccbook's cancelling the offering, but the prevailing 11ew 

is rhar SEC staff communicated to counsel that rhe 'Jlpearance of rhe solicitation in the journal 

could be considered genernl solicitation or advertising, which would have made the Reg D safe 

harbor unavailable. At a minimum, it was clear rhat, under the SEC's somewhat cloudy positions, 

counsel could reasonably ha,·e reached this conclusion on their own." I published an anicle 

discussing how this Facebook fiasco illusmued a problem the SEC needed ro address, but the SEC 

rook no acrion.11 

The SEC's inaction unfortunately led Congress to take a hatcher ro the nonpublic offering 

exemption. The JOBS Act required the SEC ro authorize general solicitation and advertising under 

rhe nonpublic offering exemption despite rhe fact d~t these were inherently incompatible concepts. 

Congress amended Section 4 to pro1ide that oo offers or sales under Rule 506 of Reg D may "be 

deemed public offerings under the Federal securities Ia\\; as a result of general ad1·ertising or general 

solicitation." In other words, although genernl solicitation and advertising are quintessentially 

''public" in oarure, Cong~tss chose ro cram the square peg of an essentially public offer into the 

" ld 

"'Stt Mcn:cr llulbnl. FtXII<okFi""' Rmds Fla111i• l'tioJtt OffiriW. Mominglru.oom (Feb. 10, 2QII). 

" The FurureofC>pi~>l Form:uion, Heuing before rh< Coounin« on O.·<cighr >nd G01~mmenr Refonn, US. House 

ofRepresem>rii'<S (May IO,:<llll) (r<>rirnooyofSEC Chaimwr ~wySchapiro) ('\lilendrcmedi> frenzycruproo, 

(F.lctbool(sJ coocem -.s rh>l rhq• mighr 001 be 2ble ro ~>risfy rhc requin:mror that this""'""' 1 gcnml solici12rion. 

And:10inUghtofrhat, 1\~ :t..<k<d rhc"'ff tocomebm tome •ith :IOmeteOOmm<nd>tioosonu'hcth«•t need to 

look at drc n:quiremcms of OW'<:<emplion. I ~'~len rhcsccxcmp<ioos wet< u'titu:n. nobodr thought a boot mcdiJ frtll%)' 

being drc son of thing that wwld rip drc baknce into u·hctbcr )W•~t< c~ in> gcncr:>l dci"rion or tllll)' • 

priv:at< offtrins-llnd :10 •~ - •• trelooling at this issue ,~. clo!cly.'). 

23 
62 

round hold of r.he nonpublic offering exemption (under the Orwellian header "Consistency in 

lmerpremtion"). 

The JOBS Act funher diluted the public·private disrinction by authorizing online 

crowd funding, raising the Reg A offering limit from $5 10 SSO million and precluding state 

regulation of large Reg A offerings. Crowdfunding sires now offer a combination of crowdlimding, 

Reg A and Reg D offerings, each "~th different disclosures and investor eligibility requirements. 

Crowdfunding issuers h~1·e routinely raised capital under dte Reg A, Reg D, crowdfunding, and 

intr:~Sme exemptions, and through donaci1·e funding on Kicksmner and Jndiegogo. They promote 

their offerings on Faccbook and T\\iuer. 

This mingling of different offerings and freewheeling public distribution has funher 

undcrO\ined nonpublic nature of privare offerings. The SEC stated in adopting rules implementing 

the JOBS Act that it would not permit private Reg D solicitations to be conducted through other 

public offerings." Howe1·er, it has permitted crowd funding offerings that receive more than the 

St.07 million annual limit to dircn inresrors who are accredited into a paraUel prime Reg D 

offering. In other words, accredited investors are being solicited entirelr through the online 

crowd funding offering- precise!)' what the SEC stated that it would not allow. 

The HALOS Act rakes the absmdiry of public private offerings to a new level. The JOBS 

Act stares that a general solicitation docs nor make an offering public in narure, as if those are 

different things The HALOS Act drops aU pretense and simp!)' declares that genernl solicitations 

are nor genernl solicitations (under another Orwellian header. "Clarification of General 

Solicimcion'). The Act will aUow 'inu.'llly any rype of public enriry to advenise and host an CI'Cnt 

that can be auended by any person for the purpesc of any issuer pitching a securities offe.ring. nte 

"HALOS Act'' is a wonderful acronym, bur the "Angels" are on~· a smaU slice of the like~· hosts for 

these vel)· public roadshows. The Act ntigbr be more appropriate~· named the "Shark Tank in 

El'ety College Auditorium" Act Afrer obtaining the credit card they should not be giren, srudenrs 

can stroll o,·er to the offering presentation ro sign up to buy stock they ha1•e no business owning." 

Members of Congress should know better than anrone that modem technology and public 

media has rendered the .idea of a pri,-ate meeting or presentation a quaint artifact of a long-gone era 

(see, e.g., the Facebook fnsco abo1·e). The idea of a troly limited, in-person roodshow in an age 

when an)' member of the audience can li1•esueam the presentation around the world is sirnihdy 

na!ve. As I predicted eighteen years ago, the public·pri,·ate disrinccion has gone by the wayside, bur 

I did nor e~pecr that bo1h Congress and the SEC would insr.all a Guemica-inspired regulatory canvas 

in irs place. 

lrQn.iel~Uy the HALOS Att's !Jw111$ion of"angel inve$1Qr group" is wholly suP\"fluous. 

From a practicing lawyer perspecril'e, it will create substantial uncertainty and impose unnecessal)· 

compliance oosrs. If an angel investor group hosts an e1·em, the issuer presenters will h.we 10 be 

"SttCm'dfundlng. Sc<uriorsAcr Rd. No.99N2t392 (O<L30,1015) ("10 iSSU<tconduclingocOJlC\Itmlrexcmpr 

offering fur ~>ilich pro! solicimrion i• nor pctmin<d •ill n<e<l ro be ,.,;,6«1 dur putclusel$ in dut ofkting "'"' 1101 

solicired hr m<>ns of rhe offering madt in reii.ncton S<aion 4{2){6)."). This is koown as rhe ')megnrion docrrint." 

" Any pcr.;on c;.n irwrsr in 2.n "'"""'"offering, in • R<g A+ or crml'dfunding offering subjc<r ro inrrsrmcnr limi1>, 

..d in • Ruk S06(b) off<ting Sl.lbject ro • 6mll(iol sophisciarion srandaol. 

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63 

confident that: (1) the Angel host is composed of accredited im•estors ("Als') (whatmr the term 

"composed" means), (2) cl1e group's members are "interested in uwesting in personal capital in 

wly-smge companies (whate.-cr cl1e terms "interested" and "personal capital" mean), (3) the 

members "hold regular meetings" (whaterer "regular" means, including whether "hold" means 

"attended'), (4) the group has "defmed processes and procedures for making in1·esrmem decisions" 

(whaterer any of that means, including whether the investment decisions reflect the group's pooling 

of funds), and (5) the group is not ''associated with a broker, a dealer, or an uwesanem ad1>iser" 

(mcl1rding whether M)' member may be employed by such a financial sen·kes firm and whether, for 

example, the group may be led by the head of a bank tn!St officer wtere aU members are the uust 

of6ccr's clients). 

The Angel host "ill become, itself, a kind of regulated enol)' that will be at risk of aiding and 

abetting an illcgaUy unregistered offer of socuricies if it docs 001 satisfy the defmition of"angel 

investOr group!' \Villthe SEC issue guidance oo what are sufficiently "defined processes and 

procedures for making in1·esunent decisions"> Or, so soon after creating a scpmre set of AI 

mificarion procedures ior Rule 506(c) offerings, will rhe SEC esmblish a o110Jhtrsct of AI 

verification procedures ior Angels? Will clre SEC create procedures under wtich issuers can 

reasonably reri~· an Angers rerifrcation procedures? Or its processes and procedures for 

in1·estmem decisions? Or the regular.ity of irs meetings? Or each member's non-affiliuion 11oth a 

broker, dealer or in1·estrnent ad10ier? I appreciate the heavenly power of Angels, but do they reaUy 

want to go there? 

Strictly as a matrer of practicable compliance, the exercise of defining "angel in1·esror group" 

is nor reasonably worth the confusion doing so will cause. Congress should consider whether, if an 

angel investor gro.up wants to host a Shark Tank, there is any reason why the group would be unable 

to fllld a go••emmcm entity or instrumcmatity, post-secondary education institution, or nonprofit. 

At least aU of these terms should be relati•·ely easy to interpret, and hosts should relati•·ely easy to 

fllld in rinuaUy any community. Every town of reasonable si?.c has a Chamber of Commerce 

branch. E•-ery city of reasonable size has a community cotlcge branch. Under current SEC 

positions, presentations could be tn-e-srreamed, therebr making them easil)' accessible to the planet. 

The Act authorizes tl1e SEC to appro,·e more Sh.1rk Tank hosts, and it is not dear on 111lat 

principled basis the agency could deny a 110de S\\~th of oxganizations admission ro this club. It is 

not a good sign for efficient capital formation when silnplistic, populisr notions of in1•esting 

"angels" infest the inoacds of complex adrninistrati,·e rulemaking. 

Rule 506(c) alread)' permits general solicitations and ad•·ertising in (public) pril~re offerings. 

The only real difference the HALOS Act makes is that up ro 35 non-accredited uwestors (the 

attending cotlcge snrdents'"} can buy stock at a de facto public presentation and i.;.-suers can be more 

., On< member of Congtm suggeroxl th>t the "'!uimncnt Ih>t such"'''""'" be sophis<iotcd would pn.'vont ~ 

srudcnts from invosring. Stt tl""" Congtmio<W R<conl" H261 Qan. I0,2017). This is incorrea. There is no, and 

tletcr has been an~'. practicable way to enforce thi..\ Rule 506 rtquiremcnL I am not :11\l."':l.re of 1n)' cnforctmem aclion or 

pri»« d<im III'Tha'ing betn brougln alleging rhat • noo-:t«rtditoo im·cstor • .., not :tdcqw.«ly sophisrimoo. I note 

that the JOBSA<trequired that rhc soplm<iorionofim·crom be ts!llblishcd. SttJOBSA<tSccrion302(b~ M)' mic\<• 

of funding poruJs ~<td rhat this "'!ui<tnlCflt is being honot<d most of<tn in the bm<h. The Congtes=n allo 

fails to !1()(t dt.lt HALOS Act P"'S<n<arions ·~I undoubt«<ly be u..<t<l to nntlet ""' under excmprions orhcr than Rule 

506. Rnall)', ir 'PI"1" that the Congressrron's po!irion is rhat the Securities Ads R'glli>tion of off<<> •~s ""'"' 

appropri>te approach to protteting ;.,..,.,.,_ 

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64 

la.x about ensuring rhar all investors are accredited investors." It is not dear why the last vestige of a 

quasi·pri,·ate offering must be eliminated :llld issuers aUowed to in1ite every one of 300 million 

Americans to a presenL1tion just so is-<uer:s more easily access Angels whose status as accredited 

in,•estoiS need not be carefuUy ''erified. 

The HALOS Act represents the de facto repeal of offering regulation. The question is no 

longer what conununicacions are pennitted ~thout triggering public offering rules. The Act pemuts 

public notices that specifically advertise a forum as a securities offering pitch (with only references 

to a "specific offering of security by" an issuer being probibired)." The Act pUl]lOtts ro require dlat 

"no specific infonnacion regarding :Ill offering of securities by the issuer [bel cooununicated or 

distributed by or on behalf of the issuer," and d1en creates an exception that COI'CIS aU of the 

essential specific infonnarion that an issuer would want to communicate regarding its offering.ll 

The quescion has become what communications are nq/ pennitted, as that category has become so 

narrow as to be more easily defined. The answer is that any cooununicarion is pennirred to any 

audience anpvhere is the U.S. as long as it is "hosted" by a listed entity. 

The HALOS Act is a de facto repeal of Section Sof the Securities Act, the hean of 85 years 

of U.S. securities regulation. Admitted!)•, the HALOS Act rides a horse that probably has long since 

left the bam, as discussed above, and there is probably no going back. The more practical question 

is whether Congress will let that horse continue to run wild or esmbtish a new model for promoting 

fair, efficient markets. Rather than repeatedly asking the SEC tO adopt incoherent rules, Congress 

should, instead, eliminate the regulation of offers and replace it 111th rules th~t ensure that, in a 

world in which aU offers are, in effect, aUowed to be pubtic, aU offering infonnation must be made 

public. 

Congress has created a regulatory regime for unregistered offerings rhar distincdy favors 

accredited in1·estors at the expense of retail investors. A S I million public crowdfunding offering 

and a $50 million Reg A offering must be accompanied by publicly available filings, while Reg D 

issuers are allowed to keep their offering documents secret while making public investor 

present:ttions. Crowdfunding and Reg A offerings must announce their offerings, while Reg D 

issuers are penniued to keep them secret. Although Reg D issuers are ostensibly required to file 

minimal infonnation on Fonn D, many (tf nor most) ignore that requirement." The SEC has 

blithely obse"·ed such noncompliance in discussing Reg D offerings but expressed no interest in 

., Th< "more lax'' reference here is to !he pwponcd diff<t<nee bct\<<en !he ocer<ditcd in'""tor requitcmcn~ und<f 

Ruios SOol(b) 2nd {c). Con!lfC'$ required dut ;Q6{c) issuer> .. ~. IC1SORible steps to veri!)" AI '"""'''using methods u 

dctermin«l by !he Commissi<>n." Prior to !he JOBS Act, it • .., undc<><ood dw """"" lud ro take reasonable steps ro 

v<ri~· .-11 SOirul under old Rule ;()6, but !he r«<&<>IJ' implicarion of n<l!' Rule 506(<) is dut !he cktennimrion of Al 

'"'"" under !he old rule is !tlbject to a to.~r mn<brd. 

" Stt HA!.OS ACI Section 3(•){1l). 

" Stt HAJ.OS Act Section 3(•)(D) (p<nniuingdismootion ofinformarion including dw the issuer will be offering 

«a~rities, !he ~1'< 2nd amount of «<uriti<s to b< offered, !he amount of «a~riti<s .Jre.d)" !pOl< en for (L<., "get your 

order in oow, b<fon: ·~ run our'), and !he intended usc of !he procetds). 

" As di!CUSSC<I bcto.•, Congttss lw tilted !he regubcion of ttgisttl\'<l offtring:< against r<Uil im~"""" .~u. This 

foliOII~ Congt>...,.s 1996 ck facto prolubicion ogainst retail inr<:~tot> bringing "'"' sccuritits Jaw cloims · ·IUie koling dut 

option 11-.ilable ro larl\( im~stors. 

26 
65 

doing anything about it. Jf all offerings are permitted ro be public, aU public offering information 

pro1~ded ro investors should be publicly avai~ble 15 

IV. Encouraging Public Offerings Act of~IS 

The Encouraging Public Offerings Aa of2018 ("Confidential Flliflgs Act') would expand 

two EGC exemptions ro OOI'eraU filers. Currently, the JOBS Act's roadshow exemption permits 

EGCs to make pm-are presentations to qualified instin•cional buyers ("QIBs') and institutional 

accredited in\-estors ("IA!s') before and after filing a registration statement. The JOBS Act's 

confidential filing exemption permits EGCs to file a confidenrhl draft registrntion statement before 

their lPO. The Act \\Ould extend both of these exemptions to ali filers. The JOBS Act pro11ded 

that an EGC must 6le irs at least 21 days before its IPO; the Fast Act reduced that number ro IS. 

These exemptions exacerbate the incoherent erosion of the distinction between registered 

and unregistered offerings and furd•cr disad1-anrage of retail investors lis·a·l'is Jruge in1·estors. What 

makes registered offerings different is that communicltions do not occur in an infom~ation ''llcuum. 

During the quiet period before a registr.~tion statement is filed, oo offering-related infom~ation may be 

disseminated. This ensures that when information is dissemin3ted, it is against the di<ciplining bacl<drop 

of • 6led, publicly available registration statement EI'C')' other communirnrion, public or private, is 

made "'th an eye ro that filed document And CI'C')' inl'esror, large and smoU alike, has access to the 

same ftled registr.~tion sratement as of the issuer's fll'St public m.ukering of its offering. 

The EGC exemption destroyed the key elements of this modeL It permits issuers to make 

unregulated presentations "'thout the disciplining effect of a fdcd registration statement as contex~ uith 

a fded registr.~rion statemem beconring anilableonly 21 daj~ prior roan EGC's lPO." This model 

facilitates the communication of fmudulent or inaccumre infomliltion prior ro the filing of a registr.~tion 

sratcment, pro,,des large inl'estors with a distinct infoonationolad1·antage o1·er n:tail in,·esrors, and 

prot,des inadequate rin1e for investors to enlu.ue an EGCs «gistration statement. 

The company discussed above, aT)T Phanna, illustrates how the confidential flliflg process can 

be abused. The con'P'"!' fded its frrst draft registration statement on O..>cember 22, 2014, and conrinued 

to fde undisclosed amendments for mort than 4 months before filing a public regisnation statementonlyone month before its !PO. Prior ro that filing, the SEChadobjected to aTry's representations in 

confidential filings reg:uding the vah~arion of its stock, but this issue was still unresolved as of the first 

public filing. The SEC rejected additional &closure initially proposed by aT)T to address the 1'aluarion 

issue," and cotrectio-e disclosu~ was not included in its regiscration statement until 9 days before 

the /PO. "iS The SEC also aUowed aT,~·r to disclose its e~ted offering price rnnge ro the SEC staff 23 

~tSE s P"'""' RmrriPOM•shl,'¥"("1• ohe UK,:illp<imoCOIIIJ"S1i<Sm fo!OOI to publish a<OOW1,.') . 

. , The JOBS ~CI ocMD)' rt<j,uired that the r<gisrntion srattmenr be filed at lcost 21 da)~ prior to ohe i~• 6nt 

roodshow. H.,.'C\~r, the SEC in!e1prtred «St·ohe>~••"' prescnrarioos not to be communic:nioos to<UishOI'., •lthoogh 

th:!t is mcdy wh:!t obey' "'· It ohereby :unended ohe jOSS Ac< to pennit ohe iniri21 tiling of a public ~oo 

saremc:m a me.rc 21 cbys prior ro the i.~r's.IJ)(). 

11 LcnerfromMoggic Wong. Goocmin Procter U.P, to SEC (.~pr. 17,20!j) ('Aprii!7Lett<t').nuil.rbltal 

hnp<:f/"v.w.'l<C.'if11'/AIChlw:s/cdg.r/dm/ 1339970/000119312515136534/filcnm: l.hon 

" aTrr Ph:mltl Prospe«us(•lpr. 27, 2015)('April27 Prospcctus').nuih>klll 

hnp<://"ww.Y:C.'if11'{ \rchl<<:S cdg.r dm 1339970/00011931251514S0!3 d81905 l~htm. A redlin<d comporioon 

<>f the otigito:illJ· 61«1 sccrion of ohe prospec'"' to ohe omended <ersion ~ P""id<d at Appendb: A to this restimoor. 

27 
66 

da)~ prior ro the TPO" while still continuing ro withhold mar infomntion from an amended «gisrration 

statement flied 9 days prior ro the !PO.oo Thu1, while retail invcsrors had 9 days ro (\'2!uateaTyrs flnal 

amended prospecrus, Q!Bs and !Als had likely been receiting presentations on a T)T for weeks, if nor 

monm~ Even rhose large im·esrors had only 9 days to compare rhc information in the final amended 

prospecrus tO information rhey had previously received. 

The l'acebook !PO illusrr:ues how retail invesror:~are routinely disadvanlllgcd br discriminarorr 

rrc:umcnt and the lack of f.tir access ro information. Facebook amended irs registration smremenr just9 

dat~ before irs TPO to indude adt·ersc information nor pre,iously disdoscd.01 While invesunent bankers 

cur their earnings forecasrs$2 and reponedly communi<ated rhe n('v information tO their large clieors, 

retail clients were left in thedark.Sl Facebook's stOCk pricecmhed after the offering, which led ro the 

filing of more ~tul 40 la~>~uirs. 

The Confidential Filings Act codifies" rrnil in,•esrors' informational disadvantage by increasing 

rhe number of issuers wlto may pro,~de information ro large investOrs when no registration statement 

has been made available ro retail in'•esrors. The aTyrand Facebook lPOs make irclear that the SEC is 

quire willing tO grant effectiveness even after material new information has been added ro a rcgisrr.uion 

sraremem only nine days before an TPO, pedlaps (\'ffi the da)' before an 11'0. The Acr engenders a 

policy of discrimination against and disad, .. nmging of retail investors rhar direc~)' comrndicrs !he core 

goal of registered offering regulation: ensuring access ro, and the integri~· of, infom1ation about public 

offerings and public companies. 

V. Consumer Financial Cboice and Capital M:ukers Protection Act of2017 

The Consmner Fmancial Choice and Capital Markers Protection Act of 2017 ('MMF Act') 

would penni! money market funds ("MMFs') ro maintain a stable net asset value of S 1.00 per share 

and exempt such funds from imposing the liquidity fee imposed by Rule 2a-7 under dte Investment 

Company Act. This pan of !he Act is intended the reverse the effect of amendments ro Rule 2a. 7 

that the SEC adopted in response !he F'mancial Crisis. The Act also prohibits such funds from 

"' J~tApri11 .<tte ,..,.,.. 

"'s,. April27 rosp<cru~ !NJW· The <"Jl'X!Cd angc wu nt\'<t disclo<ed to the public. 

" StC\·e Schacfer,M~r St .. JtyGd F~O.tiu;k]NII Bifwr IPO, Foro.. (lllay22, 2012) ('a May 9up<b•cdSEC 6Jing 

!ha1 indk.1cd the social n<l'l'Ork lw ><en more.,. .. migrate to mobile dc'im. a chon.oel•ili<h lw P""~" diffocuh to 

n>OOCtizc 10 ch~e') oruihhlt ot http>:/ """'.forb<s.corn/~!el Srt:~'t>Cruefer/2012/05/22/r<pon·"""V"·S""Iey'(IJt· 

f><ebook-estinun-s-jUSt·before·ipo/IUSI7e9b5)5-k. The l'>cebook IPO occurred on M•y 18. 

"'ld 

"' Ali.<tO~ B:ur,Mu:ar Sto"'.JGd Fd/IW F.sli1111JJts }ltll Btfon IPO, Rcure" (M•r 22, 2012) ('lnsnrunoos and mojor 

cliems gtner:~lly enjoy quid< :ac""' 10 im~''"""' bank research, while retiil diems in many ao<s ooir gor it lmr. h ~ 

uoclcu whether M<>tg:~n Sanley oolr !old its rop clients abou1 the re,i..<t<J ,;...,. or spr<ad !he u·ord roore bro.dly. The 

company dctlincd to commen1 uil<n :>Skcd uilo u-as !Old abou1 !he n.-.ruch. ") <1111ihWt !JJ 

hltJ>"//•""·"'"'""-'rmVmiclc us-facebook·forealU/illlig!>t·morgan-sanky<ur·factbook~tinutcS-jusr-b<fo~<oipoidUS8R.E&UJJ6920120522. M<ng>o Sanlq· "'bs<quen!ly • .., sued in ccnnection ui!h the f=booi: IPO and 1<nled 

forSSmillion. 

" The SEC P""icusly en<nded confidential 61ing plivileg<s to all issuer>. 

28 
67 

direct!)' receiving federal ass~tance, such as the programs implemented by banking regulato~ in the 

wake of the Ftnancial Crisis, as discussed funher below. 

I restifted before Congress in opposition to money m.1rket fund reforms before they were 

adopted b)' the SEC.s; My ,;ews ha,·e not changed, but citaunstances ha\"t. Dozens of money 

market funds ha,•e closed, hundreds of billions of dollars of credit that had been extended to 

businesses have heen di'•ened to the U.S. go,·emment, and inscirucional investors looking to fmd a 

short-term home for their cash ba,·e been forced to reer.Uuate their longstanding preference for 

money market funds. 

A 2017 Fed study found that d1e rules resulted in a massive shift of assets from prime and 

municipal bond money market funds to go,·emment funds, \\~th an increasing share of the latter 

going into agenc)' debt."' From Jan\tary 2015 to February 2017, assetS in prime/ muni funds declined 

$1,315 billion (·65%) and assets in government funds rose by $1,191 billion (115%).

81 The following 

chart from that study illustrates this rnnsformarional shift. 

F'JSUrc 1: M.MF Total Net Asse~ by Fund Category: Go,·emment \'S. Prime & Muni. 

Solid black line: share of go\•emment MMFs in perecmages (right )'·axis)."' 

" Hearing bcfO<t the Suboommi= on C.piml ~htltcts and Gm·emmem Spon.ored Ent<rpri$<$, Commincc on 

FlJUJll'ial Setvic.s, U.S. Hoo..._ ofR<pt<S<1ltsriv-. ijunc 24, 2011~ 

"S" ~hno Cip.W.O ">d G.hricle La Sp>cb, lo'·""'<>' Appetite for Moner-hle ''"""" Th: Moner Mad<et f11nd 

lodustr)' after the 01 ~ Regul:ttOI)' Refonn, S..([Repon No. 816 Qune2017; mi... -d june 2018) ("Fed m!F Repon") 

onihbk ol hnp!://mn.com/ at>stntt=m9552 . 

., ldat5. 

"'Fed MMF Rq>011, /Jif!IO, 21 7. 

29 
68 

g 

0 

., 

~ 

"' 

.~ .~ 

~~ 11 

3~ 0 

0 

~ 

0 

0 

" 

0 

Jon 15 M01 IS $ep IS Jon 16 M01 16 $ep 16 Jon 17 

Prime • Muni - Govem,.nt --Gov Share I 

However, since :2017 this shift may have run its course. From M.arch 2017 through April 

2018, prime funds gorerrunem money market assers have incre:tSed from 2,210 to 2,284 billion 

(13%) and prime fund assets ha1•e increased from $587 to $685 billion (17'/o)." Nonetheless, the 

~~\lf rules had a marked effect on the allocation of capital (notably one of reallocating a substantial 

amount of capital from private enterprise to federal gon~rnment funding) and billions of dollars in 

lost income to investors.." Rising interest rates mar lead to greater prime M!IIF gains in the future at 

the expense of both go1•emmcm funds, bank deposits and bank sa'ings accounts, but also to 

substantially higher foregone income to investors. 

The distortion in the market for shon-tenn cash inresrmems is, of course, mirrored by a 

distortion in the market for shon-tenn debt. The prime-to-go,·emmem debt shift has substantially 

reduced the role of MMFs in pro1oding businesses ll;th access to shon-tenn born:l\\ing." It is 

ironic that, in light of the MMF rules' disruption to shon-tenn funding markets, that Chairman 

~Ioney ~WI<" Fund Swislic$, U.S. Seturitieund ElOChang. Commi..<sioo (MaL 16, 2017 Ub~· 17, 2018). 1'h<st 

finding>,.,prallf<:OII!i"<"' •im Ch:Unn:>n Ciayron's OctOber 5, 2011, ktttr to House Sub<ommi•~on ~lartct<. 

S«wilic$, 2nd lni'<S"""'' R.tnl<ing Member ~Won<)· ~« I"S< 2) ("2017 l.rntr'1. 

" FortX2ll!ple, the roW woold be 58.75 billioo assuming a 251mis poim spre:td btt\\'l!<n prime and gomnmem MMF 

yields from 2015 through June 2018 2nd $1.1 uillion in a""t& As inttrest r.ICes ris<, the losses •ill be OJbS<anwlly 

higher. 

~ While me.n: ~ oo question WI O'Alnicipal bond ,_.,.,.in ~L\Ifs b>1'< dc<n:zcd dmnoticolly, I am no< per•wded WI the ~l\IF n:foons b>1'C had long·tenn acktrseCOOS<.-quencts in tht toonidpal bond m2lktl2! a •l>olc:. St< U.S. MOM)· 

Mart<tl\tfO<Ill: Jl&...,j~ the Impact, Blacktod Qunc 21l18); Money Madet Refonn and Municipal I"""', l'ang.:trd 

(D«<mbtr 2017). 

30 
69 

Cla)10n has expressed concern that pennining floating NAV MMFs "could be disrupti1•e tO the 

shon-tenn funding mar~ets.'m 

The counterargument that the MMF rules are needed to reduce systentic risk has never had a 

sound facru.1l basis. Sin-ce the inception of modern money marker funds, more than 3,000 banh 

ha,·c failed, often 1~ith disastrous consequences for depositors and other bank creditors and huge 

bills for ra.,paycrs. 1 n contrast, only two monC)' market funds have failed. One 11~s a I'Cl)' smaU 

instirutional M.MF that broke a dollar in d1e 1980s. The Reset~·e Fund's failure uiggcred a mass 

e~odus from MMFs tha1 posed a systemic threat, but, unlike thousands of bank failures, these ncar-

~L\lF failures resulted io <!"' hm! to taxpayers and non-Rcset~ e Fund sharehol.ders. Rather, the 

U.S. government enjoyed a billion-doUar 1W!dfall in rbe form of insurance premiwns for coverage 

on which not one claim was el'cr made. 

No!llothstanding such ad1·erse effects, I ha1·e four primary concerns regarding the bill that 

lead me to recommend 3gainst its enactnJent. F'U'St, I am n01 aware of there ha\'ing been a thorough 

empirical analysis of the likely effect of the MMF Act. Just as the original rules were adopted wid• 

an inadequate understanding of their effect, Congress should nor rush rum back d1e clock without 

know the effect of doing so. Instead, I recommend that Congress instrUct the SEC to conduct such 

an analysis. T disagree Chairman Clayton 1<iew that "it's too early to say we're wrong." I have no 

doubt that the SEC •~! wrong, but now that circwnsmnces have changed, I an1 n01 ctttain that 

revetting to the old system would be righr. 

Second, I do not have faith in the SEC's abilil)' to manage money market fund risk. In 

January 2008, I drafted a petition to the SEC asking it to take steps to address what I viewed as a 

gro11ing risk that a money marker fund would break a dollar and specifically cited the risks created 

by rhe SEC's longstanding policy of granting lasr-minure, ad hoc, ,·erbal cxempri.\-e relief ro address 

the hundreds of prior instances in which a money marker fund had flirted with failure." In response 

ro the petition, the SEC did nothing and, utlfonunarely, my prediction pro,·ed prescient. The SEC 

failed ro take action when the risks presented b)' the Rcset~ e Fund became vel)' apparent well before 

it failed, and the SEC's fumbling of the process of granting ad hoc e.xempti1·e relief contributed to 

the Fund's failure (and helped irs executives subsequently escape li1bility). 

Third, I am concerned that banking regulators '''ould seize upon anod1er moner marker 

fund failure (albeit high.!)' unlikely) as an excuse to impose new regulations on all funds that could 

cripple America's murual fund sector. Our murual fund industry is one of d1e country's crown 

jewels, boasting some of the world's greatest businet-ses. They pro1ide Americans 11irh a low oosr 

access to diversifred ponfolios of securities that ha1-e created enoanous wealth for investors and 

funding for our capital markets. However, banking regulators have dernonStll\ted that they do not 

" 2017 Lcnor,..,, at 1 

" Petition [.,..Fund llcmo<r:>c)', Consumer Fcdcntion of Amc:rico, Notional Association of p,.,.,.J FIJWI(io) 

Pbnncr;, Finonci>l Planniflg ,l..OO.Iion, AFI-CIO tnd eoo..mcr Acoion to SEC Qan. 16, 3JOS). The petition .!so 

2Sk«< th< SEC to require fll"l"<nt di!Closure of IIIOIICf nwi«t portfoliO<, • ,....,,. it ulrimltdy adopted aftr tht 

Fimd.JCtii< 

31 
70 

understand that this suc<ess is auribut11ble to managed risk-t11king," preferring inste:td the model of 

socialization of risk and government subsidies that lie at the heart of the banking indusuy and that 

became, as a result of the Dodd-Frank Act, an orerriding guiding principle in America's financil\1 

regulatory policy. Banking regulators' inability to recognized much less embrace risk·taking as a 

critical and necessary foundation of a capitalist democracy is the result of our Balkanized rcgulatOl)' 

structUre, which continues to put the U.S. at a significant disad,·antage to other modem economies. 

Unfortunate~ . Congress has sho'm little interest in addressing this foundational weakness in our 

financial system. The tlueat of a repeat of banking regulators' partly rurf-driven O\'ea:reaction to the 

Resen·e Fund failure d1erefore continues to be \'CI)' real. It is not dear that this risk is wonh taking. 

Finally, Congrczs has stripped banking regulators of po,ms necessary for them to take 

appropriate emergency accion in the event of another se,-crc liquidity event.'; Section 1101 of the 

Dodd-Frank Act sererely restricted banking regulators' authority under Section 13(3) of the Federal 

Reserre Act to e."end credit to non-banking insrirurions, and legislation has been proposed that 

would impose funher restrictions." The MMF Act would broadly prohibit funds mat rely on it 

from receiving any federal assistance. Forall of banking regulators' post-crisis excesses, thcir midcrisis management \\'.IS essential to suniving the Financial Crisis. Thcir aocions froze the run on 

money market funds, stabilized the industry, and acrually generated substantial profits for the 

gon:rnment while costing raxpayers nothing." It is easy to forget that what might in peaceful rimes 

appe:tr tO be bureaucratic orerreach may be the difference between preventing the collapse of our 

fmancial system and sa~.mg it from disaster. Wltile it may hare been prudent for U~·sses tO lash 

himself to the mast unoo the circumstances, it would not have made sense to do so when the ship 

was headed for the rocks. \~T,th Congress ha,.U,g significantly hamstrung our abilit)' to mitig:ue the 

effects of a future monel' market fund failure, and the MMF Ac~s broad prohibition against federal 

assistance, and considering the other factors cited above, I cannot supporr its rush to re-create that 

risk. 

" This is panicubtly oue •ith resp«~to """"!' nwket funds. Str U•""IIJ Mclanic Fein, Shooling tho Me.<!<ng<r. The 

Fro •nd MOO<J· ~f>rittt Funds (2012). Banking regulators =I)•~ of ~"'mic risk pos<d by M"""""iW>I.ife ~so 

showed '" imck<jwre under.mndingof insunoce. 

".~t d>t time of the lwncial Crill~ tho Ftd lw 2\llhori~· 10 <Xtend aedilto nonlnnking inscirulions under S<aioa 

13(3)oftho ftdml Rc!<I\'C Act. In connection •ith thoi!IOO<)·mo.rtct fund crisis, it relied on Section 13(3) 10 

tSiablish tho Assct·llocl<cd Commcrci21 Paper Money Marter Mul\131 Fund l.iquidi~· Focitity ('AMIP) and the 

Commcrci21 Paper r,nding hcili~· (CPFF"). Stt M•rc Ubont<, Ftdml R"""~' Em<<g<r<y l<nding, Coog=ional 

Reswch Sm>:e >t 26- 27 0211Wry6, llii)C"CRS R<pon"). Sccoon 1101 sc:vettl)· resuict<d d>t F<d'Huthori~· under 

Sccoon 13(3~ Sttid.a~ 10-11 (~ril:i.ngresuiction.);t«gtllm111JAf;xplllkrMibru,Li§>IA>Ihori!Ji•UIIIIJJI!!l"'d£.~"' 

Ort~t~~~ila~~m:TJ,t Ftdlm!P-re .. di!JtfiJWJd!!lCriiJ,I3 U. P2. J. s._, L 221 (Will); Eric P.,.r, Wbar Legol Authority 

Does the Fed N<td Ouringal.iquidiq· Crisis? 101 ~finn. I. Ra·. 1529, 1532 (2011) ('Unfonunatcly, in the Dodd-Fnnk 

Aa, ~""''"din tho "!''""ittdirtttion, ut>kening rather than ~ning [the Fed'•JI..I.R r'Lenderofw 

Rcson")" function~ honit•llr, the Fed bhmtd limit~ lions oo its !<gal '"lhority for flO( bailing OUt l.thmm s .... , and it 

wu l.dumn debt thot caused tho Rcs<~·e Fund tO beta a dolbr. 

"Stt, t-t .• ll.ll4l02 (2011). 

" The""""!' morittt in01noo: prosratn&<fl<t'ted Sl billion in premiums and nocbilm, tho AMlF "e<pcrieottd no 

losses and wnod income: ofS0.5 billion""" tho life of the prognm." :IJid d>t CPFF"wnod income ofS6.1 biltion 

"''"the life of the prognm :IJid suffettd no losses." CRS Rcpon,..pm,., 26-27. 

32 
71 

1See https://www.federalreserve.gov/releases/z1/20180607/z1.pdf, p. 84. 

PREPARED STATEMENT OF CHRISTOPHER H. DANIEL 

CHIEF INVESTMENT OFFICER, CITY OF ALBUQUERQUE, NEW MEXICO, ON BEHALF OF

THE GOVERNMENT FINANCE OFFICERS ASSOCIATION

JUNE 26, 2018 

Chairman Crapo, Ranking Member Brown, and distinguished Members of the 

Committee on Banking, Housing, and Urban Affairs, thank you for holding today’s 

hearing on legislative proposals to increase access to capital. My name is Chris Daniel and I serve as the Chief Investment Officer for the City of Albuquerque, New 

Mexico. My remarks here today are in my capacity as a representative of the membership of the Government Finance Officers Association (GFOA). GFOA represents 

nearly 20,000 public finance officers from State and local governments, schools, and 

special districts throughout the United States. 

GFOA is dedicated to the professional management of governmental financial resources by advancing fiscal strategies, policies and practices for the public benefit, 

including issues related to issuing tax exempt bonds and investing public funds. We 

appreciate this Committee’s continued support for efforts to strengthen the municipal bond market, especially the recent enactment of legislation designating municipal securities as high-quality liquid assets. Such actions help States, local governments and other governmental entities maintain access to low-cost capital, which 

is vital to infrastructure investment across the United States and contributes to a 

healthy and vibrant economy. On behalf of the GFOA and its members, I appreciate 

the opportunity to provide comments at this hearing in support of S. 1117, the Consumer Financial Choice and Capital Markets Protection Act of 2017. 

This morning I will describe how money market funds have been utilized effectively to both manage liquidity for public sector investments and provide a reliable 

source of working capital to fund public services and finance infrastructure investment and economic development. I will also describe the impact of the U.S. Security 

and Exchange Commission’s (SEC) change of net-asset-value (NAV) accounting 

methodology for money market mutual funds (MMMF) from stable to floating. 

State and local governments access the capital markets and issue short term debt 

for a variety of reasons. This important legislation would allow State and local governments to continue this access and investor appetite for short term debt issuance 

without increasing costs for taxpayers or creating risks to the financial system For 

Governments like the City of Albuquerque, variable-rate debt has been a very lowcost method of financing as compared to issuing fixed-rate bonds. GFOA has published best practice guidance on the use of variable rate debt by Government issuers 

to ensure that it is used appropriately. Also, variable rate debt issued by State and 

local governments has historically been a reliable low risk investment type for 

money market fund sponsors. Money market funds themselves are key purchasers 

of municipal securities—historically, they have been the largest purchasers of shortterm tax exempt debt. Therefore, the impact of SEC Rule 2a-7 of the Investment 

Company Act of 1940, as amended in 2010 and 2014, on Governments is real and 

it affects not only large governmental entities, but also small communities throughout the country. 

Additionally, money market funds are a widely used cash management and investment tool for State and local governments. According to Federal Reserve data, 

State and local governments hold over $190 billion of assets in money market 

funds. 1

While we have supported and continue to support initiatives that both strengthen 

money market funds and ensure that investors are investing in high-quality securities, we applaud Senators Toomey, Manchin, Rounds, and Menendez for introducing 

legislation which focuses on addressing the unintended consequences of the SEC’s 

2014 Amendments to Rule 2a-7 that require institutional, nongovernment MMFs to 

price their shares at a floating net asset value (NAV), by allowing those funds to 

return to a fixed NAV. 

The original objectives of the floating NAV rule were to protect investors in money 

market funds by preventing runs that hamper access to short-term capital, shield 

taxpayers from future financial bailouts, and promote general market stability. 

Those objectives were effectively addressed in the 2010 Amendments to Rule 2a-7. 

GFOA supported those amendments which dramatically increased the credit quality 

of the assets held in MMFs, required money market funds to have a minimum percentage of their assets in highly liquid securities so that those assets can be readily 

converted to cash to pay redeeming shareholders, and increased transparency by re-
72 

2https://www.sec.gov/divisions/investment/mmf-statistics/mmf-statistics-2018-04.pdf, p. 4. 

quiring funds to regularly calculate their portfolios’ per-share values at market 

prices. 

Despite the success of the 2010 reforms, the SEC adopted additional amendments 

to Rule 2a-7 in July 2014. Among other things, those amendments require institutional prime- and tax-exempt funds to use a floating NAV. The SEC’s reasoning for 

the 2014 Amendments was that a floating NAV would provide investors with a more 

frequent and accurate assessment of the value of a fund’s assets. Under previous 

rules, institutional prime- and tax-exempt MMFs were allowed to round their share 

price to $1.00, so long as the actual value of a share does not fall below $0.9950 

(‘‘known as breaking the buck’’). The SEC’s change from fixed to floating was predicated on the belief that investor awareness of the actual value of the fund’s assets 

will make investors less likely to redeem shares in times of economic distress. 

Throughout the rulemaking process, GFOA and public finance officers throughout 

the country submitted analysis showing that a floating NAV would do little to deter 

heavy redemptions during a financial crisis but would, instead, impose substantial 

costs on State and local governments. That is exactly what has come to fruition. 

The 2014 Amendments have dramatically shrunk an important market for municipal debt. Between January 2016 and April 2018, tax exempt MMFs assets under 

management fell by nearly 50 percent, from $254 billion to $135 billion, 2 as MMF 

investors, including Government investors, preferred or were required to hold stable-NAV Government MMF’s comprised of Treasury and/or U.S. Agency securities. 

The lack of investor appetite for floating-NAV tax-exempt MMMF’s resulted in municipalities issuing variable rate demand bonds seeing their borrowing costs nearly 

double the Federal Reserve’s rate increases over the same period. Many State and 

local governments determined that issuing variable rate debt to MMFs was excessively costly, and opted to issue higher cost fixed-rate bonds. These increased costs 

are shouldered by taxpayers and ratepayers. 

In addition to the impact that the 2014 Amendments had on Governments finding 

investors for their short-term debt issuances, there are also implications for the investments that State and local governments use to protect public funds. Many Governments have specific State or local statutes and policies that require them to invest in financial products with a stable NAV. The policy reason for this is to ensure 

that public funds are appropriately safeguarded. 

It is important to emphasize that MMFs with a stable NAV, particular prime 

MMFs, are required to meet the highest liquidity and credit quality standards, 

which is why they are a commonly used vehicle by State and local governments for 

managing operating cash. This important legislation would lift an unnecessary obstacle that has steered State and local entities into very low yielding U.S. Government backed funds or other alternatives from what was already one of the safest 

sources for earning market returns on the management of cash, short of FDIC-insured bank accounts. 

By allowing all MMFs—prime, tax-exempt and Government funds accessible to 

both retail and institutional investors—to offer a stable NAV, S. 1117 would allow 

State and local governments to once again utilize suitable investments as defined 

by State and local elected officials, rather than by the SEC. The disruptions to the 

short-term capital markets caused by the SEC’s floating-NAV rule are real and irrevocable short of restoring the stable NAV. The legislation fixes that problem, and 

does so without undermining the other important reforms that have made MMFs 

resilient to the kind of market disruptions that occurred in 2008. GFOA is working 

with a coalition of stakeholders to advance S. 1117 and we have submitted our most 

recent letter of support for the record. Thank you again for considering this important legislation. We look forward to working with you and supporting your efforts 

to help State and local governments on this and other regulatory and financial matters of mutual interest. 
73 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM RAYMOND J. KEATING 

Q.1. In response to questions on the Helping Angels Lead Our 

Startups (HALOS) Act, S. 588, you stated that, ‘‘[w]hat we are talking about here is going to angel investors. I mean, that is in the 

title of the legislation. So I think when we are talking about understanding who we are going to and what the purpose of these demos 

are, I think it makes—I think the legislation makes perfect sense.’’ 

Please explain how the limitation you described, ‘‘[w]hat we are 

talking about here is going to angel investors’’, is required under 

the bill. In addition, please explain if you believe there is any stated requirement that the event sponsors outlined in section 

3(a)(2)(A) of the bill must verify any information with respect to an 

attendee at an event that would be covered by the bill. 

A.1. This legislation would revise Regulation D, as noted in the 

CRS summary of S. 588, as pertaining ‘‘to events with specified 

kinds of sponsors, including ‘angel investor groups’ unconnected to 

broker-dealers or investment advisers,’’ in cases where, in part, 

‘‘the sponsor does not provide investment recommendation or advice to attendees, engage in investment negotiations with 

attendees, charge certain fees, or receive certain compensation.’’ In 

the end, it is critical to keep in mind that these events, often referred to as ‘‘demo days,’’ are geared toward the ‘‘accredited investors’’ who can purchase securities under the Section 506 exemption. 

However, at the same time, these events allow entrepreneurs and 

startups to interact with accredited investors, such as angel investors, while not soliciting investors to purchase an equity stake. 

Given these straightforward cases and limitations, this legislation 

lifts unwarranted burdens and costs placed on entrepreneurs and 

startups regarding ‘‘demo days.’’ 

Q.2. The Small Business Audit Correction Act, S. 3004, would 

allow certain brokers or dealers defined under the bill to use auditors that are exempt from Public Company Accounting Oversight 

Board registration and supervision. 

How many brokers or dealers do you believe would be covered by 

the definition in the bill? 

Does that definition in the bill capture brokers or dealers in one 

or more of the following categories: active high-frequency trading or 

principal trading firms, sophisticated market-maker firms, private 

placement brokers, dealers in the to-be-announced (TBA) for mortgage-backed securities market, and alternative trading system 

routing brokers, in addition to retail customer facing brokers or 

dealers? 

A.2. As noted in my testimony, ‘‘This legislation would redress the 

Dodd–Frank requirement that all investment brokers and dealers, 

no matter their size, must hire a Public Company Accounting Oversight Board (PCAOB)-registered audit firm to conduct audits that 

use complex guidelines designed for larger, public companies.’’ S. 

3004 would provide relief to small investment firms overburdened 

by this requirement. As for the questions about coverage and definition, the Financial Services Institute in its letter of support for 

S. 3004 noted the following points: 
74 

‘‘Currently, the Dodd–Frank Act requires all investment 

brokers and dealers, irrespective of size, to hire a PCAOBregistered audit firm to conduct audits using significantly 

more complex guidelines designed for larger, public companies. We believe this legislation will provide much-needed 

regulatory relief to small broker-dealers by exempting 

them from the most onerous audit requirements.’’ 

‘‘The broker-dealer community in the financial services industry consists of large companies, midsized firms, and 

small businesses. As of November 2017, the small business 

community consisted of 3,425 firms all employing 150 registered reps or fewer. Ten years ago, there were approximately 1,000 more of these small businesses in our industry than there are today, but the crush of regulatory burdens, including the PCAOB-registered audit firm requirement, has led to their demise. The remaining small firms 

are feeling this impact especially hard as fees rise due to 

the smaller pool of audit firms. The impact is felt throughout the country as these Main Street businesses struggle 

to remain viable.’’ 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM RAYMOND J. KEATING 

Q.1. As policymakers how should we strike the right balance between encouraging firms to go public and improving the private 

capital markets? 

Are the private capital markets currently high-functioning? If 

not, where are the biggest potential areas for improvement? 

I’m concerned about the increasingly uneven geographic distribution of growth. As the Economic Innovation Group has found, economic growth is largely clustered in the most prosperous areas, instead of evenly distributed across areas like the Great Plains and 

the Midwest. Would increasing access to equity and crowdfunded 

debt improve the geographic distribution of new firms? 

When do new and smaller firms tend to rely upon access to equity or crowdfunded debt instead of a traditional bank loan? For 

example, some have suggested that technology-based firms rely 

more upon equity while main street companies like restaurants 

more rely upon bank loans. What are the biggest hurdles new and 

smaller firms have—regulatorily or otherwise—in accessing equity 

and crowdfunded debt? 

Is there currently sufficient clarity about the conditions under 

which an offering by a small business issuer would qualify as a 

‘‘transactions by an issuer not involving any public offering’’ under 

Section 4(a)(2) of the Securities Act? Are small businesses able to 

acquire such clarity without paying a meaningful amount in legal 

fees? 

Representative Emmer’s bill, H.R. 2201, the Micro-Offering Safe 

Harbor Act would ‘‘exempt certain micro-offerings from: (1) State 

regulation of securities offerings, and (2) Federal prohibitions related to interstate solicitation.’’ Such offerings could be worth up to 

$500,000, have 35 participants, and involve and instance where the 

‘‘purchaser has a substantive preexisting relationship with the 
75 

issuer.’’ How would you evaluate this legislation? If you have concerns with this legislation, how would you ideally address them? 

How viable is conducting an offering under the SEC’s Regulation 

Crowdfunding, particularly for new and smaller businesses? What 

about for businesses that are not located in the top five largest cities? What about for smaller offering sizes? If smaller offering sizes 

tend to be less viable, how large must an offering be to be viable? 

Would there be merit to increasing the offering limit for Regula- tion Crowdfunding issuers, from $1 million? Why or why not? If so, 

what should the limit be? For example, the 2017 SEC GovernmentBusiness Forum on Small Business Capital Formation recommended raising the limit to $5 million. 

A.1. In the following, I hope to at least provide a few thoughts of 

value on your various questions. 

First, regarding how should ‘‘strike the right balance between encouraging firms to go public and improving the private capital markets,’’ in the end, it’s not an either/or. Nor should it be that policymakers ‘‘encourage’’ firms to go public. Instead, policymaking 

should be focused on establishing the best possible policy climates 

for public and private capital markets to flourish, and thereby allowing entrepreneurs and investors to make decisions about, for example, staying private or going public, based on economic, business, industry and market assessment, rather than according to 

costs imposed by Government. 

Second, I think it is fair to say that the U.S. has among the most 

high-functioning private capital markets across the global economy. 

Impediments largely come from outdated or intrusive governmental 

policies, including unnecessary and costly regulations, such as via 

various aspects of Sarbanes–Oxley and Dodd–Frank, and areas of 

high and/or multiple layers of taxation. On July 17, the U.S. House 

passed the JOBS and Investor Confidence Act (JOBS Act 3.0), 

which is a solid package of reforms to modernize some securities 

laws, and improve capital access and capital formation, particularly 

for entrepreneurs and small businesses. The biggest potential areas 

of improvement at this point are areas where there is a bipartisan 

consensus to make changes, and those reforms and solutions are 

represented within JOBS Act 3.0. Hopefully, the Senate will also 

act, and then we can build on JOBS Act 3.0 improvements from 

there. 

Third, the geographic challenges in terms of growth are quite 

troubling. A variety of factors can come into play, including shifts 

in views on entrepreneurship; State and local government costs, 

impediments and obstacles to risk taking (please see SBE Council’s 

Small Business Policy Index and Small Business Tax Index, which 

break out dozens of measures and rankings by State); access to 

markets; as well as access to capital issues, including the decline 

in small community banking, as noted in my testimony. I would 

very much agree that increasing access to crowdfunded equity and 

debt would improve the geographic distribution of new firms, 

though understanding, again, that other factors also are in play. 

These other factors include access to broadband and migration patterns. SBE Council is working on many fronts—including education 

and boosting entrepreneurship among the general population, as 

new business formation remains weak—to improve opportunities 
76 

and appeal within rural areas that have been ‘‘left behind’’ by the 

recovery. 

Fourth, I think, in general, it is a fair assessment that technology firms tend to rely on equity financing more so than do certain Main Street businesses like restaurants, and that largely 

would be due to the fact that equity investors generally have a better chance to make a notable return in tech, justifying the risk involved, as opposed to restaurants and similar business with traditionally tighter margins and bank loans (or debt-based 

crowdfunding) tending to make a better fit. As for the development 

of crowdfunding equity and debt markets, again, these are clear 

plusses for firms seeking either equity or debt financing. In fact, 

a review of the firms that have used Title III equity crowdfunding 

to date shows that firms of all types are using Regulation 

Crowdfunding, and doing so successfully. 

Because it took the SEC 4 years to write the rules around Title 

III crowdfunding, this approach to raising capital is still fairly new. 

However, early adopters across industries have been successful in 

raising funds. For example, according to Crowdfund Capital Advisors, 715 firms have successfully raised a combined $137,565,606 

from 133,006 investors. The average amount raised is $238,534. 

That might not sound like much compared to the millions of dollars 

that early stage companies often raise, but for the small businesses 

that need this capital to grow, it is very important indeed. The top 

industries that have successfully tapped into regulated 

crowdfunding include: applications software (132 firms), beverages 

(81 firms), entertainment (70 firms), personal services (67), consumer products (60), computer hardware (50), retail (50), restaurants (49 firms), autos (37), baking (31), and advertising (28). 

There are more regulatory complexities involved with equity vs. 

debt-based crowdfunding. As noted below, there are various reforms that will help more entrepreneurs and startups leverage 

crowdfunding if these costs are lowered, which would improve the 

appeal of equity crowdfunding as significant time and resources by 

the issuer is put into a campaign and they cannot access those 

funds if the target amount or goal is not reached. One of the biggest hurdles at this point is education—that is educating both 

small businesses and investors about this opportunity. In this regard, SBE Council has been at the forefront of small business education. For example, we recently teamed up with SCORE to host 

a webinar about how to raise capital via regulated crowdfunding 

and more than 2,000 individuals registered for the event. So there 

is great interest, across industries and in every corner of the U.S., 

and SBE Council believes that we are in the very early stages of 

what will become a mainstream method for raising capital, including in rural areas where new Opportunity Zones will hopefully play 

a big role in mobilizing capital to these areas and crowdfunding 

can be used as an efficient conduit for doing so. 

SBE Council supports H.R. 2201, the Micro Offering Safe Harbor 

Act: ‘‘H.R. 2201 would exempt from registration requirements with 

the Securities and Exchange Commission (SEC) offerings made 

only to the entrepreneur’s friends and family, to less than 35 purchasers, and when $500,000 or less is raised. The offering would 

be exempt from State registration and qualification rules, thus re-
77 

ducing costs and complexity. H.R. 2201 would appropriately scale 

SEC rules and regulatory compliance for our Nation’s small businesses, which in turn will provide another practical option for entrepreneurs to raise the capital they need to start or grow their 

firms.’’ At this point we do not have any major suggestions regarding H.R. 2201, except perhaps to strengthen transparency via simple reporting and compliance. 

Sixth, and finally, again as detailed in my written testimony: 

‘‘[R]egulated (Title III) crowdfunding is beginning to gain traction 

in the marketplace. Refining some of rules would help many entrepreneurs tap into this promising funding option. Some of the reforms supported by SBE Council include raising the amount that 

can be raised (which is currently $1 million), allowing issuers to 

‘test the waters,’ allowing for special (or single) purpose vehicles, 

providing simplified rules for advertising, legal clarity for platforms, and removing the caps for accredited investors, among other 

changes.’’ SBE Council fully supports lifting the amount of capital 

that can be raised. The current limit, $1.07 million in a 12-month 

period, is restricting the use of regulated crowdfunding (Title III) 

although there has been the successful use of parallel offerings via 

Title III and Title II crowdfunding. SBE Council is currently working with all the major crowdfunding platforms on this very issue 

and we feel that the limit should be raised to $20 million. To date, 

there has been no fraud associated with regulated crowdfunding 

and the $20 million limit would fill a big void in the marketplace 

for small businesses and promising firms that require larger 

amounts of financing to scale or for expansion projects. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM RAYMOND J. KEATING 

Q.1. Regarding S. 3004, one possible objection is that, in the 5 

years since noncustodial broker-dealers have been required to use 

a PCAOB-registered auditor, the PCAOB has consistently found 

those audits to have high levels of ‘‘deficiencies.’’ The deficiencies 

are with the expensive PCAOB auditors, not with the broker-dealers. Some feel the deficiencies are an argument in favor of S. 3004, 

since it illustrates the ‘‘square peg, round hole’’ problem of applying 

PCAOB audit requirements rather than the AICPA’s GAAS standards that these brokers used to use. So currently these small, privately held noncustodial brokers are being forced to choose an auditor from the PCAOB’s list, firms that charge much higher prices, 

and the end product often has deficiencies that are (perhaps) due 

to the type of auditing standards being applied. The audits of the 

noncustodial brokers may have even higher rates of deficiencies, 

and these broker-dealers tend to be much smaller than custodial 

brokers, and thus (perhaps) even less suited to the PCAOB requirements. 

Are the deficiencies in these PCAOB audits evidence in favor of 

keeping the law as it is, or in favor of passing S. 3004? What of 

the fact that audits of noncustodial brokers are even higher than 

for custodial firms? 

Attached is a letter from one of those approximately 480 PCAOBregistered firms, a firm that in theory should benefit from the sta-
78 

tus quo, but it illustrates the issue from the auditor’s perspective. 

The link below talks about the PCAOB’s 2017 report. 

A.1. While circumstances and results certainly can be unique to 

each case, the costs and general results related to PCAOB audits 

of small, privately held noncustodial brokers indicate that the law 

and standards do not properly fit these entities. As noted in the 

April 2017 Wall Street Journal article you referenced: ‘‘The Public 

Company Accounting Oversight Board found deficiencies in 83 percent of the broker-dealer audits it inspected in 2016, up from 77 

percent in 2015, the board said in its annual report on its brokerdealer audit-inspection program. As has been the case in the past, 

nearly all of the audit firms conducting the audits, 97 percent, had 

deficiencies in one or more of their audits, the PCAOB said. The 

findings don’t mean that the broker-dealers themselves have any 

operational problems, just that the PCAOB believes that most of 

the audits that assessed them were flawed or inadequate.’’ Again, 

as stated in my testimony, SBE Council supports S. 3004 and its 

focus on properly aligning regulation with the realities of small 

businesses. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM RAYMOND J. KEATING 

Q.1. During the Banking Committee’s hearing on Legislative Proposals to Increase Access to Capital, Professor Mercer Bullard from 

the University of Mississippi School of Law expressed the following 

view on S. 1117, the Consumer Financial Choice and Capital Markets Protection Act of 2017. Could each of you please comment on 

Mr. Bullard’s views? 

Mr. Bullard. Sure. That is correct that I testified against 

the SEC rules primarily because money market funds had 

demonstrated an astonishing level of safety, especially 

having had two break a dollar, one not even a retail fund, 

over about 40 years, at the same time thousands of banks 

failed. But I think one of the concerns Vanguard and 

BlackRock have and one reason they are probably opposing this is, of course, that these rules were adopted in response to the Dodd–Frank Act, which gave banking regulators, in my view, far too much authority over what I 

would call risk-based markets. Banking regulation and 

banks are designed with the socialization of risk in mind, 

and when you put them in charge and the SEC realizes 

that FSOC is controlled by banking regulators, they will 

bend to banking regulators’ will. So I cannot even fully 

blame them for what happened. But it was, I think, inevitable that there would be massive dislocation and expense. 

That has already occurred. Since then I think that there 

have been mitigating effects on the municipal business, 

but I think that is probably a close call. But I am concerned about that BlackRock–Vanguard concern, which is 

if you reintroduce floating rate NAV funds, frankly Federated will roll out a lot of funds. That will be a competitive disadvantage for the large money market fund managers. They will have to go back into the business, and 
79 

then the next time a money market fund breaks, the banking regulators will have a lot less power to save the industry and, frankly, I would expect Congress to go back and 

end up maybe taking the same steps that dislocates the industry again. 

I think the interesting point of view is we have been 

through this once. We do not want to go through it again. 

Just leave us alone. 

But, you know, the free market guy in me says there is 

more capital that is out there looking for purchasers in a 

demonstrated, successful way to create essentially a cash 

vehicle for retail investors, and that should be an available 

option. 

Another concern is really a specific SEC concern. One reason the Reserve Fund failed is the SEC was not monitoring the funds that had the greatest risk of failing. It 

also had this no-action process whereby a fund that was 

about to break a dollar, which had happened hundreds of 

times previously, was to call up an office in the SEC, and 

a guy picks up the phone and says, ‘‘Okay, you are fine,’’ 

and because that process was fumbled by the staff, in my 

opinion, and because it was such an ad hoc system in the 

first place, that contributed to the Reserve Fund failure. It 

was a primary element of their defense when the founders 

were sued, and I think that has to be corrected. 

And then, finally, I think that it is a mistake—as much as 

you can tell, I am probably not the biggest friend of banking regulators—to overly hamstring their Depression era 

authority to emergency situations, use their lending authority for nonbanks. I think that this bill would further 

hamstring them, and I think that is a mistake. 

A.1. SBE Council has not taken a position on S. 1117, so I would 

be unable to answer this question—at least at this point in time. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM RAYMOND J. KEATING 

Q.1. In the past year, we have had two high-profile chronic liars 

that defrauded investors. Elizabeth Holmes from Theranos sold a 

false blood testing system and raised $700 million from wealthy investors. Martin Shkreli is serving a 7-year prison sentence for lying 

about returns to his investors. Shkreli specialized in buying drugs, 

like Daraprim, a 62-year-old life-saving drug that helps newborns 

and people with HIV, and then raising the price from $13.50 to 

$750 a pill. Both Holmes and Shkreli ran private companies. As 

private firms, they did not have strong oversight from State regulators or from the Securities and Exchange Commission. Elizabeth 

Holmes’ firm, Theranos, bilked investors of more than $700 million 

dollars. Martin Shkreli was sentenced to 7 years in prison for lying 

to his investors. 

Of the six capital formation bills we considered which of these 

are going to help investors distinguish good-faith pipe dreams from 

fraudsters like Elizabeth Holmes and Martin Shkreli? 
80 

Which bills do you think would make it easier for fraudsters to 

rip off investors? 

A.1. The capital formation bills under consideration during the 

hearing entitled ‘‘Legislative Proposals to Increase Access to Capital’’ were meant to redress unwarranted burdens and costs facing 

entrepreneurs and small businesses seeking to raise financial capital in order to grow by better serving customers, and thereby also 

aiding economic, income and employment growth. There is nothing 

in these bills that would further open the door to fraud. The bills 

provide commonsense relief while still protecting investors. In the 

end, of course, private markets and assorted laws provide various 

means to protect investors and consumers from fraud, and where 

fraud is perpetrated, lawbreakers are pursued by the proper authorities, with the expectation of being caught and prosecuted accordingly. Unfortunately, there will always be some people who attempt to defraud or rip off others. Thankfully, technology has 

helped to boost transparency, as well as communications between 

investors and the public so that schemes are uncovered and put to 

an end more quickly. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM MERCER E. BULLARD 

Q.1. Your testimony discussed the Fostering Innovation Act, S. 

2126 and raised concerns with exempting additional companies 

from the requirements of section 404(b) of the Sarbanes–Oxley Act 

(SOX). 

Last week, the SEC approved its final rule on the smaller reporting company definition, which also impacts the application of SOX 

section 404(b). 

Are you concerned that the SEC rule change expands the number of companies exempt from SOX section 404(b)? Given the rule 

is S. 2126 still necessary? 

A.1. Response not received in time for publication. 

Q.2. Does the Helping Angels Lead Our Startups (HALOS) Act, S. 

588, propose any limits on the type of investors or persons that 

may attend a ‘‘demo day’’? 

In addition, please describe any requirements to evaluate 

attendees that would be imposed on entities that could serve as an 

event sponsors, as outlined in the section 3(a)(2)(A) of the bill. 

A.2. Response not received in time for publication. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM MERCER E. BULLARD 

Q.1. As policymakers, how should we strike the right balance between encouraging firms to go public and improving the private 

capital markets? 

Are the private capital markets currently high-functioning? If 

not, where are the biggest potential areas for improvement? 

I’m concerned about the increasingly uneven geographic distribution of growth. As the Economic Innovation Group has found, economic growth is largely clustered in the most prosperous areas, in-
81 

1https://www.congress.gov/bill/115th-congress/house-bill/2201 

2https://www.congress.gov/bill/115th-congress/house-bill/2201 

stead of evenly distributed across areas like the Great Plains and 

the Midwest. Would increasing access to equity and crowdfunded 

debt improve the geographic distribution of new firms? 

When do new and smaller firms tend to rely upon access to equity or crowdfunded debt instead of a traditional bank loan? For 

example, some have suggested that technology-based firms rely 

more upon equity while main street companies like restaurants 

more rely upon bank loans. What are the biggest hurdles new and 

smaller firms have—regulatorily or otherwise—in accessing equity 

and crowdfunded debt? 

Is there currently sufficient clarity about the conditions under 

which an offering by a small business issuer would qualify as a 

‘‘transactions by an issuer not involving any public offering’’ under 

Section 4(a)(2) of the Securities Act? Are small businesses able to 

acquire such clarity without paying a meaningful amount in legal 

fees? 

Representative Emmer’s bill, H.R. 2201, the Micro Offering Safe 

Harbor Act would ‘‘exempt certain micro-offerings from: (1) State 

regulation of securities offerings, and (2) Federal prohibitions related to interstate solicitation.’’ 1 Such offerings could be worth up 

to $500,000, have 35 participants, and involve and instance where 

the ‘‘purchaser has a substantive preexisting relationship with the 

issuer. . . . ’’ 2 How would you evaluate this legislation? If you have 

concerns with this legislation, how would you ideally address them? 

How viable is conducting an offering under the SEC’s Regulation 

Crowdfunding, particularly for new and smaller businesses? What 

about for businesses that are not located in the top five largest cities? What about for smaller offering sizes? If smaller offering sizes 

tend to be less viable, how large must an offering be to be viable? 

Would there be merit to increasing the offering limit for Regula- tion Crowdfunding issuers, from $1 million? Why or why not? If so, 

what should the limit be? For example, the 2017 SEC Government– 

Business Forum on Small Business Capital Formation recommended raising the limit to $5 million. 

A.1. Responses not received in time for publication. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM MERCER E. BULLARD 

Q.1. Regarding S. 3004, one possible objection is that, in the 5 

years since noncustodial brokerdealers have been required to use 

a PCAOB-registered auditor, the PCAOB has consistently found 

those audits to have high levels of ‘‘deficiencies.’’ The deficiencies 

are with the expensive PCAOB auditors, not with the broker-dealers. Some feel the deficiencies are an argument in favor of S. 3004, 

since it illustrates the ‘‘square peg, round hole’’ problem of applying 

PCAOB audit requirements rather than the AICPA’s GAAS standards that these brokers used to use. So currently these small, privately held noncustodial brokers are being forced to choose an auditor from the PCAOB’s list, firms that charge much higher prices, 

and the end product often has deficiencies that are (perhaps) due 
82 

1https://plus.cq.com/doc/congressionaltranscripts-534822773 

2 ICI Memo, January 5, 2018. 

to the type of auditing standards being applied. The audits of the 

noncustodial brokers may have even higher rates of deficiencies, 

and these broker-dealers tend to be much smaller than custodial 

brokers, and thus (perhaps) even less suited to the PCAOB requirements. 

Are the deficiencies in these PCAOB audits evidence in favor of 

keeping the law as it is, or in favor of passing S. 3004? What of 

the fact that audits of noncustodial brokers are even higher than 

for custodial firms? 

Attached is a letter from one of those—480 PCAOB-registered 

firms, a firm that in theory should benefit from the status quo, but 

it illustrates the issue from the auditor’s perspective. The link 

below talks about the PCAOB’s 2017 report (https://www.wsj.com/ 

articles/inspectors-again-find-problems-in-how-broker-dealers-areauditedpcaob-says-1503074899). 

A.1. Response not received in time for publication. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM MERCER E. BULLARD 

Q.1. Do money market funds benefit the public by providing an efficient means of intermediating short-term cash investments with 

short-term financing needs of State and local governments and 

businesses? 

In your testimony, you state, ‘‘[t]he counterargument that the 

MMF rules are needed to reduce systemic risk has never had a 

sound factual basis.’’ Can you explain this statement? 

In your testimony, you state, ‘‘I do not have faith in the SEC’s 

ability to manage money market fund risk,’’ however, you also recommend that the SEC should conduct an analysis on the impacts 

of the legislation before it is enacted. If you do not have faith in 

the SEC’s ability tomanage money market fund risk, why do you 

believe the agency is equipped to conduct an empirical analysis of 

the legislation’s impact? 

During the hearing, in response to a question from Senator 

Rounds, you said, ‘‘I think one of the concerns Vanguard and 

BlackRock have and one reason there [sic] probably opposing this 

is of course, these rules were adopted in response to the Dodd– 

Frank Act which gave banking regulators in my view, far too much 

authority over what I would call risk-based markets.’’ 1

In fact, a memorandum written by the Investment Company Institute (ICI) states, ‘‘Although FSOC’s recommendations regarding 

money market funds and SIFI designation do not appear to be an 

active threat under the Trump administration, some ICI members 

have raised concerns that overturning the SEC’s reforms by legislation may reenergize bank regulators and financial reform activists. 

These members wish to avoid spurring FSOC-under a future administration to return to its examination of the industry and possibly to seek to apply ill-suited, bank-oriented measures to money 

market funds, other regulated funds, or fund advisors.’’ 2
83 

Is it your opinion that if S. 1117 is enacted, large asset managers 

such as Vanguard and BlackRock will be more vulnerable to designation as nonbank systemically important financial institutions 

by future administrations? 

A.1. Responses not received in time for publication. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM MERCER E. BULLARD 

Q.1. In the past year, we have had two high-profile chronic liars 

that defrauded investors. Elizabeth Holmes from Theranos sold a 

false blood testing system and raised $700 million from wealthy investors. Martin Shkreli is serving a 7-year prison sentence for lying 

about returns to his investors. Shkreli specialized in buying drugs, 

like Daraprim, a 62-year-old life-saving drug that helps newborns 

and people with HIV, and then raising the price from $13.50 to 

$750 a pill. Both Holmes and Shkreli ran private companies. As 

private firms, they did not have strong oversight from State regulators or from the Securities and Exchange Commission. Elizabeth 

Holmes’ firm, Theranos, bilked investors of more than $700 million 

dollars. Martin Shkreli was sentenced to 7 years in prison for lying 

to his investors. 

Of the six capital formation bills we considered which of these 

are going to help investors distinguish good-faith pipe dreams from 

fraudsters like Elizabeth Holmes and Martin Shkreli? 

Which bills do you think would make it easier for fraudsters to 

rip off investors? 

Some say start up culture encourages a ‘‘fake it till you make it’’ 

hustle when pitching investors. 

Do you see Elizabeth Holmes and Martin Shrkeli as indicative of 

the perils of this ‘‘fake it till you make it’’ ethos that makes investing in start-ups risky or are they just unique and terrible exceptions? 

Professor Bullard, in 2012, Congress passed the JOBS Act into 

law. It made it easier for companies to raise capital. 

Do you have any concern that these one-off bills represent a 

piecemeal approach that may interact with one another in unforeseen ways? 

Rather than the piecemeal approach taken with these bills, 

might a comprehensive review of the requirements of, and interactions between, the Securities Act of 1933 and the Securities Exchange Act of 1934 be more desirable? 

Professor Bullard, on May 3, the United States Court of Appeals 

for the Second Circuit in Manhattan overturned for the second time 

the conviction of Jesse C. Litvak, a former trader at Jefferies & 

Co., for misstating the price at which his firm had acquired residential mortgage backed securities and then resold them to investors. 

The appeals court said Mr. Litvak had no duty to the firm’s customers, who were all sophisticated investors, to provide truthful information. The court said that sophisticated investors should not 

rely on statements from traders. 

In two other cases—U.S. vs. Weimert in Chicago and a case 

against David Demos, former managing director at Cantor Fitz-
84 

gerald—financial services employees who misled investors by providing false information were not convicted because the judges 

found that misleading other parties about prices and terms is not 

criminal. 

What is the impact for prosecutors when judges refuse to hold financial executives accountable for misstatements to sophisticated 

investors? 

The Murdoch’s, DeVos’s, and other millionaires lost a hundred 

million dollars or more when they invested in Theranos. Should 

wealthy people follow the ‘‘buyer beware’’ approach when they invest in start ups? Can ‘‘sophisticated investors’’ be defrauded? 

The accredited investor criteria was set in 1982: a million in 

wealth or $300,000 in couple income. It has not been increased 

since then. What level do you think the wealth and income level 

should be increased to? Do you think having a wealth and income 

threshold as the test is appropriate? Should there be some kind of 

test or access for knowledgeable experts who might have less 

wealth/income? 

A.1. Responses not received in time for publication. 
85 

RESPONSES TO WRITTEN QUESTIONS OF THE SENATE 

BANKING COMMITTEE FROM CHRISTOPHER H. DANIEL 
86 

economy. TI1e specific mix of deb1 inslmmems may change over lime. YRDNs1

, lax 

an1icipa1ion noles, TOBs and bank loans. There can be 1emporary seasona\1rends, bul over lime, 

1he aggregate levels will grow roughly in line wilh I he economy. 

The s1ability of the "supply" side of1he equal ion 1e1ls us I hen, 1hat over lime, il's investor 

"demand" 1ha1 wi11 be the key delerminant of municipal borro ~ng costs. So let's examine the 

demand. 

Demand for municipal securities arises through three primary channels: Tax-exempt, or 

municipal, MMFs ("Municipal MMFs"), commercial banks, and individual im·estors (directly or 

lhrouglllruSIS, or other vehicles). 

• Municipal MMFs are the most economica11y efficient, seamlessly bringing 1oge1her 

inveslors and borrowers wilh minimal friclion or transaction C()st Because lhe 2014 

regulations crea1ed a number of operalional barriers, investors fled and 1o1al Municipal 

MMF assets fell over 40% from S250 bi11ion 10 S\30 bi11ion. TI1is shnmk the demand 

side of the equa1ion and rates rose. In fact, they increased at a pace ahnosl double the 

Fed rate increases during 1ha1 period on a 1ax equivalent basis2 

• Commercial banks are a reasonably efficient source of demand but costlier to the 

municipality. Because of1he Volcker Rule (recently somewhat mitigated) underwriling 

costs 10 municipalities have increased. Because ofLCR requiremenls, it's more 

expensive for banks to issue leiters of credil, which back much municipal debt Because 

oflhe Basel 11lleverage ralio, it costs more for banks 10 hold municipal loans or 

securities on their balance sheet And fina11y, with the recent cut in coqxmue tax rates 

(almost in ha\Q, banks no longer find il cost eRective to hold municipal lax advantaged 

securilies in their portfolios. For a11 of these reasons, banks are an unanractive, high cost 

for municipal borrowers. 

• Individual investors find the grealesl benefil in I he lax exemplion. However, 1hat's nol 

much solace for 1wo reasons: I) h is prohibilively expensive and inefficienl for any 

1 At the lime tiJal Municip3l funds wtre fitSt enabled in the 19SOs byon amendmentto the lnJemal Revenue Code 

pcnnitting the Ooll"·lhrough.ofJa.x-exempl inoome in a mutual fund. municipal bonds II"Cre mostly issued and sold as 

long·tenn. foxed-ra1e bonds. A money market fund. OOII"ertr. ll"as only pmnitted 10 inrest in se<urities "ith ''"Y 

shon remaining maturities (.at the lime. a maximum of 13 months). and it was (and is) required to maintain a short 

average ponfolio maturity. The reason for this is to triable the money market fund to maintain a slable share price. 

Rule 2a-7 underthc lnvestmcnl Comp3ny Acl limits the in1'estmen1s of money market funds to I"Cl)' high 

quality. shon·ltrm s.-curilies. High quality securities, "ilh minimal credil risk, do not Ou<tualc in value due to eredi1 

considerations. Securities with \'try shon remaining maturities hare minimal interest rate risk. m~:aning they do not 

Ooctoote in value due to changes in market inltresl ra1es. 

The -ruled Variable Ra1e D<rnand Nole (""VRDN") is a struCIUJe that \\"as created specifieally to enable 

slate and local gormtltl<llts. and other tax-exempt issuers. to access the nell' pool of capilal represenled by 

Municip3l MMFs. The VRDN is 1ailored 10 salisfy the unique and specilic r,"quiremcnts thai a bond must mctt in 

order 10 be purchased by a Mu11i<ip3l MMF. 

The binh oftax-txempl mutual fund~ and the Municipal MMF. transformed 1he supply a11d demand 

dynamics of the municip3l credil market~ The creal ion of the VRDN 1ransformed I he shon end of the spectrum by 

tr~abling a '"''l' large pool of financing copacity a1 the shon-ttrm. Ja.x-exempl. capilal markels ra1e (i.e. the lowesl 

possible cost). 

' When marke1 rates ll"entto wo follo"ing 1he financial crisis, the e<enomic value of the ~ax exemp1ion for 

municipal income dedined and tolal Municip3l MMF assets from $5008 to S2508. Nonnally,this ''~poration of 

in,·eSlotS II"OUid hare increased municipal borro"ing costs. but the Fed injccled SJ Jrillion of liquidity into lhe 

financial S)~tem. locking rates at zero. 
87 

entity to raise capital by selling their shor1-1enn bonds individually to investors, one by 

one. 2) II is far more efficient for banks, trusts or pannerships to aggregate individual 

im·estors and invest in Municipal MMfs. However, this is now blocked by the "natu.ral 

persons" restriction in the 2014 Amendments. 

Based on the above, there are serious limitations on the demand side, all of which are the resull 

of post-crisis MMF and banking regulations. 

Those who oppose the sound remedies contained inS. 11173 make thl"<'e arguments, none of 

which pass close scrutiny as the above discussion clearly demonstrates. 

• Some say that the increase in municipal borrowing costs simply matched the level of the 

Fed's rate increases over similar time frames. While nominally correct, that argument 

ignores the KEY driver of'demand' from investors, which is the tax exemption of 

municipal interest. As the Treasury Strategies study pro1•ided to the Committee before 

the hearing' points out, at a 40% all-in tax bracket, investors will be demanding 

municipal interest of 60% of the taxable market rate (I • 40%). The study shows that 

muni borrowing costs based upon the SIFMA index are well above the tax-adjusted 

treasury rates.> 

• Some say that more time is needed in order to assess the impact. ll's been four years this 

month since the SEC adopted the 2014 Amendments and investors and borrowers began 

preparations. h.'s nearly two years since the 2014 Amendments were fully implemented. 

The impact was swill 11~th assets plunging over 40% prior to implementation and they 

have barely budged since then. It would seem, in this era of instantaneous market 

efficiencies, that more than enough time has passed to fully assess the impact. 

• Some say that the market will eventually reach equilibrium. Certainly, it will. A 

fundamental tenet of economics is that markets m01'e quickly 10 achieve equilibrium. We 

could argue that it already has, and the new equilibrium is not a good place for either 

investors or municipal borrowers. Given the contraction of investor 'demand" and the 

resulting shrinking of the available capital pool, municipalities achieve equilibrium by a 

3 In addition to GFOA's support, S. I 117 is supported by county treasurers, commissioners and other officials; 

mayors and other munici~al officials; primary and secondary, and higher education; colte<tivety bargained 

skilled tradesmen; and business and industry in Ohio and across therountry. Supporting national 

organizations include the American Association of Metropolitan Water Agencies, Association o[ Financial 

Professionals, Association of School Business Officials International Government Finanre Officers 

Association, National Ass<>ciation of Counties, U.S. Conference of Mayors, National League of Cities, 

International City I County Management Association, National Association of Health and Educational 

Facilities Finanre Authorities, International Municipal lawyers Association, Nationa.l Council of State Housing 

Agencies, American Public Power Association, Large Public Power Council, State Financial Officers 

Foundation, U.S. Black Chambers, and U.S. ChamberofCommel'(e. 

S. 1117 is opposecl by the largest in1•estment management firms in the world, such as Blackrock and 

Vanguard, and in turn, their industry trade association, the investment Company Institute. These firms 

believe theirsupport in the regulatory process for curtailing access to the nongovernment money market 

fund bronghtthem relief from Financial Stability 01•ersight Council ('FSOC') designation as nonbank 

Systemically Important Fi11ancial Institutions ('SIF!s"). To GFOA's knowledge, FSOC's nonbank SIFt 

candidates are the only opponents ohhe bill. 

• ""'Wtmsurystra!f$its com/jndustiY iOSiihl/b+Z319·S·II17-the·importance-o(-rtStorlni·StatNndlocal-eovtrnment-accru·to·money-marl<et·lunds (June, 2018). 

S The paper Vanguard circulate<l to all Comminee offices prior to the hearing issimply erroneous in that it 

does not tax-adjust these rates. 

4 
88 

combination of either: a) paying higher rates to attract more investors into the market, or 

b) reducing "supply" of short tem1 borrowing by either curtailing projects or entering into 

much higher cost long-tenn debt arrangements.6 

h's simply not fair that small municipalities, school districts and community hospitals are 

suffering this "new equilibrium" which includes higher borrowing costs accompanied by a 

diminished pool of capital. 

The following is in response to your specific questions. 

Question 1: Your written testimony states that the "lack of investor appetite for floatingNAV tax-exempt MM F's resulted in municipalities issuing variable rate demand bonds 

seeing their borrowing costs nearly double the Federal Reser,.e's rate increases o•·er the 

same period." Earlier in your testimony, you reference the period between January 2016 

and April2018. 

Please prol'ide a comparison of the most relevant municipal borrowing rate (or more than 

one) to the federal funds target rate (or other applicable comparison) for the thirty-six 

months ending June 30, 2018. In your comparison, please explain each of the rates used 

(i.e., an index, midpoint of rate range, etc.). 

GFOA refers you to a recent report by Treasury Strategies containing the following chan, which 

uses Municipal MMF yields as a proxy for municipal borrowing costs, and compares it to 3· 

month Treasury Bills on an after-tax basis om the past 40 months. This repor1, entitled "The 

Importance of Restoring State and Local Government Access to Money Market Funds" is 

attached as Attachment 1.1 

' The fact that m3rl<t1S rt>ach equilibrium is neither inherently good nor bad. It is simplythe point ofinterstetion 

111lerc supply equals demand. For the nay-sayer> to essentially say that in tilll(, the muni mark CIS 11ill rmh 

equilibrium is deceptive. It absolutely does not imply that the new equilibrium 11ill be "good". For example. in the 

19SOs. manufacturing declined in the Midwest due toofllhoring, Voila, in short order. the market rcach<d 

equilibrium Gus,t as the S.J t 17 nay-sayer> II'OU!d ha1·e predicted) but that was NOT a good equilibrium. The n<w 

equilibrium included higher omemplo)mcnt and'"'"' econon~ic gro111h. Sin~ilarly, the municipal funding 

equilibrium includes high« cost borro11ings and a smaller pool of capital. S. 11 17""' help remedy that. 

1 The report. in addition to bein8attachetl, is at \I'W)Y trrasucystrntg:i•s.ccmbndusuy jnsiehtlh·r·23t9·s· 

1117 ~lhe-jmportance·of·restoriog ·state:and-!ocaJ-goyernment -acces.,c;· to·mone,y· rna d;et -funds 

5 
89 

C.mporiscn Municipol 111/f >;elds {%) "'-3M Hills (after tax), 

Source· Cranedato. Treasury Strategies (May 1018) 

R.ltes:tl') 

lM:l"·Bill$fteraax)}s.GJE'MMFs 

"" , .. 

"' 

l-'0 

,,. v tOO 

1'\t...f",l ... }\ ('....} ,., .A../ 

J / .... .I _y-1 ,,. 

"" .r-.. /"' /"' 

~ § ~ § ¢ ~ • f ~ ~ ~ ~ ~ f ,f,.f/.j/J'/ I<+~J' .f.f<+~<i/ 

- 1\IJ-!<,.Y.H'kt - -;.w.f't, 

The report notes that, lx!fore the 2014 Amendments to Rule 2a-7 went into eflect, municipal 

short-tenn borrowing rates were consistently lower than the after-tax Fed Funds and T-Bill rates. 

Since then, however, municipal rates have been well above the after-ta.x Federal Funds rate. 

The report further notes that municipalities fortunate enough to continue selling Variable Rate 

Demand Notes ("VRDNs") to Municipal MMFs saw borrowing costs skyrocket at more than 

double the Fed rate increase - 170 bps vs. 75 bps after tax. Other municipalities would have to 

borrow from diOerent investors, or replace their VRDNs with bank loans at much higher rates 

and longer maturities. 

To provide more context with regard to VRDNs,1 the SEC's 2014 Amendments took away the 

stable NAV for non-natural persons investing in nongovernment MMFs (effective October 

2016), causing a decline of over 40 percent of the total assets of the funds. As assets left 

8 The VRDN is a t)'JICOfshon-tmn debt seourity dosigncd sp«ifocally to be purchased and held bp money market 

fund. 

Ordinarily, a money market fund must use the maturity date s0011n on the face of a bond to measure its 

remaining maturity. Ho11~v<r. Rule 2a-7 provid<s exceptions to this rule lonariabtc and floating rate bonds that 

·-are subject to a demand feature." Rule 2a-7 treats both of these types of bonds as hal'ing a maturity equal to '1he 

period remaining until the princip3l amount can be recoiX'f<'<l through demand." unless. in the case of l'ariablc rate 

bonds. the period remaining until the next interest rate adju~mcnt is longer than the period ,,,naining until the 

demand right can be excrciS<d, in 11hich case the longer period is used to measure the bond's tnaturity. Rule 2a-7 

dcfintS a "demand feature" as "a put that entitles tho holder to roccil'c th< p<ineip3! amount of the underlying 

S<Curity." 

The standard COn\'tnlion for the VRDN Slructure is a \-ariable int(!f\'SI ra1e that is reset to the sh.on-tenn 

market rate e~ ery ,.,.,. dars. combined 11ith a put that can be exercised on ,.,·en da)>' notice. Thiscausos the 

bond, under Rule 2a-7, to ha,·ea rctnaining maturity ofscl'en da)~ lfthe bond should be put (e.g., to satisfy 

redemptions in th< fund).~"' SUI!Cture has a "remarkttingagent" that places the bond 11ith a dincrent MMF. There 

11ill normally be a standby purchaser in the stru<~ure, as well. to hold tho bond, if ~cssary, until it is ptactd in a 

difti:rent fund. Typically. V .RDNs can also be con,·cncd into a long-term mode and re·marketcd as long·tenn. fixedrate bonds if it makes sense to do so. 

Funhcr. the structure cnabtos credit enhaneement. if n=sary. Many municipal issiiCI'S (e.g.. th< City of 

Columbus. OH) arc of suOicient shon-tenn er,'<lit quality so as to be eligible in,'CStmems fora money market fund. 

Where this is not the case, the issucr'scredit quality con be bolstc!<'<l l'ia the backstop of a bank lcncr-of-mdit. This 

adds cOSt - the issuer mUSloow pay a fee for tho LOC as ~~~lias tho interost on the bonds; but, oormally, the tOtal 

cost is still far less than issuing a long-term. fixtd·nnc bond. 

6 
90 

Municipal MMFs in 2016, the funds tendered VRDNs to fund the redemptions. Those VRDNs 

were then "re-marketed" with re-marketing agents moving the weekly interest rates up to the 

level necessary to clear the market and get the bonds placed (either in other MM.Fs or with nonMMF buyers). The supply of VRDNs exceeded the demand from Municipal MMFs, so the 

interest rate had to go up in the auction process until it auracted a buyer. 

The key metric impacting the cost of financing to state and local government is the level of 

assets in Municipal MMFs.9 Municipal MMFs dramatically increased both the supply of 

financing capacity at the short end of the spectrum, as well as the efficiency of issuing bonds 

there. MMFs are an extraordinarily effective vehicle to gather and concentrate cash into easily 

accessible, stable pools that would then bid against each other to buy VRDNs and other shorttenn, tax-exempt paper (i.e., tax anticipation notes, etc.). Otherwise, issuers have to work 

through undem7iters, dealers and banks to find other, individual buyers. 

With or without the MMF, the short-tenn, variable rate, tax-exempt end of the spectrum will 

always have, on a relative basis, the lowest cost because it has the lowest credit and interest rate 

risks. Eliminating the MMF does not alter that market d)1tamic. Rather, it changes the market 

supply-demand equation in a fashion that causes rates to go up across the spectrum.10 

With the loss of overS 120 billion in demand from Municipal MMFs due to the 2014 

Amendments, VRDN rates have increased far beyond the increase in market rates. The supply 

of VRDNs now exceeds the demand from Mwticipal MMFs for VRDNs such that the result of 

the market auction process is to increase rates to find the maximum that VRDNs are willing to 

pay to remain in Municipal MMFs. Issuers must also find altemative sources of financing. They 

either must sell directly to indil•idual investors in a less eflicient way, issue long-tenn debt, or 

borrow from banks at a higher cost. This increased demand out the spectmm raises rates for 

those already higher-cost sources. 

~he same is true for Prime MMFs. Nearly $1.2 trillion has exited Prime and Municipal MMFs. Prime MMFs 

have seen a 67 percenldrop from$1.41 trillion in January 2015 to S410 billion on May I. 2018. 

10 Issuers, such as a city, state or agency, with substantial financing needs are regularly borrowing. issuing 

and re-financing based on their needs, unique financial cir<umstances, and market conditions. Typically, any 

issuer will have a combination of different types of debt on its balance sheet-multiple borrowings of 

different types and terms. What issuers desire is a competitive universe of different sources and options that 

enable them to chiXlse the best fit. and get to the lowest cost based on their particular needs and 

circumstances. 

There are various choices in financing for governments, universities, hospitals. housing. community 

organizations and business. Broadly speaking. these choices include: whether to borrow short or long term; 

whether to have a variable or fixed interest rate; whether to borrow from a bank or in the capital markets; 

and, if in the capital markets. whether to issue ta."bleor tax-exempt. 

These sources of financing. and structuring choices. can be put on a spectrum of cost. Under normal credit 

mari<et conditions. short-term, variable-rate, la.x-exempt,capitat mari<ets financing will be at the lowest 

possible cost end ofthe spectrum. i.Qng-term, fixed-rate, taxable. bank financing will beat the opposite. 

highest-cos! end of the spectrum. The reason long· term, fiXed· rate financing normally costs more is because 

there are higher interest r.ueand credit risks to investors. and they require higher compensation to take 

more risk 

One of the key reasons why borrowing in the capital markets is less expensive than borrowing from a 

bank is be<ause the capita I markets are, in effect. an auction. There are a plethora of buyers for bonds in the 

mari<etplace. They bid against each other to buy the bonds, and this drives !he price up. and the yield down, 

so that the issuer receives the lowest possible cost as compared to a one-on-one negoliation with a bank. 

Issuers benefit from a low<!rcoslas the market mechanism for buyers to bid. or compete. against each other 

becomes more erficient. See, e.g., bttpr llwww brown senareaovtnewsr09mtprwtrelraselhmwn. 

demands·hii·banks-ust·taX·ctJl-i·tO·bring·back·us·jobs 

7 
91 

The cynics 11~11 argue11 that, over time, there will be a new market equilibrium - existing 

VRDNs will be refinanced, and the issuance of new VRDNs will fall, until VRDN rates fall back 

in line with market short-tenn rates. This is true, but it misses the crucial point. Dramatically 

reducing the poet of available short-tenn credit forces issuers to go to other lending sources, such 

as long-tenn, fixed-rate, and/or bank financing, where the cost is much higher and will be pushed 

up Cl'cn more by the new demand. Without assets in Municipal MMFs, state and local 

govemment have lost access to a large poet of the lowest cost, short-tenn, tax-exempt, capital 

markets financing. 

GFOA would note that this impact was predicted by Idaho State Treasurer Ron Crane in his 

testimony before a hearing of the Senate Banking Securities Subcommittee on May !6, 2016, 

before the implementation of the 2014 amendments.

12 Treasurer Crane testified as to the 

unfolding impact, and gave a forecast based on a Treasury Strategies study attached to his 

IITitten testimony. He lestified that: 

" ... as part of the July 2014 amendments to Rule 2a-7, the SEC also adopted a 

requirement, effective on October 14 of this year, which in effect eliminates the 

utility of any money market fund to investors who are not "natural persons" (in 

the terminolog)• oft he Rule) unless the fund invests exclusively in U.S. 

government securities. 

"Under this new requirement, any tax-exempt or prime money market fund 

accepting any inve$tor other than a 'natural person' will no longer be able to 

offer and redeem shares based on amortized cost valuation of its portfolio to 

produce a stable, Sl net asset value (NA V). Instead, such funds will have to 

apply a fluctuating or •·floating" NAV using market-based estimated 1•alues. 

Simply, again, the lloating NA V goes beyond regulation of the money market 

fund to just kill it as a cash management tool. I do not believe cash investors, 

such as myself, want, or 11~11 use, a floating NAV fund for cash investments.n 

11 Ste supra notes 3 and &. Black rock's paper, circulated to all Commi~ee offices prior to the hearing. is at 

bttps:l/vr.vw blark[Q(k.com/cowornte/li!erature/wbjttpaPtr/yjewJJOint·us-mmf-re[onn-assasin:-tht= 

jmoact·ianuary·20!8 pd! Blackrock questions whether the cause and effect olthe excess ofVRDN rates over 

the market rate is the loss ofMuuicipal MMF assets. Clearly, asa ma~er ofbasicsupply and demand~ it is; b!!l 

even jfjt js not the key point here is that, in any event,long·term, fixed rate, andfor bank financing is going to 

be more expensive than borrowing from Municipal MMfs. 

rz Ste bttps· /lwww banking senate :ovlhearin~/sjj -jmproyine-commuojtjts-and-busjnrsscs-acctSs-torapjtal-and:eronomic-dev-elopment 

13 The SEC's 2014 Amendments were in response to an FSOC"ultimatum' to the SEC in the wake of a 2012 

SEC mlemaking effort that failed to anract the nectssal}' three SEC commissioner votes to even propose a 

rule (of a SEC wilh a Democratic chair and three Democratic commissioners). FSOC demanded that the SEC do 

one or more of three things to MMFs: capital requirements. redemption restrictions and/or floating the share 

price ("FNAV1. 

The SEC discarded FSOC'scapital re<juirements option, but put out a proposed rule forcomment that 

itself had three options: (1) FNAV, (2) redemption restrictions, or (3) both FNAV and redemption restrictions. 

Blackrock. the largest investment management fim1 in the world, commented as follows with respect to (3) · 

the combination of FNAV and redemption restrictions · in a letler dated September 12, 2013 

bttptllwww.s«.~ov/commenrs/s7·03-13/s7Q313-l!S pd!at p. 13): 

"tf one ofthe slated obje<:tives of the further reforms is to preserve the benefits of MMFs 

and have a viable product for investors to use, this proposal is not worl<able. A rational 

investor would not purchase a MMF, with the strict portfolio requirements of Rule 

2a-7,that has both a noating NAV and has the prospect of a liquidity fee and gate." 

8 
92 

''Thus, by October 14, all inves10rs other than 'natural persons' are forced to 

leave any stable value, dollar per share, prime or tax-exempt money market 

fund. Since these investors are managing cash, they 11~11 be looking to move to a 

diflerent, stable-value cash managemem vehicle. As a practical matter, this 

means most will either put their cash in a money market fund investing 

exclusively in U.S. government securities or deposit their cash in the bank. 

''In either case, that money will no longer be available in the ponfolio of a 

prime or tax-exempt fund to loan to businesses or invest in tax-exempt notes 

and bonds ofldaho, other state and local governments, and other 

nongovemmem issuers such as hospitals and universities ... 

" ... Treasury Strategies has concluded that this one SEC requirement, by itself, 

will reduce the assets in tax-exempt money market funds by atleast40 

percent."'" 

The impact of the 2014 Amendments on tax-exempt issuers in Ohio can be clearly seen in 

Attachment 2. It shows both the loss of financing and the increase in cost on an issuer-by· 

issuer basis. Overall, MMF holdings of debt of Ohio municipalities fell Sl percent from $4.61 

billion to $2.24 billion between January 2016 and April2018. Originally, MMFs held 345 Ohio 

issues. That fell to 193 as a result of the 2014 Amendments. Thus, over 150 debt issues had to 

be funded elsewhere, almost cenainly at a higher cost. For those municipalities fonunateenough 

to continue receiving funding from Municipal MMFs, the median rate rose by 1.69 percent from 

0.10 percent to 1.79 percent. That is more than double the after tax-adjusted Fed rate increases 

over the period, which was 0. 75%.15 

"We would strongly urge the Commission not to adopt a proposal that would combine 

standby liquidity fee.sand gates and a Roaring net asset value as feature.s of the MMF as 

thiscombination would raise the likelihood that [nongovernment] MMFs would no 

longer be offered, with significant impact on investors, issuers and the short·term 

funding markets. "!Emphasis added.] 

The SEC then proceeded to adopt the combination of FNAV and redemption restrictions in its 2014 

Amendments. 

14 The Treasury Strategies study was a very simple exercise. As a threshold matter, the 2014 Amendments 

drew a distinction between "natural" and "non·natural" persons. and said that "non·naturat• persons would 

have to leave non·govemmen~ stable value MMFs. Thus, the impact would be, at least, the amount of assets in 

these funds in accounts of ·non· natural persons'. Treasury Strategies simply surveyed both the largest MMF 

sponsors maintaining dirett shareholder accounts (i.e. that know whether their shareholders are non-natural 

persons, or not), as well as intermediaries maintaining omnibus accounts. The sponsors and intermediaries 

told Treasury Strategies, upon inquiry, what the amounts were. 

When you compare the Treasury Strategies study to the SEC's adopting Release for the 2014 

Amendments, you see thai the SEC did not assess and weigh the impact of its rule. In its Release, the SEC 

asserted that "institutional" [non-natural person] investors likely held less than IS percent oftax·exempt 

money market fund assets. Moll<)" Markel Fu11d Reform: Amt~uhn nts to Form PF. 

""w.sec.gov/rul.slfinal/2014133-9616.odfat p. 2~4; 79 Fed. Rog. 47136 (Aug. 14, 2014). The SEC was relying on 

industry data differentiating ·institutional· and · retail• funds by criteria such as minimum account size; not 

the distinction in its rule of"natural" 1•s. · non-natural" persons. In addition, the SEC asserted that such data 

overstated "institutional" assets because omnibus accounts likely consisted of retail [natural person] 

investors. Thus, the SeC assumed, without comparable data or performing its own study, that its action would 

not significantly impact the assets of Municipal MMF~ 

IS Nominal increase of 1.25% times (!·minus 40% mar~inal tax rate). (Vanguard's pap<rdoesnotmake this 

adjUllment.) 

9 
93 

The general impa't on ta~-e~empl issuers is illustrated in the Treasury Strategies report atta,hed 

as Attachment 1.16 It is an analysis showing the loss of financing capacity and the rise in 

financing cost both in general and in selected states, including all of the states represented on the 

Senate Banking Committee. 

Question 2: Please explain how you assess the impact oft he change in corporate tax rates 

on the demand for municipal securities. 

See response to Question 3. 

Question 3: Please explain how you assess the impact of the change in indil'idua1 tax rates 

and the limit on the deductibility of state and local tax on the demand for municipal 

securities. 

Under the federal tax code, corporate and individual investors are not required to pay federal 

income tax on interest earned on most bonds issued by state and local governments. It will take 

some time for GFOA to quantify the impact of lower corporate and individual tax rates, and the 

limit on the deductibility of state and local taxes, each specifically on the demand for municipal 

securities. However, we do know that the Tax Cut and Jobs Act of2017 has adversely impacted 

the cost of borrowing by state and local governments due to the loss of advanced refunding and 

now state and local government issuers need alternative sources of liquidity to maintain cost· 

eflicient access to working capital and financing for infrastructure investment. Until rC\:ently, 

MMFs were a significant source of that liquidity. Such funds provide state and local 

governments with very low-cost variable rate financing as an alternative to issuing fixed-rate 

bonds. Unfortunately, just as Congress made fixed-rate municipal debt generally costlier and less 

available, the SEC's 2014 Amendments governing MMFs are having the same efl'ect of reducing 

liquidity in the short-term municipal debt market and driving up the cost of borrowing when it is 

needed most.17 

Question 4: Using publicly a\•ailable sourct'S, please provide the annual issuance of variable 

rate demand notes I obligations by state and local go\·ernments for each calendar year 

beginning with 2010 through, and including, 2017. For any year-over-year period where 

there is a decline, please explain the factors you believe caused such decline. 

For data on municipal variable rate securities, including VRDNs, GFOA would refer the 

Committee to the 2017 MSRB Fact Book.11 As noted previously, since the VRDN is a structure 

created specifically to meet the unique requirements of Rule 2a-7 for pem1issible investments of 

MMFs, the annual issuance ofVRDNs simply parallels the gro111h or decline of assets in 

Municipal MMFs. 

The aggregate assets of Municipal MMFs grew steadily for over 25 years from inception in the 

1980s until2009, which marked the beginning of the loss of"norrnal" market conditions. Two 

factors occurred that caused a decline in VRDNs. First, short-tenn interest rates fell to nearly 

zero and held there for eight years. This took away a key benefit of the Municipal MMF - tax16 Stt supra notes 4 and IJ.. 

17 The limit on the deductibility of state and local taxes inhibits the ability of state and local governmenno 

increase taxes and, if anything. places an even greater premium on the demand. or need for low cost 

financing. 

l8 btqr lfwww msrb oc;/-/medjaWJes/ResourcesiMSRB·fact·Book-20J7.asbx'la•en beginning on page 

51. 

10 
94 

exempt income and, as a resuh, assets in the funds fell from $500 billion to $250 billion at the 

endof201S.

19 

Enacting S. 1117 and thereby restoring the stable 1•alue for nongovernment money market funds 

will restore the utility ofthe product for investors, bring the lost assets back into the funds, and 

enable assets to return 10 previous highs as short-tenn interest rates return to their nonnal range. 

This, in tum, will result in a substamial increase in the issuance of new VRDNs. 

Qul'Stion 7: Please explain the impact of regulatory changes, other than the SEC's 2010 or 

2014 rule$, on the supply or demand for municipal money market securitil'S. 

As applicable, please discuss bank capital and other regulations that may affect variable 

rate demand note$/ obligations, such as the liquidity coverage ratio, leverage ratio, capital 

ratio, and the Volcket· rule, and any others that you belie1·e could be rele1•ant. 

Without Municipal MMFs, there are no bank capital or other regulations that may a fleet VRDNs, 

because VRDNs are a structure that is specific to MMFs. If the nongovernment MMF is restored 

by the enactmem of$. 1117, and with the Federal Rl'Serve no longer holding short-tenn market 

interest rates at zero, the potential is there for Municipal MMF assets to grow from the prl'Sent 

$130 billion to as much as SSOO billion. At that point, the primary bank regulation affecting 

VRDN issuance is the same issue that hindered bank purchases of municipal securities for their 

own account: the increased cost of obtaining bank credit enhancemem for a VRDN due to 

changes in risk capital weighting for bank letters of credit. Bank credit enhancement is more 

difficuh to obtain, and costs more, due to regulatory changes in bank capital requirements. 

However, this is primarily a cost issue in the marketplace that is factored into a municipal 

issuer's decisions on the types and tenns of debt it will issue in its particular circumstances. 

There are alternatil'e, CQmpetitive nonbank sources of credit enhancement (e.g, bond insurers). 

An issuer needing credit enhancement in order to meet the credit quality requirements to be a 

pennissible investment for a Municipal MMF will weigh the combined interest and creditenhancement cost of the VRDN (or other structure) against what it will cost to issue debt in a 

fornt that does not reqtLire credit enhancement. 

Unrelated to VRDNs, a bank regulation of concern to GFOA members is the liquidity coverage 

ratio rule approved by federal regulators in 2014, which classifies foreign sovereign debt 

securities as HQLA while excluding investment grade municipal securities in any of the 

acceptable investment categories for banks to meet new liquidity standards. GFOA beliem that 

not classifying municipal securities as HQLA will increase borro11~ng costs for state and local 

governments to finance public infrastructure projects, as banks will likely demand higher interest 

rates on yields on the purchase of municipal bonds during times of national economic stress, or 

even forgo the purchase of municipal securities. The resulting cost impacts for state and local 

govemments could be significant, with bank holdings of municipal securities and loans having 

increased by 86 percent since 2009. 

19 There was a substantial cost to state and local government, in terms or increased financing costs due to the 

loss of assets from Municipal MMFs be~\'een 20t0 and 201S.Issuers were forced to instead issue long·term 

bonds. However, the cause in this period was credit market conditions in response to Federal Resetve 

policies that presumably would eventually reverse. Supra, note 2. Remarkably, investors continued to use 

Municipal MMFs to hold and invest$250 billion in cash, even without material tax·exempt income. This 

demonstrates the importance ofthe stable NAV.Ifit was income that11~s most important to investors in cash 

management, they could have moved their assets to other mutual funds with fluctuating NAYs, such as 

ultrashort bond funds. 

11 
95 

Fortunately, Congress recently addressed some of this concern 11~th enactment ofS. 2155, the 

Economic Gr0111h, Regulatory Relief, and Consumer Protection Act, which included a provision 

to classify investment grade municipal securities as HQLA. The core features of investment 

grade municipal securi!ies are consistent with all of the criteria characterized as HQLA, 

including limited price volatility, high trading volumes and deep and stable funding markets. 

Cash Management (Questions 5 and 6) 

The stable share price ofMMFs is a critical operational feature that makes them useful to both 

state and local governments as in1•estors of cash balances, and all other types of organizations as 

well. Movement to a fluctuating NAV has made nongovernment MMFs far less useful to 

investment ofllcers. Comments submitted by state and local governments to SEC and FSOC 

dockets during the regulatory process were very blunt in stating their opposition to imposing a 

floating NAV requirement on MMFs.

20 

Question 5: What per-centage of state and local governments have access to local 

government in1•estment pools? 

Accounting requirements for state and local governments are established under applicable state 

and local law, rules and policy as well as standards set by the Government Accounting Standards 

Board C'GASB"). These state and local requirements and GASB Standards also apply to LGIPs, 

which are investment pools operated by state go1•ernments to hold state and local government 

assets. Many LGIPs are operated by state governments to invest liquid assets and have features 

similar to a MMF, including daily liquidity and a stable unit value ofSI per unit. 

There are now more than 107 LGIPs used in 44 states, with total assets in excess of$225 billion. 

The twenty-five largest LGIPs accounted for appro.ximately three-quarters of total LGlP assets. 

20 See. e.g. Letter from Conference of Mayors to Commission Ouly 18, 2013) (available in File No.$7-03·13); 

Letter from North Carolina Metropolitan Mayors Coalition to Commission Uuly 24, 2013) (available in File 

No. $7-03-13): Letter from Association ollndiana Counties to Commission (Aug. 13, 2013) (available in File 

No. $7-03-13): Letter from Gomnment Finance Officers Association, International City/County Management 

Association, National Ass~c at on of State Auditors, Comptrollers and Treasurers, National Association of 

State Treasurers, National League of Cities, National Association of Counties, U.S. Conference of Mayors, 

American Public Power Association. and Council oflnfr<lstructure Financing Authorities to Commission (Aug. 

19, 2013) (available in File No. S7-03-13); Letter from Commonwealth of Kentucky, Office of Financial 

Management to Commission (Sept. 6, 2013) (available in File No. S7·03-13): Letterfrom Massachusetts 

Municipal Association to Commission (Sept. 9, 2013) (available in File No. S7-03-13): Letterfrom 

Government Investment Officers Association to Commission (Sept. 10, 2013) (available in File No. S7-03·13); 

Joint Letter from Mayors of: Irving. Texas; Fort Worth, Texas; l-ouisville, Kentucky; Racine, WiS(onsin; 

Cincinnati, Ohio; Raleigh, North Carolina: Salt l.ake City, Utah; Arlington, Texas; Mesa, Arizona; Covington. 

Kentucky; Baltimore, Maryland; Chicago, Illinois to Commission (Sept 12, 2013) (available in File No. $7-03· 

13).Accord Letters from American Public Power Ass'n etol Oan. 10, 2011, Mar. 8, 2012 and Feb. 13, 2013) 

(available in various Commission oomment files); Letter from Hon. Michael B. Hancock, Mayor, City and 

CountyofDenver Oul. 25, 2012) (available in File No. 4·619): Letter from Hon. Stephanie Rawlings·Biake, 

Mayor, City of Baltimore Oul. 20, 2012) (available in File No. 4·619); Letter from Utah Ass'n of Counties Oun. 

27, 2012) (available in FileNo. 4-619): Letter from NewYorkStateAss'n of Counties Oun. 20, 2012) 

(available in File No. 4-619); Letter from Hon. James L Mcintyre, Treasurer, State of Washington (Nov. 15, 

2011) (available in File No. 4·619): Letter from New Mexico Ass'n of Counties Oan. 28, 2011) (available in File 

No. 4-619); Letter from Hon. Ralph Becker, Mayor, Sail lake CilyCorpor3tion Oan. 13,2011)(available in File 

No. 4-619); Letter from National Ass'n of State Treasurers (Dec. 21, 2010) (available in File No. 4-619). 

12 
96 

Approximately two-thirds of LGIPs are operated as stable value funds that seek to maintain a 

stable NA V.11 

All LGIPs are now pemtitted under GASB Standards to elect to value their portfolios at 

amortized cost. Howevoer, until December2015, GASB required that LGIPs operate in a manner 

consistent with Rule 2a-7 in order to use amortized cost to value securities. In response to the 

2014 Amendments, GASB issued Accounting Statement No. 79 on December 23, 2015, which 

ellettively de-linked LGIP financial reponing from Rule 2a-7 in advance of the ell'ective date of 

the 2014 Amendments. In the new Statement, GASB sets forth requirements for average 

investment maturity, quality of portfolio assets, diversification of investments, and portfolio 

liquidity which are similar to Rule 2a-7, and which it determined are sullicientto justify the use 

of amortized cost as an approximation of fair value. As such, GASB has repudiated the SEC's 

analysis and justification for fluctuating NAV requirement in the 2014 Amendments. 

The LGIP is an excellent case study in how a regulator can underestimate the marketplace. In 

discounting comment, the SEC did not anticipate the unwillingness of state and local 

governments. and others, to accept a fluctuating NA V. In view of the facts that: (a) states 

currently could choose to amend their statutes and policies to operate LG IPs as floating NA V 

pools, btu ha1•e not done so; (b) virtually all LGIPs that are intended to hold liquid assets operate 

with a stable NA V; and (c) state and municipal govemments have loudly voiced their opposition 

to imposing a fluctuating NAV, it seems unlikely that states would msh to embrace a fluctuating 

NAV for either LGIPs or for MMFs simply because the SEC amended Rule 2a-7. 

LG IPs are an important and valuable cash management vehicle for state and local govemment. 

However, the nature al\d extent of LGIP offerings varies substantially from state to state, 

depending on the resources available; and state and local govemments have always relied on the 

ability to choose from an array of registered MMF options alongside their states' LGIPs. Local 

governments, without either an LGIP ofTering or a prime money market fund are left with no 

ability to access prime money market instruments through a pooled investment vehicle. 

LGIPs are exempt from registration under the Investment Company Act, and thereby Rule 2a-7 

and SEC regulation, dtte to an exemption for funds with only govemment entity participants. 

Therefore, while a cash management altemati1•e to MMFs for local governments, LGlPs are not 

available to the larger universe of other non-govemment community organizations (such as 

hospitals and universities); or to businesses. 

Question 6: \'our written testimony states "many go••ernments hare specific state or local 

statutes and policies that require them to invest in financial products with a stable NAY". 

(I) How many state or local governments hare such restrictions? (2) Of those, how many 

are statutes (or the equivalent)? How many are policies? (3) How many, or what 

percentage, hare both? (4) Of the policies, bow many can be changed by amending policy 

(rather than a legislative change)? 

21 $j)urce: iMoneyNet Spe<:ial Report Government Investment Pools: Investment Strategies. Facts, Figures and 

Trends. See also, bnp·/!www jmoneynrt com/oroducts·seo•jces/specjal·reports aspx 

13 
97 

Overview· A Fiduciarv Process. 

GFOA's best practice recommends that all state and local governments have investment statutes 

and policies adopted by the governing body.12 The establishment of in1•estment policy is at the 

heart of a fiduciary investment process. The purpose of an investment policy statement is to 

document the investment plan and guide consistent, infonned decision-making. It is to ensure 

that an investment strategy is based on the unique needs and objectives of the particular investor 

or entity; and that investment perfonnance is measured against those unique needs and 

objectives. This is the essence of fiduciary behavior: acting solely in the best interest of 

beneficiaries based on their unique circumstances. 

Managing and inmting taxpayer cash and other funds is like emything else in state and local 

government: it starts with asking what is the purpose to be achieved and what is in the best 

interests of citizens, tawayers and communities? 

Investment oflicers first define their needs and goals; and then seek to crafi an investment 

strategy, and make investment choices, that meet those needs and accomplish those goals. 

Ideally, financial product pro1•iders are competing in the marketplace to provide the best possible 

solutions and services in response to investor needs and goals. 

This market-driven system breaks down when the temts of financial products and services are 

dictated in a fashion that destroys the utility of the product to the investor. Notwithstanding 

broad, deep and overwhelming public comment in the regulatory process, the decision was made 

in Washington to disregard the expertise and needs of state and local governments, including 

those in Ohio. 

Key Points. 

First, investment statutes and policies are not arbitrar)' requirements that can be readily changed 

so as to suddenly enable state and local government investors to use MMFs with fluctuating 

share prices ( .. FNA V funds"). 

The key point is that the statutes and policies are the refle.:tion, or expression, of a host of 

underlying needs and goals for how money is invested and cash is managed. Changing the policy 

does not change the under )~ng needs and goals. Rather, changing the policy would be 

subverting a fiduciary decision-making process that many in Congress support.23 

The stable share price ("stable NAV") is a critical, baseline need and requirement for investors in 

using MMFs for cash management. It is these needs and requirements that then become the basis 

for drafting investment statutes and policies. investors from across the country, and in Ohio, 

overwhelmingly expressed their position to both FSOC and the SEC in the regulatory process. 

But the fluctuating NA V was imposed nonetheless, and the result was that investors redeemed 

S 1.2trillion dollars from the funds that no longer had a stable NA V and therefore no longer met 

their needs.2

' 

11 hups·llwww efoa orefi nvesment·policv 

13 S..., •·&· Letter of Senators Patty Murray. Elizabeth Warren. Sherrod Brown, Ron Wyden and Cory A. 

Booker to U.S. Se<retary of Labor Ale,.nder Acosta (May 18. 2018) regar<ling the DOL connie! ofinterest rule 

ensuring financial advisers are acting in their clients· best interests. Available at https·l/thediwireccmiiYJ!· 

rnntentfuplnads/20 I 8/05/Sfoate·l&fler-to-PO!tndr. 

2

' See supra notes 13 and 20. 

14 
98 

Attached as Attachment 3 are the following letters to Senator Bro1111 from municipal leaders in 

Ohio highlighting their concerns as to their duties under state law and investment policy: 

• Ohio County Commissioners Association, Ohio County Treasurers Association, Ohio 

Council ofCount)•Oflicials- outlining that counties have statutory obligations to invest 

in stable NA V MMFs. This means that many of Ohio's 88 counties fall under this 

mandate and have been negatively impacted by the 2014 Amendments due to the lack of 

available, nongovernment stable NAY MMFs.l; 

• Ohio Municipal League - outlines that cities have statutory obligations to invest in stable 

funds. This means that many of Ohio's 900-plus municipalities fall under this mandate 

and have been negatively impacted by the 2014 Amendments due to the lack of stable 

NAV MMFs. Da~on Mayor Nan Whaley's letter is also included.

26 

• University ofToledo- outlines that public universities have statutory obligations to 

invest in stable VA V funds. Ohio currently has 14 four-year state universities, 24 brnnch 

and regional campuses, 23 two--four community colleges and technical colleges. and one 

public medical (OIIege for a total of 62 public higher education organizations, which are 

many of them are impacted to by the 2014 Amendments. 

• The Metro Health System - outlines that many public hospitals have statutory obligations 

to invest in stable NAV MiviFs. 

• Plain Townshif)- demonstrates that many of Ohio's l01111ships have statutory obligations 

to invest in stable NAV MMFs. 

Resoonses to specific questions: 

(I) and (2). All state and local govemments are both subject to statutory inve.stment 

restrictions and have fonnulated specific investment policies as pan of their fiduciary 

investment processes. 

Ohio is representative, as noted by the Ohio County Commissioners Association, Ohio 

County Treasurers Association, Ohio Council of County OOicials, Ohio Municipal 

League, University ofToledo, the Metro Health System, Plain To1111ship and many 

others (over SO associations and indi1•iduals representing towns, cities, counties, colleges, 

universities, hospitals, J)Ort authorities, businesses and others) in addition to the GFOA.21 

Virtually all statutes and policies require a stable NA V either as a matter of statute, or as 

a matter of J)Olicy, or both. Almost all statues, nationwide, refer to a MMF registered 

under the Investment Company Act and may also reference Rule 2a-7 under the 

25 Athens County Commissioner Lenny Eliaso11. and other county officials, have also written to Senator 

Brown. 

26 Cincinnati Mayor john Crnnley, Columbus City Councilman Michael Stimiano, and other municipal officials, 

ha\•e also written to Senat()r Brown. 

l1 Cong. joyce Beatty, Tim R)~n and Marcia Fudge, among other members of the Ohio House delegation, are 

listening and have responded byco·sponsoring H.R. 2319, the Housecoml'lnion bill toS.lll7. See 

brtps·llwww wn~rss covlbilllll Sth-conpwslbousebi1112319/rosoonsors?o:%]B%22search%22%3A%SB%2223t9%22%SD%7Q&r=2 . 

15 
99 

hwestment Company Act.

28 Until the end of2016, this requirement, in and of itself, 

meant investing in a MMF with a stable value. Otherwise, withOUithe reference to 

"money market fund," any short-lenn bond fund with a fluctuating share price would be a 

permissible investmenl. Some statUies go firnher and explicitly require that the fund 

maintain a stable net asset value.29 

Post-implementation of the 2014 Amendments in October of20 16, Rule 2a-7 now 

encompasses funds with both stable and fluctuating NAYs. Only "natural persons" can 

invest in nongovernment funds with a stable share price. Thus, as a literal mater, a state 

statute enabling a state or local government to invest in a MMF regulated under Rule 2a7 could now be interpreted to pennit a nongovernment fund with a fluctuating share 

price. However, (a) public onicials behaving as fiduciaries know and understand that was 

not the intent of the stature; and (b) regardless of the technicalities, as a practical matter, 

the fluctuating NAY ftmds still do not meet their fundamental needs and operational 

requirements. 

That is expressed and demonstrated by the fact that investors have overwhelmingly 

withdrawn their money from nongovernment, floating NAY funds. These "non-natural 

person investors" have a choice. Regulators can require the floating NAY; but regulators 

cannot force investors to invesl. 

(3) and (4). A survey has not been perfonned, to GFOA's knowledge, that would indicate, in 

percentage tern1s, and on a nationwide basis, how many statutes and/or policies would 

ha1•e to be changed to enable a FNA Y fund. There are two basic reasons: 

First, each state is diflerent from every other state. Each has a multitude of political 

subdivisions, agencies and funds. Each state, in and of itself, then has a corresponding 

28 See, e.g., Ari~ Rev. Stat.§ 35-313 ("The state treasurer shall invest and reinvest trust and treasury monies 

in any of the following items: ... 8. Securities of or any other interests in any open-end or dose(!-end 

management type investment company or investment trust_._ registered under the investment company act 

of 1940 .... For any treasurer investment pool that seeks to maintain a constant share price, both ofthe 

following apply: (a) The investment company or investment tniSt takes delivery of the collateral forany 

repurchase agreement either directly or through an authorize<! custodian. (b) The invesnnent policy ofthe 

im•estment company or investment trust includes seeking to maintain a constant share price."); Colo. Rev. 

Stat.§ 24-75-601.1 ("It is lawful to invest public funds in any of the followingserurities: ... (k) Any money 

market fund that is registered as an investment company under the federal "lnvestment Company Act of 

1940", as amended, if ... [t]he investment policies ofthe fund include seeking to maintain a constant share 

price_ .. ."); Del. Code Ann. tit. 31, §4013 ("In addition to its other powers. [the Delaware State Housing 

Authority] is hereby granted, has and may exercise all powers necessary or appropriate to carry out and 

effectuate its corporate purposes. including. without limitation, the following ... (17) To invest any funds not 

needed for immediate use or disbursement including any funds held in reserve in the following ... I. Shares of 

any investment company that ... [m]aintains a constant net asset value per share_ ... "); Lener from County 

Commissioners Association of Ohio to FSOC (Dec. 21, 2012) (available in File No. FSOC-2012-0003] ("County 

governmentS in Ohio oper:ate under legal constraints or other policies that limit them from investing in 

instruments without a stable value. If money market funds are required to noat with their NAYs. many 

counties in Ohio would be forced to use alternative funds that are less regulated, less secure, and less liquid"); 

Lener from Metropolitan ~1ayors Caucus to SEC (Mar. 28, 2012) (available in File No, 4.619) ("Many 

governmentS are required by statute to invest in financial products which bear less risk and have stable 

values. Money market funds are the im•estments used to ensure compliance with these state and local laws.") 

29 See. e.g., Me. Rev. Stat. tit. 5. § 135 ("IVhen there is excess money in the State Treasury that is not needed to 

meet current obligations, the Treasurer of State may invest ... those amounts in ... so-called 'no· load' shares 

of any investment company registered under the federal investment Company Act of 1940,as amended, that 

complies with Rule 2a·7 guidelines and maintains a constant share price."). 

16 
100 

multitude of specific statutes that correspond to those subdi1•isions, agencies and funds. 

Each political subdivision, agency and fund, in mrn, fonnulates its own investment 

policies.30 It is not a matter of compiling and tabulating 50 stamtes and policies. 

Attachment 4 is an illustrative matrix for lllinois. 

Second, focusing, in isolation, on these statutes and policies is missing an important 

point. The real issue is listening to the underlying needs and wants of investors, as 

manifested in tile statutes and policies. Based on how investors are actually investing 

their money, the vast majority not just require, but demand, a stable NAV. 

Questions for Mr. Chris Daniel, Chid Investment Officer ofthe Citv of Albuquerque, 

Government Finance Officers Association, on behalf of Senator Cortez Masto: 

In the past )'ear, we have had two high-profile chronic liars that defrauded investors. 

Elizabeth Holmes from Theranos sold a false blood testing system and raised S700 million 

from wealthy investors. Martin Shkreli is serving a seven-year prison sentence for lying 

about returns to his i11vestors. Shkreli specialized in bu)'ing drugs, like Daraprim, a 62-

year-old life-saving drug that helps newborns and people with HIV, and then raising the 

price from S13.50 to $750 a pill. Both Holmes and Shkreli ran private companies. As 

private firms, they did not hal'e strong orersight from state regulators or from the 

Securities and Exchange Commission. Elizabeth Holmes' firm, Theranos, bilked inrestors 

of more than $700 million dollars. Martin Shkreli was sentenced to seven years in prison 

for lying to his investors. 

• Of the six capital formation biUs we considered which of these are going to help 

investors distinguish good-faith pipe dreams from fraudsters like Elizabeth Holmes 

and Martin Sh kreli? 

• Which biiJs do you think would make it easier for fraudsters to rip ofT investors? 

GFQA's testimony focused on S. 1117. Our organization does not ha1•e the expertise lo 

comment on the other capital fonnations bills that were discussed at the hearing. 

Questions for Mr. Chris Daniel, Chief Investment Officer of the Citv of Albuquerque, 

Government Finance Officers Association. on behalf of Senator Menendez: 

Do you think that investors who have left municipal money market funds would come back 

into the funds if those funds were able to again report a fixed net asset value? 

GFQA would note that assets in Municipal MMFs exceeded S500 billion prior to interest rates 

falling to zero after the financial crisis. We believe that, absent the SEC's nuctuating NAV 

requirement for •·non-natural persons", those investors will return to stable NAV Municipal 

MMFs. In addition, assets in such funds would grow, and ultimately exceed the $250 billion at 

the beginning of2016, now that the Federal Reserve is allowing short-tenn interest rates to 

increase. Investors will remrn because they can receive a higher tax-equivalent yield by investing 

their cash in a Municipal MMF than from the present alternatives, such as MMFs investing in 

U.S. govemment securities or bank deposits. 

30 Forexampte, in Ohio, here is a statute pertaining to just one comnmnitycollege system (Lake Mary): 

bttp·l/codey gbjn goyloar;/3354·2·31-02lrnde;s nhjQ&m:l. 

17 
101 

In addition to increased borrowing costs which dril'e up the cost of certain public 

infrastruciUre projects, or in some cases make them unworkable, to what extent have the 

new rules limited the feasibility of money market funds as preferred investment and cash 

management tools? 

Many state and local governments are subject to policies and legal restrictions pennining them to 

invest only in funds that have a stable share price. As a result of the 2014 Amendments, 

requiring a fluctuating NAY when in,·esting in nongovernment MMFs, municipalities and other 

"non-natural person" investors, including hospitals, universities and businesses, ha\'e been forced 

out of prime money market funds and into lower yielding government funds or other altematives 

from what was already a safe and highly liquid market. As we stated in testimony and previous 

correspondence, this has had the eiTect of reducing yields on cash to state and local governments, 

without any C{)rresponding benefit in tenns of investor protection and s~ temic risk. 

ln addition, state and local govemments, and many other organizations as well, face diflicult 

operational issues in utilizing a fluctuating NAY fund to manage cash. 

According to Federal R:.eserve data, state and local governments hold about S 190 billion or assets 

in money market funds. Because of the SEC rule, the only MMF' options available to state and 

local govemments are those that invest solely in U.S. govemment debt. They are no longer able 

to invest their short-tenn cash in prime money market funds, which have always been a safe 

investment providing a higher market rate of retum. Over the past year, the average spread 

between prime and govemment funds has been 30 basis points. As a result, many state and local 

govemments were pre,•ented from taking ad,•antage of up to $500 million in additional 

investment eamings that would otherwise have been available, and must be made up through 

reduced services or higner taxes. 

One of the arguments made to justif)' the SEC's noating net asset value rule for money 

market funds was that investors do not understand that a fund with a stable share price is 

not guaranteed or insured by the U.S. government for purposes of their investment 

decision. Is that something that chief investment officers such as yourself are confused 

about? 

Confusion about whether money market funds are government insured may be true for "retail" 

investors, but funds for "natural persons" are pennitted to continue using amortized cost 

accounting to maintain a stable NAY. Only "non-natural persons" (i.e., "institutional" investors) 

in prime and Municipal MMFs are affected by the fluctuating NAY requirement. All municipal 

finance or investment onicers understand the f.1ct that money market funds are not bank-like 

products. 

Questions for Mr. Chris Daniel, Chief Investment Officer of the CitY of Albuquerque, 

Government Finance Officers Association, on behalf of Senator Rounds: 

During the Banking Committee's hearing on Legislative Proposals to Increase Access to 

Capital, Professor Mercer Bullard from the University of Mississippi School of Law 

expressed the following view on S. 1117, the Consumer Financial Choice and Capital 

Markets Protection Act of2017. Could each of you please comment on Mr. Bullard's 

''iews? 

18 
102 

Mr. Bullard. S·ure. That is correct that I testified against the SEC rules 

primaril)' because money market funds had demonstrated an astonishing 

level of safety, especially having had two break a dollar, one not even a retail 

fund, over about 40 years, at the same time thousands of banks failed. But I 

think one of the concerns Vanguard and BlackRock have and one reason 

they are probably opposing this is, of course, that these rules were adopted in 

response to the Dodd· Frank Act, which gave banking regulators, in my view, 

far too much authority over what I would call risk·based markets. Banking 

regulation and banks are designed with the socialization of risk in mind, and 

when you put them in charge and the SEC realizes that FSOC is controlled 

by banking regulators, they will bend to banking regulators' will. So I cannot 

even fully blame them for what happened. But it was, I think, inevitable that 

there would be massive dislocation and expense. That has already occurred. 

Since then I think that there have been mitigating effects on the municipal 

business, but I think that is probably a close call. But I am concerned about 

that BlackRock-Vanguard concern, which is if you reintroduce floating rate 

NAV funds, frankly Federated will roll out a lot of funds. That will be a 

competitil'e disadvantage for the large money market fund managers. They 

will have to go back into the business, and then the next time a money 

market fund breaks, the banking regulators will have a lot less power to save 

the industry and, frankly, I would expect Congress to go back and end up 

maybe taking the same steps that dislocates the industry again. 

I think the interesting point ofl'iew is we hal'e been through this once. 

We do not want to go through it again. Just leave us alone. 

But, you know, the free market guy in me says there is more capital 

that is out there looking for purchasers in a demonstrated, successful way to 

create essentially a cash vehicle for retail investors, and that should be an 

available option. 

Another concern is really a specific SEC concern. One reason the 

Resen·e Fund failed is the SEC was not monitoring the funds that had the 

greatest risk of failing. It also had this no-action process whereby a fund that 

was about to break a dollar, which had happened hundreds of times 

previously, was to call up an office in the SEC, and a guy picks up the phone 

and says, "Okay, you are fine," and because that process was fumbled by the 

staff, in my opinion, and because it was such an ad hoc S)'Stem in the first 

place, that contributed to the Resene Fund failure. It was a primary element 

of their defense when the founders were sued, and I think that has to be 

corrected. 

And then, finally, I think that it is a mislak~as much as you can tell, 

I am probably not the biggest friend of banking regulators .. to overly 

hamstring their Depression era authority to emergency situations, use their 

lending authority for non banks. I think that this bill would further 

hamstring them, and I think thai is a mistake. 

In both his \\Titten testimony and in response to Senator Rounds' question, Professor Bullard 

made several points and obsm ations that support GFOA 's position in advocating for S. I 11 7. 

First, Professor Bullard acknowledged that, during the regulatory process, he testified and 

advocated against the changes made by the SEC's 2014 Amendments to Rule 2a-7, which forced 

a fluctuating NA V for "non-natural persons", such as state and local govemments, investing in 

prime and Municipal MMFs. In fact, what Professor Bullard predicted would happen if the SEC 

19 
103 

were to do what it did has, in fact, happened. Non-natural person investors ned prime and 

Municipal MMFs in 2016 and shifted their assets to U.S. government MMFs. Short-tenn funding 

markets were disrupted! and remain disrupted as a result. 

Setond, Profe.ssor Bullard acknowledged that the real reason for the 2014 Amendments was to 

protect the large, S)~temically risky Wall Street asset managers from FSOC and Federal Reserve 

oversight. While GFOA does not have the expertise to evaluate the motivations of federal 

regulators, we would simply assert that the process and merits for a FSOC decision to designate 

a nonbank SIFI is an entirely separate issue from the regulation of MMFs. MMFs, and the state 

and local treasurers and investors that rely on MMFs, should not be sacrificed for that purpose. 

Congress can and should step in to fix this problem by enacting S. 1117. 

Where GFOA disagree$ with Professor Bullard is on his contention that the impact of the 2014 

Amendments needs further study by the SEC. TI1e consequences of the 2014 Amendments have 

already been studied, accurately forecast, and are understandable as a matter of economic 

common sense. Professor Bullard recites at length from the Federal Reserve's 2017 study of this 

very topic. He also references data provided by SEC Chair Cla)1on's 2017letter on the issue 

and published SEC MMF data documenting what happened. (Pages 29-31 of Professor Bullard's 

written statement) 

The data from the implementation of the 2014 Amendments (in 2016) is CT)~tal clear. Nongovernment MMF assets fell by 65%. A total of$1.3tri//ionwas shifted from non-govemment 

MMFs to government MMFs. (Bullard written statement at p. 29.) The data proves beyond any 

doubt that the impact of the 2014 Amendments was exactly as GFOA predicted, as well as 

Professor Bullard, during the rulemaking process and in early 2016when the Congress was 

considering an earlier \•ersion of this legislation. 

GFOA would also point out that the e!Tectiveness of the SEC's 2010 Amendments to Rule 2a-7 

has also been thoroughly studied by the SEC and others.

31 These studies conclude that the 

SEC's 20 I 0 Amendments eOectively reduced the a I ready low risk or MM F s. 

3! SEC Division ofRisk,St .. tegy and Fina.nciallnnovation, Report in Response to Questions Posed by 

Commissioners Aguilar, Paredes, and Gallagher (Nov. 30, 2012) ("SEC DERA Report'); ICI Resean:h 

PeBpective: Mone)' Marker Muruo/ Funds, Ris~ and Fina~>ciol SrobiUty in the \Yoke of rhe 2010 Reforms Qan. 

2013). 

20 
104 

Attachment 1 

Treasury Strategies Report: 

The Importance of Restoring State and Local 

Government Access to Money Market Funds 

Attachment referenced in answer 

to Question 1 from Senator Brown 
105 

• 

T1001"YSiroie9os A~<IN..rb Oc. 

'J:RW~o. 

llilfioo< 

Oi<oso. ....... 606()6 

1•1 312·w.os40 

r.t3t2·.u:J.OW 

www.T~tegiosoom 

S. 1117/ H.R. 2319 

The Importance of Restoring State and local Government 

Access to Money Market Funds 

New IMMF regulations that were implemented in October 2016 are having major 

negative consequences for issuers and borrowers of debt held by money market funds. 

Specifically, Tax-Exempt MMFs (TE MMFs) are closing and assets are leaving. This is 

drying up a very important municipal financing conduit. Additionally, the flight of assets 

out of Prime MMfs is resulting in higher borrowing costs for municipalities as the pool 

of available capilal decreases. 

As TE: MMFs dose, municipalities have fewer buyers for their debt. Even when they are 

able to borrow from the remaining TE funds, they are less able to lock in rates and more 

subje-ct to weekly rate resets. As we are seeing clearly in the current market today, this 

increases volatility and adds to their borrowing costs. If they are not able to place their 

debt issues with TE MMFs, only two options are available. They must turn to other 

lenders that have higher transaction costs f charge higher rates, or they must defer f 

cancel planned infrastrocture, educational, heakhcare and other municipal projects. 

This paper will demoMtrate the negative impacts on municipal financing of new MMF 

regulation: 

• Massive amounts of assets are leaving Tax-Exempt MMfs; 

• Borrowing rates for municipal borrowers have increased dramatically; 

BetwEen January 2016 and April2018, over $110 billion left TE MMFs, a decline of more 

than 40%. Since TE MMFs provide significant financing to municipal borrowers, the 

short-term market for municipal debt is significantly smaller. The SIFMA Municipal 

Borrowing Index was just 1 basis point in January 2016. Now it swings wildly in a range 

of 100- 180 bps. Such volatility renders this source of municipal funding much less 

attractive. Furthermore, the rate increase is more than double the Fed rate increase 

over the same period. Fed Funds rose from 50 to 175 bps· an after-tax increase equal 

to 75 bps.' 

Without Tax-Exempt MMFs, municipalities are forced to use higheHost financing 

sources like bank credit, or reduce their short-term capital consumption. Projects in 

infra~ructure, healthcare, education and government services will be impacted. 

TE MIMF assets have declined by more than 40% since implementation of new 

regulations and remain near those historic low levels eighteen months later. This was 

not an inconsequential "temporary decline•. 

' A 125 bp increase at an assumed 40% tax rate. 80% of 125 bps= 75 bps. Some 

oommentalors mistakenly claim thai municipal bo~owing oosts rose in lockstep with lhe 

Fed rate increase. Thai ignores the lax differential wllich is the key driver of the 

municipal market 
106 

• 

MMfs have historically been an important holder of short-term municipal debt. As of 

January 2016, they provided over $250 billion of short-term funding to municipalities by 

purchasing their short-term debt instruments. By April2018, TE MMfs were at barely 

half that level, and were one-quarter of pre-<risis June 20081evels. 

Figure 1 shows the precipitous 2016 decline in TE MMF assets prior to the 

implementation of new regulations in October. Note that TE MMF assets in April2018 

stand at $138 billion, hovering near their historic low. 

100 

Figure f. Tax-fxempl Money Fund Asset Lewis (SB), 

Sou!C$: Cn!nel>a18.com, Treasmy Strategies (May 2018) 

NO'o"IS 

Total Assets ($8) 

Tax-Exempt Money Funds 

-

...,, 
107 

• 

Municipal Borrowing Cost Benchmarks Have Increased Dramatically 

As TE: MMfs assets have fallen and numerous TE funds have closed, municipal 

borrowers are paying increasingly high rates to secure financing. figure 3 shows that the 

TE MMf yields, a proxy for municipal borrowing costs have jumped from just 1 basis 

point at the beginning of 2016, to a volatile 100-180 bps range. This greatly increases 

borrowing costs and uncErtainty for municipalities, university and hospitals. Since most 

debt resEts weekly, borrowing costs on existing debt has incrEased over ten times for 

many borrowers. 

In January, 2016, the median rate paid by municipal borrowers was 5 bps. By April, 

2018, that jumped to 178 bps. 

FigU18 3. Comparison TE MMF yields(%) vs. 3M f.Bills (iftet 18X}, 

Scarce: Cranedata, TteaSIJI'f Str.ilegies (May 2018) 

LID 

LiO 

uo 

LlO 

LOO 

0.80 

~ .. 

o<e 

.,. .r-... 

Rates(ll) 

3M f.Bills laftert.lx)vs. TE MMFs 

n 

I 

\l.t 1'\Af"'~ 

J I f\..J .A../ 

) ~ ,/ 

.I .~ 

j'f["' 

Before the new MMf regulations went into effect, municipal short term borrowing 

rates were consistently lower than the after-tax fed funds and T-Bill rates. Since then, 

however, municipal rates have been well above the after-tax fed funds rate. 

Municipalities fortunate enough to continue selling VRNOs to Tax Exempt MMFs saw 

borrowing costs si<yrocket at more than double the Fed rate increase -170 bps vs. 75 

bps .after tax. Other municipalities would have to borrow from different investors, or 

replace their VRONs with bank loans at much higher rates and longer maturities . 

3 
108 

Municipal BORROWING from TEMMFs has DECREASEO Dramatically 

Municipalities in 48 of SO states have lost funding from MMFs between January, 2016 

and April, 2018.' For 21 states, the toll has been in excess of $1 billion each. Those 

municipalities that lost funding must now resort to higher cost bank debt, more costly 

long-term debt or forego projects entirely. 

The following table shows the impact on a select sample of states. 

Figure 4. Loss of Funding to Tax-Exempl Money Fuod iswen; from Sele<t States 

Soutee: Cla~aracom, TreaSUtYSttat69ieS (April20t8} 

Prin<ipal Ptin<ipal Olange Cllange 

S..te 1/1/16 4/30/18 in funding infllnding 

{$000,0001 ($000,000) {$000,000) 

A!.lb.lma 2.454 1.947 15071 " ·21" 

M<ansas 1,496 935 I Sill -34% 

caJtfornia 33.92S 17,422 (16.503) -49% 

C<lfoodo 4.23S 2,693 11.5451 ·36% 

Geof8ia 3,855 3.021 {835) ·22li. 

~wa i 278 321 43 16% 

Idaho 631 404 1227) -36% 

lnd"l3na 4.459 1,765 12.6941 

Kansas 726 428 1298) --41" 

louisiana 2.674 1.944 {729) ·27li. 

Maryland 2,800 1,413 {1,3871 ·SOli. 

Ma"'chusetts 9.615 5.209 {4.4061 -46% 

Montana 153 166 13 6% 

Nebrasl:a 932 ns I1S7) -17li. 

Nmda 2.665 1.802 1862) ·32li. 

New Jersey 7,468 4,759 (2.7091 -36% 

NewrO<k 38,560 22.133 (16.4271 -4lli. 

North Carolina 4,183 1,370 {2,8131 ~]l(, 

rthO.~ota 544 140 (404) ·74% 

Ohio 4,f!J7 2.244 {2.3631 ·51" 

Pennl)fvania 6.418 4,422 1!.9961 ·31" 

RhO<!< Island 498 171 {328) ~" SovthCa!olina 1,927 50S (1.4221 -74% 

South O.kota lSI 77 1274) ·78% 

TeMes~ 3,119 2,284 {835) ·27li. 

Vifllnia 2.705 1.548 {1.1561 -4lli. 

lrotai·AII States 238,706 138.299 (100,407) I 

2 Moolana and Hawaii are the only 1wo slates to see an increase in funds hom money 

t r1<~1 funds. TMir gains were S 12M and S43M respectively. 
109 

• 

Munitipal Borrowing RATES from TEMMFs have INCREASED Dramatitally 

Municipalities in All states that have been fortunate enough to continue borrowing 

from TEMMFs have seen funding costs increase by 1.5% to 1.9%. On a tax equivalent 

basis, adjusting for the fact that these securities are tax exempt, the effective rate 

increase ranges from 2.4% to 3.2%. During this same period, the federal Reserve raised 

interest rates only 1.25%. 

The following table shows the impact on a representative sample of states. 

Figure 5. Change in booowing cosls to Tax-Exempt Mooey Fund ~rs from Se/ed Stales 

Source: Cla"*ata.rxxn, TteaSUtY Sl!at6l)ies (April Wt8) 

Tax Equivalent 

St><e Medion Med~n !Ute Increase Rote lncreO<t 

1/1/16 4/3W18 

Alabama O.OS% 1.7111 1.72% " 2.87% " ArS:.ansas 0.02% 1.72% 1.70% 2.83% 

C.tifo<nia 0.03% 1.76% 1.73% 2.8811 

C<>1orado 0.03% 1.80% 1.77% 2.9Slli 

G<-orgia 0.07% 1.78lli 1.71% 2.85% 

Hawa~ 0.25% 1.78lli I.Sl% 2.5Slli 

Idaho O.ol% 1.83lli 1.80% 3.00% 

lnd~na 0.04% 1.80% 1.7~ 2.93% 

Kansas 0.03% 1.82% 1.79% 2.98% 

Louisiana 0.03% 1.80% 1.77% 2.95% 

Marjiand 0.~ 1.79% 1.73% 2.8811 

Massachusens 0.05% 1.78% 1.73% 2.8811 

Montana 0.03% 1.78lli 1.75" 2.92% 

Nebraska 0.04% 1.73% 1.69% 2.82% 

Nevada 0.02lli 1.78lli .7~ 2.93% 

New Jer><Y 0.!0% 2.00% 1.90% 3.17% 

NewYOI!<. 0.30% 1.78% 1.48% 2.47% 

NorthC.rolina 0.02% 1.78lli 1.7~ 2.93% 

North Dakota 0.05" 1.78% 1.73% 2.8811 

Ohio 0.10% 1.79% 1.69% 2.82% 

Pennl'/fvania 0.03% 1.78% 1.75% 2.92% 

Rllocftlsland 0.02% 1.77% 1.75" 2.92% 

SoolhC.rolina 0.25% 1.80% 1.55" 2.58% 

Sooth Dakota 0.03% 1.17% 1.84% 3.07% 

Termessee 0.05% 1.77% 1.72% 2.87% 

Virginia 0.04% 1.77% 1.73% 2.8811 

0.05% 1.73% 2.8811 

!Fed Funds Rote 0.50% 1.75% 1.25% 1.2Slli 

5 
110 

• 

Conclusion 

New SEC rules that change how MMFs function are having many unintended 

consequences. One such consequence now manifesting itself is a material reduction in 

the s~ort-term credit available to municipal borrowers whose debt is held by TaxExempt MMFs. As recently as January 2016, Tax-Exempt MMF assets exceeded $250 8. 

As of August 2018, they are now at $138 8, a loss of over $110 8. 

These changes have also lead to a dramatic increase in municipal borrowing costs. Many 

muni<ipalities have seen borrowing rates increase substantially since 2016, from a 

median of S bps to 178 bps today. 

With seriously shrinking Tax-Exempt MMfs, municipalities are being forced to seek 

higher cost borrowing options like bank credit. Their only other alternative is to scrap 

projects and reduce their short-term capital consumption. Neither option bodes well for 

the U.S. economy and tax payer. 

Some major market participants and trade associations are downplaying this significant 

problem by suggesting "further study". In fact, this has now been playing out in the market 

for nearly two full years. That's the real study. Even after two years, rising rates and a strong 

economy, funds have not returned, suggesting that the impact of the SEC regulations are 

permanent and fatal. 

5.1117 and H.R. 2319 restore Tax Exempt and Prime Money Market funds and will 

facilitate the flow of ca p~al back these important segments ofthe economy. 

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6 
111 

Attachment 2 

Ohio Muni Issuers 

Attachment referenced in answer 

to Question 1 from Senator Brown 
Ohio M unl lssucrs 

38,500,000 75,000,000 1.75% 

4,000,000 4.00% 

7,855,000 2 .00% 

117,500.000 O.B% 39,150,000 1.72% 

7.350,000 2.00% 

:,700 1.00% 

l.ooo 4.95

_

% 

29,600,000 1.68% 

1 of16 
_(!!quldity Facility Deutsche Bank AGNew York Branch) 

Ohio M unl lssucrs 

22,050,000 

2 of16 

56,34 5,000 1.27% 

16,540,000 1.89% 

1.73% 

0 .16% 21,400,000 1.82% 
Ohio Munllssucrs 

3of 16 
Ohio State Air Quality Development AuthExempt 

R1chland County, OH , BANs . 1 .800% 

s "Utfer County,.-OH HospTi:ai Fa"Ciifties Authority (Cincinnati Children's Hospi tal 

Medical Center). (Serle$ O) weekly VRONs,(Fifth Third Bank, CincinnatllOC). 

Ohio Munllssucrs 

2,095,000 

49,500,000 

1,000,000 

16.5"95,000 

200,000 

4of16 

1.00% 

0.04% 

1.8_Q% 

0.:10% 

49,500,000 

__ 

1 :2_3% 
, (Serle$ 2008A) wee kly 

Ohio M unllssucrs 

63,110,000 61,515,000 

60,130,000 

60,000,000 

Sof16 

0 .01% 

0.01% 0:01% 0.01% 

25,895,000 

1.75% 

1.70% 
Revenue VROO 

OHIO STATE OF GO SERIES 2010A. S.OO% 

OhiO Higher educ-ational FaCintv Commi ssion .. (Se:tTes 2006A) weekly 

Third Sank, Cincinnati LOC), 0 .100% 

FaCilltieSAU'thOritv (Chlldf.Cn·s Hospital MediCal 

Center) weekly VAONs,(JPMorgan Chase Bank, N.A. LOC), 0.010% County of HamlitOn,OH__ _ ---Ohio Hosp. Faclllties Rev. Participating VRON Series Putters 3558,(LIQuiditv 

! acUity JPMorsan Chase Bank) 

OHIO STATE UNIVERSITY (THE' 

-Lotain Cou nty .. OH Pott Authol'ity (Bt ush Wellman, Inc.), IOAB (Series 1996) 

Ohio Munllssucrs 

55,150,000 

25,775.000 

17,100,000 

44,235,000 

4,400,000 

21,930.000 

42,880,000 

8,305,000 

0 .01% 

0.02% 0.03% 0.01% 

0 .10% 

0.02% 0.01% 

0 .05% 

-

weekly VRDNs,{JPMorgan Chase sank, N.A. LOC), o.OSO% 

Ohio .. Hospital Facilities, 

41,135.000 0.01% Group, Ser"ies 2008A 

Highland County, OH Joint Hospital District, (Series 2007) Weekly VRONs,(Fifth 4,060.000 0 .10% 

1,870,000 0.01% 

,22o._goo 0.08% 

'!:tOOOOO 

6of16 

5,730.000 

7,810._<22Q 

22.170.000 

--

3,350.000 

180.000 

27.225.000 

1.73% 1.78% 1.80% 

-,::s7% 

1.71% 1.75% 

3.100.000 --1- .?00G 
Deaconess Home Association) . (Series 2002A) Weekly VRONs,(Northern Trust 

j:HLMC: Choln Fin. Agcy. Hsg. R._!_VSen

_ec;a CoUnty, OH Health Care (Good ShePh-erd Revenue 

Refunding and l mprovementBonds (Series 2003) weekly VRONs.(Fifth Third 

Sank. 

NA 

Ohio M unllssucrs 

3,740,000 0.08% 5 .960.000 0.05% 

31950,000 1.73% 

27,800,000 0.01% 24.425.000 1.75% 

!!.oi 5.<>Qo 0.00% 

13,520,000 0.02% 13,485,000 0.02% 

3, 100, 

8,720.000 0 .03% 

25, 120,000 0.01% 

7 of16 
Ele-c. Corp. Proj.) Series 2009 8, LOC 

Ohio M unllssucrs 

1,650,000 

9,890,000 

0.01% 0.02% 

.:u.

_;;),VUU 0.61% 

0.01% 

Bof16 
N CN TY OHIO REV HOSPITAL 

(LIQ:MORGAN STANLEY BANK 0 .02% 

SERIES 2012A 

Ohio M unl lssucrs 

0 .01% 

i>:iO% 

9,215,000 0 .02% 

0.02% 

8,81o,ooo 

0.02% 

8,645,000 0.02% 

17,_165,000 0.01!.; %:._ ___ _ 16.900.000 0 .01% 15,900,000 0 .01% 18,000,000 

15,315,000 0 .01% 

7,500,000 0.02% 

9 of16 

1.75% 
Ohio Munllssucrs 

10of 16 
F ranklin County, OH Hospital Facility Authority (OhioHealth Corp,), Barclays 

Floater Cer tificates (Series 2011-218) Weekly VRONS,(Barclays Bank pic I..IQ), 

Strongsvlll.e, OH (Monarch Engraving, 10c.) Weekly VAONs,(Firs.tMerlt 8anl(, N.A. 

LOC), 0.410% 

Ohio---.:i'ighet educational Facility Commis$ionHospltal RB (Cleveland Oin1C'iSe'fies 

CHASE 1.78%_ 

Ohio Water Development Authority (Tim ken Co.), (Series 2001) Weekly 

Valley HO! Pital) TQB VRDO 

Ohio Munllssucrs 

2"';"095,oo0 

3.480,000 

9,900,000 9,670,000 

3"'100,000 

610,000 

100,000 

220,000 

4,500,000 

.! 15,0Q2._ 

11 or 16 

-o:o;% 

0.03% 0.01% 0.01% 

-

0.03% 2,500,000 1.62% 

320,000 

0.01% 24,250, 0.41% 0.02% 36,675,000 0.11% 

7 ,900,000 1.76% 

14,955.000 1.73% 

3, 750,000 1.78% 
VRON 

OH Hospital Facility Authority (Nationwide Children's 

N .A. 

County, OH 

1996) Weekly VRONS,(firstMerlt Sank, N.A. LOC). 0 .150% 

OH (Miami Valley 20088) Dally 

VRONsABarclay_s Bank pic LIQ), 0.010% 

Ohio Munllssucrs 

2,920,oo0 

385,000 360,000 

O.Oz% 

0.15% 

O.l.6% 

2.845.000 0.02% 

605,000 0.04% 

-roo.ooo --o:o4% 

2,000,000 0.01% 

1,905,000 0.01% 

120,000 0.14% 

1,105,000 0.01% 

70,000 0.15% 

11000,000 0.01% 

12 of 16 

6A7S,OOO 1.74% 

2.750.000 1.80% 
Lucas County, OH (ProMedica Healthcare Obligated Group), Golden Blue (Series 

2018-002)VRENs,(aatelavs Bank pie UQ)/(Ba<elavs Bank pic LOC), 2 .000% 

BANKS),1.80% LakewoOd OH Income Tax Revenue 

Ohio Munllssucrs 

OhiOHigher EduCational Facility coinm""'iS'SiO'OR<iVenue (Caseweste;n Re5erv-e--

13 of 16 

21,820,000 

15,100,000 

1.30% 

1.80% 

2.50% 
Hsg. Fin. Agcy. Residential Mtg. Flev. 

_tiom!..!_n . B ank, yR..Q_N 

Lucas Coull'\ty Gen. Oblig. BAN Series 2017 

Mason Gen . Oblls. BAN 

Franklin County OH Hospital Facilities Revenue (OhioHealth Corp.) TOB VRDO 

NOrtheast OH Re810n.at Sewer Olstrlct Revenue (wastewater Revenue 

'!Q_ ... _ _ 

Ohio Hosp. Facilities Rev. Participating VRON series XM OS 20, (Liquidity FacUlty 

Ohio M u nllssucrs 

14 of 16 
Ohio Munllssucrs 

Mayfield Heights Gen. Obllg. SAN Series 2018, (Ohio Gen. ObUg. Guaranteed) 

F rankllri County Hos;;:-FacilitleSR;;." XL0004. 

Facl!!_ty Baf!k 

OHIO ST HOSP FAC REV ACTING BY AND 144A 

""Oh!OH-FA ReSidentiaiMortia8e"RBse;:ies2o16F (Uci: FEIS'ERAi. HOME LOAN 

15 of 16 
Total by all Money Market Funds 

• Assumes a 40% income tax rate 

Ohio Munllssucrs 

4.607.098. 700 

Note; funds rate 

Nominal 

After tax• 

16 of 16 

0.,.0% 

0.50% 0.30% 

2, 243,734,900 1.79% 

1.75% 

1.05% 

(2,363,36
128 

Attachment 3 

letters to Senator Brown 

Attachment referenced in answer 

to Question 6 from Senator Brown 
129 

County 

Commissioners 

Association of Ohio 

Suzanne KOulaney,Elq.Executive Director 

The Honorable Sherrod Brown 

713 Hart Senate Office Building 

Washington, DC 20510 

Dear Senator Brown: 

Serving Ohio Counties Since 1880 

l09Eoll Stole Street ·Columllus,Ohio4ll1Hl09 

Phone: 614·llt·5627 · fill<: 614-221-6986 

Toll free: 888·757·1904• www.ctao.org 

August 7, 2015 

I respectfully seek your assistance to address the negative impact of recent changes made by the 

Seourities and Exchange Commission (SEC) pertaining to the structure of money market funds. The 

rule changes made by the SEC in 2014 risk impairing the ability of Ohio's oounties to obtain low-cost 

financing for critical infrastructure projects. 

CCAO, both individually and as a member of the National Association of Counties (NACo), have been 

advocating that money market mutual funds are important investment tools used by our counties. 

These funds contain substantial amounts of the short-term debt that local governments use to finance 

public works like roads. bridges. water and sewage treatment facil~ies, and other infrastructure and vital 

public facilities that are crucial to economic development. Unfortunately, the SEC proceeded with rule 

changes that forced money market mutual funds to abandon their stable price per share and instead 

"floal" the net asset values (NAV). 

County governments in Ohio operate under legal constraints that limit them from investing in 

instruments without a stable value. Without such financing, local governments may be forced to limit 

projects, spend more on financing or increase taxes due to the necessity of shifting to bank products 

that have historically paid lower yields or are much less secure. 

I understand that Senator Toomey recently introduced the Consumer Financial Choice and Capilal 

Marl<ets Protection Act of 2015 (the "Act") which has now been introduced as S.1802. Under the Act, 

an Institutional Fund would be required to operate as a Floaling NAV Fund unless its board of directors 

elected to operate as a Stable Value Fund. Any open-end investment fund, including an Institutional 

Fund, could operate as a money marl<et fund that computes its price per share under the stable NAV 

approach. This legislation appears to be a reasoned approach to addressing the concerns of counties. 

Please consider supporting S. 1802. I look fonvard to any assistance you can provide in supporting 

Ohio's counties. Please do not hesitate to contact me at (614)220-7977 with any questions or 

concerns. 

~ c-. .. 

F.l.d14 -·

-

220·0.209 

WIYN.<Ot'Sa.otg 

Sincerely, 

• L"'N'f_ lei ~ s;;'7a(o; 

CCAO Execut

K. Dulaney ive Director ~ 

=-~ 

:.!!':~ • ===- $Mok1C.,...f01'-

hd14·229·4$S8 F«61·H21·6986 www.ctb<o.org Vt'W'W.((,t0,CN9 
130 

February9, 2018 

COUNTY 

CTATREASURERS ~ ASSOCIATION OF OHIO 

The Honorable Sherrod Brown 

United Sutes Senate 

713 Hart Senate Office Building 

Washington, DC 205 I 0 

Re: Urging support for S 1117, the Consumer Financial Choice and Capital Markets 

Preservation Act 

Dear Senator Brown: 

On behalf of Ohio's 88 county treasurers, we respectfully urge your support for Senate Billll I 7, 

which is currently pending in the Senate Banking, Housing, and Urban Affairs Committee. As 

the Chief lnvesiment Ofticers for Ohio's 88 counties, our members are sututorily empowered to 

preserve, and whenever possible, leverage the counties' financial resources to fund needed public 

works projects to inclwde enhanced infrastructure necessary for needed economic development. 

County governments use tax-exempt debt to finance various capiul and public works projects. 

Money Market Funds ("MMFs") are significant purehasers of county ta.x-exempt obligations. 

In October 2016 a Securities and Exchange Commission (SEC) rule requires MMFs to account 

for their underlying net asset value on a floating basis rather from a fixed sum. This rule change 

has uused prime MM Fs to stop purthilSing our debt. Accordingly, local governments have lost 

our largest purchaser of local government debt. 

A second cost!)• impact on our counties is the loss of enhanced financial returns on surplus 

government deposits. Most county treasurers use MMFs to help manage their short tenn ush 

flow needs. Senate Bill 1117 will enable MMFs to continue serving our members and provide 

elevated returns on statutorily approved investments. 

You may hear from some of our individual member county treasurers during the course of the 

debate and we would urge you to reach out to any one of our members who would be more than 

happy to enlighten you upon the positive impact Senate Bill 1117 will have on our local 

communities. 

llery Elick, P1 · County Treasurer 

President ofthe County Treasurers Association of Ohio 

17 ~H hSt SVile 750,Qibnbus,Ohio4l21S 

www.ohiocountWr.asuren.or& 
131 

Febru3r)' 9, 2018 

COUNTY 

CTATREASURERS ~ ASSOCIATION OF OHIO 

The Honorable Congresswoman Man:y Kaptur 

United States House of Representatives 

2186 Rayburn House Office Building 

Washington, DC20515 

Re: Urging support for HR 2319, the Consumer Financia.l Choice and Capital Markets 

Preservation Act 

Dear Congresswoman Kaptur: 

On behalf of Ohio's 88 county treasurers, we respectfully urge your support for HR 2319, which 

is currently pending in the House Financial Sen•ices Committee. As the Chief Investment 

Officers for Ohio's 88 counties, our members are statutorily empowered to preserve, and 

whenever possible, leverage the counties' financial resources to fund needed public wo.ts 

projects to include enhanced infrastructure necessary for needed economic development. County 

governments use tax-exempt debt to finance various capital and public works projects. Money 

Market Funds ("MMFs") are significant purchasers of county tax-exempt obligations. 

lo October 2016 a Securities and Exchange Commission (SEC) rule requires MMFs to account 

for their underlying net asset value on a floating basis rather from a fixed sum. This rule change 

has caused prime MMFs to stop purehasing our debt. Accordingly, IO<:al governments have lost 

our largest purehaser of !O<:al government debt. 

A second costly impact on our counties is the loss of enhanced financial returns on surplus 

government deposits. Most county treasurers use MMFs to help manage their short term cash 

flow needs. HR 23!9will enable MMFs to continue serving our members and provide elevated 

returns on statutorily approved investments. 

You may hear from some of our indi\•idual member county treasurers during the course of the 

debate and we would urge you to reach out to any one of our members who would be more lhan 

happy to enlighten you upon lhe positive impact HR 2319 will have on our IO<:al communities. 

Ellery ick, Picka vay Co nty Treasurer 

President of the County Treasurers Association of Ohio 

17 S. HlgiiSt SUitt 750, Cot MIIOJ!,OII~4lllS 

www.oNocoiMI)<t<OWrtt>.Oii 
132 

August 9, 2017 

The Honorable Sherrod Brown 

United States Senate 

713 HartSCB 

Washington, D.C. 20S10 

OHIO COUNCIL OF COUNTY 

OFFICIALS 

President 

Jerry R. McBride 

Clermont Co. CPCJudge 

Vice-President 

ScoH C Coleman 

Logan County Engineer 

Secretary/Treasurer 

Jill Thompson 

Athens County Auditor 

Re: SupportS. 1117, the Consumer Financial Choice and Capitol Markets Protection Act of 

2017 

On behalf of the Ohio Council of County Officials {"OCCO"), we respectfully urge your support for 

S.1117,1egislation that would remedy an unintended consequence of money market reform. OCCO is a 

statewide organization that indudes three representatives from each of the following county elected 

officials' associations: 

County Auditors Association of Ohio 

County Clerk of Courts Association 

County Commissioners Association of Ohio 

Ohio State Coroners Association 

County Engineers Association of Ohio 

Ohio Judicial Conference 

Ohio Prosecuting Attorneys Association 

Ohio Recorders Association 

Buckeye State Sheriffs Association 

County Treasurers Association of Ohio 

S. 1117would reduce the adverse consequences of a recently implemented Securities and Exchange 

Commission (SEC) rule, which required money market funds to switch from a fixed net asset value to a 

floating net asset value. This SEC rule had the negative effect of eliminating $1.2 trillion of capital 

markets financing for state and local infrastructure projects. 

Counties rely on access to money market funds to finance the construction and maintenance of water 

supply systems, roads, public transportation systems, and other important infrastructure projects. They 

also rely on money market funds to invest short·term cash because of their secure nature, simple 

accounting methodology, and liquidity. These are features that are necessary to protect publicfunds, 
133 

access cash and pay bills when they are due. 

S. 1117 will help remedy the problems created by the SEC rule by allowing money market funds to 

operate on a stable net asset value basis as permitted over the past forty plus years. It also addresses an 

artificial barrier to the utilization of money market funds by municipalities due to internal investment 

policies that require immediate liquidity and the presemtion of principal. 

To keep Ohio's economy growing. I strongly urge your support for S.lll7, and ask that you advocate for 

its adoption. Thank you for your consideration of this request and we have enclosed our letter from last 

Congrm urging your support of similar leg~lati . S. 1802. 

Sincerely, 

Scott C. Coleman, P.E., P.S. 

OCCO Vice-President 
134 

Augusl9, 2017 

The Honorable Rob Portman 

United States Senate 

448 Russell SOB 

Washington, O.C. 20510 

OHIO COUNCIL OF COUNTY 

OFFICIALS 

President 

Jerry R. McBride 

Clermont Co. CPC Judge 

Vice-President 

Scott C. Coleman 

Logan County Engineer 

Secretary/Treasurer 

l Thompson 

Alhens County Auditor 

Re: Support S.Jlll, the Consumer Financial Choice ond Capitol Markets Protection Act of 

lOll 

On behalf of the Ohio Council of County Officials {"OCCO"), we respectfully urge your support for 

S.1117, legislation that would remedy an unintended consequence of money market reform. OCCO is a 

statewide organization that includes three representatives from each of the following county elected 

officials' associations: 

County Auditors Association of Ohio 

County aerk of Courts Association 

County Commissioners Association of Ohio 

Ohio State Coroners Association 

County Engineers Association of Ohio 

Ohio Judicial Conference 

Ohio Prosecuting Attorneys Association 

Ohio Recorders Association 

Buckeye State Sheriffs Association 

County Treasurers Association of Ohio 

S. 1117would reduce the adverse consequences of a recently implemented Securities and Exchange 

Commission (SEC) rule, which required money market funds to switch from a fixed net asset value to a 

floating net asset value. This SEC rule had the negative effect of eliminating $1.2trillion of capital 

markets financing for state and local infrastructure projects. 

Counties rely on access to money market funds to finance the construction and maintenance of water 

supply systems, roads, public transportation systems, and other important infrastructure projects. They 

also rely on money market funds to invest short·term cash because of their secure nature, simple 

accounting methodology, and liquidity. These are features that are necessary to protect public funds, 
135 

access cash and pay bills when they are due. 

S. 1117 will help remedy the problems created by the SEC rule by allowing money market lunds to 

operate on a stable net a<sset value basis as permitted over the past forty plus years. It also addresses an 

artificial barrier to the utilization of money market funds by municipalities due to internal investment 

policies that require immediate liquidity and the presemtion of principal. 

To keep Ohio's economy growing. I strongly urge your support for S.l117, and ask that you advocate for 

its adoption. Thank you for your consideration of this request and we have enclosed our letter from last 

Congress urging your support of similar legislation. S. 1802. 

Sincerely, 

Scott C. Coleman, P.E., P.S. 

OCCO Vice-President 
136 

Ohio Municipal League 

011r Cities and Villages* BriugiugOhio to Ufe 

The Honorable Sherrod Brown 

United States Senate 

713 Hart Senate Office Building. 

Washington DC20510 

August 20, 2015 

Re: The Consumer Financial Choice and Capital Markets 

Presentation Act of 2015 (SB 1802) 

Dear Senator Brown: 

On behalf of the 900 + villages and cities in Ohio, we respectfully urge you to support 

Senate Bill 1802, which is currently pending before the Senate Banking, Housing, and Urban 

A !fairs Committee. This legislation will enable our members to cost efficiently fund desperately 

needed public works projects to include an enhanced infrastructure necessary for needed 

economic development This is an especially important tool for local government since the state 

has deceased the funding to local governments. Local governments use short-tenn debt to 

finance various capital and public works projects. Money Market Funds are significant 

purchasers of municipal obligations. Without Senate Bill !802, Money Market Funds may no 

longer purchase such debt after October 2016when the fund's underlying net asset value moves 

from a fixed sum to a floating value. 

We are very concerned that local governments will lose the largest purchaser of local 

government debt if money market funds are not pem1itted to retain a fixed net asset value. A 

second costly impact is the loss of enhanced financial returns on surplus government deposits. 

Most of our members use the Star Ohio program to help manage their cash flow needs. Senate 

Bill !802 11 enable this program to continue serving our members and provide elevated returns 

on statutorily approved investments. 

We thank you in advance for your consideration. You may hear from some of our 

individual members during the course of the debate and we would urge you to reach out to any 

one of our member's cities who would be more than happy to enlighten you upon the positive 

impact of Senate Bi111:802. 

Very truly yours, 

Susan J. Cave 

Executive Director 
137 

NAN WHALEY MAYOR 

March I, 2016 

The Honorable Sherrod Brown 

United States Senate 

713 Hart Senate Office Building 

Washington, DC 20510 

Dear Senator Brown: 

OFFICE OF THE MAYOR CITV HAll • 101 WEST THIRD STREET 

P.O. BOX 22 • DAYTON, 0Ht0 45401 

(93-71 333·3636 • www.d•ylonol'llo,gott 

On behalf of the City ofDa)1on, I urge your support Senate Bill l802, a bipartisan bill which 

will ensure that Da)1on can continue to cost-efliciently fund much needed public works projects. 

Da)10n is home to renowned universities, premier medical centers, entrepreneurs and inventors 

and boasts world-class research and development in the fields of aviation as well as industrial 

and aeronautical engineering. Like man)' Oider Midwestern cities, we need to expand upon 

existing infrastructure to remain competitive. 

Senate Bill 1802 is a narrow fix in response to a rule by the Securities and Exchange 

Commission (''SEC") pertaining to money market funds ("MMFs"). The SEC rule, eiTective 

October 2016, will require MMFs to switch from a fixed amonized valuation or a stable net asset 

value (''NAV") ofS I per share price, to a floating NAY. According to Crain's, this switch has 

caused over fifty (50) MMFs to either liquidate all of their assets or switch to U.S. obligations. 

MMFs have been significant purchasers of tax-exempt obligations and we fear that without 

Senate Bill l802, which would allow the NAY to remain fixed, MMFs may no longer purchase 

our debt. lf MMFs no longer purchase ourtax-exempt bonds, the cost to build capital and public 

works projects in and around Da)'10n will increase. 

As such, passage of Senate Bill1802 is critical in allowing us to continue to cost-effectively fund 

facility improvements and expanded services to include enhanced infrastructure necessary for 

needed economic development. In addition, these projects create or sustain hundreds of 

prevailing wage jobs for the local construction trades, which in tum. support our local 

economies. 

Funhermore, Da)10n relies on MMFs for shon and mid-tenn investing needs, as well as to 

protect principal, ensure liquidity and maximize returns on our surplus cash. We invest in MMFs 

because of their simple accounting methodology and management, security and liquidity. These 

are all features that are necessary for Da)10n to protect public f1mds, access cash, and pay our 

bills when they become due. 
138 

Please join the City of Dayton, the Ohio Municipal League, the Ohio Council of County Elected 

Officials, labor leaders. universities, hospitals and others across the state, in supporting Senate 

Billl802. Unfortunately, the impact of this particular rule change could have a dampening el'l"ect 

upon our ability to anract and retain a vibrant economy leveraged with new infrastructure. 

Please feel free to contact me should you hal'e any questions. 

Sincerely, 

Mayor 

~. ~ 
139 

' THE UNI,.RSITIOFTOLEDO • OffiCE OFTEIE PRESIDENT 

June 14,2017 

The Honorable Sherrod Brown 

United States Senate 

713 Hart SOB 

Washington, D.C. 20510 

Re: Support S.J/17, tire Consumer Fiuaucial Choice aud Capital Markets 

Protectiott Act of 2017 

Dear Senator Brown: 

Enclosed please find our letter from last Congress urging your support oflegislation that would 

remedy an unintended consequence of money market refonn. A Securities and Exchange 

Commission (SEC) rule, which required money market funds to switch from a fixed net asset 

value to a floating net asset value, had the negative effect of eliminating $1.2 trillion of capital 

markets financing for state and local infrastructure projects. As long as the money stays parked 

in the federal government funds, it is not available to fund facility and capital improvements 

for: local schools, hospitals, universities, sewer and clean water facilities, roads and bridges, 

airports, public transit, affordable public housing, and other job creating infrastructure projects, 

all of which finance these projects through prime and tax-exempt municipal money market 

funds. Because there has been a large reduction in money market funds as a direct result of the 

rule, we have experienced a substantial increase in the cost of financing our capital projects. 

As an issuer and investor in prime and tax-exempt funds, we continue to be negatively impacted 

by higher borrowing costs through increased short-tenn borro\\ing interest rates and limited 

returns on surplus cash because of this rule. Moreover. many public entities arc limited and/or 

prohibited from investing in instruments that do not have a stable value. 

To keep Ohio's economy growing, \VC strongly urge you to support the re-introduced 

legislation, S.lll7, and advocate for its adoption. Please feel free to contact me should you 

have any questions. 

Sincerely, 

~t~ Sharon L. Gaber, Ph.D. 

President 

lSCI W !.,NCROIT lT-TOUOO. 011104Jt.Oo-3)9~HIUJO.l211 · fAX41~ll0.4?34 

IHAI((lN,GA~lR~I)TOl!OO.roU • \\ WW.UTOUOO.IDU 
140 

r.¥ MetroHealth 

November 18, 2015 

The Honorable Sllerrod Brown 

United States Senate 

713 Hart Senate Office Building 

Washington, DC 20510 

Dear Senator Brown: 

The MetroHealth System is a nationally ranked public health care system located in Cleveland, Ohio. 

Founded in 1837 as City Hosp~a , MetroHealth has evolved into an integrated delivery system. The 

system continues to serve as a major employer and the essential ('safety net') health provider for tens 

ofthousandsof patients by providing state ofthe art facilities and advanoed comprehensive diagnostic 

tools to ensure the greatest pos~ble heaHh outcomes for patients. We respectfully urge you to support 

Senate Bill1802 to facilitate our abil~ to invest in options that best protect the short and long term 

financial health of MetroHealth system. S-1802 is currently pending in the Senate Banking. Housing, and 

Urban Affairs Committee. 

As you may know, MetroHealth and other hospitals use municipal/ tax-exempt debt to finance various 

capital and public works projects. These projects create or sustain hundreds of prevailing wage jobs for 

the local construction trades. Your constituents benefit from state of the art facilities financed primarily 

with tax-exempt bonds. Passage of Senate Bi111802 would enable MetroHealth to continue cost· 

efficient funding of facility improvements and to expand services to include enhanced infrastructure 

necessary for patient care and economic development purposes. 

Today, Money Market Funds (MMFs) are signifiCant purchasers of tax-exempt obligations. MetroHealth, 

along with many other issuers of tax-exempt bonds, fear that without the passage of Senate 8ill1802, 

MMFs may no longer purchase sucll debt after October 2016 when the fund's underlying net asset value 

moves from a fixed sum to a floating value. Without Money Market Funds to purchase our bonds, the 

cost of projects will be incrementally more expensive and could possibly limit our future growth. 

With reduced reimbursement payments from insurance companies, Medicaid and Medicare, hospitals 

utilize short·tenm debt to finance various capital and public works projects. We need access to the 

lowest possible interest costs for tax-exempt financing to fund hospital facility improvements. In 

addition, our hospitals rely upon MMFs to support short and mid·tenm investing needs, to protect 

principal, ensure liquidity and maximize returns on surplus cash. Many Ohio healthcare facilities invest 

in MMFs becauie of their simple accou ting methodology and management, security and liquidity. 

These are all features that are necessal'f for hospitals to protect their reserve funds, access cash, and to 

pay bills. Moreover, because hospitals are highly regulated and receive substantial reimbursements 

from CMS, we are subject to federal and state policies and legal restrictions requiring us to invest in 

funds that are stable and r~k adverse. If the SEC's new floating NAV requirement is imposed on 
141 

prime MMFs beginning in October of 2016, we may be forced out of these funds and directed to other 

investment vehides that have historkally paid lower yields. 

We are deeply ooncemed that hospitals will lose a significant cash management tool if Money Market 

Funds are not permitted to retain a foxed net asset value. Therefore, we urge your support of Senate Bill 

1802. We thank you in advance for your oonsideration. Please feel free to contact me or Tracy Carter, 

MetroHeaWs senior directorfor federal and state affairs, at 216-778-1406, should you have any 

questions or oomments. 

Warm regards, 

~i$e_ 

Vice President, Government Relations 
142 

Plain Township Board of Trustees 

ESJA8U$HII) 1110 • aox m ·t«W AIBAIIY.OII04lOS4 • (614)ass.mo • Fax(614)asS-7761 

September 30,2015 

The Honorable Sherrod Brown 

United States Senate 

713 Hart Senate Office Building 

Washington, DC 20510 

Rt: Requesting Suppon for Tilt Consumer Financial Choice and Copital Markets 

Protection Act of2015 (S-1802) 

Dear Senator Brown, 

I am CII!Ttntly serving as the fiscal officer of Plain T0\1mhip, Franklin County, Ohio, which 

is located northeast of Columbus. h is a suburbanized township. It is home to nearly II ,000 

resideniS and is known for iiS quiet neighborhoods, excellent school systems and expanding 

business community. As the Fiscal Officer, I am responsible for determining how tOI111Ships 

funds are spent and managed. I believe the new Securities and Exchanges Commission 

("SEC") Rule changes impacting money market funds (~M.\1Fs") could have a negatil"e 

impact upon the ~~ability on.il'<ffs and in tum, negatively impact local governments in Ohio. 

I respectfully request your consideration for the passage of Senate Bill 1802, which I 

understand 11111 be heard by members of the Senate Banking, Housing and Urban Affairs 

Committee. The Act would appear to correct a significant impediment to the SEC's 2014 

money met refonn rule while leaving other reforms in place. As the fiscal officer for Plain 

Township, Franklin County, Ohio, I am particularly concerned with the change requiring 

MMFs to switch from a fixed net asset value to a floating net asset value. The proposed 

legislation adds a mechanism for MMF sponsors to cneate a MMF 1vith a fixed NAV, if the 

sponsor so requests at the time the fund is created. I support this change for a number of 

reasons. 

As investors, local governments rely on MMFs to protect principal, ensure liquidity and 

maximize returns on surplus cash. Local govemmeniS do not have a steady and predictable 

inflow of revenue (tax payments and pa)meniS from local governments are collected only at 

,._ Dolllll W. fllGUSOII 

7311So<.oi-SQ»o 

.... _Ott>43054 

(61~116011• 

DIIIIIC. -OUIS!UD 

62<3-liooll 

.... -.ONo-w 

16148$2283 

._ 1liOIW tll'11SI:I 

mcllct<:Ciiooll .... -.()lj()4JO!< 

161')~2510 

-..... IOOzmnlW ,..._ 1Sif~liooll 0No43054 

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[61'1116-1110 
143 

certain times of the year), disbw'sements - including payroll and general bill paying - is 

constant. Many govenunents invest in money mmet funds because of their simple 

accounting methodology and management, security and liquidity. These are all features that 

are necessary for governments to protect public funds, access cash, and pay bills when they 

are due. 

Many local governments are subject to policies and legal restrictions permitting them to 

invest only in funds that are stable and risk advme. If the SEC's new floating NA V 

requirement is imposed on prime MMFs beginning in 2016, go1enunents may be forced out 

of these funds and would have to look to other investment' ehicles that have historically paid 

lower ) ields, or to other less secure produCts with equal or less liquidity than MMFs. All of 

these potential scenarios would reduce investment returns for Ohio's local governments. 

For all of these reasons, we hope that you can suppon S-1802, allowing MMFs to maintain a 

fixed NA V for prime MMFs. Thank you for your consideration of this request. 

Mf-ltl· 

Bud Zappitelli, Fiscal Officer 

Plain Township, Franklin County, Ohio 
144 

Attachment 4 

Matrix of state investment policies 

Attachment referenced in answer 

to Question 6 from Senator Brown 
I[ r f ~l(f[ l r i 

fl f i i i [ if i i f II f : lr fa 

lf f I r :;: 

I i ! ! 

r ( i) p< § l ~ r 1 .. ; § ~ P ~ ii' I 1-4 ~ ~--~-~"'--1- ! !-+-[-r -~ ;--r-1-ii' J. -, -~ ~ 3 F ~ I i ,~,lr~i ::tt; ~ ::! :~c:ll.~ !~f ~~jll = I a ~~ i~~ rj(al jtiP· 9 ea~~ ~~!r-ti~! ~ii JI ~ ~ llrf J~'a JI; 

111t!! i ~~ ~ sjf.~:jl~ !I ~~~ ~ -Tf'J 11 IB .•! 

g·l(a· s ~~~h~ rtfli.h~ ~ ? ii!l ~ii!ii ![jf11 ' Jj!: i~!! !~i ~ ~~~ : s;J~f1 J!J ii"lit Hf~~. ilt!! ~ 1 a. 8' l: l -Tfi ~l. u:'ll .... ~1 .. ~"' -ii1.'5J' .Ite s • • h. ·~ '? u

3 i e:U.f~r 

----- !l~;ll. lt i .h ~ 
146 

ILLL~OIS 

m"DS 1:>'\l.SmE.\T ~ )lm.U. R~IDS ASDCO:IDITIO~S 

OTltiR SIG~lflCA.\T ~l)S 

Etocal:ioc Strvt<t Rtsm flmtJ VC$, fllllds of* fal,txii:Q&I SeMCt Re~n cr.:y be lt\Cl:td 

"' ~~S<rlic<Rrpooa~it.t-twm"N:I~ 

AICIIC)' - '" '""'"'-·-.. OO<MSc pro. \dot II Ill• Code. lStt W.tJ (Stt lO ILCS illll. "'"•· 10! ll.CS S l · 9.1) 

. 8ood Pt«..e~:o dle: YCI. MOO!r " IOCt fiDII obal u 110< nocdc<! !01 ewe= 

Copiul flMiopocu Food clpCDbm 1111)' be iwt11«J II """Y UUI ""'""' Mfs . r.._,.a.,. Boa!. Series A r"" "~-~lo.-~Aa.)X0'>11io!Oollbc 

• T~Bood.Stllt!Bfllld poillfOOoo/1111 t<llll islimill4:o: m ptltll"!llil>lt Ulk 

. ~C.........., f..., -W II liUI<I b IIII.CS lllll!l.S; (2) - -. .

. Alfi.Polh<ioo Flllll cem(""" of-..-w~ .. """ ""'""""· . Coo!Dc\•1"""" fu:d •!licbuc f'llliii'Cod b)'clc r.JI foil aod<!..Uo! Ill< ~oil<\1 

Slaw .... ~ bl<ml. aolboods. """' dt"l>c!Rm aod 

Oilier similar ~ ol tile Ulli:<d Slaw aod is "'"'"'· IS« lO llCS ))1)119. lliLCS JlQ/llJ.lO ILCS 2Jl!2l 

f11rl<aoftllcllli:louDc\""""'"'F.-...e• YCI. fll>boftllc-.qzoybc-=~IY 

Allllimy scco:usoi iO ial-""""'1~- illc 

"'"""" eoq..y Au.."""' .. """· Oilier dll:l ~ 

aol .. - ~ "' ol>lipiom lil:td " c5jlbl<b<ama&Siorlbi:AIIIIIariy. Mllilloo1ltCSiric1!oct 

't"""""""IDdllsCodc~ (SH lOILCSllOSIIJi 

~.oca~c ........ oyCOIJIS<Duft<N:II< Yes. Tbl<cfllldsllll)'bc-OIIIyC>IO.Oilll:ldsW. 

F<OI!> """ pri=ot\1)' i& "'ffRR< ;....-.. """ Of !loOII '"""""""llrxt""'boW.p!O'idol dwsochiUIUI!fl:.a bll't W<ISO!IIkosl SiOOlllillloo aodotc UlO! u Ill< liD: o( 

po.-uoocolrk IOtlPn<--by • 

~ nriDc t<Mtt. lbcio ....... lblilbcPJbj«IIO 

.,.....t b)' ll>e loco! c_,., COlliS< Booot of T-. 

Ed c-ay c.llop llo&rd ol frwa Wll ~ • 

policy tqi.Uf ct.: ~""*&< o( llic cotl<lf'' """"""" 

poM>1io WI "" be - i& """ Nods. (Stt JO ILCS ll!IZJ 

Co4c r~cfl<aM Ul/93. 

Ciadoos 1R IOIU.. COla. STAT. A.\l<,cb. a. pan. t(s=ii>Hln 19u). 
147 

ILLUOU 

PO IIIII IIYU1'11111'f II WIVJ.I. 1'C111>1 Alii) eOIID1710011 

OIIIIJ.J.I. 1'C111>1 

Public Agency Pun<!• Yu. Any ~Jblic ogo.ncy CAY invc::lSt o.ey public: fundt 

in c.oncy r.:trkct ::-.J:ud fu::.cb :-cgi:tcrcd \Ander tht 

· PUblic Agoncy• is Inve•tt.ent coc:po.ny Act of 1940, provided that the 

deClnod to lnclulle the portfolio o! M':Y such outual !Wid Is li:oited to 

State o! llHnois. tho Ill bonds. notes. certl!lcatu of lndobtedll .. s. 

various counties, treasury bills or orl\er securities. wbieh an 

tCN'IUbi~. cit£.6'-· gu.o.r.mtood by tho ~ull fdtb a.'ld c rodit of tho IJnitGd 

t.owna, villigea, States •• to princiPAl ancl intereatr (2) bor.do, 

t~bwl !lb~r cu, no"•· dtm1wru •rm otl!<tr •il!lilu oblig~~ione of o®cuional servi~ the united States a.'\d its agenciH: a6d 

req!ons, SPOC!al ~e,o Ill o;r""""u to repurc~.ooe such obligations. I See 

diltricto, public 30 ILCS 235/2.) 

vote-:- w pply 

~Uatricta, fire Public Age:>cy ~ r4y llt invested in the !ollowifl!l 

protection distric:t.s, pcr't!olio; of Money Xorkct Obligotiona T'rUSt; 

du!na!JC dhtrict&, Ill Treasury Cbli;otlona fund: l2l Govem:r.ent 

levee districts, sewr ocliootloos 'l'aJC Kar.oge<l fUnd; aDd ()) Go<ltrr:.tnt 

distdett, housir-..g Oblig-.ations Fur.d . 

IUthorititl, tbt 

lllinob Bonk 

£xci nors • &d~&tlon 

f oondotion, the 

Chlc:•9• I'Mk Diat~ict. 

&1'.4 all other 

polieica:l corpoueiona 

or nWivieione. of the 

Stat• of lll!noio. 

_iS•• 30 lLCS llS/1.) 

Gtnoul Oblloatlon No. ISft )0 ILCS ll0/19. t Bcod.s !Uitir.,.,t and 

lnton=t F\md 
148 

ILLIIOII 

lVIDI IIIVZHIIIII! u IIV!UlL rtJIIDI liiD COIDltJOI't 

IIIILOYIIUT UL.t.fiD I'VIDI 

R€!nr~t syne cr Yi:t. "no.e boan! c f trustMS o f a rt:tireoent syat~ or 

Paru:ion f\Ir.dJ. pension 111114 uy i.l\vett. i.nt~r •ll•. in invese-.t 

co~ico whic:h: (1) oro rcghtcrod under the 

InvestJoertt C~ Act; (2) ore diveni!led, opcr.-ond 

.,..,.IIE!Wnt imestcent to.:Qaniea; and l3) Invest only 

ln - ear~et tnsu-nu. (S<!e 40 ILCS S/1-lll. ) 

In addition, up to 10\ of tt't.t~ .usetft of the 

rttirO«ont ayot.,. or ponoion f\:1\d IIOY be i nvested In 

litay ether type of inve5tnent, intluding ony .!t!Jtuol 

!u.">d. provido<l thot ••cit invcot1>0nt ~lies with the 

prudent ""'' rul e set forth In 40 ILCS 511-109. 40 

ILCS 511-109.1, 40 ILCS 5/1-10!.2, 40 ILCS 511-110 

and 40 ILCS S/1-111. 

State ~loyees • r ... l'llnd• retoinod by the State as deferred 

Deferred C()Q)ensation comoensat.1on zay be invested ln such 1nvest::aonts .u 

ue <lee:r.e<l accepuble lr1 the IlliMis State Soard of 

I~voot=G t., including, b-Jt. not lil'litod t.o, life 

insurance, or &MUit.y contracte o: autual !und:J. All such ir.vestocmt:l .$hall hAvo been revicwtd and. 

••l tttod by the eoord bosod on a c0111)etitive b10dlnQ 

rocogs. rsee co 1LCS 5124-10~ .1 

Local g~rr!o'11@nt ot Yeo. ille agency or depart:oont do•lgnated by the unit 

School Dietriet of loal govomwnt or •cbool d.i.erict to estahlbh 

~fer-red C~n:un;ion ond adooiniater a deterred cec:penut!0:1 plon 014Y 

Plo.n in•test th9 CUill8t.s of the plan in investrtenu ~ 

•pproprlate by the agency or topor'--'t ($ .. 10 ILCS 

S/24-107 .) 
149 

JLLIMOII 

l1JIDI I 11'111711111'1 1.1 wrvu. rvi!PS AMP COIIDI71011 

O'liU IIOIXPJCAII'r rvi!PI 

Muc::atlCXV!l Sorvic::11 Ye$. FundJO a! the !duuti ond $en•ice Regio-n :ray be 

Reoion F\lnds inVEsted by tile &duc•tioMl Strvice Re;i011 In tile 

liMe naM&r u Public Aoency rums ue invested. 

(S.:o • bovo) (S..o !LCS 2JS/2, oupra, lOS ILCS 

S/l-9.1.) 

• 80nC Pcccee<ls YO$. Money In aucl> fur.ds that Is not neede<l tor 

•llOCI>ted to the: current expenCitures ~•Y be invos~ed in SM.e RAMer 

• Capital oevelop:oQnt as Publ!e Agency Funds are bvested. (SH 3G ILCS 

l'll.'ld 2)5/2, supra, 30 ILCS 330/19.) • tr.noport•tloo Bond, 

Strieo A fund 

• Trar,gpertat!on I!Q<ld, 

Series 8 fund 

• sebool Conatruct!on 

rw.l 

• Cool Dovolopan~ 

rum 

funds or the Illinois Yes. FUnd& of t he Autbori tY IIAY be i nvest.C by the 

Devel~t f iMnce Authority in the MDlf! rr.annor u Public Agellcy FuMs 

Aut hority aro lnvcs;tod. In •cidition, Fund; of tho Autl-.ority 

NY be i nvested in eq>rlty oecuriti•• o£ on inveotlllr:."t 

cocq>any regiotcrcd under tho lnvcstMnt Coc:DMY Act, 

~. sole assets, other tha.~ cash and other 

teo:porory invostr..,nts ore oblio•tions listed as 

eligible investlllents for the Authority. A&!ltlonal 

~ur!ct!on: ara O:lu:Kl.rAtod in thh Coda provision. 

(S<:G lG II.CS 235/ 2 •upr• 2G ILCS J50S/14.) 

COMWllty Collego res. comomity College Fundi xay be inveate4 in the 

Fur.<b OADlf! aan.~er as Fublic Agency rums an investe4. 

(5ee JO !LCS 2JS/ 2 supr~ llO ILCS 805/l•41.) 
150 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTERS AND STATEMENTS SUBMITTED BY CHAIRMAN CRAPO 
151 

Key Observations and Recommendations 

MMFs experienced challet19M durir1glhe 2008 Crisis that led to calls for reform. 

• The 'b<eal<ir9olthe bucf<'bythe Resem Primary Food resuttedin historic outllows auoss the MMF industry. 

• Government intervention hei.Ped calm ilwestors and stabit~e outflows. 

• SubsequenHy, MMFs became a priority issue for post .Crisis reform. 

The Securities and Exchange Commission (SEC) adopted reforms for US MMFs in 2010to require more 

conservative portfolio construction, followed by structural reforms in 2014. 

• Among the 2014 reforms was a requirement that instiMional prime and municipal MMFs adopta floating NAV. 

• The final compliance date for the slruclural reforms was Odober 2016. 

The extensive reforms to MMFs warrant revitw to fully understand the impacts on financial stability, short4erm 

fundif19 markets, issuers, and MMF investors. 

• We recommend that the SEC condua lhissludy, as the SEC is the primary r~ulatoroiMMFs and their sponsors, as 

weB as us capital marf<ets. 

• Based on this analysis, policy mal<ers can determine ~any addroonal modfficalions to rule$ for US MMFs are wananted. 

• We do not believe a roll back of the rules is advisable without filst studyi~ the effeds of MMF reforms and the 

implications of any potential d1anges. 

Short-term fundir19 markets are complex; borrowing costs reflect numerous factors. 

• Monetary poky, issue< «edit quality, tax reform, and supply and demand are st a few of the fadors that need to 

be considered. 

• Claims thai MMF reform has causedrisi~ bonowi<19 costs for municipal issue~S do no1 fully consider all ~vant ladors. 

• Objective analyses of bonowilg costs must con~ol for the fad that MMF refonn coincided vdth a rising interest rate 

enWonmeol 

• Followif19 seven years of near wo short-tenm rates, the Federal Open Markel Committee (FOMC) raised the Fed Funds 

target rate six times between December 2015 and May 2018.1n add'rtion, on June 14, 2()18, the FOMC announced an 

addroonalrale hille. 

MMF Reform: How Did We Get Here? 

Although MMFs had e~sted for several decades prior to 

2008, the 2008Cnsis exposed slructuralweaknessesin 

MMFs. Specifically, the 'breakil\9 of the Ml<' by the 

Resem Primary Fund, a MMF that hekl sub<tantial 

amounts of lehman Brothers' oommetcial paper in 

September 2008, led to historic net outllows aCIOSS the MMF 

industry, as illustrated in Exhi>it 1. To stabilizeMMFs, the 

Federal Reserve and the US Treosury Department inmated 

several programs to help stabilize the MMF mall<et' For 

e>ample, on SeJ)lember 19, 2008. the US Treasury 

Department aMOUnced the Temporary Guarantee Program 

for Money Markets Funds, which temporarily p<olected MMF 

shatehoi<lers from losses.' 

Given this unp<ecedented govemment intervention into 

money marf<ets. ~is not $lWprisiJ1g that policy makOIS sought 

to implement refonns to ai'Oid such a scenario in the future. 

While one con debate the necessity of some aspeds of the 

US MMF reforms, the reality is that the SEC approved these 

ru!e Cha~es after several years of debate and data -<I liven 

analyses Importantly, fund SJ)onsors were given time to 

implemeol changes, and mall<et participants have largely 

ada pled. 

Exhibit 1: Assets in 2a-7 MMFs 

2006-2018 

$4,000 

• £ $3.0:.0 

; $2.500 

! 

:$2.()00 

~ 

$1.500 

GROIIIG-37~9-HOllOO 
152 

Exhibit 2: Selected Eleme:nts of Current SEC Regulations for MMFs 

IMtfMional Prime FIOaling Upto2'!. Up to 10 t:uWss days 

lns!Monal M~I TaxEi<empo FIOaling Upto2'!. Up to 10 t:uWss days 

lnstiuliooai/R<lal ~ent Slable Nooe' Nooe' 

Retai Prime Slable Uplo2'!. Up lo 10 t:uWss days 

Relai Mooicipal/ Tax Ei<empo Slable Uplo2'!. Up to 10 t:uWss days 

Sww:S<C. ~ MllfsareJlE'Ili!ledllul nc(requied loiqlose re<!Eo¢>nilUi<ltYfeesaoo reslli:OOos. 

G...,llox~lllsr•!Nreqo........,lhall>allnotbeoo il placep<i:J<Iolhe2014reblro. 

k; sho..,, in EXhiM 2. among the struclural reforms adopted 

in the 2014 reforms was a requirement for instillJfional prime 

and municipal MMFs to convert to FNAV. meaning they are 

no longer perm~ed to use amortized cost accounting to 

round the NAV to a stable $1.00 per share prioe. The 

reforms also require both retail and instiMional prime and 

municipal MMFs to have the abirrty to implement a 

redemption liquidity fee and redempfion gales during times 

of stress. 

The final SEC reforms folk>lved several years of vigorous 

debate about the way forward foJ MMfs. vm~ ind!Kfed the 

consideration of many aHemaliYe sohrtions. EXhiM 3 

provides a timeline of MMF reform diswssions ~om the 

2008 Crisis until July 2014 when the reforms we1e finalized 

by the SEC. During this period, many MMF investors were 

challenged by the tacl< of oe~ainty around the Mure of 

Exhibit 3: Major Reform Milestones 

Oa'e '·' es·~ 

Sop'08 R....,.. PIWn3l'J Fl.Wld 'trol<.ethe bock' 

S€C ado!>'ed c:e<lail R>*o 2a·7 amendments Feb1

10 ngthe .. ity¢theportf~~: 

effectiYeMay2010 

Mar'1t sec proposed nAes to eimmte ce<1aio 

re~ecences 10 credit ~aSngs in MMF forms 

Sep'12 Tro=rySeaelafyGeilllner lelle< ur¢19 SEC 

alld~ltjtore.-take~~olrt!O/Il\ 

Nov'12 FSOC" release-s r>eform ptoposal 104' convnenl 

Jun'13 SECreleasesprosl0$31 irlduol'llgoca·-IO 

FNAV f0< prime ins~uliooal MMFs 

Mar'14 SECissues4""""""SW..regatdilg 

MMF~solicaspulikCOIMlefll 

Jul '14 SeC finalizes MMF relorm~ effective ~Obe< 

2016 

Sww:~oci<. 

'FSOCsm:!sfafilalciaiSt.a!:iityC.'EcijltC<ulci. 

MMF s. We belie1•e materially altering Rule 2a·7 again ~ould 

ere ale unoertainty for investors and polenlially di<>nJptions to 

the stlo~ lerm funding marl<ets. As such, n~H reforms should 

only be undertaken d there is conClusive evidence that MMF 

reform has resulted in unintended consequences. This calrs 

for careful study by the SEC before any policy actions are 

taken. 

MMF Reform and Cost of Funding for 

Municipalities: Context and Timing are 

Important Factors 

Recognizing that MMFs play an important role in the 

economy by providing a source of short·term funding to 

commercial and municipal borrowers, policy makers should 

study the potential implications of these reforms. That said, il 

is important thai analyses do not consider isolated dala 

points, bul rather take a comprehensive approach that 

considers the bloader context, as sho~ lerm funding 

maftets are compfex and bof'rowing costs reflect numerous 

factors. 

For example, some critics of MMF teform ha,. argued that 

borro\Wig costs for municipalities have increased sharply as 

a resu~ of the MMF reforms. They ate a 91 basis point 

increase in lhe SIFMA Municipal Swap Index {SIFMA Index) 

between January 2016 and August2017 as the basis for this 

condusion.' The StFMA Index represents the average yield 

on 7-0ay municipal Variable Rate Demand Notes (VRONs).' 

This index is widely used as a benchmark to measure the 

average cost of borrovnng fllf municipal issuetS. When 

considered in isolation, this ino"ease in fundirlg costs might 

be cause for concern. However, ~1len asses~ng borr.,;.,g 

cos!s for issuers, the intetest rate environment is important 

to consider, given that monetary poi"JCy is a key driver of 

borr.,;.,g costs. 

k; shO'"" in EXhibil4, wh~ plots the SIFMA Index and the 

Fed Funds tale, the FOMC inoreased the Fed Funds target 

rate six times beho.~en December 2015 and May 20187 As 

such, lhe implementation ol US MMF structural reforms 

directly coiroded 1Yi1h a rising interest rate en~ronmenl. In 

dd~on. during this windo1v, the Fed announoed the end of 

GROIIIO.ll~9·BOSIOCI 
153 

Exhibit 4: Fed Funds and SIFMA Index 

December 201 S-May2018 

2.5 

-- l 's -... ! 1•ftd 

~ 1! .. 

~~~----~_. ~-+--~ 

,.., .. -- ...... 

........ 

OSTu 

...... 

...... 

...... 

--,, 

~ 0 0 0 0 : : ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ • • ~ = = ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ ~ ~ ~ 0 ~ ~ ~ ~ 0 0 0 

t i ~ ~ ~ ~ ~ i ~ f ~ ~ t i ~ ~ ~ ~ ~ i i f - F<olfulolslo<lu - SifMA1todex 

Quanli1alive Easing (QE), and began reducing s balance 

sheet' While the SIFMA Index and Fed Funds rate largely 

move in line wi1h each other, lhe1e are periods of 

divergence. These indude bolh periods where the SIFMA 

Index is below and above Fed Funds. For eJGample. in late 

201Sioearty2016, theSIFMA lndexdimged from the fed 

Funds rate when asselsofTax ExempiMMFs exceeded 

inventories of available VRONs, creating a soenario in ""ioh 

high demand was driving prevaning rates in VRDNs lower. 

This dynamic is shown in ExhibitS. likewise, the SIFMA 

Index spiked jusl as MMF reforms approached the October 

2016 compliance dale. The SIFMA Index spiked asain at the 

end of 2017 due ll> a dramatic ii)CIOase in municipal issuance 

as a resu~ of US lax reform. Exhibi14 shows the SfFMA 

Index below and abcwe lhe Fed Funds rale at different 

poinls in time. Given these ffuctuabons, any na~is win be 

sensitive lo the start and end dates of the sludy, requiring 

careful consideration before di3'Mng oonclusions. 

Exhibit 5: Tax Exempt MMF Assets v. VRDNs 

Outstanding 

" . . .. .. .. .. ~ ~ 

& 

§ ~ ~ 

2 

§ 

2 

;, 

~ 

2 

§ ij 

~ 

2 

§ 

2 

~ 

2 

§ 

~- TOII-&emc:ct!Mf"""' 

Sooroe: Ba'dajs. M ollolay 31,2018. 

tool<ing more closely althe spike in October 2016, the 

monlhs just before and just after MMF reform 

implemen1alion represented a period of uncertainty. Since 

fund managers were unsure, at the lime, as lo the amounl of 

assets lhat woo1d ftow ou1 of prime and municipal MMFs, as 

the final wnpliance date for reforms approached, most 

institutional prime and municipal MMF managers increased 

the amounts of liquidity they were holding and shortened the 

malurity profles of lhei' porlforoos. This dynamic a wears to 

have ~lrbuled 10 a temporary rise in borrowing oos1S, as 

the demand for shorter-dated assets increased relalive to 

supply. The dynam<: was mostrooliceable in the spike in the 

UBOR-OIS spread, as adjustmems in commercial paper 

markets' were similar to municipal markets. As shown in 

El<llibit 6, this dislocation was lemporary in nah•e and 

reversed relabve~ quid<ly thereafter. 

Exhibit 6: LIBOR.OIS Spread 

2.< 0.110 

JfJ :: ~ I 

0.30 i 0.20 

0.10 

-CI.11(') ~ I'D Cl 0 I'D Cl ... ,... ... ,.. ""' ... cc. G) 0.00 

HU HHHH ~UBOR OIS - UBOR-OIS(RHSI 

Sotte: Bloolltlerg_Md lolay31,2018. 

GROIII(;.JU149-H05l00 
154 

Exhibit7: Volatility Analysis 

O.M 

Ul 

0.25 

0.29 

O.t~ 

0.10 

o.os 

Exhibit 7a: Absolute Volatility R~ 1QV<ialiily, AbsoluleVI/1Je 

- SIFMAindex 

In llle monllls leading up to and shortly following October 

2016 \\!len lhe refonns were fiAiy ~nted, municipal 

MMF outflows oonttiblrted to a period ol elevated dealer 

VRDN inventory, as municipal MMFs. IIIlich had been 

traditional purchasers ofVRDNs. had less demand. This 

dynamic can be observed in Exhibit 5. /'<;a result. VRDN 

~Ids were higher to atttact CIOSSO'ier and shot1 duration 

buyers, creating a temporary d'ISiocation in 111e SIFMA Index. 

To further analyze the impact of interest rate dynamics on 

municipal borrowing costs, we pelfooned a volatility analysis 

olllle SIFMA Index and lhe Fed Funds rate. Exhibit 7a lool<s 

at llle absolute volatility of each rate, and Exhibit 7b depicts 

the ~atiity of week o.er week changes in eacll rate." 

White this analysis shows lhat there was ~atiity around 

MMF reform and US tax reform. we do not observe any 

~atiity regime sllift for llle SIFMA Index relative to the Fed 

Funds rate. This further suppons llle oonctusion lhat much 

of llle increase in borrowing costs for municipalities is a 

product of the rising interest rate environment. We note lhat 

this analysis reflects a simple approacll and !here are 

se•eral other factors lhat can impact municipal funding, 

including issuer a edit quality, tax reforms, and supply and 

demand. These dynamics would need 10 be considered in 

order to dMlop a comprehensive assessment of the impact 

of MMF reform. We encourage tile SEC to undertake this 

comprehensive analysis. 

Who1e oornmentators ha'le pointed to an inaease in 

borrowing costs for municipal issuers as a cfired impact of 

MMF reform, the evidence to suppo<11his assertion is not 

condusive \\!len the interest rate environment is taken into 

account. As shown in Exhibit 4, between December 2015 

and May 2018, the Fed Funds rate increased from 0.13% to 

1.7%, a 157 basis point increase. During this same time 

period, the SIFMA Index increased kom 0.01% to 1.06%, a 

1 OS basis point inaease. With this context in mind, 

borr<Wiing costs for municipa1mes appear in line with 1\!lal 

'o\OOtd be expected during this period of interest rate 

normalization 

1~00 

Exhib~ 7b: Week .OVer-Week Volatility 

o!Oig1QV<ialiily \\\W ~ 

One counterargument that has been noted is that interest 

rate dynamics do not fully ellplain the trend in inaeased 

borr<Wiing costs for municipalmes, as there is a yield 

d~erenlial between taxable and tax exempt bonds lhal is not 

fuW depicted in this data." We believe this differential exists 

gr.-en the supply-OO!land dynamics lhat occurred around 

money marl<el reform and again around US tax reform, but 

lhal ultimalely the ma11<et di<l andwil normal~e. Further, we 

belie'le the reduction in the corporate tax rale resulling kom 

lax reform is causing the marl<et to find a new equilibrium lhat 

d~ers from historical periods. 

Importantly, aside from the temporary dislocation around the 

6me of the MMF reform oornpl'oante date. botrowing costs in 

municipal marl<ets ha'le followed a similar trend as other 

shot1~erm taxable fixed income marl<ets. This is illustrated in 

EJCI1ibit 8, IIIlich compares llle SIFMA Index to the 3·month 

Treasury bill, and the ICE Bc!AML 0.1 Year AAA·A US 

Corporale Index. IIIlich is a measure of short-term funding 

rates for hghly rated corporales. 

Exhibit 8: Short-Term Interest Rates-Multiple 

Markets 

3.00 

2.50 

OJIO - .,..-,-=..J 

.Q.50 ~~ ~~~~~oo~oc~~~~~~~~ 

j~~i}8j~l~i~l~~~}~j~! 

- SFW.tldex 

- 3Moni>T'""'YBil 

ICCBoW.U.O.!Yea<MM.USCocporaoelnife.< 

$Me: Bloolltlerg.AsdMay31,1018. 

GROt 11(;.31~9-HOllOO 
155 

Conclusion 

In sum. while ~ is no question !hal there has been an 

incsease in bo"ov'ng costs for issuers (correlation), wllen 

we oontrollor the rising interest rate environment and the 

effeets oltax relonn,the evidence to supp011 a causal 

relationship between MMF relotm and a pem>anent 

ina ease in municipal bo«owing <:Osts is incondusiYe. 

T~mporary marl<~! impads llav~ been observed over lhe 

course ol implementation of MMF reforms, but this does not 

appear to have had a permanen! irnpad beyond the natural 

inc~ease in borrowing cos!s associated with intefesl rate 

n01malizalion. Clearly. more comprehensive analysis ~'<ill 

need to be pertormed bef01e any conclusions can be 

drawn. 

Endnote$ 

As was suggested at the time ol MMF reform. MMF refoons 

shoold be mooit01ed f01their effectiveness in mitigating 

financial stability risks.'' Now that tuB implementation has 

taken place. a review of the impacls on financial stability, 

short-term funding mall<ets, issuers, and MMF investors is 

wa"anted.ln light olthe 2008 Crisis and the e><perience of 

MMFs. this re~ew needs to oonsider the effectiveness of 

MMF refoons as well as identify any unintended 

¢01l~uenoos. As 1M regula101101 MMFs and their 

sponSOIS, the SEC is best positioned to OOndU¢11his re~. 

We do n<>l believe a roll bacl< of the rules is advisable 

l'<ilhoul firnt studying the effects of MMF reloons and the 

impl~tions of any potential changes. 

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156 

CHAMBER OF COMMERCE 

OF THE 

UNITED STATES OF AMERICA 

NEIL L. 8RAOL£\' 

Xl,U:TIH \"10: Jl'U$11)1!.\T & 

C1t1£t POI.IC\' OttJCU 

The Honorable Michael Crapo 

Chair 

Committee on Banking, Housing, and 

Urban A IT airs 

United States Senate 

Washington, D.C. 20510 

June25, 2018 

HiLS H STJ:EET. ~\X' 

\\""l~H"GT0\.1)( 20062 

(202) .-63-.HIO 

The Honorable Sherrod Brown 

Ranking Member 

Committee on Banking, Housing and 

Urban An'airs 

United States Senate 

Washington, D.C. 20510 

Dear Chaimtan Crapo and Ranking Member Brown: 

The U.S. Chamber of Commerce suppons a number of bills that the Commiuee is 

scheduled to consider at the June 26'h hearing entitled "Legislative Proposals to Increase Access 

to Capital." The Chamber supports the following bills that would expand capital market access to 

America's small and mid-size businesses: 

S. 588, the "Helping Angels Lead our Startups Act," would clarify that stanups and 

angel investors are permiued to panicipate in "demo days" or other events in which no specific 

investment solicitation is made. This change is consistent with the original intent of the 

Jumpstan our Business Startups ("JOBS") Act of2012 and would help innovative companies 

expand and hire new employees. 

S. 2347, the "Encouraging Public Offerings Act of 2018," would allow any company 

- regardless of size or EGC status - to take advantage ofTitle I of the 2012 JOBS Act, such as 

allowing investors to submit confidential draft registration statements with the SEC and to "test 

the waters" before filing an IPO. Title I of the JOBS Act has proven to be a tme policy success, 

and Congress and the SEC should continue to explore how more companies can take advantage 

of its provisions. 

S. 2765, the "RBIC Advisers Relief Act of 2018," would help expand the now of 

capital into ntral communities by cutting down unne<:essaryred tape and regulatory requirements 

that are more appropriate for larger funds. Given the fact that post-recession business creation 

has largely been concentrated in large urban areas, this legislation would help cre~te more 

opponunities in communities where business creation has been slow. 

S. 3004, the "Small Business Audit Corre<:tion Act of2018," would exempt privatelyheld non.;:ustodial brokerage finns from a requirement to have a Public Company Accounting 

Oversight Board (PCAOB)·registered finn conduct their annual audit. Small broker-dealers are 

often imponant sources of capital for stanups or small businesses around the country, and there 
157 

is no compelling reason to subject them to an audit process that is more fitting of a large 

company. 

The Chamber appreciates your work to have these bills considered and looks forward to 

working with the Committee as they advance through the legislative process. 

Sincerely, 

d;W<i~ Neill. BradiC)' 

cc: Members of the Committee on Banking, Housing and Urban Afiairs 
158 

{ . COMPANY I

"IINVESTMENT 

~ tt/i INSTITUTE" 

1401 H Street, NW, Washington. DC 20COS·ll48. USA 

m /)>6·s8oo www.ld.O<g 

January 12,2018 

The Honorable Jeb Hensarling 

Chairman, Committee on Financial Services 

US House ofRepresenr.uives 

2129 Rayburn HouseOfllce Building 

Washington, DC 20515 

Paul Schott Stevens, PR!SIO!NT 

201/)26·1901 fAX: 201/J26·S8o6 

paul:stmnsOici.Ofg 

The Honorable Maxine Waten 

Ranking Member, Committee on Financial Services 

US House of Representatives 

2129 Rayburn House Office Bu~ding 

Washington, DC 20515 

Dcat Chairman Hensarling and Ranking Member Waren: 

I am writing on behalfofrhe Investment Company Institute' (ICI) roconveyouropposirion to H.R. 2319, the 

Consumer Financial Choice and Capital Markers Protection Acr of2017, a bill that would undo some of the 

Securities and Exchange Commission's (SEC) 2014 money market fund reforms, including the requirement 

rhar prime institurional and tax-exempt institurional money marker funds float their ner asset values (NAYs). 

Since the early 1970s, money marker funds have been a sr<ady, pt<dicrable mainstay of financt. Today, more 

than 54 million terw invesron, as weU as corporations, munkipaliries, and orher insrirurional invesrors, entrusr 

some $2.8 trillion to money markt~ funds as low-cost, efficknr cash management tools rhat provide a high 

degree of liquidity, srabiliryofprincipal value, and a market-based yield. Money marker funds also serve as an 

important source of direcr financing for state and local governments, businesstS. and financial institutions, and 

of indirect financing for houstholds. Without these funds, financing for all of these institutions and individuals 

would be more expensh·e and less efficient. 

Money mark<r funds owe their success, in large pan, ro rhe srringenr regularoty requiremenrs ro which rhey ar< 

subject under rhe federal securiries laws-including. most norabl)'• Rule 2a-7 under rhe lnvesrmenr Company 

Acr. The tegulatory regime under Rule 2a-7 has proven to be effe"ive in ptotecting investors' interests and in 

sustaining their conndence in money marker funds as a valuable roo! for managing cash. The SEC has 

modernized and strengthened the rule from rime to time as circumsrances have warranted (most recently in 

2010 and 2014,asdiscussedbelow). 

1 The lnvmmtnr COIDjliD)' }rurirust {!Cl) is ohe lc.ding=><:iarion r<prcscnting regulated limds g!olnlty, including mutud funds. 

mhange·mded funds (ETI1), closed-end funds. and unit in•·cstment trust!(UITs) in the Unistd S..tcs, and sin>ibr fundsolltrtd 

tO in'·CSfors in jurisdictions woddwidr.ICI sctks tOCIKOUI'lgc adh<rrnc< 10 high crhic:al sundnds, prom01c public undm:rmdi~) 

and otherwis<acmncc ohc intcrcsu of funds. their shareholders, directors, and adviscrs.!CI's members manage toul asscu of 

USS21.5 rrillion in che Unir«< Saccs,scning more than tOO million US shmho!decs,and USS7.! crillion in ass<csin O<htr 

jurisdictions. ICI carries Ollt itt in.tnnational worl through J.C.l..G.l2haL with ofllccs in London, Hong Kong. and \\:'ashington, 

DC. 
159 

January 12, 2018 

Page2 

In light of money market funds' experience in the financial crisis, and with the industry's suongsupport, the 

SEC in 2010 approved far·rcaching rule amendments that enhanced an already·srrict regime of money marker 

fund regulation.' The amended rules made money marker funds more resiUenr by. among orherchings. 

imposing new credit quality, manority, and liquidity standards and increasing rhc transparency of these fund~ 

The SEC amended Rule 2a·7 again in 2014. The 2014 SEC rules, which took effect on Ocrober 14, 2016, 

focused on two principal reforms.' The first reform requires prime institutional and rax·exempt institutional 

moner market funds to price and transact in their shares using "floating" net asset valu~ The new rules also 

require rhese fu.nds to calculate their NAYs ro fOur decimal plac<>. (For a fund with a NAY of S 1.00, rhar 

means calculating the NAY roone·hundredth of a penny-i.e., $1.0000.) Government money market funds' 

and reraU money market fim.ds' may continue tO seek to maintain amble NAY using amortized cost valuation 

and/or penny rounding. 

The second principal reform enables, and in certain cases requires, all non·governmenr money market funds 

(i.e., all prime and tax·exempt fimds, whether inStimrional or retail) to impose barriers on redemptions (so· 

called liquidity fees and gat(S) during extraordinary circumstances, subject to determinations by a money 

market fund's board of directors. Specifically, the new rules gi1•e a money market fund's board the flexibility to 

impose liquidity fw of up to 2 percent, redemption gates (a delay in processing redemptions for up to 10 

business days}, or both if the fund's weekly liquid assets have dropped below 30 percent of irs total asser.s.lf a 

fund's weddy liquid assets fa'!] below 10 percent of irs roral assets, the SEC rub require the fund to charge 

redeeming im·<>tors a f<e of i perccm of their redemption, unless the fund's board derermin<> eirher thar no 

f<e, ora lower or higher fee (nor ro exceed 2 percent), would be in the best inreresrs of the fund. When coupled 

with the 2010 SEC refom1~ th<>e new rules add la)~rs of transparency and redundant safeguards that more 

rhan adequately address any risks that may have existed in 2008. 

H.R. 2319would rescind certain 2014 reforms, including the requirement that prime institutional and tax· 

exempt institutional money market funds float their NAYs. Although !Cl and irs members did nor support 

many of rhe measures adopted in 2014, we wue pleased that the reforms ultimately preserved monC)' market 

' Money mark« funds in fa<r wrr< rhr 6m p>n of rhr US 6nan<i~ sptrm ro br n:formrd in 1hr ·~kr of 1he 6na.ncial crisis. &t 

M01tqMatlw Ftmd Rtfm•.SEC Rrlca!< No.IC.29132(F<bMry23. 2010). iS F<d. Reg. 10060 (March 4, 2010). Taking1h< 

ini1iari''' 10 r<5p0nd quki:Jyartd aggn:ssivrly 10 1h< l\~n!Sofr.l 2008,1CI fonnrd 1h< Moll<)' Marl:« Worl:ingGroup1osrudy rhr 

mon<y nmk«. moll<y marl:<t funds, a.nd orhrr pmicipan~ in 1hr mon<y mark«. a.nd rhe 6nancial crisis o£2007·2008. The March 

2009 Rtpm oftl!t M011tJ Matl!tt Woriliog Gro11p addrrss<d rh<>< 1opia and advane<d widr·ranging rct'Ommrnda1ions for rhr SEC 

10 srrrngrhrn monry nurk<1 fund rcgularion. S<t ln\'<Sim<nl Compa.ny lnsti1urc, //rpm oftl!t M011tJ Mar/;ct J~rl:i11g Gro•p 

(MaKh 17. 2009). J\~ilablca1 bn;pl'l/www jd,oq;ipdllwr 09 mmw¥ pd( The SEC's 20 IOamendmen~ incorpora1«l many of 

the rcport'sr:commcndnions. 

'&dl"ltJ ,l~sr/;ct Fum/ Rrf.,.,t; Ammdmmts to F111711 PF, SEC Rrlca!< No.IC·31166 {)uly23, 2ill4), 79 Frd. Rrg. 4n 36 

{Augull 14, 2ill4). 

1 Go,·cmmcm money ~mrkct ftmch in,·tst n !(1St 99.S percent of th~ir total US(ts in ush, go,·cmmcnt s«urirics. tnd/or 

ttputdwc agmmcn!S ihar act collacmliZ<d bywh orgo,·Cfl\ment stcurirics. 

' Rcr>il n>on<y marl:cr fund! Ju>t poliriC$ and proc<dum r<1!01Ubly dmgned ro limit all brnc6cial owners of rho fund ro nacural 

I""""'· 
160 

January 12, 2018 

Page3 

funds as a key cash management product for fund investors and a source of financing for businesses and 

governmentS. The new regulatory regime involved substantial and costly operational changes implemented on a 

very aggressh·e timetable, buc money marker funds and rhe money markers have adjusted to the reforms. The 

constnrus of our member leadership is that reopening rhcst reforms is not appropriate or desirable. 

Thank you for your consideration of our views. 

With very best regard~ 

Sincere.ly, 

Y4r:Jt~ Paul Schorr Stevens 

President and CEO 

Investment Companr lnsrirure 

cc: Members of rhe Committee on Financial Services 
161 

THE WALL srRREf J01JRNA1 WSJ.-

Ol'i·~~- November 22. 2012. 5:27p.m. ET 

Time for Compromise on Money-Market Reform 

Nor all money-market funds are creared equal. The riskier 'prime' ones should be subject 

to a l'llriable net-asset value. 

By WALT BETTINGER 

It is time to address the challenge.~ that the counlry faces in a spirit of collabora1ion and 

compromise. As a fim1 sen•ing the needs of millions of individual investors, Charles 

Schwab believes this includes compromise on money-market fund refonn. A thoughtful 

and responsible compromise will help restore trust and confidence in our financial 

markets-and set an example for other urgent changes that are needed in Washington, 

D.C. 

Money-market funds are a critically important tool for investors to manage their cash. 

Our finn has vigorously opposed "refonn" proposals that would, in effect, put an end to 

them. 

Still, there are reasonable arguments in favor of change. After more than two years of 

debating the merits of various regulatory proposals, Charles Schwab believes that 

requiring certain money-market funds to have a variable net-asset value is the right thing 

to do to bring the debate to closure-and to provide clarity for millions of investors who 

depend on these financial products. 

A money-market fund faces two di!Terent kinds of risk. The first is "breaking the buck"-

when the net-asset value of its investments falls below SJ. The second kind of risk is a 

run- when investors rnce for the exit by redeeming their shares. Significantly, these two 

problems are charncteristics of prime money-market funds and, more specifically, prime 

money markets in which institutions invest 

As far as risk goes, not all money-market funds are alike. A prime money-market fund 

invests in short-teml, fixed-income securities issued by entities other than U.S.-based 

governments, such :as corporations, banks, foreign governments and the like. The 

problem here is fairly obvious: If a company gelS into trouble, a money-market fund's 

assets can decline a.nd the value of its holdings may no longer equal $\ per share. 

But nonprime money-market funds invest exclusively in securities issued by U.S.-based 

governments-Treasury bills, U.S. govemment agency debt and sometimes debt issued 

by state govemme11ts. These entities pl'l.>sent far Jess risk. 
162 

Now consider the risk of a run. A nm occurs when many investors all want out of a fund 

at the same time, right? Wrong. A run occurs when many i n1•estors who also represent a 

large percentage of the fund's 101al assets all want oul of the fund at the same lime. 

Here's a simple example: If a re1ail money-markel fund has one million shareholders and 

every shareholder owns one dollar in the fund, SO,OOO inves1ors can ask to liquidale on a 

single day and it won't create a nm. However, if another fund, an institulionalmoneymarkel fund, has SO,OOO shareholders and 10,000 of them 01111 90% of the asse1s, you 

have a potential problem. If those 10,000 shareholders all want out on !he same day, 

that's a run. 

In the 2008 financial crisis, !here was no evidence-none-that relail i1westors ran from 

!heir money-market funds. lnslilulional investors did run from their money-market 

funds- thus adding to the financial crisis. 

But what about !he Reserve Primary Fund, which broke the buck on Sept. 16, 2008, and 

experienced a nm. Didn't it have retail investors? Yes, it did. But !he Reserve Primary 

Fund mixed institutions and retail inves1ors all in one fund. This meant that a run led by 

institutions left many retail investors holding the bag. 

Mary Schapiro, chainnan of the Securities and Exchange Commission, explained the 

problem nea1ly a few months ago in testimony before Congress. "Early redeemers lend to 

be institutional investors with subs1antial amounts at stake who can commit resources lo 

watch their inveslments carefully and who have access to teehnology to redeem quickly," 

she said. ''This CJn provide an advantage over retail investors who are not able to monilor 

the fund's portfolio as closely. As a consequence, a run on a ftmd will result in a wealth 

1ransfer from retail investors (including small businesses) 10 institutional investors." 

When you lay out these facts, the solulions are pretty simple. 

Mos1 objective observers would say 1ha1 money-markel funds inves1ing exclusively in 

U.S. Treasury instruments, U.S. government agency paper or debt issued by states have 

minimal credit risk. These "nonprime' money-market funds should continue to operate as 

they do now wi1h careful oversight, 1ransparency, regulation by the SEC and a stable Sl 

per share net-asset ''alue. 
163 

But prime money-market funds do have a degree of potential credit risk that could arise 

in extreme capital-market credit crises. And the reaction of institutional investors in these 

funds to this credit risk creates a potential for mns. 

Retail and institutional prime funds should be treated in ways that refleet their risk. 

Institutional prime money-market funds-meaning any fund in which a shareholder 01111s 

more than a defined percentage of the fund-should be subject to a variable net-asset 

value that would immediately reflect losses from credit events. The defined percemage 

should be determined after careful analysis. The fund's price should be reponed at the end 

ofthe day, just like other kinds of mutual funds. 

But resolving the tax and accounting issues that arise upon switching to a variable net· 

asset value system is critical. In today's environment, operating at a static $1 net-asset 

value, investors can sell shares as often as they need from a money-market fund each day 

without creating taxable events. This simplicity is central to a money-market fund's 

usefulness. Variable net-asset valuation creates taxable events for every transaction, 

adding enonnous complexity. 

Retail prime money-market funds, in which all shareholders have less than a determined 

percentage of shares, should be pem1i11ed to maintain their stable $1 per share price. But 

they should be subject to additional oversight, including enhanced transparency and 

disclosure standards. As a manager of both types of funds, Charles Schwab realizes this 

will considerably complicate the business model. But the company believes it is 

manageable-and a compromise on the issue of variable net-asset value is necessary for 

the good health of our industry and the economy. 

Mr. Bettinger is presidem and chief executire officer of the Charles Schll'ab Corp. 
164 

(t\ Credit Union ll National 

cuNA Association 

June26, 2018 

The Honorable Mike Crapo 

Chainnan 

Committee on Banking, Housing and 

Urban Affairs 

United States Senate 

Washington, DC 20510 

JimNussle 

President & CEO 

Dear Chainnan Crapo and Ranking Member Brown. 

99MSiee1Sf 

S...:.lOO 

WO!IInstM. 0C 200Jl.J199 

The Honorable Sherrod Brown 

Ranking Member 

Committee on Banking, Housing and 

Urban Affairs 

United States Senate 

Washington. DC 2051 0 

On behalf of America's credit unions, thank you for holding the hearing "Legislative Proposals on Access to 

Capital." The Credit Union National Association (CUNA) represents America's credit unions their 110 million 

members. As you oonsider ideas to enhance consumers' access to capital, II'C urge you to consider tii'O proposals 

peninem to credit unions. 

Delay NCUA 's Risk-Based Capital Rule 

Credit unions throug)loutthe United States have expressed their significam ooncems regarding the National Credit 

Union Administration's (NCUA) risk·based capital standards for credit unions. TI1cse concerns relate both lo the 

appropriateness oflhe regulatory burden this regulalion imposes on credit unions as well as whether NCUA has the 

legal authority to impose a risk-based standard for detennining whether a credit union is well-capitalized when the 

Federal Credil Union Act penn its the NCUA to impose a risk -based s1andard solely to detcm1ine capital adequacy. 

NCUA 's rule imposes new regulatory burden on credil unions tha11he agency has failed to justify, and the rule 

represents a solution in search of a problem. The current Prompt Corrective Action (PCA) system served very well 

during that crisis, with relatively few credil union fa ilures. If a goal of a PCA scheme is for oovered inslitutions to 

hold suflicient capitallo withstand a severe financial crisis witltoul imperiling the deposit insurance fund. credit 

unions' perfonnance during t~e re«nl financial crisis stands as compelling evidence that a major overhaul of current 

credi1 union capital requirements toward a Basel·style system is simply not required. Credi1 unions failed at roughly 

one-third the rate of banks over the decade since the beginning of the financial crisis. In addition, credit wtion failures 

were generally confined to small institutions: total assets in failed credit unions are equal to only 2% of1he asscls in 

failed banks. Funh.r, our anal)~is shows that risk-based standards applied to crcdil unions would have done very 

linle 10 reduce costs to the National Credit Union Share Insurance Fund (NCUSIF) had it been in eOect during the 

most recent financial crisis. 

NCUA lacks the legal authority to set a risk-based c~pi1al standard to detem1inc whether a credit union is well 

capitalized, and coming out <>fthe financial crisis, Congress did not com•ey this authorily. During consideration of 

the Dodd-Frank legislalion, Congress explicitly excluded credit unions from risk-based capital requirements, in 

recognition of the credit union diftcrcnce and the fact that America's credit unions- nearly half of which employ 

fewer 1han five full-time employees and hold less than S20 million in assets- were neither responsible for nor 

panicipatory in the risky financial activities that predicated the 2008 financial crisis. 

NCUA finali7.c'd a rule that addresses a problem that docs not exist using authority il docs not have. We urge the 

Comminee to address this situation by passing legislation to delay the implementation ofNCUA ·s risk-based capital 

cuna.org 
165 

rule for two years to prevent credit union capital from being unnecessarily impaired to comply with this rule, and to 

give the agency time to revise these requirements consistent with law and the risk-profile of the credit union S) lem. 

Eliminate Maturity LimiiS on Federal Credit Union Loans 

Credit unions could do more 10 provide access 10 capital if Congress eliminated statutory restrictions on the maturity 

of loans made by federal credit unions. While federal credit unions are pemtiued 10 make mongage loans with 

maturities of more than IS y~rs, most other federal credit union loans must have maturities of I 5 years or less. This 

puts federal credit wtions at an unnecessary disadvantage relative to many state chancred credit unions and other 

depository institutions. II also makes credit less available for federal credit union members because it complicates 

both credit unions' ability loan 10 some education borrowers and 10 sell cenain loans into the secondary market 

Eliminating the statutory restriction on federal creditmtion loan maturity would help credit unions deliver more safe 

and aflordablc loan products 10 their members. We encourage Congress 10 eliminate these maturity limits for federal 

credit unions. 

On behalf of America's credi1 unions and their 110 million members, thank you for yom consideration of our views 

and for holding this imponan1 hearing. 

Sincerely, 

cuna.org 
166 

"A 

~ 

COALITION 

FOR INVESTOR CHOICE INC. 

Preservutg MOite)' Markel F11111fs for Public ltifrasJmdure ln•..stmrmt and Eco/I(Jmic Growth 

S.lll7, the Consumer Financial Choice and Capital Markets Protection Act 

Background and Explanation 

June 21,2018 

S. 1117, the Consumer Financial Choiee and Capital Markets Protection Act of20 17 amends the 

Investment Company Act (lCA) of 1940 to expressly provide any open-end investment company that 

is a money market fund that relies on the Securities and Exchange Commission's (SEC) Rule 2a-7 with 

the choice to operate as a stable net asset value (NA V) money market fund if it adheres to certain 

requirements and restrictions. The legislation would not have any impact on the other changes to the 

regulation of money market funds (other than the applicability of the mandatory liquidity fees 

provision) that were adopted by the SEC in 2010 and 2014. S. 11 17 also prohibits Federal Assistance 

to any money market fund. 

Background 

Congress broadly addressed the regulation of the mutual fund industry in the ICA more than 75 years 

ago, among other things, to define open-end investment companies, establish federal regulation of 

them and require their registration with the Commission. The ICA has nem expressly addressed the 

category of mutual funds known as "money market funds.'' 

Since the 1970's, money market funds have grown to become a popular consumer and institutional 

investment ''ehicle. Since their inception, until October2016, all n1nds were pennilled by SEC rule to 

maintain a stable NAV (typically of$1 .00 per share), rather than calculating daily NAV based on the 

value of the fund's underlying portfolio securities. In 1983,the SEC adopted Rule 2a-7 under the ICA 

to codify the conditions under which an investment company would be permined to operate as a 

money market fund. 

Basis for Using Amortized Cost Accouming 

Money market funds historically have priced their shares at Sl, a practice that facilitates their 

widespread use by corporate treasurers, municipalities, individuals, and many others who seek the 

convenience of low-risk, highly liquid investmentS. This share pricing convention, which uses 

amortized cost to produce a stable net asset value (NAV), is preferable to mark-to-market pricing, 

which produces a floating NAV, because amortized cost provides a more eflicient and accurate means 

to value portfolio assetS held by funds that operate as cash pools. 

Until implementation of the SEC's 2014 Amendments to Rule 2a-7, all money market funds were 

permiued to use amortized cost to maintain a stable NAY "only so long as the board of directors 

believes that it fairly reflects the market-based net asset value per share." Funds were required to 

Coolirion For Jo.-estor Cboic.,loc. -t02S Con.nteticut A-.., NW, Suit< 1000, Washington, DC 200J6 

202.828.1216 - ""'"'·.protectin,~torchoice.eom 
167 

estimate and make public 1heir market-based NAV per share (known as its "shadow price") each week 

and the fund board was required to monitor the deviation between the shadow price and Sl at each 

regular meeting. 

Money market portfolio assets are typically held to maturity and trade very infrequently. In addition, 

the maturity, credit quality, and liquidity restrictions in Rule 2a-7 ensure that any deviation between 

market value and amortized cost generally is immaterial. Rather than improve the quality or accuracy 

of the valuations of the individual ponfolio assets, the pool as a whole, or the pricing of units of the 

pool, the noating NA V rule complicates and slow do\\1tthe process for establishing unit values, 

thereby delaying seulement of fund unit purchases and redemptions. 

The widespread use of money market funds by large and small institutional investors is not practicable 

without a stable S I per share value characteristic. The ability of funds to offer their shares at a stable 

NAV using the amortized cost method of valuation provides significantly administrative and 

accounting cost benefits for both fund companies and short-tenn cash management investors. 

2010 and 2014 Amendments 

In 20 I 0, the SEC adopted a series of revisions to Rule 2a-7, with the intention of making money 

market funds resilient to the kind of market disruptions that occurred in 2008. Among other things, the 

2010 Amendments require money market funds to have a minimum percentage of their assets in highly 

liquid securities so that those assets can be readily converted to cash to pay redeeming shareholders. 

They also shortened the average maturity limits to limit the exposure of funds to certain risks such as 

sudden interest rate movements. As a result, 30 percent or more of a money market fund's portfolio 

assets are required to mature in a week or less, and their weighted average portfolio maturity is 

required to be 60 days or less. 

In July2014, the SEC again amended Rule 2a-7. Under the 2014 Amendments the board of directors 

of a money market fund is authorized to impose a liquidity fee and/or a redemption gate if the fund's 

weekly liquid assets fall below 30 percent of its total assets under certain conditions. In addition, if the 

level of a money market fund's liquid assets were to drop below 10 percent of its total assets, the fund 

(other than a fund that limits its investments to government securities, or a "government fund") would 

be required to impose a 1% liquidity fee unless its board of directors detennines that imposing a fee 

would not be in the best interests of the fund or that a lower or higher fee that would be appropriate 

("Mandatory Liquidity Fees Provision"). lltese provisions are referred to collectively as the "20 14 

Fees and Gates Provisions." 

The 2014 Amendments also provide that, as of October 14,2016, money market funds (other than 

go1•ernment funds) that are available to investors other than ''natural persons" are no longer penni ned 

to operate on a stable NAV basis, and instead are required to use a noating NAV. 

Explanation of S. 1117 

S. 1117 does not have any impact on the requirements regarding the operation of money market funds 

imposed by the 2010 Amendments. Nor would the legislation have any impact on the 2014 Gates and 

Fees Provisions other than the Mandatory Liquidity Fees Pro1•ision. 

Under S. 1117, a fund may continue to operate as a noating NA V fund unless its board of directors 

elects to operate as a stable NAV fund. In other words, any open-end investment fund may operate as 
168 

a money market fund that computes its price per share under the stable NAY approach historically 

contained in Rule 2a-7 without regard to the identity of its investors, provided that it meets the 

following requirements: 

a. The fund's investment objective must be the generation of income and preservation of capital 

through investment in short-tenm, high-quality debt securities; and 

b. The fund's board of directors mttst determine, in good faith, that: 

(i) it is in the best interests of the fund and its shareholders to operate on a stable value NAY 

basis; 

(ii) (ii) the money market fund will continue to operate on that basis only as long as the board 

of directors believes it fairly reflects the fund's market-based NAY; and 

(iii) (iii) the fund will comply with quality, maturity, diversification, and liquidity requirements, 

including reasonable procedural and recordkeeping requirements that are required under 

Rule 2a-7, or any other rules or regulations that the SEC may prescribe or has prescribed as 

necessary or appropriate in the public interest or for the protection of investors that are not 

inconsistent with the legislation. 

S. 1117 would further provide that any money market fund that makes a stable NAY election is not 

subject to the Mandatory Liquidity Fees Provision. 

Tile legislation also prohibits "Federal Assistance"' from being provided direetlyto any money market 

fund, regardless of whether it operates as a stable NAY or a floating NAY fund. To underscore that 

money market funds and t'heir investors understand that money market funds will not be eligible to 

receive Federal Assistance under any circumstances, money market funds would be required to 

disclose this prohibition in any prospectus, advertising, or sales literature. S. 1117 provides the SEC 

with the authority to adopt rules and issue orders prescribing the manner in which such disclosure shall 

be provided, after consulting with the Board of Governors of the Federal Reserve S)~tem, the FDIC, 

and the Department of the Treasury. 

Finally, S. 1117 specifically provides that any company that make.s a stable NAY fund election will 

remain subject to all the provisions of the lCA and the rules and regulations of the SEC that would 

otherwise apply to the company, as long as those provisions do not conflict with the legislation. 

Need for the Legislallion 

When the SEC's 2014 Amendments went into eiTecl in October 2016, they caused approximately $1.2 

trillion of private sector liquidity- roughly 80% of prime and municipal money fund balances - to be 

shifted to U.S. govemmetll funds, which were allowed to maintain a stable NAY. 

Tile 2014 Amendments did nothing to reduce systemic risk in the financial system. Instead, it inflicted 

huge costs on municipalities and businesses in the fonn of higher borrowing costs and lower retums on 

invested cash. State and local governments, which had relied on money market funds as a source of 

1 "Fodcrnl Assi~ance'' means Federal Deposil inStl13J1ce Corporation ("FDIC'') insurance or guaranle<s; transactions 

ini'Oil'ing the Secrt~aryoftho Trcaswy; or 1hc use or any adV3liCCS from Federal Rcseri'C credit facilities that arc 1101 pon or 

a program ofbrood·based eligibility established in unusual or e.xigent circumStanCes- for 1hc purpose of(i) lOOking any 

loan to, or purchasing any Stock, equity interest, or debt obligation of, any money marktt fund, (ii) guaranteeing any loan or 

debt issuance of any money marktt fund, or (iii) entering into any assistance arrangement. loss sharing or profot sharing 

11i1h any money market tun<l. 
169 

short-tem1 financing and as a safer place than banks to hold large seasonal cash balances, have been 

greatly harmed in their ability to manage their cash nows, and have been exposed to greater risks as a 

result. It is resulting in lost revenues that could be available to invest in schools, affordable housing, 

public infrastructure, and economic development. 

S. 1117 would roll back the hannful provisions of the 2014 Amendments by allowing state and local 

go1•ernments and businesses to invest cash balances in non-government money market funds and raise 

shon-temt funding from those funds as they had for five d~ades priorto 2016. 

S. 1117 has the support of organizations representing a broad spectrum of public and private sector 

finance ofllcers and entities, including: 

American Association of Metropolitan Water Agencies 

American Public Power Association 

Association of Financial Professionals 

Association of School Business Ofllcials International 

Government Finance Officers Association 

Large Public Power Council 

National Association ofCorpcrate Treasurers 

National Association of Counties 

National Association of Health and Educational Facilities Finance Authoritie.s 

National Council of State Housing Agencies 

National League of Cities 

State Fina1tcial Ofllcers Foundation 

U.S. Conference of Mayors 

Frequenth• Asked Questions 

I. Does the legislation roll back any of the SEC's reforms to money market funds in 2010 that 

strengthened them irn response to the 2008 financial crisis? 

Long before the SEC's 2014 Amendments to Rule 2a-7, and even before the enactment of the 

Dodd-Frank Act, the 2:010 Amendments were adopted to strengthen money market funds against 

any future financial crisis. The 2010 amendments increased the already high credit quality of the 

assets held in money market funds, and increased the already high liquidity of such funds by 

requiring them to have a minimum percentage of their assets in highly liquid securities so that 

those assets can be readily converted to cash to pay redeeming shareholders. The 2010 

Amendments also increased transparency by requiring money market funds to regularly disclose 

their ''shadow prices" (i.e., their ponfolios' per-share values at market prices). S. 11 17 does 

nothing to alter those amendments. 

2. What were the reasom the noating NAV rule was implemented in the first place? 

The floating NA V nde was not intended to create market stability or prot~t investors; otherwise, it 

would have also been applied to funds olrered to "natural persons" (retail funds), as well as U.S 

government funds. According to the SEC's adopting release, "[T)he Ooating NA V requirement is 

de.signed to ... disincentiviz[e] redemption activity that can result from in1•estors attempting to 

exploit the possibility of redeeming shares at the stable share price even if the portfolio has 
170 

suffered a loss ... "2 However, nowhere in the SEC record does the agency cite studies or data 

suggesting that a floating NAV creates more of a disincentive to redeem than a stable NAV. 

The real reason for the rule was to protect the large, systemically risky Wall Street asset managers 

from FSOC and Federal Reserve oversight. This reason was highlighted in a January 5, 2018, memo 

from Investment Company Institute President Paul Stevens to the group's Executive Committee. As 

the memo notes ''E.reculi1•e Commillee membe1~ will remembel' 1ha11he SEC odop1ed 1he new rules 

duri11g a period of illflmse e.wmrilla/io11 of the asset !11/lllilgelllel// i11dusrry by the fillimcia/ Stability 

01'ersighl Council as COIISiilllled under I he Oboma Adminislralion. Among of her filings, FSOC was 

recommending dull money markel funds be subjec1 10 bonk-like regulmions, such as copilal 

requiremenls, and era/ualing ll'helher fimds or /heir advisers pose risks 10 financial s/abilily and 

should be considered for designalion as syslemically imporuml financial inslilulions. enhanced 

prudemial regula/ion. and supervision by lhe Federal Reserve 80<1Yd." 

3. Some in the money market fund industry contend that the SEC's floating NAV rule has not 

negati1•ely impacted municipal borrowing costs, so why is the legislation needed? 

Testifying before the Capital Markets Subcommittee in suppon ofH.R. 2319 on November 2, 2017,3 

Pat McCoy, President of the Govemment Finance Oflicers Association, which represents 19,000 

public finance oflicers from State and local go1·emmcnts, schools and special districts throughout 

the U.S., stated: 

• " ... the impact of the SEC rule on govemments is real and it atl'ects not only large govemmental 

entities like mine (New York Metropolitan Transportation Authority), but also small 

communities throughout the country." 

• "Between January 2016 and July 2017, tax-exempt MMFs assets under management fell by SO 

percent, from $254 billion to $135 billion, dramatically shrinking an mpo~ant market for 

municipal debt. An the same time, municipalities issuing variable rate demand bonds saw their 

borrowing costs nearly double the Federal Resen•e's rate increases over the same period. Many 

state and local govemments detennined that issuing variable rate debt to MMFs was excessively 

costly, and opted to issue higher cost fixed-rate bonds. These increased costs are shouldered by 

taxpayers and ratepayers." 

4. What evidence exists of long-term market dislocations due to implementation oft he SEC's 

floating NA V rule? 

First, nearly S 1.2 trillion has exited prime and tax-exempt funds, and moved into U.S. treasury and 

government funds, because of the n•le. Ta.x-exempt funds, a key source of funding for state and local 

governments and their infrastructure projects, experienced a 40 percent decline between January 

2016 and April 2018. This caused the SIFMA Municipal Borrowing Index to increase from I to as 

much as ISO bps, or more than double the Fed rate increase on an after-tax basis, 01•er the same 

period. 

Second, state and local govemments hold overS 190 billion of assets in MMFs.' Because of the rule, 

the only money market fund options available to state and local govemments are those that im·est 

solely in U.S. govemment debt. They are no longer able to invest their short-tenm cash in prime 

funds, which have always been a safe investment providing a market rate of retum. According to a 

' hups://"""'·SC(.govlrute&'final/20 I ~133-96t6.pdf 

' https:llfinancialscrviccs.house.govlupload<dfilcs'hhrg-lt s.ba t6-ll>tate-pmccoy·20t71103.pd[ 

'See https://m"d<deralres<fl'e.gov/relea.sesl-tl/20t80607ttl.pdf. page 84. 
171 

6 

report by BlackRock, "prime money market mutual funds have consistently yielded 30 basis points 

more than government money market muiUal funds since the beginning of2017 .'~ As a resuh, state 

and local governmeniS were prevemed from taking adva111age of over $500 million in additional 

investment earnings that would otherwise have been available, and had to be made up through 

reduced services or higher taxes. 

Third, main street businesses have been severely impacted. Large, highly rated corporate borrowers 

have easily replaced the S 161 billion they lost from prime funds with ba!tk borrowings. The shortfall 

burden, however, fell {)n the shoulde.rs of main street businesses. ll1ey have been crowded out of 

bank lending by the larger companies. Some Main Street finns now pay higher rates to ahernative 

lenders; others are simply unable to borrow at any competitive rate. According to a study by Treasury 

Strategies6

, for each Sl bill on of prime money market fund debt that a large company replaces with 

bank borrowing, 10,000 main street businesses lost access to SIOO,OOO in funding. 

5. The fund industry incurred enormous costs to implement the SEC rule. Isn't it unfair to 

change some aspects of it so soon before the industry has had time to "recover" its investment? 

According to a study byTreasuryStrategies7

, total one·time implementation costs ranged from S120 

· $200 million, and all of those costs were passed on to the end·users through fees. Also, this is an 

insignificant part of the S4.8 billion in annual expenses that the industry passed through to its 

customers last year, and it is an insignificant part of the S2 billion in annual yield which investors 

are losing each year on their investments in government funds vs. prime funds. 

6. If there is little material difference between a floating NAV and a stable NAV when it comes to 

money market fund valuations, why don't state and local governments and other institutional 

innstors simply change their investment policies? 

Underlying this argument is a fundamental misunderstanding of investment policies. Such policies 

establish general investment goals and objectives, and describe the strategies that finance officers 

should employ to meet these objectives. If municipalities and other institutional investors are going 

to change their investment policies to fit the products they want to invest in, then why have a policy 

process at all? 

7. The primary reason that innstors ned noating NAV prime and tax·exempt funds is because 

of the redemption gates and liquidity fees. Does S. 1117 address that issue? 

The stable NAV is an essential element of the utility of the MMF product to the investor. Liquidity 

fees and redemption gates do raise additional concerns. S. 1117 addresses a large part of this concern 

by enabling funds to elect out of mandatory liquidity fees that were part of the 2014 Amendments. 

Institutional investmem policies emphasize preservation of principal and access to liquidity, and 

mandatory liquidity foo; violate those principles. 

Notably, since enactment of the lCA 1940, and with that statutory enabling enhanced under the 20 lO 

Amendments, all mutual funds are pennitted to suspend redemptions and postpone payment of 

redemption proceeds. lllat discretionary authority, which exisiS to protect shareholders, has ne1•er 

deterred inl'estors from using money market funds. 

'See hupsi/"""'·btackrock.romfin,·estinglflnaociat·professional>ldefined-<:onlributionloc"'·insight·analysis'do·and· money.market·funds 

6 llww.treasurysuatcgies.rom/wp-ronleni/uploadsllOt 7/ltll\egatiwtrnpactsOfNe" US~toneyMarketfund.pdf 1 """'·lreasurJ•Iralegies.romlindustry_insightlthe"<Osl-of-irnptelllC1lling-lhe-2016-mrnf-regulalionrJ 
172 

8. Before enacting S. 1117,shouldn't the SEC conduct a study of the long-term impact of the 2014 

Amendments and report back with recommendations? 

The SEC did perfonn a study before adopting the 2014 Amendments. Four years after adoption and 

20 months since the loss of stable-value nongovernment funds, the eO'ects are clear and the SEC's 

study and anticipated impact was wrong. The pennanent disruptions to our short-tem1 capital markets 

are real and irre1•ocable short of restoring the stable NAY, hurting both municipal and business 

borrowers alike. That's ~ause the o~rating features of a floating NAY make non-govemJnent 

funds unworkable for cash management applications, as stated by 1•irtually everycommenter on the 

proposed rule. For example: 

• Sweep Accounts were rendered inoperable by the floating NAY. These popular operating 

accounts simply cannot work without a stable share price. 

• Floating NAYs 31ld mandatory liquidity fees are not permitted under many institutional 

investment policies, including those of most state and local governments. Such policies are black 

and white; investments which do not meet minimum policy requirements may not be used under 

any circumstances. 

• Floating NAYs and mandatory liquidity fees are not permitted by many loan covenants and bond 

indentures. In the past, many loan and bond proceeds were invested in prime money market 

funds. 

• Tax and retordkeeping requirements raise excessive operational costs to investors in prime and 

tax-exempt funds. 

9. Money market funds are not bank products. But man)' investors believe they provide the 

equil·alent of federally insured bank products. Wouldn't a floating NAV make that more 

apparent? 

Confusion about whether such funds are govemment insured may be true for retail investors, but 

retail funds are not required to comply with the floating NAY. Only institutional investors in prime 

and tax-exempt funds are covered, and no financial oOicer for a company or municipality is unaware 

of the fact that money market funds are not bank-like products. 

IO.Isn't a floating NAV more transparent because it reflects the actual value of the underlying 

assets, whereas the stable NAV hides the true value of risky assets to inrestors? 

The SEC's 2010 Amendments already require the publication of"shadow prices" based on a floating 

NAV. Those shadow prices show that a floating NAY d01->snot materially provide more transparency 

than a stable NAY. ll1at's ~ause money market funds invest in short-tenn securities representing 

high"Juality, liquid debt that is held to maturity. (They do not, and have nem, invested in "risky'' 

assets.) Under the 2010 Amendments, 30 percent or more of a fund's portfolio assets must mature in 

a week or less, and their weighted a1•erage portfolio maturity must be 60 days or less. Today, total 

weekly liquidity in prime funds is 51 percent, and total daily liquidity is 32 percent8

. To show any 

variability, the 2014 Amendments require prices to be rounded to the nearest 1/IOOth of one cent (or 

four detimal places). 

1 https://11'\\w,sec g<Jv divisionslinvostmentlmmf ~atisticslmmf statistics 2018 0S.pdf. page 9. 
173 

In the case orthe Reserve Fund breaking the buck in 2008, a floating NAV would not have provided 

any additional transparency. Shareholders would have experienced exactly the same losses as 

occurred under the stable NAV. That's because the lehman commercial paper held by the fund was 

"marked to model," and the pricing services had not discounted the paper prior to the bankruptcy. 

Therefore, on the business day before the lehman bankruptcy, a floating NAV of the Reserve Fund 

would have been subs!antially the same as the stable NA V. 

lfan)1hing, a floating NA V may contribute to less transpaJency by forcing investors seeking a market 

rate of return on short-tenn liquidity to move their cash into non-regulated funds and riskier products. 

And for municipal borrowers who lost access to money market funds, but still want to benefit from 

the yield cum, riskier interest rate swaps have become more appealing. 

II. Why not just exclude tax-exempt funds from the floating NAV rule as a way to address the 

impact on state and local governments? 

Excluding just tax-exempt funds from the floating NAV nile would not address problems for 

municipalities both as investors and as issuers of debt. According to the G01•emment Finance 

Oflicers Association9

: "Restoring the stable NA V for both prime and municipal money market funds 

will restore the ability of state and local government to access pennissible funds for investing their 

operating cash. In addition, it will lower short-term funding costs for municipalities by increasing 

overall liquidity in the market." GFOA explains that state and local go1•emments depend on the 

safety and stability of prime money market funds, how they need both prime and tax-exempt funds 

to finance infrastmcwrc and economic development, and that they look to both prime and tax-exempt 

funds for disaster recovery efforts. 

12. Don't the 2014 Amendments protect municipalities by forcing them to shift their operating 

cash from risk)' inrestments (prime and tax-exempt funds) to less risky investments (U.S 

government funds)? 

By design and regulation, prime and tax-exempt money market funds are only pennitted to invest in 

the 1·ery highest quality, short-tenn fixed income securities that are largely held to maturity and do 

not have material fluctuation due to either market, interest rate or credit risk. There is no safer 

product available for cash management other than an insured bank deposit. By forcing municipal 

investors out of prime and tax-exempt funds and into go1•emment funds, the SEC's floating NAV 

rule has increased costs on taxpayers and businesses without any material benefit. 

13. The SEC went throwgh a rigorous rulemaking process. Why should Congress second-guess 

those who hal'e the duty and expertise to ensure our financial markets are functioning 

properly? 

It is always good to be skeptical of legislative efforts to overturn regulatory actions. But 

sometimes the regulators get it wrong, and Congress needs to step in and right the "'ong. In the 

case of money market funds, the SEC laid out a theory that suggested that the benefits of a floating 

NAV would exceed the costs to investors and issuers. Twenty months into implementation of the 

rule, there is no evidence to suggest that theory is correct, and plenty of evidence to prove it11,ong. 

'http:l/prOiectinl'eslorch ice comlwp~ entlu oods/201 810 1fliow Munic pa ities _Depend_ on_Prime_MMFs-GFOA.pdf 
174 

6/2W2018 

0. f in "# 

Washington Examin•r Mag&:zine, digital tdition: ln-d~" fe-ctore-s_ tope oo!UmM.:s. \XI <Y c;O'o~rage. ,'.\'t~l)· 'IIG!:O f'CI"'"J e<1 :or 

• Ct !CYHEPE 

f!xaminer 

Digital M•gazine Log In I Subwibe 

Friday, June 29,2018 

OPINION 

State and local governments need Congress to fix one 

more mistake from financial reform 

by Ron Crane !June 21, 201812:00 AM '# in 

Rilles desi9Md to <OJ>tain bod octM"' Viall Sum insteod {ru<~~oted ued•wi<X!hy "'""""" lllld loco/ 90"ff'"""l1 

(.St"'*! 

Lost month, an impressive bipartisan majority in Congress acknowledged what has long been obvious to 

most Americans: Some of the reforms enacted in the wake of the financial crisis of 2007-2008 went too 

far. 

Rules designed to contain bad actors on Wall Street instead frustrated creditworthy consumers and 

small business owners on Main Street who need access to capital to invest in the American Dream. The 

bill PresidentTrump signed into law was a significant but incomplete step in correcting that regulatory 

overreach. 
175 

612912018 

0. f in 'I 

Another key regulation that needs to be fixed is a Securities and Exchange Commission, or SEC, rule 

enacted during the waning days of the Obama administration that put sharp restrictions on moneymarket mutual funds. The rule eliminated the use of stable net asset value, or NAV-the dollar-pershare valuation of nongovernment money market funds- in favor of a ftoating NAVvaluation system 

that makes them impractical for state and local governments to use. This may seem like an obscure and 

hard-to-explain finance issue, but consider this: The change has caused more than $1 trillion of private 

sector liquidity to shift away f rom funds that invest in the economic infrastructure of our communities 

and into funds that invest strictly in U.S. government debt. 

Despite the clear harm caused by the rule, the largest Wall Street asset management companies want 

you to believe the rule is a good thing. Well, it is for them, but it isn't for state and local taxpayers, main 

street businesses, and other drivers of economic development and job creation. 

State and local governments, nonprofit hospitals, public schools, and universities. transportation 

agencies and economic development authorities are just a few of the institutions serving our 

communities that rely on money market funds as a source of low-cost financing, and as a tool for 

managing large cash ftows. Because of the SEC rule, their financing costs have spiked far above the 

Federal Reserve's rate increa-ses over the past two years. And they have lost the ability to earn market 

rates of return on the investment of operating cash. 

These additional costs and reduced incomes are straining budgets and creating upward pressure on tax 

rates. State and local governments have to make up that difference by finding new sources of revenue, 

or scaling back investments in schools, affordable housing, public infrastructure, and other important 

services to their residents. 

Thankfully, there's growing momentum in COngress for a solution. Earlier this year, the House Financial 

services Committee passed bipartisan legislation to roll back the harmful2016 changes to money fund 

rules. The measure, H.R. 2319, would give institutions like state and local governments, businesses. 

pension funds and nonprofit organizations the freedom to invest cash balances in prime money and taxexempt money market funds, which can in turn invest in things our communities need to maintain 

economic growth. The senate Banking Committee will consider similar legislation (S.1117) at a hearing 

onJune26. 

In the face of this momentum, several Wall Street firms that backed the SEC rule to avoid regulatory 

scrutiny of their own businesses practices in the wake of the financial crisis. are actively working to 

prevent enactment of this legislation, which is supported by over 400 national state and local officials 

and organizations representing municipal~ es, main street businesses. building trades. and nonprofit 

organizations. 

In the past 10 years, money market fund investors and borrowers have twice become victims of Wall 

Street's excess; first by a financial crisis that devastated communities and, second, by having to pay the 

price for a backroom deal that protects large financial companies from oversight designed to prevent a 

repeat of 2008. 

The Trump administration and Congress can right this wrong by enacting legislation to restore the 

ability of money market funds to support the infrastructure and economic development needs of our 

states and communities by returning to a stable net asset value for money market funds. 
176 

Vanguard' 

Money market fund reform 

and municipal issuers 

Has money market reform had a meaningful, lasting 

impact on municipal market interest rates? 

No, the irf4l'Ct was terropc<ary. The Securities a00 Exchange 

C<lc"nmiss>on's money ma!ltet reforms became effective oo 

Oetober 14, 2016. In the months lea<ing up to implementation, 

the municipal money market industly saw a decfne of neally 

50% "' assets under management. The resulting outllows from 

money market funds caused a peood of excess supply ., the 

municipel wriable-<ate demand note market. This imba~oce 

in the ma:ltet drove inte<est rates on the 7-d:t{ SIFMA index 

(average -Uy variao:e funding rate for a municipal issued 

~ne~ than comparall!e taxable money tnall<et interest rates. 

Hm'l'e'Ver, this dislocation in municipal yields was short-lived 

and borrowing oosts normalized as an influx of demand from 

taxable money ma:ltet funds and other l\1le5 of horNe~m 

mur>cipal investors ltelped to qukkly drive the market bacJ: 

Ju'e 2018 

to h~toricat norms. Demand appealS not to have felt the 

munM:xpal ma:ltet; rather. onvestors are accessing the ma:ltet 

through ~le~ent investme<>t >ehkfes. 

Further, the relationship between municipal and taxable 

money market interest ra1es has returned to historical 

averages. Varial>'e-rate demand note inte~est rates (the primary 

short·tellll fundng mechanism for municipal ~rs) have 

sen~ back in at feve~ approximately in line v.ith historical 

oi>seMtM:>ns (Chart 1). 

In the case of I -year municipal no:es (a key source of cash-flow 

frnanong for muniapatrtiesl. shifts 01 demand have l>enef~ed 

mun!Qpal issuers. The ratiO of I .year muntapaJ inte1est rates 

e~tive to I -year U.S. Treasury rates is<:urrently ~ver than the 

historical average of this relationsl4>. 

Chart 1. Municipal variable-rate yields have returned to long·run averages relative 10 taxable ahernatives 

- 7~mur-.¢p31ir'ldexiS!fMAJi$~d1·rTIQt\lhUBOR 

- A'o$'lgl 200ft 

Uooey~t(!!Ofm~110"W®'Y 
177 

If money market reform isn't responsible for higher interest 

rates, then why are munidpal interest rates higher? 

The sustained rise in short·lerm municipal funding rales has 

J)fimarily been driven by increases to the federal funds rate 

by the Federal Reserve's Federal Open Mali<et Committee 

(Chart 21. The F<JMC. in keeping 1\ilh !heir intended cusrent 

moneta')' pol~. has increased !he target rate by 25 basis 

I)O:JltS on seven separate oc:cw.ons sta~rng in ~mbe< 2015 

f01 a to131.nctease of 1.75%. The <Xlincrdental timrng of these 

increases and of 100f1eV ma1ke1 fund teform has led to 

misidentification of the 1rue C<!Usallon of higher mun~rpal 

yields. 

Chart 2. Sustained rise in short·term municipal interest rates has been driven by Federal Reserve hikes, not money 

markel rerorm 

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178 

LETTERS AND STATEMENTS SUBMITTED BY SENATOR BROWN 

Vanguard' 

Money market fund reform 

and municipal issuers 

Has money market reform had a meaningful, lasting 

impact on municipal mati:et inter~ rates? 

No, <he rmpact \'tas tempc<ary. The Se<:u<ilies aod Exohatlge 

C<lmtnlsslon's money matl<et refoans became effectwe oo 

Oetobe< 14, 2016. 1n the mootlls leading up 10 irnl)lemen<atioo. 

the municipal money market indusuy saw a decine of nearly 

50% VI asseiS under ma-t. The resulllllQ 001flows from 

money market funds caused a penod of excess supply i> the 

municipal variable-fate demand note markel This imba!ance 

in the ma:1et d<O''e interest rates oo the 7~ SIFMA index 

(average weekly varial>le funcfng rate for a municipal1$$1r01) 

h~her than oompa~at>'e tal<able money market interest rates. 

Ho\·,-ever, this dislocation in municipal yields was short-lived 

and borrowing costs normalized as an inrtux of demaOO ffom 

tal<able money ma!l.et funds aoo other lypeS of s!lOI!·term 

municipal investors he!>ed to qu~!:)y drive <he mall<et back 

to hist~l110<ms. Oemaoo awea<> not to have left the 

munW:ipal ma~et; ra~r. wwestors 31113 ~the ma.r\::et 

through cifferent investment veh~. 

Further, the relationship between municipal and taxable 

money market interesl rates llas returned to historical 

averages. VaRa~te demand nole interest rates (the primafY 

short·term fuool>g mechanism for municipal issuers) ha\'0 

senled back in at leveo approximately in Wle with hist~l 

observat!)ns \Chart 11. 

In the case of l"1'3r munkipal no:es Ia key sourco of casl>llow 

f<nanang for muoicrpalaiesl. slvlts., demaoo have benef•ted 

mumopal isstJeJs. The rauo of 1-yea' munictpal interest rates 

1etatrve to l.yea1 U.S. T 1easul)' rates is eorrentty lower than the 

hist~ 31'erage of this re~tiorlsl4>. 

Chart 1. Munieipal variable·rate yields tlave returned to long·run averages relative to taxable alternatives 

. 

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179 

If money market reform isn't responsible for higher interest 

rates, then why are munidpal interest rates higher? 

The sustained rise in short·lerm municipal funding rales has 

J)fimarily been driven by increases to the federal funds rate 

by the Federal Reserve's Federal Open Mali<et Committee 

(Chart 21. The F<JMC. in keeping 1\ilh !heir intended cusrent 

moneta')' pol~. has increased !he target rate by 25 basis 

I)O:JltS on seven separate oc:cw.ons sta~rng in ~mbe< 2015 

f01 a to131.nctease of 1.75%. The <Xlincrdental timrng of these 

increases and of 100f1eV ma1ke1 fund teform has led to 

misidentification of the 1rue C<!Usallon of higher mun~rpal 

yields. 

Chart 2. Sustained rise in short·term municipal interest rates has been driven by Federal Reserve hikes, not money 

markel rerorm 

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7~ 

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180 

ISS> 

Aprill6, 201 8 

Roxanne S. Austin 

Chair of the Compensation Committee 

Abbonlabomtories Boarrl of Directors 

c/o Abbott Corporate Secretary 

Abbott lAboratories, Dept364, Bldg, AP6D 

I 00 Abbott Park Rood 

Abbott Pari:, IL 60064-6400 

Dear Ms. AuSiin, 

lmtitu1iono1SIIortllold«s.Mcosr.c. 

lOl(;ngf.,.._Soil<'lll 

~1.'0201!0 

T; lJOlSS6.01(10 ~ •IJOI 16.0m 

I am 11Titing in conncclion with your letter (the "Abbott Letter") to the shatd!oldm of Abbon lAboratories(" Abbott"), 

contained in Abbott's Schedule 14A filed with the SEC on AprilS, 2018. The Abbott Letter relates to the Pro~y Analysis 

repon (the "ISS Repon") issued by Institutional Shareholder Services Inc. ("ISS") to its clients, in connection with 

Abbott's upcoming annual meeting of shareholders on April 27, 2018. 

The Abbott Letter claims to "highlight and correct substantial error.; in analysis and fact" purponedly made by ISS in the 

ISS Report. Given the smrity or she accusations in the Abbott Letter and ISS' fundamental disagreement with the 

assertion~ we fell it was imponant to communicate "ith you directly on these matter.;. I will addrm each of the main 

complaints from the Abbott Letter below in mOft dctai~ but let me Start by saying in summary that all the main assertions 

made in the Abbon Letter about !be ISS Repon are either misinformro or plain iiiCOI'RCI. and "e are surprised th31 such a 

mischatacterizalion ~~~sent by Abbott to its shatdlolders. The Abbott Letter itself contains a number of serious tictual 

errors and misrtpreSCntations abolll both the ISS Repon and the process undertaken by ISS in the prqlllllltion of the ISS 

Report, including its engagement efforts 11 ith Abbott. 

Below I've taken the liberty of extracting from the Abbott Letterthe key accusations and assenions made, and following 

each of those extracts I've provided ISS' substantive response. I ha1•e numbered them for easier reference, but 11~uld note 

that they are not so-numbered in tile Abbott Letter. 

I. Abbott uller: ''ISS is a~·are of the flaws and ina«uracies in its Report and has disrtgQfdtd our allemfl(s to 

rorrtct thtm. Allachtd as Anntx A is the dttailtd ltlltr sent to ISS correcting their errors, omissions and 

misltprtstntations.~ 

ISS Response: ISS is ROI aw.m of any flaws or inatCII!liCie:s in the published ISS Report, and certainly has R01 disrtptdcd 

anyattemputocorrect any errors. Tothetootmy, in response 10 Abbott'sApril31ener to ISS(the lenerrefertneed 

above as Annex A),ISS corrected the two facrual inaccuracies Abbon identified in the draft report which 111s provided to 

Abbott as part of our "draft review" process for companies in the S&P SOO index. Those two facl1lal inaccuracies were 

identified in Abbott's April3 leuer to ISS and we of cour.;e corrected them before publishing the final version of the ISS 

Report to our clients. This is precisely the goal of our draft review process, namely to help ensure the accuracy and 

quality of our repons for the benefit of our institutional investor clients for whom the reports are prepared. While 

Abbott's April31etterdid identi~· a number of other areas that we understand Abbott considers to be flaws and 

inaccuracies. in fact those other areas reflected differences of opinion or disagreements by Abbott with the methodologies 

The Glcbat lt~ '• Co<poute Gove•n.~nce 

.... 
181 

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702 fr9 form Boulovord Sullo 400 

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lhat ISS appli<$. These methodologies art made available publicly. are consislenllyapplied in lhe ISS mocltls and 

rtSearth, and have been C(lfre(lly and fairly applitd wilhin lhe ISS Repon. 

While Abbot! is obviously frte 10 disagrte with 1he philosophical approach ofiSS (or of any research provider or 

shareholder for 1ha1 mauer), and ISS ~know ledges 1ha11here is room for open-minded deba1e on various corporale 

govemMce policies and a=sment melhodologies, a disagreemenl in philosopllyor approach does 1\01 constilule an 

error, omission or misrepresentalion. 

2. Abbon Ltntr: • Additional/); •'t nurdt multi pit rtqutsts to ISS for a lll(tting to discusstht Rtport. Conttary to 

thtit gattd po/icirs, howe>·tt,JSS ttfiiJld to tngagt and proceeded to publish afla•·ed and in«cutatt Rtport#, 

ISS Response: ISS is alwa)~ happy 10 consider cngagemenl requeSIS, as you should be aware from our in.<Jeplh 

en~gemenl wilh Abbon in ad1'311« of the con1pany's 2017 shareholders mceling. However, Abbon did nel make 

muhiple requesls for ~gemen1 this year. In fae11hm was only one requesl for a mceling lodiscuss lhe ISS Report, 

and ISS respondtd lo Ibis reques1 oolhe same dJy in a manner fully consist en! "itlt our policies. 

As part of our draft review process, Abbon submined its wrinen commenls on lhe draft ISS Repon on Aprill . Once 

received, our analysis considered lhe company's ex1ensive commentai)'. idenlified !hal mosl oflhe alleged errol$ were 

~don disagrtemenls abotll our staled melhodology ralher than being errol$ of faCI or omission, and idenlified lwo 

items lhal were factual inaccuracies (lhedalc Abbou cmcred inlo 1he agreemen110 acquire A Jere was incorreclly noled in 

the draft, and lhe start ycaroflhe company's audit fim1 was confirmed by Abbo11 to be 2014 ra1her !han 2013). In 

addition 10 some other adjustments to our analysis which were made based on Abbon's feedback, lhese 1wo fac1ual 

c:orreClionswere made before !he ISS Report \\1S finalized and sen11oourclien1S. 

The -mul1iple requtsts" for ~emenl men1ioned in lhe Abbon Lener we.e in realil)• one request for an enpgcment 

mceling following !he company's provision 10 ISS of ilS April3 written commenlS on lhe draft Repon. This request was 

received from Jessica Paik of Abbo11 on April4$, and ISS responded on 1he same day 10 lei Abbon know lhat the 

company'scommcnls were being rcviewcd,1ha1 1ve would reach ou1 to 1hecon1pany if we had any questions, and asking 

the contpany 10 le1 us know ifil had any addilional commcnls. Subscquen1ly, our analysiS delermincd thai Abbon had 

provided fulsome commenls and feedback and 1ha11hey had no funher questions which would nceessi1atc further 

en~gcment a11ha1 point 

I should also point ou1lhat our decision that no further engagemenlwas n«tSSaa)' allhal point was no1 in any way a 

viola lion of our Slated engagemenl polici<$. To I he conltar)•, in lhe March 30, 2018 email CO\-e< letter ISS sen1 to John 

Beny of Abbott when detil'tring our draft report ror review, we noted the following on our policies for full clarity: 

We do r«d to rtulve yoor written comments before wtun dttermlnt whether further tf(agtrt'lfnt ~ nKtssary,•nd that determination~ at 

IS$ solo di!(rttlon. OUrif( pro>ry swon, comparllH shoold tlpoct that on~ ttllly excopdonols~uatlons w\11 worront tf(agement lmmed~te~ 

prior to, or~ pubbtionoltSS' "fleW 

Our records shownoolherrequests formgagemenl 11ere rteci1'td fioom Abbon in 2018 prior to lhedelil'eryoflhedraft 

ISS Reportlo Abbott for review. 

The Glo~lleader In Corporale Governance 

WWW ~UOIIII 
182 

ISS> IMtitution>ISNttlloldt<Serviusln<. 

701(;ngf""'8o<JIM<dSuilt 4o:l 

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3. AbbDn Lttttr: "In 2017tht ~mp!Jnp ~rformtd allht top of its ~tr group ~rith To/Ill Shllltholdtr Rtturn (TSR) 

gro•·th of SJ% and rompltted all of its financial and Slraugir objtrti•·es. The CEO JrDS granted LTI in 2017 at the 

23rd ~rrtntilt of our ~tr group. Abbott impro•·ed Ol'tr JS points on ISS' Key Relatil't Dtgru of Alignment/est 

and achiered on Ol't!roll "low concern" outcome on ISS' quontitat/l·e tests. It is absurd that ill/lit face of these 

facts that ISS has not recom·mended supf!iJrl for Sa}'-On-Po}'. ISS's mommtndotiom should bt objecti•·e and 

based on facts." 

ISS Responst: The basis of lite ISS vOle ~mmmendatioo on lite ·Say-on-Pa( item is clearly Slated in lite ISS Repon. 

and is neilher an issue "ith Abbon's performance nor 11ith the amount of the CEO's pay and equity gmns. The "against" 

recommendalion was driven bycQncerns (I) regarding the design and structure of the incenti1-e plan and a lack of 

transparency of metrics and goals, and (2) that the long· term program awards are too heavily influenced by short·term 

TSR performance. We also nore 1hatiSS' quantitative assessment of the compensation p!Oglam resuhed in an overall 

'1nedium concern·. not an overall"lowconcern" as you state in the Abbott lener(ste page 14 of lite ISS Report~ 

In any event, ISS' analysis of, and vOle ~mmrntndations on. Say-on·Pay agenda items ue based on both qualitative and 

quantitative facton. ISS C<lnducts an analysis of the pay programs and practices for all C<lmpanies, and an enhanced 

review is C<lnducled for all companies that exhibit an elevated overall eoncem (Medium or Hig)l) on the quantitative 

screen, and for a selection of C<lmpanies thai exhibit a Low overall concern level from the medel. 

With respec110 the company's specifiC oommentlhat, "Our CEO 11-u awarded L TI at lite 23rd percentile of our peer group 

in 2017. while our Company perfooned at lite top of our peer group with a TSR ofS:Iro", ISS does nor dispute this 

st.arernent. It does 001, howe1·er, mitigale the structural and transparency eoncems identified in our qualitative review. 

4. Abbottlttter: "Instead, ISS's recommendation on executil't p!JY is drirtn by: 

Manipulation of our ~tr group-ISS llltertd lht ~mpony's ~r group lllld sdecttd inappropriate ~n 

•·hich do not rtj/tct the impact of AbbDn's $ignificanl intrtast in $itt follo•·ing fM•o significant 

acquisitions, St. Jude and A lm, during 2017. ISS addtd ~tn which do not tl'tn mttlthtir own criteria 

and omined Comp!Jnf stlected pem if they p!Jid relotil·tly high •·hilt performing relati•·tly low, thus 

purfJi)StiJ• manipu/a#ng tlrt outcome. " 

ISS Responst: These assertions are wllolly without basis.ISS.stlected pem ue nor a -manipuL!tion" of the oompan)"s 

peer group. and there has absolutely been no "lnanipulation-of the ISS·stlected peer group to Abbon's detriment In fiiCI. 

the only aherations to the initially-selected ISS peer group have been to take account ofthe acquisitions made by Abbott 

in 2017, which adjuStments were made after considering the information Abbott provided to ISS. 

As a staning point and to C<lnfirm what I believe Abbott already knows, ISS' policy approach provides for the creation of 

an ISS-stlectcd peer group for every company, and this is based on an algorithmic·dri>·en approach. ISS' methOOology for 

its peer group delcnninations is made available publicly and is used consistently 11ithout prejudice. Our peer selection 

methodology coosiders the marlieL capitalization, revenue, and induSII)• of a company and its peers, and does nor take into 

atcount rtL!tive shareholder rttums or CEO pay at any point in the process, as the Abbott Ltncr alleges. The purpose of 

using ISS·selected peer groups is to provide objectivity in peer selection and consistency amongst companies for the 

purpose of our quantitative anal)~is of pay for performance. ISS' peer stlection for Abbon adhered to our metboclology, 

and also appropriately took into aCCQuntthe acquisitions made in 2017 based on information provided by Abbott. 

The Glo l Le~der In Corpo e Govemance 

-.'l ....... ~.~ft(UIIft 
183 

ISS> --s.mc .. w. l021Cingf""'-.,dSuae<OO 

Ro<Mie, MO 20850 

1: •ll01156.0SOO I ~ ·1 301.>~91 

The ISS pm pp for 1he ISS Rtp011 was fiiSI gmmted based entiftly oo our pm selection algorithm. \\ilich fully 

considered Abboct's 2017 pm pp as submined by rile company to ISS during the~ f~~k- process. This 

algorithm·selected peer group already had signiftcant omlap with the company's self·selecled pm group. Abbott thtn 

reached out to ISS in early March 20 I 8 asking that we considertht acquisitions that the company had made during 20 I 7, 

and the impacl oflhose acquisitions on Abbott's marl:et cap and re1·enue as it relates to our peer group scleclion. After 

considering the points raised in Abbou's Marth I, 20181etter. ISS detennincd that it was appropriate to remo1't one of the 

pms lhat ISS' algorithm had selected (Boslon ScientifiC Corporal ion~ and to add an additional company suggested by 

Abbott and which met ISS' rtquirements roranlpjllllllriatepeer(l'bmno Fisher ScientifiC). 

Contrary to the assenion that ISS manipulated the peer group to the detriment or Abbon.these updates were made taking 

into account the infonn1ation Abboll provided, and resulted in an even greater overlap between the con1pany's selection 

and the ISS·seleeted peers. The li'nal peer group used by ISS in the ISS Repon had significant overlap with Abbott's self· 

selected pms(l2 OUt or 16). 

5. Abbott Lttttr: "Manipulation ofGAAP and non.GAAP measures- ISS seltctil·ely uses GAAP and non·GAAP 

measurtS during its analysis. Whtn GAAP measures are tmployetl, ISS ignores the one-time impact of U.S. Tax 

Reform and thtrtby understatts all of Abbott's financial metrics. Although they state EBITDA Is the most 

important measure for our GJCS code, they exclude its USt. Abboll outperformed all of its Cotnp(lny and ISS pttrs 

in EBITDA ro~·th. lndusion of EBITDA in the analysis trould hlll't posilil't!J illlp(ldtd Abblln's sewing. After 

txeluding EBITDA, ISS thttr t/Dims ROA, ROIC and ROE rts•lls art lo"' bastd on the one-liiM GMP~f/«1 of 

U.S. Tu Reform. Jllith such arbitrary methods, ISS artificially inflates pay and fa~ly IISSlrts optrating 

performance is lower. Moreo>·tr, ISS makes little at/emptio explain the cotnp(lsition of, or rationale for use of, 

those measures. • 

ISS Response: Thert was no manipulation ofGAAP and non-GAAP measurtS in the ISS Repon. The measurtS used in 

our models and analyses are consistent and transparen~ and !hey 11-ere cenainly not selectively used -against" Abbott as is 

implied here. Equally imponant and as explained aOO.-e, our I'Cie rte001mendation oo 1he Say-on-Pay agenda item did 

not rely upon either the quantitati,·e model results or the operating ptrfonnance measurtS quoted by Abbott. 

A number of other assertions here are simply incorrect statements of fact· we do not state that EBITDA is the most 

important measure for AbboU's GICS code nor does "ISS then claimfs) ROA, ROIC and ROE results are low ... " In fac~ 

the references to ROE, ROA, and ROIC perfonmance in 1he dnart repon were rerno1'ed before the ISS Report was 

finaliztd. after ta~ing into consideration the comments JliOI'ided by Abbon in 1he April 3 draft review response letter. 

6. Abbott uner: "lnflaJion of CEO compensation-ISS uses a non-GAAP approach to the •·aluation of option 

grants M•hich leads to an infltJJed and incorrect calculation of J·)'tar a>~rage CEO pay. For example, the 

combinaJion of a /().year option lift (Abblltt'SIII'tragt option lift Is actually 6) with a J.)'tDr I'Oiatililp assumption 

purpastly a•·erstates the •·al11t of tht grant/he Compensation Committee 111/ldt, tht •'lllut of tht IIINrd the CEO 

rtctil•td, the actual txpt~ to the Company and tht octual illlp(ld on shattholdtrs." 

ISS Response: There was no inHation of CEO compensation in the way that Abbott describes. ISS' Black·Scholes option 

valuation methodology is clearly explained in our publicly available policy documents and I refer you to FAQ #4 in our 

U.S. Compensation ol icies-f~uently Askod Questions document which is available on our public website at 

hnps' """.i'W'cmanct.com file pol~ctilnmerica:. US.ComJ'(n..atjrn-Policics·FAQpdf 

The Globol ltader In Co<poute Govt:~:1« 

Wlloiii'~C'Oo 
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ISS> lnstilulionol SN<eholdorSorvimlrK. 

701 K"'9 f •nn 8oulevard Suilt 400 

Roc~Mi<, MO lOS 50 

!: •L lOLS564100J f: +LlOI.SS'-0491 

The 1'\'lluarions of !he op«ion granlS to Abboa's CEO were made fully in line wilh that melhodology, in line 1\ilh our 

nonnal process, and we consider !hem 00/TCCI and fair. 

Regarding oprion life. ISS is aware and acknowledges rhat Abbott is using valid, pemrissiblc and accepted acoounting 

praclices to estinlate the life oft~ options for all employees. and uses rhe same assumptions (or calcularing rhe oprion 

1enn for lhe CEO for valuarion putpOSeS- which "e understand is completely consistent 1\ilh whar is allowable under 

applic~ble accounting rules. ISS' methodology. holl't\'er, is based on the different assump1ion that 1110!1 e.xecutives rend 

to hold onro !heir ope ions until close to expirttion and there is empirical evidence ro suggesrlhis p.~nem. In looking atlhe 

specifics for Mr. White, we see that this holds true - Mr. White rends to hold options for longer than six years. Per 

Aboon·s most rceen1 proxy, for example, he has a tranche of options 1ha1 was issued over 9 years ago and with less lhana 

year left to expiretion. 

Regarding volatility, according loa -Radford Revic1Y' published by Radford Consuhing, 11hich Qll be found at 

~" radlllfd c'"" bomecct 'aluf!l"ll Itt\ Itt' Wltirepa_m_;\ 'C..Iori£71& .\<,ul!iJ!k>'l'.Jiel! Pooi«>.oor. 

about20% of eomp.~nies use a similar method to calculare volarilily as ISS does- rhar is, basing •·olariliry assumptions on 

a single hisrorical volarilily measuremenr period (in ourcase.rhree years). In the study, Radford srares: "In pllCiice, the 

mosl frequcnl categories for derer:mining expected volatility are hisrorical volatility, implied volariliry, and peer volarilily. 

Further. many comp.~nies elect to use a combination of the abo1·e volariliry types, also referred 10 as a blended volatility." 

Aecording to !he same study, 95% of comp.1nics use hisloril:al volatility as an input to their vobtility assumplions. 70% 

of oomp.1nies do use historical volatility in concert 1\ith implied or peer volatility; for the SlrOI\8 majority of comp.10ies. 

historical I'Oiariliry is an important input into their final 1'0la1 ility assumptions. 

We believe ISS' merhodology is robusrand transparent -and is also accepted as a standard, or as a primary componenl, by 

many companies. 

ISS' uwment of Abboa's opcions is consistent with OUt published methodology, has been in place for a number of years 

(providing year on year oonsistency). and !here are no deviations from our standard valuation methodology in the ISS 

Report. For full trensparency, ISS displays in our research reports both ISS' and the company's assumptions used for 

CEO option award valuation, as well as the resulling difference (if any) between the two •·aluations. This information was 

included in the ISS Report as follows: 

Abbott Llbot•tor~ (ABT) 

POUCY United Sta:es 

OPTION VAlliATI0~ ASSUMPTIONS 

For CEO's last FY Grlnt 

Volatility(!')' 

orlidtnd Y'fld '"'' Tenn(yrs)' 

Rill:· fret Rate l"l' 

Company ISS 

18.00 10.74 

2.40 228 

6.00 10.00 

2.10 1.41 

Gr~nt d~te fair value J)fr option' 6.54 9.27 

Grant Oate F~irValue (Sin 0001" 4,100 5,910 

'leo•«· St~'<f¥lf & Poor s Xp<<'llfHd " lwct: 0(fl4~ (~/»'uti· SS 

:SSV!k.t O~t"f"""(f bt!'"o\ffn 'SS.at\d(Of1"~f'Jnt dltthtva\lf IS .;.:.M 

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7021Gng F1m1 llo<Jiev.W Suitt 01 

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1: • UOI.II6.0500 IF: •LlOlSS6.049l 

7. Abbo« Lttttr: "A falst claim that our Proxy filing /at/ltd adtquate distlosurt-ISS inrorr«<l)' claims that our 

disclosure in our Proxy filing lads rigor and spteifics. To the rontraiJ our disclosure clearly statts the rewns 

for romptnsation derisions as ~·elias Sptcific targtls and arhit••tmtntln'tlS, the design of ou1 comptnsation 

programs, anti provides disclosure on 2018 grants which is 110t required or provided b)• most companies. Although 

we do not publisfl compttitil'ely sensiti•·e strategic goals, the goals themstil'ts are direct, measurable, time-bound 

and indil'idual~· assigned to tht appropriate tXtcuJi•-es. 1'/rey are neither subjecti•'t or •·ithout rigor os ISS 

suggtsts. • 

ISS Respo~~se: Wllile we understalld !hal Abboll disagm:s "ilh our conclusions, ISS believes !hal its Say.Qn-Pay anal)lis 

in !he ISS Repon t~J~m:lly idenlifics coocems around disclosure. In ISS' view. and as e.xplained in !he ISS Report, several 

irn:enlive melrics and goals are described in overly broad 1enns, wilhoul specir~e resulls or weigl11i~ on a per-goal basis 

being disclosed. In olher eases, perfonnan<:e resulls are emirely undisclosed. These concerns are mceroa1ed by lhe fact 

1ha11he Slnllegic and leade~ip goals aceounlcd for half of 1he annual in<:enlive award opponunily. and lhallhe award 

was paid ou1 above ~argctwilhout 1he company providing iiS shareholders wi1h adequa1e informa1ion 10 assess Ibis. We 

believe our anal) 'Sis of !he inc:cnti\'e programs is OOITCCI and JeasOnable, and il is in line wilh our eStablished policy and 

pratt ice. 

8. Abbott utttr: "ISS then reacflts a condusion regarding separation ofChairtMn and CEO based entirel)' on 

"concerns• about control of extcuti•'t comptnsation that ISS mated through its distorted ana~•sis. • 

ISS response: Putting aside !he efficacy of our anal}~is on lhe Say-on-Pay ilem as discussed in delail above, ISS' 

reoommenda1ion 10 1'01e "for" !he slwdlolder proposal for !he company 10 adopl a policy to have an independenl chair 

"os nol based only on !he oompensalion COfiCelm. When analyzing shareholder proposals seeking an independenl chair, 

ISS' policy approach for U.S. companies is gcnmlly lo rerommend "for" the proposal, while considering on a case-by· 

case basis 1he scope oflhe proposal, company-specific fac1ors, and any other faclors thai may be applicable (such as compensalion concerns). 

In addi1ion 10 referencing !he execu1i1-e compensalion oorn:ems, !he ISS Repon is clearlhallhe scope of !his panicular 

proposal is 1101 considered 0\-eriy prcscrip1h•e on !he company. This is also a strong supponing faelor 10 our "for" 

retommendalion on !he proposal. You 11ill be aware 1ha11here was a similar proposal al Abboll's 2017 meding, and !hat 

we also recommendtd a vole in favor of1ha1 proposal las! year. 

9. Abboll utter: "As explained in our March I, 2018 and Dtctnrbtr II, 2017/e«mto Mr. Bima/ Patei,J•our Vice 

Prtsidtnt, U.S. Restorch, Abboll compltttd hl-o large strattgic atquisitions during 2017 which great f)' incrtDStd 

ou1 silt 1nd had a substantial impocl on ow financial mtlrics. As thtst ltffm qptor n01to hOI't been adequately 

considtrtd, •'t hDI't rtittrated their contents below. • 

ISS Response: The leners referer.ced were reviewed and considered in full. As 1101cd above, lhc issues and infonnalion 

Abbonarticulalcd in iiS March I, 2018 1ener did resull in changes 10 1he ISS peer group seleclion for Abbott to reflec11he 

acquisilions made. In hindsighl pethaps we could have communicalcd lo Abbott direedy a11ha1 poinllhal we had, in fac~ 

considered and acltd upon lhe Marth I, 20181ener. However we considered lhatlhost changes would be fully apparenl in 

!he dtaJI repon sen11o Abbon on Mareh 30, 2018 as pan of 1he draft review process. 

10. Abbott u«er: • Substanth-e reliance on our CEO's 2018 equity a•·ard os a basis for concern which is irreln·antto 

2017's Say on PoJ• recommendation, ond Is pro.-ided only as information in od.-once of neA1 year. • 

ISS Response: As described by Abbott ilselfin iiS 2018 proxy Slalcmen~ 1he 2018 equity award for Mr. White was 

delennined based on performance in 2017, and based on rela1ive TSR for !he one·. lhree-, and five-year periods ending in 

Tht Global leadefll1 Cci])C<~It Govt'nance WWW~f(O/WI 
186 

ISS> lns1itut;...i Shortholdtr s.McaltK. 

7011Gng fo•m Boui<Yord s.Mt< 400 

i!<x!>ilt.MOl0850 

T: • L lOUS6.0l00 If: • LlOlS!6.G.'91 

2017. Given !his disclosure, while !he gran1was made in 2018. ilwas an appropriale consideration in !he analysis oflhe 

CEO's cow pay foc2017. The praclieeofoonsidainggrants made subsequen11o !he oomspondingperformanee )tar is 

roolinely applied by ISS foccompanies thai ha•e such a liming lag issue. This poin1 is also explained in !he ISS Repoot. 

We would also nOie 1ha1 ringAbbo~'s review of ISS' n:pon for the 2017 shareholders meeting, Abbott made the case to ISS 11 thai time thai pay decisions made with respect CO 2016 perfonnance wm rdlected in !he rmgnilude of !he CEO's 

2011 equil)' granL and !hal ISS' enlua1ion should lake I his inlo aecounL Having aeeep1ed Abbolfs argumenl for our 2017 

analysis, lhisapproaeh wasalso llSed in 1he 20181SS Repoi110 pro,• ide fair and eorrec1 eonsislency. 

I hope lhallhe foregoing will be helpful in addressing 1he concerns and allega1ions you raised 10 your sharehokleB, and in 

underslanding lhailhe alleged "subslanlial errors in analysis and faef peteei"ed by Abbon are nodling of !he kind. II is 

also my hope !hat you \\ill now undcrsland thai ISS did 1101 refuse to enpge with Abbott in the way thai is 

mischaraclerized in the Abhon Lener or oomrary 10 our policies. 

While you may n01 necessarily agJCC wilh aspects of our medlodologies or our cooclusions, I hope you are now more fully 

informed as 10 !he facts of !he disagreemeniS, and of ISS's melhodologies and approaches which are applied as 

consisten1ly and tr.msparen1ly as possible, and wilhoul prejudice. If you and ocher members ofthe Abbott Board or 

Compensalion Comminee would like 10 discuss further. we would be happy 10 do so, whelher now or in advance of 

Abbon's 2019 proxy and annual meeting. 

If you lhink il would be approprialc and/or useful, you have our permission 10 make !his teller available to your 

shareholders. 

Yours sincerely, 

Georgina 

c~~ Marshall, 

Global Head of Research 

lllSiilutional Shareholder Services Inc. 

tc: Gary Re1elny, ISS Preside~! and CEO 

The Glo~lleader In CO<po~att Governanre ¥111/W"~i\.lrl(f(f'! 
187 

ISS 

May30, 2018 

The Honorable Dean Heller 

Chai.nnan 

Subcommittee on Securities, lnsttrance and Investment 

Senate Banking, Housing. and Urban Afl1lirs Committee 

United States Senate 

324 Han Senate Onice Building 

Washington, D.C. 20510 

The Honorable Thont Tillis 

Senate Banking, Housing, and Urban Affairs Commiuee 

United States Senaie 

185 Dirksen Senate Oftice Building 

Washington, D.C. 20510 

The Honorable David Perdue 

Senate Banking. Housing. and Urban Afiairs Committee 

United Slates Senate 

455 Russell Senate Office Building 

Washington, D.C. 205!0 

Dear Senators Heller, Tillis, Perdue, Rounds, Cotton and Scott: 

lns1itutiooal Sllaroholde< SO<Vi<es lll<. 

unA,...,.oiAmerica<,:!*Ftoor 

N~N Vori<. NY 111036 

T: +1.&46.~31101~ +1.640.417.60'!0 

The Honorable Mike Rounds 

Senate Banking. Housing. and Urban Affairs Committee 

United States Senate 

502 Hart Senate Office Building 

Washington, D.C. 20510 

The Honorable Tom Cotton 

Senate Banking. Housing. and Urban Affairs Committee 

United States Senate 

124 Russell Senate Oflice Building 

Washington, D.C. 20510 

The Honorable Tim Scou 

Senate Banking, Housing. and Urban Affairs Committee 

United States Senate 

717 Hart Senate Office Building 

Washington, O.C. 20510 

Thank you for your letter dated May 9, 2018. Institutional Shareholder Sen1ces Inc. (ISS) weloomes this opportunity to 

answer )'Our questions, address common misinfonnation about ISS and proxy advisors, and provide clarity about our 

business practices and the regularory requirements to which we are subject. 

Fir>1, as a general note, ISS is a Registered Investment Adviser (''RIA"). As such, we are subject to the Investment Advisers 

Act of 1940 ("Advisers Act'') and the rules and regulations that the U.S. Securities and Exchange Commission ("SEC") has 

promulgated thereunder. As an RIA, ISS owes a fiduciary obligation to our investor clients, which means ISS and our 

employees must cany out our dulies solely in the best interests of clients and free from any compromising influences and 

loyalties. The Advisers Act and related SEC rules provide a mature and comprehensive regulatory regime that covers 

virtually every aspect of our business and that subjects ISS to the SEC's continuing oversight and examination authority. 

We must and do contply wiih these rigorous federal legal requirements. Being regulated under theAdl1sers Act also aligns 

us with our investor clients, many of whom are themselves also registered and regulated under the Advisers Act. 

ln this context, I am confident you will find that the Advisers Act effectively addresses many of your concerns. 

Our response to your Jetter is organized as a direct reply to each statement and question you've posed (italicized): 

l> "For years, your organizatio1111as significantly increased it{ sf influence in sharel•older rating practices, and benreen 

lnstillltionn/ S/mreholder Sen> ices (ISS) and Gloss, Lewis & Ccmpmo• (Gloss Lewis), you now CJJIIIro/97 perce111 of tile 

ofille {sic] pro:ry advisory i11tlustry ... •· 

ISS is indeed an industry leader in the corporate governance space and we are proud to have earned our market share by 

\'irtue of the quality of our work 3J1d the level of service we have pro,1ded for more than a quarter century. The GAO report 

entitled "Issues Relating to Finns that Advise Institutional Investors on Proxy Voting" concluded as much when it 111ote 

that ISS has "gained a reputation with institutional investo~ for pro,1ding reliable, comprehensive proxy research and 

The Global leader In C<Kpo<ate Governance 
188 

ISS lns1itutiooal Sllaroholde< SO<Vi<esill<. l!nA,...,.oiAmerica<,:!*Fioor 

N~N Vori<. NY 10036 

T: +1.&46.~3001~ +1.640.417.60'!0 

recommendations."' While we have seen lhe 1\idely circulated conjecture lhat IWO firms "control" 97% of the proxy 

ad,isory industry, ibis is not a statistic we have verified or c~n confirm. 

There are no artificial barrie~ to entry into the proxy advisory indUSlry in the United States. We opernte in a competitive 

market and we have seen entrants c9me and go within the industry. Moreover, institutional investors are not required to 

purchase our senices. In the free market, institutional invest~ purchase our services because they choose to do so, and 

find ''alue in the products we provide. 

We do, however, want to dr.lw a distinction between our market leadership and your assertion that we influence "shareholder 

voting practices."ISS clients control both their \'Oting policies and their \'Ote decisions. ISS is generally not a discmionary 

proxy voting manager, excqll in rare situations where a client has an actual connie! of interest (for example, a financial 

institution lhat holds and must vote the shares of its parent company), and asks ISS to make a proxy voting decision on lhe 

clienrs behalf. 

In fact, ISS is relied upon by our clients to assist lhem in fulfilling lheir 0\\11 fiduciary responsibilities regarding proxy voting 

and to inform them as they make t'heir proxy ''oting decisions. These clients undersland that their duty to vote proxies in lheir 

clients' or beneficiaries' best interests cannot be waived or delegated to another pany. Proxy advisors' research and vote 

recommendations are often just one source of information used in arri\ingat institutions' voting decisions. As participants 

in the SEC's 2013 Proxy Adviser Roundtable explained, many investors have internal research teams that conduct 

proprietary research and use proxy advisory research to supplement their own work 1 Some im~ors use lhird-party proxy 

resea~th as a screening tool to identify non-routine meetings or proposals. A number of institutional investors use the 

services of two or more proxy advisory finns. These 'ie"~ are consistent with the results of a 2012 survey of asset managers 

by Tapestry Networks that found pro~')' advisory finns' "role as data aggregators" has become increasingly important to 

asset manage!$, and that even if smaller manage~ are more reliant on such advisory finns, lhey Slill acknowledge lhat 

responsibility for voting outcomes lies \\;th investors.3 Said more simply, weare an independent provider of data, analytics 

and voting recommendations to support our clients in their 0\\11 decision-making. 

Moreover, in lheir paper, Tire Power of Proxy Advisorl: Myth or Rea/iry?.' University of Pennsyh•ania Law School Professor 

Jill Fisch, along with colleagues from New York University, analyzed the effect of proX)' ad,isor recommendations on 

voting outcomes in uncontested director elections. The authors estimate lhat, after controlling for underlying company· 

specific fact~ that inOuence voting outcomes, far from being detenninative of outcomes, an ISS recommendation appears 

to shift a very small percentage (o to 10 percent) of shareholder ''otes, but that this influence may stem from ISS' role as 

information agent: 

1 Jones, Y. D. (2007). Issues RelatiJ!g to Firms that Ath·ise /nstillltionallnrestors on Proxy Voting. (GAM7-765). Washington, 

DC: Government Accountability Offiee (hereafu:r, -2001 GAO Report") at ij. 

' Remarks of Michelle Edkins. cunrently Managing Director, Global Hea<l of BlackRock Investment Stewardship. BlackRock, Inc. 

Transaipl of Proxy Adrisory Firms Roundlable ("Roundlable Transaipl"), a\~ilable at "'"''.scc.&<wls!!"tlishrlpro.,y·adliSOIJ"· 

sel\'ie<slproxv-advison•·sm·iees-tran.criP'.txt (0..'«11\ber 5, 20 13) at45; remarks of Anne Sheehan, Din.'Ctor of Corporate Go\'<manee, 

CaiSTRS, /d. at 151-54; remarks of Lynn Turner, Managing Director, litiNomics, Inc., dis<ussing his experience at Colorado Public 

Emplo)~' Retirement Association, /d. at 51-52. 

3 Bew, Robyn und Fields, Richard, VO!ing Decisions at US Mutual Funds: How lni'CSIO!'S Really Use Proxy Adrisets (June 2012) at 2. 

A1'3ilable at SSRN: http;l/m.cpmlabstract=2084231. ("Across lhe board, participants in our research said they ''alue proxy firms' 

ability to collect, ooganize, and present V3SI amounts of data, und they belie"e smaller asset managers an: more reliant on those 

sel\'iees. Noncthclcss, participants emphasized that respon~bility for vQ!ing outcomes lies \\;th in1'eslors"). 

' Choi, Stephen J., Fisch, Jill E. and Kahan, Marcel, The P011tr of Proxy Advisers: M)'111 or Reality? 59 Emory L J. 869 (2~10); 

University of Pennsylvania, ln~itllle for Law & Ecooomics Resean:h Paper No. 10.24. A1'ailable at SSRN: 

lutp;/1Slm.comtabs!ract=t694S3i. 

The Global leader In C<Kpo< ate Governance 
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ISS lns1itutiooal Sllaroholde< SO<Vi<esill<. 

l!nA,...,.oiAmerica<,:!*Fioor 

N~N Vori<. NY 10036 

T: +1.&46.~3001~ +1.640.417.60'!0 

{IV}e find evide11ce that ISS's power is portially due to the factthat !SS (to a greater exte/11 than other otMsors) 

bases its rerommendaJiom on factors that shareholders consider importmu. "This fact and competition among proxy 

advisors place upper ba1mds on ISS's po"·er. l11stitlllional Share/wider ~TIIices cannot issue recommendations 

arbitrarily if it wants to retain its market position. Doing so would lead institutional investors to seek the seTIIices 

of other pro:ry advisory firms. Thus, ISS is not so much o Pied Piper followed blindly by institutional im·estors as 

it is an information agtllt and guide, helping im·estors to identify •·oting decisions that are consistent .-ith their 

existing preferences (emphasis added). s 

Many large institutional investors have their own customized voting and corporate governance principles that proxy 

ad,1sory firms use as the basis for making tailored, client-specific vote recommendations for that panicular im•estor. 

What this means is that a client with their own unique view of how to assess and vote upon proxy voting matters willl.ook 

to ISS for assistance in the administration oftheir own customized proxy voting policy as opposed to using one of!SS' 

policy frameworks. As of January I, 2018, approximately 85% ofiSS' top 100 clients used a custom proxy voting policy. 

To provide fun her context, we note that during calendar year 2017, approximately 69% of the ballots processed by ISS on 

behalf of clients globally were linked to clients' custom policies, representing approximately 87% of the total shares 

processed by ISS during this period. 

Moreover, in addition to both customized policies and our ISS "benchmark" proxy voting guidelines, ISS pro\ides options 

for our clients in the form of mult-iple thematic, specialty policy options for investors who rt<juire a particular philosophical 

approach to proxy voting and corporate governance, including a policy set for faith-based investors and two focusing on 

social and environmental investing priorities. Again, the choice of which policy to use belongs to the cl en~ not ISS. In 

other words, ISS does not have a monolithic \i ew on proxy voting issues nor do we dictate how investors themselves think 

about these issues. Indeed, ISS bas presented opposing recommendations on the same ballot proposal to different clients 

based on the diftenng policieslapproaches of those clients and the proxy vOting policies that they themselves select. In 

short, ISS provides investors with research, data and vote retonlmendations that enable them to implement their own proxy 

voting and corporate governance philosophies. 

ISS is sometimes mislabeled as an ''activist" organization. While the foregoing demonstrates that we are not, in fact, a 

monolith to which that or any similar label could apply, we think it is wonh noting that for calendar years 2015, 2016and 

2017, under our "benchmark" policy guidelines, ISS recommended votes in support of the management position over 90% 

of the time (91.3%, 92.2% and 91.3% in each year, respectively). 

As noted by the Council oflnstitutionallnvestors(CII), a leading nonpartisan and nonprofit association of public, corporate 

and union employee benefit funds and state and local entities with combined assets exceeding $3.5 trillion: 

Proxy advisory finn influence is exaggerated by analyses that confuse correlation 1vith causation. ISS and Glass 

lewis tend to follow im"CStors on governance policy, not lead them. In setting their policy frameworks, the two 

firms have a business interest to ensure they reflect investor (client) perspectives, in part through extensive 

consultative processes, and to consider empirical e~idence. Their fi'ancbises are built on credibility with investors. 

As a result, advisors' views reflect those of many funds. Indeed, if there were a sharp divergence, we would expect 

to see ad,isors ponished in the marketplace. 6 

At the end of the day, institutional investors are not rt<JUired to use proxy ad\isors' sel\•ices or to use only one proxy 

ad1isory company, nor are they required to follow the vote recommendations of any proxy advisor they choose to use. The 

s /d. at906. 

' June 13,2016 kiter from the CoWJCil oflnstitutional lnl'eslors to Rep. Hensarling, Chair of House Committee on financial Services 

and Rep. Waters, fUn king Member of Ho~~<t Committee on Financial Services at2. 

The Global leader In C<Kpo< ate Governance 
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ISS lns1itutiooat Sllaroholde< SO<Vi<esill<. 

l!nA,...,.oiAmerica<,:!*Fioor 

N~N Vori<. NY 10036 

T: +1.&46.~3001~ +1.640.417.60'!0 

ultimate voting decision for each resolution a.t a company meeting remains the responsibility of our diems, the owners of 

the corporation, as we believe it s:hould be. 

Question I -JSS' Voting Systen1 

)> "We req~11$tlhat }'Q!I prq••i!lii detpiled infomtq/iQII Qll hqw tlze Pr~ £xclz~nge >V!i11g w•·i~ ~>w/<.1 pn(/ why )'Q~ tlziltk 

yo11r com poll)' is in complimtce with SEC Slaff Legal Bulletill ZO, especially i11 circumstmrces II' here l!ilC!z client does 

not/rare to formal/)• approre or submit the pre-populated electronic ballot that )~II ore produci11g[or each shareholder 

meeti11g.'' 

Exchange Act Rule 14a-l(l) defines a proxy "solicitation" to include the "furnishing of a fonn of proxy or other communication 

to security holders under circumstances reasonably calculated to result in the procttrement, withholding or revocation of a 

proxy. "

7 The furnishing of a proxy pursuant to a sa:uril)• holdefs unsolicited request is excluded from this defioition• 

Both the SEC and itS Stall'have historically recognized the distinction between unsolicited and solicited proxy ad1~ce, applying 

the Exchange Act proxy rules to the fonner, but not the Iauer. for example, ina 1979 release, the SEC explained that, "As a 

general matter, unsolicited proxy voting advice would constitule a 'solicitation' subject to the proxy rules.oot In making this 

obsen-ation, tbe SEC cited an earlier opinion of the SECs General Counsel that addressed proxy advice in a broker.;lealer 

context 

In our view, a broker nonnally is not engaged in solicitation where he merely responds, 111lether orally or in writing. 

to an unsolicited request from a CUStomer for advice as to how to vote. Since the broker is merely responding to his 

cUStomers request for advice in his capacity as adviser to the customer and not actively initiating the communication, 

it may be concluded that he is not engaged in 'soliciting.''' 

Unfo~unately, the longstanding regulatory distinction between unsolicited and solicited proxy voting advice has been blurred 

as a result of more recent Stall' guidance. In addressing the interplay between proxy ad1~sory services and the federal proxy 

rules, Staff Legal Bulletin C'S LB~) 20 (issued in June 2014) paraphrased the SEC's 1979 release, but omined the cntical 

"unsolicited" qualifier, thereby erroneously suggesting that all proxy advice is a solicitation. 11 

ISS submits that a registered inves~ment adviser who is contractually obligated to furnish vote recommendations based on 

client-selected guidelines is not providing "unsolicited' proxy I'Oting advice, and thus is not engaged in a "solicitation" subject 

to the Exchange Act proxy rules. 

l.SS dces not choose the ballots or3genda iten1s on which we render advice. Rather, at a clien(s direction, we are asked by our 

clients to analyze and provide a voting recommerrdation for each agenda item related to every equity sa:urity held in our 

clients' ponfolios. Furthermore, as a disinterested fiduciary, ISS has no financial stake in the outcome of a panicular vote. 

We are agnostic as to whether clients suppon a proposal, reject the proposal or abstain from voting altogether. We are similarly 

indifferent to whether clientS choose to follow an ISS vote recommendation or not. ISS' oni)' job is to analyze proxy statementS 

1 Rule 14a-1(1Xiii) 

' Rule 14a-1(1)(2Xi). 

' S/I(ITtho/der Communicotiollt, Sf.arelwlder Parlicipolimr in dre Ccrporo!t Electi){(J/I'roces$ and Corporate Go1~rll(ll~ Ge11erol6; 

SEC Release No. 34-16104 (August 1.3, 1979144 Fed. Reg. 48938 (Augllll20. 1979)at ll01e25. 

~ Brol:er-Deo/er Participolioll in Prox)'SIIIiciloliOII$, SEC Release No. 34-7208 (January 7, 1%4). This view was remted in a leiter 

1\om Abig,.il Ann~ Chief Counsel of 1lle Oi1~sioo ofCOipOI3tion fiii3!1Ct to Richard G. Kerchwn. EVP, Legal. Regulatory & Market 

Policy ofllle NASO, Inc. dated May 19, 1992. 

11 SLB 20, Question 6. 

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and provide infonned resemh and vote recommendalions based on the policies and guidelines lhe instirutional investors ha1·e 

selected, and in many cases developed, themsell'es. Given lhe diversity oft~ policies and guidelines and as alre3dy noted 

abo1-e, ISS may issue different recommendations on a given issue, For example, recommending VOiing "AGAINST" on a 

panicular item to clieniS using ISS' faith-based policy guidelines, and "FOR" on Ibm same issue to clieniS using ISS' 

''benchmark" VOiing policy guidelines. 

ISS' fiduciary proxy =hand VOiing advice is simply nollhe kind of"over-lhe-uansom" communication lhai the federal 

proxy rules are desi!?Jed to address. 

Wholly apan from the question of whether 01e pro1ision of proxy ad1ice can be considered a solicitatiOI\ SLB 20 explains 

that Exchange Act Rule 14a·2(bX3) exempts a proxy solicitor 111\o renders I'Oting ad1ice from lhe information and filing 

provisions oflhe prox-y rules if the solicitor. 

a. furnishes proxy voting advice in lhe ordinary course ofbusiness; 

b. discloses to the recipient of the advice any significant relationship \\ilh the issuer or any of iiS affiliates, or a security 

holder proponent of lhe maner under advisement, and discloses any material interests the solicitor has in such maner, 

c. receives no compensation for furnishing the advice from anyone olher lhan recipients of the advice; and 

d. does not furnish the II'Oting advice on behalf of any person soliciting proxies or on behalf of a participant in a 

contested election.'l 

Although ISS is confidentlhat it is not a proxy solicitor wilhin the meaning of Rule 14a-l{l), we have nonetheless taken steps 

tO ensure that our proxy adviSOf)' activities would qualify for lhe Rule 14a·2(bX3l exemption if such an exemption were 

needed. In this regard, after the publication ofSLB 20, ISS enhanced our already robuSt suite of conflict management and 

disclosure policies by adopting a Policy Regarding Disclos11re ofSignificanl Relationships. This Policy, which is available in 

the Due Diligence section of our 11-ebsite,

1

J provides a clear explanation of how ISS assesses and discloses any significant 

relationships that may exist between the company and lhe subjeciS of its proxy resean:h repons. 

ISS also enhanced iiS client facing delivery platform, ProxyE.xchange, to deliver the required disclosures to clients in a way 

that both se;~mlessly integrates with their worl;flo"~ and proteciS the critical firewall bet\\'een ISS and iiS corporate solutions 

suooidiary. 

Question 2 ·Report Accuracy 

l> "Currently there are no standards or regulations that apply to these reports prepared by proxy advisory firms ... {1]here 

are often questions about the dependability, accuracy of factual mmerial, and correct assumptions made for each 

COIIIf!OliJ' e.-aluated. " 

" SLB 20, Question 9. Questions 10 through 13 address bow a pro.xy advisory finn lhar aciSas a proxysolicilorcould make lhe facts· 

and<iltllliiSWlCeS delmnination of whether it had asignificant relationship 11ith an issuer or se<Urity bolder proponen1 or a mal erial intcresl 

in the maner under advisement, and bow il should make any n«tSSaa)' disclosures relaled thereto. 

11 htpps1~"'w.issgoremanct comlfoJelduedili ign ficant·relalionships-<lisclosure.pdf. The ISS 11dlsi1e con1ains a range of 

disclosures that sa1isfy ISS' rtgUia1ory requiremtniS under the Advisers Act and assist fiduciaries who USt ISS' smi~ to sa1isfy 1heir 011n 

busilless and rtgUialory obliga1ions. 

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The fi~t sentence quoted above is inaccurate. In 20 I 0, the SEC con finned that proxy advice is a fonn of investment advice 

subject to the Advisers Act and the rules and regulations thereunder. " Among other things, this means that 

as a fiduciary, the proxy ad1isory finn has a duty of care requiring it to make a reasonable investigation to detemtine 

that it is not basi.ng its recommendations on materially inaccurate or incontplete infonnation. 

11 

The SEC restated this view just last month in a proposed interpretive release on investment adviser siandards of conduct 

ln addition to confinning that the obligation to provide advice that is in the be$1 interest of clients applies not only to ad1ice 

regarding potential investments, but to all advice provided to clients, the SEC also con finned that an ad1iser has a duty to 

conduct a reasonable investigatiofl "sufficient to not base its advice on materially inaccurate or incomplete infomtation."11 

As an RIA and a fiduciary, ISS has adopted a number of policies and procedures designed to ensure the integrity of our data 

collection and research process, upon which our repons are founded. We have robust systems and controls designed to 

ensure that resean:h repons and \'Ole recommendations include high-quality, relevant infonnation, are accurate, conectly 

based on the relevant ISS or client custom policy and are reviewed by appropriate personnel prior to publication. ISS also 

commissions regular SSAE 16 audits, conducted by a third-pany auditor to ensure compliance with our internal control 

processes, including our research process. 

ISS is commined to having the most complete and accurate information upon which to base our research and 

recommendations to our clients. As described in more detail below, .ISS' approach is to use and rei)' only upon publicly 

available infonnation in the prepru-ation of our proxy resean:h repons and vote recommendations, the primary soun:e of 

which is the public filings of the companies that we cover. Within the paramete~ of that approach, ISS regularly undenakes 

dialogue and interacts with comJXI!ly representatives, institutional shareholders, shareholder proponents and other relevant 

stakeholders, both during and outside of "proxy season" to (I) gain the greatest possible insight for our clients and (2) 

maintain the overall quality of the research by ensuring full infomtation and deeper insight into key issues. ISS' dialogue 

with issue~ is transparent and disclosed to clients. 

With respect to facl\lal e~rors, ISS' research team does, infrequently, identify or receive notice of material factual errors in 

research reponts that have already been published to our clients. These erro~ include those relating to agenda changes, 

material data or research/policy application. ISS tracks such occurrences, which are rare. For example, in 2017, ISS covered 

over 6,400 meetings in the United States and the error rate was approximately 0.76% as measured by post-publication 

''Proxy Alerts" to clients notifying them of a material error 11ithin our benchmark proxy research that resulted in a change 

of a \'Ole recommendation. 

We reiterate the findings of the 2007 GAO Repon which concluded that our clients trust us to pro11de "rei iable, efficient 

services."" The GAO's follow-up repon in 2016 addressed this funher, stating "Both corporate issuers and institutional 

investors (the GAO] interviewed .said thai the data errors the)' found in the proxy reports were mostly minor ... "11 

"Concept Release on the U.S. Proxy Sys~cm, lA Rel<ase No. 3052 (July 14, 20 10) C'J>roxy Concept Releas<:") a1 110. 

"id., atll9. 

16 Proposed SEC lnterpMation Reguding Standard of Conduct for ln1'eslm<nl Advisers. lA Release No. 4889 (April IS. 20 18) {"lA 

lnlerprtlil>e Rel<3se ~ at 13, quoling the Proxy Concept Re!C3St. 

112007 GAO Rcpon s11pra, note I at. 13. 

,. ClenteniS. M. (2016). Proxy Adl'isoq fimJS ·Role in i'oti•tg ond Corporate Go•~man<e l'riiCtices. (GA0-17-47). Washington. OC: 

Go1•emment Accountability Onice a1 29. 

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However, we 1vartt to underscore that there is a fundamental and important dillerence between factual errors and 

disagreements over interpretive judgment and methndology. Although the laner are often referred to as "errors,• they do 

not entail any mistake, omission or misrepresentation. What is often portrayed as an ''error" by the management and'or the 

board of a compan)' may be a disagreement about the vote recommendation itself or about the u11derlying corporate 

govem311ce guidelines applied.19 For example, ISS was recently accused by a company of selecting inappropriate company 

peers for the purpose of manipulating the assessment of the issuer's executive compensation program in the context of a 

say-<~n·pay" agenda item. However, ISS had, as always, followed its consistent and publicly-disclosed methodology for 

ISS peer group determinations 311d had also, in fact, already considered new infom1ation pro,;ded by the issuer and adjusted 

our initial determination to remove one peer and add a different one in line with the company's representations. ln 

presenting the information to our clients in our report and consistent with our nonnal approach, we outlined in side·by·side 

fashion the peers selected by the issuer and the ISS·selected peers. In this particular case, there was overlap of 12 of the 16 

peer companies and the variance was not an error but rather reflocted ISS' thoughtful and independent assessment of the 

matter, precisely what our clients expect of us. 

We acknowledge that policy differences on important issues such as executive compensation, overboarding (i.e. how many 

boards an individual can serve on effectively), and whether the CEO and Chairman of the Board should be different 

individuals, can scmetimes generate tension between shareholders (and by exte.nsion iSS) and the companies in which they 

invest. However, it is the policies selected by our clients that dictate our vote recommendations 311d the application of those 

policies does not equate to our work product being erroneous or manipulative. 

l> "We understand lira/ your company and otirer proxy advisory firms hire more staff to meet the demands of prory season 

by hiring temporary workers and outsourcing a signiflcam amount of meorclt and analytirol work. " 

To help meet our clients' needs during proxy seasoo, ISS does indeed hire "temporary" employees. Temporary employees 

are subject to the same employment onboarding procedures that apply to ''permanent'' hires, including training regarding 

ISS' compliance program and subject maner training \\1th respect to the tasks and issues that will fall within an employee's 

work responsibilities. Temporary employees do not undertake work beyond their training and experience and dtese 

employees are generally focused on data collection and capture. It is also not uncommon for some "temporary" employees 

to return to ISS on a recurring basis. 

ISS does not outsourte any of its research and anal)1ical work. 

> "Wily hasn't ISS expanded fits] draft review process to indude more companies, i11 order to improve the quality of the 

reports for issuers not listed j11 tile S&P 500 index? Are youll'illing ta exp(l)rd tire draft review process 10 companies 

listed in tire S&P 1500, {sic]with a reasonable tra11sitio11 period?'' 

As you note, the shareholder proxy season is "short." The condensed schedule allects the process that advisors like ISS 

employ in producing proxy repolts and formulating 1>ote recommendations. ISS has incorporated a limited issuer review 

step for S&P 500 companies because these companies are the most 11idely held by our clients and generally have the most 

complex disclosures. ISS voluniaril)' provides mosl companies in ihis index the opportunity to review the factual accuracy 

of the data included in ISS' pending proxy analyses. Because we are commined to the accuracy and quality of our reportS, 

we consider other requests for review on a case-by-case basis. 

However, given the limited time between the hard start of receiving the proxy statemetll and the hard stop of delivering the 

repon to our clients with sufficient review time in advance of their having to make their voting decisions, expanding the 

included coverage universe would require a significant inerease in resources and a concurrent increase to our clients ofthe 

costs of our services (which, of C'OUrse, is ultimately borne by the underlying beneficial shareowners). Moreover, even if 

''As Anne Shtthan ofCaiSTERS obsM'td a11ht SEC's Proxy Adviser Round~able, "Wbat I hal'e found [is] that many limt.S tht errors 

are reallydifterenctSofopinion • Rcundtable Transcript, supra, note 2. at I 55. 

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additional resources were added, the time consuainiS remain subslantial •• we remain concerned aboln lhe value and 

feasibility of accommodating an expanded draft review process and still being able to meet the imperative of providing our 

clieniS with our researth on a timely basis. ISS does, however, work continually to enhance lhe quality of all of our 

preductlsenice offerings, and is open tO appropriate changes that are sensible, contmertially 'iable and which would 

provide additional value to our clients and other stakeholders. Expansion of the coverage unive.rse of our current draft 

review process is one potential change that ISS has considered and will continue to do so. 

All issuers. even iflheydo not ~ive a draft repon for miew, are entitled to receive a free copyof!SS' published analysis 

for their own shareholder meeting. This aftords all issuers the opponunily to bring any factual error in the repon to ISS' 

attention and as noted elsewhere in this response, we have a formal process to update previously issued repons where 

necessaJ)' and communicate those updates 10 our clients. 

l> "Do you ilm·e specific policies and procedures regordi11g providing draft report to issuers? If so. please include a copy 

of tiiOSe policies mtd proced11res. '' 

Yes. ISS' approach to the provision of draft repons to issuers (which is available on our website), is as follows: 

There is no entitlement to review our research repons prior to publication to our clients, but draft repcns are 

provided in cenain markets as a counesy and at the sole discretion of!SS, in order to allow an issuer to check the 

factual information prior to publication. For example, in the United Stales, companies in the S&P 500 index will 

generally recei'•e a draft repcn for fact-checking if they have provided contact details, and for France, the process 

is set out in our Engagement and Draft Repcn Disclosure Policy for lhe French Market. 

To ensure consideration Cillt be given to any review responses within the often tight publication deadlines for our 

repons, any comments should be sent back to ISS by e-mail, although companies are welcome to provide a hard 

copy as well. Note lhatthis is not an opponunity for the issuer to lobby for a panicular voting recommendation, 

but to check the facts that are being included in our repon. Procedures for providing draft reporiS to companies 

vary on a market-b)•·market basis, and in any case, no drafts \\ill be provided in markets or sin~ations where there 

is insufficient lime 10 do so whilst still respecting our clients' voting deadlines. 

For all markets, ISS does not normally allow pre-publication reviews of any analysis relating to any special 

meeting or any meeting where lhe agenda includes a merger or acquisition proposal, proxy fight, or any item that 

ISS, in iiS sole discretion, considers 10 be of a contentious or controversial nature. This policy is intended 10 

safeguard the independence of our process and recommendations. 

l> "When do you pro1•ide issuers draft reporls and how much times do they ha>-e to prol'ide their comments on facmol 

istues?'' 

Draft repcns are generally etnailed to company contacts in the two-to-four week period before an issuer's anm~al meeting. 

During the height of proxy season, the time frante may be closer lo two 10 three weeks before the meeiing. We will generally 

advise lhecompany contaciS beforehand when to expect the draft repon for review, and the cover lener accompanying the 

draft repon specifies lhedeadline for the issuer's comments, which typically provides the company with 2 business days 10 

provide comments. 

l> "If an issuer idemijies an error in a draft report what correcti>-e measure do you take?'' 

If an issuer identifies an error in a draft report, the maner is re\iewed by the relevant research analysts and any identified 

and agreed errors are corrected prior to the finalization of the repon and iiS delivery to our clieniS. 

With respect to final repcns that have already been published, if a material error is identified (whether by ISS, the issuer or 

an investor), or updated relevant information is publicly released by the issuer (for exan1ple, through supplemental prOX)' 

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malerial filed wilh 1he SEC), ISS promp1ly issues an aforemenlioned "Proxy Alert"lo infonn clients of any correc1ions, new 

infonnalion available and, if necessary, any changes in 1he vole recommendalions as resull oflhose correclions or upda1es. 

Alerts are dislribuled 10 ISS' cliems lhrough lhesame ProxyExchange plalfonn used 10 distribule lhe regular proxy analyses. 

This ensures 1ha11he clie.1ts who received an original ana )~is and reton101e11dations will also receive the related Alen. 

l> "Do you publicly disclose Jour guidelitte$ and melhodologies for prepori11g draft repom? If not. why not?·· 

Yes. All proprietary proxy analysis ai iSS is undenaken in acconlance with lhe publicly disclosed anal)ticalli:amewolt 

which is comprised of1he full vo1ing policy guidelines for all policies offered by ISS. The only exception to lhis is for I he 

cliem-specific cus1omized policies which are each clien1's own propriel3f)' infonnation. As described above, ISS oilers a 

wide range of proxy voting policy options, providing to our clients both a be11chmark policy focused on good governance 

principles, shareholder prolection and mitigalion of governance risk, and a wide array of specialty policies that e-•aluate 

governance and other voting issues from the perspeclive of sustainability, socially responsible investing, public pension 

funds, labor w1ions or mission and faith-based investing. To ensure the ISS proprietary voting policies take into 

consideration the changing views and needs of its institutional investor clients and the perspeclives of companies and lhe 

broader corpornte governance community, ISS gathers input each year from institutional investors, companies, and olher 

market constituents worldwide tlrrough a variety of channels and over many months. 

Case-by~ analytical frameworks, which take into account company size, financial performance and industry practices, 

also dri1•e many ofiSS' vote reoornmendations on more comple~ issues, such as those pertaining to the election of corporate 

directors, compensation matters, and capital or shareholder rights-related proposals. 

A II ISS Policy Guidelines for 2018, covering the U.S., all g)obal markets and ISS' specialty policies can be found in lhe 

"Policy Gateway'' section of our websile https:f/ll~vw.issgovemance.com policy-gateway voting-policiesl). 

Question 3 ·Conflicts of Interest 

An obligation to either eliminate, or manage and disclose, conflicts of interest is the very essence of an investment adviser's 

fiduciary duty of loyalty. The SEC most recently con finned this fact in its proposed interpretive release on investment 

adviser standards of conduct, saying: 

In seeking to meet its duty ofloyalty, an adviser must make full and fair disclosure to its clients of all material facts 

relating to the ad,•isory relalionship. In addition, an ad,•iser must seek to avoid conflicts of interest with its clients, 

and at a minimum, make full and fair disclosure of all material conflicts of interest that could aiTectthe advisory 

relationship. The disclosure should be sulliciently specific so that a client is able to decide whelher to pr0\1de 

infonned consent to the conflict of interest .... Because an adviser must serve the best interests of its clients, it has 

an obligation not to subordinate its clients' interests to its own ... Accordingly, the duty of loyalty includes a duty 

not to treat some clients favorably at the ex.pense of other clients."' 

Advisers Act Rule 206( 4)-6 applies this traditional fiduci3r)• com:eptto proxy I'Oiing by requiring an RIA who has expressly 

or implicitly assumed voting aulhority over ils clients' ponfolios to adopt wrinen policies and procedures reasonably 

designed 10 ensure lhatthe adviser monitors corporate actions and votes proxies in the clients' best interests; supplies those 

policies and procedures to clients upon request; and offers clients infOilllation about specific votes cast on their behalf. 

As an RIA, ISS takes this fiduciary duly of loyalty very seriously. ISS places primary imponance on conducting our 

business in a transparent and responsible manner, and has de,•eloped a comprehe.lSive progrnm to manage potential 

conflicts of interest as required by the A<h~sers Act and related SEC rules. In this regard, ISS has undertaken a 

comprehensive risk assessment to identify specific conflicts of interest related to its operations and has adopted 

"' lA lnterpretil•e Release,, s11pra 1101e 15, atl5·16 (citations omitted). 

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com pi iance controls reasonably d.esigned to manage those risks. Moreover and as discussed above, ISS has adopted a 

significant relationship disclosure policy and took robust steps to enhance transparency following the promulgation of 

SLB 20. At the heart of ISS' regulatory compliance program is a deliberate, carefully crafted, regularly tested and 

periodically updated series of measures designed to eliminate, or manage and disclose conflicts of interest. 

Separate and apart from our compliance protocols, ISS addresses conOicts, in part, by being a transparent, policy-based 

organization, with resean;h and voting recommendations based on publicly-disclosed infonnation available to all 

sharehold~. We provide our clients with an extensive array of infonnation to ensure that they are fully infonned of our 

policies to manage conflicts of interests, and of any po1ential conflicts and the steps ISS has taken to address them. Among 

other things, ISS supplies a comprehensive due diligence compliance package, also publicly available on our website, so 

that our clients can confidently and fully assess the reliability and objectility of our voting recommendations. 

> "Your company lias established a comulting sen1ce that charges public companies a fee to learn flow to best to 

comply witii!SS benchmark l'Otilog policies arod obtain /Ol'Orable recommendations in tile fumre. " 

To be clear, ISS Corporate Soluti-ons, Inc. ("ICS"), a wholl o()\\t~ed subsidiary ofiSS, pro\~des governance data, anal)1ics 

and services to corporate issuer clients. ICS' stated mission is help companies design and manage their corporate 

governance and executive compensation programs to align with company goals, reduce risk, and manage the needs of a 

diverse shareholder base by delivering best·in<lass data, tools, and advisory services. !CS does not and cannot provide an)' 

client "ith any assuran« as to how ISS "ill recommend with respect to the mailers that appear on any client's proxy 

statement. 

> "lfllrattypes of conflicts do you disclose a11d !tow accessible are these disc/osure[s] to your c/ie11/S wlteJI l'Oti11g 

decisio11s are being made?" 

As required by the Ad,•isetS Act's con1pliance program rule," ISS has implemented, maintains and periodically updates a 

program designed to eliminate, o~ manage and disclose, conflicts of interest. In addition to appointing a chief compliance 

officer, establishing comprehens ve compliance policies and procedures, and testing the adequacy of those policies and 

proce\lures and the effectiveness of their implementation on an ongoing basis, ISS has also adopted a comprehensive Code 

of Ethics as the Advisers Act regulatory regime also requires." ISS' Regulatory Code of Ethics is available on our public 

website at hnps11\l"w.issgorernance.comlfile/duediligenceliss-regula10r\'<ode·and<xhibits·iune-2017.odf. In addition 

to mandating disclosure regarding an RIA's Code of Ethics, the Advisers Act and related rules also dictate that we provide 

clients with transparency about oor internal operations, including how potential conflicts of interest are addressed. 

ill confonnance with our regulatory obligations, ISS has identified the following potential conflicts: 

Conflicts between ISS' institutional global research department and ICS 

Conflicts within the institutional advisory business 

Connicts arising fitlm an ana )~t s stoc.k own~hip 

Conflicts in connection with issuers' review of draft analyses 

Conflicts in connection with ISS' O\\t~ership structure 

Conflict disclosure is addressed first and foremost in the Fom1 AOV disclosure brochure that we must deliver to all clients 

at the outset of the relationship and must update periodically thereafter.

23 In addition to delivering this brochure to clients, 

ISS also includes the most recent version of the brochure in the due diligence compliance package available to the public 

"SetAdViS<rS Act Rule206(4)-7. 

" Set. Ad1isers Act Rule 204A·l. 

" Set. Adl'isers Act Rule 204·3. 

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on the ISS website. ISS cliems can also readily idemifY any potential eonDict of interest through ISS' primary client 

delivery platform, ProxyExchan~-e, which provid-es infonnation about the identity ofiCS clients, as well as the types of 

services provided to those issuers and the revenue received from them. Similarly, each proxy analysis and research report 

issued by ISS eomains a legend indicating that the subject of the anal)~is or repon may be a client of ICS. This legend 

also ad,~ses institutional clients about the way in which they can receive additional, specific details about any issuer's use 

of products and sen~ces from ICS, which can be as simple as emailing our LegaVCompliance department. 

} "Are )YIIIII'illing to disclose potenriol a11d oct11al conflicts on the from page of comptmy reports. as Gloss Lell'is does?" 

Although in our experience investment advisers typically discloseconDict-of-interest infonnation at a macro lew!, ISS does 

more. Any institutional client that wishes to learn more about the relationship, if any, between ICS and the subject of a 

particular anal)~is or report may accm this infonnation through ProxyExchange and/or through contacting ISS' 

LegaVCompliance depanment for relevam details. This proem allo"~ ISS' proxy voting clients to receive the names of 

ICS clients without revealing that infonnation to research analysts as they prepare vote recommendations and other research. 

IdentifYing an ICS relationship on the face of a proxy analysis or repon would destroy the conflict-of-interest firewalls we 

bave created in this area. While it would actually be easier for us to provide this disclosure on the repon itself, we believe 

that eliminating such a critical conflict control wou.ld not be in our clients' best interest 

l> "Do )'Our disdos11res i11clude, i11mo11etory term~ tire size of the cliem relationship ill>'oil-ed a11d do you disclose 

eo11jlicts illlolvfing] more t11a11 o11e propa11e11t or actil'e supporter of a particular shareholder proposal?" 

Yes, ISS makes available to its institulional clients the identily of ai! ICS clients, the particular produclSiservices they 

receive, and the fees paid 10 ICS. Again, this infonnation can be readily aecessed via the Proxy Exchange platfonn or by 

emailing ISS' LegaVCompliance~partment. In addilion to oblaining repon-by-repon conflicl infonnalion, lSS clients can 

obtain lists of all JCS cliems. Further, many clienls meel with ISS staff on an annual basis lodiscuss conflicts and other due 

diligence matters. 

Beyond the disclosure ~h regarding e ICS clients, the Policy Regarding DiscfoSIIre of Sigllificolll Re/otiomhips 

refemxt 10 above explains ISS' approach for disclosing olher types of potential conflicts, including those thai mighl arise with 

respect 10 a proponent or aclive supporter of a paniculat shareholder resolution. 

l> ''Does ISS allow hedge fund c/iemsto purchase Special Silllations Reseorch or other services at the same time that 

ISS is recommending/or or against a pe11ding merger, bii)Y/111, or proxy fight iu which the hedge ju11d hos au imerest?" 

Yes. 

l> "Please pro>·ide a record of each instance of proxy voting advice that )'Our company or Oil)' regulatory body hilS 

determi11ed constituted or may hm·e eo11sti111ted a coujlict ofimerest o•'er the /ast/0 years, and all related documents 

and communication. lfno such record is moimained, please erploin why. • 

ISS is n01 aware of any inslance in which a proxy research report or a vote recommendalion was compromised by a conflict 

of inlerest, nor any instance where a regulatory body has reached that conclusion. As discussed at length above, ISS has 

worked hard to identifY potential conflicts of interest and taken concrete steps to m:mage and mitigate those potential 

conflicts so that they do not impacl the efficacy or integrily of our research and recommendations. We are heartened by the 

fact that the most vocal critics of ISS on this point are !hose who speak on behalf of CO!pOI'ate managemenl,and not the investors 

who rely on ISS' research and vote recommendation~ We see this as a strong indication that we are managing this potential 

conflict extremely well. 

l> "Please provide a list of all outside entities from whom you obtain ill/ormation referring or relating to )Ollr proxy 

>'Oting tuMce, and de1criptions of any e•-oluotions that ore performed to ensure such information is accurate and that 

The Global leader In C<Kpo<ate Governance 
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ISS lns1itutiooal Sllaroholde< SO<Vi<esill<. 

l!nA,...,.oiAmerica<,:!*Fioor 

N~N Vori<. NY 10036 

T: +1.&46.~3001~ +1.640.417.60'!0 

tire information pro••ider does 110t lm•·e a cortjlict of imerestwith tire company witlr respect to ll'lriclr tire information is 

being provided. •· 

As explained above, ISS' approach is to use and rely only upon publicly available infonnation in the preparation of our 

proxy research reportS and \'Ole recommendations. The primary source of lhat information is the public filings of lhe 

companies that we cover, meaning, for U.S. companies, the proxy statement and other reponing materials that companies 

are required to file with lhe SEC. supplemented by press releases, information from a company's website and other generally 

aecessible infonnation. ISS also uses a small number ofthird·pany vendo~ to provide standardiled financial information 

and securities identifiers. ISS submits that this approach fully complies with our fiduciary duty of care described above. 

> "We ore interested inll'lrether you disclose Mo other types of COitj/ict of interest. The first of rhese /ll'o corif/icts 

inl'oi•-es cross-oll'nership, where owners or execmives of your firm may ha•oe a siguificam o•merslrip imeresr in, or 

smoe on the board of direcrors of emities that hal'e proposals on which the firm is qffering \"Ole recommendorions. 

Tire second COitj/ict ilwo/1-es orlrer finmrcial inreresrs by J"Ollr owner, Genslar Capiro/. " 

> "Are J"OII disclosing rhese fiwtcia/ or b11siuess re/atiouships when tlrey ini'OI••e or include a proponem or an acti>-e 

supporrer of marrers in which you are making •-oriug recommendarions?" 

ISS' executives, like all of our employees, are required to disclose to ISS and ISS will, in tum, disclose to our clients any 

significant (or material) 0\\1lrnhip interest that an executive might have with reo.,anlto a contpany on which we are 

providing proxy research covernge." ISS' executives are not permitted to sit on the Board ofDirectors of a public company 

except in extremely limited circumstances and only with the approval of ISS' General Counsel and the company's senior 

management. No such exceptions are currently in efi"ect and so no ISS employee currently serves as a director of a public 

company. 

ISS is a pri\'lltel)•·held company, whose ultimate owner is affiliated \lith Genstar Capital, a private equity finn. ISS has 

adopted a Policy on Potential Conflicts of Interest Related to Genstar Capita.land its affiliated funds (the "Genstar 

Policy''). Among other things, the Genstar Policy pro,ides that Genstar persons (defined as Genstar 

directors and certain others) may not participate in the fonnulation, development and application of ISS voting policies, 

and will not have access to any data relating to the ponfolio, investment strntegy or securities holdings of ISS clients. In 

addition, as a private equity finn that 0\1115 or contrOls a number of operating companies, some of 

which may become publicly tr.!ded, and may thereafter be the subject to ISS research, we recognize that actual or 

potential conflicts of interest, or the appearance of conflicts, could arise in the production by ISS of research with respect 

to coverage of Sllch a Genstar company (what we refer to as a "Genstar Aftiliated Company"). ISS therefore provides 

disclosure of these relationships on its website, and includes information about any such relationship in the research repon 

for any issuer that happens to be a Genstar Aftiliated Company. Currently, there are no Genstar Affiliated Companies. 

Pertinent !Agislatioo before the Senate Banking Comm.ittee 

finally, we want to reiterate our strong view that both of the pertinent legislative proposals before the Senate Banking 

Committee - H.R. 4015, "The Corporate Govemaoce Reform and Transparency Act," and Subtitle Q of Title IV under 

H.R.IO, "The Financial CHOICE Act" (FCA)- are misguided attempts to improve corporate governance. Each of these 

proposals would only deepen yo'UI ooncems about industry oompetition and conflicts of interest. Each proposal would 

eliminate a proxy adviser's existing fiduciary duties of care and loyalty to investors, the owners of the companies in which 

they invest, and would infuse a proxy adviser's operations with a new issuer-related conflict of interest that would be 

"Note that the ISS Regulatory Code ofEthics requirtsall emplO)'ees to provide the ISS compliance dep<trtrnent 11ith acwu111 Slatemtnts 

for all securities iD\'eSimtnt accounts for the employees and members of their immediate familie<. Certain 1ypes of trades mus1 be pre· 

cltan.'ll and ISS imposes black-out :perieds on trading of issuers 11hose proxies are currently bei.ng analyzed or acted upon by the 

comp311y. This black-out period extends from the time ISS logs receipt of the subject proxy into the Global Research database of 

meetings, until one day after the shareholders' meeting being C<l\'ertd. 

The Global leader In C<Kpor ate Governance 
199 

ISS lns1itutiooal Sllaroholde< SO<Vi<esill<. 

l!nA,...,.oiAmerica<,:!*Fioor 

N~N Vori<. NY 10036 

T: +1.&46.~3001~ +1.640.417.60'!0 

difficuh to manage effectively. In this way, either bill, if enacted,. would hann every shareholder who relies on independent 

research to make informed investment decisions. 

Shareholdm should have the right to choose the tools, services and information they need to make infomted proxy voting 

decisions- without it being fihered through the management of the corpor.uion in qu~ion. This is a fundamental tenet of 

corporate governance and it i.s why this bill is opposed by a number of large public se<:tor pension fund managers, as well 

as many other institutional investors, including the Cll, NCPERS, AFL-CIO, AFSCME and Teamstm to name a few. 

The proposed new regulatory regime under both bills will do nothing to enhance competition in the industry. Indeed, it may 

actually erect barriers to entry and make it more difficuh for smaller industry participants to compete. The proposed 

regulatory regime is unnecessary, burdensome and would do nothing to enhance market competition or create mlllket 

conditions conducive to new proX)' ad\osors entering the market. Cll wrote in its most recent opposition letter that the 

proposed regulatory regime would "increase barriers [emphasis supplied] to new entrants and potentially lead some current 

proxy advisory fimts 10 exit the industry ahogether.•ll 

The National Conference on Public Employee Retirement Systems (NCPERS), the arg~ national, nonprofit public pension 

advocate whose members manage more than S3 tri Ilion in pension assets, warned that the suggested regime proposes to 

"bypass free-mlllket principles by authorizing tbe SEC to pre-quality industry entrants based on a set of vague and highly 

subjective standards.",. Soch authority would likely provide the SEC - under this and future Administrations - with broad 

discretion to establish criteria to funher restrict, not enhance, competition. 

The litmus test for any federal intrusion into the free market is whether it targets a proven problem and seeks to address it 

cost-effectively. The proposed bill does not pass either test. As the foregoing discussion demonstrates, the investors who 

use proxy adviSOI)' services do n01 see the "problenl" the proposed legislation purports to address. Furtbennore, the bill's 

backm fail to provide any cost·l>enefit analysis 10 support the idea of supplanting a comprehensive and mature regulatory 

regime with a brand new scheme that will require several years of new SEC rulemaking only tO end up with something 

that favors entrenched corporate interests over shareholders, freedom of choice, freedom of expression and free-market 

capitalism. 

ln conclusion, ISS appreciates the opportunity to answer your questions and underscore the rigorous regulatory S)~tem and 

internal compliance progrant und:er which we operate. If there is any additional information I can provide, please do not 

hesitate to contact me. 

Sincerely, 

Gary Retelny, President and CEO 

InStitutional Shareholder Services Inc. 

" Letter from the Cll to Sen. Micha.-1 Crapn, Chair of the SenateCommineeon Banking, Hoosingand Urban AlTai,; and Sm. 

Sherrod Bro11n, Ranking Member of the Sell3te Cootmittee on Banking, Housing and Urban AlTai" (february 28, 2018) at 2. 

" Letter from NCPERS to Sen. Michael Crapo. Chair of the Senate Comminee on Banking. Housing and Urban Affairs and Sen. 

Sherrod Bro•n, Ranking Member of the Senate Committee on 83nking, Housing and Urban Afiairs (february 16. 2018) at2. 

The Global leader In C<Kpo<ate Governance 
200 

71511018 SfG.Qcw I SEC Expands lhe Soope of Smale< Public Comparies lllat Quai1y for Scaled llisdos<Kes 

Press Release 

SEC Expands the Scope of Smaller Public 

Companies that Qualify for Scaled Disclosures 

FOR IMMEDIATE RELEASE 

2018-116 

Washington D.C., June 28, 2018- The Securities and Excllange Commission today voted to adopt amendments 

to lhe 'smallef reporting com,pany' (SRC) definition to expand lhe number of companies that qualify for <:Main 

existing scaled disclosure aooommodations. 

~ want our public capi1al martels to be a place whele smaller companies can Ill rive and thereby provide our Main 

Street inveslors willl r1t01e access to invesUng options whele oor pubi"IC company disclosure rules and protectiorls 

apply; said SEC Cllairman Jay Clayton. 'E.<panding the smaller rej)Ofting company definition recognizes thai a 

one size regulatory structure for pubi"IC companies does not fit an. These amendments to the existing SRC 

complianoe structure bring thai structure more in line wilh the size and scope of smaller companies while 

maintaining our long-standing approach to investor protectiorl in our public capi1al mal1<ets. Both smaller 

companies-where the option to join oor public marl<ets will be more attractive - and Main Slreet inveslors -

who will have r1t01e inveslmeflt options -should benefit" 

The new smaller rej)Ofting company defirition enables a company wilh less than $250 mi lion of public float to 

provide scaled disclosures, as compared to the S75 mi ~on lllreshold under the prior definition. The final rules also 

expand the definition to inctu<:e companies with less than $100 milion in annual revenues ff they also have eltihel 

no public float or a public float that is less than $700 million. This reflects a change from the revenue test in the 

prior definition, which allowed companies to provide scaled d"osclo&Jre only ff they had no public float and less than 

S50 mil ion in annual revenues. The rules will become effective 60 days after publication in llle Federal Registef. 

The amendments do not change the threshold in the 'aooeleraled filer definition lhat requires, among otihel things, 

that filers provide the aud~or·s attestation ol management's assessment of internal control over financial reporting. 

However, Chainnan Clayton ihas directed the slaff, and the staff has begun, to fonnulate recommendations to the 

Commission for possible additional changes to the 'aooeleraled filet definition to reduce the number ol companies 

that qualify as acteletated filers in order to further reduce complianoe costs lor !hose companies. 

Background 

FACT SHEET 

Amendments to the 

Smaller Reporting Company Definition 

SEC Open Meeting 

June 28, 2018 

Today the Commission approved amendments to ra~ the thresholds in the smaller reporting company definition, 

tiheleby expanding the number ol smaller companies eligible to comply with oor oment scaled disclosure 

requirements. These amend"ments are intended to promote capi1al formation and reduce compliance cosls lor 

smaller companies wh~e maintaining appropriate investor jllotectiorls. 

1r4 
201 

7/l/1018 SfG.Qcw I SEC Expands lhe Soope of Smale< Public Comparies lllat Quai1y for Scaled llisdos<Kes 

The Commissioll established the smalle< reportillg company rsRC') C<tegory of companies in 2008 in an effort to 

provide general regulatcxy relief for smaller companies. SRCs may provide scaled disclosures under Regulation 

S.K and Regulation S.X. Under the previous delinilion, SRCs generally were companies with less than S75 lion 

in public ~oal. Companies with no public float - because they have no public equity outstanding or no market 

price for their pubriC equity - were considered SRCs H they had less than S50 milroon in annual revenues. 

Amendments to the Smaller Reporting C<>mpany Definition 

Under the amendments, companies with a public float of less than S250 million wiD qualify as SRCs. A company 

with no pubrte ~oat or with a public ftoat of less than S700 mmion will qualify as a SRC ff ij had annual revenues of 

less than $100 million during ijs most recenlly completed fiscal year. 

The following table summarizes the amendments to the SRC definition. 

Criteria Previous SRC Definition )Revised SRC Oefinition 

Public Float 

Public float of less than $75 milion 

Public float of less than $250 million 

Revenues 

Less than S50 milion of ual tevetMJOS and no public float 

Less than $100 milion of annual revenues and 

• no pubic floa' or 

• public float of less than $700 million 

Consistent with the previous definition, unde< the ame<ICments, a company that determines that n does not quafily 

as a SRC under the above thresholds will remain unqualified until ~ dete<mines that it meets one or mo<e lower 

qualffiC<Iion thresholds. The subsequent qualilication tluesholds, set forth in the table below, are set at 80% of the 

initial quaJilication thresholds. 

Criteria ,Previous SRC Definition 

Revised SRC Oefinition 

214 
202 

71511018 SfG.Qcw I SEC Expands lhe Soope of Smale< Public Comparies lllat Quai1y for Scaled llisdos<Kes 

Revised SRC Definition -J 

Public Float 

Public float of less than S50 milion 

Public float of less than $100 millioo, ~ ~ pre'liously had $25() nillion 01' more of public float 

Revenues 

Less than $40 milon of al reveooes and no public float 

Less than S80 milon of ual reveooes, ~ ~ previously had SIOO nillion 01' more of annual reveoues; 

and 

Less than S560 milion of public 1\oal ~ ~ pre'liously had $700 million 01' more ol puljc float 

Commission staff estimates Ulat 966 ad<frlional companies will be eligible for SRC starus in the first year under the 

new definition. These illdude: 779 companies with a public ftoal of $75 million or more and less than $250 lion; 

161 companies with a public float or $250 lion or more and less than $700 million and revenues of less than 

S1 00 mil i on; and 26 companies with no public float and revenues of S50 million or more and less than $100 

million. 

Amendments to Rule 3.05 of Regulation S-X 

The amendments to Rule 3-05(bX2Xiv) of ReglAation S-X increase the net revenue lhteshold in that rule from S50 

million to $100 minion. As a result, companies may omit finaooal statements of businesses acquired or to be 

acquired for the eartiest of the three fiscal years otherwise required by Rule 3-05 f the net revenues of that 

business are less than $100 million. 

Amendments to the Accel&rated Filer and large Accelerated Filer Definitions 

The final amendments preserve the application of the current thresholds oontailled in the 'aoceterated filer" and 

'large aooelerated filer" definitions in ExChange N:J. Rule 121>-2. As a resul~ companies with $75 minion or more of 

public float that qualify as SRCs win remain subjed to the requirements that apply to aooelerated file<S, illduding 

the timing of the fiting of periodic reports and the requirement that aocelerated filers pmvide the aud~OI'·s 

attestation of management's assessment of mtemal oon~ol &-~e~ financial reporting r~u red by section 404(b) of 

the Sarbanes-Oxley N:J. of2002. However, the Cllairmal1 has directed the staff, and the staff has begun, to 

formulate recommendaliors to the Commission for possible additional changes to the 'aooeleraled filer" delinition 

tha~ f adopted, would have the effect or reducing the number of OOI'npanies that qualify as aooelerated filers in 

order to promote capital fOI'mation by reducing compliance oosts for those companies, while maintaining 

appropriate investor proledions. 

Related Materials 

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203 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON. D.C. 20549 

The llonorablc Carolyn Maloney 

Ranking Member 

October 5, 2017 

Subcommiuce on Capilal Markets, Securities. and Investment 

Commiuce on Financial Services 

U.S. House of Representatives 

2129 Rayburn House Oflice Building 

Washington. DC 20515 

Dear Ranking Member Maloney: 

Thank you for your lcucr dated September 14.2017 concerning the market cOects to the 

regulation of money marketlimds (""MMFs"") that the Commission adopted in 2014 and which 

were li1lly implemented in October of last year. I appreciate your interest in this issue and share • 

your goal of preserving liquidity in the shon-tenn funding markets and minimizing disruptions to 

investors, markets. and market panicipants. 

The Commission. in the 2014 release adopting the rcfonns. indicated that the impetus 

behind the reforms was a concern that MMFs, as they existed then, could pose risks to investors 

and the broader markets. panicularly to the extent their features may have created a lirst-mover 

advantage that inecnlivizcd investor runs during periods of market stress. The Commission's 

adopting release further noted the hann that can result from rapid investor redemptions during 

periods of market stress. as the Reserve Fund's Primary Fund ··broke the buck"' and other prime 

institutionallimds experienced heavy redemptions- which in tum caused fund managers to 

retain cash. thereby free-ling short-tcnn financing markets. Ultimately. as the 2014 release 

describes. the Department of the Treasury intervened with ils Temporary Guaranlec Programextraordinary measures that helped quictlhc market disruptions. Treasury was subsequently 

prohibited by statute from undcnaking such measures in the future, thereby creating the nt'Cd tor 

structural refom1s to the markets to prevenl such disruptions going forward. 

Accordingly, the 2014 refonns included cenain structural rcfom1s de.1igncd 10 mitigate 

run risk in MMFs. These included a floating NAV for all institutional prime (e.g .. nongol·emmcnt and retail) MMFs designed to address potential first-mover advantages. The refom1s 

also pro1•idc non-government MMF boards new tools -liquidity fees and redemption gateswhich are designed to help MMFs beuer manage any potential investor run should one occur. 

The staO"havc been closely monitoring the implementation of the 2014 rcfonns and 

reviewing their impact on MMFs and the shon-tenn funding markets. Based on their review and 

analysis. lhc staO'have shared the following observations. 
204 

The Honorable Carolyn Maloney 

Page2 

• As MMFs were implementing the 2014 reforms, there was a shift in assets of 

approximately $1.1 trillion from prime MMFs into government MMFs. Despite this 

reallocation, overall MMF assets remained largely stable (at about $3 trillion) 

throughout this period and to date. 

• During this period, some short-term rates increased, though these rate increases have 

since dissipated. The reallocation of assets from prime to government MMFs and 

potential effects on yields in the short-run were possible consequences of the reforms 

that were anticipated and discussed in the rule's 2014 adopting release. At that time, 

the Commission determined, however, that realizing the goals of the rulemaking 

justified the reforms, despite the potential costs. 

• Since the October 2016 compliance date for the reforms, investor fund reallocations 

have not significantly changed, with assets in both government and prime MMFs 

largely stabilizing. The time period since the compliance date of the reforms has also 

coincided with a rising interest rate environment, with the Federal Reserve raising 

short-term interest rates several times over the last year. This has resulted in yield 

increases for MMFs. 

The staff have further informed me that, as the reforms went into effect, many fund 

managers chose to realign their fund offerings and close certain funds, many of whose assets had 

been shrinking during tlle extended low interest rate environment. These changes have led to 

some reductions in investment in prime and municipal MMFs, particularly when combined with 

the reallocation of assets from prime to government funds that I mentioned above. To the extent 

that MMFs experiencin.g outflows invested more heavily in certain types of assets than the 

MMFs receiving inflows during this period, those types of assets could be experiencing 

decreased demand from MMFs. Some market participants and corporate and municipal issuers 

suggest that this decrease in demand for commercial paper and short-term municipal securities 

from MMFs and related increase in demand for government securities from MMFs is one of the 

primary impacts of the 2014 reforms on the short-term funding market. 

I appreciate your question regarding the SEC potentially reversing the floating NAV 

element of the 2014 reforms. It is difficult at this time, however, to predict what the impact on 

prime and municipal funds would be if the Commission were to permit them again to use a stable 

SI.OO NAV. While some investors might choose to leave government MMFs and return to prime 

and municipal funds, such a shift also might not occur if investors newly appreciate prime and 

municipal MMFs' inherent liquidity and principal stability risks and therefore choose to remain 

in government MMFs. The MMF reforms were not fully implemented until October 2016, and I 

am concerned that making major changes at this time could be disruptive to the short-term 

funding markets. The Commission and its staff are monitoring the short-term funding markets 

and MMFs' activities generally, and \viii remain focused on the role MMFs play for investors 

and the short-term markets. 

Thank you again for your letter and for your attention to this important matter in our 

capital markets. Should you wish to discuss these issues further, please do not hesitate to contact 
205 

The Honorable Carolyn Maloney 

Page 3 

me at (202) 551-2100 or have your stan· contact Bryan Wood. Director of the Onice of 

Legislative and lnterg()vemmental Aflairs. at (202) 551-2010. 

Sincerely. 
206 

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FAIR GAME 

Sarbanes-Oxley, Bemoaned as 

a Burden, Is an Investor~ Ally 

By Gretchen Morgenson 

Sepl. 8, 2017 

Seismic accounting scandals like the ones that sank Enron and WorldCom in the early 

2000s have, happily, been scarce in recent years. But they may well resurface if elements 

of the Sarbanes-Oxley Act, the law created to curtail accounting fraud, are rolled back as 

some corporate executives are urging. 

Tom Farley, president of the NYSE Group, which operates the New York Stock Exchange, 

is among those leading the charge. In congressional testimony in July, he criticized the 

law's provision requiring auditors of publicly held companies to report on and attest to 

management's assessment of internal controls on financial reporting. The requirement is 

costly and burdensome to companies, Mr. Farley said, and helps to explain why the 

number of public corporations in the United States is declining. 

He urged lawmakers to review the requirement because markets had evolved since it 

became law. 

Mr. Farley's comments notwithstanding, it seems smart to have an outside auditor check 

on management's oversight of financial reporting. If a company does not have solid 

controls in place, how can investors trust its financial reports? 

But investors do not seem to be a concern for Mr. Farley, who was speaking about the law 

(known as SOX) as an advocate for the big companies that list their shares on the New 

York Stock Exchange. "Designing, implementing and maintaining complex systems 

required to satisfy SOX's internal controls over financial reporting requirements can 

command millions of dollars in outside consultant, legal and auditing fees, in addition to 

other internal costs," he said. 

715!2018. 12:54 PM 
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Through a spokesman, Mr. Far~d~ijn._ed iWl rQq~st to expand on his views in an . . ~ge~'CWi!OfK~llllC5 mtel'VIew. 

Since 1977, companies have been required by law to have effective internal controls over 

their financial reporting. But many failed to comply, as the subsequent accounting frauds 

and numerous financial restatements showed. That is why Congress decided in 2002, as 

part of Sarbanes-Oxley, to make auditors attest to corporate controls on financial 

reporting. 

Lynn E. Thrner, a former chief accountant of the Securities and Exchange Commission 

and a trustee of the Colorado Public Employees' Retirement Association, said he knew 

well that many companies hate having auditors assess their internal controls. But the 

regulation has done a lot to prevent devastating accounting frauds, he said. 

"Corporate frauds like Enron, WorldCom and 'JYco cost investors hundreds of billions of 

dollars and the NYSE and Nasdaq trillions of dollars in lost market capitalization;' Mr. 

Thrner said. ''And they were a worldwide embarrassment to the United States." 

Critics of the provision on financial reporting contend that it has not prevented 

accounting fraud, but a new academic study shows otherwise. 

The analysis concludes that the external auditor requirement on corporate financial 

reporting is a highly effective warning system for corporate fraud. The study was 

recently published in Auditing: A Journal of Practice & Theory, a journal from the 

American Accounting Association. 

Its authors are Matthew S. Ege, an assistant professor of accounting of Texas A&M 

University, and Dain C. Donelson and John M. Mcinnis, both of the University of Texas at 

Austin. They say their work is the first to link weak internal controls on financial 

reporting with a higher risk of undisclosed accounting fraud at public companies. And 

proof of this link is an important consideration when weighing the costs and benefits of 

Sarbanes-Oxley. 

The academics collected auditors' opinions on internal controls at companies with more 

than $75 million in publicly held stock - about 3,500 companies per year - from 2004 

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through 2007. They searched f~o~v)th~at~i~weaknesses. Then they compared 

h . find. . h f fi u ew · or mtes . t e1r mgs wit reports o na c1ill rau S. . . and Justice Department 

enforcement actions from 2005 through 2010 as well as settled securities class-action 

lawsuits during the period. 

The exercise identified roughly 1,500 reports of material weakness at companies. And 

within three years, 127 of those companies faced legal actions that revealed fraud, the 

study said. 

That's not a big number. But here's where the study gets compelling. Auditors had 

identified material weaknesses in financial reporting at about 30 percent of the 

companies that later disclosed accounting problems. Chief executives were named in Ill 

of the 127 fraud cases, and chief financial officers were identified in 108 of the cases. 

"Over all, we believe this link should be of interest to regulators and the general public:' 

Mr. Ege said in an interview. "We need to ensure that entity-level weaknesses are being 

reported and not withheld." 

Here's another reason to keep the financial reporting audit requirement: Research 

indicates that companies with weak financial reporting controls significantly 

underperform those with stronger setups. A 2007 study by Glass, Lewis & Company, for 

example, found that companies disclosing material weaknesses in their financial 

reporting during each of the prior three years were conspicuous market laggards. 

Although critics of Sarbanes-Oxley prefer to focus on its vexing costs, an analysis in May 

by Ernst & Young, a big accounting firm, highlighted the law's benefits. They include a 

"decreased severity of financial restatements and increased investor confidence:· the 

firm said. 

Arguments like those raised by Mr. Farley of the NYSE Group and other corporate chiefs 

about accounting rules are nothing new, Mr. Thrner said. During his years as the S.E.C.'s 

chief accountant, from 1998 to 2001, officials from the New York Stock Exchange would 

regularly request exemptions from reporting rules, he said. "I never once agreed to what 

they were asking for," Mr. Thrner recalled. 

715!2018. 12:54 PM 
209 

Sarbanes-Oxley. Bemoaned as a Burd<n, Is an lnl'estor's Ally-The Ne... ttps1~ w. yt mescomll017/09 08Jbus ess/sarbanes estors ... 

4of4 

Clearly, investors will be hurt ~mo~~iftt{lr~· ~of Sarbanes-Oxley is watered ~ u.'e\U ' r \!itmes down. Which raises a question, ac or'dmg t r. rner: Why should a public company be 

able to raise money from investors if it can't generate accurate reports for them? 

Twitter: @gmorgenson 

A~ th~article appe<llsin print on Sept. 10. 2017,on ~e BUI of the NewYO<I<e<J"otionwith the headline: Oversig!lt Law Under At!llci<Aids 

lm'eSI:ors 

715!2018. 12:54 PM 
210 

" The MMF reforms 

were not fully 

implemented unUI 

October 2016, and I 

am concerned that 

making major changes 

a/ this time could be 

cfiSIIIplive to the shorl· 

term funding marl<ets." 

-Hon.J¥t0ay'.oo.~ 

Seadiesam 

Extbange Coolmissm 

O:t5.W7 

BLACKROcK· 

US Money Market Fund Reform: 

Assessing the Impact 

In 2014. refoans for US money mart<et funds (t.IMFs) were adoj>ted to address 

problems lila I surtaced during the 2008 financial crisis (2008 Crisis). 

1 The reforms 

resu~ed hom yeass of ~bata ltlat included conSideration of many refonn oplions. 

Among the final refonns was a requilementlhat ~tut>onal pnme and municipal 

MMFs convert to floa1Jng ne1a~t ~;~!Ue (fHAV) funds hom ccnmnt ne1 asset value 

(CNAV). In general. lhls led to net outllo-~ &om U~S~~MlOnal pnme and Rlln.opal 

W.tFs. Though. recenlly. we have obseMd renewed O\lt1tSt., bolh pnme and 

Rllf1IO'pal stra:eg:es, a:t>e.tata measured pace sugge$llg the dedlne WI these 

stra:tgies may not be permanent. 

Some have ca!led lor a rei bad< ollhe MMF te'.onns due to ooncems about nsing 

botrcrMing costs lor lllnCipal1$$ut!$ In conlta$1. an Oclobel20171ettef wn1ten by 

Seorie$and EJdlangt ~(SEC) Chalnnan. J¥y Clayton. sta:ed; 1 am 

eoncemed ltlat mal<.ng map ella¥ aiiM lome oould be clistupliYt to the shot!· 

tern> fundlng mar1<ets.., In OUt W!ll, c:cnc:MtYe data<lmen analysiS should precede 

policy action. To data, analysesollhe '"l)a(tolt.IMF refonn on bonvt.'Wigc:oslS are. 

a1 besllllOOIIClJslve. Notably. MMF re!otms were intbaled dunng a penocl of 

historicaDy low in:erest rates (and hence. hiStoncally low -ng cos!s)ltlat was 

followed by se•-eral in:erest rate weaset by the federal ReseM and US tax reform. 

~ is.therefote, not SliJ)risong ltlat botrOW1ng costs for all issue<s have 1ncteased along 

with the Federal ReseM rate hikes. inespedrie of t.IMF reform. 

Over a year and a half aftet implementation, the m~ and effediveness of MMF 

reform should be revielwd. As the primary tegulator of MMFs, the SEC is best placed 

to perform this analysis. We do not believe a roll back of the roles is a®sable lrithout 

first studying the effects of MMF reforms and the implications of any potential changes. 

In tliis ViewPoint ... 

t.IMF reforms were adopted to address strudutal weaknesses that led to 

government support for money mart<ets "2008. 

EffOf!s to rol bad< reforms must earefuDy consider the reasons v.lly these 

roles were implemented in the first place 

Arguments thai MMF refonn IS illl~ng h,gllel botrO\\illg (()$!$ lor mu~ 

fail to tuay oonSidet the nsong llltttest rata en~1011ment 1n whicll MMF refonn 

was ~_,ted. as onterest ratas are a pnmaty dnvet of bonvt.ing costs 

WI* lhere 1S e'ildence ol a lemj)OIJty matl<et di$1ocabon die to MMF reform. 

ille da'.a suppottong longet .fetm 1mpac:\S IS onc>ondusl\'t 

The sec sllooAd condUct a study ollhe e~e<l$ or M\lf refonn be!ole 

de:emiMg ~ tUie ella¥ ate nec:essaty or appropna'.e 

We do not beieYe a rei back ollhe nAes IS~ w.t!lotalitSI ~the 

eltecls o1 Ml.lf re!otms and lhe "'lliallonS o1 any poCentl3t ella¥ 
211 

Key Observations and Recommendations 

MMFs experienced challengM durir1glhe 2008 Crisis that led to calls for reform. 

• The'b<eal<ir9olthebud<'bythe Resem PrimaryFood resuttedinhistoricoutllows auosstheMMF industry. 

• Government intervention hel,ped calm investOfS and stat>l~e outflows. 

• SubsequenHy, MMFs became a priority issue for post .Crisis reform. 

The Securities and Exchange Commission (SEC) adopted refonms for US MMFs in 2010to require more 

conservative portfolio construction, followed by structural reforms in 2014. 

• Among the 20t4 reforms was a requirement that instiMional prime and municipal MMFs adopt a floating NAV. 

• The final compliance date for the sii\Jctural reforms was October 2016. 

The extensive refonms to MMFs warrant revitw to fully understand the impacts on financial stability, short4erm 

fundif19 markets, issuers, and MMF investors. 

• We recommend that the SEC condua lhisstudy, as the SEC is the primary regulatoroiMMFs and their sponsO<S, as 

weB as us capital marf<ets. 

• Based on this analysis, policy makers can determine any addroonal modfficalions to rules for US MMFs are wananted. 

• We do not befieve a roB back of the rules is advisable without fitst s1udyif9the effeds of MMF reforms and the 

implications of any potential d1anges. 

Short·term fundir19 markets are complex; borrowing costs reflec:t numerous factors. 

• Monetary poky. issuer «edit qualily.tax reform, and supply and demand are st a few of the faders that need to 

be consiOOred. 

• Claims that MMF reform has causedriSif9 bonowi<19 costs for municipal issue.s do not fully consider all ~vant fadO!S. 

• OlljettiYe analyses of bonowilg costs must con~ol for the fad that MMF reform coincided vdlh a rising interest rate 

enWoomeot. 

• Followif19 seWl years of near wo short-term rates. the Federal Open Marl<et Coovnittee (FOMC) raised the Fed Funds 

target rate six times between December 2015 and May 2018.1n add'rtion, on June 14, 2()t8, the FOMC announced an 

addroonalrate hille. 

MMF Reform: How D1d We Get Here? 

Although MMFs had e~sled for several decades prior to 

2008, the 2008Crisis exposed s.tructuralweaknessesin 

MMFs. Specifically. the "breakil\9 of the bOO<' by the 

Resem Primary Fund, a MMF that hekl sub<lantial 

amounts of lehman Brothers' oornmetcial paper in 

September 2008, led to historic net outllows aCIOSS the MMF 

industry, asillusttatedin ExiOOit I. To stat>lizeMMFs, the 

Federal Reserve and the US Treosury Department inmated 

several programs to help stabilize the MMF mall<et' For 

e>ample, on SeJ)lember 19. 2003, the US Treasury 

Department aMOUnoed the Temporary Guarantee Program 

for Money Mall<ets funds, which temporarily po-olected MMF 

shatehoklers from tosses.• 

Giverllhis unpo-eoedented govemment intervention into 

money marf<ets. ~is not $lWplisiJ1g thai policy makeiS sought 

to implement reforms to avoid such a scenario in the future. 

While one can debate the necessityol some aspeds of the 

US MMF reforms, the reality is !hal the SEC approved these 

ru!e chaf9es after several years. of debate and data -<I riven 

ana~ Importantly, fund spoosors were given time to 

implement chaf9es, and marf<et participants have largely 

ada pled. 

Exhibit 1: Assets in 2a-7 MMFs 

21)()6.2018 

$4,000 

• 

~ Sl.o:» 

; $2.500 

! 

:$2.()00 

~ 

$1,500 

Scute: iMoneytlel. As d~lay 3t, 20 ~ 

GROI ti0.ll~9·BOSIOCI 
212 

Exhibit 2: Selected Eleme:nts of Current SEC Regulations for MMFs 

IMtfMional Prime FIOaling Upto2'!. Up to 10 t:uWss days 

lns!Monal M~I TaxEi<empo FIOaling Upto2'!. Up to 10 t:uWss days 

lnstiuliooai/R<lal ~ent Slable Nooe' Nooe' 

Retai Prime Slable Uplo2'!. Up lo 10 t:uWss days 

Relai Mooicipal/ Tax Ei<empo Slable Uplo2'!. Up to 10 t:uWss days 

Sww:S<C. ~ MllfsareJlE'Ili!ledllul nc(requied loiqlose re<!Eo¢>nilUi<ltYfeesaoo reslli:OOos. 

G...,llox~lllsr•!Nreqo........,lhall>allnotbeoo il placep<i:J<Iolhe2014reblro. 

k; sho..,, in EXhiM 2. among the struclural reforms adopted 

in the 2014 reforms was a requirement for instillJfional prime 

and municipal MMFs to convert to FNAV. meaning they are 

no longer perm~ed to use amortized cost accounting to 

round the NAV to a stable $1.00 per share prioe. The 

reforms also require both retail and instiMional prime and 

municipal MMFs to have the abirrty to implement a 

redemption liquidity fee and redempfion gales during times 

of stress. 

The final SEC reforms folk>lved several years of vigorous 

debate about the way forward foJ MMfs. vm~ ind!Kfed the 

consideration of many aHemaliYe sohrtions. EXhiM 3 

provides a timeline of MMF reform diswssions ~om the 

2008 Crisis until July 2014 when the reforms we1e finalized 

by the SEC. During this period, many MMF investors were 

challenged by the tacl< of oe~ainty around the Mure of 

Exhibit 3: Major Reform Milestones 

Oa'e '·' es·~ 

Sop'08 R....,.. PIWn3l'J Fl.Wld 'trol<.ethe bock' 

S€C ado!>'ed c:e<lail R>*o 2a·7 amendments Feb1

10 ngthe .. ity¢theportf~~: 

effectiYeMay2010 

Mar'1t sec proposed nAes to eimmte ce<1aio 

re~ecences 10 credit ~aSngs in MMF forms 

Sep'12 Tro=rySeaelafyGeilllner lelle< ur¢19 SEC 

alld~ltjtore.-take~~olrt!O/Il\ 

Nov'12 FSOC" release-s r>eform ptoposal 104' convnenl 

Jun'13 SECreleasesprosl0$31 irlduol'llgoca·-IO 

FNAV f0< prime ins~uliooal MMFs 

Mar'14 SECissues4""""""SW..regatdilg 

MMF~solicaspulikCOIMlefll 

Jul '14 SeC finalizes MMF relorm~ effective ~Obe< 

2016 

Sww:~oci<. 

'FSOCsm:!sfafilalciaiSt.a!:iityC.'EcijltC<ulci. 

MMF s. We belie1•e materially altering Rule 2a·7 again ~ould 

ere ale unoertainty for investors and polenlially di<>nJptions to 

the stlo~ lerm funding marl<ets. As such, n~H reforms should 

only be undertaken d there is conClusive evidence that MMF 

reform has resulted in unintended consequences. This calrs 

for careful study by the SEC before any policy actions are 

taken. 

MMF Reform and Cost of Funding for 

Municipalities: Context and Timing are 

Important Factors 

Recognizing that MMFs play an important role in the 

economy by providing a source of short·term funding to 

commercial and municipal borrowers, policy makers should 

study the potential implications of these reforms. That said, il 

is important thai analyses do not consider isolated dala 

points, bul rather take a comprehensive approach that 

considers the bloader context, as sho~ lerm funding 

maftets are compfex and bof'rowing costs reflect numerous 

factors. 

For example, some critics of MMF teform ha,. argued that 

borro\Wig costs for municipalities have increased sharply as 

a resu~ of the MMF reforms. They ate a 91 basis point 

increase in lhe SIFMA Municipal Swap Index {SIFMA Index) 

between January 2016 and August2017 as the basis for this 

condusion.' The StFMA Index represents the average yield 

on 7-0ay municipal Variable Rate Demand Notes (VRONs).' 

This index is widely used as a benchmark to measure the 

average cost of borrovnng fllf municipal issuetS. When 

considered in isolation, this ino"ease in fundirlg costs might 

be cause for concern. However, ~1len asses~ng borr.,;.,g 

cos!s for issuers, the intetest rate environment is important 

to consider, given that monetary poi"JCy is a key driver of 

borr.,;.,g costs. 

k; shO'"" in EXhibil4, wh~ plots the SIFMA Index and the 

Fed Funds tale, the FOMC inoreased the Fed Funds target 

rate six times beho.~en December 2015 and May 20187 As 

such, lhe implementation ol US MMF structural reforms 

directly coiroded 1Yi1h a rising interest rate en~ronmenl. In 

dd~on. during this windo1v, the Fed announoed the end of 

GROIIIO.ll~9·BOSIOCI 
213 

Exhibit 4: Fed Funds and SIFMA Index 

December 201 S-May 2018 

2.S 

l 's 

! 1•ftd 

« '! .. 

.......... 

-... 

o; ~~~----~_.~~~--~ 

.. .. .. .. .. .. .. ~ .. .. ~ 

~ ij ~ ~ i 0 ij g ~ ~ g 'I 0 

~ i < I; ~ ' t Cl .. i ~ ~ • < "' 

.. ~ 

~ 

! 

ij 

~ 

.... "''" ... 

~ .. ~ 

~ 

• .% 

~ < 

; i 

...... 

....... 

.. .. ~ 

0 

'I ij ~ I; ~ ~ • 

~ ~ .. ~ ~ ~ .. < I, ~ 

OSTu 

...... 

...... 

...... 

--,, 

~ .. g ~ 

~ ! 

.. 

ij 

~ 

... ... ....... 

' 

.. .. .. ~ 

• 

~ 

~ < i ~ 

~ 

.. 

0 

'I 

I; 

• -F..s-- - S!fLIA1rldex 

Quanli1alive Easing (QE), and began reducing ~s balance 

sheet' Whle the SIFMA Index and Fed Funds rate largely 

move in line wi1h each other, lhe<e are periods of 

divergence. These include bolh periods where the SIFMA 

Index is below and above Fed Funds. For example. in late 

201Stoearty2016, theSIFMA lndexdiwlged from the fed 

Funds rate when assets of Tax ExempiMMFs exceeded 

inventories of available VRONs, creating a soenario in wllioh 

high demand was driving prevaning rates in VRDNs lower. 

This dynamic is shown in Exhibit S.likewise, the SIFMA 

Index spiked just as MMF reforms app!oached the October 

2016 compliance dale. The SIFMA Index spiked again at the 

end of 2017 due ll> a dramatic ir)C<ease in municipal issuance 

as a resu~ of US lax reform. EJ<hibi14 shows the SIFMA 

Index below and above lhe Fed Funds rate at different 

points in time. Given these ffuctuabons, any ana~is win be 

sensM to the start and end dates of the study, requiring 

careful consideration before di3'Mng conclusions. 

Exhibit 5: Tax Exempt MMF Assets v. VRDNs 

Outstanding 

300 

.. 

m 100 

<'> 

~ 

. . .. .. .. .. .. .. & 

§ ~ < 

~ 

~ 

§ ~ < 

~ 

~ 

! 

2 

~ " 

2 

! 

2 

~ " ~ 

§ 

-<MsUocllng \IRON$ TOJ<-El<~MMFAss& 

Sooroe: Ba'days. Mol t.lay 31,2018. 

looking more closely althe spike in October 2016, the 

months just before and just after MMF reform 

implementation represented a period of uncertainly. Since 

fund managers were unsure, at the lime, as to the amount of 

assels that would flow ou1 of prime and municipal MMFs, as 

the finalwnpliance date for reforms app!oached, most 

institutional prime and municipal MMF managers increased 

the amounls of liquidity they were holding and shortened the 

maturity profles of !heir porlforoos. This dynamic awears to 

have ~lrbuled to a lemporary rise in borrowing oosiS. as 

the demand for shorter-dated assets increased relative to 

supply. The dynam<: was most rooliceable in the sp;ke in the 

UBOR-OIS spread, as adjustments 01 commercial paper 

markets' were similar lo municipal markers. As shown in 

Elcllibit 6, !his dislocation was temporary in nature and 

reversed relative~ quid<ly thereafter. 

Exhibit 6: LIBOR.OIS Spread 

2.< 0.110 

- -UBOR - 3-<ro<t/IOIS - UBOR-OIS(RHSI 

Sorce: Bloolltlerg_Md t.lay31,2018. 

GROIIIG-31~9-BOSIOO 
214 

Exhibit7: Volatility Analysis 

Exhibit 7a: Absolute Volatility R~ IQV<ialiily, AbsoluleVI/1Je 

- SIFMAindox 

In llle monllls leading up to and shortly following October 

2016 \\!len lhe refonns IW!re fiAiy iq>lemented, municipal 

MMF outflows contliblrted to a period ol elevated dealer 

VRDN inventory, as municipal MMFs. IIIlich had been 

lr.ldilional purchasers ofVRDNs. had less demand. This 

dynamic can be observed in Elhibit 5. /'<;a resu1t. VRDN 

~Ids IW!re higher to atltact CIOSSO'ier and shot! duralion 

buyers, creating a temporary d'ISiocalion in 111e SIFMA Index. 

To further analyze llle impact of interesl rate dynamics on 

municipal borrowing cosls, we pelformed a volatility analysis 

olllle SIFMA Index and lhe Fed Funds rate. Exhibit 7a lool<s 

a IItle absolute volatility of each rate, and Exhibit 7b depicts 

the ~aliity of week o.er week changes in eacll rate." 

While this analysis shows thalltlere was ~ataity around 

MMF reform and US lax reform. ""do not observe •"' 

~atiity regime shift for the SIFMA Index relative lo the Fed 

Funds rate. This further supports the oonctusion that mucll 

of lhe increase in borrowing oosts for municipalilies is a 

product of the rising interest rate environment We note that 

this analysis reflects a simple approacll and !here a1e 

sei'Oral other factors that can im.oact municipal funding, 

including issuer aedit quality, tax reforms, and supply and 

demand. These dynamics would need 10 be considered in 

order to dMlop a oomprehensive a$$€$$Rienl of the impact 

of MMF reform. We en<:OUrage 11>e SEC to undertake this 

oomprehensive analysis. 

Who1e commentators haYe pointed to an inaease in 

borrowing oosts for municipal issuers as a direct impact of 

MMF reform, the evidence to suppo<1 this asserlion is not 

<X>ndusive \\!len the interest rale environment is taken into 

aooount. As shown in Exhibit 4, between Deoember 2015 

and May 2018,1he Fed Funds rate increased from 0.13% to 

1.7%, a 157 basis point increase. During this same time 

period, the SIFMA Index increased kom 0.01% to 1.06%, a 

1 OS basis point inctease. Wilh !his coni ext in mind, 

borr<Wiing o:osts tor municipalities appear in linewilh 1\!lal 

would be expected doong this period of interest rate 

normalization. 

Exhib~ 7b: Week .OVer-Week Volatility ~IQVolaliity,\\\W~ 

One counterargument that has been noted is that interest 

rale dynamics do not fully eJII)Iain the ttend in inaeased 

borr<Wiing o:osts ror municipalities, as there is a ~ld 

d~erentiat between taxable and tax exempt bonds that is not 

fully depicted in this data." We believe this differential exists 

gr.en the supply-OOnand dynamics thai occurred around 

money mail<el reform and again around US lax reform, but 

thai ullimalely the mail<et di<l andwil normal~e. Further, we 

beliei'Othe reduction in the oorporale lax rnte resulling kom 

tax reform is causing the mail<el to find a new equilibrium that 

d~ers from historical periods. 

lmportanlfy, aside from the temporary dislocalion around the 

6me of lhe MMF refonn oompl'oante date. borrowing costs in 

municipal marl<ets haYe followed a similar trend as other 

shotl~erm taxable fuced inoome mail<els. This is ilustraled in 

ExMiit 8,1>11ich oompareslhe SIFMA Index to the 3·month 

Treasury bill, and the ICE Bo!AML 0.1 Year AAA·A US 

Corporate Index, IIIlich is a measure of shotl-term funding 

rales for hghly raled oorporales. 

Exhibit 8: Short-Term Interest Rates-Multiple 

Markets 

3.00 

- SFW.Itldu 

- 3Monil>l'""'YBi 

ICE Bo!MilO.!Ye><MA.AUSCo<por"'inl!ex 

So<rte: Bloolltlerg.AsdMay31,1018. 

GROIIIG-ll~9·BOSIOCI 
215 

Conclusion 

In sum. while ~ is no question !hal there has been an 

incsease in bo"ov'ng costs for issuers (correlation), wllen 

we oontrollor the rising interest rate environment and the 

effeets oltax relonn,the evidence to supp011 a causal 

relationship between MMF relotm and a pem>anent 

ina ease in municipal bo«owing <:Osts is incondusiYe. 

T~mporary marl<~! impads llav~ been observed over lhe 

course ol implementation of MMF reforms, but this does not 

appear to have had a permanen! irnpad beyond the natural 

inc~ease in borrowing cos!s associated with intefesl rate 

n01malizalion. Clearly. more comprehensive analysis ~'<ill 

need to be pertormed bef01e any conclusions can be 

drawn. 

Endnote$ 

As was suggested at the time ol MMF reform. MMF refoons 

shoold be mooit01ed f01their effectiveness in mitigating 

financial stability risks.'' Now that tuB implementation has 

taken place. a review of the impacls on financial stability, 

short-term funding mall<ets, issuers, and MMF investors is 

wa"anted.ln light olthe 2008 Crisis and the e><perience of 

MMFs. this re~ew needs to oonsider the effectiveness of 

MMF refoons as well as identify any unintended 

¢01l~uenoos. As 1M regula101101 MMFs and their 

sponSOIS, the SEC is best positioned to OOndU¢11his re~. 

We do n<>l believe a roll bacl< of the rules is advisable 

l'<ilhoul firnt studying the effects of MMF reloons and the 

impl~tions of any potential changes. 

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216 

THE 

FINANCIAL 

CRISIS 

INQUIRY REPORT 

• OFFICIAL GOVERNMENT EDITION • 
217 

FI N,\NCIAL CRISIS I~ QU Y COMMISSION RtPORT 

On Monday, September 15, the Dow Jones Industrial Average fell more than 500 

points, or 4%, the largest single-day point drop since the 9/11 terrorist attacks. 

These drops would be exceeded on September 29- the day that the House of Representatives initially voted against the 5700 billion Troubled Asset Relief Program 

(TARP) proposal to provide extraordinary support to financial markets and firmswhen the Dow Jones fell 7% and financial stocks fell 16%. For the month, the S&P 

500 would lose s889 billion of its value, a decline of 9%-the worst month since 

September 2002. 

And specific institutions would take direct hits. 

MONEY MARKET FUNDS: 

"DEALERS WEREN'T EVEN PICKING UP THEIR PHONES" 

When lehman declared bankruptcy, the Reserve Primary Fund had S785 million invested in Lehman's commercial paper. The Primary Fund was the world's first money 

market mutual fund, established in 1971 by Reserve Management Company. The 

fund had traditionally invested in conservative assets such as government securities 

and bank certificates of deposit and had for years enjoyed Moody's and S&P's highest 

ratings for safety and liquidity. 

In March 2006, the fund had advised investors that it had "slightly underperformed" its rivals, owing to a "more conservative and risk averse manner" of investing- "for example, the Reserve Funds do not invest in commercial paper:'" But 

immediately after publishing this statement, it quietly but dramatically changed that 

strategy. Within 18 months, commercial paper grew from zero to one-half of Reserve 

Primary's assets. The higher yields attracted new investors and the Reserve Primary 

Fund was the fastest-growing money market fund complex in the United States in 

2006, 2007, and 2008- doubling in the first eight months of 2008 alone.'' 

Earlier in 2008, Primary Fund's managers had loaned Bear Stearns money in the 

repo market up to two days before Bear's near-collapse, pulling its money only after 

Bear CEO Alan Schwartz appeared on CNBC in the company's final days, Primary 

Fund Portfolio Manager Michael Luciano told the FCIC. But after the governmentassisted rescue of Bear, Luciano, like many other professional investors, said he assumed that the federal government would similarly save the day if Lehman or one of 

the other investment banks, which were much larger and posed greater apparent systemic risks, ran into trouble. These firms, Luciano said, were too big to faiL'' 

On September 15, when Lehman dec.lared bankruptcy, the Primary Fund's 

Lehman holdings amounted to 1.2% of the fund's total assets of s62-4 billion. That 

morning, the fund was flooded with redemption requests totaling s1o.8 billion. State 

Street, the fund's custodian bank, initially helped the fund meet those requests, 

largely through an existing overdraft facility, but stopped doing so at 10:10 A.M. With 

no means to borrow, Primary Fund representatives reportedly described State Street's 

action as ''the kiss of death" for the Primary Fund." Despite public assurances from 

the fund's investment advisors, Bruce Bent Sr. and Bruce Bent II, that the fund was 
218 

CRISIS AXO A~IC 357 

committed to maintaining a $1.00 net asset value, investors requested an additional 

S29 billion later on Monday and Tuesday, September 16.'' 

Meanwhile, on Monday, the fund's board had determined that the Lehman paper 

was worth So cents 011 the dollar. That appraisal had quickly proved optimistic. After 

the market closed Tuesday, Reserve Management publicly announced that the value 

of its Lehman paper was zero, "effective 4:ooPM New York time today:" As a result, 

the fund broke the buck." Four days later, the fund sought SEC permission to officially suspend redemptions. 

Other funds suffering similar losses were propped up by their sponsors. On Mon· 

day, Wachovia's asset management unit, Evergreen Investments, announced that it 

would support three Evergreen mutual funds that held about S540 million in 

Lehman paper. On Wednesday, BNY Mellon announced support for various funds 

that held Lehman paper, including the $22 billion Institutional Cash Reserves fund 

and four of its trademark Dreyfus funds. BNY Mellon would take an after-tax charge 

of S425 million because of this decision. Over the next two years, 62 money market 

funds-36 based in the United States, 26 in Europe''-would receive such assistance 

to keep their funds from breaking the buck. 

After the Primary Fund broke the buck, the run took an ominous turn: it even 

slammed money market funds with no direct Lehman exposure. This lack of exposure was generally known, since the SEC requires these funds to report details on 

their investments at least quarterly. Investors pulled out simply because they feared 

that their fellow investors would run first. "It was overwhelmingly clear that we were 

staring into the abyss- that there wasn't a bottom to this- as the outAows picked up 

steam on Wednesday and Thursday;• Fed economist Patrick McCabe told the FCIC. 

"The overwhelming sense was that this was a catastrophe that we were watching 

unfold:'•' 

"We were really cognizant of the fact that there weren't backstops in the system 

that were resilient at that time," the Fed's Michael Palumbo said. "Liquidity crises, by 

their nature, invoke rapid, emergent episodes- that's what they are. By their nature, 

they spread very quickly:'•• 

An early and significant casualty was Putnam Investments' Sl2 billion Prime 

Money Market Fund, which was hit on Wednesday with a wave of redemption requests. The fund, unable to liquidate assets quickly enough, halted redemptions. One 

week later, it was sold to Federated Investors. 

Within a week, investors in prime money market funds- funds that invested in 

highly rated securities-withdrew S349 billion; within three weeks, they withdrew 

another S85 billion. That money was mostly headed for other funds that bought only 

Treasuries and agency securities; indeed, it was more money than those funds could 

invest, and they had to turn people away,. (see figure 20.2). As a result of the unprecedented demand for Treasuries, the yield on four-week Treasuries fell close to 

o%, levels not seen since World War ll. 

Money market mutual funds needing cash to honor redemptions sold their now 

illiquid investments. Unfortunately, there was little market to speak of. "We heard 
219 

FINANCI.II. CRISIS ISQUIRY COMMISSION Rl PORT 

Investments in Money Market Funds 

In a flight to safety, investors shifted from prime money market funds to 

money market funds investing in Treasury and agency securities. 

INTRJLLIONSOF DOLLARS, DAlLY 

$2 

1.5 -------~liiii;;;;;;;;;;;;;;;;;;;;;iiiiiiiiiiiiiiii_., prime ~ Treasury and 

~ government 

--~------~?' .5 

0 ji l l I I IIII I I ti l l II ilij l lllil I I ill I I I il l I I ijll i I till l ll i ii l llil ll j 

AUG.2008 

SOURCE: Crane Oala 

Figure20.2 

SEPT. OCT. 

anecdotally that the dealers weren't even picking up their phones. The funds had to 

get rid of their paper; they didn't have anyone to give it to," McCabe said." 

And holding unsecured commercial paper from any large financial institution 

was now simply out of the question: fund managers wanted no part of the next 

Lehman. An FCIC survey of the largest money market funds found that many were 

unwilling to purchase commercial paper from financial firms during the week after 

Lehman. Of the respondents, the five with the most drastic reduction in financial 

commercial paper cut their holdings by half, from S58 billion to s29 billion." This 

led to unprecedented increases in the rates on commercial paper, creating problems 

for borrowers, particularly for financial companies, such as GE Capital, CIT, and 

American Express, as well as for nonfinancial corporations that used commercial paper to pay their immediate expenses such as payroll and inventories. The cost of 

commercial paper borrowing spiked in mid-September, dramatically surpassing the 

previous highs in 2007 (see figure 20.3). 

"You had a broad-based run on commercial paper markets:' Geithner told the 

FCJC. "And so you faced the prospect of some of the largest companies in the world 

and the United States losing the capacity to fund and access those commercial paper 

markets:'" Three decades of easy borrowing for those with top-rated credit in a very 

liquid market had disappeared almost overnight. The panic threatened to disrupt the 

payments system through which financial institutions transfer trillions of dollars in 
220 

CRISIS ANO A~ C 359 

Cost of Short-Term Borrowing 

Durir1g the crisis, the cost ofborrowingfor lower-rated nonfinancial firms spiked. 

IN PERCENT, DAIJ..Y 

7% --------------------------------------------------

Ill 

llflf' 

I 

k ··a. 

0 

2007 2008 2009 

NOTE: Shown is the spread bei\'I!En the rate paid by second-tier rated nonfinancial oompanies 

(A2/P2) that borrowed by issuing 30·day commercial paper and the rate paid on similar paper by 

the best·rated companies. 

SOURCE: Federal Reservo Board of Governors 

Figure 20.3 

cash and assets every day and upon which consumers rely-for example, to use their 

credit cards and debit cards. ''At that point, you don't need to map out which particular mechanism- it's not rele\•ant anymore-it's become systemic and endemic and it 

needs to be stopped;' Palumbo said.•• 

The government responded with two new lending programs on Friday, September 19. Treasury would guarantee the Sl net asset value of eligible money market 

funds, for a fee paid by the funds.'' And the Fed would provide loans to banks to purchase high-quality-asset-backed commercial paper from money market funds." ln 

its first two weeks, this program loaned banks $150 billion, although usage declined 

over the ensuing months. The two programs immediately slowed the run on money 

market funds. 

With the financial sector in disarray, the SEC imposed a temporary ban on shortselling on the stocks of about 8oo banks, insurance companies, and securities firms. 

This action, taken on September 18, followed an earlier temporary ban put in place 

over the summer on naked short-selling- that is, shorting a stock without arranging 

to deliver it to the buyer-of 19 financial stocks in order to protect them from "unlawful manipulation:· 

Meanwhile, Treasury Secretary Henry Paulson and other senior officials had decided they needed a more systematic approach to dealing with troubled firms and 

troubled markets. PauJson started seeking authorit)• from Congress for TARP. "One 
221 

lil'A~CW. CRISIS I>QUIRY ( O.I! MISSION REPORT 

thing that was constant about the crisis is that we were always behind. It was always 

morphing and manifesting itself in ways we didn't expect:' Nee! Kashkari, then assis· 

taJJt secretary of the treasury, told the FCJC. "So we knew we'd get one shot at this au· 

thority and it was important that we provided ourselves maximum firepower and 

maximum flexibility. We specifically designed the authority to allow us basically to 

do whatever we needed to do." Kashkari "spent the next two weeks basically living on 

Capitol Hill."" As discussed below, the program was a tough sell. 

MORGAN STANLEY: "NOW WE'RE THE NEXT IN LINE" 

Investors scrutinized the two remaining large, independent investment banks after 

the failure of Lehman and the announced acquisition of Merrill. Especially Morgan 

Stanley. On Monday, September 15, the annual cost of protecting s 10 million in 

Morgan Stanley debt through credit default swaps jumped to s682,ooo-from 

S36J,OOO on Friday-about double the cost for Goldman. "As soon as we come in on 

Monday, were in the eye of the storm with Merrill gone and Lehman gone;· John 

Mack, then Morgan Stanley's CEO, said to the FCIC. He later added, "Now were the 

next in line:•Js 

Morgan Stanley officials had some reason for confidence. On the previous Friday, 

the company's liquidity pool was more than S.t30 billion-Goldman's was s120 

billion'•-and, like Goldman, it had passed the regulators' liquidity stress tests 

months earlier. But the early market indicators were mixed. David Wong, Morgan 

Stanley's treasurer, heard early from his London office that several European banks 

were not accepting Morgan Stanley as a counterparty on derivatives trades.'• He 

called those banks and they agreed to keep their trades with Morgan Stanley, at least 

for the time being. But Wong well knew that rumors about derivatives counterparties fleeing through novations had contributed to the demise of Bear and Lehman. 

Repo lenders, primarily money market funds, likewise did not panic immediately. 

On Monday, only a few of them requested slightly more collateral.'' 

But the relative stability was fleeting. Morgan Stanley immediately became the 

target of a hedge fund run. Before the financial crisis, it had typically been prime brokers like Morgan Stanley who were worried about their exposures to hedge fund 

clients. Now the roles were reversed. The Lehman episode had revealed that because 

prime brokers were able to reuse clients' assets to raise cash for their own activities, 

clients' assets could be frozen or lost in bankruptcy proceedings." 

To protect themselves, hedge funds pulled billions of dollars in cash and other assets out of Morgan Stanley, Merrill, and Goldman in favor of prime brokers in bank 

holding companies, such as JP Morgan; big foreign banks, such as Deutsche Bank 

and Credit Suisse; and custodian banks, such as BNY Mellon and Northern Trust, 

which they believed were safer and more transparent. Fund managers told the FCIC 

that some prime brokers took aggressive measures to prevent hedge fund customers 

from demanding their assets. For example, "Most [hedge funds] request cash movement from [prime brokers] primarily through a fax:· the hedge fund manager 

jonathan Wood told the FCIC. "What tends to happen in very stressful times is those 
222 

Km11 HENHSSt\', DOUG I.AS OLTZ·EAK . ANI) IIlLI. TI!OMAS 435 

Lehman for an indefinite time period while Lehman searched for a buyer. That asset 

revaluation would later have come under intense legal scrutiny, especiaUy given the 

likely large and potentially uncapped cost to the taxpayer. In the meantime, other 

creditors to Lehman could have cashed out at 100 cents on the dollar, leaving taxpayers holding the bag for losses. 

Fed Chairman Betnanke, his general counsel Scott Alvarez, and New York Fed 

general counsel Thomas C. Baxter Jr. aU argued in sworn testimony that this option 

would not have been legal. Bernanke suggested that it also would have been unwise 

because, in effect, the Fed would have been providing an open-ended commitment to 

allow Lehman to shop for a buyer. Bernanke testified that such a loan would merely 

waste taxpayer money for an outcome that was quite unlikely to change. 

Based on their actions to deal with other failing financial institutions in 2008, we 

think these policymakers would have taken any available option they thought was 

legal and viable. This was an active team that was in all cases erring on the side of intervention to reduce the risk of catastrophic outcomes. Fed Chairman Bernanke 

said that he "was very; very confident that Lehman's demise was going to be a catastrophe:·• We find it implausible to conclude that they wotdd have broken pattern on 

this one case at such an obviously risky moment if they had thought they had another option. 

Some find it inconceivable that policymakers could be confronted with a situation 

in which there was no legal and viable course of action to avoid financial catastrophe. 

In this case, that is what happened. 

THE SHOCK AND THE PANIC 

Conventional wisdom is that the failure of Lehman Brothers triggered the financial 

panic. This is because Lehman's failure was unexpected and because the debate about 

whether government officials could have saved Lehman is so intense. 

The focus on Lehman's failure is too narrow. The events of September 2008 were a 

chain of one finn failure after another: 

• Sunday, September 7. FHFA put Fannie Mae and Freddie Mac into 

conservatorship. 

• This was followed by "Lehman weekend at the New York Fed; which was in 

fact broader tha:n just Lehman. At the end of that weekend, Bank of America 

had agreed to buy MerriU Lynch, Lehman was filing for bankruptcy, and AIG 

was on the verge of failure. 

• Monday, September 15, Lehman filed for Chapter 11 bankruptC)' protection. 

• Tuesday, September 16, the Reserve Primary Fund, a money market mutual fund, 

"broke the buck" after facing an investor run. Its net asset value declined below 

$1, meaning that an investment in the fund had actuaUy lost money. This is a critical psychological threshold for a money market fund. On the same day, the Fed 

approved an s85 billion emergency loan to AJG to prevent it from sudden faiJure. 
223 

tSSl~TING TAff. f.~1' 

• Thursday, September 18, the Bush Administration, supported by Fed Chairman Bernanke, proposed to Congressional leaders that they appropriate funds 

for a new Troubled Asset Relief Program (TARP) to recapitalize banks. 

• Friday, September 19, the S700 billion TARP was publically announced. 

Sunday, September 21, the Fed agreed to accept Goldman Sachs and Morgan 

Stanley as bank holding companies, putting them under the Fed's regulatory 

purview. After this, there were no large standalone investment banks remaining 

in the United States. 

• Thursday, September 25, the FDIC was appointed receiver of Washington Mu· 

tual and later sold it to jPMorgan. 

• Monday, September 29, the TARP bill failed to pass the House of Representa· 

lives, and the FDIC agreed to provide assistance to facilitate a sale of Wachovia 

to Citigroup. 

• Wednesday, Oct()ber 1, the Senate passed a revised TARP bill. Two days later, 

the House passed it, and the President signed it into law. Wells Fargo. rather 

than Citigroup, bought Wachovia. 

As the month pwgressed, interbank lending rates soared, indicating the height· 

ened fear and threatening a complete freeze of lending. 

The financial panic was triggered and then amplified by the close succession of 

these events, and not just by lehman's failure. Lehman was the most unexpected bad 

news in that succession, but it's a mistake to attribute the panic entirely to lehman's 

failure. There was growing realization by investors that mortgage losses were concentrated in the financial system, but nobody knew precisely where they lay. 

Couclusiou: 

In quick succession in September 2008, the failure, near-failure, or restructuring of 

ten firms triggered a global financial panic. Confidence and trust in the financial system began to evaporate as the health of almost every large and midsize financial institution in the Un ited States and Europe was questioned. 

We brieAy discuss two of these failures. 

Tire Resene Primary Fuud 

The role of the Reserve Primary Fund's failure in triggering the panic is underappreciated. This money market mutual fund faced escalating redemption requests and had 

to take losses from its holdings of Lehman debt. On Tuesday, September 16, it broke 

the buck in a disorganized manner. Investors who withdrew early recouped 100 cents 

on the dollar, with the remaining investors bearing the losses. This spread fear among 

investors that other similarly situated funds might follow. By the middle of the following week, prime money market mutual fund investors had withdrawn S349 billion. 

When the SEC was unable to reassure market participants that the problem was isolated, money market mutual fund managers, in anticipation of future runs, refused to 
224 

Kt iTII II ~CSS[\', DOUGLAS 110LT7.·EAKIN, A Nil BILL TI!O.II AS 437 

renew the commercial paper they were funding and began to convert their holdings to 

Treasuries and cash. Corporations that had relied on commercial paper markets for 

short-term financing suddenly had to draw down their backstop lines of credit. No one 

had expected these corporate lines of credit to be triggered simultaneously, and this 

"involuntary lending" meant that banks would have to pull back on other activities. 

Tile role~{ Pmmie Mae aud Freddie Mac iu musiug tile crisis 

The government-sponsored enterprises Fannie Mae and Freddie Mac were elements 

of the crisis in several ways: 

• They were part of the securitization process that lowered mortgage credit quality 

standards. 

As large financial institutions whose failures risked contagion, they were massive 

and multidimensional cases of the too big to fail problem. Policymakers were unwilling to let them fail because: 

- Financial institutions around the world bore significant counterparty 

risk to them through holdings of GSE debt; 

- Certain funding markets depended on the value of their debt; and 

- Ongoing mortgage market operation depended on their continued 

existence. 

They were by far the most expensive institutional failures to the taxpa)'er and are 

an ongoing cost. 

There is vigorous debate about how big a role these two firms played in securitization relative to "private label" securitizers. There is also vigorous debate about why 

these two firms got involved in this problem. We think both questions are less important than the multiple points of contact Fannie Mae and Freddie Mac had with the financial system. 

These two firms were guarantors and securitizers, financial institutions holding 

enormous portfolios of housing-related assets, and the issuers of debt that was treated 

like government debt by the financial system. Fannie Mae and Freddie Mac did not by 

themselves cause the crisis, but they contributed significantly in a number of ways. 

THE SYSTHI FREEZING 

Following the shock and panic, financial intermediation operated with escalating 

frictions. Some fund.ing markets collapsed entirely. Others experienced a rapid 

blowout in spreads following the shock and stabilized slowly as the panic subsided 

and the government stepped in to backstop markets and firms. We highlight three 

funding markets here: 

• Interbank lending. Lending dynamics changed quickly in the federal funds 

market where banks loan excess reserves to one another overnight. Even large 
225 

FimlS \11th Troubled Brokers Are Often Behind Sales of Private Stakes... hllps:I ""W.\\>j.con an cleslfinns with troub ed brokers·are oftcn·behi ... 

I of4 

rxtll JO..\'fS..II ~tV;'SCOitPCOU.P.r.HY 

MAAKETS 

Firms With Troubled Brokers Are Often 

Behind Sales of Private Stakes 

Surge in private·piacerr<'Ot sales ~ fuei ng concerns aboot how they're sold and vmat set~ pedes"' 

martuPS the ll<ol<ersget 

fftl~\\'ltl'ltdlltf'.tPoJ:St.Jbollt"tt.:SWsalts"".xtctlbuws"~fttns.II'JdbtotttsntN:~~ 

rnarUl PHOlO:STEF'HENVOSSFMTHEWA.llSTft£ET ..IOU1t'W. 

By JI/Qn Eagles/ram and Coulter Jones 

UP<!ated June 24, 20t8 3'53 p.m. ET 

Securities ~rms with an unusually high number of troubled broke" are selling tens of 

billions of dollars a"'" of private stales in companie~ on en targeting senio,., an 

analysis by The Wall Sln!et Joumal found. 

The emerging trtnd could mMn that unsuspe<ting investo" will be exposed 10 losses 

or fraud in a market that has grown sharply in re<ent years. 

In a review of mo,. than a million t1'gU!atory records, the Journal identified om a 

hundred firms whet1'lll!l to GO% of the in·house brokers had three or mot1' investor 

complaint~ regulatory actio~ criminal charges or other t1'd 1\ag:< on their reoords 

-significant outliers in the investment community. These brokerages helped sell to 

investors more than S60 billion or stales in prh•ate companies/ known as private 

placements. 

Sales of private placementsm S'Urging, as pan of a broader rise in private capital 

markets, fueling concerns among investor rept1'Sentatives about hw the products 

m sold. More than 1,200 finns sold al'Cund $710 billion of private placements last )'ear, 

and sales for the first five montilSof this"'" are on track to top that record·setting 

tally,theJoumalfound. 

612612018. 11:49 AM 
226 

Firms \11th Troubled Brokers Are Often Behind S.losofPri1•ate Stakes... hllps://II"W.II>j.rom/anicleslfirms·with·troubled·brokers·are-often·behi ... 

2of4 

HOW THE JOURNAL DID TME MATH 

• TheW.d Sbftt.Jcc.ma1 burl a~d~T~CXehtl 3200001qs pctm!~ tnowmasfocm 

Ds 

Private placements, which could be stal<es in anything from an apanment complex or 

oil ~11 to a biotech company, can offer investors higher rttums than publicly traded 

stocks and bonds. But there's typically less information available about the companies, 

increasing the risks for investors. 

The clustering of higher· risk brokers underscore< regulator worries about the largely 

unpoliced market. 

"Sales of private placementsare so lucrative to the brokerage firms that they are a 

perennial concern for regulators, • said Brad Bennett, a former enforcement chief at 

brokerage 1vatchdog the Financial Industry Regulatory Authority. Issues on the 

regulators' radar, he said, include 1vhether the private placement offers a stal<e in a 

legitimate business, what selling perks or markups the brokers get, and how it is sold to 

investors. 

N011bridge Securities Corp., in Boca Raton, Fla .• for instance, was the biggest outlier 

among firms with more than 100 brokers, the Journal found: Investor:~ have a one in 

four chance of getting a broker there with at least three red flags. Regulators 

sanctioned the firm 20 times-an ave me ofl\1ice a year-over the past decade, with 

finesofSI.75million. 

Robert Abram~ general counsel at Newbridge, said that they assess each broker before 

hiring and added that the finn's ISO or so brokers are more !ii;e!y to have red flags 

because they deal with investors more than many larger brokerages. "Firms like 

N011bridge become easy pickings for the lawyers; he said. 

Most private placements are restricted to sophisticated investors, such as hedge funds 

and insurers, seeking alternatives to public stocks and bond~ In some cases, relatil·ely 

wealthy indi1iduals can get in. 

Regulators lean heavily on the hQndredsofbrokerages to monitor deal~ but rich 

commissions mat~ strong motivations to sell, sometimes without consid~ration 

for the investor. 

"Firms that permit brokers to peddl~ these products tend to put fee gen~ration above 

what is good for their clients,• said Andrew Stoltmann, a Chicago-based lawyer who 

represents investors in claims against bro~ers. "'And bro~ers who want to generate fees 

at their clients' expense tend to Hock 10 these fimt~· 

Finra has warned in the past about 'fraud and sales practice abuses" by firms and 

brokers in the market. 

l.al'l)'ers representing investors say the red·ftag firms identified by the Journal tend to 

hire troubled brokers for the~ track ~ord in aggressively selling high-<Ommission 

d~sometimes IISing questionabletacti~ Firms say their vetting of brokers goes 

muthdeeperthan th~ number of red H~ 

Most ofthese firms are small to midsi~e brokerage~ with fe~mthan 500 brokers, and 

are spread throughout the oountry. The big Wall Street firms in general have 

proportionally fewer brokers dealing direct with investors, and also with multiple red 

flags. Only of the more than 28,000 brokers at Merrill Lynch, for example, which is 

6/2612018. 11:49 AM 
227 

FimlS \11th Troubled Brokers An: Often Behind SalesofPri<ate Stakes... hllps:I ""W.\\>j.con~anicleslfinns with troub ed brokers·ar< oftcn·behi ... 

3of4 

the brokerage arm of Bank of America Corp. and one of the biggt>St national firms, ha~·e 

thr>eor more red ftags. 

Ewn though only around 4 out ofiO brokeragt>S sell private placements, these 

brokerages a«<Unt for more than half of the 94 firms that Finrae<Pelled since 2013, 

the analysis found. for example, Texas E&P Partners Inc., a brokerage in Richardson, 

Texas, was booted last rear over its sale of interests in thr>e oil 11~lls. Finra alleged that 

the firm falsified a document and its owner Mark Plummer failed to return money to 

investors for a 1vell that was neverdriUed.ln 2016, the year the finn shuttmd, more 

than halfits u brokers had al leas! o~~ red Hag, lite J01111lal found. Mr. Plummer said 

"all the Finra allegations were false" and his finn had le~ the industry before it was 

e<Pelled. 

John Harrison, executive directo1 olthe Alternative & Direct Inwstment 

Securities Association, an industry organization, said that private·platt'ment 

deals were a lot more complicated than publicly tmded stocks and bonds an dare 

"logkally" expe<ted to draw a larger number of complaints. 

Some firm.sdmw brokers with red flags. Austin Dutton, a Doylestown, Pa., broker, was 

hit 11;th the highest fine Pennsylvania regulators have ever imposed on an individual 

-S200,000-while at Newbridge, before he jumped last fall to another finn called 

Sandlapper Securities LLC in South Carolina. 

At Sandlapper,Mr. Dutton was in famlliarcompany-morethan a fifthofthe50or so 

brokers had thr>eormorered Hags, t~eJoumal found. Mr. Dutton, who has more than 

a dozen investor complaints, with $1.95 million in pending claims against him. said on 

his disciplinary record he •vehemently denies all allegations" in the complaint~ He 

didn't respond to reGuests for comment. 

Sandlapper last year helped sd to investo~ more than twodoun private platt'ments, 

ranging from an apartment complex in Alpharetta, Ga .. to stlf·storage businesses. 

"Sandlapper is one ofthe brokerages~flast resort that wiU hire individuals 1vith wry 

troubled re<ords; said Nicholas Guiliano, a laW)erwho is representing investors suing 

NO\\ bridge over Mr. Dutton's sales at'that finn. Headded that some brokerage finns 

won't hire brokers with multiple red flags. 

Gilbert Boytt', a l>wyer representing Sandlapper, said it's •grossly unfair• to destribe it 

as a brokerage oflast resort. "SandJapper does not hire e'<ryone with a troubled past 

and, in fact, rejects many who apply; he said in a statement. 

Newsletter Sign<Jp 

Markets 

Ap:t·martets primerpackedv.itll news. 

trerx1saOO.idf3$.PiliS,tiP·:o-che·minutt 

nw'atdata. 

.. IPRMew~ l 

four days after Mr. Dutton joined 

Sandlapper, Finra took disciplinal')' 

action against the finn and 11\'o or its 

principals. The regulator alleged the two 

Sandlapper executives set up a 

middleman company to buy interests in 

Texan saltwater disposal well~ used in 

the oil and gas industry, which were then 

sold to investors by Sandlapper at 

undisclosed markups of as much as 376%. 

The fraudulent markups totaled more 

than S8 million, Finrasaid. 

Mr, Boyce, the lawyer representing 

Sandlapper and the e•ecutives, said they 

"vehemently deny" Finnl's"one·sided compilation of unproven allegations: 

612612018. 11:49 AM 
228 

Firms \11th Troubled Brokers Are Often Behind S.losofPri1•ate Stakes... hllps://II"W.II>j.rom/anicleslfirms·with·troubled·brokers·are-often·behi ... 

4of4 

How the Journal Did the Math 

The Wall Street Journal built a database of more than 320,000 filings for private 

plac:<ments, known as Form Ds, that issuers liled with the Securities and Exchange 

Commission lrom September 2008 through May 2018. From rhooe filings, the Journal 

compiled a list of all the brokmge firms listed as selling private placements and then 

compared thedisdplinary ~rds of 5tockbrokers currently working at those firms 

withrhoseofbrokers working at firms in the industry as a whole. 

The 3li31)'Sis tallied customer oomplalnrs, regulatory investigations and actions, 

6rings, criminal charges and other non6nandal disc:losures reported to rhel'inandal 

Industry Regulatory Authority by the brokers and the firms on their public Finra 

BrokerCheck ~rds. (This excludesdisdosures of personal bankrupt de~ tax liens 

and other financial issues reported on thelilings, which may be less directly related to 

the broker's advice or conduct.) 

A revie~vof the percentageofbrokers at each firm with three or more nonfinancial 

disclosures was based on broketages with 10 or more brokers-about half of all current 

broketage firms have at leasriO or more brokers. 

Tooompare the red llags per broker at the typical firm selling private placements 1vith 

the typical firm in the industry as a 1vllo!e, the Journal used the median: the firm whose 

red·Hag ratio is exactly in the midpoint of all firms in that category- half of the firms 

would have a higher ratio of red flags and half would ha~•e a lower one. This comparison 

was based on ~rds filed 11ith Finra, posted to the BrokerCheck website that the 

Journal collated and includes more than 1.2 miUion brokers currently and previously 

registered with Finra as of June. 

The Journal also oompiled a list of brokerage firms Finra reported expelling from 2013 

through May 2018, and reviewed 1vhich olthose were involved in the sale of private 

placements. 

Coulter Jones and Jean Eaglesham 

Write to Jean Eagles ham atjean.eaglesham@wsj.oom and Coulter Jones at 

Coulter.Jones@\1~~oom 

~lccwl!»1Door.Jcww&r..fi;~~N~~ 

n.~•»rwpl'l(tlllll.~~o~t~111(lfdlr~.-t:t•bml~:~'!»~**'o:~w.t 

~iWa't~Wrtt((t'L 

6/2612018. 11:49 AM 
229 

Looking behind the 

declining number of 

public companies 

An analysis of trends in 

US capital markets ., 

May 2017 
230 

I ;s.,...,.,...facllhll tlltiUilbord U> .... ~hosdochdconsilnllrflalltlltpelld 20JMS 

190-Thoddne, OtfJitint,is,.>iP'<dlhlll hos boen-•......u.qpolcyacliol\ 

AtEY.wenrn.n.tltadotsilOIMshl~-"'ljllifnlj~t!rot41thtlllill.,...olfflil9 

(IPO) ptOCeSS. II ado< IG W«m policy delliltts. we betiel'e palicymolc«$ sh«M consldor""" roes bohind tho 

de<h iltllttot.l1111!lberd US .,...c-'ts. tlltatltoctiYenessof USpoAlic~t.lm.vt<etstodoy, the 

,.vb'ancydl)ril<aleue>QI morlets-"'rectftpolcy adicns ~ .... tormation. 

llcntl>onhofdtlltdodntilthoiUilborofp.Mc~Yai996CM1btllltribWdlotlltpost.dot'OOOI 

~tradbusilossliib'esonddoistinQslhll ~,......, .. ~-di'Os. ...... 

rectlt!OW>, .. &llthS 4SII9tft prM!oaP!al ondtllt triquodlndorislics .. _ .. t.do(s -~ 

hMINdtiiM!ie<to-cWilttho .... oo.iy...toetlorlcni)lrtl>on~-..... 

As policyn*'>-hr1!1or ations. .. boliM il is~ loiXIfllidor objodMs.., palenliol 

c:cnsequonces. "poicymol:or>' o!ljtctiYt k to _.to~ lormation. OClOIICifric.,...U..., job aeotion. ii!MI 

btloss~-~lcnnotlonOCICU'Sin .... Ofprivoto~-~ 

H the o!ljtctiYtis to Jlf'OIIidt rotallrwoslcn !Jt«er ocms to oortrstaqe hiQit9rowth comwoles. policyn*'> IM1 

face • chob belweenefK'OtnQinq • fa!ler-for IPOs"' easini;J res!tictions of priyato ~ marbt inwstmtnl 

--Thert .. risk tradroffs wllh tither chob-whetller .... to~ qoinQ ..... too soon.« tho 

Nlo!MiyboltleYtlof- ptdKtions In tho""""" ....... -

ll*t!RCIOWisn'"""""'boirj-booedon-wriodond-~~ _....of 

whethertho'ln_...., 

As an..t. !his~"~"" a ob!eMs tho~ Mrl9thn •«~Mnm ~Aiht us 1M* I1IIIU mliiiU.I ~~ 

mi~Uleto boliewlhll LIS~~clloosttoCOfllbl thWIPOs oWidt USp.Mc -last-. 

thero-<riyhoo. -~is~ loconsldorlht"'JJ!!nlt:."~90!1of~"'""' lheQicl>e t--111!1....... c11oost to i<t on 1n exdllnQe in tho country ltwNctllho _,~domiciled. ..anq the SIMI nUI1W of kreiQn 

..... -.... ~ IIIII dol<! on en ~oulsi1t IIIWhomtcOuntry,lwic:e.,_.,ct-. USmorletsaslhoselhol .. i<tin~~rtolherjurislidion. 

We llopo !his-wl ""'""""rod twoedfn the dol>!teiii'Oinllho IOstOficAI dodnt in tho""'*'"' us .... 
231 

llwCAIIibl-~ hascNrl9fdCIOII!iderallly-tho pO!I t.odKadls. intbrr~Qtho_,.mal 

priveteCAIIibi-~MIId~dlln:los. ~shco*lbe..,...al-<lln)osaslhoy 

......, thercbjednes lor ...,allonnolion llld tho I!IM1S toadiMUS pJ>ic ~ n r.-in "'-'11ber lodot than 20 I'NfS a;o but """"1v91' ~ mWI QlliUiiation. They 

wt also more stablo. and deisti'IQ rales"' """"lowor lhon irnrneciately folooin91ht doi'CCIII boom. In Q<n«aa, 

lho Ioibi number ot domestic US-Isted ~has stallized, e<pe<ioly PD$1·2008, and lhe runber ol fcn9> 

~llstedonlJS~hassttdylnatased_lhe..,..li'ne. 

A-runberal F0s.,., Nift9t boon>tlust C'ldt she<*~ ..X Uomllicelly bt '*"'111 prolllemotic. Thert 

b.,.. Miera INIIodoy's FOs"' crtalirj sltonljlt ~ cxri'C*its than at my tint in !he pa!l. GrOIIIh 

cxri'C*its d>oosinq totolsharts to tho pjlic ~odor .. l'llli<a!Y st.lllt llld 11M..., crOII>tds lor~ 

l'ocll(s hNihr 1'0 IMtll is tsllrtconlra!l to lilt post.dokcm l>.ttilo,.... "'*' ~ wih.....t.in 

business proopects lbol ... pjlic. afttn slaltr afbr lmnalill. lat!r c:clepsed. 

Somt-......roiseooncoms-lllt-'of..........,leoYi'lljllltUSioislinlramotionolonn.tsllld 

,......""""""'pot...tioly~olhormo<toels<M<IhetiS. I"-teen. ~n..Xbome<>Jtbylllt 

dDta. Allrocled to lhe slabity and liqoid;lyal USC4Pilalmortet~ tor.iin~ loc!oy~choose 

lho US whon thtyist -allhelrhoml...,..t~ ~-inlhe US rtrt!yete<l lotist elsewtlen!. 

lncroiSod mWt .ot.IDy slefmli'o9lnm irleteot role llld geopoliciJI.......w.ty lltly-dooni'O IU1lben 

In 2016. &i ontmaior ~"""'"""'~liM< is !he <hmotic ~In priveteQIIilal. Toda(s emer9n9 

cxri'C*its hM mcn options INn -lofiod prMie ~lor okn;ie< llnnllld in~ li!IOiris. 

Uqislalion INded - tho p..t rot I'NfS has lllldo 1 easier 1or emer9n9 Cllll'l*liel to s11y prM~e kn;ie< 1rt rolaUwjCIIIt.in~requftnwUIIId~-privete~-willllr90-af 

tlllbt -irlcldnll trodticnlt vrin tlllbt llld priwolo """' as ,.. as lir9' corpcnlo llld i1st.lulionof r..stor. 

· IIMhfnodtolhepriwoltmDII in-aln.estmootopporlriiesin'""~h~ 

In lht folooin9-..,wl ci!cuss in men de4ai lhe pJ>ic rnart..I.IPO mWt and private mWtlrtnds 

~lhtrunberal US-tisted~to<~ay. 
232 

Public market trends: US companies get blgge~ more stable 

US~Itq>podaftor <Mdal~am ~.but lhtonn.l hos ~ staztd,ondUS I>IJIIk~tocloy .. 

ll'l.dl '-"'1M! .. lht past. 

~lhodalum I)Nkn 1996. US~bt • tt<crdtqlolmc>rt U...8.000dolrdic.tly~~ 

ist!d on a US !!edt•~ 'llih IIIMI"'f owlol "'llaiuuiln ol Sl.8b in lodtt'<dclars.1 "'""""""' ol domtslic 

~I>IJIIk"""'*'iesOeaN!ed~tlvotlgh2003, ~h-2.800c.._...,lo!t boausool M&A 

atti>ty ...tdeist"'-1>.' &!2003, tne.e -5.29Sdome$1ic lJSoisted c:c<nponios.' The lou ol domtslic US-listed 

CQII'OOOiesin 19%·2003_.....t< 741ollhtlol>from 1996toclatt.4 (Sto ~r•• lond2,) 

flq\Ktl 

Change In the number of US public companies 

•. OCCO)j.OOO 

:ooo.ooo.occ 

,..,. 

1000 

,.,. 

,.,. 

• fi~ji~fiflli~iiflillg-~·!!~·sss:~:!~ "!;:.;.. -- "-- __ , ----" ,,. hhu h~UP.1: ~?. 

i.+'qN"f((~.#ll;~~t\IUf ~·· -- :~· .. ·~ t.-. •·•9~VIGIIJ<~teot'lr.lif5~ ·(IIICII\.,....~ ~IIDI!Ir.CJ(~ 

Sinct the 2008 rMidalaisis,lhotct.l.......t>o< ol domtstic!Mstedcanpooits hosllr9flr~090in. rMIQinq 

btl...,.4,100ond 4,400. OurinljtNssomt poriod, l.,.q.~lisledon US '"llonqosiiM sttoellyncr..s.d In 

IUIII>e<.(S.tfJ9UI't2.) 

• "ff«<d~~·llb!l:l&ri_ ...__.,._,.7r.c....y2017ondEY ........ I '"Wottdl~~·.,., ..... ..,....,__..,. Ji. ~• r.tnw,201 ....0£Y~ 

'""""~-.:'llb!I:IW- ..,7 rw..,.20t7w£Y­

•.....,~~-~..,........, • ......,..~~on7r~MlfftiiEY...,.. 

................................ _ _....,,, 
233 

f~ur 2 

Domestic and foreign US public companies 

. .,.. 

Public~hmalso9'0W11insize.A lypicaldomestdlledcompanylodayll.lsahiQhe<fllollllel~lioo 

Ilion inlhfl990s. alrend thai ha,.cxeiE<ated inn!COOiyN<S(S.t fi;wt !.)Asci e.vly 2017.11,......,"90 ""'""' 

«P~aiza!ion cia US-i<ted company i< $1.3b. ar<llhe ...0... i<$832m.' Also, U..lanJell "cl US public cornpan;.. 

roproSMt 291olthetolalm.!ltiotcaoitatilation.• About 1«1~-eachtruods SSOb lnm¥i<ot voluo. 

ropreseotil<J more than hall cl the total US marie~ c.p;talization.' 

"The U.S. Listing Gap," a June 2016 academic study using listing data from 

major exchanges from 1975 to 2012, highlighted some of the dellstlng trends 

beginning in the 1990s due to the dot·com bubble. Table 4, Panel A of the 

study reveals that following the dot-com peak, 2.101 companies were 

"dellsted for cause" over the next seven years (1997·2003), unable to meet 

the listing standards of their exchange: an average of 300 companies a year. 

From 2003 to 2012, for-cause dell stings fell to fewer than 100 per year.8 

• AI<f<AIW,!ics • ...r~-.. 7r&ualv2017. 

·AI<I<-f!i<$.a>IJ~-.. 7r&ualv2017 . 

• Aod!AIW,!ics • ...r~-.. 7r&ualv2017. 

• "'hoUS.IJilio'oJCop,"SSRN-., """"'~1""''"\.Id•lc();()C)O OX<$$Odl Apll2017 . 

............................... """_.....,. 
234 

IPO trends: keeping sight of the big picture 

US IPOs "'-from their pMc inlht 1990s. b.t _,;., cnncWilqa USIPO lodov"' r,;,ino...,. rrrctrt'f 

INnMibofcrt.w...,.~~tli<IM9,__islft9>_to iOiinlhfUS ~w'lll 

.,._. .... inlhfWOIIil. 

Pliloc ~act cl!omjsd..,.,..,.-oft"' 9MJ irame IIOAlic ollention,IU IPOs "'Jill one d "*" opti:m 

r... ornorQinQ ~to attract r...tcn. "MiieiPO ICtiviy has incrHsod a.'ter tht 2008 ~ lhfooni>or 

"'I'Wf< olftrinqshlsromoinod Oflbtlowb .... ·l990s-Arnorwjothor factors. tht~d-prival• 

iwt!lrnont rll¥btsandolltemoliw linancinOmtthodshaotltendldlhfprivatoflloWinq llqol lht""'>I<at• ife 

cyctt. 

ln201 ,thtrunberdUSIPOs~to291(Sftl ~1tlt~loYelsinct200l lllliethttotol-ol 

CAIIIitatr-t!You9hiPOshita,_,oiS96b.._.201Sw2016..,._,lt""lorlhftFO~.In2016. 

thort ..,, ortj 112 ~ IPO dNII. r4ilinQ ai<Uid S2lb. 

r.,..3 

US IPO market 1991-2016 

ko,r(t 0t*9KW£lMIM'M 

a.t.tQOfti'O~t'¥US •~ ~<roti*Wat-'\:t,(J.AH~.,.p.te(IMI.:<Plt<)"'~·~•$51.A.C~·W~J 

~.~,~~·6CC\' 

Mr,olhfdfch inUSIPOs n2016? llarMI wltlb poOII toa 0111lbord CllOIIWinq !actors. indl.QnqanN<t1 

2016~amdion<i.f -f<l'01v-..ully)~frcm~..._.--ions 

w ......tainly ....o.ted orilllht US tloctions. n1<051 ratos¥d</dJat"'""""""' is1urs. Ad6tionolly.lht 

~olprivato~-....,_-.tobt...,.soiodt4willlhteirmQoiiiiNIPOsas-wtrt 

ltlsll.lblt. 
235 

What makes a robust IPO climate? 

· -llrenQlh 

• !Wooln!soctormorrorMI 

• A!tract."<P~CXXTWII'\Iiltullms 

• Low'«<IItT<ty 

• Sl""'c!Nipe<focrn.w<;t 

What makes a challenging IPO 

climate? 

• Ealnomoc or~ ..-artAriy 

• ll..ri!l dl!dnes 

• Arisl..,..sei'NOS!orCross·border listing trends: US exchanges are the destination of choice 

w. ..... ~~~~~~'-"'INIU.US.-Ihorooot«tr«tiwcx.lilk~nwrlitlllllhfworfd.SI.a 

oclllnljes n locoted i1 .. reqion<ol!howorfd. ond M<lhf lon91«111. more INn 9011 al FOs oco.< on .. <""- lntbt~slltlmoCXIUIIty.(Sttfi;on 4.) lbtamnon ,_ b ~boolln<b!t• !!nloqbaseal 

C\IIIOmO<S or •IJ...:h s~r.-.., tllot loMis on lllo lltlmo l!lllto!. alulxn ir>tsta ond llllfl!l base b.ad;, tilt lltlmo 

-. •Njho< ""'*"' IM!Mth""'-Mirv t!qM!ionm~ st-ondoAt•"•"""IJ. 

·~1Kt 4 

Historically, over 90% of IPOs have listed on their 

domestic exchanges, and the trend continues 

6\ of g'obaiiPOs II' 2016 Ylfft cross-border :isli.,gs 

1996-~16-1'01•-ri--II'Oo 

, ..... IIV$4 ...... ro. .... ,. ... r.-.~trfi' ·N;.o. ~ ........ ~ ..... ...., ................. -....~ •• 1 .. :---~ • ...,... .... .,....I$'W9 ........ --·-- W•:....C.'-....._·~ 
236 

I kalso~ lordtthat IM~ <A US IPOs hoscllonc)ed ~allr ..... u..P&>~ t..odecadts. Allhouoh 

11w<t Itt'-<Aie!ings.today's US tPOs"" ~,.... stoblo and"' raisllq,.... ec>ital. Al thf !996 ptOk. 

624 us IFOs cr.«ed S38b in ~.c.~.,........,., -• S6lm. r .... 2012 to 20!6.11w<twt~t ~owotlllan 300 IFOs 

por.,...-.but-nu!FO--tlatdodlhtl996p9. n...t...lltti>OAii"4.,...monoyinto~ 

........._nll!lose~~ttl!oo4rtobt,.....stoblolllaninU..PIII.aM!oncodbrlllt<R!>in~I>Oit 

2008." 

Thilltondt-I'Osol~...,.a-, ..... ..--~lkelrlobonoll-....-""""" 

Sl"""l f'l'idence that 1'0 COITI)Orios with hiQhfr _.,-perform better in lht lon9 run. Amonq IPOs oomplo!od 

!run !980t~~2014. ~ •~h aM<JairMMOYO< SSOOn !lij"jlyOIJ1j)eff«mod theiNI1<el. ~cmtrast. 

lssutnwith.rmairMM under SIOOm und!rl>trlormtd the INI1<el br"' llVffll9' <A mortlh!n2111." 

The IPOoutlook for 2017-18 

Af'.«I'M>_!M".,.,.pcrito.d•rtbotn!"lhtFOnwtot.Solarn2017.11w<thabotnon14'10in 

FO «tMtv. rill -.lllqtord., US""""""" <l>ooonQ to 90 ld>ic-.ttonQ INI1<el cot1Cil-. That tTe1d 

,.,aru..ewthlho- PC>OW>td"""'"""lnwro..c.ptolnpnvot•equiy~~lhoi' 

nntra.ndol I~ 

muon 11M bf9un ~ I'Os Oljlin in Aoril 2017. and ,..,mes ar•-"" to romp up s'l"if<aolly in tho 

hiltoOOily busy se<ond-quar't" wirdow cl May and .Me. Mo<t<ot and dNI pt~locmonce""' lht >ecood QUO<l" 

willnltuence is>uor and '-lor -'*•"" tho IKUid half cl tilt.,.... and wilqr,.lly .nlotm lhf do4l ootloolc 

tkouqh .,...--end 2017 n!into 2018. rMICidl ""'"""'"lntinuotoviowlho F0 INI1<el4<a ustf<iooticnon the 

Pllhto ,.is.andt!W port!olio_... wilcmtinuotobtaiiP(SO<Jitfoii'O do4l flow 

Tho<t tS IOCtNSod ~lor l:st"9' !rem • n.rrte< ol st.I'I;I)S w.U. S l+l>lon --o!lso kncron as 

..........._ b<i most <liiiM lhtkmr'fcl ~tho~ ti'!W!Qbasodon lhoi' _,.c ~ A.oxh. 

llw<tistriloflytobtab:'9J)arJdo <A '""'"'l:stiloo n2017. Hcwow<. a IIOUd nc1 btSIIII<1Si>9 to ... ......,,. 

hq!1l'dio names~ lhoi' .....,....,.opatod IPOs o m.n.t condbxiS-.ttonQ. 

ror lorfion(IXI'4)4nios<llocM>o tomcute a cross-bordO< l:stino. lhtUS is the IM<od mariti. f"""20121f<oooll 

2016. the US w.n hamt lo-twict as marlY foroiQn ll'Os as its closest ~or. the I.WtodKinodcrn. ~ thf 

same time lrarnt. US FO ...,mtkcrncross·-listinostdaled S66b. mortth!n lour tmesasl\ilh as l!riishc=· 

- FO......,.ol ara.nd Sl2b. ll'sdNr that oltona-decO.S lotiiOC..tt•crost-l:st<>Q.Iheit 

- ol clll>a is....., tho US." (Set fi9<n 5J 

•Sourot:~EY-

"Ctii!OoiOlt.~-..-......,lllolw.StW,...,.U.S.'-""9Gip,"pq<I • .J~>no~Jci,__IS!l 

~-Col!9fola.siliS1~Apr-2015<1}()7:01o1tsA.IbCotarllortto;Poc>t< No.201~7.1-

2016.~•tSSftftl!!- '91'1'.. '~ ""5(0).. 

• JOfR.-'\'IIWN*Oiflli'9<~-

....-. ~~~4' ,. • ..., 

... 

' 

~Porior::¥a."l-2016.

-..un,r~'-ll-lOl.,Ol• 

.... -~ 

.... eut'SX'dl9Actt2011. 

·~--£1- Looo.Oo ....... ..._.-. ................ ,1 
237 

f!QU1t 5 

Among the key global IPO markets, the US IPO 

market attracted more cross·border IPOs in 2016 

2016 top stock oe~chanqes for cross-border listings' 

Number of IPOs 

.. 

,, .. ·~ " 5 ' " 

II 

Capital raised (USSb) 

. .._ ....... '" 

... ~"""' -'t so' , .. __ __ .,_ s., 

'" Ll

_ ~ ~· '" '" • 10 

•m..o""'l~-... MSI>AO Oow' NYSf .. ""'l~-

-- -....., -11«£· Gel/ .. (ASltJ OIIJ(f..: 

...... r..>~oo IH<E>.,. 

GEM! ISGX"" 

C....] ~OSO'Oi ""' -- • 'W~~rhv.ta ......,N~1fh,.,.....-,,o¢toor -r~~fl<'~""""'"''*~...,.,._,,_ ... -.a. rr.t.o -.._. 

V!Oillf"'ltllti"Mlol"l .. ~~·oo:·.-.oo c.t.!,_ ('\to>:t~.-.~~ .. Jtlt>t't"'ICIICII'IW't>: t;rf9'~ 

·~ .... n~ ....... <fOIW•-It$oN ~LM:Iiotf.~U.IIrl•':' ~~~~·t=-o~~.,..a.nt l:~MJI(~l5,..~C(Ior'f"''t 

Uhl•l ...... MIIt.nl~ftt,">--1,'-1.""""'·1" ... --IIO!t<~-(\.·,~.,1""-tt-!'.l~CWI''II*'-• ~ .... ~~ .... ·N(,I~It• ~:?l~'- St.!t.""--~IUI' -~ ): ._,. •ollw'; ~,...,llr.· W trr ... --·SJT 

'-'..:At"~W'!)·~J S...C.)N-.C'I'"f''l'f"t" 

US~ .......t>ile, rarely&st-..(See ri<Jift 6.)from2012 to2016. cnly 18 US-dornicied rompanies 

&sled exclu!Nelyon loreiJ>exdlan9eS, r~isilQontr Sib collectiwty. In 2016, cnly too US IPOs 5sted ~M!Iyon 

lorei<J> ~ o..r.... list*"ls alo> tend to be smaler. Over 15 ~"""· 73llollhe90US ,..,.,...., that listed 

aiJ<oad raised less ti>M $5()n, .. a below the US norracctleroted lief Mel smo11« repa-tinc)-ttv.shoifs o1 

$75rni>~floa . 
238 

Very few IUS companies are listing abroad 

2.S 

.. .. 0 0 

M 

12 

tO 

~ l.S 

a 

• 10 

l ! 1.0 

! • 0 

o.s 

0 2 

0 0 

O.O 144lSO-O<-MSUOSO.lOSO.li !401 10.28SUISG.OI50.37!02ASUO SG.OI 

~ ~ ¥ § § i i § ~ ~ ~ ~ ¥ 

Private market trends: multiple options for growing companies 

"Why,,. m«f C<~~T¥Mnifs stf)'inq priv•tt, .nd lor IonqH? B«IUSt thfy cfn." 

Tt$limony from G!tn Gi<wannelti, EY ~ Biot><hnofocw Lead«, btt... tile S.Curiliti ond ExcilanQO 

COIMiission'sAcfViso<yConvni\UtonSmolandEmt!ljin;Compalit•" 

lhepriyatec.ll>iN"""" hos'10"'1~0Ke!'lty,olifowiiiJ~companiestoaccessmorecapital\litlwt 

9Qinqi)Ublic. 

Toa~X~J~alel/ -the i'e.JI!hol US~at .met~~ iscruciallo~Wo!id!r llleMil.!blity and iml)o!(t oiP"iv.lte 

COflilal. Venl.1n COlli!~ ftms.and privateeqgty fur.ls~~~t OQQ<eS"'"frfnaoci>;J~"""~ wihlhehealthy 

SUJ)I)Iyol privale copiloii>O!HO!ialy delaying the 10MQ for pobl~ olleri>QS. In some cases, emo<QinQ COII'jlallies.,. 

~OCQIIiredllyslrote9ic ~ filor<ialbuyenrofher Uwo9Qinqputic. v.ntur.c.ptalandprivafeeqlityfrmsos 

..Uos ~....,. h funds hove lor9f.....,.,.sol "')ilol to...,., f...lr9occmc>anies~~~teslailfosllinq'ltnl~<earms; 

instftuli:>NI...,.ors hove fur<fs focvsed on privole iM!tinQ; and both.,. aclivoly ....:hin; for ways to inwst sizalole 

amcunfs of copital. 

u 'lkml so.t" s.artiosandtExci>MwjrCorlvMOonSINI¥1<1-gio>j~AdYi!«yCoowrittot~~· S&:W<!Islt•, 

1tlf1>i"'" ""-'P'h<rllrr.•>J1~ U...alPIOll~l/ 001, """"" 19Aidl011. 
239 

lhllt!Wod tO'Iml !)ffl&e i'Mitmtnl has bHn a«ff«atinQ. (Set fi9Utt 7 J Yonl11t ~~ lnYe!lmont i> priwte 

<~hasfll)lododinr><«""l'fOI>.In2006.S31.2bol-<dalonor-.yhrldld2.S88.,.;,.ttUS~ 

ln201S.S77.Jbweotinlo4.244~" """""'-•doOXl)OdtheirMilmlntiMitomortdo!ortollistcrU -·--tllb..-.:!lloor. 

r~o7 

There has been an upward trend in VC·backed* 

company formations 

""""· :...-....... Mu 'o ........ (o- ~•_,_ rf _~•·loo·--···,...,.D.M .. 4"_..,, o ··--o•olt-o.-.o•o .... W..'" o.-....... , ~-.... c;. ..... ~~"f"' 

OINt lonns ol priratt firwn<i>; 11M ~illl as~ lho<ill!rauol illl•ltw ye.nun be dr""*- Far 

·~· 

~ 

f«.t>oci rai5edS2.2b in ....... flniw;J-IOYenytnQOOSio 201 u ahNd ol h FO.•Owrporiod !Urti>g li"lt ye.nlotf! aGIO to 2016l Uber raised"""' llwn 1M b'oelas flUb~ in tQ<Iiy 

IIIUIIII--trSI3bfrllOI-.<API~~pnv~OQ<Iiylinns.IOI"<Ri9o,_~~~ 

Fer"""' companies. debt r ....... hasal!o bHn.,iltradjyeopticnas._. .,.lblt to borrow at or,_ .. 

time-tow int....t rate~.lol<t<ost flflOOCiolq al!o enobles ~rM09ic buyers toac:quW. privMo ..,._.,and smallor putlic 

ccmponles. rrnany. debt flflOOCiolqalowsprivoto CIOfi'OOI'ies toavoid~t~!lwosand odd"IOQ n<winlo!lor~ thus 

~their sMreholder .....t below the «erodiied Mtor imi ol2.000. 

'*Dolt~'Ytta'eSo.zcr 

n DoorJns-.Sc<Ro..-19Ac>f201l . 

• DoorJonos--19Ac>t2017. 
240 

Somtof tM ~-v!lill!unitortl~ tMt IIIOIO.~IPO candidoles i>ovtiOUQht ad04icnol linonclnqllv""lh 

delt While t.nicom~ l!.lrt-ups with $1+ billion~. do not ropreser~ typa\1:-.sc~ the top two 

unicorns as of~ 2017 accoofiO<liO The8ilion Doll¥ StMtup Wl (an interactive feature oiThe Will Slreel 

.IM>iin ~rdion wih Dow .klm Verli ... Sc:utel '-!Men on a sqofo:Mt amotJill of dell!IIJIICflf1<l." 

ttWH*gtt'Mt'r+ 

$1(.91> .1~ 

$31.00 17-IW Sl.3b $t.Ob~ 

How much do unicorns matter? 

ll$v{~">II'O', :-c-ll.JKorni:O:.(\~ Tot~=cu'l:h Ur><CI'nlf"'t.toc:t''\h r«<~~J'OstQ(Ic'\"'h 

r~.Hf)sl lr.:>$mO\cHoto.JIIf() t})$m 

proc ~'do>) 

1014 8(311) 291 $!;.369(6!1) $96,114 

1015 6(311) 174 Sl.902(6!11 $33,631 

1016 4(41) Ill $21,419 

18(l!ll S76 $7.961~ Sl51.164 

WtW a siQnificant amooot ol med"ta atteotoo ls focused oo souled uNCom ('()I'T'IDanies, it is inpott¥~t to 

remerrte< tilat unicomswilr~ cdyasmall perunlaQeof lhei)C!Mllalionof privole, hiqti'QfO"'hCM'C>IIIies 

lookili;J to raise ca,?ital in the 'fe«'aheod. The l!l4jority ol c~ that 90 pol(~ dl not he tncoms. 

Unicorn IPOs ... a lt<'fsmaiiSIA>set ol the pool of st«tup~ ~~ 3%oflros in the last tlv .. 

'fe«'sirathe tenn "lllirom"wascoiledin~te 20!3, Mid 5\of """"'rdised. Of the 18 t.nia:rnros. 4"""' 

0'05S-i>orOE< US istinc)sdintemalional ~ SUCJQO<Iinqlhot USexcllonQes ... the!l'e!erred\OMior lcnql 

t.nia:rnsloQOpoblic. 

l'111ie being alllirom brings the bentfds ol adofdion.ll ~1. rnedio attention a.'ld inl'eslor inlerest,lheir hiQh 

v-ions tMt he sust~n<d b\' a«fflatinq growth and fliiMCial performance a1:>rq with the luturelicttlidity 

proviOod from S1rooq poobc equity morlo!ls. 

Modern emerging companies are different from In past cycles 

The lyPU i>'olile ol todoy's emerQinq company~ often a helterl~ with the private mar1ce! than in J)'evious «oocmic 

cyc~durinQwlli(h(OII'C)IIIiKreQUil!d ~(jjlit.!l irr.oeslmMIS « h.!d more ~buliM~s~ 

Some st.vh4> todrlollqy ~today are able to bo.oll upon 20 ~«n ol imoYalionin todrlollqy Mldtal:e acMntoQe 

dlow<ool --ratherthanMvinq to bo.ollthei'ownnelwort<sMidolher infraS1ructu'e. Other st.vi'IJPS 

attprnlooinc)to~o~yprivat&untithey....,alllQ'e stablebusilessmodellhot >oil attract morei'Oinveslcn. 

""llwMonDolar~CU>,"llwiWS!Iftl.lturWI-.I<IPI'Iho-~.-19A9<11017 . 

• OowJom""""•Soom. -19Acrtl017. 

"DcwJoneo-.S.U.0..-19Acrt2017. 
241 

I)JMo J febnwy 2017111Htiroo cllllt Sf<ulititi !tid E.\tNoiot Conmssion (SEC) M;i!oty Ccmtrillee on Sm.l and 

£mec9n9Con-c>onio>.a--lhotlm-61ioncl~"""""'""ondlhri'lcundonpriorilizec0111tol 

ond fltmlly...,._ CIHiionino "*f llloi-Oil'$1)rivote>«<or fNneiroQ." Under P'Mit~ di5n.llC~ 

c~nabielol*rilks.somotomosn~ll'l¥ltU,cWidecllllt.,..._~WIIio 

.,..._crawp:teiclaly. monrcl tock(s...,~bofttR mllltabilyto .. rists11iho1A inttnw 

.,...l<lltily Underpri\'illt~~ lotnle<1ondoar!rirM!IcnnstJabielosei~Yiaprivale 

!halt 

lhomiOwlisfyllllr-liiPdil'l--~·llfflolttrhtldontly

trdlarilt fiiOJ1I1IS to msm loclmQ for a O'Oirlh eoJty !~ale. Sometmts 

. 

lilt -1!8 •i ~ 

Corrc>anles wlh towor valuations« lmftecl 9'0"111 prospect, hove uswlj b<tn"""' iktly lotxPicn an ICQI.Jililion. 

-laly~ lhevhove lechnoloQiesor product• that.,. vafu4ble tola<Qe r ..... ~.lhese ocQUisiionsar. 

occvrino In......., 9fN1« rorrlbe<s INn In prior dtcodes. in 2016. mcn INn 4.800 ptivolt ~ wer .. cquiod. 

c~ wlhobcM 1.950 cfiJriroo lht IPO PHl in 1996." {Sot fi9urt 8.) These'"""' hove b<tn fueled by a robust 

ondSU!Uined leYtlcl 11:-bacMd-lormolions.(Stt'*" 9J 

Acquisitions of US private companies 

remain robust 

7.000 , 

.... 

iOOC 

i . .,. !' ... 

• i'® 

"'"':"' 

.... , 

0 

.... 

~. ... l UI 

!Ml 

.... 

... ... "" 

SHJ 

" ,_ 

-~ 

__ Mid~Como!illionSNird&norqoq""'--.,~ •na%<.·sa:-. 

'1H)ZJSI7...,__19.1oot2017. n Ooilo;lcnEY....,._ 
242 

US VC·backed M&A activity remains strong. 

Valuations drive deal values up in recent years. 

noo t 

"uo ::6 ~ .. 

.. 

"' 

"' 

100 

Aloo.a iao'Qt n<Jmbe<oll>rivate cxxnpaoiH withvaiuotionsn txcmol SIOOm""' boon acqumnthe post few jOltS. 

lklllratinQ lilt fad that lteC111insa vial>ltOI)tion foriao'Qefccml*liH ~an !PO iuM oltNCII.(S.o fiQI>-olO.) 

..................... .-~--111 
243 

FiQurtlO 

Acquisitions of US private companies 

with values >$1oom 

... 

r 

lloo 

.. 

tOO 

I 'I 

Ill 

.I 

::o ,, 

!07 

"' 

Congress takes action: legislation extends the IPO runway 

... 

E""'9il9 ~ so.Ydl'ilQ lor privalo finor>elnQ 11M bonol~ed Iran leqislation I)OSlOd in Ccnotts1 in recenl yo.rs 

I~ has~ them to acom privote caQitalrooce ...av. fer WI!'CIIf.lht .Jumpstart Out lWit« starn.>s (J()8S) 

A<lol2012.-nended!olltQ1'oOttlobcrt«ionondeconomic~brirctroWvlacautolhtcdolmori<eblor 

"""'1in9CIIfiiQolllirs. 

llltJ08SAdincrtosedlht ~Mitorllril fo<~dhlhtSECfrwn500to2.000ond­

~,....;m;OIIOOlll equiy-frwnlht-a:ut~ t.eq;,Wmpos!Od lnlato 2015aoa~tc~•m 

""""'"""""*"~~·thltftnotlf9i>tt<eddhtfttSEC."n-cllan9K-privalt~ 

to_, 11<ivate lor tonoet. aslcnQ as tltW r"*""'9noec11""' btothelwi!tOMIOCI flvoutll Cl<ivate dttJI""' prival• 

OQU1y capbl. 

1httt ~<M!Oiued int....t OlllOIIQ ~ too•suOQI.iolions on roiUI911<~ote capbl. Ahocty in2017, the 

Hoult ond Senate 11M botl't takln 1.11> leqislation to lncreost the capon inYo!l«s ina QU611iod \'tl'oturi <aPtal food from 

100to250.~ 

u ISU.SCodt1811;). 11 tSU.SCcdt774. 

• ~---Acl(2017).11All19,SM4. 
244 

'(O]vr PIJ/;Ik c.Jlil•l ""'*'" m ,.,, •«r«titlt !o b<n!ntos !""' in lilt p"'!. A• • -..'!, invfflmrnt -"""l~s 

for~ Strttt inmtoa •tt mott litMftf."' 

JayCIIyton. dlJrinq his <Otl•mation htatin9 btfort tilt S...lt 86nl<in9 Committtt to,.,.. IS <hoir of tho 

s-ilit>and Exchinrjt Convniuic<\, 22 Mrn2017." 

Thef.....a.IO«XE Ad ol2017.ocomprel>onsi-..f.....a.l,...... ~oryreform tJihuthcred bylblse 

fumciol s.M:es Ccmnitt .. ClloirmanJebllfnsMIDQ. if~Wdesidenticol lonquoqecn ..m..ll.<ld5." I okoadd< 

-~ether cal)itaiiM!Il!i<on provisions, incbfriQ slroamilinqthe Req~Aotion Oof!orinQ"'"'"" and au1llcri2ing tho 

creation of "'ventUI'e exchanges. "2ut 

Rt9u!atorsareokolccltil9al !aki119 ~•ps toSilW inwo!lmenl.lnaf<l>ruary2017 Adinq SECChorm.n 

Mictwll'iwowar caled for~ cJwooes to the awodited invos!or tlvnhcld thol "'>>JJd .,_ 9reale< ace.., by 

rm1 m.stors Into the private"""""'~ statinq that. 1n my .WW. here~ a 91arir'<l rwed toriiC\'e beyond the artfKiol 

tfistildion belweon 'accrodltod' and 'noo·aruedited' irwestor>."" 

OIJrinqthol..,..mcnth.SE(Convn......,.KoroSteinll0$0doQt.Oellion"9'fddoqacl:lilionoldisdosure$andfe9Wtion 

......:! private market iwe!tmonl. noti>9, "Weoko rwed to ttldenland ""fmcre companies""' S!ol\'in9 privolt for 

lonqer poriocl!d limo. Sho<Jdwe olllPIYerllaro<>ddisdcsll'el!ws to the!e privote~?Or pe<IIOQ$1hey reQilfta 

"""""setcl ........ .,. 

Clowdfund'"'9 ~ anolhet rocont~ wnrtioned privoteflflltlCinq mechol01sm. Crco<lflll<ilg r09'Jiolions odopted by tho 

SECinOctcber2015allowstvt1JI)Sandcthe<priv<lle~tcr~smalarnMtsole®itv~~(lessthan$1m 

i>Mualy) I rem polenlioly torqe poots of m.st"" <mr !be i'ltomet tlvouQh on Wlle<mecliory ...n as • _._,"' 

luncf""lpcrtll tlklt R'lJst I!Cjisterwlh lhoSK Th~newplalfcrmyielded 163clferinQs Uvotq,theendcl2016." 

lnadd'~ion, arutekoo«n" ~ion A+ <ReQ A+)tlpandedcomponies' ~lily toiNi<e unreQistered P<blieofforinQslo 

omaxilun oiSSOm ilany 121ll0111hperiod. T!YcuQh thoendol2016.tllern•re97 cfferirv)surmrRoQA+. tdisinQ 

$239msolar,lrilhatypic.olcCill)On'fseelill9 1oroise$!9m.• 

" Wrlteol~-edlolhoUSSonoi<C<omloti,.an8orilin9.~""UI..,Alfa>•JorOijttln,2311ord>2017,~ 

-CaMW~t .. mBrihj.Houst>;.lllllc.tbWIA!t.o;n-., hllp!://w.,.'*"'<4-..,...~ '«<<iiiesi6<10<215+ 

9<7d~7<2-8d<N-t:W,;5904f50Ef701~l0940A7•90CA4-""'I!!ony Hl·17 ..... oO<aS«d 19Aprl 

1017. 

" lhtrNIIdaiO(IICUd .. IOI7, H.R. IO,S«tlon471. 

" lht r-OlOICt Ad o1101 1, H.R. 10. s.ctJon 466. 

• lht FNnciiiO«<ICt Ad tll017, H.~.lO. S<dix1416. 

tt ~attnt'SECSpNb"Conl«tntt2017:~f'l9theForqottf'flii¥Htor."Arlfn9~~S.~,$EC 

-. -..,.,...~-"ttht'IOr90<1-«.IM'I. 9Aidl017. 

• "ThtW..n.tsi\1017 WIIII~IISIM<?"~K.IraM.Slok!.5«-t,-.'inw.>«~S« 

..,.._,. .. ~ ao:tSl<d19Apjl2017. 

" '\J.S.IC<\I&$-~undorlltltldlhoJOeSAd."s«-.,tr.ps://*"''"'upJries/1017~. 

--#.-19Apjl2017. 

" Romarufromtto$!C'$DM!ionolf.onxrlc.,..Rl!kAnaljsi<olttto'SECSpeot(~mra2017"'l4.r.dlSf<lln>O'Y20 . 
245 

Additional costs to an IPO 

Alo IPOisofton the rr...t irrwt.1l cd.III!'Miot•Mid-cmlicntwnt inocorwott llt(ldt. \JMiatd>ed 

...,..!o..,...ato-costisodNr-'lin'-alani'O.alongwilll,.,...atobrondinQ--Mid 

• bolla olh« bloNis. HooMt.IIIM~~t otoiWblcls to~ • calW1r p.~~~c~~~a~ do not mt nthe lrivalt 

mn.t.t:ordxln;i~IPO.-inl!scxrild ~~~~ ninoelor>MidRm!ed~top.lllc 

~h~ tlle~willim"C!!Wlone-tine~anl 111111 pllllcr cnqoi~QOOII~ iddng 

incrNiod ......,...tend-~""""'vondlt9'ffoos. __,.....,_""' ..WO<YCIOCIII>ionc• 

cost~~ decisions M>d ecticmln publicc~¥tmart~l<Minirld b\'ini'Oit<n. analystsM>dthe 

....r ... Addiionatt. -t lfl/lf hm diff«tnt "'""'"'the best'"""" f« tl* buiNss thin the inmtrntnt 

~. Oi!clostKes~of publicCOIIII>'Oioscculd rne&\lrolfiSPO"tiiCYIOc~aON andlhtpol.entialkt 

....,_octivi!m. 

Conclusion 

hrurilw.USP<A'cccUmdolsn~IIHihrn-thoprtlomd-lorUS.w>drrJilf( 

lottiQn ~11\ot sttl.lo 110--Thodfnamja in the pt;vae•capi4illloYII!ti>M cNnQid sqific.rlly. atlelll 

~ 

t-lrilj. M>d-comp.rie< !oQ<ow lorQO< .wid slay~ lonljor.Tho-ol ll<ivbteiotltmenl ~~os.,_ 

.... ,...,...., torms. indudinQwnttn ~ ~~ .... dobt ronanc~nq. eo.wws thlt ,....~ 

to • public alf«ino in rocen~.,..... hm ttndld to bo more mat ... M>d 11M <old buiNss prospoct~ in oontrast to tho 

priorboom1MtC)<Ies. 

As pel~ rospond l~<m:«nsabout thedectMinputlic ""'P>lY........._ the~ toioosiON M>d 

~ax.ldbo~M>droisoiTwt¥11QUt!tiMs: 

• !IIIII <hiU11>tthe9'ici'l9 oljfdivf d-(ltlt.y"'9"di>g the JX.Uc .... """"'CC/Illl m.trtrb? 

• flthe<fin.llo!IO'Ito_ .... cd.lllonnltiotlinthetA"99'ddossal-·isintheJX.UcotfJ(WtJ..IIIoYII!t? 

• fltheloo6e<ftlor,.,. """*"' loiiO....UCsocnetiodyloalfotdrrWinoelor>~ocmsto~ """*"' orier in the ""llll"IIIf fft <yrlf? 

• SllotMff9Wtionsa>priwlfuploitn¥tfl ~n>enll>tedSe<J to•ffO<dmottirrmtonQrt.lter ocms,....., fttou9h 

t!dnq so WCliJd""" to furtllfr """*"'"lblily to -!iwer and stoy l)tiv«•ionq«? 

• SllooMpriv«e upo14ilf!Ort« «tM!yl>tff91J161.tdrfllerfttl( Hrestrictions oninwstor.....,...,.tian ... ~ 

Tho<e~~torly...,.ofthe4J@IIian<we ~-MIIcor.ideratianos....,.......conlidor~ lhatcoulil 

I>M,qilic.MII~fcriM!Iots.~mthtoctlfiOillYosawldt. 

Authors 

Oavicl&own 

SMcr Manaoilo Oftctor 

liNd of EQOily~ 

llal1celsA<Mso<y 

Etmi&Yo..n;~ 

-..lie 

clr<d.-lfoy.corn 

.ltlfG<obow 

[jroctor.USVetot .. tt.pitol 

Emil& Y<u>Q U.P 

jeffrty.Qr obowtoy.com 

Chrislioknts 

Nalianol Diroctor ol SEC 

~Cf)'Matters 

ftnst& YOlllllllP 

cllns.hcllmosto.com 

Jac!Ue l<lllty 

Portne< 

EY"""'icosiPOM.lrkets 

L-

)IOlU<h~.com 
246 

-EY EY~,..,_., ___ .-.~~..-. 

lilt~---·---"'*"'"'..,_ .,,....,..,_..., .. _liw __ ,....., 

_.._,....,_lo_OOW.,._IO .. GIOI 

-htodohi.•JIII•-rololnldil'o;•-110111n9 -"'""'*""·"'OIJI-.... IofOifffrllttsiOh~~MI<IMWttflt!oCIItorn'at,ollllt -lhnool£m111Ycon;CI:ibai~_,GI __ , __ 

IIQII«Qy.U..& 'loui;CI:ibaltlmd. aU<..._...,.,.. 

910'-doosnot~-lo-fornatlnlomltion-

..,~ ....... -- £mil I 'IIM9U.Piloclllt18Wiq,_ bGIU.. I 'lou!; C1:iba1 

lblldoptrllhj hh us. 

rn.t i'IIM9c:..&ll_, llC~o~--­

wiiiU..I 'Ioui;UPno-GIFNlA. 

ll2017£mlll 'locnojUP. 

AI~­ Fti0No.OI93+17Ulll 

1104·227115>3 

!DIIotit 

........... ----..... .., ............. -~ ................... ._.. ... ,... ....... _ .... .. 
247 

NASAA 

NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC. 

750 First S1ree1 N.E .. Suile 1140 

Washinglon, D.C. 20002 

2021737.0000 

Fa<: 2021783-3571 

\1\\'\\'.nasa.l.org 

June 28,2018 

The Honorable Mike Cr:apo 

Chaim1an 

Senate Committee on Banking, Housing 

& Urban Affairs 

538 Dirksen Senate Office Building 

Washington, DC 20510 

The Honorable Sherrod Bro11n 

Ranking Member 

Senate Committee on Banking, Housing 

& Urban Affairs 

538 Dirksen Senate Office Building 

Washington, D.C. 20510 

Re: Legislation Considered by the Committee on June 26, 2018 and June 28,2018 

Dear Chainnan Crapo and Ranking Member Brown: 

On behalf of tlte North American Securities Administrators Association (NASAA), 

1 I am 

111iting to provide NASAA's perspective on ce~ain legislative proposals that have been the subjeet of 

hearings by the Committee on Banking, Housing and Urban Affairs during the week of June 25, 2018. 

I. The "C)•berseeurity Disclosure Act" (S. 536) 

The "Cybersecurity Disclosure Act'' would amend the Seeurities Exchange Act of 1934 to 

require that publicly traded companies disclose in their annual filings with the U.S. Securities and 

Exchange Commission {SEC) whether any member of their governing body, such as their board of 

directors or general partner, possesses expenise or e.xperience in cybersecurity. The bill does not 

impose any requirements on issuers beyond disclosure of the specified infonnation. 

lncentivizing publicly traded companies to consider whether they have adequate cyberseeurity 

expenise in their governing body is an appropriate step given that cyberattacks on U.S. companies 

continue to increase in both frequency and sophistication. Cybersecurity risk and preparedness can 

have major implications for businesses and their investors.2 Funher, investors, issuers, and consumers 

stand to be well-served by policies that encourage companies to consider c)t>ersecurity risks 

proactively, as opposed to after a data breach or other intrusion has occurred, when the ha.m1may be 

1 Th! oldlll in11ma1i«W • i2ation ~-o~!d 10 inl'e!IM Jl<M!>.~ion, 111t Norlh AlllMCM S!M1ie! Adminillr:!lOB, lne. ~~ 

Otl)al!il<din 1919. l~""mbef>llipconsistsoflhesec.rioiesadminisl13t01Sin lheSOSI31tS,IheOisuicl ofColllmbia.C""""-

M<.<ico. PLitrto Rico 01ld lhe US. Vilgin lsl3rids. NASAA is ohe \'Oict of SO<Urioies :>gtn<its respoosibk for gra<s·IOOIS 

in~...,or pnMecUon 01ld eflk~no api~l formal ion. 

1 In lOt 7. t aillllom! an oped highlighoing lhe gro"ing <OfiCtm O\'trlhe numbn ofC)1lmooaclis p<rpMI<d agaillSI companies 

01ld lhe effons Slale st<urioies rqubiO<S ore laking 10 assisl mid-~zed i"'"""""' advism 10 impro-. lheir <)i>crsc<urity 

p!1l<li= (S«; Boig, J"""" P. "E,·eryone bas a Role in Pn>l«ling ag;.inll C)bernttaclis". S<pt<mber S, 201J. Mai~ble 31 

www.ametignb>y.O!"dmtrot/damlab.tfadmit11Sl@!h'Ofbusirgs bwlnewsl£ttm!C!68000Qtfull·iswo201W..uthc!«Mam·OOO. 

--lkql ...... l~·Eb.'t M.ll"'c\'iM(Vc=oal (""'"'""'""""'"So<)· 

s.-.,· ~-1 .... ...,.1 T~TCCIC«<cf(~) 

""""" ...... , .... ln..lol &}11t~l~t 

MdDt Scm-lc.tWI,;.\\ar}Undi 

Tan)-a$ollwtllfmoiil 

G:nlrfRCIO'Jr4C~) 
248 

irreversible. In fact, we note that since the bill's introduttion in 2017, the SEC has issued guidance 

that compliments and supports the legislation's premise.

3 

NASAA is pleased to support S. 536. 

2. The "Fair Investment Opportunities for Professional Experts Act" (S. 2756) 

S. 2756, the "Fair Investment Opportunities for Professional Experts Act", would amend the 

Securities Act of 1933 to add specified, inflation-adjusted income and net-worth standards to the 

"accn.>dited investor" definition. In addition, the bill extends "accredited investor" status to new 

categories of nal\1!31 persons "1lo would qualify as "accredited" irrespective of income or net-worth. 

NASAA is not wholly opposed to efforts to modernize the accredited investor standard, 

including in a manner that would increase the size of this marketplace, as is envisioned by S. 2756. 

Further, NASAA appreciates the steps that the sponsors of S. 2756 have taken to improve the 

legislation relative to similarly entitled legislation previously passed by the House of Representatives, 

including in consultation with NASAA.' Nevertheless, state regulators have a very large stake in any 

legislative changes that would affect the pri1•ate securities markets.; We strongly believe that any 

legislation that effects a further expansion of private securities markets must also take steps to improve 

the oversight of these markets by providing regulators with benertools to address fraud and miscondutt 

in these markets. 6 

Further, NASAA respectfully reminds the Comminee that policies that implicate private 

securities markets cannot be judged in isolation. Over the past two detades, there has been a dramatic 

shift in how companies mise capital. Private securities once comprised just a fraction ofthe ovemll 

marketplace, but today !hey serve as a major source of capital for certain businesses, exceeding the 

public markets.' The unprecedented growth in private markets, and the decline in initial public 

l "U.S. SEC Calb for'CI<arn' C)1><r Rill: Oil<"""" fll>m Coml""ics". Rtuten. F<bruarylt.l018. See: 

hnos1lww ,• mn£!S.()Qrnfartick}~~lu·s-sec=callt-!9 -c earn-c>W-risk-d!sclosure=fro <OOJ!?Miet 

idVSK(NtG)?FK. 

Smion 2(b) ofS. 2756 impo!<S guid<lin<S that the SEC mUll follow in ;,.;ng a rule to clct<rmine •nether' natural Jl"''Ol 

m~yq1101 6•os >nacmdited in,...,orby,•inot <d~~Cttion,job. orptOftsSiONI ~- No~ il3/r.qui...-.nu,. 

mclt<led in H.lttlSS, the "Fair lm""mmt Opportunities for Professiooal Experts Act". \Veal., note tha' •llmas H.R. 

tSSS would ><!just the i!IOMl<and n<t· ~nh stanclards to account for inflation c."')' r,,~ )...., S. 2756 wouldadjllsl th<m 

0\'<l)' lhr<e)'W$. 

' SWe SC¢Urities ftt\ll ors. poiSU3llt to their amift3Ud outllority.,. the de-fO<to primasy r<g~~ 31ors of off<rin; condu<Ud 

under Regulation D. Rule S06. S~te ftt\llators f"'l'JC'''ty ~mil e complain~ liom tho>< •ilo "" \'ic:timiud in olf<rings 

coodu<Ud under Rule 506. and expend eonsidmble ....,.""' por<ing tllis marte~ bce. 

' Sped f1C3IIy, S. 2756 slloukl be iO\jlf0\"«1 by i"""l""ting modest chaogts to Rule 506 and form 0 that •ill tnhance the 

obilityofthe SEC and NASM members to ptOO«< n~'eslors ~i e minimizing the burd<nsto the small busi,..,.. • ilo utilitt 

the rult to rai5e "'J)it . Such changes were Jll')pO!<d by the SEC in lOll, but hm not yet bem adop<<d. (For IJdditiollnl 

informo~ion, see; htrm·lhwwg f!m'rommrnt£14=49'1j69>.J.I. pdf). NASAA has also offered sugges.i<lns for how tOrt\"ise 

the C'UI1'tnl ¥t.reditcd in\'cstordelinition to more aocuralely l'llleaSUrt irn'tStOrsophistkation. and to limit the ~posweo less 

soplli~icated n~estofS to the risks of the private markt~ploet. (For additi<Jnol informatiJJn. s«: lltrplbntw.l!aii!O·!IIX!I<·o-

<9"""IIriP!IJIItM0/31/0INASAA·l£tttr·to-Hor!!t=l,tgdenloiD=Rt-HR-1!8S-11·1·17.odfJ. 

~: EC is ono Ec""""~ and Risk Analysis, ,\e«ss to Capital and Morl<<! Liqvidity(Aug. 8. 2017~ avoibble 31 

h"po1A "'·S«.g01'/foi<s ae<ess to-<api~l->nd morl<et ~uid ty·llud)'-dera-20 7 .pdf. S.. also: Stou IV. 8augll($$, 0.:1)0Jty 

Di"'-"or. SEC o;,i.sion ofEcooomic Risk and nal)li~ Pri10tt Sealritics Oll'<rin!l' post-JOBS Aet Preset1E81ioo to 
249 

offerings (IPOs), tan be. anributed in part to Congress. Congress has made it easier for tompanies to 

raise tapital in private markets and that is one of tbe main reasons that more companies are staying 

private for longer instead of pursuing IPOs.1 Gi1•en Congress's ongoing, bipartisan interest in 

increasing the number of lPOs - effons which were discussed by the Committee at a hearing earlier 

this week9

- Congress s:hould be thoogbtful in taking any steps that would further expand the private 

markets to the potential ·detriment of pub I ic markets. 

3. Tbe "Helping Angels Lead Our Stanups Act" (S. 588) 

The "Helping Angels Lead Our Startups Act", or "HALOS Act," woold dirett the SEC to 

amend Rule 506 of Regulation D to specify that prohibitions on general solicitation and general 

advertising in Rule 506 offerings do not apply to sales events (also tailed "demo days", "venture fairs", 

or ')>itch days") that are sponsored by a governmental entity, a college or university, a nonprofit 

organization, an angel investor group, a trade association, a venture forum, or a 1•enture capital 

association. The bill would also limit the amount and type of infonnation that can be tommunicated 

prior to, and at, such events. 

Given that Congress has already acted to repeal the prohibition on general solicitation in tertain 

private securities offerings under SEC Rule 506(c), it is not clear why Congress would now require tbe 

SEC to relax rules governing the use of solicitation to non-accredited investors under Rule 506(b).

10 

However, in the event that Congress detemtines StK:h action is appropriate, there are steps the Senate 

can and should take to improve the legislation prior to its becoming law. 

As presently constituted, the types of entities that woold be eligible to sponsor an event under 

S. 588 is exteptionally broad. Congress should consider whether these criteria should be made more 

tailored thereby narrowing the number of entities eligible to sponsor such events.11 further, Congress 

A«0011ting Standards E.'« uti« Commillee (F<b. 25, 2016), ••~itable" 

httJ!8:J.fM\w.xs:_goylinf®rNllboslgc/ori\'3te= mrili<:HtTtlings-oost·tobs-xt-b!ugum-922516.odr. 

1 As H"lthy Mat!c<tS Association E.'«<lli>"e i~oc Tyler O.llas<h .....,tlytestifi<d to 3 "'bcommiuee ofth< 11ous< Fi-~1 

Smi<es Com min«, "It's 11013 gJ<Ot myste<y "11)' in th< las< fewyws th< trend bas de•~IOjl<d \\h<reby th<re.,. """"priV31e 

offerings in lle~S. today lh3n public ones. lnth<p351, th< low and SEC rules~~lydidn t pennn 311 th<sopri>..,toff<rings. 

0>-..-th< pollt"" cl«ades. ho'"'""· CongNSS and th< SEC ba>t spent)...,. COOSIIUCiing ad hoc <:<emplions and ex«ptions 

cksi@fiCd 10 allow lirms. t!Mir ex«uth·es. and 1BtirMy in\tseOfS 10 stU securities without ii'IC\IT'ing 1be costS or burdens 

~~iollly assoc &~«! \\ilh publ~ olfering< While some of these exemp<ions and <X«plions may hm bc<n "'ll·intend<d. th< 

und<ciable 1<$Uit has b«n lballbey ba•·e gro»n so cllam3t~olly that th<y have Wld<rn\iJKd the public mat!c<tS. • (S.C: 

Testimony ofT)i" O.lr..ch b<fO« th< HOOJS< Financial S<nic<sCommillee, Subcomminee oo Capital Mat!c<ts, S=rities 

and '"'""""''(May 23.2018). 

' S<t: LtgiJlali>~ PropostJI•to Inmost. A""' fo Capifal, Hwing Bef01< th< S<oate Comm. on Banl:ing. HO<JSing. and lhban 

All'aifS. H51hCong. (Jn26 201S~ 

M In Title llofth< JOSS Act of2011, Congress <Xpandal rompanies' ability 10 oJitad bti)<fS to th<ir privale olfcrings by 

pennining g<ner.ll sol~ talion and 3dwnising. This <x<mption. codili<d und<r SEC Rule ;Gii(c~ C3J1 b< ebim<d provided 

that issum ooly sdltoi!C<'Mliled in>'CSIOI> and lbal th<y talie 'ltasonablt~eps" to ,.,;~ that th<in>'estorsare aocr<dit<d. 

Th< HALOS ACI ""uld go funb<r and <"mptdemo da>' liom th< prohibition on g<neral solicitatioo and 3d•'Mising. th<!<by 

alio»ing rompanies to gen«aJiy solicn and ad>trtise and still b< able 10 use ;Gii(b~ •ilich unlike Rule $06 (c~ does "'t 

rtquirt ~IOW:t ~stepS to&ttrmine wbttller in,·tstorSart ac:atdittd. 

11 As Uni>wity of Univmhy ofMissis>ippi La•v School Professor M««r Bullanl testili<d to th< Comminrelhis w«k, S. 

;&s'\\ill allowvinuallyonytypeofpublie<ntityto ad>·<nist andho<l 311t><ntthat0111b< ~t<nd<d by '"YP""" focth< 

putpOS< of any issuer tc~inga se<urities off«ing." Ste: 

hurn:l!wwY<',bMkinyrnate.BO~·Iiroofroot docJBull:ard%20Testimoor%20§.2~!S.odf 
250 

should require the filing ofFonn D with the SEC and the rele1•ant state regulator prior to the event.'2 

The infom1ation included in Form D would be panicularly valuable to state regulators who will be 

tasked with ensuring that "demo days" and similar events sponsored in their jurisdictions are legitimate 

and compliant with the Jaw. Finally, Congress should clarify that attendance at an evem does not in 

itself establish a pre-existing relationship for purposes of Rule S06(b). 

4. The "Compensation for Cheated ln,•estors Act" (S. 2499) 

S. 2499, the "Compensation for Cheated Investors Act", would direct the Financial Industry 

Regulatory Authority (FINRA) to establish a fund to provide investors with the full value of unpaid 

arbitration awards issued against brokerage firms or brokers regulated by FINRA. The bill would also 

require FINRA to provide enhanoed public disclosure of information pertaining to the tOial number of 

arbitration awards issued in favor of investors against brokerage fim1sor brokers regulated by FINRA. 

NASAA welcomes the introduction ofS. 2499, and wholeheartedly suppons the intent behind 

the legislation, which is to ensure that wronged investors are not literally left holding the bag when it 

comes to the payment of arbitration awards issued against broker·dealer firms and their representatives. 

Unpaid arbitration awards remain an unresolved and well·documented investor protection concern. b1 

failing to pay arbitration awards, broker·dealers fail to comply 11ith their legal, regulatory and ethical 

obligations. NASAA has been a longstanding proponent of measures to address this problem.1

l We 

look forward to working with Congress and other stakeholders to finding a solution so that no investor 

awards or sen Jements go unpaid. 

5. Tbe "Expandiog Access to Capital for Rural Job Creators Act" (S. 2953) 

S. 2953, the "Expanding Access to Capital for Rural Job Creators Act", would amend the 

Securities Exchange Act of 1934to add "nrral·area small businesses" to the scope of small businesses 

with unique challenges and issues from which the SEC Advocate for Small Business Capital Formation 

is required to (I) identify problems with securing access to capital; and (2) issue an annual repon 

containing a summary of the most serious issues encountered by such businesses and their investors. 

As the closest regulators to the investing public, NASAA's member.; regularly work with and 

assist local businesses seeking investment capital. On the basis of this experience, we strongly agree 

with legislation's premise - which is that rural communities and the small businesses located in these 

communities can face uoique barriers to accessing capital. 

NASAA is pleased to suppon S. 2953. 

Thank you for your consideration ofNASAA's views. lfl may be offunher assistance, please 

don't hesitate to contact me or Michael Canning, NASAA's Director of Policy and Government 

A flairs, at (202) 737·0900. 

u NASAA hasr<pe31c<lly urged Coog<$s 10 r<quirelhe folingofFonn 0 priorlo saleorg<ncr3lsol~it>tion of :s«urities 

oiTe<ings "'empt from registratitwtund<r RegulaJion D. Underthecurmu rui<S, Forno Dn«d not be fitc<luntill)da)> 

aBeT tM firsc sak. so an issuer can ad\·tnise for in\'ts10C'S \\ithotll filing W foon. The lad: of any Jn·SOlicitation filing 

makes it impossible for 51:lle enformnet'll pe'fWI'II'!e'llo rasily determine whether an offeriog is being coOOucted in 

accordance wilh lhe S«urities laws. 

u So\\ tg. t.euer from NASAA Pmidfttl meph Borg 10 Marth E. Asquith .ing FINRA Regu~tory Notice 11-33 (De<. 

20,2017). 

4 
251 

Sincerely, 

~~ Joseph P. Borg 

NASAA President and Alabama Securities Commission Director 
252 

. Vanguard' 

What's behind the falling 

number of public companies? 

Vanguard Research Note 1 November 2017 

• The number of publicly 

listed U.S. companies has 

fallen by about 50 percent 

rn the last 20 years. But 

focosing solely on this 

decreasing number masks 

some important trends. 

• A closer lock at these 

market and regulatory 

trends reveals that microcap companies account 

for most of the decline. 

• We find that the shrinking 

number of public companies 

has not materially changed 

the concentration and diversification of the investable 

U.S. marl<et. 

In 1996. the number ol publidy listed U.S. oompaoies 

exceeded 7.000. By the end ol 20t6. that number 

had dropped below ~.800.' There is oonjee<ure that 

burdeosome regulations impede oompaoies from going 

public and obtaining funding.' However. llle declining 

nomber alone doesn~ tell the whole Stoly. 

In th~ research note. we show that the decline awears 

to be largely limited to micro-cap companies and that the 

foous on the number of companies-rathet than tnall<et 

capitalization-<foes not fully measure the <Guity marl:et's 

health, Our research suggests that despite the dec<ease, 

the concentration and diversjfi<;ation in the investable 

U.S. <GUitv marl:et has not materially changed. Howew<, 

while our researcll reviews po~ential causes of the 

dec< ease. it does not intend to draw oondusions 

regarding the eoonomic effects of the dec<ease. 

To what extent is the number really shrinking? 

Although it is true that the number of public companies 

has been falling sillce 1996. the headlile number. ~ 

accepted at faoe wlue. is rrisleading. Figure 1 shows 

that the severity of the trend depMds on the time horizon 

of the analysis. When vie'""' relative to 1996, it awears 

that the number of publicly listed companies has fallen 

by more than half.' However, the nomber of pub/'1(; 

ccmpanies in 1996couk!~ wei be viewed as a 

Figure 1. The existence of a trend depends on the time horizon 

8.000 3.100 

3,000 

2,500 

2000 0 

.:500 f 1,000 5 

500 j 

0 

·500 

~--~-,---r--r--r--~~--,-~r--r--r--r--~-,---r" -1000 

1974 1977 1980 19$3 1936 198$ 1992' 199S 19$8 2001 200-1 2007 2010 2013 2016 

. NM<i'On9t 

TOIIIII'I.lti'Jbet 

o.; s::!Utidy l$redo;::mpiries8:bje lhl$e lr3dedooNVSE.ANtl.M:J~Pitsflee;$1cd:s<nb'adediMIIheUltllCSMi. tiA ¥enotiO.ded ft lhed'M 

OIUtet:VafO*d tastdon~ffctDClSP, 

IC.....f•P..-IIo Seorii)PDcestaiSI'I 

! See-...12011l 

1\/MtiO!td_..,.nilo!o Oi filo '""CRSPnluodod.,HYSI.AM!X.WiiASQAO; tllry-- nl hAls. 
253 

Figure 2. Larger IPOs have remained relatively stable 

900 

800 

700 

600 

o500 

i.aoo 

boo 

z 200 

100 

~--~~~~~ua.u~ 

1no t983 ,. l939 tm 1m tm zoo, zoo.: 2007 2010 am 2016 

N-oiiPOs--$100-

1 Nut'nberollPOs.sm31etitflat'I$\OOmAorl 

N~r. Sotio9ti<-~SIO -yidlso-.... 

1)11 e:~d~tesedond.lt3:fr«a~ 

high point rather than a normalamoun' because ol 

the economic boom in the 1990s leadi"'l up to the tedl 

bubble. When viewed relative to 1972, the deoine 

shrinks to on .. third. Moleover. the SPil<e in the numbef 

ol publicly toted companies in 1972 ooa"red beca..se 

NASOAO went public and the 3.000illus oompanies 

that pr~ uaded ove< the <Xl\lnter became 

p\lblidy rosted. 

The blame for the dedine is olton focused on the d((lj) 

in the number of initial public offeri"'lS (IPOsl.' 8ut thO 

largely igrores analysO of additional cllafocteristics of 

those companies, sod'l as tt\eir size. Figure 2 sho'NS 

the numbef of IPOs according to oompany size. Smal!er 

firms, defined as those with gross IPO proceeds under 

S1 00 milion-which essentially makes them micr<>eap 

comparUes-fell precipitously lollovnng the tedl bubble.' 

SooV~I20lnondir>Ml~ILI20tll 

The disappearanoe of mal~ and micro-firm IPOs was 

the main reason the total number of stocks decfined 

between 1996 and 2016, consistent Y<ith what Riner 

(20111 has noted. Meanwhile, larger firms continue to 

keep a healthy pace oiiPOs. Since 2003. there have 

been more large-firm IPOs than smaller ones in all but 

one year. 

It appears that companies are choosing to be aoquired 

by larger pubic oompanies rather than go pOOiic 

themselves. Figure 3, on page 3. shows the cha"'le in 

the number of pub6cly fisted oompanies by aocounti"'l 

for those oompanies that wore aoquired in lieu of goi"9 

public. An IPO is considered a net addition to public 

eq.,;oy (positive bois). v.ilile a detisti"'l from a public 

exclta"'ll is consM:Iered a net subUOC!ion (Mgalive ba~. 

Measuring just tllese twO octions shows that the net 

Sfo<"""'-"""""""""""''ql ... fiA .. ml"""l•tl>ell>ll"""'liMioo..,$13!.9-..Sfo<lhelQIIo""""-""S"l.6- a=d<g~FTS!Rwel1211 1l 
254 

Figure 3. Private companies often .. go public· as part of a larger company 

.-11'0 

·--.o ·~·~-·-pw...,.......,.. .. _l>ypili:--f<w""""a"'*"'•'*""Y--dlo>!e»deis!l -~ .. l:«ol»deis!l.-d-~ .. lili<'O!bo<Med~ 

s-o:v~-.-.. ~~ou..., __ .-dti!SI' Ilill.,l'lf<-~--nfloi--M&Idifference in llle number ol publicly listed oompan~ 

is generally negative. confirming a trend of a decline. 

However. a we include tile number of private oompanies 

that were aoquired 11( publ'~ 0<10$-what we cam 

'phantom' oompanies-the number ol net additions 

be<:omes pos~ive. In other I'<O<ds, focusing only on tile 

number ol pobi'IC companies eliminates a CJIOUP 

ol private compa~bout 500 each year-that 

essentially pin tile public market as pa~ of a t>gger 

company lllrough merges andfO< aoquisit;on. 

Even a~er go1ng public via an IPO, most oompanies 

remain small re~tive to other putlicly listed companies. 

Figure 4a, on page 4, shows tllat only a very smal 

pefC*Otage ol oompanies grow to be<:ome small-. mid-. 

<>< ~rge.cap. The oveMIIelming majority of oompanies 

Miler remain micro<:ap"' defist. and it appears that ol 

lllose two outcomes. a 91owing ponion was delisted. 

HOV>-ever, a firm's being del~ted does not neoessarily 

mean it is no longer reP<OSil<1led in the pobic marl<et. 

Figure 4b, on page 4, indicates that mergers ate tile 

cause of a grov.ing pr~ ol delisted firms. Even 

lllough these companies cease to OJ<ist from a "eoum· 

perspective, they oontinue to exist frO<n a "c:ornpany 

value" perspective because their business enterprise 

exists as pa~ olanother public c:ornpany. 
255 

Figure 4. The smallest comp.anies stay that way, while those that delist usually merge 

• t.»ge 

·-

Low 

I Mi:ro 

• Oeliste6 

b. Stocl;s' reasons IO< deisting 

80 

.. 

40 

1979 1981 1983 l98S 1987 1989 1991 1993 19!1S 1991 1999 2001 2003 2005 2007 2009 2011 20l3 2015 

~~~~~oill>w,...,..,...,;,r...,brO\!P lbok..!......tdee utdohoosla<fiO<'!<Iiotid.l<ri.""r.H. .. .W..Oasooidqi:C....._ """'-""Of#.,._as_(i.o..-..cta>llhtnildln!ld.,d!foedas..,_o;,_""Nd""'olo....,...,.,....,. 

~tv*.Vcttrlatrlf'lml~dloos:eto*~lllf'.n~ftdtlstoldbec:Med~WtMIIA~W~nbttdCDOeill 

0(11Ct:~d~~(X1~fmnQ&. 
256 

Figure 5. Siz:e of private eQuity has been growing relative to public equity 

~vmhhoJd inp-Nr.o~ 

wMnnhf!kl.n~~ 

- MWeighing the effect of regulatory and 

structur11l changes 

Reasons for the decrease in IPOs and the numbel 

of publicly l~ted oornpanies tend to focus 011 the 

ccrnpl~nce and regulation ccsts of being public. This 

appears to have some vali<ity. EYidenoe suggests 

that even though changes to marl:et structure and the 

regu~tO<Y landscape have led to a diminishng benefit 

of g<>ng publ~. this has oon<ide<l with an increasing 

benefit of sta)ing private.• 

Consequently, Figure S shows the multiple of publicto-private equity value has been 011 a dcwnward trend. 

However. the overal vatue of ll'Jblic equity markets has 

cootinued to grow-just not at the same pace as that of 

private equity markets. Put another way, publk: market 

equity ~·t suffering in absolule terms; rather. ~·s 

laggi1g in relative terms.' 

Soolho~aol.nocably.r9nA t"''""'cletalod-. 

Implications for investors 

Despite the rJrop in the number of publicly listed 

companies, there appear to be few, if '"~· implk:atioos 

for investors. The investable U.S. equity market-the 

large-. mid-, and small-cap stocks that rellect investors' 

investable OjlpOIIIJrity set-has remained a relatively 

COflStant proportion of the total U.S. equity market, and 

it has atso maintained a eonsistetlt level of concentration 

among ~ ccnstituents. These p<oporlion and coocen· 

!ration effects are measured in terms of a company's 

vsluo. and they are sometimes overlocked by a focus 

on the shrin1ing number ol pub!~ oornpan·IOS. 

7 """''""'""'"'~"'"""~""'- "'.,...,;e,""'""~"'""P """''"'""'""""" ""'" .............. ,g • .,.., .... """ "" "t>Aii<oP!'r""""• See m.~n.nocably rogur A~"'' ""' detaiol-. 
257 

Figure 6a, oo page 6, shows thatlhe tolal number 

of mbcxaps has been falrtng. Howeve~, Figure 6b, 

oo page 6. shows that mict<><:ap6' propo<bon of overal 

market capitalization has stayed relatively stable. at 

around 1.5%. It is important to notelhatthese smallest 

firms are no1 oons;deled investable for most mutual foods 

and are not induded in many indexes because of theit 

if'lUid'I!Y and the regthtory consuainiS on the amount 

of ownership that may be acquired. In other wo<ds. the 

shrinl<W>g numbel of publicly isted ~nies oonsioiS 

a!most entirely of those secu!ities that would not have 

been invested in by active and passive funds anyway. 

11 does not appear thatlhe investable market has 

become more ~ntr.ned as a <esult of a sma!1e< 

number of public <XlOlj)Onies. either. We adoPted IV><> 

coocepl$ from social and ~sErial economics: lhe Ginl 

coefficieotO and the Herfinda~!schman Index (HHU.' 

Aps>ied to ou< analysis of eqlily marl<et coocernmlion. 

lhe Gini coefficient and HHI woold become larger if 

the m.ad::et were more c:on«muated. figure 7 plo1s the 

yea<-o<>year changes of lhe Gini coefficient and the HHI, 

as wei as the change in the number of public ~ies. 

Despite the facllhat the number of public oompanies. 

has been declining. nether the Gini ooefficient nor the 

HHI shows a uend of higher level of marl<et inequalily 

Of conceruration. 

Conclusion 

In this researcl> note. we expioted some causes ofand implicationS for-<nvestors related to lhe shrinl<ing 

numbel of public ~nies. Our analysis suggests that 

lhe falk>ff in publicly isted companies has been a mbocap phenomenon and thallhe focus on the shnn~ng 

number of public ~nies ignores lhe overall marl<el 

capitalization of the public: equity marf<et. 

We beiM the headline number is shrin\Ong in pan 

because of the inaeasing ben.efits-lrom a oompany's 

pe~Spective-of remaining P<Nate. Despite the uend, 

ho\vever, we do not believelhaltha public marf<el has 

become tess investable or RlOI'e concenuated. 

Figure 7. Degree of concentration of public equities 

in the investable market has no noticeable trend 

Hlil 

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258 

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2l>on!o tvy)(iyw>g. 2007. Economc~oflht 

~Acloi2002Jo<Jtnllol~¥1d 

E<ooomrcs.44: 74·115. 
259 

Appendix 

Figure A-1. Major sttuctural and regulatory changes 

of public and private equity markets 

Pubhc matket regulatcon and slruc:tural events 

1996 lniiOduction llld gtOWUI of online bcol<etage ocoounts 

mOg!lt """' edUCe<~ the incenm IO< Smal-<op 

marbltmakefs. 

2000 The SEC's f~r d'.s<losvfo mandate rright have 

caused a deteriocation of reseaccheoverage for 

smol""""""ios. 

2001 Oeoimafrution might Mwreduced lhe incentive 

fof small<:ap market makers and reSMrch oover8Qe. 

2002 TheSalbarlos.Oxleykt!SOXlmOg!ltllavoraised 

~lanceCO$t$fOtissuets.. 

2003 The G»baaSeurem&nl separated researct.and 

-t~n~~~O\cenM$ 

10 J)<O'idereswch ..,.,age IO< smaJI~. 

2005 The SEC's Regvlatlon Na;IOC"'al M.1rket5Y$tem 

prcvide<Jinwstorswitllequatac:cossto iniO<matlon. 

cooltibuting toincteased f~agmen~tion and "dar!( 

poOOofliquiditv. 

P11v<Jto market deregulation 

1982 SEC Regulatioo D J)<-sever~ safell:llbors 

fromregisttation. 

1990 SEC Rule 144A a!Joy.'ed resale of private se~rities 

wilfloul reslliction to qualified insbtutional buye(s. 

1996 A <113nge to Set<lon 31<17 of the lnve>tment Conl>any 

Act of 1940 of fee lively"'""'""' the 100..,.stor cap 

foe private investment funds. although ittvest«sare 

stlilsvi)ject to status., a "QUalf;odPWtii3Ser: 

1012 The,...,.tart0ur&>sino,.S1811UPSIJ08SlAct 

,....., the shareholder eemno of private COMC>Onios 

fro.n 500 10 2,000. 

2015 NASDAQ ac<~ure4 SecoC'IdMarkttto fa<ilrtate the 

ex<N~ of sha<es IO< pcivateeompar>es. 

ooreo:~-""""ill'll'~""O.~!llil1j. 

Earlier analyses in1o the shrinking number of public 

oompanies largely focused on the gcowil>g regula1ory 

burden that lessened the incentive for oompanies to 

go public. f<rr exaf!'4)1e, the Sa<llaoes-O>dey Acl (SOX) 

in 2002 is commonly blame4 for raising cornpl~noe 

OOSls for issoers.•• Other regula!lons. soth as the 

2003 Global Senlemen\, YA1ich settled aliega!lons 

of conflicts of interest ben·reen inves1mern bat>king 

and securities research at brokerage firms. reduced 

research awerage for small firms and might have 

dampened marl<et-rna);jng.11 

However, more r<(enl researc:ll has noled 111at the 

decline in the mJmber of publicly listed oompanies 

predates these regulations and has shifted anenlion 

to ellanges 111at oeourred before SOX," For example, 

Weild ancl Kim 12009! cootende4111a1 the collective 

ellanges in regulalion oncl marl:et structure led to a 

"perlect storm,· redu<;ing tho inoentive to go public. 

Add~ionalty, the shrinking number of pub1ic companies 

seems 10 rake place onty in the United States; !he 

numbers are uending higher in many other major 

CO<Jnlties, although their regulations on the public 

market have been tightening." 

It is possible lllat tho challenge for private companies 

isn'l necessarily lllat IIIey face higher ~ts as public 

oompanies bu1 that they enjoy relatively more benefits 

fronn remaining pcivate. loosening regulation on the 

l'rivate market has &'fov.~ l>ivate companies to gamer 

beoeflts usoaly enjoyed by public companies. For 

example, Rule 504 of Reg.Ution 0 adopted by tho 

SEC in 1982 provided an exemplion fO< c:enain typeS 

of irwestotS to invest in lhe privale malket Since 

then, however, the exemption has allowed a glowing 

number of ind'Mdual investors to participate in the 

private market." 

IO !hoogi)OO~f"""nego!M--rel""_...,lbc_of$0X;("''("""'aoiW"912(10~-.. ino-o-~ll>~ ... , ... sox. II Seo~CaiWn,aoSMijl!lf)17). 

-.-..,>lailllf)m""o.;og.~<tt\..,Snllt2<11n«<ed,.,.htl~"""'"'to"'...,""' ... ~.,.·""""'-sox-. .... S..Wolllrii211t111otd!II01roullisled---ooocf>,.li>nlin197S:o.;og.l:or<tt\..SSnllrl0171-•-IIII<IJIIl.~<1* 

dttav.«tqllt'ltii2Cl!l 

US..Ooloor...,f!Wl 
260 

liquidity in private securities has inaeased in pan 

be<:ause the adoption of SEC Rule 144A facilitated 

the resale of private securities. and the emergenoe 

of exchanges cate<i~ 10 private oompany investO<s 

alows investO<S to trade their :Shares." Also. the JOBS 

Act ino<eased the cap-from 500 to 2,000--on the 

number of shareholders that requires OO<nparOeS 10 

go public, thus allowing private oompanles to broaden 

their investO< base. Finally, increasil1g the financial 

disdosure requirement trom public companies creates 

a positive externality to their private counterparts." 

As a result. the •time to exit· fO< P<Mlte equity has 

been increasing sio<:e 2006 across several exit suategies, 

as shown in Figure A·ll. FO< e:xample, in 2006, private 

equity waited only three years befO<e realiling its exit 

strategy through IPO. By 2015. that wait was seven 

years. As a result oompanies 11\at go pubic are in a 

mud1 mole mature stage. Exits via seeondaty buyoot 

and CO<porate acquisilion have folk>.ved a similar uend. 

R~ng the p!essing need I<> limit the COSIS of going 

public. the SEC recently extended 10 larger OO<npanies 

a conrodenliality exemption that P<eviously had beef> 

granted only to small OO<npanioes and stan<Jps. The 

exemption allows larger rrms to ~eep their financing 

intentions, business strategy. •nd operating pOOO<· 

manoe private 1>1lile the SEC r~ their offering 

PI-•·" This might be a step in the right direction. 

but reversing a licle three decades in the making stil 

poses a challenge. 

Figure A· II. It has been taking longerfor 

companies to go public 

~ 

;_s 

" 

~ 4-r--------- c 

~' ~ 

o+-------.------.------.-

2006 2012 201$ 

- IPO 

Cocpor~t&~ 

- Seconclo<ybo)wt 

Nom:The_..,...-rr..__..-.......... 2006. 

Jhe2016da\aNdbrlebeen~\\benl!lis~waspti'P'I'ed.. Thlcllin 

,_.,,.,..,..,..."'P"""""~'"'I'G·""""'­ ..,_,~ 

Seurcr.~d~basedcntWftnlb:H!oal 

$<e~~.., ..... {211151. 

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261 

Connect with Vanguard3 > vanguard.oom 

Vanguard researth authors 

James J. RovAey Jr .. CfA 

Ha~eng Wang, Ph.D. 

For II)Ore: informa1io11 abcut Vanguard funds. visit vtngltlrd.com or call 800·662·2139to obtain a 

prospectus or, il milable, a SUI'Mlafl prospectus.lnvestme111 objectives, risks, charges, expertS.et, 

a11d other impanant infon~ation about a fund are contained in the ptospectl.ls; read and consider 

~carefulllb lore nmtillg. 

AI ilm~ oatjocl IOri>t. i<Wng lflepoullo lo5o ol lfle"""''l"UilmL 

rJII>isof<gis"'ed--brtfAi'o$1i!uto. 

Vi nguard flesearch 

P.O. Box2600 

.,_ fO<ge, PA 19482-2600 

Ol0111beYIQ1001~k 

Alf9'U rtwofd. 

V~d~~Ci$uQw. 

IS&PCAU20U 
262 

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263 

June 26,2018 

nili1 Americans for ~Financial Reform 

AFR Statement 

The Senate Committee on Banking, Housing, and Urban Affairs meets today to conduct hearings 

on a set of bills ostensibly designed to increase access to capital. Several of these bills are part of 

a dangerous agenda to rollback securities markets regulations. The deregulation of private capital 

markets contemplated i.n these bills would disproportionally affect small, retail investors vis-a-

'' is large investors and would undem1ine the effective regulations and investor protections that 

are fundamental principles of stable and enlarging U.S. public capital markets. 

There is no evidence supporting the premise that undercutting compliance with enacted 

regulations would magically increase the number of i.nitial public offerings (IPOs). In fact, this 

approaclr-represented by the passage of the JOBS Act in 2012-has proven ineffective and 

even counterproductive. Instead of encouraging public markets, Congress' deregulatory spree of 

private capital markets further undermines public oll'erings by incentivizing companies to stay 

private and reap the ad1•antages of expanded exemptions and reduced compliance relative to 

IPOs. A number of bills in these hearings would double-down on this failed approach by 

reducing disclosure requirements that are integral to maintain investor confidence and stable 

capital markets. 

Another bill, S 1117, the "Consumer Choice and Capital Markets Protection Ad', would roll 

back post-crisis systemic risk protections related to money market funds. 

A more extensive, detailed discussion of the securities markets implications oftoday's hearing 

can be found in the test.imony of Mercer E. Bullard, Professor of law at the University of 

Mississippi School of Law, at: https:/lbit.ly/219JN1P. In addition, Americans for Financial 

Reform has previously written opposition letters to three of the bills under consideration today 

when they were advanced in the House. These letters are quoted below. 

• S. 588, the "Helping Angels Lead Our Startups (HALOS) Act'' 

Related House bill: H.R. 79 

Previous AFR Statement: The "HALOS Act," would permit issuers of unregistered 

securities to be exempted from safeguards regarding general solicitations so long as such 

solicitations were made at an 'event' sponsored by any of a wide range of non-profit or 

educational organizations, investor associations, or trade associations. 

SEC registration requirements are designed to protect investors by pro1<iding investors with 

verified, reliable financial information concerning the securities in which they invest. The 

JOBS Act made it possible to do broad-based general solicitation of the public forthe sale of 

riskier unregistered securities. But it also required that companies do a good-faith verification 

that investors were in fact accredited investors who met a range of qualifications indicating 

they could afford the increased risk ofloss associated with investing in unregistered 

securities. This requirement is an important in1•estor protection. 

1615 L S~eel NIV Suit< 450. WashingtOn. D.C. 20036 j20l.~.l885 l ourfi11311Cialsecurity.org 
264 

Amrorens for Financial Refonn 

1615 LStrctt NW 11• Floor Washington. O.C. 200361202.466.1885 lourfinancialsteurily.org 

The HALOS Act would eliminale this investor proJection for a very wide range of types of 

issuer e1•ents, evenls thai could easily be used 10 solicil inves1men1 from the broader public, 

including many who are no! accredited inveslors. This exemplion is overly broad and would 

likely lead 10 losses for investors who are no! prepared lo lake the significant risks associated 

wilh purchases of unregistered securities. 

• S. 1117, the "Consumer Financial Choice and Capital Markels Protection Act of2017" 

Related House bill: H.R. 2319 

Previous AFR Statement: H.R. 2319 would reverse key 2014 reforms to rules governing 

Money Market Funds (MMFs). During 1he 2008 crisis, declines in the value of MMFs that 

were over-invested in risky bank debt eventually led to a multi-hundred billion-dollar run on 

the en1ire sector of prime MMfs. Due to !he threat to financial stability and the broader 

economy, the Federal government intervened and bailed out !he entire MMF sector by 

publicly guaranteeing its assels. This slopped the run, but exposed laxpayers to !he polential 

loss of hundreds of billions of dollars.1 

In response to 1hese events, regulators took several sleps to require that a key subsector of 

MMFs-inslitutional prime funds-report accurate informal ion to their investors aboulthe 

currenl markel value of their holdings. In a technical sense, !his is a requirement that funds 

report a so-called "floating Net Assel Value" (NA V) which represents !he true market value 

oflheir holdings, rather than a fixed NAV which gives the impression that each share in a 

money market funcl is worth one dollar. This refonm became effective October, 2016.

2 

This regulatory change enhances financial stability by helping to ensure that fund investors 

are prepared for tluctualions in the value of their funds and are less likely to engage in a 

disorder!)' exil from !he sector when priees start to shift. It also makes clear thai shares in 

MMFs are market investments that carry risk. The floating NA V is designed to lessen the 

impression that shares in MMFs are similar to insured bank deposits, thus lessening the 

perception thai they are implicilly backed by the government 

H.R. 2319 would reverse the regulatory response to the crisis by once again penmining 

inslitutional prime funds to report an inaccurate fixed value for their holdings, thus 

encouraging investors to view these instrumenls as the equivalent of bank deposi!S-which 

they are not. Funds affected by this regulatory change are funds invested in by large 

institutional investors, not retail investors, and only "prime" funds that hold securities not 

guaranteed by the Federal government are affected. 

H.R. 2319 purports to address any increased threat of a taxpayer bailout by prohibiting any 

Federal govemmen1 bailout of MMfs. However, the definition exempts a "facility with 

1 McNanwa, ChriStian, "Tempor.ll)' Guarantee Program for Money Market Funds; Yale Progrom on Financial 

Stability lnten•eotion Case Study, January ll. 2016. Available at: httpsi/ssrn.comlabstract-2723529 or 

hnp:hbil.lyl2091upl 

'"Money Mark <I Fund Refcrm; Amcndmeots 10 Form PF; Investment Company Act Relea~e No. 31166, July 23, 

2014. 
265 

Amrorens for Financial Refonn 

1615 LSirctt NW 11• Floor Washington. O.C. 200361202.466.1885 lourfinancialsteurily.org 

broad-based eligibility established in unusual or exigent circumstances" from the definition 

of"covered Federal assistance." This language would exempt Federal government assistance 

provided under Section 13(3) of the Federal Reserve Act from any prohibition on bailoulS 

under this bill- leaving the door wide open to future Federal Reserve assistance to MMFs. 

Congress should n()t reverse important regulatory changes made in response to the 

government bailout of MMFs during the crisis, and should maintain the requirement to report 

more accurate fund valuations to investors. In tttent testimony to the Committee (October 4, 

2017), SEC chair Jay Clayton expressed his view that any such change would be premature 

at best.3 

• S. 2126, lhe "Fostering Innovation Act of2017" 

Related House bill: H.R. 1645 

Previous AFR Stafemenf: H.R. 1645 would double the time for which certain new public 

companies are exempt from key financial reporting controls, most notably attestation by an 

auditor that their earnings and accounting are accurate. It granlS this exemption to a class of 

companies, newly public companies with low revenue growth, which have a particular strong 

incentive to manip11late their financial statements and deceive investors. TI1is bill would both 

hann investors and undennine the integrity of capital marl<ets. 

' See Testimony by Jay Oa)<ton on Hearing entided "Examining the SEC's Agenda, Operations, and Budget• House 

Committee on Financial Services, October 4, 2017. Available at: http:l/bit.!y/1fP4POK. 
266 

IPO Markel Posts Blistering Firstllalf- WSJ hllpsi/•mw.ll•j.comlanicleslipo-market·posls-blistering-fi rs1-hal f-1530 ... 

I of3 

MARKETS 

THE WALL STREET JOURNAL. n.~•!cl'fO.I'~~-Cf'#/5)0'$J'~_.b'Mb.10'11DfOI~cr.woc~"" I(\IHn~rttWll 

ttl;ll,.._.,.,~~~ ~l 

IPO Market Posts Blistering First Half U.S,globai POfundraising,sonpaceto.oneo thebest~arsonre<ord 

$JS I'fts,alt(lll)~k'l(.ll$(1nt~tht~Wtl\i$f'f<f'C'ICtt~ITIOtlt'Jtlw'ot9\"'ntiJI~ 

ofttoo}PHO O:SCOTTIJliHlYRE/Bt~~lOG 1<1'£\'JS 

By Maurtfn Farrell 

Updated ~ 2. 2018 S'26 p.m. ET 

All IPO market that was left for dead jus! two years ago has oome roaring back in 2018, 

~>ithcompanies raising public capital at a pace rarely sten in the past "'o decades. 

So far thisyear,120 companies have wed initial public offerings to raise $35.2 billion 

on U.S. mllanges. That is the highest. volume since 2014 and the folll'th·busiest ,..,.. 

to·dateon record. according to Dealogic, whose data go back to 1995. 

Bankers say no single catalyst is puslhing oompanies to tap the public markets for 

capital. Instead. the surge has been caused by a oonvergenceof favornble business 

oondition~ strong stock markers and investors' hunger for high·growth oompanies. 

Those factors have led to offerings by an arrayoffinns varied by size, industry and 

age-rangingfrom the web· storage and collabor11tion company Dropbox Inc. 

oax 2l~ • ro home-alarm company ADT Inc. AOT ·0.99\0 to big-box n>tailer BJ's 

Wholesale Club Holdings Inc. 

The total amount raised doesn't ooun tone of the largest and most high·profile 

companies to go public in the U.S. this 1·ear. Swedish music·sharing oompany Spotify 

Technology SA went public without raising any money through a so-called direct 

listing. 

!PO issuance began to pick up pace last ~ar after a moribund 2016. Helping along this 

year's rush: Companies are no longer worried they may have to go public at valuations 

below those they had achieved in the private markels, as a disoonne<:t has largely been 

erased between public and privale·marker valuations. 

Bankers and lall'yers expect the rapid !PO pace to continue for the rest of the year. 

7/5/201S.l:20PM 
267 

IPO Mari<<1 Posts ~l tering First Half- WSJ hllps:/1" "w. "'j.comlanicleslipo-mari<et·posls-bl istering-fi lSI-hal f·l530 ... 

2of3 

'OurglobaiiPO pipeline is stronger now than it's been since the financial crisi~" said 

Evan Damast, global head of equity and fixed income syndicate at Morgan Stanley. 

Companies that have gone public in toe U.S. this year are trading, on average, WI 

above their IPO price, and te<hnology companies have done panicularly weU, up 53% 

above their IPO price, according to DeaJogic data through Thursday's dose of trading. 

Meanwhile, the s&P 500 rose less than ~for the year and the te<h·heavy Nasdaq 

Composite climbed 8.'/l!, during the same period. 

Newsleller Sign-op 

'This )' .. r 1ve're finding the investor 

demand for technology IPOs is literally 

the highest we've ever seen both in tenns 

of the quantity and quality of interest," 

said Madhu Narnburi, JPMorgan Chase& 

Co.'s h .. d of te<hnology investment 

banking. 

Not that this has dented private·markot 

aetivity. Many companies continue to 

raise vast sums there. That companies 

are rapping both private and public 

markets defies expe<tations that 

companies would largely lllrn to IPOs 

once private funding tightened. Activity 

so far this year has made it dw both. markets can thrive in tand<m, at least for now. 

'Private markets primarily facilitate companies to raise capital. A public !PO is a 

landmark event for a company that goes far beyond just raising capital," said Mr. 

Narnburi. Employees of public companies, he said, hm a dear sense of the wealth 

they,\'e earned, and public companies ha\'e a currency to use ror acquisitions and for 

future capital· raising. 

The largest private cornpanie~ includ.ing Airbnb Inc., Uber Te<hnologies Inc. and 

We\Vork Cos., which ha~·e raised vast arnourts of private capital,areexpe<ted to hold 

o!l ongoing public until at least 2019, according to people familiar with the companies' 

plan~ 

Another closely watched IPO candidate, ride·hailing firm Lyft Inc., recently raised $600 

million from mutual fund and hedge· fund investors inc.luding F1delity Investments. 

And Soft Bank Croup Cor)). continues to pour money into private companies through its 

S92 billion te<h·focused Vision Fund, extending the IPO timetinesofits portfolio 

companies-and pushing up their private valuations. 

Bankers expe<t to see a steady pace or multibillion·dollar te<hnologycompaniesgoing 

public in the U.S. the restofthisyear. Among them: Sonos Inc.; Up1vork; 

SUrveyMonkey; and Eventbrite Inc. 

Tech IPO~ mostly software companies, ha~·e been going strong, raising $12.2 billion in 

28 deals in the first half of2018, nearly double the volume from the same period in 2017 

and a more·than·tenfold increase from 2016's 1•olume, acoording to Oealogic. 

The largest IPOs in the second half of 2018 are expected to come out of China. Many of 

the largest Chinese companies planning to debut in 2018, including Meituan Dianping 

and Xiaomi Cor))., will do so in Hong Kong as its stock exchange changed its listing 

rules this )'ear to allow companies IYith dual<lass shares to list there. 

7/512018. I :20 PM 
268 

IPO Mari<<1 Posts ~li ering First Half- WSJ hllps:/1" "w. "' j.comlanicleslipo-mari<et·posls-bl istering-fi lSI-hal f·l530 ... 

3of3 

An exception is Tencent Musk Entertainment Group, China's largest music·streaming 

oomp.my, which ise'Jl'<led 10 go public in the U.S. and is expteled 10 bt one oflhe 

largesiiPOs of the year, according 10 ~pie familiar with the deal. 

While 2018 oould bt a near-reoord )'ear, bankers and lawyers are bettingactivicy could 

oonlinue 10 accelerate from there. "There's a real chance that 2019 oould bt even 

strong.r than 2018," said JPMorgan Chase's Mr. Namburi. 

Write to Mauretn Farnll at maureen.farrell@wsj.oom 

Corrections & Amplilications 

So far this year, l20 companies have used initial public offerings lo raise 535.2 billion 

on U.S. exchanges. Thai is the high"'tvolumesince2014. An earlierwrsion of this 

article inoorrectly said it was the high!$! volume since 2012. 

Appet~red in the Jul)l3, Z0/8,print edition QS '/PO MQrket Runs Qt Fastest Clip Since 

2014.' 

Co9ptt&o:!pfl)1 b~b't«~l'c.AI R~~ 

Tht~·b~PnQI'&~!Mr;rltlooodill'~ .... b'6t/:~~op.t~ CW.Cif~W( 

tGPh•'fi"I'Q""" 

7/512018. I :20 PM 
269 

Joly2013 

GA0-13-582 

United States Government Accountabilit Office 

Report to Congressional Committees 

INTERNAL 

CONTROLS 

SEC Should Consider 

Requiring Companies 

to Disclose Whether 

They Obtained an 

Auditor Attestation 
270 

G/{() 

Highlights 

~i\11fg.l soi GA0-13-582.• repMto COO!Jessiooal coomittees 

Wby GAO Did This Study 

Section 404(b) of the Sarbanes-Oxley 

Act requires a public company to have 

its inde~ ejlt auditor attl!$t to and 

repon on management's internal 

control over financral reporbng; thrs IS 

known as the audrtor attestation 

requrremMt. In July 2010, the DoddFrank Wal Street Reform and 

Consumer Protection Act exempted 

companies Wl1h less than $75 l!llllron in 

public lloat from the auditor attw.alion 

requorement. The act mandated that 

GAO examine the impact or the 

permanent exemptiOn on the qualily of 

financial reporting by small public 

companies and on investors. This 

report discusses (1) how the number of 

financial statement restatements 

compares between exempt and 

nonexempt companies o.e., those wrth 

$75 million or more in poblic float), (2) 

the costs and benefits of complying 

Wl1h the attestation requirement, and 

(3) v.itat is known about the extent to 

v.itlch Investor confidence is affected 

by compliance with the audt01 

attestation requirement. GA011natyzed 

financial restatements and audit fees 

data; surveyed 746 public companies 

with a respon$$ rate of 25 percent, 

interviewed regulatory oflicials and 

others; and reviewed laws, surveys, 

and studies. 

Wbat GAO Recommends 

GAO recommends that SEC consider 

requiring public companies, where 

applicable, to expliciUy disclose 

whether they obtained an auditor 

attestation of their internal controls. 

SEC responded that investors could 

datermine attestation status from 

available inf01matioo. 1M without cleat 

disclosure, in\/Qstors may misinterpret 

a company's status; therefore, this 

warrants SEC's further consi:leration. 

"'"'*GAO.I:l-582. For more informllliM. contac A.NIOOieC!c>oersal(202)512~78 

« ttowe..,@gao.goy. 

INTERNAL CONTROLS 

SEC Should Consider Requiring Companies to 

Disclose Whether They Obtained an Auditor Attestation 

What GAO Found 

Since the implemelllalioo of the auditor attestation requirement a the SarbanesOxiey ~t of 2002 (Sarbafle'l·Oxley ), companies exempt from the 

req\lrement have had more frnancial restatements (a company's revisaon of 

publicly reported financial inf01mation) than nonexempt companies, and the 

percentage of exempt companies restating generally has exCEeded that of 

oonexe~ OOillf.EirVES. Exempt and nonexempt companies restated their 

financial statements for similar reasons (e.g., revenue recognrtion and 

expense$), and the majority a these restatements prooooed a negative effect on 

the companies' financial staterneds 

Percentage or Exempt and Nonexempt Companies That Restated Their 

Financial Statements, 2005 to 2011 

Percent:.Jge 

:l ~ ~ [1 ~~ ~c.- 2006 ZOOS 2001 2008 200S MilO 2011 

SI:Dw:GAO_,_dhdi~O. 

M e: Nmexem[l """'""'' ~rst oomptje<!Wllh tlle S.cti<lo •04(b) re"'i:emeol fot lhel' nrst ns<al year enclng on« ater Nc....-etnbef 15, 2004. Exempt companies never had to com'*" wilh the 

req.~iremenl. 

Vtews on the costs and benefits of aootor attestation vary among COflllanies and 

others. Altlllugh companies and others reported that the costs associated with 

compliance can be signihcant, especially for smaller comparues, GAO's and 

others' analyses show that these costs have declrned for companies of all sizes 

since 2004. Companies and others reported benefits of compliance, such as improved internal coruols ard eliabil y of financial re!Xlfls. H01vever, meaSl{ing 

whether auditor attestation ~iance costs outweigh the benefrts is difficult and 

views among companies and others were mixed as to whether the costs 

exceeded the benefrts of compliaroe. 

A majority of emj)rical stooes GAO reviewed suggest that compliance wfth the 

auditor attestation requirement has a posftive impact on investor oonfldence in 

the quality of financial reports. Some interviewees said the independent scrutiny 

of a oompany's inte1na1 oontrols is an ifl'll<lllant investor protection safeguard. 

The Securities and Exchange Commission (SEC) dJes not require exempt 

comi'Jnies to disclose in their an~al report whether they voluntarily obtained an 

auditor attestation. SEC officials said ft is not 001m1on for SEC to require a 

company to <lsclose voluntary compliance with requirements from wllch ft is 

exempt HOvtever, federal sect.rities laws require companies to disr;l()se relevant 

inf01mation to irwestors to aid in their investment decisions. Although irlormation 

on auditor attestation status is available to i~tors, re rillg a company to 

expticitly state whether it has obtained an auditor attestation on Internal controls 

00\td increase transparency and investor protection. 

-----------Unite<! stotes GovemmoniAeeounlablltlyOfftee 
271 

Contents 

Letl r 

Appendix I 

Appendix II 

Appendix 1ll 

Appendix IV 

flihllography 

Tables 

llackgmund 5 

The Pe ~nt; ge of exempt Companies ~ith Flnancial 

ResUilements Was Generally GresterThan tl1e Percentllge of 

Nonexempt Companies from 2005 thmugh 20 II 12 

Views on the Costs and llenefits of Auditor Attestation Vary an10ng 

Companies and 0!1-.ers 20 

Auditor Atl.eSiatlons Appear to Positively Affect. Investor 

Confi en~, and Disclosure of Con >liance Status Could 

Enhan~ Investor Protection 30 

Conclusions 37 

Recommendation for Executive Action 37 

Agency and Third-Part.y Conm1ents and Our Evaluation 38 

Objectives, Scope, and Metbodology 

Comments from the Securit.ies and Exchange Commission 

GAO Survey of Accelerated Filers and Nonaccelerated 

Filers 

GAO Contact and Staff Acknowledgments 

Table 1: Sarbanes-Oxley Act Section 404 Requirements Compliance 

40 

48 

50 

67 

68 

Dates by fi'ilcr Status Set by SEC 9 

Table 2: Number of Exempt and Nonexempt Companies, 2005-2011 10 

Table 3: Number of Exempt Companies That Did and Did Not 

Voluntarily Comply wiU1 U1e Au<.lil()r Atle>ilation 

Rcquircmert a:nd tllC Percentage of Compruties That Filed 

Restatements, 2005-20 U 17 

Pogo I GA0.13·S82 Auditor Attestation on Internal Controls 
272 

Figures 

Table 4: Financial Restatement Cawgory Descriptions 18 

Table 5: Average Total Audit Fw; as a Percentage of Revenues, 

2005-20 II 22 

Table 6: Estimated Percentage of Companies witll Market 

Capitalization Less Than $10 Billion That Perceive &oefits 

from the Auditor Attestation, by Type of &>nefit 26 

Table 7: Sun'ey Sample Disposition 4-1 

Table & Sample Disposition for A<UtlSted Target Population 45 

Figure 1: Number of ~atements by Exempt Companies and 

Nonexempt Comp.-ulies. 2005-2011 14 

Figure 2: Percentage of Exempt and Nonexempt Conq><lllies That 

Re::tate<l Their F'mancia.l Statements, 2()05.2011 15 

Figure 3: Reasons for f1nancial Restatements by Exempt 

Companies and No exen~JL Companies, 2005-2011 19 

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~ed States The publi$hed product may be reproduoed and distributed in its entirety 

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necessary if you 'Msh to reproduce this maletlal S<jparately 

Pogt li GA0.13·S82 Auditor Attestation on Internal Controls 
273 

GAO u.s. GOVERNMENT ACCOUNTABILITY OFFICE 

441 G St N.W. 

WashingtOn, DC 20548 

July3, 2013 

The Honorable nm Johnson 

Olairman 

The Honorable Mike Crapo 

Ranking Member 

committee on Banking, Housing, and ~an Affairs 

lklited States Senate 

The Honorable Joo Hensarling 

Olairman 

The Honorable Malline Waters 

Ranking Member 

COmmittee on Financial Services 

House ot Representatives 

Public and investor confidence in the accuracy, reliability, and 

transparency of companies' financial reporting is critical to lhe effective 

functioning of U.S. capital markets. In response to a series of high-profile 

corpaate aCCOiflting scandals that resuted in substantial losses to 

investCI'S at lhe start of the last decade, Congress passed the Sarba.nesOxley Act of 2002 (Sarbanes-Oxley Act). ' The act introduced major 

reforms to public company finandal reporting and auditing !hat were 

intended to, among other things, improve lhe reliability of finandal 

reporting and enhance audit quality. Effective internal contrds are a key 

focus of these reforms. In particular, Section 404{b) of lhe act-the 

audita attestation requirement-requires that each public company's 

independent auditor annually attest to and report on management's 

assessment of the effectiveness of lhe company's internal contrd over 

finandal repating.

2 The auditor determines whether any material 

weaknesses exist as of year.end. 

1

Pub.l.l'lo. 107·204, 116 Slot. 745 (2002). 

1

Seetioo 404{b) applie$ to COflllMie$ required ton~ rep«tsv.ith the Seeuritle$ and 

Exchange Conmission (S£C) unde< the Securilie$ Exchange Act ol1934./dat§404(a). 

Regi&ered investment companie$ andasset·baeked issuers generally are exempt tom 

Seetioo 404(b). see Management's Report on lntemal Con~ol Over Financial Reporting 

and Cerlification ol Disclosure in Exchange Act Reports, 68 Fed. Reg. 36,636 (June 18, 

2003). 

Page1 A0 3~ Aud~or Attestation on nltm~ Cwol• 
274 

The auditor attestation requirerMnt has been subject to much debate 

since ~s inception. Congress, business groups, regulators, consurMr, 

investor and auditing groups, and academics have debated the need for 

small public COITClanies (generally considered to be public companies 

with a publicly available stock value of less than $75 million) to comply 

with the auditor attestation requirement. Opponents of the requirement 

argue that compliance is too costly, especially for small public companies. 

In contrast, proponents of the requirement argue that, generally, small 

public companies lack adequate internal controls and restate their 

financial statements-that is, revise their financial statements to correct 

aocounting errors-more often than large companies. Therefore, they 

argue, the requirement provides an important investor protection 

safeguard by ensuring independent scrutiny of a company's financial 

reporting process. 

The Dodd-Frank Wall Street Reform and Consumer Protection M (Dodd· 

Frank Act) Section 989G, arMnded the Sarbanes-Oxley Act so that 

Section 404(b) does not apply v.ith respect to ·any audit report Pfepared 

for an issuer that is ne~her a 'large accelerated filer' nor an 'accelerated 

filer' as those terms are defined" by the Secur~ies and Exchange 

Commssion (SEC).~ By adding Section 404(c) to the Sarbanes-Oxley 

M, Section 989G permanently exempted smaller issuers from the 

requirement to obtain an auditor's attestation on management's 

assessment of the company's effectiveness of internal control over 

financial reporting.' At the time of enactment in 2010, Section 989G 

affected about 5,500 small public companies, representing about 61 

3

Pub. L l'lo. 111·203, §989G(a), 124 Stal1376, 1946 (2010). SEC refers tosmal public 

companies and large public comparies 34 nonao:eletated tiers and ac<:elerated filers, 

respedively, and uses a public flo3t me34Urement to determine the C31egO<y of filer. 

Although the term "non~rated tier" is not defined in SEC rules, it refers to a reporting 

company that does oot meet the derinmon of either an "aooelerated filet' or a "large 

ao:elerated filer"undertlleSecuritiesExcllange A<:tof1934 Rule 121>·2. 17 C.F.R § 240.12b-2. M ao:elerated filer generally is a company that has been pubic for at least 12 

months and, among o1ller things, had at least S75 maion but less than S700 nWion in 

public float 34 of the last business day of its most recently completed second fisc>JI quarter 

and filed at least one annuli! report v.ith SEC. A large ao:elerated filer generally is a 

company that has been public for at least 12 months and, among olher !hings, had a 

public float of S700 milfion Of more as of the last busiless day of i1s most recently 

completed se<:ond fiscal quarter and lied at least one annual report with SEC. SEC 

defines pubic float as the v.ort<t.vide aggr~ate market valle of voting and nonvoting 

common equity held by nonaffiliates cl tile filer. 

4

§989G(a). 

Pogt2 GA0.13·S82 Auditor Atttstallon on Internal Controls 
275 

percent of all public companies, by exempting them from the 

requirement. s 

Section 9891 of the Dodd-Frank Act mandated us to study and report on 

the impact of the permanent exemption on the quality of financial 

reporting by smaller public COI11l<lnies and on investors. 6 This report 

discusses: (1) how the number of financial statement restatements 

compares between exempt and nonexempt COI11l<lnies; (2) the costs and 

bene ~s for nonexempt companies and exempt COI11l<lnies that voluntarily 

comply 'hith the audnor attestation requirement; and (3) what is known 

about the extent to which investor confidence in the integrity of financial 

statements is affected by whether or not corrpanies CO"l>IY >Mth the 

auditor attestation requirement. For the purposes of this report, we define 

exempt companies as those with less than $75 million in public float 

(nonaccelerated filers) and nonexempt companies as those with $75 

million or more in public float (accelerated filers). 

To identity the number of financial statement restatements (referred to as 

financial restatements) and trends, we analyzed data from Audn 

Analytics' Restatement database, which contains company information 

(such as assets, revenues, restatements, market capitalization, location, 

and industry lass~ication code) for 2005 through 2011.

7 We identified 

6,436 financial restatements by 4,536 public COI11l<lnies, 2,834 of which 

were exempt COI11l<lnies.

8We used Audit Analytics' 69 classifications to 

dassWy the type of financial restatements into siX categories: core 

expenses (i.e., ongoing operating expenses). noncore expenses (i.e., 

nonoperating or nonrecurring expenses), revenue recognition, 

eclass~ications and disclosures, underlying events Q.e., accounting for 

mergers or aoquisnions), and other (e.g., restatements related to 

ss.e Secur es and Exchange Commission, Study snd Reoomtrendslions on Section 

404(b) of the Sarl>8n&·O)I}ey Ad of 2002 for I$$1W$ wih PIJbli: Flo81 Belween $75and 

$250MIIkon [Wash"9ton, D.C: Aprj2()11). 

6

§ 9891(a)·(b). 

7 Audit Analytics is an online market inteligenc;, service that provides information on SEC 

registrants. Audit Anatytics mainta_l\s a proprietary database containilg information from 

the filii'IQS public companies submit to SEC, sucll as audit lees, d~ opinions, and 

financial restatements. 

&t'he number of financial restatements exceeds the number of public companies issuing 

financial restatements because some ot these companies restated their financial 

statements l!l()fe than once. 

Pogtl GA0.13·S82 Auditor Atttstallon on Internal Controls 
276 

pensions and any other issues ident~ied in the restaternent).

9 To identify 

aud~ costs of compliance, we analyzed data from Aud~ Analytics' Au ~or 

Opinion database, which contains aud~ors' report information, including 

aud~ fees, nona d~ fees, auditor name, aud~ opinions, revenues, and 

company size, for 2005 through 201 1. Our analyses of ~ costs do not 

include 2012 data because some of the data for small companies were 

incomplete as we concluded our analysis. According to Aud~ Analytics, 

the incomplete data was often due to the fact that the small companies 

had not yet filed the relevant information \'.ith SEC. In add~ on, afthough 

2012 restatement data are available, we were unable to conduct some of 

our analyses of restatements for2012 because of inCOI!lllete 2012 smallcompany data in the Auditor Opinion database. IJIJe tested samples of the 

Aud~ Analytics database information and found ~to be reliable for our 

purposes. 

To obtain information on large and small public companies' experiences 

with the costs and benefits of complying with the auditor attestation 

requirement and the extent to which investor confidence in the egr~y of 

financial statements is affected by COI!llanies' compliance with the 

requirement (referred to as aud~or attestation status), we identified a 

population of 4,053 oompanies that frt within the soope of our review. To 

define the population, we obtained a list of al publicly traded oompanies 

for calendar years 2004 through 201 1 from Audit Analytics. We strat~ ed 

the population into three strata by first identifying the nonaccelerated filers 

that voluntarily complied with the integrated audit requirement in any year 

from 2004 through 2011. We excluded from our population any exellllt 

company that did not obtain an aud~or attestation of its internal controls 

and then stratified the remaining companies into accelerated filers and 

large accelerated filers. 10 We suNeyed all nonaccelerated filers that 

9

Susan Scho~ . The Changing Nature and Coosaquences of PUbli:; Company Finsncial 

Restalmlents: 1997-2006, a special report prepared at the reque& of the Department of 

the Treasul)', Apnl2008 FIVe of the six categD<ies are based on the claS$rllca1Jon sdleme 

developed by academics Zoe-Vonna Pamose and Susan Scholz. The remainrng 

calegory ('"otherj was developed by GP/J and comprises financial resllltemenls that were 

not included in one ot the other categoms. 

1

"r o identity aocelerated filers and large accelerated filers, we re6ed upon the companies' 

SEC filing status, W>ich is based on public float. In instances in W>ich CO<OPW S did not 

disclose their filng stalus, we relted upon the oompanie~ market capitalization. as 

reported in the Audl Analybcsdatabase, lo make an independenl determination of likely 

lil ng sllllus. Marl<etcapilal~ation is deliled as the total dollar marl<et value of all ol a 

firm's outstanding shares and is calculated by mu!t4>lying a firm's outstanding shares by 

the current market price of one share. 

Pogt4 GA0.13·S82 Auditor Atttstallon on Internal Controls 
277 

Background 

voluntarily oomplied as well as a random sample of both strata of 

aocelerated filers for a total survey population of 746 oompanies. We 

received valid responses from 195 oompanies. The m ighted response 

rate for this survey, which aocounts for the differential sampling fractions 

within each strata, was 25 percent. All percentage estimates presented in 

this report have a margin of error of plus or rrinus 15 percentage points or 

femr, and all estimates of averages have a relative margin of error of 

plus or minus 20 percent or less, unless otherwise noted. 

For an three objectives, we interviewed representatives of small public 

oompanies, regulatory bodies (SEC and Public Company Acoounting 

Oversight Board (PCAOB)). trade associations (representing individual 

and institutional investors, acoounting firms, financial analysts and 

investment professionals, and financial executives), industry experts, a 

large pension fund, a cred~ rating agency, and academics kno'hiedgeable 

about acoounting issues. We also reviewed relevant academic, industry, 

and SEC research studies and surveys. 11 Appendix I oontains a more 

detailed description of our soope and methodology. 

We oonducted this pelformance aud~ from May 201 2 to July 2013 in 

accordance with generally accepted government auditing standards. 

Those standards requi e that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and oonclusions based on our aud~ objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

oonclusions based on our audit objectives. 

Internal oontrol generally serves as a first line of defense for public 

oompanies in safeguarding assets and preventing and detecting errors 

and fraud. Internal oontrol is defined as a process, effected by an entity's 

board of directors, management, and other personnel, designed to 

provide reasonable assurance regarding the achievement of the following 

objectives: (1) effectiveness and efficiency of operations; (2) reliability of 

financial reporting; and (3) oompliance v.ith laws and regulations. '

2 

11See ~ bibliography for a det11led liSt ol sources rev_, 

1

1coSO, Inteinal Control-Integrated Frarnew:>rk, 1992, 1994, and 2013. The "reliabiity 

of financial reporting" objective is the objecti<elllat is relevant for purposes ol Sedion 404 

and the SEC's implementing rules. 

Pogt5 GA0.13·S82 Auditor Atttstallon on Internal Controls 
278 

Internal control over financial reporting is further defined in the SEC 

regulations implementing Section 404 of the Sarbanes-Oxley Act.

13 These 

regulations define internal control over financial reporting as a means of 

providing reasonable assurance regarding the reliability of financial 

reporting and lhe preparation of financial statemeniS, including those 

policies and procedures that: 

pertain to the maintenance of records that, in reasonable detail, 

accurately and fairly reflect the transactions and disposnions of the 

assets of the company; 

o provide reasonable assurance that transactions are recorded as 

necessary to permn preparation of financial statements in conformny 

with generally accepted accounting principles, and lhat receipts and 

expend~ures of the company are being made only in accordance with 

authorizations of management and directors of the company; and 

o provide reasonable assurance regarding prevention or timely 

detection of unauthorized acquisition, use, or disposition of the 

company's assets that could have a material effect on the financial 

statemeniS." 

Regulators regard an effective internal control system as a foundation for 

high-quality financial reporting by companies. Tme IV, Section 404 of the 

Sarbanes-Oxley Act, aims to help protect investors by, among other 

things, improving the accuracy, reliabilny, and transparency of corporate 

financial reporting and disclosures. Section 404 has the following two key 

sections: 

o Section 404(a) requires company management to state its 

responsibility for establishing and maintaining an adequate internal 

control structure and procedures for financial reporting and assess the 

effectiveness of iiS internal control over financial reporting in each 

annual report filed with SEC.'s In 2007, SEC issued guidance for 

13

Managemenfs Repan on Internal Control Oves Financial Repo<llng and Certification ol !Mclosure in Exchange N:;t Repons, 68 Fed. Reg. 36636 (June 18, 2003) (amending 17 

C.F.R §§ 210, 228, 229, 240, 249, 270, and 274). 

14/d. 

'5pub. L. No. 107-204, §404(a), 118Stat. 745, 789 (2010) (codified as amended ai lS 

U S.C. § 7262). 

Pogt6 GA0.13·S82 Auditor Atttstallon on Internal Controls 
279 

management regarding tts report on internal control over financial 

reporting. 

18 

• Section 404(b) requires the firms that serve as external aud~ors for 

public companies to provide an opinion on the internal control 

assessment made by the companies' management regarding the 

effectiveness of the company's internal control over financial reporting 

as of year-end17 In 2007, PCAOB issued Auditing Standard No. 5, 

v.tlich contains the requirements that apply v.tlen an aud~or is 

engaged to perform an audtt of management's assessment of the 

effectiveness of internal control over finandal reporting. 

18 

While management is responsible for the implementation of an effective 

internal control process, the external auditor obtains reasonable 

assurance to provide an opinion on the effectiveness of a company's 

internal control over financial reporting through an independent audrt. 

Investors need to know that the financial statements on v.tlich they make 

investment decisions are reliable. The audftor attestation process involves 

the external auditor's testing and evaluation of the company's internal 

control over financial reporting and relevant documentation in order to 

provide an opinion on the effectiveness of the company's internal control 

over financial reporting as of year-end; a company's internal control over 

financial reporting cannot be considered effective if one or more material 

weaknesses exist. '

9 

Audftor attestation of the effectiveness of internal control over financial 

reporting has been required for public co1Tf)3nies v.ith a public float of 

18Commissi:m Guidance Reg8!ding Managemmt's Repal on Internal Con~o/ oWJr 

Fm nciat Repaling Un<W S«lion 13(~) a 15(d) o/lhe S«urities Exchange Ado/ 1934, 

lnterpretahon, SEC Release No. 33-8810 (June a:>, a:l07). 

11§ 404(b). 

18Auditing Stllndaod 1'/o. 5, An Audit o/ Internal Ccn~o/Over Financial Repa5ng Thetis 

Integrated wlh an Audit of Fi118nci8t Statements (PCAOB a:l07). 

19

SEC and PCAOB define a malerial weakness as a deficiency, or combination of 

deficiencaes, in internal control OYer flnanciaJ reporting such that there IS a reasonable 

possibility that a material misstatement ci the firm's annual or ilterim fina.1eial statements 

v.iJl not be prevented or detected on a timely basis. See SEC Regulation S.X, 17 C.F.R. § 210.1.Q2(a)(4); Au<iting Standard No. 5. 

Pogo 7 GA0.13·S82 Auditor Atttstallon on Internal Controls 
280 

$75 mllion or more (accelerated filers) since 2004.

20 However, SEC 

delayed implementing the aud~or attestation for public COif4lanies with 

less than $75 million in public float (nonaccelerated filers) several times 

from the original comp&ance date of April 15, 2005, to June 15,2010, in 

response to concerns about compliance costs and management and 

d~or preparedness.

21 On July 21, 2010, 1he Dodd-Frank Act 

permanently exelf4lted nonaccelerated filers from the auditor attestation 

requirement 22 The Dodd-Frank Act did not exempt nonaccelerated faers 

from Section 404(a) of the Sarbanes·Oxley Act (management's 

assessment of internal controls). See table 1 for final compliance dates 

for internal control over financial reporting by issuer filer status. 

20Managemenfs Report on Internal Control Om Financial Repoc1ing aid Certilicathn ol 

Disclosure in Exch<!nge Act Reports, 68 Fed. Reg. at 36,647. 

21GAO, Conrnunify Bani<s and Cred~ Unions· Impact ol tho OodcJ.Frank Act Depends 

l.argo•'yoo Futuro Rule Makings, GA0.12.U1 (Washington., O.C.: Sep 13, 2012) 

2lpub. L. No. 111·203, §989G(a), 124Stat.1376, 1948 (2010)(cod iedat1 5 U.S.C.§7262) (amending Sarbanes.O.tey Act). SEC amended its rules and form> to conknm to Sectioo 404(c) ol the Satbanes-Oxtey Act. as added by Seaion S89G ol the 

Oodd·F rank Act. See lntetnal Control Over Financial Reporting in Exchange Act Periode 

Reports oll>lon-Accelerated Film, 75 Fed Reg 57,365 (Sept. 21, 2010). Section 404(c) 

prOYides that Sechcn 404(b) of the Sarbanes.Oxley Act shall not apply wth respect to any 

aud:it report prep;ued for an ISSuer that is neither an accelerated filer nor a large 

aocelerated filer as defined in Ru!e12b-2 under the Securities Exch<!nge Act of 1934. 

Pub. L. No. t07-204, §404(c), 116Stat. 745, 789 (2010) {codiiedasamended at 15 

U.S. C.§ 7262). Additionally, the Jumi)Sla~ Our Business Sta~ ps Act(" JOBS Acr) also 

exempted emerging growth companies, defined generally as issuers v.ith less than $1 

billion in annual gross revenue, from the auditor attestation requirement of Sectioo 404(b) 

as long as the issuet retains emerging grov.th oompany status, v.l>ich is subject to four 

conditions. Nnong other conditions, an issUCt v.ill ordilanly no longer retain emerging 

growth ¢0fll'any status at the end of the fiscal year il v.l\ich the fifth iv~ry of its 

n~iaJpu licoffe lngofcommoneq ityseetHitiesoocurs. Pub. L. No. 112·106, § 10l, 126 

Stat. 306, 310 (2012) In dd~ion. our sludy dJd nol specdrcalty addre$8 the rmpadof thiS 

JOBS Act exemption on the number of exempt companies, the number of testatements by 

exempt companies. the auditor attestation pradi<:esof neYtiy public companies or investor 

perception ol the reiabiiy ol fin& nO. I Slatements of emerging gr<Mih companies 

Pogo8 GA0.13·S82 Auditor Attestation on Internal Controls 
281 

Table 1: Sarbanes-Oxley Act Section 404 Requirements Compliance Dates by Filer Status Set by SEC 

U.S. issuer 

Foreign private 

issuer 

NB'My public 

corrpany (U.S. 

Of foceign private 

issuer) 

Compliance dates for internal control over financial reporting requirements 

External auditor's attestation 

Managemenrs report on internal controls report on internal controls and 

ISsuer flier status and effectiveness eff~ve ess 

Large accelerated tier or Annual reports filed 'llith SEC for fiscal years Annual reports tied wth SEC for 

aocelerated filer (S75 ninion ending on or after Ncwcmbcr 15, 2004 fiscal years Clldiog on or aft<n 

or more in bl ~ float) Ncwembet 15, 2004 

Nonaccele<ated file< (less Annual reports filed 'llith SEC for fiSCal years Pe<manently exempted by Doddthan $75 milion in p<Jblio ending on or after December 15, 2007 FrankActon.llly21, 2010 

float) 

Large accelerated tier (S700 Annual reports filed 'llith SEC fo< fiscal years Annual reports lied voith SEC for 

milton or more in public ftoaf) ending on or after July 15. 2006 fiscal years endu>g on or aHer July 

15, 2006 

Accelerated tier ($75 mmion Annual reports filed 'llith SEC fo< fiscal rears Annual reports lied v.ith SEC for 

or more and less than $700 ending on or after July 15, 2006 fiscal years endi119 on or aHI!f July 

milion in p<Jblic ftioa~ 15,2007 

Nooaccelmted filer (less Annual reports filed 'llith SEC for fiScal rears Permanently exempted by Doddthan S75 mil ion in public ending on or after December 15, 2007 Frank Act on.llly21, 2010 

floa~ 

large accelerated tier or Second annual report filed v.ith SEC followilg Second annual report fried v.~th 

accelerated filer (S75 nillion company's initial pub~c offering SEC follmng company's n~ial 

oc more in publi: float) pubic offering 

Nonaccele<ated file< (less Second annual report filed v.ilh SEC followilg Pe<manently exempted by Doddthan $75 mil ion in publiC 

ftoan 

company's initial pubtic offering Frank Act on~ly21, 2010 

~tsGKJWSEC 

N«e: fordgn private issuers are generally foreign CMWnieS lhal ha¥0 a rela~ly lesser degree of 

U.S. ~are ov.nersllip « U.S. business contacts. SEC lla-s adq:lted ~at rules apj:(icable to foreign 

priwte i~ers that tile d~i{Jied toreoog·u2e inlernabc:tllllllllnd I'K:rr«! JJriSdicbon. 11 C.F.R. § 24(L3b4; 17 C.f.R. § 230405. 

The number of exempt companies exceeded the number of nonexempt 

companies in each year from 2005 through 2011 (see table 2). According 

to our analysis of Audit Analytics data, the number of exempt companies 

fluctuated and uhirnately declined from 6,333 in 2005 to 5,459 in 2011 

(1 3.8 percent during that period). The number of nonexempt companies 

also fluctuated and ultinately declined from 4,256 in 2005 to 3,671 in 

201 1 (13. 7 percent). 

Pogt9 GA0.13·S82 Auditor Atttstallon on Internal Controls 
282 

Ta.ble 2: Number of Exempt and Nonexempt Companies, 2005-2011 

Yea.r Number of exempt companies Number of nonexempt companies 

200; 6,333 4,256 

2QOO 5,858 4,456 

2007 5,530 4,437 

2QOO 5,915 4,166 

2009 6,285 3,697 

2010 6,166 3,586 

2011 5,459 3,671 

Sor.ltt GN'JNft/401.au6t~fl(SOU 

H<te.- The number r.A exempt oetr'(lan!es Includes companies lhal vdunta~ly C«!''Piiedv.\th the aucftor 

attestation recpJirement. ~ny stimal es il the lebte do not ildude subiidiaries of a putic 

company, re9stered investment companies, or atsel·btcked securities issuers. Exempl companies 

are ncnaccelerated ftltrS, ildoding smaller reporting companies.. For our purposes, we !JOOped 

c.ompanie•ltlat did not dS<IO$e their filing .tat.,. b" '>ho$0 ma<i<et .,.PialiUtion w .. le$$ th011 $75 

nVIIioo wi1h exempt ccmpMies.. F« example, ~lies thai dd na ose their filing status 

inClude C"'adian f<Xm ~ filefS. We u$0d mal< <I e'llitalization as a ptot.y let f)Ubloe loot il these instam;es beet use tile Audit atyti~ <fe1abese dd not coo!.-. ilbmaboo oo tQT1)anies' P'Jblic 

loat. H<rlexemJ:f OO"fii00ies ere aocelecaled ftlef5 and large aocelereled 61ers. For ovr pt,rposes, we 

grouped comparies that did na dsctose their filing status Wt whose martel ea,pitaiza1ioo was eq.;al 

to« 9'ea!Cf lhan S75 millia'l W.:h ntr~cxempt canpani~. We exelu~ companies l.tlat !lid net di clcloelheifililg~alllsan thotdid nothavta ep<X!e mo ~ copitolzalioo, 

SEC and PCAOB have issued regulations, standards, and guidance to 

implement the Sarbanes-Oxley Act. In 2007, in response to companies' 

concerns about implementation costs, SEC provided implementation 

guidance to company management, and PCAOB issued a new auditing 

standard to external audijors to make the internal controls audij process 

more efficient and more cost-effective. 23 SEC's guidance for management 

in implementing Section 404(a) of Sarbanes-Oxley Act and PCAOB's 

Alldijing Standard No. 5 for external audijors in implementing Section 

404(b) of Sarbanes-Oxley Act endorsed a "top-down, risk-based 

approach" that emphasizes preventing or detecting material 

misstatements in financial statements by focusing on those risks that are 

more likely to contribute to such misstatements. These changes were 

provided to create a more flexible environment where company 

management and external auditors can scale their internal controls 

23Commlssb> Guldanre R~ing Man~t• Repat on InteriM! Control Over 

Frnanctal Reporling Under Section 13(a) a 15{d) ol lila Securities Exchange Acto! 1934, 

Interpretation, n Fed. Reg. 35,324 (June 27, 2007); and Auditing Standatd No.5, An 

Audil of Internal Control Over Financial Repatjng Thai Is lnlegroled with an Audit of 

Financial Stalernenl$ (PCAOS 2007). 

Pogt 10 GA0.13·S82 Auditor Atttstallon on Internal Controls 
283 

evaluation based on the particular characleristics of a company to reduce 

costs and to a6gn SEC and PCAOB requirements for evaluating the 

effecliveness of internal controls. 

Both SEC regulations and PCAOB Auditing Standard No. 5 state that 

management is required to base its assessment of the effecliveness of 

the company's internal control over financial reporting on a su~ab , 

recognized control framework established by a body of experts that 

followed due process procedures. Both the SEC guidance and PCAOB's 

auditing standard ctte the Committee of Sponsoring Organizations of the 

Treadway Commission (COSO) framework as an example of a suitable 

framework for purposes of Section 404 compliance. 

24 In 1992, COSO 

issued its "Internal Control-Integrated Framework" (the COSO 

framework) to help businesses and other entities assess and enhance 

their internal controls. Since that time, the COSO framel'.llrk has been 

recognized by regulatOI'f standard setters and others as a comprehensive 

framework for evaluating internal control, including internal control over 

financial reporting. 

25 The framework consists of five interrelated 

components: control environment, risk assessment, control aclivtties, 

information and communication, and monttoring.26 Ho~ve . SEC and 

PCAOB do not mandate the use of any particular framework. 

2'COSO was originaly fonned in 1985 to sponsor the National Commission on fraudulent 

Financial Reporting, an inde9endent rivate-~< n~iative that studied the causal factors 

that can lead to fraudulent financial reporting and developed recorrrnendalions for pub!~ 

CO"l"'nies and their independent auditors, SEC and oC!Ier regulators, and educational 

institutions. 

~OSO,Inlomaf Contol-fnlegrafed Frarnework, 1992, 1994, and 2013. 

~n May 14,2013, COSO Issued an update to ils 10021n1erna1Control.lntegrated 

Fra.......,.k to· (1) rellect a business environmentthat is more complex than ~was when 

the original fiamev.ork was developed; (2) broaden the application of inlemal oontrol in 

addressing operations and reporting objectives; and (3) darify what oonstiu!es effedive 

internal oontJol 

Pogt 11 GA0.13·S82 Auditor Atttstallon on Internal Controls 
284 

The Percentage of 

Exempt Companies 

with Financial 

Restatements Was 

Generally Greater 

Than the Percentage 

of Nonexempt 

Companies from 2005 

through 2011 

Exempt Companies 

Generally Have Harl More 

Financial Restatements 

Than Nonexempt 

Companies 

Since the leme ation of the Sarbanes.Oxley Act, the number and 

percentage of exe~t companies restating their financial statements has 

generally exceeded the number and percentage of nonexempt companies 

restating. However, from 2005 through 2011, restatements by exempt 

companies were generally proportionate to their percentage of our total 

population. Specifically, on average, almost64 percent of companies 

restating were exe~t companies and exempt companies made up, on 

average, 60 percent of our total population. Exempt and nonexempt 

companies restated their financial statements for similar reasons, and the 

majority of these restatements produced a negative effect on the 

companies' financial statements. 

The number of financial statement restatements by exempt and 

nonexempt companies has generally declined since 2005. k, illustrated 

in figure 1, the number of financial restatements peaked in 2006 for 

exempt companies and declined gradually unti12011, despite a slight 

uptick in 2010. The number of restatements peaked in 2005 for 

nonexempt companies, declined gradually unti12009, and then trended 

upward for the remaining 2 years of the review period. k, we have 

previously reported, some industJy observers noted the financial reporting 

requirements of the Sarbanes·Oxley Act and PCAOB inspections may 

have led to a higher than average number of restatements in 2005 and 

2006.27 A 2010 Audtt Analytics report noted that some observers 

attributed the subsequent decline in restatements to a belief that SEC 

relaxed standards in 2008 relating to materiality of errors and the need to 

file restatements.2ll The number of financial restatements by exempt 

companies exceeded the number of financial restatements by nonexe~t 

companies each year from 2005 through 2011. However, a~hough the 

overall number of financial restatements from 2009 through 2011 

remained lower than the prior period, the number of fllancia.l 

restatements by nonexempt companies increased about23 percent from 

27GNJ, Financial Restalemet~ls: Update of Pllblic ~ny Trend$, Marl<ellmpacl$, and 

Regufatry cnft;JI'I;emet~l Aclivhics, GA0$678 (Washington, D.C.: Mar. 5, 2007). 

28Audit Analytics, 2009 FinBtx:ia/ Reslolemenls: A Nine Year Cotrparison (Sutton, Mass .. 

febluary 2010) 

Pogo 1Z GA0.13·S82 Auditor Attestation on Internal Controls 
285 

2010 through 2011. The number of financial restatemenls by exempt 

companies declined almost 8 percent during the same period. 

SEC offiCials and one market expert vAth whom we spoke indicated that 

there is no clear explanation for these restatement lrends. They also said 

that a review of each individual financial restatement oould be necessary 

to deterrrine the reasons for the restatement trends, but they offered a 

few factors to consider when assessing the trends. In particular, a recent 

Audij Analytics report found that approximately 57 percent of 

restatements disclosed in 201 1 were defined as revision restatements, 

the highest level since 2005 (the first full year of lhe disclosure 

requirement). 

29 According to the report, revision restatemenls generally 

do not underrrine reliance on past financials and are less disruptive to the 

market. SEC officials noted that although restatements by nonexempt 

companies have increased, as illustrated in the Audit Analytics report, 

they may be less severe as a result of higher numbers of revision 

restatements, fewer issues per restatement, and a lower cumulative 

impact on the company's net income. According to our analysis of Audij 

Analytics data, in 2011, the percentage of restatements that were revision 

restatements was approximately 62 percent for exempt companies 

compared to approximately 70 percent for nonexempt companies. SEC 

officials also suggested that the detection rate of financial restatements 

could affect restatement trends, especially when looking only at a one or 

two year period. The officials said that the lag time on detection and the 

likelihood of detection could be different be!YA:en exempt and nonexempt 

companies. Finally, SEC officials said tha ~ is ~rtant to consider the 

nature and seve ~ of restatements. 

29Audit Analyties, 2011 Fillllncial Reslol<menl.: An Olcvcn Ytor ~omen (SUtton, 

Mass.: Aprl 2012). A revision restatement is defined as a restatement oonlained in a 

periodic report out prior d~lowre in Form S.K, Item 4.02. SEC requres public 

CO"ll3nies to disclose a determination that any prevously issued financial statements 

should no looget be reiJOd upon. Additional f orm S.K Disclosure Requirements and 

Acceleralion of '9 Date, 69 fed. Reg. 15,594 {Ma1. 25, 2004).This set ol disclosure 

requirements became effect~e August 23. 2004.1d. 

Pogt 13 GA0.13·S82 Auditor Atttstallon on Internal Controls 
286 

Agure 1: N11nber of Restatements b'f ExelfClt companies and Nonexempt 

companies, 2005·2011 

Restatemenl& 

700 

100 

-

Yur 

$uc:t GAOWlfMOI~~u... 

..... __ _ ,. __ _ 

2010 2011 

Not~· The ~a fO<tl'os tabl~ i<Wde 11>& """~' ot~!l&meo1ls ci!GI)S&d In ~ca~d¥ye¥ '""" 100511\ri)Ugh lJ) II 

Except for 2006, the percentage of exempt companies restating their 

finandal statements exceeded the percentage of nonexempt companies 

restating. From 2006 through 2009, there was a dedine in the percentage 

of restatements for both exempt companies and nonexempt companies. 

The percentage of exempt companies restating their financial statements 

rose in 2010 to 7.6 percent and remained constanlin 201 1 (see fig. .'~1 

At the same time. starting in 20t0. the percentage of norrexempt 

companies restating has been on the increase. In additiorr, from 2005 to 

2011, on average, almost 64 percent of companies restating were exempt 

companies, which made up 60 percent of our total populatiorr. 

edata r~led tile unique number of exempt and nonexeiT!'I cO<npanie~ restating in 

each calendar year, independent of the period or periods being restated. The percentage 

is calculaled by clvicinglhe runber of unique restating exempt ecmpalit'i in a gwn year 

by the total population of uniCJle exempt companies lor that year. 

Pagt 14 GA 13~2 Aud~or Atteslation on lnt•mol Controls 
287 

Agure 2: Percertage <A Exempt Md Nonexempt Compalies Thai Restated Their 

Ananclal Statemerts, 2005-2011 

12 

1005 2006 1007 200t 2009 2010 2011 

Vw 

DExemjlt~ 

SwoeGAO~IIAI.OI~dn ·--- NO!~ The ~a lo<ti>S ta~~ are !>as~ on the proportmolllle unoque runber ol exemp! ~ 

""'""mPI OO!lP'W'0$1ll$<losong a ~ttemenleacll Oll~«year <iv1~d llytlle respective 

poptlabom lor fiscal l"'l• 20051trough 2011. 

Our analysis is generally consistent with a number of studies that have 

found that exempt companies restate their financial statements at a 

higher rate than nonexempt companies.l1 These studies suggest that 

having an audita- attest to the effectiveness of a ca-npany's internal 

control over financial repa1ing generally reduces the likelihood of 

financial restatements. Foc example, in 2009, Audit Analytics found that 

for ca-npanies that did not obtain an audita- attestation and stated that 

31Secwities and Exchange Conrnisslon, study and Recomrrendat»ns on Sedion 404(b) 

of the SarbarH>S·Ox/ey Mof2002 ForlssuM wlh Public Float Bell\..., $75and $250 

Mii/Jbn (Washington, D.C.: April 2011 ); Audi Analylics, R.e.!latemen/s Di.scl<md by the 

Two Types of SOX 404 Issuers: (1) Audlor Att&$/atlcn Filer; and (2) Management-Only 

Report Filws (SuttDn, Mm, Noverrllw 2009); and A Nagy, 'Saction 404 Canpliance 

and Financia.l Reporting Quality,' Accourting Horizons. vd. 24, no. 3 (20111). 

Pagt 1$ GA0·13~2 Aud~or Attestation on lnt•mol Controls 
288 

Exempt Companies That. 

VoiWllarily Complied with 

Auditor Attestation Issued 

Fewer Restatements Than 

Exempt Companies That 

Did Not 

they had effective internal oontrols, their financial restatement rate was 46 

percent higher than I he restatement rate for oompanies that had obtained 

an aud~ r attestation and stated that they had effective internal oontrols.

32 

Exempt oompanies that voluntarily oomplied -Mth the aud~or attestation 

requirement oonstitute a small percentage of exempt oompanies (see 

table 3). Prior to the passage of the Dodd-Frank Pd. in July 2010, the 

number of exempt companies voluntarily complying -Mth the auditor 

attestation requirement grew 70 percent from 2008 through 2009. 

Although SEC deferred the requirement for nonaccelerated filers to 

comply until June 15, 2010, some exempt companies likely voluntarily 

complied in anticipation of SEC's implementation of the requirement.» 

Nonetheless, in 2009 during the peak oompliance period for exempt 

companies that voluntarily oomplied, 6.9 percent (435) of a total 

population ol6,285 exellllt oompanies voluntarily oomplied w~h the 

auditor attestation requirement. According to one academic study, exempt 

companies that voluntarily oomply with the aud~ r's attestation 

requirement are more ikely than companies that do not comply to have 

evidence of the superior ~ of their internal control over financial 

reporting and fewer restatements, among otherfadors.

34 

32Audrt Analytics, Restatements Disclosed by the Two Types of SOX 404 Issuers: (1) 

Auditor Affeslation Filfifs and (2) Managemeni.Qnly Report Filers (SUtton, Mass., 

Novembel 2009). Audl Analytics uses SEC data for its analysis, and SEC and PCAOB 

define intemal control over financial reporting as effec!Ne n a malerial ~al<ness does not 

exist. See SEC Reg la~on S·K. 17 C.F.R § 229.308(a)(3); Auditing Standaid No. 5, An 

Audi ollnternal Control <Ner Financial Reporting that Is Integrated v.ith an Aud~ of 

Financial Statemmts (PCAOB 2001). 

33prior to isstling several temporary exemptions from the audilof attestation req iremen~ SEC issued guilanoe stating that nonacoelerated (exempt) oompanies were nol required 

to obtain an audio(s report on inte<nal oontrol over mancial reporting until the company 

fi'ed an annual report for i1s fiscal year ending on or alter Apri115, 2005 See Managemenrs Report on lnte<nal Control <Ne< Financial RepO<ting and Certifi:ation of 

Oisclos<Jre in Exchange Act Reporls, 68 Fed. Reg. at 36,651. 

3-<See K. Brll'M1, P. Pacharn, J. Li, E. Mohammad, F. A. Elayan, and F. Chu, "The 

VaiJation Effect and Motivations of Voluntary Compliance v.ith Aud~or's Attestation Under 

Sarbanes-Oxley ArJ. Seolion 404 (8)." 'Mlrking paper, (Jan. 15, 2012). 

Pogt 16 GA0.13·S82 Auditor Atttstallon on Internal Controls 
289 

Table 3: Number of EXempt Companies That Oi~ an~ Dl~ Not Voluntarily Comply with the Aud~or Attestation Requirement 

and the Perctnta9e of Companies That File~ Restatements, 2005·201 1 

Exempt companies that did not Exempt companies that 

voluntarily eom ply voluntanty complied Total exempt companies 

Total Total Total 

Total number Percent Total number Percent Total number Percent 

Year number restating restating number restating restating number restating restating 

2006 6,253 

2006 5,755 

2007 5,370 

2006 5,659 

2000 5,650 

2010 5,816 

2011 5,t60 

Reasons for Financial 

Restatement and Industry 

Trends Are Generally 

Consistent for BoUt 

r:xempt and Nonexempt 

Companies 

643 10.28'll. 80 7 875% 6,333 650 10.26% 

750 13.03 103 12 11.65 5,658 762 13.01 

513 9.55 160 12 7.50 5,530 525 9.49 

418 7.39 256 17 6.64 5,915 435 7.35 

387 6.62 435 24 5.52 6,265 41 1 6.54 

4S3 7.79 350 16 457 6,166 469 7 61 

392 7.60 299 23 7.69 5,459 415 7.60 

As table 3 also sho1w, the percentage of financial restatements by 

exempt companies that voluntarily complied with the requirement is 

generally lower than that of exempt companies that did not voluntarily 

comply. From 2005 through 2011, on average, 7.5 percent of exelllj)t 

companies that voluntarily complied restated their financial statements 

compared to 8.9 percent of restating exefll>t companies that did not 

voluntarily comply. 

From 2005 through 2011. based on our analysis of Audit Analytics data, 

the major~y of exempt and nonexempt companies that restated their 

financial statements did so as the resuH of an accounting rute 

misapplication.

35 That is, a company revised previously issued public 

financial information that contained an accounting inaccuracy. To analyze 

the reasons for financial restatements, we used Audit Analytics' 69 

classifiCations to classify lhe type of financial restatements into siX 

categories (see table 4): revenue recognition, core expenses, noncore 

35An 'accounting rule nisappicalion' refers to lhe misapplication ol Generally Accepted 

Accounting Pmciples 

Pogo17 GA0.13·S82 Auditor Attestation on Internal Controls 
290 

expenses, reclassWications and disdosures, underlying events, and 

other.36 

Table4: Financial Restatement Category Descriptions 

Category 

Re~~enue recogn~ion 

Core expenses 

NoOCOfe expenses 

Reclassificati:>ns and 

disdosures 

Underfyl ng e~~ents 

011\er 

Description 

Restatements due to improper re~~enue accounting. This 

category inclUdes restatements origilating from a faillre to 

properly interpret salesoontracts fix hidden rebate, return, 

barter, or resale c~use~ They may also re~te to the 

treatment of sales returns. oredis, and other allowances. 

Restatements of oompames' ongoing operabng expenses. 

This category includes cost of sales. compensation 

eJ<penses, lease and dep!eciation costs, seling, general 

and administrative ~penses. and research a Ad 

develop!nenl costs. 

Restatements that affect net iK:ome bu1 do not arise from 

ongoing operating expenws. Thi$ category includes 

aocoun~ng for ilterest, taxes and derivatives. It also 

ilclldes msstatements arising from aooounting for 

nonrecurmg e~~ents. 

Resta.tements due to imp!oper1y classified financial 

statement i ems (e.g., current liabilities classified as k>ngterm debt on the balance sheet, or cash ftOI'oS from 

operating activrties classlhed as cash flov.s from financing 

activities on lhe statemerlt of cash flews). This category 

includes restatements that generally revise footn«e 

information. 

Restatements due to improper acoounting for acquisitions 

or mergers and issues from PfOblems v.ith foreign affiliates 

and their related accounting or finanaal reporting. 

My restatement not covered by the listed categories. This 

category inclUdes restatements related to pensions and 

any other issues identified in the restatement 

Based on our classification, core expenses (i.e., ongoing operating 

expenses) 1-.ere the most frequently identified category of reslatement for 

both exempt and nonexempt companies. Spec~icalty, core expenses 

accounted for 30.2 percent of disclosures by exempt companies and 28.5 

~Ne of lhe SIX categories are based on the classi11cahon scheme developed by 

academics Zce-Vonna Palmrose and Susan Scholz. The sixth category ('other') was 

developed by GAO and comp!ises financial restatements that were not in«uded in one of 

the othO< categories. 

Pogt 18 GA0.13·S82 Auditor Atttstallon on Internal Controls 
291 

perca1t of disdosures by ncnexempt companies from 2005 through 2011 

(see fig. 3). Cere expenses include cost of sales, compensation 

expa1ses, lease and depredation costs, selling, general and 

administrative expenses. and research and development costs. Noncore 

expenses (i.e., nonoperating expenses)were the seccnd most frequently 

identified reason for restatement across exempt and ncnexempt 

companies during this pertod. Each of the other reasons for restatements 

rEf)resented less than 20 percent of all restatements by exempt and 

ncnexempt comparies during the pertod. 

Figure 3: Reasons for Financial Restatements by Exempt Co~anies and 

Nonexe~t Companies, 2005-2011 

0~5 

Fran 2005 through 201 1, the majority of financial restatements by 

exempt and nonexempt companies negatively impacted the company's 

financial statements. $1 Specifically, 87.6 percent of financial restatements 

by exempt canpanies resulted in a negative net effect on lhe financial 

$1 AIK!it Analytics' ROS1llln ent database includes an assessment of whecher the efl\oct on 

the financial sta.tenw>nt is positiYe or negalive. 

Pagt19 GA0·13~2 Aud~or Attestation on lnt•mol Controls 
292 

Views on the Costs 

and Benefits of 

Auditor Attestation 

Vary among 

Companies and 

Others 

statements-the income statement, the balance sheet, the statement of 

cash flow.;, or the statement of shareholder's equity-of these 

companies. Similarly, 80.6 percent of financial restatements by 

nonexempt companies resulted in a negative net effect on the company's 

financial statements. 

The characteristics of exempt and nonexempt companies v.ith financial 

restatements varied from 20~ through 2011. For example, in terms of 

industry characteristics, on average, most exempt companies restating 

were in the manufacturing sector {29.4 percent), followed by agricufture, 

construction, and mining (14.6 percent). On average, most of the 

nonexempt companies restating were in the manufacturing sector (29.3 

percent), followed by the financial sector (16.6 percent). Further, in 2011, 

91.4 percent of nonexempt companies restating compared to 35.3 

percent of exempt companies were listed on an exchange.38 1n addition, 

nonexempt companies had an average financial restatement period that 

was longer than that of exempt companies. 

38 Specifically, from 20~ 

through 2011, nonexempt companies had an average financial 

restatement period of 9 quarters compared to an average financial 

restatement period of almost 6 quarters for exempt companies. 

Companies and others identified various costs of the aud~or attestation 

requirement. A number of studies and surveys show that since the 

passage of the Sarbanes.Oxley Act, and especially since the 2007 

reforms by SEC and PCAOB, aud~ costs have declined for companies of 

all sizes. These studies and surveys also show that these costs, as a 

percentage of revenues, affect smaller companies disproportionately 

compared to their larger counterparts. Companies and others also 

identified benef~s of compliance, including stronger internal controls and 

more transparent and reliable financial reports. However, determining 

whether aud~or attestation compliance costs outweigh the benef~s is 

difficuH because many costs and benef~s cannot be readily quantffied. 

~ompanies were listed on the New York Stocl< Exchange, Nasdaq Na.tional Marltet 

Nasdaq Smallcap Markel, American Stock Exchange, or \>ere traded ill the 0'/er.the· 

counter market. 

38-rhe financial restatement period is the aocounting penod (e.g., last 4 quarte!S) of the 

previously issued financial statements that contained a material inaccuracy that had to be 

conected by filing revised financial statements Yoilh SEC 

Pogt20 GA0.13·S82 Auditor Atttstallon on Internal Controls 
293 

Auditor Attestation Costs 

Can Be Significant, 

Especially for Small 

Companies, but Costs Are 

Declining 

A number of studies and sUiveys show that the estimated costs of 

obtaining an external aud~or attestation on internal control over financial 

reporting are gn~icant for COITCl3nies of all sizes. Obtaining an auditor 

attestation incurs both direct and indirect costs, according to one study' 0 

Direct costs are expenses incurred to fuWill the ud ~or attestation 

requirement, such as the audit fees, external fees paid to outside 

contractors and vendors that help companies complyv.ith the 

requirement, salaries of internal staff for hours spent preparing for aud~or 

attestation compliance, and nonlabor expenses (e.g., technology, 

software, travel, and computers related to compliance). Indirect costs are 

those costs not directly linked to obtaining the auditor attestation. Two 

examples of indirect costs cfted by one interviewee and one study are the 

time spent by management in preparing for and addressing audftors' 

inquiries, which diverts their attention from strategic planning, and the 

diversion of funds from capital investments to auditor attestation·related 

expenses." 

Aud~ fees are a significant direct cost of the aud~or attestation 

requirement. Sarbanes-Oxley Act and PCAOB standards require that the 

financial statement auM and the aucttor attestation audft be conducted 

on an integrated basis'2 As a resutt, the auditor attestation is included in 

the total audft fees-that is, the total amount companies pay to their 

external audftors to conduct the integrated audft. Audft fees are based on 

several factors, including but not limtted to the scope of an audit, which is 

a function of a company's complexity and risk; the total effort required by 

the external auditor to complete the aud~; and the risk associated v.ith 

pelforming the audft.

03 Hov.ever, according to SEC's 2011 study and one 

>We. R. Alexande<, S. W. Bauguess, G. Bernile, Y. A. Lee, and J. Marietta.West!le<g, "The 

Economic Effects of SOX SecOOn 404 Compiance: A Corporate Insider Pe!spective," 

Worl<ing paper, ( Marc/12010). 

41Y. Jahmani and W. A. Oo>Ming, "The lmPQCt of Sarbanes-Oxley Al;t." JO<Inal of 

Business & Econorni;s Research, vol. 6, no. 10 (2006). 

' 2pub. L. No. 107·204, §404(b), 116S1at. 745, 789 (2010) (codified as amended at 15 

U.S. C. § 7262); Audrong Standard No. 5, An Audl of Internal Coolie/ Over Financial 

Reporling That Is lnlegl81ad with an Audit of Financial Slalemenls (PC AOS 2007). 

<3Aocord1ng to PCAOB Auditing Standard No.8, in an audit ot financial statemeots, ~ 

nsk is the risk tllat the audiO< expresses an inappropriate audl op1n100 v.hen the lila neal 

sta!ements are materially misstated, i.e., the financial statements are not presented fairty 

in confomity with the applicable financial reporting frame\\Ork. Audiing Standard No. 8, 

Audl Risk (PCAOB 2010). 

Pogt21 GA0.13·S82 Auditor Atttstallon on Internal Controls 
294 

interviev.lle, the costs incurred by a co~ny to comply with the auditor 

attestation requirement generally decline after the initial year. 

We analyzed total aud~ fees as a percentage of revenues from 2005 

through 2011 for exempt and nonexempt companies ... We found that 

exempt companies, Yilich tend to be smaller, had higher average total 

audit costs, measured as a percentage of revenues, compared to 

nonexempt companies (see table 5). Among exempt companies, the data 

indicate that exempt companies that do not voluntarily comply with the 

aud~or attestation requirement have (except for 2006) higher average 

total aud~ fees as a percentage of revenues than the exempt companies 

that voluntarily comply. While two acaderrics we contacted about this 

trend could not provide a definttive explanation, there are many factors 

beside company size that can affect aud~ fees. 

Ta.ble 5: Average Total Audk Fees as a Percentage of Revenues, 2005-2011 

exempt companies EXempt companies 

tllat did not voluntarily that voluntamy Nonexempt 

comply complied companies 

Number of Number of Number of 

Year companies Percentage companies Percentage companies Percentage 

2005 3729 2.93% 50 1.44% 4151 

2005 '2'127 2.85 77 l07 4206 

2007 2370 3.14 111 1.95 4060 

2008 2306 3.19 215 1.16 3967 

2009 2449 3.27 393 2.98 3560 

2010 254$ 3.14 322 1.57 3476 

2011 2227 3.41 285 1.22 3556 

SCutt GJD~QIAidf~GMa 

NO!e: In CaiC\Ialrl911le o"""ge i11Jdill01'' '' 0 peroentage ()( revenue•. """~)>""in aD lllree categainwith lmthanS150,000in rmnue 8feexduded. 

1.40% 

1.41 

1.07 

1.11 

1.33 

0.91 

1.15 

Our data analysis resuHs are consistent with our previous m rk on audtt 

fees. Specffically, in 2006, we reported that smaller public co~nies 

paid disproportionately higher audtt fees compared to larger public 

"sEC defines audit lees as those fees for financial statement aud4 and reviewseNices 

perlooned by the audaor tolu1611 ils 1esponsib~ily unde< geneJally accepted accounting 

standards Of to render an opinion or review 1eport on the financi:al statements 

Pogo 22 GA0.13·S82 Auditor Attestation on Internal Controls 
295 

companies.

45 Smaler public companies noted that they incur higher audit 

fees and other costs, such as hiring more staff or paying outside 

consulants to comply with the internal control provisions of the SarbanesOxley Ad. One study noted that historically, these higher aud~ fees and 

other costs increased regulatory costs for smaller public companies 

because regulatory compliance, in general, involves a signl icant number 

of fixed costs regardless of the size of a company. Thus, smaller 

companies v.ith lower revenues are forced to bear these fixed costs over 

a smaller revenue base compared to larger companies. 48 

However, the aud~or attestation is one element of the total audtt fees. To 

gauge the amount spent on the aud~or attestation, we asked respondents 

to our survey to provide us v.ith the amount of total audit fees and the 

approximate amount attributable to complying with the auditor attestation 

requirement. Based on our survey results, we estimate that all companies 

with a market cap~ali2at on of less than $10 billion that obtained an 

auditor attestation in 2012 spent, on average, about $350,000 for aud~or 

attestation fees, representing about 29 percent of their average total audit 

fees.'1 

Although these costs remain significant for many companies, the cost of 

implementing the aud r attestation provision has been declining and 

varies by company size. For example, SEC's 2009 study on internal 

control over financial reporting found that, among other things, the mean 

auditor attestation costs decuned from about $821,000 to about $584,000 

(approximately 29 percent) pre- and -post 2007 refonns for all companies 

that obtained an auditor attestation. Median costs declined from about 

$358,000 to $275,000 (approximately 23 percent) pre-and -post 2007 

46cAO, Sarbanes-Oxtey Acl: Coosidera~oo of Key Principles Needed in Addressing 

/mplemerJIIIOO!J frx Snlakr Pvboo Coo¥X~nks, GA0-00-361 (Washington, D.C.: ~. 13, 

:2006). 

"~J. L Orcutt, "The Case Against Exempting Smaller Reporting Companies from 

Sarbanes.O:dey Section 404. 'Miy Milket·Based Solutions are Not likely to Harm 

Ordinary Investors; Fordham Journal cl Crxprxefe & Finencisl Law, vol. 14, no. 2 (2009) 

41

The y,elghted 1!$limatl!$ have margils ol error ol about plus or minus 571,000and plus 

or minus 6 percentage po>nts, rl!$peCINely. In additon to sampl:ng error, the y,eighted 

estrnates are subject to nonsamplilg enor in that respondents were asked to fXovide the 

approximate aJOOUnt attributable to the aud~or attestation requirement See appendix I for 

more details. 

Pogo23 GA0.13·S82 Auditor Attestation on Internal Controls 
296 

Companies and Others 

Also Ident:Jfied Perceived 

Benefits of Compliance 

reforms.'8 According to the study and an academic we interviewed, costs 

have been declining for a variety of reasons, including companies and 

audrtors gaining experience in the aud~or attestation environment and the 

2007 SEC and PCAOB guidance. The academic further stated that in the 

earty years of implementation of Section 404{b), initial costs were high for 

all companies, in part, because they had not previously implemented 

effective internal controls. '

9 

There are 11'10 types of potential benefds or positive impacts--(!irect and 

indirect-that companies can reoeive from complying with the auditor 

attestation requirement according to one study. 50 Direct benefits are those 

directly related to improvements in the company's financial reporting 

process, such as the quality of the internal control structure, the aud~ 

committee's confidence in the internal control structure, the ~y of 

financial reporting, and the company's a billy to prevent and detect fraud. 

Indirect beneftts are other dimensions that may be affected by changes in 

the qualrty of the financial reporting process, such as a COrTCJ3ny's abilrty 

to raise caprtal, the liquidity of the common stock, and the confidence 

investors and other users of financial statements may have in the 

company. 

'SSecuritics and Exchange Commission, Study of lhc S<vbanes.Oxley Act of 2002 Section 

404/ntema/ Con&ol CNer Financial Repcrlifl9 Requirements (Washington, D.C.: 

September 2009). 

"'nternalc:on~ot is nola new requirement f01 pubticoompanies. lnOe<:embei 1977, as a 

resuk of corporate falsificalion of recO<ds and imp<oper aooounting, Congress enacted the 

f01eign Corrupt Practices Act (FCI'A). 1'\lb.l. No. 95-213, 91 Stat 1494 (1977) (codlied 

at 15 U.S. C.§§ 7Sdd-1-78cld-3). The FCPA's inW<nal accounting control requi'ements 

were intended to prevent fraudulent financial reporting, among other thilgs. The FCPA 

amended the Securroes Exchange Act of 1934, Pub. L No. 73-291 , 48 Stat. 881 (cod lied 

as amended at 15 U.S.C. §§ 78a-78pp (2012), to require publoc OO<npanies to (1) make 

and keep books, recO<ds, and aooounts that in reasonable detail accurately and faify 

reflect the transactions and disposiions of assets and (2) develop and mailtlin a sy!tem of internal accounting controls sufficient to provide reasonable assurance that transactions 

are executed with management authorization and that transactions are re001ded in a 

manner to (a) allow the preparation of financial statements in accordance with generally 

aooepted accounting principles or other applicable criteJia and (b) maintain acooontability 

fO< assets./d. (amending Sec. 13(b) ci the Securities Exchange Act of 1934; codified at 15 

u.s.c. § 78q(b)). 

50<:. R. Alexande<, S. W. Bauguess, G. Semite, Y. A. Lee, and J. Marietta-Westllerg, "The 

Economic Effects of SOX Section 404 Comphnce: A Corporate Insider Perspective; 

'Mlrking paper, (March 2010). 

Pogt24 GA0.13·S82 Auditor Atttstallon on Internal Controls 
297 

Respondents to our survey identified a number of benefits or positive 

impacts stemming from co~liance v.ith the auditor attestation 

requirement, although fewer of them perceived indirect benefits compared 

to direct benefits. Many survey respondents noted that they experienced 

a number of direct benefds. For example, we estimate that: 

• 80 percent of all companies view the quality of their company's 

internal control structure as benefiting from the auditor attestation; 

• 73 percent view their audit committee's confidence in internal 

control over financial reporting as benefrting from the auditor 

attestation; 

• 53 percent view their financial reporting as beneming from the 

requirement; and 

• 46 percent view their ability to prevent and detect fraud as 

benefiting from the auditor attestation (see table 6). 

Our findings are consistent ~th other surveys. In particular, Protiviti's 

2013 survey found that, among other things, 80 percent of respondents 

reported that their company's internal control over financial reporting 

structure had improved since they began complying with the auditor 

attestation requirement. 51 However, we also found that, except for 

improved confidence in the financial reports of other Section 404(b) 

compliant COfT4Janies, fellllr companies' perceived indirect benefits of the 

requirement. Spec~ically, based on our survey esu~s. no more than 30 

percent of all companies with less than $10 billion in market capitalization 

perceived any of the ent ied indirect benefrts (see table 6) as sterrrning 

from the auditor attestation requirement. 

51

Protiviti, 2013 Sstbanes.Ox/ey Compfance Suntey. Building Value in YOlK SOX 

Compfa!IC& Program. 2013. 

Pogt2S GA0.13·S82 Auditor Atttstallon on Internal Controls 
298 

Ta.ble 6: Esbmate<l Percentage of Companies with Mar1<et Capitalization Less Than 

$10 Billion That Perceive Benefits from the Auditor Att~ation, by Type of Benefit 

Type of benefit Percentage 

()reel benelr1S: 

Quality ol company's internal oonbol structure 8G'If. 

Audi committee's confidence in 00<11'3nl's interna.l control wer hna.ncial 73 

reportng 

Quality ol company's financial reporting 53 

Ability to prevent a.nd detect fraud 46 

Indirect benefits: 

Companys ability to raise capital 16 

lnvestOJ confidence'" company 30 

Efficieroey ol company's operation 19 

Efficieroey ol company's financial repor1Jng process 19 

Liqlidity of companys common stock 7 

Timeliness of company's financial statement aud~ 11 

Company's OYerall value 16 

Confidence in the fnancial reports of cUrer 404(b) compliant 00<11'3nies 52 

$Cr..rttGK>~ 

N<ie: The percentage estimttes have a mar~ of err« d plus or minus 15 percentage points ex ttwer. 

A 2013 study conducted by one academic we interviewed examined the 

earnings quality- how well earnings reflect actual firm performan~f 

exempt companies and nonexempt companies. sz The study found a 

signifiCant deterioration in the quality of earnings for exempt companies, 

but not for nonexempt oompanies.53 1n add~ion, SEC in its 2009 study on 

S2A. 0. Holder, K. E. Karim, and A. Robin, "Was Dodd· Frank JuS1ltied in Exef!l>llng Small 

Firms from Sectiln 404b Compliance?' k0011n6ng Horizons, vol. 27 no. 1 (March 2013). 

There is no single defin~ion of the term ' earnings quality.' 

53rl'o0 other studies looking at the effect <:A auditO< attestati:>n on exempl and $ll'IOIII 

nonexempt companies had sinilar findings: one found that compiance v.ilh audiO< 

attestation had imprOYed lhe quality ol mandai reporting as mea$1Jred by materially 

misstaled financial statements (see Nagy, 'Sectiln 404 C<>mplianoe and Financial 

RepO<ting Quality,' Accounting Horizoos, vel. 24, no. 3 (2010), I'Alile lhe other found !hat 

audllor atteslaoon be.'lefitssmall 00<11'30JOS via higher revenue qualty as measured by 

discretionary (abnoonal) rOYenues (see G. V. Krislrnan aoo W. Yu, 'Do Small Firms 

Benet~ frO<n Audile< Attestation of Internal C<>ntrol Elfectiveress?' Auditing: A Journal of 

Ptacliceeoo Thecty, vel 31 no. 4 (2012)). 

Pogt26 GA0.13·S82 Auditor Atttstallon on Internal Controls 
299 

Measuring the Costs and 

Benefits of the Auditor 

Attestat.ion Requirement Is 

Difficult, and Views Differ 

on Whether Benefits 

Exceed Costs 

auditors' involvement in internal control over financial reporting noted the 

follov.ing benefits: (1) the independent d~or's assessment of the 

effectiveness of a COill>any's internal controls resu~s in a more 

discipliled management assessment process: (2) the independent 

auditor's expertise can provide management with an addttional 

perspective on the quality of the company's internal controls; and (3) the 

independent aud~ of a company's internal controls improves the el ab~tty 

of a company's internal control disclosures and financial reports. 

According to some academic researchers, oblllining an auditor attesllltion 

can also have a posl ive impact on a company's cost of cap~al. One 

acaden-.c we interviewed noted that by comptying with the auditor 

attestation requirement smaD companies incur lower borrov.ing costs and 

therefore a lower cost of capital because investors have greater trust in 

the accuracy of the companies' financial reporting. Another academic we 

interviewed noted that companies that do not comply v.ith Section 404(b) 

of the Sarbanes·Oxley Ad reduce investors' confidence in the companies 

and reduce the transparency and reliabilly of companies' financial filings. 

As a result, he would expect their cost of capital to ilcrease. ln addition, 

as discussed later in the report, a 2013 study empiricaDy supports the 

view that companies that voluntarily colll'IY with the aud~or attesllltion 

have lower cost of capital. so 

Measuring both the costs and benefits of the aud~or attestation 

requirement is difficult. Accordilg several studies, direct costs, such as 

audrt fees, are lllngible and immediate and therefore are more readily 

measured. Indirect costs, such as opportuntty costs, are more difficu~ to 

measure be<:ause they are less tangible. In comparison, however, 

benefits are more diffiCUlt to identify, measure, and quantWy than costs 

because they are intangible and may occur over a longer period. 

56 

Because measuring the costs and benefrts of auditor attestation is 

difficuH, comparing costs and beneftts is also challenging. 

"'c. A. Cassell, L.A. Mym, and J. Zhou, 'The Effeas of Voluntary Internal Contsol Audis 

on theCostofCapiai,'Working paper, (Feb. 13, 2013). 

56v. Jahmani and W. A OO'Ming, 'The Impact of Sarbanes-Oxley Al;t, • Journal of 

Business & Economics Resemh, vol. 6, no. 10 (2008); Coates IV, John C. 'The Goals 

and Pronvsea the Sarbanes·Oxley At;t,' Joumafo/ coonomrc Perspec!Nes, vo1 Zl , no 1 

(Z007); and Chief Financial Officers' Council and the Presidenfs Council on Integrity and 

Effi:iency. 'Estinamg the Costs and Benefits of Rendering an Opinion on Internal Control 

C11er Financial Repo<ting.' 

Pogo 27 GA0.13·S82 Auditor Atttstallon on Internal Controls 
300 

Our survey resufts indicate that the views on whether the benems 

associated with aud~or attestation compliance outweigh the costs are 

mixed. According to our survey results, we estimate that about 57 percent 

of all companies >Mth less than $10 billion in market cap~aliza ion view 

the costs as somewhat or greatly outweighing the benefits; 16 percent of 

the companies view the benefits as somev.tlat or greatly outweighing 

costs; 21 percent of the companies view costs and f~s as being 

about equal; and 6 percent are not sure. Generally, the perceptions were 

consistent across companies of different sizes. 56 Some of the reasons 

companies gave for their views include that the costs are particu ~y 

onerous for smaller companies. the time and effort devoted to 404 divert 

resources away from more value-added activ~ es, and that the attestation 

overemphasizes testing and the number of controls that are necessary. 

Some of the reasons companies gave to support the view that the 

benef~s outweigh the costs include that the attestation leads to improved 

internal control over financial reporting process, increases investor 

confidence in company's financial reports, and makes it easier to detect 

fraud. 

Companies, trade associations, industry experts, and academics we 

interviewed expressed various views on the cost-benefrt ratio of the 

audftor attestation. Companies generally assess the costs and benef~s of 

auditor attestation as~ relates to themselves and not the marketplace. 

For example, chief financial offiCerS of too exempt companies that 

previously had obtained audftor attestations stated that the costs of 

compliance outweighed the benefits because of the money and time that 

they (and companies in generaO spent on obtaining auditor attestation 

and the lack of benefits gained from such attestation. In addition, a 2010 

empirical study looking at companies of comparable size >Mth public float 

between $50 million and $100 million found that the net effect of auditor 

attestation (as measured by stock returns) was negative. s? The reduction 

in the market value of nonexempt companies suggests that the costs of 

~or exempt companies that voluntarily complied v.ith the audlor attestation requ emen~ 63 percent view the costs as somev.hat or greatly outvoeigh<>g the benefits; 19 percent 

view the benelits as somewhat 01 greatly outvoeighilg costs: 15 percent view costs ard benefls as beilg about equal; and 3 percent are nol sure. For nonexel!'j>t companies, 57 

percent view the costs as somewhat 01 greatly outweighing the benefls; 15 percent view 

the benelits as somewhat or greatly outvoeighing costs; 21 percent view costs ard benefls 

as being about equal; and 7 percent are not sure. 

S

7P. lliev, 'The Effect of SOX Section 4()4: Costs, Earnings Quality, and Stock Prices,' 

J()l)rna/of Finance, val. 65. no. 3 (2010). 

Pogt28 GA0.13·S82 Auditor Atttstallon on Internal Controls 
301 

compliance may outweigh the benefds for small companies. In contrast, 

trade associations, industry experts, and some academics we interviewed 

generally view the benefits as outweighing the costs. They stated 

generally that even though the auditor attestation is costly to obtain, ~ has 

led to more reliable financial reporting, greater transparency and investor 

protections, or improved internal control systems. SEC and PCAOB 

officials noted that their agencies have not taken an official pos~ion 

regarding whether the benefrts of a company obtaining an aud~or 

attestation outv..eigh the costs. 

Other survey results also show mixed views on whether the benefits 

associated ~ aud~or attestation compliance outweigh the costs. A 2012 

survey of financial, compliance, internal aud~. and other executives 

examined issues companies must address related to the Sarbanes-Oxley 

Act. The survey resuHs show that even though initial costs and efforts to 

com ly~ Section 404 were burdensome, many companies (31 percent 

of respondents) viewed the benefrts as outweighing the costs, in part due 

to improvement in internal controls. 

54 Fifty percent of aD responding 

companies viewed the costs as outweighing the benefrts to some degree, 

and 19 percent viewed the costs and bene ~s as equal. Large companies 

held a slightly more positive view of the benefits than small companies. 

Another 2012 annual survey that looked at au ~ fees found that 51 

percent of tile companies that complied with the aud~or attestation 

requirement thought that they had better internal controls as a resuft and 

that the attestation was v.orth the expense.

54 Thirty-seven percent of 

respondents thought they had better internal controls but that this benefrt 

was not v.orth the expense, and 7 percent thought that the cost of 

compliance far exceeded any add~ional improvement to internal corrtrols. 

In comparison, the 2005 annual survey showed that during the early 

implementation of Section 404(b) of Sarbanes-OxJey Act, over 90 percent 

of survey respondents said that the costs outweighed the benefits. 10 

14Protiviti, 2012 SaJtJanes-Ox/eyCompiance &Jrvey: Where U.S.-li<led Companies 

Stand-ReVIewing Cost, Time, Effotf and Proe&s. 2012. 

69Financ~l ExecU1ives lntemational and Financial Executives Research Foundation, 2012 

Audh Fee S!#Vey (Mooistolo.ll, N.J.: 2012). Financial ExetW;es International is a trade 

group for financial execuwes. 

&financial Executives International and Filancial Executives Research Foundation, 

Spe<ial S<NVey on SarbllfleO-Oxley SecOOn 404/rrp/eme!JisOOn (MouistO'Nil, N.J: 2005). 

Pogt29 GA0.1 3·S82 Auditor Atttstallon on Internal Controls 
302 

Auditor Attestations 

Appear to Positively 

Affect Investor 

Confidence, and 

Disclosure of 

Compliance Status 

Could Enhance 

Investor Protection 

Most Empirical Studies We 

Reviewed Suggest That 

Auditor Attestation Has a 

Positive Impact on 

Investor Confidence 

Research suggests that aud~or attestation generally has a positive effect 

on investor confidence. Although exempt companies are currently not 

required to disclose 'lltiether they volunlar y complied with the aud~or 

attestation requirement in their annual reports, doing so would provide 

investors with important information that may influence their investment 

decisions. 

Recent empirical studies we reviewed found that audrtor attestation of 

internal controls generally has a positive iiJl)act on investor confidence. 

Investor confidence is considered an indirect benefrt to companies that 

comply with the audrtor attestation requirement. Specifically, an auditor 

attestation of internal controls helps to reduce information asymmetries 

bei'M::en a company's management and investors. 61 With increased 

transparency and better financial reporting due to reliable third-party 

attestation, investors face a lov.er risk of losses from fraud. This lowered 

risk has a number of posrtive consequences for companies, such as 

enabling them to pay less for the caprtal as more confident investors 

require a lower rate of return on their money. 

Because investor confidence is difficutt to measure directly, empirical 

research has examined the impact of audrtor attestation on other 

variables that are considered proxies for investor confidence, including 

the cost of equ~ and debt caprtal, stock performance, and iquid~. 62 ki 

611nformation asymmetry refers to the fact that managers of a company typically know 

more than outsiders about the conditions of the OOflllany and its future prospects. They 

can eploit this infom'IOtion asymmetry to help the COflllany or themselves by, for 

example, releasilg imo~ or biased information. These actions v.oold affect the abilly of 

investors to make good investment decisions and in turn lead to inefficiencies, such as 

misallocation of capital. 

82our focus in this secbon is on recent empirical research about the 1mpad on investor 

confidence of auditor attestations required by the Sarbanes-Oxley Acfs Section 404{b). There is a large body of empirical researclt that has investigated different aspects of the 

implementation of the Sarbanes-Oxley Acfs Sections 302, 404(a), and 404(b) silce the 

passage of lhe act See A. Schneider, A Gramlng, D. R. Hermanson and z. Ye, 'A 

Review of Academic l iterature on Internal Control Reportilg Under SOX. • Journal of 

ACCOIInfing Lf.erafure, vol. 28 (2009). 

PogtlO GA0.13·S82 Auditor Atttstallon on Internal Controls 
303 

described below, such research has found that the auditor attestation 

inaeases investor confidence. 

• A 2012 study examined exempt and nonexempt companies with 

mar1<et capitalization between $25 million and $125 million. This 

study found that the market value ol equity- as measured by the 

common stock price-is positively associated v.ith the book value 

of equity-which is an element in financial statements-but that 

this relationship is stronger for nonexempt companies. 

63 1n other 

words, investors appear to put greater trust on the book value of 

equity of companies that are subject to aud~or attestation 

compared to those companies that are not. As a resu . book value 

is more likely to have a positive effect on market value ~the 

auditor attestation is present. These results are consistent v.ith the 

notion that the aud~or attestation provides useful and relevant 

information to investors. 

• A 2013 study found that exempt companies that voluntarily comply 

v.ilh the auditor attestation enjoy a lower cost of capital. 

Speclically, both the cost of equity and the cost of debt are 

significantly lower for companies that voluntarily comply with the 

requirement compared to those exempt companies that do not.&< 

These results are consistent w~h the view that auditor attestation 

leads to higher investor confidence and that voluntary compliance 

v.ilh the requirement reduces the risk companies present to 

investors. This lowered risk, in turn, reduces the risk premium that 

investors demand to hold these companies' stocks or bonds. 

• A 2012 study examined the equity mar1<et response to the 2009 

proposed permanent exemption from the auditor attestation 

requirement for public companies v.ith a public float of less than 

~. V. Krishnan and W. Yu, 'Oo Small Firms Bene/it from Aud or Attestation ot Internal 

Control Elfectt<eness?" Auditmg: A Journal d Proctk;e and 1heay. vcl. 34, no.1 {1012). 

111C. A. Cassell, LA Mye10, and J. Zhou, 'The Effeds o/ Voluntary Internal Control Audis 

on the Cost of Capilai." W<>rking pape•. (Feb. 13, 2013). 

Pogtll GA0.13·S82 Auditor Atttstallon on Internal Controls 
304 

75 rnllion. 

64 The study found a negative martel response to the 

exemption but less so for those companies that voluntarily 

complied before 2009. It also found that to redue1! information 

asymmetry, companies that voluntarily comply use their 

compliance as a signal to the marketplaoo of the superior quality 

of their financial reporting-a signal that is credible because~ is 

costly and difficult to imtate by companies Y<ith weak internal 

controls.64 Also, companies that voluntarily complied with audttor 

attestation had significant increases in iq id ~. f1 

Other research supports the view that auditor attestation of internal 

control effectiveness matters for investors and other market participants 

insofar as adverse aud~or reports have negative consequences for 

companies. Such consequences include higher cost of debt (and possibly 

~ore speaticaRy, the study underllll<.es an empirical investigation of the response to !he 

November 2009 Ganett·Adler ameodment &pp!oved by the House financial Se<vices 

Committee, v.l\ioh proposed to exempt smiler public oomi)Mies from the aud~or 

attestation requirement. (see Investor Prolection foe. of 2009, H.R. 3817, 111th Cong. § 

606). K. &own, P. Pacham, J. Li, E. Moharrmad, f . A Elayan, and f . Chu, 'The 

Val.ration Effect and Motivations of Voluntary Compliance v.ith Aud~rsAttestalion unde< 

Sarbanes-Oxley Ad Section 404 (8),' ~rl<ing paper, (Jan. 15, 2012). 

66signal ng may P<ovide a benef4 especially to small, high-grcw.th oomponies that need 

capital to elQ)and. Exempl oomponies have to balance the potential benefits and oost of 

voluntary compliance, as alldiiOrs' involvement ina eases the likelihood that llternal 

control deficiencies v.ill be discovered and d~d, v.ith negat;,e consequences. 

87This i'lcrease suggests that aud1tor attestation enhances publ1c confidence in f1nancial 

reporls loading to a fbght to quality by investors and an increase in liquidity, m 'tollich 

investors move their capital z.MJY from assets perceived as risky in favor d those viewed 

as safe<. 

Pogt32 GA0.13·S82 Auditor Atttstallon on Internal Controls 
305 

Anecdotal Information 

Also Suggests Audilor 

Attestation Can Positively 

hnpact Investor 

Confidence 

higher cost of equity), lower probabiltty that lenders 1'.111 extend ines of 

credtt, stricter loan terms, and unfavorable stock recommendations.es 

While most research findings we reviewed suggest audttor attestation 

provides valuable information to investors and has a pos~ive effect on 

confidence, a 2011 study questions lhe value of lhe audttor attestation for 

small companies.69 Looking at exempt and small nonexempt companies 

with market capitalization of $300 milion or less, the study finds that small 

companies that became nonexempt, and therefore subject to lhe audttor 

attestation requirement, in 2004 experienced a statistically signWicant 

inefease in their material weakness disclosure rate, but companies that 

remained exempt saw similar increases through their management 

reports under Section 404(a) of the Sarbanes-Oxley Act. The results 

suggest that auditor attestation provides little addilional information to 

investors in terms of detecting material weaknesses because there is no 

statistically significant difference in the rate of disclosure of material 

weakness between the two types of companies. 

The majority of academics and market participants we interviewed 

su9gest that having audttor attestation posttlvety impacts investor 

confidence. SpecWically, they told us that the involvement of auditors in 

attesting to the effectiveness of internal controls ill'!)roves the reliabiltty of 

the financial reporting and serves to protect investors. As a resutt, they 

said, the exemption granted to small companies is likely to reduce 

investor confidence because these companies already have greater 

68see for example, A Crabetee and J. J. Maher, "Credit Ratings, C<lsl of Deb~ and 

Internal Control Disclosures: A Comparison ol SOC 302 and SOX 404," The Jooma/ of 

Applied iJusirless ReSINfch, vof. 28, no. 5, (2012); J.S. Kim, S.Y. Song, L. Zhang, 

, nternal Control Weakness and Bank Loan Contracti\g: Evidence from SOX Section 404 

Oi$closures,• The kcounNng Review. vol. 86. no. 4 (2011); D. DhaiPIIal, C. Hogan, R. 

Trezeva ~ and M. VVIkins, "Internal Control Disclosures, Mon mg, and :he Cost a Debt," The Accounting Review, vol. 86, no. 4 (2011); H. Ashbaugh-Si<aife, D. Coll ns, W. Kinney, Mel R. LaFond, "The Effect ol SOX ln:etnal Control Delieiencies on Firm Risk Mel 

Cost of Equity," .lo<rnalof Aeoounling Research, vol. 47, no. 1 (2009);A Scllneider and 

B.K Church, "The Effect of Audite<s' Internal Como! Opinions on Loan Decisions, • 

Joumalol AocouroUng and l'lib/ic ~icy. vol. 27, no.1 (2008), S. K Asare and A. Wrig ~ 

"Tha Effect of Type of Internal Control Report on Users' Con!mnce in tha Accompanying 

f inancial Statement Audl Report, • Conte~ Accoon~ng Research, vol. 29, no. 1 

(2012). 

I!Sw. R. Kin nay and M. L. Sllepardson, "Do Control Effectiveness Disclosures Require 

SOX 404(b) Internal Control Audits? A Natuoal Experiment v.ith Small U.S. Public 

Companies,' Journal of Aeoounling Researclr, vot. 49, no. 2. (2011). 

Pogt33 GA0.13·S82 Auditor Atttstallon on Internal Controls 
306 

informational asymmetry. They said that aooording to acaderric and other 

studies, small companies are also more likely than large ones to have 

serious internal control problems. Furthermore, they commented that 

mana,gement's report on internal controls alone is often uninformative 

because management often fails to detect internal control deficiencies or 

class~ies them as less severe than they are. Some market participants 

also told us that any company accessing capital markets, regardless of 

size, should be required to comply with the auditor attestation 

requirement as investors in any company, large or small, are en ~led to 

the same investor protection. 

Our survey resuhs also indicate that some companies view aud~or 

attestation as contributing to investor confidence, which is similar to 

findings from others' studies and surveys. Our survey results show that 

the major~ of respondents are more confident in the financial reports of 

companies that comply with the auditor attestation requirement than 

companies that do not. In add~ on, we estimate that 30 percent of 

respondilg nonexempt and exempt companies that voluntarily comply 

thought that the requirement increased investor confidence in their own 

company, while 20 percent were not sure and the remaining 50 percent 

reported no impact. This perspective is consistent with the resutts from an 

in-depth 2009 telephone survey SEC conducted of a small group of 

financial statement sers~uch as lenders, securities analysts, credit 

rating agencies, and other investors-regarding their views on the 

benef~s of aud~or attestation. These SEC survey respondents indicated 

that the auditor's attestation report provides additional benefits to users 

and other investors beyond the management's report under Section 

404(a) and that the requirement generally has a positive inpact on their 

confidence in companies' financial reports. Moreover, in response to a 

2010 Center for Alldit Quality (CAQ) survey of individual ilvestors, almost 

two-thirds of investors said they v.ere concerned about exempting 

companies v.ith annual revenues of under $75 million from the 

independent auditor attestation requirement, suggesting that the 

requirement has a positive effect on ildividual investors' confidence in the 

financial information generated by smaller companies.

70 Similarly, in a 

10center tor Audit Quality, The CAQ's Follth MIIU41/ndivid!illl lm<estcr S..wy, 

Septetmel 2010. The Center for AudR Quality Is a nonprofit groop whose boaid includes 

leadetS from the public company audrting hrms, the American Institute of CPAs, and three 

members from outside the public company auditing professi>n. The organiza!i>n is 

affib ted with the American Institute of CPAs and seeks to enhance investor oonfidence 

and pubic trust in the global capb.l markets. 

Pogt34 GA0.13·S82 Auditor Atttstallon on Internal Controls 
307 

Disclosw·e of Auditor 

Attestation Status Could 

Enhance Transparency 

2012 swvey of investors conducted by the PCAOB Investor M</isory 

Group on the role, relevanoo, and value of the aud . over 60 peroont of 

respondents said that the auditor's opinion on the effectiveness of internal 

controls is r~ cal in making investment decisions.

71 Further, in a 2012 

survey of individual investors by CAQ, 70 percent of the respondents 

identified independent aud~s in general as the most effective means of 

protecting their interestsn 

Expl c~ disclosure of auditor attestation status in exempt companies' 

annual reports could quickly provide investors useful information that may 

influence their investment decisions. Currently. exempt companies are 

not required to disclose in their annual reports V>ilether they have 

voluntarily obtained an auditor attestation on their internal controls. From 

2005 through 201 0, SEC granted small public companies muhiple 

extensions from having to comply with the auditor attestation requirement. 

During this time of forbearance, SEC required exempt companies to 

include a general statement in their annual report that the company was 

not required to comply with the auditor attestation requirement because of 

SEC's grant of temporary exemption status. According to SEC officials. 

the statement served to provide investors who may have been looking for 

the attestation an explanation of ~ absence. SEC granted as final 

temporary exemption to take effect on June 15, 2010, prior to the 

passage of the Dodd· Frank Act. SEC did not require exempt companies 

to include the disclosure statement when implementing the provision of 

the Dodd· Frank Act that created the permanent exemption. 

SEC offiCials said that ~ is not common for the agency to req uire a 

company to disclose compliance status for requirements that are not 

applicable to the company-which, according to SEC offteials, could 

potentially influence a company's behavior. Further, SEC officials noted 

that information on the company's fiing status-and, therefore exemption 

status-can be found in the company's annual reports and other 

711n addition, about 47 percent ol respondents reported using the auditor's report "always· 

or "often" v.hen makilg investment decisions, v.tth about 27 percent reporting using il 

~metimes." PCAOB Investor Advisory Group, March 28, 2012, presentation on the Role, 

Relevance, and Value of the Audi. 

71center fOf Audit Ouality, The CAQ's Sixth Annual Main S~eef tnvesla Sutvey, 

Septerrbef 2012. 

Pogt lS GA0.13·S82 Auditor Atttstallon on Internal Controls 
308 

doct~ments, ~ich are available to all investorsn Therefore, SEC offiCials 

stated that such information allov.s investors to determine l'dlether an 

attestation has been obtained. However, v.tlile this information is 

available, a company's attestation status is not readily apparent without 

some knowledge or interpretation of the ctl'rent reporting requirements. 

~ noted earlier, SEC has previously required companies to provide 

additional clariy on their compliance with the auditor attestation 

requirement. Thus, requiring companies to explicitly disclose their auditor 

attestation status would be consistent with its past action. 

Further, federal securities laws require public companies to disclose 

relevant information to investors to aid them in their investment 

decisions. 7

' Many market participants we inteiViewed consider the 

external audaor's assessment of the effectiveness of a company's internal 

control over financial reporting to be important information for investors. 

Thus, many mar1<et participants we interviewed and companies we 

surveyed noted that exempt companies should be required to expldly 

disclose ~ether or not they obtained an auditor attestation to make the 

information more transparent for investors. In particular, aooording to the 

resutts of our survey, we estimate that 57 percent of all companies with 

less than $10 billion in market caprtaization are in favor of requiring 

exempt companies to disclose whether they have voluntarily obtained an 

auditor attestation. A representative from one company said "I believe 

there is an assumption that SEC-listed companies are in compliance with 

404. 1f companies are not, they should disclose such." A representative 

from another company said that "If investors value the independent audit, 

then they should be made aware of situations where such audij has not 

been performed. Investors should not have to interpret the regulations to 

know~ the audit is required." Some companies we surveyed that v~ere 

not in favor of such disclosure generally believed that investors can get 

the information from the audit opinion in the annual report ~ of year-end 

2011, approximately 300 exempt companies had voluntarily complied 1\ith 

the auditor attestation requirement. Although information on voluntary 

compliance with the auditor attestation requirement is determinable, 

having the information explicitly disclosed could benelit investors. Such 

73see for example, Items 8 and 9A in 1he annual reports filed with SEC and Item ~a)(4) 

of Regulation S.K, as amended in 2010. 

'seegeneraHySecu iesAttof 1933, §§ 7, 8, 11, 12, and 17;Securities Exchange Att 

of 1934, §§ 10, 13, and 14. 

Pogt36 GA0.13·S82 Auditor Atttstallon on Internal Controls 
309 

Conclusions 

Recommendation for 

Executive Action 

disclosure would increase transparency and investor protection by 

making investors more aware of this i111>0rtant investment information. 

Investors need accurate financial information with v.tlich to make 

informed investment decisions, and effective internal controls are 

necessary for accurate and refiable financial reporting. The attestation 

requirement is part of legislation aimed at helping to protect investors by, 

among other things, improving the quality of corporate financial reporting 

and disclosures. Perceptions of the costs and benef~s of aud~or 

attestation continue to vary among companies and others, but among 

other benefits, obtaining d~or attestation appears to have a positive 

impact on investor confidence.ln add~ion, our analysis found that 

companies (both exempt and nonexempt) that obtained an auditor 

attestation generally had fewer financial restatements than those that did 

not, v.tlich suggests that knolling whether a company has obtained the 

auditor attestation may be useful for investors in gauging the reliability of 

a company's financial reporting. However, because SEC regulations 

currently do not require explic~ statements regarding the voluntary 

attainment of aud~or attestation, investors may have to interpret reporting 

requirements and filings to determine v.tlether exempt companies have 

obtained an aud~or attestation. Previously, v.ilen certain companies were 

te111>0rarily exempt from the auditor attestation requirement, SEC 

required xplic~ disclosure of exemption status in companies' annual 

reports. However, SEC eliminated this requirement in 2010 when 

companies of certain sizes were permanently exempted. Federal 

securities law; require public companies to disclose relevant information 

to investors to aid them in their investment decisions. Although 

information on a company's exempt status is available to investors, 

explicit disclosure would increase transparency and investor protection by 

making investors readily aware of whether a company has obtained an 

d~or attestation on internal controls. The disclosure could serve as an 

important indicator of the reliability of a company's financial reporting, 

which may influence investors' decisions. 

To enhance transparency and investor protection, we recommend that 

SEC consider requiring public companies, v.tlere applicable, to explicnly 

disclose whether they obtained an aud~or attestation of their internal 

controls. 

Pogt37 GA0.13·S82 Auditor Atttstallon on Internal Controls 
310 

Agency and ThirdParty Comments and 

Our Evaluation 

We provided a draft of the report to the SEC Chairman for her review and 

comment. SEC provided Vol"itten comments that are summarized below 

and reprinted in appendix II. We also provided a draft of the report to 

PCAOB and relevant excerpts of the draft report to Audit Analytics for 

technical review. We reoeived technical comments from SEC, PCAOB, 

and Aud~ Analytics that were incorporated as appropriate. 

In its written comments, SEC did not cOllllrent on our recommendation 

that ~cons der requiring pubic companies to explimly disclose whether 

they have obtained an internal control attestation. Rather, SEC confirmed, 

as described in the draft report, that a nonaccelerated filer (referred to as 

an exempt company in our report) does not have to explicitly disclose 

whether ~obtain ed an auditor attestation report on ~s internal controls in 

its annual report. However, SEC stated that this fact can be easily 

determined by investors from information that is already disclosed in the 

annual report. In addition, SEC stated that investors can also find 

information regarding the existence of an opinion on internal controls by 

looking at the aud~ report in the company's filing. SEC also noted that 

PCAOB standards permit an auditor that is not engaged to opine on 

internal controls to inc de a statement in its report on the financial 

statements indicating that~ is not opining on the internal controls. In our 

report, we acknowledge that information needed to determine a 

company's aud~or attestation status is available. However. because an 

explim statement on the company's status is not required, investors must 

deduce the company's status from the available information. Explicit 

disclosure could significantly decrease the potential for investors to 

misinterpret the information regarding a company's aud~ attestation 

status. Such disclosure muld increase transparency and investor 

protection by making investors readily aware of this important investment 

information. We therefore maintain that the disclosure warrants further 

consideration by SEC. 

We are sending copies of this report to appropriate congressional 

committees, SEC, PCAOB, Aud~ Analytics and other interested parties. 

In add~ion, the report is available at no charge on the GAO webs~e at 

http://wMv.gao.gov. 

Pogol8 GA0.13·S82 Auditor Attestation on Internal Controls 
311 

If you or your stall have any questions about this report, please contact 

me at (202) 512-8678 or clowcrsa@gao.gov. Contact points for our 

Offioes of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix IV. 

A. Nicole Clo\Mlrs 

Director 

Financial Markets and 

Conurunity Investment 

Pogol9 GA0.13·S82 Auditor Attestation on Internal Controls 
312 

Appendix I: Objectives, Scope, and 

Methodology 

C-omparison of Exempt 

and Nonexempt Financial 

Restatements 

This report discusses: (1) how the number of financial statement 

restatements compares between exempt and nonexempt companies; (2) 

the costs and benefrts for nonexempt companies as ~II as exempt 

companies that voluntarily comply with the audnor attestation 

requirement, and (3) ~at is known about the extent to ch investor 

confidence in the integrity of financial statements is affected by ~ether 

or not companies comply with the auditor attestation requirement. We 

define exempt companies as those wnh less than $75 million in public 

float (nonaocelerated tiers) and nonexempt companies as those 'Aith $75 

million or more in public noat (accelerated filers). For the purposes of this 

report, we define exempt companies as those 'A1th less than $75 milion in 

public float (nonaccelerated filers) and nonexempt companies as those 

with $75 minion or more in public ftoat (accelerated filers). 

To address all three objectives ~ reviewed and analyzed information 

from a variety of sources, including the Sarbanes·Oxley Act of 2002 

(Sarbanes·Oxley Act), the Dodd· Frank Wall Street Reform and Consumer 

Protection Act (Dodd·Frank Act), relevant regulatory press releases and 

related public comment lettets, and available research studies.' We also 

ntervie~d officials from the Securities and Exchange Conmission 

(SEC) and the Public Company Accounting OVersight Board (PCAOB), 

and we interviewed chief financial ff~eers of small public companies, 

representatives of relevant trade associations (representing individual and 

nst~utiona l investors, accounting companies, f111ancial analysts and 

investment professionals, and financial executives), a large pension fund, 

a credn rating agency, academics knowledgeable about accounting 

issues, and industry experts. 

To determine the number of financial statement restatements (referred to 

as financial restatements) and trends, we analyzed data from the Audit 

Analytics database from 2005 through 2011.2 We used the Audn 

Analytics' Audnor Opinion database to generate the population of exempt 

1

1'\Jb. L No. 107·204, 116 Stat. 745 (2002); 1'\Jb. L. No. 111·203, 124 Slat 1376 (2010). 

2

Audrt Analyt>cs IS a.n online market intellgence SOIVICe that pr011ides information on SEC 

registrants. Auria Anatytics maintails a proprietary database contain"9 informabon flom 

the filings public companies submit to SEC, sud! as audit fees, auda opinions, and 

financial restatements. 

Pogo40 GA0.13·S82 Auditor Attestation on Internal Controls 
313 

Appendix I; Objectives, Seope, m Mctho<lology 

and nonexempt companies in each year from 2005 through 2011.

3 Our 

analysis does not include 2012 data because 201 2 small-company data 

was incomplete. According to Audrt Analytics, the incomplete data was 

often due to the fact that small companies had not yet filed the relevant 

information with SEC. The sample we used to produce the population of 

exempt and nonexempt companies does not include subsidiaries of a 

public company, registered investment companies, or asset-backed 

securities issuers. Once we excluded these companies from the entire 

population, we grouped the remaining companies based on their filing 

status (i.e., nonaccelerated filer, smaller reporting company, accelerated 

filer, large accelerated filer, and filers that did not disclose their filing 

status).' Exempt companies are nonaccelerated filers, including smaller 

reporting companies. For our purposes, we grouped companies that did 

not disclose their filing status but v.tlose market capitalization was less 

than $75 rrillion '11th exempt companies.

5 We also identifted for each year 

from 2005 through 2011 exempt companies that voluntarily comp&ed with 

the integrated audrt requirement as indicated in the data. Nonexempt 

companies are accelerated filers and large accelerated filers. For our 

purposes, we grouped companies that did not disclose their filing status 

but whose market caprtafJZation was equal to or greater than $75 million 

with nonexempt companies. We excluded companies that did not disclose 

their filing status and did not have a reported market ca p~a zatio . 

We then used Audrt Analytics' Restatement database, v.tlich contains 

company information (e.g., assets, revenues, restatements, market 

caprtalization, location, and industry clas catio n code) to id nt ~ the 

he Audrt Opinion data set covers all SEC registrants v.ho have disclosed their auditor's 

report on the aud~ of the financial statements in electronic flings and represents the data 

concerning !he auditor's opinion. 

'rile de$gnation of "La:ge Accelerated Filer" was not apprONed by SEC until Oeeembe< 

2005, and the designation oi"Smallel Reportirg Company" was not approved by SEC 

until January 2008. See Revisions to Accelerated Filer Definition and Accelerated 

Oeadlines for Filing Periodic Reports, 70 Fed. Reg. 76626 (Dee. 'l/, 2005); Smaller 

Reporting Company Regulatory Relief and lification , 73 Fed. Reg. 934 (Jan. 4, 2008). 

5

Companies that did not disclose their filing status include canadian Form 40-F filers and 

other>. We used market eaprtalization because Audrt Anal)lics database does not caplure 

companies' po.t>lie !bat. Market eaprtalization is defined as the total dollar market value of 

all of a company's outstanding shares and Is calculated by mu~ lying the number of a 

company's outstandmg shares by tile current market price ol one share. Publrc float is a 

subset of market caprtalization. SEC defines public float as the v.orkiWide agg1egate 

market value ol voting and nonvoting convnon equity held by nonaffil~ es of the tier. See 12C.F.R. § 240 12b-2. 

Pogt41 GA0.13·S82 Auditor Atttstallon on Internal Controls 
314 

Appendix I; Objectives, Se<>pe, m 

Mctho<lology 

number of financial restatements from 2005 through 2011 based on our 

population of exempt companies, exempt companies that voluntarily 

complied, and nonexe111>t companies. Using this database, we identified 

6,436 financial restatements by 4,536 public co111>3nies, 2,834 ol vAlich 

were exempt C0111>3nies. We used Audit Anatytics' 69 classifiCations to 

classify the type of financial restatements into six categories: core 

expenses (i.e., ongoing operating expenses), noncore expenses (i.e., 

nonoperating or nonrecurring expenses), revenue recognition (i.e., 

improperly record revenues), reclassffications and disclosures, underlying 

events Q.e., accounting for mergers and acquisHions), and other. s The 

majority or restatements we classified v.llre the resu ~ ol an accounting 

rule rrlsapplication. 

7 To identify audH costs of compliance, we analyzed 

data !rom AudH Anatytics' AudHor Opinion database, vAlich contains 

auditors' report information such as audit lees, non d~ lees, aud~or 

name, audH opinions, revenues, and company size, among other 

information from 2005 through 2{)11. Our analyses ol audit costs do not 

include 2012 data because 2012 small-company data was incomplete. 

The incomplete data was often due to the fact that small companies had 

not yet filed the relevant information with SEC. We tested a sample of the 

AudH Analytics database information and found o be reliable lor our 

purposes. For example, we cross-checl<ed random samples from each of 

AudH Analytics' databases v.ith information on financial restatements, 

filing status, and internal controls from SEC's Electronic Data Gathering, 

Analysis, and Retrieval system. We also spoke with other users of d~ 

Analytics data as well as Audit Analytics officials. In add~ on, we reviewed 

relevant research studies and papers on the impact of compliance with 

the internal control audits on financial restatements. We consider the 

information to be reliable for our purpose of determining financial 

statement restatement trends and audH fee calculations. 

6

FIVe of the six categories are based on the elasslication SGI'oeme developed by 

academics Zee-Vonna Palmrose and Susan Scholz. The "other· category w.!S developed 

by GAO and OOIT'j)rises mancial restatements that ""re oot included in one of the other 

categories. 

7

The Aud~ Analylics Restatement database uses a taxonomy to group restatements inlo 

three categories (1) restatements based on aeoounting rule misapplication failure (I.e., 

generally accej>ted aocounting p<1neiples); (2) restatements based on hnancial l!aud, 

irregularities, and misrepresentations; and (3) restatements based on accounting and 

clerical errOl& The database includes a fourth catego<y to identify signifi:ant additional 

issues in the restatement Q.e., rrrate1ial ~kness or loan covenant vi::>lation). 

Pogt42 GA0.1 3·S82 Auditor Atttstallon on Internal Controls 
315 

Cost~ and Benefits of 

Auditor Attestation 

Compliance 

Appendix I; Objectives, Seope, m Mctho<lology 

To examine the characteristics of publicly traded companies that 

complied, c~ r voluntarily or because required, with the requirement to 

obtain an independent ud~ r attestation of their internal controls, we 

conducted a web-based survey of companies that had either vo nt ~y 

complied or were required to comply with the integrated audit requirement 

in any year between 2004 and 2011. Based on a list of pub5cly traded 

companies obtained from Audit Analytics, we en ~ied 4,053 companies 

that had either voluntarily complied ~th the integrated audit requrement 

in any year from 2004 through 2011 or that were required to comply in 

2011 as determined by their filing status.

8 We stratified the population into 

three strata by first identifying the nonaccelerated voluntary filers. These 

are companies that voluntarily complied with the integrated audit 

requirement in any year from 2004 through 2011. Since our primary focus 

was on the nonacoolerated voluntary filers, we selected all392 of these 

companies. i From the remaining companies in the population, we created 

!'NO additional strata based on 2011 filing status, and we took a random 

sample of companies from the remaining strata. The sample sizes for the 

remaining strata were determined to produce a proportion estimate ~thin 

each stratum that would achieve a precision of plus or minus 10 

percentage points or less, at the 95 percent confidence level. Finally, we 

inaeased the sample size based on the expected response rate of 40 

percent. We submitted our survey to a total ol850 companies from the 

original population of 4,053. 

We id nt d 104 companies in our sample that were closed, merged ~th 

another company, or improperly included in the sampling frame. We 

received valid responses from 195 out of the remaining 7 46 sampled 

companies (see table 7). The weighted response rate, ch aooounts for 

the differential sampling fractions within strata, is 25 percent. 

81n this report, we use Aud~ Anal)tics data, \>hieh are based on public fili1gs made >Mth 

SEC, to develop the population for our survey. SEC uses public flootto delermine 

eompenies' ming status as of the ~anies' mosl recently completed second fiScal 

quarter. To eCCO<Int for changes that could occur >Mth regard to the companies' filing 

starus as of !heir reeenl!y completed second fiscal quarter and lhe end ollhe year, we filte<ed the poi)IJ~tions by marl<et capial~ation because I)IJblic float data were not 

available in the Au<it Anal)ties database. 

9rhis figure was based on the unique ntl'llber of exempt firms \\00 voluntarily complied 

>Mth the requirement from 2004through 2011 based on their filing status and marl<et 

capitalization rate greate< than zero and less than S75 nillion. 

Pogt43 GA0.13·S82 Auditor Atttstallon on Internal Controls 
316 

Appendix I; Objectives, Se<>pe, m 

Mctho<lology 

Ta.ble 7: Survey Sample Oisposftion 

Population 

Stratum size 

1. Nooaoeclcrated voluntary 392 

filers 

2. Aaelerated filers 1,620 

3. Large accelera'.OO filers 2,041 

Total 4,053 

S...<tGII> 

Sample Out of 

size scope Respondents 

392 92 93 

226 9 56 

230 46 

850 104 195 

We conducted this survey in a web-based format. The questionnaire was 

designed by a GAO survey specialist in collaboration v.ith GAO staff ~th 

subject-matter expertise. The questionnaire was also reviev.lld by experts 

at SEC. We pretested drafts of our questionnaire with three public 

companies of different sizes to ensure that the questions and response 

categories were clear, that teriTinology was used correctly, and that the 

questions did not place an undue burden on the respondents. The 

pretests were conducted by telephone h company financial executives 

in Iowa, Virginia, and Washington, D.C. Pretests included GAO 

methodologists and GAO subject-matter experts. Based on the feed bad< 

r~eived from the pretests, we made changes to the content and format 

of some survey questions. We directed our survey to the chief executive 

officer, chief financial officer, or chief accounting officer, ~ose names 

and email addresses we obtained from Nexis. We activated our web· 

based survey on December 17, 2012, and closed the survey on February 

19, 2013. We sent follow-up emails on three occasions to remind 

respondents to complete the survey and conducted telephone foUow-ups 

to increase the response rate. 

Because our survey was based on a random sample of the population, it 

is subject to sampling errors. In addlion, the practical Mficulties of 

conducting any survey may introduce nonsampling errors. For example, 

difference in how a particular question is interpreted or the sources of 

information available to respondents may introduce errors. We took steps, 

such as those described above, to minimize such nonsampling errors in 

the development of the questionnaire and the data collection and data 

analysis stages as well. For example, because this was a web-based 

survey, respondents entered their responses directly into the database, 

reducing the possibilly of data-entry error. Finally, n the data were 

analyzed, a second independent analyst reviewed all computer programs. 

We conducted an analysis of our survey resu~s to identify potential 

sources of nonresponse bias using two methods. First, we examined the 

Pogt44 GA0.1 3·S82 Auditor Atttstallon on Internal Controls 
317 

Appendix I; Objectives, Se<>pe, m 

Mctho<lology 

response propensity of the sampled companies by several demographic 

characteristics. These characteristics included market capitalization size 

categories, region, and sector. Our second method consisted of 

comparing weighted estimates from respondents and non respondents to 

knovm population values for total market capaalization. We conducted 

statistical tests of differences, at the 95 percent confidence level, between 

estimates and known population values, and between respondents and 

nonrespondents. We determined that there wes significant bias induced 

by the largest companies (measured by market cap~afizatio ) not 

respondilg to the survey.ln other words, we found that companies v.1th 

market capitatization over $10 billion 1~re underrepresented in our 

sample. However, we found no evidence of substantial nonresponse bias 

based on these characterislics l'.!len generalizing to the population of 

companies v.1th market capitalization less than or equal to $10 bilflon. 

Therefore, 1-.e adjusted the scope of our survey to include only those 

companies v.;th market capitalization of less than or equal to $10 billion 

(see table 8). 

Table 8: sample Disposition for Adjusted Target Population 

Population Sample Out of 

Stratum size size scope Respondents 

1. Nonaccelelated voluntary 392 392 92 93 

fileiS 

2. Aece~•ated fileiS 1,620 228 56 

3. La1ge accelerated file•s 1,565 176 1 43 

Total 3,597 796 102 192 

..... ..., 

Because we found no evidence of stilstantial nonresponse bias l'.!len 

generalizing to the adjusted target population and the weighted response 

rate of 25 percent, we determined that weighted estimates generated 

from these survey results are generalizable to the population of in-scope 

companies.'

0 We generated weighted estimates and generalized the 

'Djn-scope population refeiS to the population to which we are generalizing that Includes 

all publicallytraded companies v.ith a publ•c float value of less than S75 mlflon that 

voluntarily complied will the integlllted ud~ requirement in any year from 2004 through 

2011 as well as those public companies v.ith a market cap~lization undet S10 Won that 

we•e •equired to comply in 201 1 and that remained in business at the time of the '"'"'"Y· 

Pogt4S GA0.13·S82 Auditor Atttstallon on Internal Controls 
318 

Investor Confidence and 

Integrity of Financial 

Statements 

Appendix I; Objectives, Se<>pe, m 

Mctho<lology 

resutts to the estimated in-scope population of 3,432 companies (plus or 

minus 42 companies)'' 

Because we followed a probability procedure ba.sed on random 

selections, our sample is only one of a large nuni>er of samples that we 

might have drawn. Since each sample could have provided different 

estimates, we express our confidence in the precision of our particular 

sample's resul s as a 95 percent confidence interval. This is the interval 

that 110uld contain the actual population value for 95 percent of the 

samples we could have drawn. /Is a resutt, we are 95 percent confident 

that each of the confidence intervals in this report includes the true values 

in the study population. All percentage estimates presented in this report 

have a margin of error of plus or minus 15 percentage points or fewer, 

and al estimates of averages have a relative margin of error of plus or 

minus 20 percent or less, unless herv~se noted. 

To obtain infonnation on the impact of obtaining an auditor attestation on 

a company's cost of capital, we included questions in our web-based 

survey to large and small public companies of various industries about 

this matter, interviewed trade associations, industry experts, a large 

pension fund, and academics; and reviewed relevant academic and SEC 

research studies. 

To examine the extent to which investor confidence in lhe integray of 

financial stalemenls is affected by companies' compliance with lhe 

aud~or attestation requirement, we reviewed relevant empiricallaerature 

written by academic researchers, as well as recent surveys, studies, 

reports, and articles by others. To identify these studies, we asked for 

recommendations from academics, SEC, PCAOB, and representatives of 

organizations that address issues related to the auditor attestation 

requiremenl We reviewed bibliographies of papers we obtained to 

identify additional material. In addition, we conducted searches of online 

databases such as ProQuest and Nexis using keywords to link Section 

404(b) of the Sarbanes-Qxley ht with investor confidence. We also 

conducted interviews with agencies and organizations, as well as 

11Since we v.e~e able to identify t04 out of soope COO\?olnies n our sarrple, we can 

log!C311y expect thatthere are out of soope compames rn !lie population that were nol 

sampled. The 3,423 represents an estimated number of in-scope oorrc>anies and because 

it is based on a random sample, \\e can compute a ma1gil of error d plus ex minus 42 

co~nies aroond that estimate. 

Pogt46 GA0.13·S82 Auditor Atttstallon on Internal Controls 
319 

Appendix I; Objectives, Se<>pe, m 

Mctho<lology 

academics and other knoiMedgeable individuals who focus on issues 

related to investor confidence and the audrtor attestation requirement 

Moreover, we interviewed small public companies exempt from auditor 

attestation but who nonetheless complied with the requirement. In 

addition, we reviewed surveys undertaken by various government 

agencies and organizations to gauge the impact of the audrtor attestation 

on investor confidence. We conducted a focused review of the research 

related to Section 404(b) of the Sarbanes-Oxley M and summarized the 

recent studies most relevant to our objective. The empirical research 

discussed may have limitations, such as accuracy of measures and 

proxies used. We reviewed published m rks by academic researchers, 

government agencies, and organizations with expertise in the field. We 

pelformed our searches from September 2012 through May 2013. We 

assessed the reliability of these studies for use as corroborating evidence 

and found them to be reliable for our purposes. We also included 

questions in our 'Neb· based survey to large and small public companies 

of various industries about this matter. Lastly, ¥/e revie'Ned relevant 

federal securities laws, the Securrties Act of 1933 and the Securities 

Exchange Act of 1934.12 

We conducted this pelformance audtt from May 2012 to July 2013 in 

accordance with generally accepted government auditing standards. 

Those standards requr e that 'Ne plan and pelform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audrt objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

1

2securitiesActol1933, Pub. L No. 7322, 48 Stat. 74 (C<>difiedasamendedat 15U.S.C. 

§§ 77a-77aa (2012)); Securities Exchange Act of 1934, Pub. L No. 73291 , 48Stal881 (C<>diied as amended at 15 U.S. C. §§ 78a·78pp (2012)). 

Pogt47 GA0.13·S82 Auditor Atttstallon on Internal Controls 
320 

Appendix II: Comments from the Securities 

and Exchange Commission 

P~o48 

UMrTIOIT.ATC-1 

SECURITtU AND !XCMAHG!. CO"'N!SIION 

A.~100leCie.,'<!1 

OWcccor 

Fin~mci:.l \!and$* (Mnmll:lil) ln\1':'.1~nl 

U.S {lo\'(l'n~~abib:)Offi«: 

4-IIGStroa,NW 

WashinJI.O:I, OC2054! 

ThW: :;ou lOr lbtopportldyto mic1r d~drtfl tcp;)f1 requi."Cd by Scaixl ~91 of tile 

Ood4·Fratic Wall SIJCCI Rclxmand Comwacr PtotcaJM Ad. We ply apprtc:Wt tbe 

,..mblc ni&Jt<h>lii<Go><malOII ""'"">bm~yOffioe("GAO")Ili<I'O"i!ol~ 11< 

importat)((orreliablc fin3l!eial rcp:arting.I'ICblln&the imponaneeo!ii:CI'NJoxwldovcr 

fl'IJt'lCi:tl ltp.'rting(MICfR") .wd tbt ind.::pendt.tll aOOit fund»cl. 

Thcdnft rq:.on concaly idcnnlics thK a non~cnccd lil« thil docs I'IOl IOkll!lanly 

111Ciu.k in U an:ml report II'IICICII.aH rtpon &om a IOdllOt oet lCFR II not KqUucd tO 

d!Sdm tl:is f2a cxp!icily. We bdierc: lhu this fact a~~~. be eastly&tamDcd by 11\\'\'Siort &om 

inkln:ution tlw U alrafydiscloted in the L'IIIUII ~· An imler is required eo ai•.:.c II$ 

fii!Qg UUS.OtUhcOWft' ~&cfliiL~ o111N13l n.:pOI\ clev\)'d~losing whclhtr 1bc ISSUd' 118 not!· 

.-ccler.atc:d fikf ard, d.rd;ur.,cu:~ ft'ornthc~u.iilor :~~ttsbOOn rtq'llirtt!lUC. FW'.hc:r,SF.C 

n~!a f«!IIII'C atl)' iSSQtt that includes at1 a&ditot'$1111esution l t:p.'l1 oo ICFR in its anff.lll tq)Oit, 

whdhtr the atrcsta~:ion repol'l ~ \'CJkiiUI)'O< requU~ to i:1dt.de 11 st.11emt~t tl\:al t1ICI.:tes~ation 

rcpol151nch.dcdirii~8Mila!rtp;nt. A$aresul,nO~III~filer.,lh#v<~lurtui))• 

{11'0\i.ic.ltlalti':!IMilllrqlOIIatertadily~ifltd. 

fna.idition,in\tslettcanali:ltir. irl~ioArtgU"Jif«lbeu1$1mctOiantpiniotlt~n 

CfRbylookingatthcau!~~llllho~'sfiling .. FOfex~•~tbe*torG 

cacastd h)OI)iocooi('FR., Nllic~y Atcol.lneif18(}.~ gk bd("PCA081 ~ 

pcmut lhuOOICOrM t,..Wel~ine.! ~rt. v.lnchv.'Ould IXlt!Ulllbocllanopiruoaonlt.: 

fmaoct.11 ~S;.~ d w1or~ionOIIICf"ft) l(theoudtorc:tooses to ISSUe I sepwlle 

attew~ion tep<!!1()n !('Fa,. P<'A08 scan:btdsnoqu'ft metphcd "atnttnl thallht ~·, ICFR 

JNft ~·M'tlel'lltr!~tilrc ~K 

S«PCA.OB ,\o.t1Qisw.iwdf"AS1No.S.p.w~,.,.U. 

GA0·13-682 Auditor Atltstation on ernal Controls 
321 

Appendix II: Comments from the Securities and Exch:ange 

Commission 

P11it49 

It» brtam)ccd 1 In tbe eM of e~~b.::r rombGcod c.w ~ tep!l!ts., tht: !ac1 dtAtlk mi~r 

ll9ino.1oe iCfRildcatlyd~UIIbUIJdCilf~t'!pi)I'IOfld!e~A131C'flltru 

\lo11CQ dte 4Ud&M WIIOI enwed 10 opine«~ I~ PCAOO MIIAd:J pcrml tb: l!ldi!Of 

10 al~ include Zl i''*f{pcctCOtho 5r.~lli3!Ct'llfru antxplkit SI*ICII'~nt or thiS fla ond ltm 

the a!illlr ~ ""' cxpr~ '" OPJ%0:• oo 1m c 'Olt PC\08 11M ann(li.Uoi tllot, as pono(ic! 

UMdomS ,dl .. q• c pliO$ to proposedllDJnto II~~: ~11.01 , tq(ll111&fi!Odd !;tee l., 

201l A.\ 1Qt oflhlf projoct, wcoo&n:.l!.'d IM!Itlc PCA08 ~alf snttn!) tu I'CI(()cr•IID"'.t lbt the 

PC\OB ittk ~ifie bibd. on R!f!il'm&, asoppoKd 10 pmttiU~~~S-1~ t.q!!lic1aM"a:ncn:s. 

We mn.2in dedlQied 10 (.J)ISifruoudy c¥llh.acin& and irn!'f')\'int ®I' d~~~:losvt 

roqu.nmr:tu ;uld 10 ~il~gNelh:at in\l':st(Q 1~¥>-c: !be inR!nn.IJ.'Ju they lit«! h) wJkc in'flnu(d 

iM'CSimtdi!«i~ Wc~cOAO's.lttmlioRIOII:iescuupo!Urll$$bc$,.n.l'tocwodf 

fa:t 10 e,bu1k }elliDJ )'OUl ~f(IOr )1M 11101t. 

P1111ISet--widt 

Chic!Aocounllnt 

Office oflllcChkr A«<~llltW 

XtK'AO&AS.'.~J>l.f*'Flflb'l 

.\rtrt:M>II.\U:ift.IIMI"iO!O 

GA0•13-6e2 Audittlr Attntation on Internal Controh 
322 

Appendix III: GAO Survey of Accelerated 

Filers and Nonaccelerated Filers 

Survey of Accelerated and Non-accelerated Filers Regarding 

Section 404(b) of the Sarbanes-Oxley Act 

United States Go'ltmment Accountability Offict 

r.~lfoducl.ion 

~t",S.(i(JI'GID.'!t~ OIJ«(IJ.\O}I•h:okp.11ib!:C\'•"-u6ilr>~.lh'C 

"f*)\ttlcC..,.aA.ul.n&WyblliSIIoJ!Ir$c(~\lt91<(W~\\ills.tlhS. 

d~~IJltM VI:O'liiO( WJ.ITAA,t),.(i,\(J_s(•.-!)~1...., lldl 

a'IJWtl)ile..._'f~UNfl...-.-.b~'tlaiOI(b)flla!s.t.:.~ \dPIXIOl 

~MI)b~~'lii(IIMIIIIIIttt~IIM 'IM .. 11 $7S .... (~ 

l(lltll(lM('«:~*IIIm)~~~)(<(m~An~tc.~M 

~~ <liC.,.CO:MC«Ir:M! &cobW\vt'>C«!W"~~~6caodiu'a~~ 

f«##~..SC.~~))tilk~o\rt. 

\'011'.-,plt(lfie-W\~11illldf~Jfll'Wt~~tep.11110flt0..& .. 

~~fle~Mrfoi6cMIIV<"':~'to!IIM! .e ~~IIO )~-'W«Jr19M"lrf.W. 

G.\Opnlty~~«•I!~OI'M\~1ilfiiSPt*\lblkQ,\O-.,~-m..l 

"'PM<••krtpJI. we ~~jO~J~ ll'llll:ll:l:4caiJt:r.j~~lbdM\~rts"'**~ 

~ ........ hrfall.\OIIill•t"hrll"'n.M ... ~IPiifiiiWI) .......,,tMdfJ~f(fM 

IIIIIM'~b)a.•(f~l!) .m:vtla.,-. 

Tflcanl~~~ntliWICOIIf'k .. lkiW\~f'l*I}\'Citf~aal\lb;ft~"'*11f)\'41hl'l~ 

....... ~ 

Page 50 GA 13~2 Aud~or Attestation on lnt•mol Controls 
323 

Appendix Ill: GAO SuiVeyof Accelerated Filers and Nonacctlerated Filer'$ 

Section 1 • Blckground 11\foriM!iotl 

l.~pmlW Cludlddmn. p-.-t) p;ntn~~~fniiiiiO IIIIh.\fl,..loW 

n.x410<'t'ftlk )\'1110dtrif\ I$W\\'\~ 

I'INw fllif'l ll-lll~~lh.!li'alyeriSd.:li!W h\ w. !o'W tnmpm-Y 

~-tisui)Ui . 

:t .. v.t.t)\'lll' dtd loi:W~ IIN •IIMUd ~• ~•f«mto-I\«Fim3).f "'lh lh.! 

S«uririd..,~c.m;,;,.,Sttv 

~~f~)-1<07 

on,l-<al~wb»i 

q~,-20:4 

C lllrilcMir<*'ZI'hJ 

111 '*1liJO I)""'""'"" !I)" qk.l~-21112 

),\\V.bb.:l14-~yow~ 

A U.S."-

MI:Nmff:~ .... 1 fNdft(l.rihinlbblk&k--

(<(lb:~ uN'<(~out~(....tlilia!¢fmli~)lllllipli,:4 

~.., ... p~o:. 

Page 51 GA0 13~2 Aud~or Attntation on lnt•mol Controls 
324 

Appendix Ill: GAO SuiVeyof Accelerated Filers and Nonacctlerated Filer'$ 

Section 2 · Fiscal YeM and Filing S&atu.s 

S.\\tlltb4lmJ&~.:otet.~y"*r«WKh~ ISI."-'!l F<fll ~or»r«~ 

flt.-CIIiltr-m .... ....~>~·Fw~(,v.GOI!p21f'JfQQ?I/yto# ~llii'Dtm.btr 

JI.YJJJ.ft•{IW rrF« Io.K ttt Ft~.'fJI1.}fJit iiiJ6/J(t(f(t 

l'»«.Nt.JJ.Jfll/,; 

i. ()lf\uslO-._ n:O.Io 'IIIUb>;(o.b§:Cn.l))lnrtfih llft.d.cl)t-~dtX.Lboechut' 

lh:~(~ 'Uttft &i«Jwfii:IW4r .. CidNWJ 

... ,.,__ .... _ .............. .. ____ .. ____ ~ .. __ __,.,._ ....... ____ ~"" ___ 

l'lttMnMr: *'._.,....-JR Itl 111111\'r(f" ....,..C*r._. 00.\:f'-cialt..'f\-'ltil'f." 

J . .. v.fx.c( lt:~llfli!W~mdtl)\V<~ .. r<uio.kp:ld.'dau.tito(lh:.:~t~K~ 

ot'•bUle"<a«ttifllll"n' lll- i'mw:l 

tYXot 

IY>m 0 

1Yl006 

.,' :OOJ 0 

fY»Jt 

n~ 

f.Y~ O 

tY~II 0 

tY4»1! 

W:a~~-, h.W:•~t......._'d.ul.:d likr or•'lllllb ~IJI~' 

JA::-oro:a~l.:nol.'cl6krtrra-.Acr~q~<"diit~ .,~no·i 

f&r ll ~~ 

Page 52 GA0·13~2 Aud~or Attntation on lnt•mol Controls 
325 

Appendix Ill: GAO SuiVeyof Ac~lerat Fil ers 

and Nonacctlerated Filer'$ 

0 \lk'>W!IIU.:.Cll iii.WM.Iu»J Gio.l il' l«d.nkd 6b,l ... ri ..... !.ct-,: IKCO:.I•IoJ r.1o 

(t.f(Wknt.,....,. 

0 ~'-''('~.,b.'O'Ia~.-.xkm.'4...,«#cb'M::41J."t g.u,•stlt&!"''·liftl 

S. Ui.I)\U~C\ii:J IIIIIIIII•ril) fl..\flliii iiiJ.:p;:~dJil ~bffl«1j,ca,-ufl•l: lti' 

(' ~-t~W6f111J#.'MM\ 

(i :-;q£+<tk1 t'H ... +t 

Sb.f«'lll!i(h tLi\:~ W«(...).f.!~'W~~»,...-..; yhl\-cuitd!~ 

..tll dlfl.;~~.,,dirs(:f1t1 t)d«foi!J.JI..,tr.,l 

D lo~Mu~ft:("=ln'<D;U((~(,.~'IIIMI ~ 

D r .... ti..S.cr ...nxcudi~•fw~t:l-11: 

ro~t-:qlllirycifl(~'sll..nl~ 

ri To~-c~~~I) »J~~Uc.af*l 

foarii•"C"JU•~•It.:~ 

ol.&.'tX! ~;t"~'Cdp:6R lblllll 

0 ""'"' ~~ (stko.-t'"""....,""""''l<l>< 

k.Si»: KII~cat!Dik!}NC~"'" ~~~1.._a,'tlillll.al)'alllli ~ 

c!~-nfii.\ICI<llt 

o y •. c--uu 

0 ~Q.tW+'iJ:"I!>fWJ.i'l)o!l<t 

u ~.~),)l"«v.tuf\'l.,)6Jyc:v«w~~~l(ljl(f•r irc•~,.or~ 

~lk<fl(ftM&IifitsiCI ~~~~dl•'"*l 

D \\'6•U .. ~Ifl*li.~b .,v.m,~,,•&o. •I ll:L"FK 

~v~k!Otoflk' 

~; .• ..._..~ 

0 \\(bodk\'(il'llaSIIIo:~bdoOO.'t .... dOCIJI'IIIWai~ 

fJ Wllh:b.:.\.tt.I R.aocdtt•kd f.l.n .. .J lolldo.Tr.ptlq:~lh:ull~.:,"i11cpl in11 

1Nsf"1Ukfrt.,. 

o f'(.(4tt),~)·/f.J.:t..V.,.(yi.IIA"~W• 

$c •• « .. ONibOiil)"t'W.~ 'n•~ ,a..nDI.IIIfth• .. '(lll ~-'tl~.f~ 

c~•ib:rr.R? 

Kf ii/•<J fulllld ~~\}ks)lJII'«tl llllll !'*'a. .. ,ta\~)-"'Cl ~ 

e~.:n..""ol'i151CI-ll. l:lr lit:ft.-"l li~~._, f$ti«JIIJirll11.,., 

0 \\'.:tW>btp4JIIIIkiWl.v•'-~~ban.:illlf6el:Flt 

a !'kr .. ~•»~~ 

n..1-.""~ 

PageS$ GA 13~2 Aud~or Attntation on lnt•mol Controls 
326 

Appendix Ill: GAO SuiVeyof Accelerated Filers and Nonacctlerated Filer'$ 

\\Ch:kntil-. 11~6a t.Jdr:t.:.N.:t••....alb. 

Q \\:e....._,,.., .........wm~ 1.n ii'J ~r ...... ~..Wltrc.:lll.'fltli\'411 

CI -·~ ;.'H"hlr~-.())·f~'\( ~MYI'fi~:VJ~~f1)MtM: 

Page 54 GA 13~2 Aud~or Attntation on lnt•mol Controls 
327 

Appendix Ill: GAO SuiVeyof Accelerated Filers and Nonacctlerated Filer'$ 

Seccion 3 ·Total Audit Fees 

'lli'f~fo>.,imoCth:MJI'I\1'babN ftlc.,.lf«s:~•<~.~,.Wm~.-,bio«h 

e:•u.!ir«~"-W•W.Incob.t~-'1oCICfk•'l'iCiti£t:kn,_I..,, ... ,.:~W 

l"C51ndluwfi\111~.:.1n) ... 

\{IIJ*-ld mWr ill(m"-t)b tWII (-""111)~;.-trU;a...-llho.n~(.:I!Hin; 

®fli"'"J«~o-k<i«td...,..k«•~...-.~>:la"dt>6!itwlol~ow~··r.ncw 

~v;,ih)Sf.C.-.:baJfotf.lnald ua~l\."11.:61 f'l.ln}. 

9. \\laa &lh:< ttbiJMO!If thudltftbpaSI ~}\'III' Wer--"'''&rlwdiu*-.:•pp~tr•m«mt 

.tho. !wld '-'rtlw :Mi'lilfKl'Mb b::al )C.> 2009 lllll,~ll. -.nl~l:t jfAW 11'1\t-kihll.r 

~lf.-.... -.c!rtdtw.J 

Tttll ldtfC <\JIPftl .... fwS. 

.UCGI'ItiriCHt 

t1'Mflt s,-- s,-- !At.~n 

n·:t•• •r--=:1 •r--=.1 """'" 

F\ ltll s,-- 1,--- 0 1'"-n 

n·a:n. sr- ~ 

.0, rur llni)NrZOII. trfh: ldlw. .. ,...- tJ.~t (annm.-lll, *lfi:IPdd!dft..") hmn.-)l'UI 

'ICIII IOd~l<tl(r;:bliwt>llohMbfc.:$-'dMw.,_'l:llll.dbt\~CI~ft)l 

~&Jc...'f(IW,...,....,Mflld ..... J 

L~J«14l ....... OI4j\,"JJINN 

b J;em._.d""""tf"'(Y ~~ 

C-~IRII!Ifb)}\U~ ... ,I(c 

.~ .. d<*n(4f..~ 

....... 

4:~tltt-'Vtt..~Jlllmhtq 

111..- n."~MW~b~i"ia lfll•tirc 

S>nlW~5) 

·~"'""'" fO..•n lh:~of'hlln -.cfllli•<" 

~t:)<MSI.k ltir:Milc*»d~t 

OltrlhwllhN~M" 

e-Ob.YC\OIII«f»:r I/'F~ 

•{'«1/yodJ..Y<WN~MI:ttf 

~oo.. ..... i)( .... if......,, fJWd!Y•·-f.nldow 

~-

Page 55 GA 13~2 Aud~or Attntation on lnt•mol Controls 
328 

Appendix Ill: GAO SuiVeyof Accelerated Filers 

and Nonacctlerated Filer'$ 

Page 56 GA 13~2 Aud~or Attntation on lnt•mol Controls 
329 

Appendix Ill: GAO SuiVeyof Accelerated Filers and Nonacctlerated Filer'$ 

Sedion 4 · Fee$ Related to tlte ICFRAudit 

.,lha~w;v.ila!k~llb.'C111b:~..,.~·· ·tl!l.)i)(i.dlJ\'.ift., 

llll.:p..bll.auMofiCHt ~CM~n.:.~asddkf r~flllin~.: ..... t.•v.u-.:~ 

~~w~c:«Wobc.)knri«<~«-'tfoflb:....._.._..,_..,...-. 

II B«w«n ~lf.nllyttrlGl nd lk<'II)Or201l ~Jadl sllf).r~'tiOR. 

la)y,•_.I'( •• L,ftl('.dlll frr:o"kn\ ... C.Cb\ .. 'fc<lthlll'l-.111 Cdllil .. )(lrlll b)'*t 

lndtJrnrlml l .... ll,..,..ftlt-'l.s1f;ti~t-W...Uifte.d• l 

,~illklllif>:rOft<«W,j.w.J 

~~f<Ymlll 

~CJIIt:iDib:lllll'kofmub\lollidl 

lenkpc:nklf ... t'Uidld:ll 

lAIII ... 

~~lllth:llln'kol'<~t"'-'<100 

aA.I«floiiM"t.llaf$.ald~<l 

~~bv~~ .. 

4.Claf9"iolb:IIIRNolc~ 

b:ali<-.$0Ld."'JD-.bt 

·~illhlk~tJf~•ldrllnu!<tl 

ilfa'alaiili

"'""""'""*~­ l) 

f.O.nt:ioChc!UNo('holnlb;,auilt't 

~IO~ttwilOtcroct.p 

(._., IM~Jir.bl~.: 

•Ooha-·Q' .... ...U."""" ... dJ:'rttrtJiM'!'rt 

O.:~oi'~~Mk:•dlh:Tr~C.-..tirS.UI~IIf:m. Colwl· 

hqpiOI:IIbm."'M'l;h;•-~1'«~-C'·Ii~\)'il.:miJl-. ~ 

ll. \\\llilknul~bm."l\\.'d:~)Oif~ ~!MfO~' .... itiS..'(b.t)l(j).W t)l(l))d~s.tt.~· \cf? 

<coso 

COSO't UfiiJ~•It5 9Jl 11tl'fi;JI (.'(llliNirl~d l1•'~~01't ·Th111f\bieb41..10 

4;s•~~.,C'I:alul¢i~«-*in•Cfo.'l'•"c»lr~""~''- iaflll"fc 

a.•'\:hn1t-., v.IUI .,,~bm."'M.d; •~dc-.w.rwt:\ol4 Th: ._l'lfnm.lmlhi 

~I'Ull_,.lt!Udb.'1 .. GI Ih: l'lnt.-t..-dtalmbi )'lM201l) 

Page $7 A0 2 Aud~or Attntation on lnt•mol Controls 
330 

Appendix Ill: GAO SuiVeyof Accelerated Filers and Nonacctlerated Filer'$ 

IJ W!l. ·~~r f}>6J)Wil 't1 1W t1JSt)llpM;t.l.a.l~ f--v.u&.ldmlak-...1 

d'-ilv.ill llbiO~Ik~aldill'l'lh.:Dlt blikc111ftfMIJJ 

Uo.\(.Y.*i()~~ v.ill 

'-'<t~~li*~~ 

~-ll~~t:W*v.twl 

•JCNkam:~t 

-~-.:-,"*~' 

ol:\pp'!.'N! Ic )bfM' ""' ii IW)~'U~ rti $1MA ... Ih\al .. h\d•nJ "")«fww 

ltOMJ\orup$11111ft t)IL·~~v.ffl~~b)b'li<a y<*f~.~IO.~II.IBI 

)) l?£wt,lt'l\fAI~iJ.;,~If~ (/t(lf)f~dft:t·llf'tii"P~Nt.J 

""liJlt 

f\'JOJI 

Page 58 

~...., _.~pmlnatllhwr ._.•frj 

tl'l'l d. lnl ....,.., npr~ 

GA0·13~2 Aud~or Attestation on lnt•mol Controls 
331 

Appendix Ill: GAO SuiVeyof Accelerated Filers 

i nd Nooacceterated Filer'$ 

Seefion 5 • Use of OutsicJe \leMor$ and.lof Consultants 

~WI)~Iiirf~ >arln ...J.««:M~ Ia&lo~~~~.:dtllb~aru.lic..oCr:flt 

~IN)WIIIdo~ ·~ e~ tllam:;.llllds" r~ ... - ·•l"<"fNb\d 

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Appendix IV: GAO Contact and Staff 

Aclmowledgments 

GAO Contact 

Staff 

Acknowledgments 

A Nicole o~M! s, (202) 512-8678 or clo~M!rsa@gao gov 

In d~ion to the oontact named above, Karen Tremba, (Assistant 

Director), James Ashley, Bethany Benitez, William Chattos, Janet 

Eackloff, Joe Hunter, Cathy Hurley, Stuart Kaufman, Marc Molino, l auren 

Nunnally, Jennifer Sclrwartz, and Seyda Wentmrth made key 

oontributions to this report. 

Pogo67 GA0.13·S82 Auditor Attestation on Internal Controls 
340 

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~Ill 

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Please Pnnt on Recycled Paper. 
344 

LETTERS SUBMITTED BY SENATOR TOOMEY 

June 25,2018 

The Honorable Mike Crapo, Chaim1an 

The Honorable Sherrod Brown, Ranking Member 

Commiuee on Banking. Housing and Urban Affairs 

United Slates Senate 

Washington, DC 20510 

Dear Chainnan Crapo and Ranking Member Bro~rn: 

~ 

.. .. 

ill' ~t.!!Fs!E~ ' Hcallh and Educational 

Fa<iitles Fi~ncc Aulhofiijes 

On behalf oft he National Association of Heallh and Educational Facilities Finance Authorities 

(NAHEFFA), I am IITiling 10 express our strong supporl for S. 1117, the Consumer Financial 

Choice and Capital Marke!S Protection ACI, which will be considered during the Senate Banking 

Committee bearing on June 26. This bipartisan legislation would preserve access to an important 

sourte of capital and promote low-cost financing for construction and maintenance of health care 

and educational facilities and other infrastruclure investments. 

NAHEFFA represents organizations in 34 stales which have the authority to provide capital 

financing for not-for-profit healthcare and higher education institutions as well as other charities. 

Our borro11ing colleges, hospitals, and other institutions depend on money market funds as a 

souree for low-cost capital. 

Unforlunately, that access was diminished by a Securities and Exchange Commission (SEC) rule 

that took effect in OCiober 2016. II prohibits prime and tax-cempt money market funds 

operating on a stable net asset value (NA V) basis from being offertd to investors other than 

"natural persons." As a result, organizations that require stable value investments had to shift 

their investments out of those money market funds and into other types of investments !hal do 

not support the capital access needs of institutions that provide health care and educational 

services. 

Money market funds are among the largest purchasers of variable rate notes issued by health and 

education finance facilities authorities. These instruments have a nominallong-tenn maturity, 

but the interest rate is adjusted on a daily or weekly basis. As a result, not-for-profit health care 

and educations instirutions are able to undertake long-term infiaslru(rure projCCIS at low shortterm rates. Unfortunately, funds that purchase the variable rnle notes of the instirutions we serve 

have experienced a nearly 50 percent decline as a result of the SEC's floating NAY rule, thereby 

driving up the cost of borrowing for investments aimed at improving the quality of health care 

and education in our country. 
345 

June 2S, 2018 

Page2 

We urge you to support enactment of S. 1117 so that we can preserve stable value money market 

funds as a viable, efrlcient and cost·efTective source of financing for health care and educational 

institutions. 'Thank you for your consideration. 

Sincerely, 

Charles Samuels 

NAHEFFA General Counsel 

Email: c<~samuclsl/i'mintz com 

Telephone: 202-434-7311 
346 

ANGEL CAPITAL ASSOCIATION 

June 26, 2018 

The Honorable Mike Crapo 

Chairman, Senate Committee on Banking, 

Housing and Urban Aff~irs 

534 Dirksen 

Washington, DC 20515 

Dear Senators Crapo and Brown: 

The Honorable Sherrod Brown 

Ranking Member 

534 Dirksen 

Washington, DC 20515 

Thank you for giving us this opportunity to share with you the views of the Angel Capital 

Association (ACA) on legislative proposals to increase access to capital. On behalf of the 13,000 

members of the Angel capital Association we applaud your bi-partisan approach on one of the 

most pressing issues impacting our nation-increasing access to capital for small and startup 

businesses. 

The Angel Capital Association is the voice of accredited individual angel investors, angel groups, 

accredited online platforms and family offices. Angels are accredited individual investors who 

deploy their own individual money investing in early-stage companies, helping them grow into 

successful companies. On average in 10 angel investments, 3 to4 break even, 5 may fail and only 

I delivers high yield results. These investments are risky but one that our members value because 

of the opportunities they provide for mentoring and making a difference for the American 

economy. Every year ~ngels invest about $25 billion in more than 70,000 startups. Angels and 

venture capitalists have invested roughly the same amount of money for many years, although 

angels invest in 15 times more businesses. An estimated 300,000 angels supported promising 

companies in every American state. 

In addition to providing investment capital, angels often volunteer their own time as mentors, 

providing support and expertise to grow their companies. Angel-funded startups include 

Amazon, Home Depot, Google and so many other iconic American brands. Angel investors are 

found throughout the United States in all states, working to support local startup companies. 

Congress has a critical role in increasing economic growth by removing barriers to capital 

formation. Making it easier for new companies to find the capital they need to grow and expand 

will not only increase economic growth, it will create high value jobs throughout the country. 

Below are the views of ACA on some of the legislation being discussed at today's hearing. 
347 

S. 588, Helping Our Angels Lead Our Startups (The HALOS Act). 

S. 588 is bi·partisan legislation sponsored by Senators Christopher Murphy, Pat Toomey, Heidi 

Heitkamp, John Thune, Brian Schatz and Thom Tillis. The HALOS Act seeks to clarify a 

misinterpretation of the definition of general solicitation by the SEC. 

As you know the JOSS Act created general solicitation, allowing entrepreneurs to publicly raise 

capital for non·public Reg D offerings with safeguards to protect investors. The SEC did not 

change or modernize the definition of general solicitation, effectively including in that definition 

traditional "demo days," in which entrepreneurs pitch their companies to potential investors, 

local economic development officials, academics and others. Because demo days are interpreted 

as general solicitation, participating entrepreneurs are now responsible for verifying the 

accreditation status of every potential investor, instead of the previous way of investors self· 

certifying their accredited status. Many angels are not willing to invest in generally solicited 

offerings because of these additional verifications. 

Demo days have been a firmament of the startup culture in the United States for over thirty years 

and have always focus~d on including all members of the innovation ecosystem, from business 

students to seasoned angel investors and venture capitalists. Entrepreneurs pitched their ideas 

and privately they engaged in capital raising with individual accredited investors. The demo day 

itself and the event of having entrepreneurs pitch their ideas traditionally provides practical 

entrepreneurship education to students and new startups. The SEC has not pointed to any fraud 

in the traditional demo day or pitch competition model. 

The unintended consequence of the general solicitation rules has created confusion among 

investors and potential legal liability for entrepreneurs, reducing the effectiveness of demo days 

and reducing capital availability for some startups. 

s. 2756, Fair Investment Opportunities for Professional Experts Act 

The Oodd·Frank Act updated the definition of an accredited investor to exempt the primary 

residence from net worth calculations. Oodd·frank also required the SEC to examine the 

definition every four years and report on any potential changes. In 2015, SEC staff released a 

report outlining several steps it could take to dramatically alter the definition of accredited 

investor. The SEC has yet to act on the recommendations of the staff report. 

The Angel Capital Association supports the provision in S. 2756 that would codify the current 

income ($200,000 for an individual/$300,000 for a couple) and net worth ($1,000,000 excluding 

a primary residence) thresholds for being considered an accredited investor. Eliminating the 

regulatory discretion over these thresholds provides needed certainty to the Angel Investors who 

are the front line of capital formation in our country. In addition, S. 2756 would allow certain 

people with financial credentials ·like passing a Series 7 test· to be considered accredited as well 

as provide an on·ramp opportunity for people who have investment sophistication and 
348 

experience but who do not meet the income or net worth thresholds to become accredited. 

These are common sense ways to safely grow the pool of accredit investors. However, ACA is 

concerned about the impact of indexing the numerical thresholds for Accredited Investor status 

to inflation and adjusting them every three years going forward. We understand the intent of 

ensuring that accredited investors continue to have the financial ability to withstand potential 

losses from their investments, however if the threshold is raised too quickly it could dramatically 

shrink the pool of capital available to startup companies. One potential solution would be for 

the Committee to ensure that any changes in the thresholds continue to allow current accredited 

investors to remain accredited through a hold harmless or "grandfathering" provision, if any 

inflationary increases are added to the financial thresholds going forward. 

We would be pleased to see the similar House bill become law, as would many other investors, 

incubators, accelerators, and startups. The House bill would review the wealth and income 

thresholds every five years instead of the three inS. 588. 

Conclusion: 

Thank you so much for giving us the opportunity to discuss legislation important to the Angel 

Capital Association and our 13,000 members. We applaud your bi-partisan approach to 

considering legislation to increase access to capital for early-stage startup companies. The Angel 

Capital Association stands with you and all the Members of the Senate Banking Committee as a 

partner in economic opportunity and job creation. We look forward to the opportunity to work 

with you and your Committee members as a resource and offer our leadership team as expert 

witnesses as you delve deeper into the innovation agenda. 

Sincerely 

Marianne Hudson 

Executive Director 
349 

June26, 2018 

Senator Pat Toomey 

American 

Securities 

Association 

248 Russell Senate Office Building 

Washington, D.C. 205EO 

Senator Joe Manchin 

306 Hart Senate Office Building 

Washington, D.C. 205 EO 

Senator Robert Menendez 

528 Hart Senate Office Building 

Washington, D.C. 20510 

Senator Michael Rounds 

502 Hart Senate Office Building 

Washington, D.C. 20510 

RE: Senate llillll17, the Consumer Financial Choice and Capital Markets 

Protection Act Background and Explanation 

Dear Senator Toomey, Senator Menendez, Senator Rounds, and Senator Manchin: 

The American Securities Association (ASA)1 welcomes the opportunity to submit a letter in 

support ofS. 1117. The ASA's support is derived from the diversity of our membership, the 

different business models of our membership, and the vast experience our members have 

transacting in the U.S. municipal bond markets. 

This bill dres~ an issue of government regulation picking winners and losers. This outcome 

is not a theoretical debate as the aftermath of the SEC's 2014 Amendments to Rule 2a-7 in 

October 2016 (to allow for a floating NA V) caused approximately $1.2 trillion of private sector 

liquidity including roughly 80% of prime and municipal money fund balances to be shifted to 

U.S. government funds, which were allowed to maintain a stable NAV. 

By forcing municipal investors out of prime and tax-exempt funds and into government funds, 

the SEC's floating NA V rule has increased costs on taxpayers and businesses without any 

material benefit, other !han creating artific.ial demand for U.S. government deficit spending. 

Because of this, municipalities are being forced to seek higher cost borrowing options, reduce 

their short-term capital consumption, and tern1inate infrastructure projects that benefit their 

communities. These options hinder growth, fail to increase prosperity, and disadvantage state 

and local tax payers. 

1 The ASA is a trade association !hat represents the mail and insli!Uiional equityrapital markets interests of middle 

m3ll<tt financial sen;ces finns "bo pro1ide Main S~~ttt businesses "ith access to capital and adl'ise hardworl<ing 

Amtticans how to create and preseM 11talth. The ASA 's mission is 10 promote tiiiS1 and confidence among 

inves~ors and suppcn efficient and competitively balanctd ~uily e<~pital markets that ad1~nce financial 

independence, stimulate job cn:atioo. and increase prooperity. The ASA has a gtogJJphie<~lty diverse membership 

base 1ha1 spans the lteanland, Sooth"'CSI, Southeast, Atlantic, and PacifiC Nonhwest regions of the United States. 
350 

American 

Securities 

Association 

$.1117 is a broadly bi-partisan bill that fixes the SEC's misguided policy to Hoat the NA V 

without any detrimental impact on financial stability. 

We are pleased to see the committee taking up this bill. We support its swift approval out of 

committee and its passage by the filii Senate in this Congress. 

Sincerely, 

Christopher A. lacovella 

American Securities Association 

Chief Executive Oflice:r 
351 

LETTERS SUBMITTED BY SENATOR SCOTT 

United States Senate 

The llonornblc Mary Jo White 

Chair 

WASH NGTON. DC 205 

March 28.2014 

Securities and Exchange Commission 

100 F Street NE 

Washington. DC 20549·1090 

Dear Chair White. 

ES151556 

We \\Tile 10 you as former state and local oOicials who arc concemed about a Securities and 

Exchange Commission {"SEC" or "Commission") regulatory proposal that would have a 

deleterious effect on the nation's states and municip.1litics. The proposal would subject 

municipal money market funds (MMFs) to a new round of significant rctom1s and imp.1ir the 

vital role that such timds have played in pro1·iding low·cost financing for state and local 

governments for some 40 years. 

Together. the signatories of this letter have decades of municipal and local governance 

experience. so we know l'ery well how imponant it is for states and municipalities to have ready 

access to the capital markets. Municipal MMFs play a primary role in pr01·iding such access in a 

cosHOicicm manner for low-cost borro11ing needs - for example. to help fund such important 

local projects and SCfl'ices as schools. hospitals. water treatment plants. public power facilities. 

highways. and mass unnsit systems. Municipal MMFs provide more than two·thirds of the 

shorHem1 funding for such proj<'CIS and sen•ices. making them the largest purchaser of short· 

tenn municipal debt. The SEC's proposed regulations 11ill shrink this critical source of funding. 

leading to significantly higher borro11ing costs tor states and municipalities - or a reduction of 

proj<'CIS and sen•iccs. with a corresponding decline in the quality oflifc-or Cl'en both. 

We note that in 2010 the Commission implemented an extensi1·e array of refonns that 

substantially improl'ed the resiliency. sathy and transparency of all MMI's. The Commission 

proposed another round of refonns in 2013 in1·olving stmctural changes that would either require 

ccnain funds to abandon their stable S I net asset l'aluc (NA V) and move 10 a floating NAV or 

impose redemption restrictions on inl'cstors under specified circumstances. The proposal 

exemp!S all Trc'3Sury and U.S. government MMFs from these proposed stmcturnl changes. 

I lowem. municipal MMFs were uot exempted from the proposal CI'Cn though these funds- like 

Treasury and U.S. government MMFs- did not exhibit signs of stress during the 2008 crisis. In 

fact. municipal MMFs remained remarkably stable during the financial crisis of2008. with only 

modest outflows. 

Municipal MMFs have extraordinary lcl'clsofliquidity. shon maturities and high credit qualityjust like Treasury and U.S. government funds .. and should rcceil'e the same exemption from 

SII\ICtural refom1s. ~torcol'er. municipal MI-fFs hold only about $270 billion of assets- a very 
352 

ES151556 

small fraction of the S2.7 trillion MMF industry. They simply do not pose a systemic risk to the 

financial system. 

Subjecting municipal MMFs to a floating NA V or redemption restrictions would diminish the 

desirability of such funds by investors, who value the stability and liquidity they oOer. Surveys 

have found that inrcstor demand for municipal MMFs would decline siguificantly. scuing in 

motion a series of ncgati1•c consequences. The amount of shon-tcnn municipal debt that MMFs 

would be able to purchase would dwindle. and there is no readily apparent substitute purchaser 

for these securities. Debt issuance costs would rise significantly- by a multiple of five or even 

more. according to some municipal treasurers. Subjecting municipal MMFs to burdensome new 

regulations 11ill directly - and quite literally - atTect Main Street. We have heard directly and 

loudly from state and loc.al officials in our states about these concerns. 

Municipal MMFs have provided generous economic benefits to states, towns, cities and 

taxpayers alike. without imposing undue risks to the financial system. We arc concerned the 

proposed regulation will plaoe additional stress on municipal budgets by making it more 

expensive and difficult to raise capital to moet shon-tenn borrowing needs. We ask the 

Commission to carefully consider the costs of its proposed regulations on state and local 

governments and whether these costs outweigh any perceived benefit. 

Thank you tor your attention to these important issues. 

Sincerely. 

f»rrL .~. Robert P. Casey. Jr. 

United States Senator 

~E1: United States Senator ~ 

United States 

,f_Senator I-J J 

United States 

P Senator 

~~~--- United States Senator 

J~~.,JJ.~ by hambliss 

it States Senator 
353 

Susan M. Collins 

United States Senator 

4b 

United States Senator 

sAUnited :s~States Senator ~~ 

;lff:.,{UUnited States Senator 

United 

MgoS

States 

. ••k 

Senator 

~ ~ 

ir~C~ 

?fi'L 

United States Senator 

~ ES151556 

United :;~ States Senator 

~ United States Senator 

~ United States Senator 

J2)L, 

Tim Kaine 

United States Senator 

ct!'~ United States Senator 

~~ Tim Scott 

United States Senator 
354 

~~ Jeanne Shaheen 

Uni1ed S1a1es Senalor 

E9151556 

fMcJ_ t J)~ Mark R. Warner 

Unilcd Slales Scnalor 
355 

LETTERS SUBMITTED BY SENATOR COTTON 

<>IPA 

lnslilule lor Portlollo Allernolives 

June 20, 2018 

The Honorable Tom Cotton 

124 Russell Senate Office Building 

Washington, DC 20510 

Dear Senarors Cotton and Jones: 

The Honorable Doug Jones 

326 Russell Senate Office Building 

Washington, DC 20515 

I am writing to expr= the Institute for Portfolio Alternatives' (IPAs) support for S. 3004, the Small 

Business Audil Correcrion Act of2018. We appreciate your leadership in advancing this importanl 

legislarion rhat provides necessary regulatory relief for small, privately-held, non<ustodial broker-dealers 

(BDs). 

For over 30 years the Jnstilute for Portfolio Allernatives has raised awareness of portfolio diversifying 

investment (PDJ) products among stakeholders and market participants, including: investment advisers, 

public policymakers and the investing public. We support increased access to inveslment stralegies with 

low correlation to the equity markets: lifocycle real estate investment trusts (Lifocycle REITs), net asset 

value REITs (NAY REITs), business development companies (BDCs), interval funds and direct 

participation programs (DPPs). Through advocacy and industry-leading education, the IPA is committed 

to ensuring all investors have access to real assets and the opportunity to effectively balance their 

investment portfolios. 

Independent broker-dealers, an importanl part part of the IPA's membership, face increasing regulatory 

challenges while tl)~ng to compete on a level playing field 1\~th larger finns. One of those challenges is 

that current regulations require privately-held, non<ustodial brokerage finns to use a Public Company 

Accounting Oversighl Board (PCAOB) registered audit finn for their annual audits. For small, noncustodial BDs it can be challenging to find a PCAOB registered auditor willing to take their business. 

Very few PCAOB auditors today conduct small fimt audits, and charge increasingly high fees and 

require extensive and complex paperwork of their small finn clients. 

Prior to the enactmenl of !he The Sarbanes-<lx ley Act of 2002, BDs were required 10 hire AICPA 

regislered auditors who followed Generally Accepled Auditing Standards (GAAS) when conducling BD 

annual audits. Following !he enacrmenl ofSarbanes-Oxley, BDs irrespeclive of size are now required 10 

hire a PCAOB-regislered auditor who follows !he PCAOB-defined set of audil slandards, which are 

markedly ditierenl and significamly more complex !han GAAS. The reason they are more complex is 

because they were designed and intended for use in the performance of financial audits of public 

companies with public shareholders, not privately-owned small businesses. 

The PCAOB audit requirement makes sense for large public companies such as Apple, and for BDs that 

carry customer funds or securities, like large Wall S1reet wirehouses, because the investing public and 

markers are potentially at much greater risk from lhese companies. Conversely, the PCAOB requirements 

make no sense for privately-held, small non<ustodial finns that do not carry customer funds or 

lOSS PENNSYLVANIA AVENUE. NW SUITE •oo 

WASHINGTON. o.c. 1ooo• 1 lOH48.l190 1 IPA.COM 
356 

securities. Currently, a 3·person small business is held to the same standards as a these larger brokerage 

finns; this is not fair or reasonable. That is why the IPA supports your legislation to eliminate this 

burdensome requirement, which 11~11 allow small, private non<ustodial BDs to better compete and serve 

their customers. 

We look fom'3rd to working 11~th your oftices to pass this simple, common sense legislation that 11 11 

remove costly burdens on non<ustodial BDs. Please contact myself or Anya Covennan,!P A's Senior 

Vice President, Government Aftairs and General Counsel at 202.548.7190 with any questions. 

Sincerely, 

Anthony Chereso 

President & CEO, Institute for Portfolio Alternatives 

l~SS PENNSYlVANIA AVENUE. NW SUITE ~00 

WASHINGTON. D.C. 2000~ 20U~8 7190 IPA.COM 
357 

BD\Bond 

Deale~'Sof 

Amenca 

June21, 2018 

The Hooorable Mike Crapo 

Chaim1an 

Comm. on Banking, Housing, and Urban Affairs 

United States Senate 

Washington. DC 20S I 0 

Dear Chairman Crapo and Ranking Member Bro1111: 

I'm K Sum ti~V • Suite 510 

\l'ashi1J%100, DC2m 

202 2()1.i~ 

11\ .bdamcriaoog 

The Honorable Sherrod Brown 

Ranking Member 

Comm. on Banking, Housing, and Urban Affairs 

United States Senate 

Washington, DC 20S I 0 

On behalf of the Bond Dealers of America (BOA), I write to ask for your support and ~o-sponsorship of the 

Small Busin.ess Audit Co~mtion Act (S. 3004). The BOA is the only Washington, DC based trade 

assodation representing the interests of ''Main Street' investment firms and banks active predominantly in 

the U.S. ftxed income markets. 

S. 3004 would exempt privately held, small non-<:ustodial brokers and dealers in good standing from the 

requirements to hire a Public Company Accounting Oversight Board (PCAOB) registered audit firm to meet 

their annual SEA Rule 17a-S reporting obligation and that the audit firm perform the audit in aocordance 

with PCAOB standards. For these smaller firms, S. 3004 would reinstate the previous regulatory 

requirements, under which they must file audited financial statements, without a requirement that the audit 

satisfy PCAOB standards. The one-size-fits-all audit requirements have placed an unfair burden on small 

businesses, including many BOA member firms, and substantially heightened regulatory burdens onto Main 

Street broker-dealer firms around the country. S. 3004 would more appropriately tailor the audit 

requirements while still providing quality customer protections. 

Audits conducted in accordance with PCAOB standards delve into granular-level details that have nothing to 

do with the financial soundness of the small broker-dealers that meet the eligibility requirements for S. 3004 

or provide their investors with additional protection. Small broker-dealers that qualify for the exemption do 

not hold or carry cUStomer funds or securities in their own accounts, choosing instead to have those risks 

assumed by a larger carrying finn. The PCAOB audit requirement is appropriate and the right fit for public 

con1panies and broker-dealers, which carry customer funds or securities, betause the investing public and 

markets are potentially at. much greater risk from these companies. Passage of the bill would provide 

significant and much needed relief for small broker-dealer businesses a.nd access to local, affordable, and 

sound inveshnent options for your ~onstitue ts and their communities. 

Thank you for your attention to this very important issue. 

Sincerely, 

;/AM;£ 

Michael Nicholas 

Chief Executive Oftlcer, 

Bond Dealers of America 

cc: Members of the Senate Committee on Banking, Housing, and Urban Affairs 
358 

June 22, 2018 

The Honorable Mike Crapo 

Chairman 

Comm. on Banking, Housing, and Urban Affairs 

United States Senate 

washington, DC 20510 

Dear Chairman Crapo and Ranking Member Brown: 

The Honorable Sherrod Brown 

Ranking Member 

Comm. on Banking, Housing, and Urban Affairs 

United States Senate 

washington, DC 20510 

The undersigned people, at a minimum and representing small businesses in 49 of SO states (there are no 

small brokerage firms headquartered in Wyoming ... YET), strongly urge Congress to pass bipartisan legislation, 

The Small Business Audit Correction Act of 2018 IS 3004), co-sponsored by Senators Tom Cotton (R·AR) and 

Doug Jones (D·AL), which would request a specific exemption for small, privately held, non-custodial brokers 

and dealers in good standing from Title One of Sarbanes·Oxley requirement to hire a Public Company 

Accounting Oversight Board (PCAOB)·registered audit firm. 

The legislative and regulatory burden for small businesses in our industry is substantial and small firms are 

struggling to survive. The signs are clear, small businesses face disproportionate compliance and audit costs 

and while we have seen increases in regulations and compliance costs, possibly the most unreasonable and 

unfair is that a small, privately held, non-<ustodial brokerage firm like ours is required by law and regulation 

to hire an expensive Public Company Accounting Oversight Board (PCAOB)·registered audit firm. 

The PCAOB audit requirement makes sense for public companies and Broker-Dealers that carry customer 

funds or securities, because the investing public and markets are potentially at much greater risk from these 

companies. Conversely, the PCAOB requirements make no sense for privately-held, small non-<ustodial firms 

that do not carry customer funds or securities. Currently, a 3-person, non-public small business is held to the 

same standards as Merrill lynch; this is not right, fair or reasonable. 

The one-size-fits-all PCAOB audit standards that were designed for significantly more complex companies, 

and are priced exorbitantly, have been devastating to small businesses around the country. We simply 

cannot sustain the human and financial resource burden that these audits place on our small firms, time and 

money that we should be dedicating to our customers, and we urgently need legislative relief. 

Our economy is powered by small business. Our future job growth depends on small business. Our future 

economic prosperity and competitiveness depends on the ability of our small businesses to innovate and 

grow into industry leaders across the country. As small business owners and operators across the country, we 

are asking for your help with this bipartisan issue of helping small businesses. Please help our firms and our 

community of small businesses by supporting our efforts to get the Small Business Audit Correction Act 

supported in Committee, brought to the floor of the Senate and House, and passed. Passing this Act will 

provide significant and much needed relief for small businesses and our customers around the country. 

Thank you for your attention to this important issue. If you have any questions or would like additional 

information, please contact Paige Pierce at paige@paige-pierce.com or (801) 733·9909. 

Thank you, 
359 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

Al Marc Whitehead Harbor Financial Services, llC 

AK John Guthrie PT Securities, llC 

AR Mark Chambers Thrasher & Chambers, Inc. 

AR Mary Ellen Williams lieblong & Associates, Inc. 

AR Robert Keenan St. Bernard Financial Services, Inc. 

p.z James Williams Gogan & Williams 

p.z Bruce Hilby Hilby Wilson Inc. 

p.z Patrick Conway Fairport Capital, Inc. 

p.z Mark Howells M. S. Howells & Co. 

CA Gary Ching NPB Financial Group,llC 

CA Neal Nakagir NPB Financial Group,llC 

CA Shirley Coria NNPB Financial Group,llC 

CA Richard leach Investment Security Corporation 

CA James Fox James Fox Securities, Inc. 

CA Morris Midkiff Midkiff & Stone Capital Group, Inc. 

CA William O'Connor O'Connor & Company Securities Inc. 

CA Audrey McMahon Ares Investor Services, LLC 

CA Jose Portillo RH Investment Corporation 

CA Howard Feigenbaum Sharemaster 

CA Jeffrey Joslin Stock Traders 

CA Debra Draughan Top Capital Advisors, Inc. 

CA Christopher Mates Opus Financial Partners 

CA Stephen Perry JCP Securities 

CA Deborah Higgins Higgins Capital Management, Inc. 

CA Eduardo Tovar Private Portfolio, Inc. 

CA Gary$ Sherwold G.W. Sherwold Associates, Inc 

CA Eduard Bagdasarian Intrepid Investment Bankers LLC 

CA Michael Kane T ransactiondrivers, lLC 

CA James Reilly Stonepine Advisors, LLC 

CA Joseph Delaney Delaney J.V. Delaney & Associates 

CA Thomas Courtney The Courtney Group, LLC 

CA Kevin Breard Breard Breard & Associates Inc CPAs 

CA Thomas Korzenecki Grand Avenue Capital Partners, lLC 

CA Allen Chi Mainspring Capital Management, LLC 

CA Glen Haddock Investment Architects, Inc. 

CA Cha~es Painter Painter, Smith And Amberg Inc. 

CA Maria Boyd Investment Placement Group 

CA lisa Roth Tessera Capital Partners LLC 

CA Michelle Thomas WBB Securities llC 

CA Matthew Miller WBB Securities, lLC 

CA Richard Levenson Western Financial Corporation 

CA Gil Mogavero JMP Securities LLC 

CA Randy Fox Atel Securities Corporation 

CA Donald Mahon Bayridge Securities, LLC 
360 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

CA Stephen Nasser Coit Capital Securities LLC 

CA Lloyd Leanse Prager & Co., LLC 

CA Robert Blum Robert Blum Municipals, Inc. 

CA Marieanne Jorajuria Sharespost Financial Corporation 

CA Alan urlisle Soft Securities LLC 

CA Weiming Ho Integral Financial LLC 

CA Paul Magnuson Silicon Valley Securities 

CA Mark Rogers N4 Financial, Inc. 

CA Maia Mcgehee Mercury Securities, LLC 

CA Shieva Rajaee EQIS Capital Management, Inc. 

CA Elizabeth Collins Financial Telesis Inc. 

CA Robert Santos Arrowroot Partners, LLC 

CA Joseph Helmer Caldwell Securities, Incorporated 

CA Nusheen Javadizadeh Rjj Pasadena Securities, Inc. 

CA Daniel Roberts Roberts & Ryan Investments Inc. 

CA Carolie Smith Alamo Capital 

CA Allison Kent-Aster Alamo Capital 

CA Jerry Sanada Alliance Advisory & Securities, Inc. 

CA Anthony Duckworth Investment Architects, Inc 

co Phil Antico Withum Sm~h And Brown 

co Blaine Stahlman Professional Broker-Dealer Financial Planning, Inc 

co Chester Hebert Colorado Financial Service Corporation 

co Roberta Babitz Andrews Partners 

co Maxine Johnson Kessler Company Investments, Inc. 

co John Vansant Cascade Financial Management, Inc. 

co Caspar Ooms Clearcreek Securities, LLC 

co Robert Kessler Kessler & Company Investments, Inc. 

co Adam Carmel larimer Capital Corporation 

co Gordon Yale The Yale Group, Inc. 

co Patricia Kramer Destiny Capital Securities Corporation 

co Stephen Kohn Stephen A. Kohn & Associates, Ltd. 

co Doug Brode Christian financial Services LLC 

CT Robert Malik Charter Oak Asset Management, Inc. 

CT Pasquale Lavecchia Lavecchia Capital LLC 

CT William Poon Casimir Capitall.P. 

CT Michael Butler Cfs Securities, Inc. 

CT Eugene Mauro Quattro M Securities Inc. 

DC Gregory Bowes Albright Securities LLC 

DC John Mckenna Hamilton Clark Sustainable Capital, Inc. 

DC Elizabeth Avery Kalorama Capital, LLC 

DC Larry Scully Scully Capital Securities Corp. 

DE David Monahan Coastal Equities 

DE Stephen Sweeny Brittingham, Inc. 

DE Charles Reiling Coastal Equities, Inc. 
361 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

Fl Sarah Vegneron Renaissance Regulatory Services 

Fl Jed Bandes Mutual Trust Co. Of America Securities 

Fl Mark Beloyan T radespot Markets Inc. 

Fl Victoria Ragland Equity Investment Services, Inc 

Fl Ruben Araneda Bci Securities, Inc. 

Fl lndra campbell Area capital Investments, Inc. 

Fl David Wilson EquifinanciaiLLC 

Fl Susan Escobio Southern Trust Securities, Inc. 

Fl Clifton Morris Mcduffie/Morris Financial Group, Inc. 

Fl S. David Moche Cornwall Partners, LLC 

Fl Michael Petagna American Municipal Securities, Inc. 

Fl Laura uosby·Brown Still point capitalllC 

fl Robert Schlitt Schlitt Investor Services, Inc. 

Fl Karen Fischer BG Strategic Advisors 

Fl Patricia Wells Valor Financial Securities Lie 

GA John Curran Fintech Securities 

GA Bruce Williamson Fortress Group, Inc. 

GA Marion Glover Glover capital, Inc. 

GA Phyllis Johnson H & l Equities, LLC 

GA Aaron Prisco Propel Advisory Group, Inc. 

GA Jeffrey Villwock Lanier Securities LLC 

GA Caroline Wisniewski Bridge capital Associates, Inc. 

GU Sandra Mckeever Asia Pacific Financial Management Group, Inc. 

HI Min Won Yang Sun's Brothers Securities Inc. 

lA Timothy Weiuel Weitzel Financial Services, Inc. 

lA Harley Whitfield American Equity capital, Inc. 

ID Christopher Miller Allegis Investment Services LLC 

ID Ryan carlson American Independent Securities Group, LLC 

ll Darrell Butler Billow Butler & Company, LLC 

IL Christopher WurUinger Forest Securitie.s, Inc. 

ll Margaret Wiermanski Rapid Execution Services, LLC 

IL Frederic Floberg Tee Securities, LLC 

ll Donald Grava Vgl Global LLC 

ll Gregory Taunt lasg Alternatives, LLC 

IL Randall Mitterling Liccar Securities, LLC 

ll Donald Despain Despain Financial Corporation 

IL Kevin Nicol N icollnvestors Corporation 

ll Kenneth Sweet Reliance Worldwide lnvestments,LLC 

IL James Correll Correll Co. Investment Services Corp. 

ll Tim Ogara Shannon Advisors LLC 

ll Charles Millington Millington Investments, LLC 

ll Frank Chauner Chauner Securities, Inc. 

ll Stephen Mack Mack Investment Securities, Inc. 

ll Suzanne Bond Inland Securities Corporation 
362 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

IN Melvin Brewer Cornerstone Financial Services, Inc. 

IN John Evanich Atis, Inc 

IN Randall Mitterling Applied Capital, llC 

IN John Simmons Morris Group, Inc. 

IN George Steel Planned Investment Co., Inc. 

IN Tom Faust Edward Opperman, CPA 

IN Timothy Peoples American Equity Investment Corporation 

IN Edward Opperman Edward Opperman CPA 

KS John Stepp Central States capital Markets, llC 

KS Robert Hamman First Asset financial Inc. 

KS Kristopher Miller Tandem Securities, Inc. 

KS Margaret Hornbeck Truenorth, Inc. 

KY Stanley Kerrick lexington Investment Company, Inc. 

LA Raymond Thompson Dorsey & Company, Inc. 

LA Brian Marcotte Johnson Rice & Company llC 

LA Craig lewis lewis Financial Group, LLC 

MA David Oldaker Northern Capital Securities Corporation 

MA H.Oon Drake O'neil Securities Inc. 

MA Stephen Oleary Aeris Partners lLC 

MA Paige Rand AgcPartners 

MA Michael O'hara Consensus Securities llC 

MA Sumner Kaufman Kaufman & Company, LlC 

MA Tina Maloney Winslow, Evans & Crocker, Inc. 

MA Kristin Kennedy Wood (Arthur W.) Company, Inc. 

MA Lawrence Martel O'Neil Securities, Incorporated 

MA Matthew Stumpf AGCPartners 

MA John Mccarty Charles River Brokerage, LLC 

MA Richard Murphy North Bridge capital, lLC 

MA Oayna Gant Apple lane Group LlC 

MA Gilbert Moreira Donegal Securities, Inc. 

MA William Mccance Advisory Group Equity Services ltd. 

MA Bruce Fox Advisory Group Equity Services, ltd 

MA Sherry Horn North Bridge Capital 

MO Craig Fischer Atlantic Securities, Inc. 

MD David Pringle Fells Point Research LlC 

MO Carol Greenwald Potomac Investment Company 

MD frederick Holloway Holloway & Associates, Inc. 

MO Ernest Brittingham International Money Management Group, Inc. 

MO Thomas Schmidt TLS financial Services, Inc. 

Ml Edward Schwartz Gregory J. Schwartz & Co., Inc. 

Ml Laura Powers Gregory J. Schwartz & Co., Inc. 

Ml Gregory Papesh Dart, Papesh & Company, Incorporated 

Ml Randall Hansen Centennial Securities Company, Inc. 

Ml Jordan Powers Centennial Securities 
363 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

Ml Mark Cleland Donnelly Penman & Partners 

Ml John Butterfield Jack V. Butterfield Investment Company 

Ml Thomas Swiat Olmsted & Mulhall, Inc. 

Ml Jason Welch Wwk Investments, Inc. 

Ml Erica Momany Koehler Financial, llC 

Ml Craig Adams Confidential Management Financial Services, Inc. 

MN Todd Johnson Cedar Point Capital, LLC 

MN Anthony Pence Blacktorch Securities, llC 

MN Michelle Sandberg Dougherty & Company llC 

MN Jeannie Sonstegard Craig-Hallum capital Group llC 

MN Tyler O'neill Craig-Hallum capital Group llC 

MN Kimberly Chapman DST Market Services, llC 

MN Patricia Bartholomew Craig·Hallum capital Group llC 

MN Basil Joseph Van Clemens & Co. Incorporated 

MN Philip Wright Brokerbank Securities, Inc. 

MN Todd Morgan Stannard Financial Services, llC 

MN Thomas laird T. E. laird Securities, llC 

MN Thomas laird T. E. laird Securities, lLC 

MN Thomas Martinson Martinson & Company, ltd. 

MO Deborah castiglioni Cutter & Company, Inc. 

MO Boyd Atteberry Financial Planning Consultants, Inc. 

MO Leann Knuth Labrunerie Group 

MO Alexander labrunerie Labrunerie Financial Services, Inc. 

MO Michael Dardis Commerce Brokerage Services, Inc. 

MO Anton Burch Burch & Company, Inc 

MO Sandra Dershem-Vega Country Club Financial Services, Inc. 

MO Marco Listrom Valdes & Moreno, Inc. 

MO Jenifer Burch Burch & Company, Inc. 

MO Patrick Hasty Neighborly Securities 

MO Dana Bjornson George K. Baum Capital Advisors, Inc. 

MO David Miller General Securities Corp 

MO Trinity lee Heim, Young & Associates, Inc. 

MO Dean Young Heim, Young & Associates, Inc. 

MO Deborah Mertz J.A. Glynn Investments LLC 

MO Catherine Marshall Huntleigh Securities Corporation 

MO Norman Conley J.A. Glynn Investments, LLC 

MO Robert Chambers Huntleigh Securities Corp 

MO Robert Hillard Arlington Securities, Inc. 

MS James Coker Coker & Pal mer 

MT Kimberly Smith S.G. Long & Company 

NC Larry Forrest Smith Point Capital Ltd 

NC Gregory Len eave Anderson Leneave & Co. 

NC Charlie Lucas Elevation, Lie 

NC Bennett Cole Falcon bridge Capital Markets, lLC 
364 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

NC John Fennebresque Fennebresque & Co., LLC 

NC Debra Gilboy P.R. Gilboy & Associates, Inc. 

NC Robert Abbott South Atlantic Enterprises, Inc. 

NC Fredrick Fisher Milestone Investments, Inc. 

NC Andrew Burch Carolina Securities, Inc. 

NC Melissa Hoots Falcon Square capital, LLC 

NC William Sykes Sykes financial Services llC 

NO Garry Pierce Garry Pierce Financial Services, llP 

NO Brian Kraft Alerus Sewrities Corporation 

NE Mark Bell COR Clearing lLC 

NE Danielle Hampton First National Capital Markets 

NE Shirley Overly Haley Securities, Inc. 

NE Todd Engle Kuehl capital Corporation 

NE Thomas Teckmeyer Teckmeyer Financial Services llC 

NE John Detisch Weitz Securities, Inc. 

NH John Clarke 1st Bccw Capital Corp 

NH Robert Macleod Bigelow capital Securities llC 

NH Thomas lewry Curbstone Financial Management Corporation 

NH James Tovey J lT capital Partners llC 

NH William King lSI Transaction Advisors, lLC 

NH laura Crosby-Brown Pronet Financial Partners llC 

NH lisa Durgan Secure Planning, Inc. 

NH Douglas Drozdowski SWN Securities llC 

NJ Daryl Hersch Celadon Financial Group llC 

NJ David Sokolower Repex & Co., Inc. 

NJ Alan Achtel Aca/Prudent Investors Planning Corporation 

NJ John Iannone Quantex Clearing, LlC 

NJ John Kuhn Avatar capital Group llC 

NJ Granville Ungerleider Whitemarsh capital Advisors 

NJ Juan Espinosa Apto Partners, llC 

NJ Mark Furman Cvf Securities, Inc. 

NJ August Cellitti Securevest financial Group 

NJ Anthony Cianci Fox Chase capital Partners, l LC 

NJ John Frontera Cross Point capitalllC 

NJ Brent Hippert Hardcastle Trading Usa LLC 

NJ Andrew Macinnes Brilliquid LlC 

NJ Kevin Hull Robert A. Stanger & Company, Inc. 

NJ Sheldon Grodsky Grodsky Associates, Inc. 

NJ Randolph Rogers Merrion Securities, llC 

NM Randall Dry Thornnburg Securities Corp. 

NV Kim Schmidt Elmcore Securities 

NV Sean Deson Deson&Co. 

NV felix Danciu Elmcore Securities llC 

NY Bonnie Mann Falk Mazars USA llP 
365 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

NV Charles Pagano Mazars USA LLP 

NV Bruce Jackson Carver Cross Securities Corp. 

NV Gary Hoch Gary Hoch Agency, Inc. 

NV John Rogers Intercoastal Capital Markets, Inc. 

NY Austin Rybstein A.C.R. Securities, Inc. 

NV Eytan Feldman Old City Securities LLC 

NY George Reichle A. P. Securities, Inc. 

NV Parbati Bhattacharya Westrock Capital Management, Inc. 

NY Dominick Scianandre Hudson Heritage Capital Management, Inc. 

NV Samantha Larew Manning & Napier Investor Services, Inc. 

NV Michelle O'Brien Manning & Napier Investor Services, Inc. 

NV Maureen O'Brien Dynamo Consulting, LLC 

NV Carl lanzisera Federated Securities 

NV Gloria Scheiman TG Private Capital 

NV Arthur loomis Northeast Capital & Advisory, Inc. 

NV Richard Carlesco Ibn Financial Services, Inc. 

NV James Westmacott Westco Investment Corp. 

NV Barbara Fulcher Westco Investment Corp 

NV Wendy lanton lantern Investments 

NV Dawn Haye Glaucon Capital Partners, llC. 

NY Janice Parise Sddco Group 

NV Robert Aufhauser Aufhauser Securities, Inc. 

NV Robert Solomon Beekman Securities, Inc. 

NV W.Stewart eahn Cahn Capital Corp. 

NV Ronald Pasternak DbotAts, Uc 

NV E. Magnus Oppenheim E. Magnus Oppenheim & Co. Inc. 

NV Howard Spindel Surya Capital Securities LLC 

NV Garfield Miller Aegis Energy Advisors Corp. 

NV Victor Park Alternative Asset Investment Management Securities 

NV Kevin Hourihan Ashmore Investment Management (Us) Corporation 

NV Oliver Cromwell Bentley Securities Corporation 

NV I an Green Brokerageselect 

NV W.Stewart Cahn Cahn Capital Corp. 

NY Michael Steinberg Ccb International Overseas (Usa) Inc. 

NY David Wong Colonial Securities, Inc. 

NV Michael Kraus HT Capital Securities, lLC 

NV John Kiremidjian NB Markets, Inc. 

NV Gerhard Summerer DZ Financial Markets LLC 

NV Jason Eveleth Exane, Inc. 

NV Scott Abrams Finance Securities, LLC 

NV II an lessick Gmp Securities, llC 

NV William Hunnicutt Hunnicutt & Co. LLC 

NY Henry Marshall Hunter, Keith, Marshall & Co., Incorporated 

NV Bishen Pertab ICICI Securities Inc. 
366 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

NV Howard Spindel liP Securities LLC 

NV Robert Rabinowitz J.H. Darbie & Co., Inc. 

NV John loofbourrow John W. Loofbourrow Associates, Inc. 

NV Leslie Feldman Eureka Capital Markets, l 

NV Sam Kopkind Lwpartners Capital Group LLC 

NV Lawrence May May Capital Group, LLC 

NY Lawrence Walther Maybank Kim Eng Securities Usa Inc. 

NV George Ramirez Mfr Securities, Inc. 

NY Ann-Marie Baker Muzinich Capital LLC 

NV Steven Perlstein Mvp Financial, LLC 

NV Robert Snider Omnicap, LLC 

NV Ruben Brache Opening Night Capital, LLC 

NV Kenneth Boyar Palico LLC 

NV Patrick O'meara Profor Advisors 

NV Robert Hackel R. F. Lafferty & Co., Inc. 

NV Larry Kimmel Redburn (Usa) Lie 

NV M.AIIison Steiner Rhone Group Advisors LLC 

NV Martin Pollock Eurekacap Partners Inc 

NV David Debiase South Street Securities LLC 

NV Steven Jafarzadeh Stonehaven, llC 

NV Michael Cardello Terra Capital Markets LLC 

NV George Schinkel The Klein Group, LLC 

NV William Robertson Tm Capital Corp. 

NV Charles Gerber Triumph Global Securities, Ltd. 

NV David Shields Wellington Shields & Co., LLC 

NV Michael Lowenberg White Mountain Capital, LLC 

NV David Rappaport lnvestec Securities (US). LLC 

NV John luttenberger Macro Risk Advisors LLC 

NV Alexander Mack Middlema rch Securities llC 

NV Robert Kent Morningside Securities, LLC 

NV Brent Hippert Ashton Stewart & Co. 

NV John Parmigiani Alllied Millenia! 

NV Michael Mangieri Seven Points Capital, LLC 

NY Andrew Epstein Gordon, Haskett 

NY Raymond Mendez Brittany Capital Group, Inc. 

NV Constantine Baris Longship Alternative Asset Mgmt, LLC 

NV Robert Stearns Longship Alternative Asset Management 

NV Steven Rubenstein Arrow Investments, Inc. 

NV Allan Goldstein Trade Informatics lie 

NV Joseph lanzisera Excel Securities & Associates, Inc. 

NV Scott Zollo Mutual Funds Associates Inc. 

NV Wayne Holly Sage, Rutty & Co., Inc. 

NY John Maceranka The Windmill Group, Inc. 

NV Olaf Neubert Topcap Partners, Inc. 
367 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

NV John Pisapia Chelsea Financial Services 

NV Teresa Davies Burke & Quick Partners LLC 

NV Philip Coombe Coombe Financial Services, Inc. 

NV Jerome Keenan International Equity Services, Inc. 

NV Steven Blecher Morgan Joseph Triartisan, LLC 

NV Stephen Distante Vanderbilt Securities, LLC 

OH Frank Panzeca Clark xhaefer Hackett CPAs & Advisors 

OH Peter Nerone Great American Advisors, Inc. 

OH John Seibert J. D. Seibert & Company, Inc. 

OH Salvatore Raffa Northcoast Research Partners 

OH Martin Rizzo Northcoast Research Partners, LLC 

OH Timothy Henahan Baker & Co., Inc. 

OH Dock Treece Treece Financial Services Corp. 

OH Melissa Henahan Baker & Co., Inc 

OK James Oplotnik Access Investments, Inc. 

OR Edward Curiel DLX Financial Group, LLLC 

OR Richard Goud HP Securities, Inc. 

OR William Campbell Equilibrium Capital Services, lLC 

OR Tanya Durkee Urbach Paulson Investment Company, LLC 

PA Leona Robinson Robinson & Robinson, Inc. 

PA Betty Rainier Beaconsfield Financial Services, Inc. 

PA Richard Rainier Beaconsfield Financial Services, Inc. 

PA Mark Karbiner Pm Securities, LLC Dba Phoenix Capital Resources 

PA John Marsden JRM Securities 

PA Peter Engelbach J. Alden Associates, Inc. 

PA Steven Segal Park City Capital, Inc. 

PA Kevin Kornfield Kevin Hart Kornfield & Company, Inc. 

PA James Oconnor Bestvest Investments, Ltd. 

PA Dale Pope Mercap Securities, LLC 

PA Mark Cresap Cresap, Inc. 

PA W. Dean Karrash Burke, Lawton, Brewer & Burke, lLC 

PA Brian Anderson Nestlerode & loy, Inc. 

PA Judy Loy Nestlerode & loy, Inc. 

PR John Holman Esh Capital, llC 

PR Ramon Thomas Rd Capital Group, Inc. 

Rl Wilson Saville Barrett & Company 

Rl David lzzi Brown, lisle/Cummings, Inc. 

Rl Karen Bacon Diversified Resources, LLC 

sc Nelson Arrington V. M. Manning & Co., Inc. 

sc Edward Dowaschinski Dunes Securities Corporation 

sc Edward Dowaschinski Dunes Securities Corporation 

sc Joan Grava Palmetto Advisory Group 

sc Derrick Grava Palmetto Advisory Group 

sc Kenneth Wilson TRC Markets LLC 
368 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

so Gregory Wilson Variable Investment Advisors, Inc. 

TN Raymond Brandon Brandon Investments, Inc. 

TN Dan Mayfield Sanderlin Securities, Lie 

TN Lisa James Wiley Bros Aintree capital, LLC 

TN Joel Oertling Avondale Partners, LLC 

TN James Murphy Avondale Partners, LLC 

TN David Wiley Iii Wiley Bros.·Aintree capitai,LLC 

TN David James Pnfp Capital Markets, Inc. 

TN Thomas Altfillisch Western Equity Group, Inc. 

TX Byron Treat Great Nation Investment Corporation 

TX Dante Fichera Independent Investment Bankers, Corp. 

TX Jason Rivera Ace Securities, LLC 

TX Billy Sims Brazos Securities, Inc. 

TX Travis Duren Crescent Securities Group, Inc. 

TX Chad Bailey Guidestone Financial Services 

TX Lewis fisher L. B. Fisher & Company 

TX Daniel Dooley Maplewood Investment Advisors, Inc. 

TX John Mauldin Mauldin Securities, LLC 

TX James Davis Texas Corporate capital Advisors 

TX Katherine Cook Venovate Marketplace, Inc. 

TX Jeremy Halpin Guidestone financial Servioes 

TX Carla Wright Signal Securities, Inc. 

TX Ivan Singleton Signal Securities, Inc. 

TX Robert Bagley Bullish Bob Bagley Securities, Inc. 

TX Robbi Jones Kipling Jones & Co., Ltd. 

TX Melinda Legaye Moody Securities, LLC 

TX Kevin Regan RHCA Securities, LLC 

TX William Wilson SP Securities LLC 

TX William Hoover Steward Securities Group LLC 

TX Patrick Smetek Sun belt Securities, Inc. 

TX Randal Ferguson first Western Securities, Inc. 

TX Craig Kilpatrick first Western Securities 

TX llonka Nobles Nobles & Richards, Inc. 

TX Linde Murphy ME Allison& Co 

TX Christopher Allison M. E. Allison & Co., inc. 

TX David Mcnally Mcnally Financial Services COrporation 

TX Heather Nelson ME Allison 

TX Tiffany Fisher CNS Securities, LLC 

TX Richard Sandow Forte Securities LLC 

TX Timothy Kohn Investors Brokerage Of Texas, Ltd. 

TX Scott Taylor Scott T. Taylor, Ltd. 

UT James Dowd North capital Private Securities Corporation 

UT Stephanie Holt North capital Private Securities 

UT Betsy Voter Michael Best 
369 

The Small Business Audit Correction Act of 2018 

State Name Small Firm 

UT Eric Vos Moreton Capital Markets LLC 

UT Paige Pierce PSP Consulting 

VA Francis Stiff Cheval Capital, Inc. 

VA Robert Mann First Georgetown Securities, Inc. 

VA Shawn Mclaughlin Mclaughlin Ryder Investments, Inc. 

VA Jennifer Szaro lara, May & Associates, LLC 

VA Nicole Saunders Northwest Financial Advisors 

VA Robert Moreschi Eastern Point Securities, Inc. 

VA Kenneth Smither Smither & Company Capital Markets, LLC 

VA Donna Aries Wealthforge Securities 

VA Mark Dempsey Navy Federal Brokerage Services, LLC 

VT Brian Mckenna D. B. Mckenna & Co., Inc. 

VT Donald Mckenna D. B. Mckenna & Co., Inc. 

WA Dick Smith Down Under Enterprises 

WA Michael Keller FSIC 

WA James Humbard A&A Securities LLC 

WA Sean Grubb Northwest Investment Advisors, Inc. 

WA nm Vorpahl Vorpahl Wing Securities 

WI Richard Peterson liberty Investment Counsel, Ltd. 

WI Tami Strang Buttonwood Partners, Inc. 

WI Mari Buechner Coordinated Capital Securities, Inc. 

WI Gennady Bekasov Hewins Brokerage Services, LLC 

WI Michael losse Willow Cove Investment Group, Inc. 

wv Jacob Doyle Financial West Group 

wv Timothy Bidwell Hazlett, Burt & Watson, Inc. 

wv Ami Shaver United Brokerage Services, Inc. 

wv Rose Wilson Wesbanco Securities, Inc. 
370 

• 

Dave Banerjee, CPA 

Accountancy Corporation 

June212018 

TomConon 

Senator R ·AR 

Attn: Economic Policy C<lunselor Kyle Hauptman 

Re The Small Business Audit Correction Act [Bill Nwnbers: H.R. 6021 and S. 3004] 

Dear Senator Cotton 

The regulatory bunlen for small businesses in my industry is substantial, and it has gonen to a point 

where small fim1s are struggling to survive. While we have seen increases in regulations in many areas, 

possibly the most unreasonable and unfair is that a small, privately held, non-custodial brokerage finn 

like mine is required by law and regulation to hire an expensive Public Company Accounting Oversight 

Board (PCAOB) registered audit finn. 

Prior to Sarllanes-Oxley, as amended by Dodd-Frank, Broker/Dealers were required to hire AI CPA 

registered auditors who followed Generally Accepted Auditing Standards (GAAS) when conducting 

Broker/Dealer annual audits. Follo\\;ng the enactment of the Acts Broker/Dealers, irrespettive of size, are 

required to hire a Public Company Aecounting Oversight Board-registered auditor who follows the 

PCAOB-defined set of audit standards, which are mrukedly ditlerent and significant!)' more complex than 

GAAS. The reason they are more complex is because they were designed and intended for use in the 

perfom1ance of financial audits of public companies with public shareholders, not privately-owned small 

businesses like ours. We :request a return to the more appropriate AICPA Generally Accepted Auditing 

Standards. 

The PCAOB audit requirement makes sense for public companies like Apple and Broker!Dcalers that 

carry customer funds or securities, like Morgan Stanley, because the investing public and mrukets are 

potentially at much greater risk from these companies. Conversely, the PCAOB requirements make no 

sense for pri,•ately-held, small non-eustodial finns that do not carry customer funds or securities • 

companies like mine. Cumntly, a 3-person small business is held to tbesame standards as Merrill Lynch; 

this is not right, fair or reasonable. 

The one-size. fits-all PCAOB audit standards that were designed for significantly more complex 

companies, and are priced acconlingly, have been devastating to small businesses around the country. We 

simply cannol sustain lhe human and financial resource burden lhat these audits place on our small finns 

and we need legislative relief, and we need it now. 

The Small Business Audit Correction ACI [H.R. 6021 and S. 3004] therefore requests a specific 

exemption for privately held, small non-custodial brokers and dealers in good standing from the Title One 

ofSarllanes-Oxley requireme>~t to hire a Public Company Accounting Oversight Boanl (PCAOB)-

registered audit finn. 

CPA oices for broker-dealers and securities professionals 

2186o Burbank Blvd,Ste 150 • Woodland HillsCA91367 

Phooe(818)657.{)288 • Fax((818)6S7-0299 • "'""·da'tbanefjet,ccm 
371 

{I&: i DaveBanerjee, CPA 

~ ~ Accountancy Corporation 

...... My fiml is a small business owner and operator located in California and 1 am asking for your help with 

this bipartisan issue ofhelping small businesses. Please help the community of small businesses by 

supporting our efforts to get the Small Business Audit Cormtion Act included in the HFSC June 

marlmps, supported in Committee (RR. 6021 and S. 3004 ], brought to the floor of the House and Senate, 

and passed. Passing this Act will provide significant and much needed relief for small businesses and our 

customers in our state and around the counuy. 

Thank you, 

Dave Banetiee, CPA 

PCAOB Audit firm with expertise in Broker-Dealers 

CPA ~n>ices for broker-dealers and securities professionals 

2186o Burbank Blvd,Ste 150 • Woodland HillsCA91367 

Phone (818) 657.{)288 • Fax ((818) 657-0299 • lnnv.dalt baneljet.ccm 
372 

<Congress of tire tnite~ §totes 

masttington. il[ 2D313 

Mr. Jim Doly, Chairman 

PCAOB 

1666 KStreel, NW 

Washington, DC 200l6 

Mr. Danit>l L Goelzer,, Board Member 

I'CAOB 

1666 K Street NW 

Washington, DC 21Xl0t> 

Mr. Steven B. Harris, Board Member 

I'CAOB 

1666 K Street, NW 

Washington, DC 200l6 

February 14, 2011 

Mr. Lew Ferguson Board Member 

PCAOB 

1666 K Street, NW 

Washington, DC 200l6 

Mr. Jay Hanson. Board Member 

PCAOB 

1666 K Street, NW 

Washington, DC 200l6 

Rc: Proposed Interim Rulemaking for Auditors of Broker·Dealers 

Dear Board Members; 

We are writing to you as both Members of Congress and as Certifit>d Public Accountants 

(CPAs). Each of us has eJ(tensive experience as CPAs and we are well aware of the important 

role the Public Company Acrounting 0\-er sight Board (PCAOB) plays in ensuring that federal 

regulation of the accounting and auditing professions is effective and appropriate. 

We are writing today regarding Section 982 of the Dodd·Frank Act which grants broad new 

authority to the PCAOB regarding the oversight of auditors of broker·dcalers. As the Board 

w1dertakes its interim rulemaking under this provision, we ask that you carefully weigh the 

need to extend additional protections to investors while also avoiding the creation of new 

onerous, excessi\'e regulations on small CPA firms. Since this is an entirely new area of 

ovi.'I'Sight for the PCA06, we applaud )'OUr decision to undertake an interim rule first to gather 

important information and expertise before proposing a final rule. 

In this initia.l interim ntle, we believe that the most appropriate route for the PCAOB to take is 

to focus your oversight on th~ audit firms wh~ broker-dealer clients have access to im•estor 

funds. These so called "clearing. carrying. and custodial" brokcr·dcalcrs are the class of 

auditors for whom there is a broad consensus for additional regulation, as well as the most 

perceived benefit to investors. We urge the I'CAOB to act quickly to begin an effective and 

targeted inspection program over these auditors. 
373 

II is also importlntto note that during oongressional consideration of Section 982. there was 

oonsiderable debate about what benefits, if any, would be achieved by extending PCAOB 

oversight to auditors of introducing broker-dealers-those broker-dealers 1vith no access to 

client monies. This interim rule period is an appropriate time for the PCAOB to study that 

question. We believe that along with an interim rule covering auditors of clearing, carrying, 

and custodial broker-dealers, the PCAOB should undertake a study on the benefits of 

registering and inspecting auditors of introducing broker-dealers, without actuaUy extending 

such regulatory oversight to this class of auditors until the study is done. 

\Ve would like to caution you that it would be a mistake, at this juncture, to extend regulation 

over auditors of introducing broker-dealers when there is insufficient evidence about the 

benefits of such regulalion, and there is the very real chance that a final rule may not ultimately 

include this class of audit firms. The issuance of an overly brood interim rule would create 

regulatory uncertainty, impede business decisions, and add unwarranted costs to these small 

businesses. However, once a study has been done, and the PCAOB has publicly articulated the 

merits of a second rule focused on o•·ersight of auditors of introducing broker-dealers, then it 

would be practical to proceed. If the case is compeUing, then in consultation with Congress. 

and with input from affected parties, the PCAOB should move to a rulemaking on auditors of 

introducing broker-dealers. If the case is not strong. you will have averted imposing regulatory 

chaos, unforeseen costs, and lost time and resources on those small firms whom it was 

ultimately deemed inappropriate to cover. 

If the PCAOB follows our counsel and undertlkcs this due diligence study, we ask you also to 

l'!lgage the Securities and Exchange Commission and the FinancUI!ndustry Regulatory 

Authority, in their role as principal regulators of broker-dealers. We understand that there may 

be certain instances where introducing broker-dealers may have brief and limited access to 

investor funds. In situations such as these, where there is a heightened opportunity for fraud or 

malfeasance, rather tha.n extending new oversight over the auditors of introducing brokerdealers, a fresh discussion of associated risks to investors may more appropriately solicit ideas 

for stronger safeguards by the principal regulators themselves. 

In closing. we are pleased that Mr. Goelzcr, in his capacity as Acting Chairman, has publicly 

acknowledged on repeated occasions that it would be inappropriate to treat all auditors of 

broker-de~ lei$ identiCillly. Weshart his perspective and hope that all of you, both the recently 

appointed members as well as the longer serving members, will allow that philosophy to guide 

your approach. 

We look forward to working with you as this rulemaking proceeds, as well as on other 

important topics which affect the accounting and auditing professions. 
374 

Respectfully, 

Rep. 

(bA Collin C. 

!!~ Peterson 

~~~ Rep. Brad Sherman 

I Rep. 

11:.>~ Steven Palazzo Rep. Bill Flores 

~ 
375 

FINANCIAL I"""'"'""""""' SERVICES ::;-:::::.,.., 

INSTITUTE ,_....,. 

VIA ELECTRONIC MAIL 

June 20, 2018 

The Honorable Mike Crapo 

Chairman 

Senate Bonking Committee 

534 Dirksen Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Crapo ond Ranking Member Brown: 

The Honorable Sherrod Brown 

Ranking Member 

Senate Banking CommiHee 

534 Dirksen Senate Office Building 

Washington, D.C. 20510 

The Financial Services lnslilute {FSI)I ond the 35,000 independent financial advisors and over 100 

independent financial service firms that we represent strongly support S. 3004: Small Business 

Audit Correction Act of 2018. This bill would exempt privately·held, small, non-rustodiol brokers· 

dealers in good slandiog from the requirement to hire a Public Company Accounting Oversight 

Boord {PCAOB)-registered audit firm lo meet their aMuol reporting obligation and would instead 

reinstate the previous regulatory audit requirements. Currently, the Dodd-frank Act requires oil 

investment brokers ond dealers, irrespective of size, to hire o PCAOB-registered audit firm to 

conduct audits using sig~ificantly more complex guidelines designed for larger, public companies. 

We believe this legislation will provide much-needed regulatory relief to small broker-dealers by 

exempting them from the most onerous audit requirements. Therefore, we urge the CommiHees to 

support S. 3004, ensuring that small broker-dealers con continue to operate without these 

unnecessary burdens. 

The broker-dealer community in the financial services industry consists of Iorge companies, midsized firms, and small businesses. As of November 2017, the small business community consisted of 

3,425 firms oil employing 150 registered reps or fewer. Ten years ago, the approximately 

1,000 more of these small businesses in our industry than there ore today, but the crush of 

regulatory burdens, including the PCAOB-registered audit firm requirement, has led to their 

demise. The remaining small firms ore feeling this impact especially hard os audit fees rise due to 

the smaller pool of audit firms. The impact is felt throughout the country as these Main Street 

businesses struggle to remain viable. 

On behalf of our members, FSI appreciates your time in considering support for the S. 3004: 

Small Business Audit Correction Act of 2018. For all of the above reasons, FSI applauds both 

Senators Cotton and Jo.nes for introduction of S. 3004: Small Business Audit Correction Act of 

2018 in the 115"' Congress, and we hope that the Senate Bonking, Housing and Urban Affairs 

Committee will consider this worthwhile piece of legislation that will provide much-needed 

regulatory relief to small investment brokers across the United States. 

1 The F1nancial Services ln<'itute (FSI) is the on~ organization advocating solely on behalf of independent finanoal 

advisors and independent fi~ da~ services firms. Since 2004, throug ~~. education and pubfic ~w reness, 

FSt has sue<essfully promoted a mort responsible regulatory environment for mort than 40,000 independent 

financial adYi'Sors, and more than 100 independent flnandal services firms who represent upwards ot 160,000 

affiliated finandal ~dv'ISOfS. We effect cha"9e through involvement in FINRA ge>vemance a~ \vtll as wnstructlve 

engagement in the regulatory and legislative processes, working to create a healthier re-gufatory environment for 

our members so they can provide afforcfabte, objective advice to hard·worting Haln Street Americans. 
376 

If you hove any quesliOons, please conloct J. Maurice Jodcson, Director of legislative Affoirs, ol 

(202)499-7220. 

Sincerely, 

Dole E. Brown, CAE 

President & CEO 

c<: Members of the Senate Bonking, Housing ond Urban Affairs Committee 
377 

LETTERS SUBMITTED BY SENATOR TILLIS 

Senator Heidi Heitkamp 

BioND 

Bioscience Association of North Dakota 

Center of Innovation 

Suite 500, Rm 500 

4200 James Ray Drive 

Grand Forks, North Dakota 58202 

Pll.: 701·l11·248l 

btosciencend@smail.com 

W\WI.ndbto.com 

June 21, 2018 

516 Hart Senate Office Building 

Washington, DC 20510 

Dear Senator Heitkamp, 

I write to you in strong support of S.2126, the "Fostering Innovation Act: I encourage you 

to support this important legislation, which would build on the success of the JOBS Act and 

support growing biotech companies as they continue to develop life-saving medical 

advances. 

The Fostering Innovation Act would support the growth of emerging biotechs by reducing 

the cost of burdensome regulations. Specifically, the bill would create a targeted five-year 

exemption from Sarbanes·Oxley (SOX) Section 404(b) for JOBS Act companies that are still 

pre-revenue when the !PO on-ramp expires. The Fostering Innovation Act would extend the 

exemption for years 6 through 10 after a company's !PO if it maintains average annual 

revenues below $50 million and a public noat below $700 million. 

The JOBS Act has stimulated more than 260 biotech !POs by reducing compliance costs and 

increasing companies' access to investors. The law's five-year SOX 404(b) exemption saves 

newly public biotech companies up to $1 million annually-but most research and 

development-intensive innovators will still be pre-revenue when their exemption expires. 

Every dollar spent on regulatory burdens that do not provide meaningful information to 

investors is a dollar unnecessarily diverted from the lab. 

The Fostering Innovation Act builds on the JOBS Act's successful move away from one-size· 

fits-all compliance burdens. We believe it will help sustain the growth of the biotech industry 

in our state and support the search for the next generation of medical breakthroughs. 

Thank you for your hard work on behalf of North Dakota's emerging biotech innovators, and 

we look forward to working with you on this important issue. 

~ll~ Richard Glynn 

Executive Director 

Bioscience Association of 

North Dakota 

701·317·2483 

biosciencend@gmail.com 
378 

June 21, 2018 

Senator Sherrod Brown 

713 Hart Senate Office Building 

Washington, DC 20510-3505 

Dear Senator Brown, 

I write to you in strong support of S.2126, the 'Fostering Innovation Act.• I encourage you to 

support this important legislation, which would build on the success of the JOBS Act and 

support growing bio companies as they continue to develop life-saving medical advances. 

In Ohio, over 78,800 employees, the highest on record, work with at least 3,336 biosciencerelated organizations, manufacturing products, providing essential services, or researching the 

next breakthrough at 4,165 facilities found in 81 of 88 counties, generating $5.83 billion of 

payroll at an average wage of $73,897. All six Ohio regions have experienced growth in the 

bioscience industry ancl play a role in advancing critical discoveries. 

The vast majority of these companies are small businesses, even though many do not yet 

generate product revenue-they are still investing in vital research in the lab or the clinic and 

are years away from having a product on the market. 

The Fostering Innovation Act would support the growth of these companies by reducing the 

cost of burdensome regulations. Specifically, the bill would create a targeted five·year 

exemption from Sarbanes·Oxley (SOX) Section 404(b) for JOBS Act companies that are still 

pre-revenue when the !PO on-ramp expires. The Fostering Innovation Act would extend the 

exemption for years 6 through 10 afler a company's IPO if it maintains average annual 

revenues below $50 million and a public float below $700 million. 

The JOBS Act has stimulated more than 260 biotech IPOs by reducing compliance costs and 

increasing companies' access to investors. The law's five-year sox 404(b) exemption saves 

newly public biotech companies up to $1 million annually- but most research and 

development-intensive innovators will still be pre-revenue when their exemption expires. Every 

dollar spent on regulatory burdens that do not provide meaningful information to investors is a 

dollar unnecessarily diverted from the lab. 

The Fostering Innovation Act builds on the JOBS Act's successful move away from one-sizefits-all compliance burdens. we believe it will help sustain the growth of the biotech industry in 

our state and support the search for the next generation of medical breakthroughs. 

Thank you for your hard work on behalf of Ohio's emerging biotech innovators, and we look 

forward to working with you on this important issue. 

Sincerely, 

s~'- -. ---.. c=-:~ John F. Lewis Jr., President & CEO 

1275 Kinnear Road, Columbus, OH 43212 

Telephone# (614) 675-3686, Fax# (614) 675-3687 

www.bioohio.com 
379 

June 22, 2018 

StniltOr Mark Warner 

703 Hart Senate Office B~ilding 

Washington, DC 20510 

Dear Senator Warner, 

•••• ••• ·: ...

•

. 

••• • • 

••

• 

••••

• • 

•• 

I write to you in strong support of S.2126,the •fostering Innovation Act.• I encourage you to support 

this important legislation, which would build on the IIICCess of the JOBS Act and support growing 

biotech companies as they continue to develop life-saving medical adv3nces. 

Virginia is home to 1,876 companies and research organi1ations in the biotechnology, bioscience 

industry employing 23,926 Virginians at an average annual salary of $80.018. The vast majority of these 

companies are small businesses that do not yet generate product revenue-they are still investing in 

vital research in the lab or the clinic and are years away from having a product on the market 

The fostering Innovation Act would support the grO'Nih of these emefling biotechs by reducing the cost 

of burdensome regulations. Specifocafty, the biU would create a targeted flVt-year exemption from 

Sarbanes-Oxley {SOX) Section 404(b) for lOBS Act companies that are still pre-revenue when the IPO onramp expires. The Fostering Innovation Act would extend the exemption for years 6 through 10 after a 

company's IPO if it maintains average annual revenues below $50 million and a public float below $700 

million. 

The JOBS Act has stimulated more than 260 biotech IPOs by reducing compliance costs and increasing 

companies' access to investors. The law's five-year SOX 404(b) exemption saves newly public biotech 

companies up to $1 miaion annually-but most research and development·intensive innovators wiU stiU 

be pre-revenue when their exemption expires. Every dollar spent on regulatory burdens that do not 

provide meaningful information to investors is a dollar unnecessarily diverted from the lab. 

The Fostering Innovation Act builds on the JOBS Acfs successful move away from one-sile·fits-all 

compliance burdens. We believe it will help sustain the growth of the biotech industry in our state and 

support the search for the next generation of medical breakthroughs. 

Thank you for your hard work on behillf of Virginia's emerging biotech innovators, and we look forward 

to working with you on this important issue. 

Sincerely, 

Jeff Gallagher, CEO, Virginia 8io 

=:~.~· v1rg1n1abio loo (. U IG)i STREEl, SUift -. 

t1etocouo. VA !ps,• qJt. 

• •·h).6)6o 

ht.. 6.1.). 6)6: vabio.org 
380 

O IPA 

lnllilute for Portfolio Allerrnotive1 

June 20, 2018 

The Honorable Thorn Tillis 

185 Dirksen Senate Office Building 

Washington, DC 20510 

Dear Senators Tillis and Cortez Masto: 

The Honorable Catherine Cortez Masto 

204 Russell Senate Office Building 

Washington, DC 20515 

On behalf of the Institute for Porfolio Alternatives (lPA), l write to express our support for S. 2756, "Fair 

Investment Opportunities fnr Professional Experts Act." We appreciate your le3dership on this 

legislation, which will broaden the definition of accredited investor in a safe and responsible manner. 

For over 30 years the Institute for Portfolio Alternatives has raised awareness of portfolio diversifying 

investment (POI) products among stakeholders and market participants, including: investment advisers, 

public policymakers and the investing public. We support increased access to investment strategies with 

low correlation to the equity markets: lifecycle real estate investment trusts (Lifecycle RE!Ts), net asset 

value RE!Ts (NA V RE!Ts), business development companies (BDCs), interval funds and direct 

participation programs (DPPs). Through advocacy and industry·le3ding education, the IPA is committed 

to ensuring all investors ha1•e access to real assets and the opportunity to effectively balance their 

investment portfolios. 

S. 2756 updates and modernizes the current definition of"accredited investor" under Section 2(a)(15) of 

the Securities Act of 1933, by, in part, codifying the income and net worth requirements under Rule 501 

of Regulation D and indexing them for inflation based on the Consumer Price Index on a going-forward 

basis. The bill also recognizes that people with certain credentials such as registered broker-dealers, 

investment advisers and their representati1•es, should qualify as accredited investors, and provides the 

U.S. Securities and Exchange Commission ("Commission") 111th authority to qualify additional 

categories of investors as accredited based on education, job or professional experience and/or cetain 

non-financial thresholds. 

Many LPA members otTer private placement products to accredited investors under Regulation D. We 

strongly support legislation that will expand the current definition of accredited investor in a manner that 

is safe and responsible, while not unduly shrinking the current pool of eligible investors. We believe that 

S. 2756 is a substantial step in that direction. The IPA strongly suppo11s prol'isions that allow people 

with a Series 7, CFA or other credentials to be considered accredited for the purpose of being able to 

invest in non-public offerings. We also support the bill's provision that would allow the Commission to 

include persons based on factors such as financial sophistication, net worth, knowledge, experience in 

financial matters, or amount of assets under management. 

The lPA would also support an inclusion in the bill of a reasonable belief standard in its codification of 

income and net worth standards. A reasonable belief standard currently exists in Rule 50!(a) of 

Regulation D-allo11~ng an issuer to establish a re3sonable belief as to an investor's accredited investor 

14SS PENNSYLVANIA AVENUE. NW SUITE 400 

WASHINGTON, D.C. 20004 t 202.S48.1190 I IPA.COM 
381 

status-and should be consistent inS. 2756.1 We also support a grandfathering provision to allow 

existing investors to participate in future investments in the same issuer to avoid dilution of their current 

investments.2 

The lPA looks fonvard to working with your offices to support this sensible bill's passage. If the IPA 

may be of any assistance, pfease do not hesitate to contact me or Anya Coverman,IPA's Senior Vice 

President, Government Affairs and General Counsel at 202.548.7190 111th any questions. 

Sincerely, 

Anthony Chereso 

President & CEO, Institute for Portfolio Alternatives 

1 A~re<liled in,·;:siQr sh;!ll mean any pc®O who ~ ,,;lhin any of !he follo11;ng c;11~, qr •tlq th~ iWJer TftJ.fOIIll/iiy 

belieres comes withi11 mry of the followi11g caJegi)Ties, allhe lime of !he sale oflbe securities lo lha1 pe!SOil .. " 17 CFR 230.i01 

(emphasis added). Under Rule 5()6(c1 1Dllike olher Rules under Regul3tion 0, lhe issuer mUSt "verify" a«redi1ed inl'tSIOf 

Slat US. 

2 The SEC ~alf made a r«:ommendalion 10 grandfather issuers' exi~ing invC5lors I hal are accredil«< inrC5lors under the 

CWT<111 definilion 11;1h t<Spe(IIO fuuJre offerings of I heir securilies. See SEC Repon on I he Re,;ew oflhe Definilion of 

"Accrediled lnvC5lor," December 18, 20t5, IIIYJilable nt https:/lw\\,v.sec.govlfileslreview-dcfinilioo-of-accredit«<·invesiOr12-18·2015.pdf. 

t~SS PENNSYlVANIA AVENUE, NW SUITE ~00 

WASHINGTON, D.C. 2000~ 20U~8 7190 IPA.COM 
382 

\, 

BIOSCJENCE 

lll\.1\.(1 

June 21, 2018 

Senator Jon Tester 

311 Hart Senate Office Building 

Washington, DC 20510 

Dear Senator Tester, 

I write to you in strong support of S.2126, the 'Fostering Innovation Act." I encourage you 

to support this important legislation, which would build on the success of the JOBS Act and 

support growing biotech companies as they continue to develop life·saving medical 

advances. 

The Fostering Innovation Ad. would support the growth of emerging biotechs by redudng 

the cost of burdensome regulations. Specifically, the bill would create a targeted five·year 

exemption from Sarbanes·Oxley (SOX) Section 404(b) for JOBS Act companies that are still 

pre-revenue when the IPO on·ramp expires. The Fostering Innovation Act would extend the 

exemption for years 6 through 10 after a company's IPO if it maintains average annual 

revenues below $50 million and a public float below $700 million. 

The JOBS Act has stimulated more than 260 biotech IPOs by reducing compliance costs and 

increasing companies' access to Investors. The law's five·year SOX 404(b) exemption saves 

newly public biotech companies up to $1 million aMualty-but most research and 

development-intensive innovators will still be pre-revenue when their exemption expires. 

Every dollar spent on regulatory burdens that do not provide meaningful information to 

investors is a dollar unnecessarily diverted from the lab. 

The Fostering Innovation Act builds on the JOBS Act's successful move away from 

one·size·fits·all compliance burdens. We believe it will help sustain the growth of the 

biotech industry in our state and support the search for the next generation of medical 

breakthroughs. 

Thank you for your hard wort< on behalf ol Montana's emerging biotech innovators, and we 

look forward to worldng with you on this important issue. 

Sincerely, 

Executive Director, P.O. Box 1773, Billings, Montana 59103 
383 

June 22,2018 

Senaror Bob Menendez 

528 Han Senatt Oflict Building 

Washington, DC 20510.3001 

D~ Senator Menendez, 

Whiteholse Exeartive Center 

1255 Wh~ehorse-Mercerville Road 

Building B -Suite 514 

Trenton, New Jersey 08619 

T 609.890.3185 F 609.581.8244 

1 write to you in strong suppo.n ofS.2126, the "Fostering lnnov:nion Act" I encowage you to support !his important 

legislation. which would build on the success of the JOBS Aa and support growing biotech companies as they continue to 

develop life-m<ing medical advances. 

New Jersey is bome to 2,877 compani.es and r:em.tth organizations in d1e biotechnology, bioscienct industt)· employing 

93,293 New Jersq'21ls at an avmge annual salary of$144,178. The vast majority of these companios are small businesses that 

do not )~t genente product revenu<-Chey are still investing in ,;raJ reseorch in the lab or the clinic and are f"'" away from 

having a product on d1e nwket. 

The Fostering Innovation Act would support the growth of d1ese eme.ging biotechs by r:tducing the COS! of bwdensome 

regul.tions. Specif ... Uy, the bill l!lould cre2te a wger:td five-)~' exemption from S>rb:!nes-Ox!ey (SOX) Soction 40-l{b) for 

jOBS Act companios that are still pm-revenue when the !PO on·ramp expires. The Fosreriog Innovation Act would estend 

the cx<mption for l""" 6 duough 10 after a company's !PO if it maintains "•erage annual revenues below $50 million and a 

public float below $700 million. 

The JOBS Act has srimulattd more than 260 biotech IPOs br r:tducing compliAnct costs and increasing co"'P"oies' acctSS to 

in,·estors. The law's G.·e-y~ SOX 404(b) ex<mption soves newlr public biotech companies up to $1 million annuaUy- -bur 

most ~ and devclopm<!nt-incensn·e innovatOrs "ill still be pre-revenue when their e.'emption expires. Evtl)' doUar spent 

on regulatory butdens that do not pro,,jde meaningful infonnation 10 inrestors is a doUar unnocessarily diverted from the lab. 

The Fostering lnno,-.tion Act builds on the JOBS Act's succtSsful mo1·e away from one-si<e-6u-aU compliAnce bwdens. We 

bclie\-e it will help sustain the growth of d>e biotech industry in our state and support the soarch for the nell genention of 

medical breakthroughs. 

Thank you for rour hml u-odt oo behalf of New Jersq's eme.ging biotech innol'>-tors, and we look fot11'2rd to u-orking Mrh 

you on this important issue. 

Sincerely, 

I I , , . ..., 

Debbie Han 

Pre;ident and CEO 

BioNJ.org 
384 

June 21, 2018 

Senator Joe Donnelly 

720 Hart Senate Office Building 

Washington, DC 20510 

Dear Senator Donnelly, 

I write to you in strong support of S.2126, the •Fostering Innovation Act." I encourage you 

to support this important legislation, which would build on the success of the JOBS Act and 

support growing biotech companies as they continue to develop life·saving medical 

advances. 

Indiana is home to 1,680 companies and research organizations in the biotechnology, 

bioscience industry employing 54,418 Indianans at an average annual salary of $89,982. 

The vast majority of these companies are small businesses that do not yet generate product 

revenue-they are still investing in vital research in the lab or the clinic and are years away 

from having a product on the rna rket. 

The fostering Innovation Act would support the growth of these emerging biotechs by 

reducing the cost of burdensome regulations. Specifically, the bill would create a targeted 

five-year exemption from Sarbanes-Oxley (SOX) Section 404(b) for JOBS Act companies 

that are still pre-revenue when the IPO on-ramp expires. The Fostering Innovation Act 

would extend the exemption for years 6 through 10 after a company's IPO if it maintains 

average annual revenues below $50 million and a public Hoat below $700 million. 

The JOBS Act has stimulated more than 260 biotech IPOs by reducing compliance costs and 

increasing companies' access to investors. The law's five-year SOX 404(b) exemption saves 

newly public biotech companies up to $1 million annually-but most research and 

development-intensive innovators will still be pre-revenue when their exemption expires. 

Every dollar spent on regulatory burdens that do not provide meaningful information to 

investors is a dollar unnecessarily diverted from the lab. 

The fostering Innovation Act builds on the JOBS Act's successful move away from one-sizefits-all compliance burdens. We believe it will help sustain the growth of the biotech industry 

in our state and support the search for the next generation of medical breakthroughs. 

Thank you for your hard work on behalf of Indiana's emerging biotech innovators, and we 

look forward to workirng with you on this important issue. 

Sincerely, 

Kristin Jones, President and CEO 

Indiana Health Industry Forum 
385 

LETTERS SUBMITTED BY SENATOR MENENDEZ 

COUNTY OF BERGEN 

OFFICE OF THE COUNTY EXECUTIVE 

One Bergen Count)' Plaza, Room 580, Hackensack, NJ 07601-7076 

(201) 336-7300 Fax: (201) 336-7304 

countye.xecutiw@:co.bergen.nj.us 

James J. Tedesco Ill 

Coumy Executil'e 

June 2. 2017 

The Honorable Josh Gonheimer, Unite<! States Congressman 

United States House of Representatil•es 

213 Cannon House OOice Building 

Washington. DC 20515 

SENT VIA EMAIL to Christopher Tully (Chris.Tnllv@mail.house.gov) 

Dear Congressman Gonheimer, 

The New Jersey Association of Coumy Administrators expressed iiS suppon for a re-introduCiion of 

legislation aimed a1 addressing the Securities and Exchange Commission (SEC) modifications to SEC 

Rule 2a-7 of the /m·estmenr Compa11y Act of 1940. The County suppons the Association in this endeavor. 

The Legisla1ion changes the nCI asset value (NA V) accounting methodology for money market mutual 

funds (MMMF) from stable to Hoating and imposes liquidity fees and redemption gales on investors of 

these funds. 

The Association relied on the hallmark stable NA V feature in a ''ariety of wa)~. Many govemments 

invest in money market funds bocause of their Secl.lre nature., simple accounting methodology and 

management. and liquidity - all features that are necessary for governments to protect public funds. 

access cash and pay obligations. Changing the main feature of these funds to a Hoating NA V has create<! 

administrati\'e and costly burdens to govemments, large and small. in addilion 10 having goremmenls 

look to other, more expensive investments. 

Anoth"' problem for state and local govemments related to the changes to Rule 2a·l, is the impaCI it has 

on go,·emmems that issue debt, especially shon term debt. Mutual funds are tlte largest purchasers of 

shon term municipal bonds and due to the changing criteria in this rule the demand for these bonds has 

diminished. This puts added pressures on state and local govenm1ents as it has le<l to higher debt issuance 

cosiS across the country. Policies such as this, potentially hun governments' ability to fund capital 

projeciS with municipal bonds for infrastruCiure impro\'emems for the benefit of their citizens. 

Moreover, state and local gorcrnments as in\'estors ";11 continue to be adversely afi'ecte<l by the liquidity 

fees and redemption gates provisions of Rule 2a-7. which would be impose<! during times of fiscal stress. 

The imposition of liquidity restrictions of MMMF investors have funher pushed Stale and local MMMF 

investors away from MMMFs due to concerns about liquidity and potential losses that could result during 

times of fiscal stress. This puts taxpayers· dollars at risk. 

For these reasons, the County looks forward to working with you and supponing your effons to help Stale 

and local go,•emments on this money market mutual fUJtds issue and other regulatory and financial 

matters of mutual interest. 
386 

Sincerely, 

&-1~ James J. Tedesco, Ill 

Bergen County Executive 

cc: Senator Robert Menendez 

Senator Cory Booker 

Congressman Bill P:ascrell 

Congressman Albio Sires 
387 

~b) 8.2017 

The Honor..ble Bob \1~1 

Unll.:dSlale,St1131e 

A~mAL RMlOS. J R. Con<c u. )it ~uu:t<· :\OI<Tll 11'.\lm 

:\Y. ... \1<1!.:\J:" JJ<J<SY.\'0710:! 

528 Han 5.-llJteOffice Bu•ldmg 

Wa1hmgt(ll1. D.C. 20510 

~ Honorable Cory~~ 

Un!l.:d Slate> &n:iie 

3S9 Diri.'<'ll ~Off""' Bwldmg 

\\':t~mgton. D.C. 2IJS 10 

(tnJ ,.. •• ,. 

I 1>11h tOC!JlltS.< my suppon fonhe n:·Jntroducuon of the Comumcr Fin!lllCJal Choioe and Capit~l 

Marlret~ l'rolcaion Act of2017 W)'tJt.the Sccunlies and Exchange Comnu\Sion (SEC) ;,doptcd 

•nlendmenl\ to Rule 2a· 7lhat unmu:nllorolly hale burlkruorrc eonscqutnccs on cdies well~ Ne~~<-ark. 

~ ~ndment. "hicll than~ the net a>s:et 1-aiUI' !NA V) accoonong rntthodology for rl'llrley m:ulct 

IIIJIU31 Fund' \~t\!F) 3nd ·~ hqu•mt) f= undemunes our .Jbtlit) to Ill\ estill IIJIIlOIUill 

mfra!IIU<WR JliOJI>'l' 1b.11..rt 11ulto oar rr~ 

1\1 tho: l.vgt<! city in the St.m of Ne" l<N). New.lll.: willa.h-er..tl) bt ille~:led try Its Jnabihl)tO JS.<Ue 

ikbc for capillll proje<;, lll;n b.:nefll our CJll7.cns. Mulllll Fml<h. "h1~h hold a brge <h;ue of >bon h:rm 

01\JniCJp.ll bonds. are reliable m•~trntnllool< that empowerci~~s 10 m.'l}.e ,ignif1C31lt tnl'eSIIIlelll>. 

WithoutiOOe n:l(llm:~. munk1pali1ie.< an: subj«lto higher debt i11Uanct c05t> and added fl.Sf31 

pre.._-.urt. The Consurrcr financial Choice andCapilll Marl.tt< Proteetioo An of2017 alle,iiJic< <on~ of 

lbt.lt clullcng._-. and~ nuny of 1be conoons tll3l ptl-11 •n•C'Ion 311"1) 

Tlunl )I'V for )('Ullcalb\llir '" "'·mllOducmg .IJld ad\~g thb 1mportlllt ~ ofkglsWton. llool. 

fOf"anl co v.orktng 111th )'liU and !llppomng )OUt tffons 10 defend tbe lh•hl)' 10011 go•=~OC$halt! to 

miN 10 tht1r Ollll 001Mlumtit1. 

~~0 Couneilm.lll 
388 

NEW JERSEY ASSOCIATION OF COUNTIES 

A.'0. CA~~ 

N)ACI'I<!idtnt 

M!rm(Oon~· FI'HIIoldfr 

Honorable Cory Booker 

United States Senator 

Gateway One 

11-43 Raymond Plaza 

West Suite 2300 

Newark, N) 07102 

Dear Senator Booker: 

Ulw Coemm~t rC'itJr 11 ~ifrld Voitt! 

July 28, 2015 

RE: MONEYMARKETfUNDS 

)O!L'G.=AOIO 

E.ua.ti\'t Oiftdor 

On behalf of the board of directors of the New jersey Association of Counties 

(N)Aq, I would like the opportunity to meet with you in person to discuss 

N)ACs support of S.1802, which would establish the "Consumer Financial 

Choice and Capital Markets Protection Act of 2015." Senator Pat Toomey (RPA) is the prime sponsor of this important and timely legislation, and we're 

hoping that you would consider joining senators joe Manchin (D-WV), Mike 

Crapo (D-ID), and Robert Menendez as co-sponsors. 

NJA C supports 5.1802 as recent changes made by the Securities and Exchange 

Commission (SEC) to the structure of money market funds will substantially 

impair county governments' ability to manage cash reserves and obtain lowcost firtancing for critical infrastructure projects. N)AC is particularly concerned 

with the fact that SEC rule changes in 2014 forced money market funds to 

abandon their stable $1.00 per-share price and instead "float' net asset values 

(NAV). N)AC is also concerned that the new rules impose penalties and early 

redemption fees for the pre-mature withdrawal of funds to meet liquidity 

needs. As you know, money market funds have proven to be a vital cash 

management tool for county governments, which until the SECs untimely rule 

changes, relied on the stability of managing cash with a consistent principal 

value. Moreover, county governments counted on the convenience and 

simplicity that a stable NAV provided for accounting. recordkeeping. and the tax 

treatment of cash balances accordirtgly. 
389 

The dangers of a Aoating NAV are clear and will undoubtedly lead to increase 

costs for county governments across New Jersey and the nation. As you also 

know, money market funds hold more than half of the short-term debt that 

finances vital public projects such as roads, bridges, airports, water and sewage 

treatment facilities, hospitals, and low-income housing. Without such financing, 

local governments may be forced to limit projects, spend more on fmancing, or 

increase taxes. Moreover, a Aoating NAV will force county governments to use 

bank products that have historically paid lower yields or are much less secure. A 

Aoating NAY will also undermine local economies as money market funds hold 

more than one-third of the commercial paper that businesses use to finance 

payrolls and inventories. The flight of investors in the wake of a floating NAV 

will disrupt the supply of short-term credit that employers need to operate. 

With this in mind, I look fonvard to the opportun.ity of meeting you in person to 

further discuss th.e long-term ramifications of a floating NAY and on how 5.1802 

would reinstitute stability and consistency in money market funds. NJAC is 

committed to ad\•ocating for legislation, regulations, and policy directives that 

empower county governments to operate more effectively and efficiently. As a 

non-partisan organization that represents the only true regional form of 

government in the State with a unified and proactive voice, N)AC is dedicated to 

advancing innovative programs and initiatives that enhance the level of service 

provided and save valuable taxpayer dollar. Thank you for your time and 

consideration, and please do not hesitate to contact me at (609) 394-3467 with any 

questions or concerns. 

Very truly yours, 

John G. Donnadio, Esq. 

Executive Director 

cc: Matthew Chase, Executive Director, National Association of Counties 

Deborah Cox. Legislative Director, National Association of Counties 
390 

COUNTY OF HUDSON 

OFFICE OF THE COUNTY ADMINISTRATOR 

THOMASA. DE GIS{ 

COUNTY EXECUTM 

ABRAHAM ANTUN 

COUNTY ADMINISTRATOR 

Senator Cooy Booker 

359 Dirksen Senate Office Building 

Washington, DC 20510 

RE: S.1802 

Dear Senator Booker. 

AOMINISTRATIONANN!X 

567PAVONIAAV£NUE 

jERSEY CllY, NEW JERSEY07J06 

ffiEPHONE 

(201) 79).(;100 

FAX 

(201) l'JS·6S20 

July 30, 201S 

As you know, the Securities and Exchange Commission (SEC) made significant changes in 2014 to money 

market mutual funds that will seriously impair our ability to both manage our cash reserves and obtain 

low-cost financing for important priorities such as schools, hospitals, public transportation and 

infrastructure projects. As a former Mayor, you understand the financial challenges New Jersey 

counlies and municipalities face and why it is critical that we have access to simple, efficient and low· 

cost professional cash management. 

Money market funds are~ critical cash management tool for us, whether we use the New Jersey Asset & 

Rebate Management Program or other similar pools offered through banks or other providers. Many 

New Jersey local units also use the State's Cash Management Fund, a local Government Investment 

Pool that while unregulated by the SEC, is subject to the GASB rules and the new SEC regulations will 

have an adverse impact on these funds as well. 

Money market funds are the largest purchasers of short-tenm municipal debt and provide more than 

two-thirds of the short-term funding for vhallocal projects and services. The SEC's changes requiring 

prime and municipal money market funds to maintain a fluctuatins share price, while not affecting 

government funds, endanger the ability to fonm and run viable local Government Investment pools and 

will negatively impact the capital markets leading to higher borrowing costs. As a result of the SEC's 

changes, the Wall Street Journal recently published an article about how institutional money is flowing 

out of prime funds and into Government funds, and that the increase in demand for U.S. government 

securities will continue to depress the yield of those securities for other investors, including state and 

local governments. The SEC's changes are a disproportionate reaclion to the risk it is toying to prevent, 

conditions that might only exist in the face of a future fiscal crisis. 

THE COUNTY OF HUO>ON IS AN E<{UAI. OPPORTUNITY EMPtO\'tR 
391 

8y rNkirc it fll()(e expensive and d1ffJCUk to meet short-term borrowifc costs, the SEC's cmnges pbce 

add1tion.JI stress on county, munf(lpal, and local authority budgets. State and local gtMmment 

1nvestors met with the SEC Commissiontrl. wrote comment letters, and testified at Congression.JI 

hearings in oppos~ion to the fluctuating share price. Still, the SEC acted to draw an arbitrary d"~tinction 

between 'retair and 'institutionar investors. 

Given the strong opposition by investors, state and local governments, and Members of Congress, I urge 

you to consider supportirc and co-sponsoring S.l802 whkh would establish tile 'Consumer finafKial 

Choice and Cap~al Markets Protection Act of 2015'. This will preseNt the daily liquidity and stable Sl 

net asset value share price for investors and etiminate the requirement to tmr&e penalty and early 

redemptoon fees for pre-rNture Wlthdrawal of funds to meet liquidity needs of the local uM. 

Sincerely, 

~ 
392 

CITY OF ELIZABETH, NEW JERSEY 

J. CHRISTIAN BOLLWAGE 

Mayor 

Honomble Robert Menendez 

United States Senator 

One Gateway Center 

Suite 1100 

Newark, NJ 07102 

Dear Senator Menendez: 

CITYt!AU. 

50 WINFIELD SCOTT PlAZA 

ELIZASElli, NEW JERSEY 0720H 452 

May 16,2017 

TEL 90&-8:!0-4170 

FAX~I:Jl 

Please lei this letter serve as support for the Consumer Financial Choices and Capital Markets Proreclion Act of20 17. This 

Act proposes changes made to the structure of money market funds by the Securities and Exchange Commission (SEC) and 

will substantially enhance opportunities for local govemmcnrs to manage cash effectively. 

Amendments to Rule 2a-7, whicll were adopted by the SEC and went into effect in October 2016, bave bad unintended, 

adverse impaciS on the governing of municipal money market funds. Local govemmeniS depended upon these funds to 

implement improvemenrs as well as increase SC!Vices through investmenrs in infrastructure projects as well as economic 

growth and development initiatives. In addition to being a vital ca>b managem011t tool, municipalities also counted on the 

convenience and simplicity that ~ stable NA V provided for accounting, recordkeeping and the tax treatment of cash 

balances. 

The City of Elizabeth is the fourth largest municipality in New Jersey and the Union County Seat. Implementing a 

comprehensive economic development strategy, the City continues to foeus on the attraction, retention and expansion of 

businesses; revitalization of conununities as well as inereasingtheavailability of and accessibility to servi~ "lli]ecreating 

employment and gT0\\1b opportunities. 

Utilizing publi< and private resources, the City also remains dedicated to ~ximiz ng investment and renewal efforts. 

Building upon its geogmphic (ocation and direet acxess to Termioal A of Newark Liberty International Airport, the Port 

NeWllfk/Elizabeth Marine Term.inal, the New Jersey Turopike, Routes 1&9 as well as rwo train stations, the City advances 

development, transportation and quality of life initiatives. 

The Consumer Financial Choices and Capital Markets Protection Act of2017 restores vital options and enhances the ability 

of municipalities to incorporate innovative strategies, which facilitate progress, promote sustainability and enable efficient 

and effective serv~ to be delivered. 

Than.~ you for yOUJ time and consideration. 
393 

J. CHRISTIAN BOU..WAGE 

Mayor 

CITY OF EliZABETri, NEW JERSEY 

CITYHAU SO WINAEtD SCOTT PI.AZA 

8JZABe1H, NEW JERSEY 07201·2>162 

Ta~1l0 

FAX~1:11 

May 16,2017 

Honorable Ctxy Booker 

United States Senator 

One Gateway Center 

23~ Floor 

~ewari, NJ 07102 

Please let this letter $«\'0 as suppon for the Consumer Financial Choices and Cipital Markets Protection Act of20 17. This 

Act proposes eb3Dgcs made to the shucture of money m3Ikct funds by the Seeuritics and Exchange Commission (SEC) and 

will subslantially enhance opportunities for local governments to manage cash effectively. 

Amendments 10 Rule 2a-7, whieb were adopted by the SEC and went into effect in October 2016, have had unintended, 

adverse impacts on the governing: of municipal money market funds. Loeal governments depended upon these funds to 

implement improvements as well as ioc= $Cn•ites lhrougb invesbnents in infraslruCCllrC projeds as well as economic 

growth and de-.'elopmeot initiatives. In addition 10 being a vital cash management 10n!, municipalities also counted oo the 

eoovenienc:e and simplicity dl3l a stable ?\A V pnll'ided for accou.11in& reeonlkeeping and the tax treafi:neot of easb 

balances. 

The City of Eli23beth is the foW1h largest municipality in New Jersey and the Union County Seat. Implementing a 

comprehensive economic development strategy, the City continues to focus on the attraction, retention and expansion of 

businesses; revitalization of communities as well as increasing !he availability of and a=ibilityto services, while creating 

emplO)'lllCOt and g101'1b opportunities. 

Utilizing public and priva1e resources, the City also remains dediwed 10 maximizing investment and reoewal efforts. 

Building upon its geographic Jocatioc and dited ~ 10 Tennioal A of Newark Liberty l.otemalional Airport, the Pori 

!\ev.1llk/Eiiubeth Marine T enninaJ, the New Jetsey Turnpike, Routes 1&9as weU as rwo !Jain statioos, the City adl"aDCa 

developmen~ transpo!latioo and quality of ltfe initiatives. 

The Consumer Finaocial Choices and Capital Markets Protection Act of2017 restores vital options and enhances the ability 

of municipalities to incorporate innovative strategies, wbieb facilitate progress, promote sust.ainability and enable efficient 

and effccti1oe services to be delivettd. 

Thank you for your time and consideration. 
394 

STEVEN M. FWIP ""OI'OI.PSlYCIT\' 

May 8, 2017 

CITY OF JERSEY CITY 

OFFICE OF THE MAYOR 

CIIYHAlli280GIIO'/ESIIIf£1 I J<liSEYOOY, NJ0/302 

P: 201541 5500 I F: 201541 54~2 

The Honornble Bob Menendez 

United Stales Senate 

528 Hart Senate Office Building 

Washington, D.C. 20510 

·ntc Honornblc Cory Booker 

United States Senate 

359 Dirksen Senate Office Buildi11g 

Washington, D.C. 20510 

Dear Senator Menendez and Senator Booker, 

I write th.is letter to express my support for re-.introduction of the Consumer Financial Choice 

and Capital Markets Protection Act of2017. Following the unintended and advcTSC effects oft he 

Securities and Exchange Commission's amendments to Rule 2a-7 governing money markets, 

remediation proves vital to the economic growth and development of municipalilies such as 

Jersey City. 

As the second largest city in the State of New Jersey, Jersey City relies on its ability to fund 

important infrastmcture projects that affect the daily lives of its residents. Investment in vital 

projects such as new affordable housing and improvements to public safety facilities and 

roadways is made possible by the secure and reliable nature of money market funds. 

Since the adoption oft he SEC's amendments to Rule 2a-7 and removal of the stable net asset 

value feature, money market ftmds have become a burdensome resource for local governments. 

The Consumer Financial Choice and Capital Markets Protection Act of2017 ameliorates these 

challenges and directly empowers Jersey City and other growing mid-sized cities across the 

nation to make meaningful investments in infrnstructure. 

Thank you for introducing this important legislation and working to defend valuable resources 

for state and local govenunents. 

--
395 

VICE PRESIDENTS 

JOSEPH EGAN 

JOSEPH --DEMARK, JR. 

RAYMOND ---POCIN-0 

....... 

MAACCIAUO 

-· ,_ ..... ROBERT CRITCHLEY 

GREG -lALEVU. 

--

JA.MESCI1EW 

LEOHARDL.EGOm -

_.,...._, 

JOHH 8.I1UHTYNE 

RAYMOHOWO®AIJ. -... _ 

77 Brant Avenue 

Clark, NJ 07066 

Ph: (732) 499-0100 

Fax: (732) 499-0150 

www.njbctc.org 

NEW JERSEY STATE BUILDING & 

CONSTRUCTION TRADES COUNCIL - OVER 100 YEARS STRONG -

WILLIAM T. MULLEN 

President 

The Honorable Bob Menendez 

United States Senate 

Washington, DC 20510 

Dear Senator Menendez: 

DAVID CRITCHLEY 

Se<retary·Trt3Sllrer 

May 3, 2017 

On behalf of the. New Jersey State Building and Construction Trades Council, I am 11'1iling 

to thank you for your support for the Consumer Financial Choice and Capital Markets 

Protection Act of2017. This legislation will address the unintended consequences of a 

burdensome Securities and Exchange Commission (SEC) regulation that has unnecessarily 

increased the cost of infrastructure projects while stifling local economic growth. 

As you know, New Jersey State Building and Construction Trades Council represents over 

150,000 hard working men and women throughout the New Jersey, making it one of the 

largest bu.ilding trades councils on the East Coast. The New Jersey State Building and 

Construction Trades Council equips professional craftsmen with the skills that are 

demanded in today's construction industry. 

Your active support for the Consumer Financial Choice and Capital Markets Protection 

Act is important to union trades men and women because New Jersey has lost out on about 

billions of tax-exempt funding from money market funds as a result of the SEC rule. 

Nationally, these funds invested hundreds ofbillions of dollars in building and maintaining 

transportation projects, education and hospital facilities, affordable housing, utilities, 

environmental projects and port facilities. 

Thank you for your leadership in introducing and ad1•ancing this important legislation. It 

is an important part of our efforts to increase investment in the roads, bridges and other 

critical infrastructure projects that are among America's great public achievements and a 

source of our shared prosperity. 

Sincerely, 

William T. Mullen 

President 
396 

May31,2017 

The Honoroble Bob Menendez 

United Swes Senate 

528 Han Senate Office Building 

Washington, D.C. 20510 

The Hooorable Cory Booker 

United States Senate 

359 Dirksen Senate OffiCe Building 

Washington. D.C. 20510 

RAS J. BARAKA 

MAYOR 

NEWARK, NEW JERSEY 

Dear Senator Menendez and Senator Booker, 

I write this letter to express my support for the re·introduction of the Consumer Financial Choke and 

Capit~l Markets Protection Act of 2017. As you are aware, the recent modifK"ations to the Securities and 

Exchange Commission (SEC) Rule 2a·7 have unintentionally affected the ability of municipalities to fund 

imponant projects that are vital to economic growth. The amendment undennines our ability to be 

equipped with the proper financial tools that are crucial to enhancing the daily lives of our residents. 

As Mayor of the lllf&(st city in the State of New Jersey, Newark relies heavily on the secure nature of 

Money Market Mutual Funds (MMMF) to Lo;sue debl for projects such as new affordable housing and 

improvements to our infrastructure. I'm concerned about the changes to the net asset value (NAV) 

accounting methodology. which adversely affecL< our ability to access cash. and the liquidity fees that are 

being imposed on these funds. Shifting the NAV from stable to Ooating will be prove to be burdensome 

for cities such as Newark:. 

This piece of legislation alleviates some of the fiscal challenges that we face. As a result, we have the 

ability to shift our focus to implementing a comprehensi,·e economic development strategy. At a time 

when policies in Washington are geared towards infrastructure improvements, we remain dedkated to 

maximizing the invesurent in our city. The Consumer Financial Choice and Capital Markets Protection 

Act of2017 will strengthen Newark's financial wellbeing. 

· you and supporting your efforts to help cities such as Newark, and I thank 

• 1 mportanl pi~ of legislation. 

Orne( OfTM£ MAYOfl • 920 8AOlO STRfrT. ROO!ol200 t\twAJtl(, NJ07102 • TEU:PHOhE t9731733·&400 • 'FU. {973.733·3711 • WV.WCI NfWMU\ P«J U$ 
397 

May31,2017 

The Honorable Bob MerM:ndel 

United Slates Senate 

528 Han Sen:ue Office Building 

Washington. D.C. 20510 

The Honorable Cory Booker 

United Slates Sen:ue 

359 Dirksen Senate Off~e1: Building 

Washington. D.C. 20510 

RAS J. BARAKA 

MAYOR 

NEWARK, NEW JERSEY 

Dear Sen:uor Menendel and Senator Booker. 

I write this letter to express my support for the re·inuodlldion of the Consumer Financial Choke and 

Capital Marl:ets Pro!ection Act of2017. As you are aware, the rectnl modifications to the Securities and 

Exchange Commission (SEC) Rule 2a·7 have unintentionally affected !he ability of municipalities to fund 

important projecls !hal are vital to economic growth. The amendment undennines our ability 10 be 

equipped with the properfiniii!Cial tools that :ue crucial to enhancing the daily lives of our residell(S. 

As Mayor of the la~geS~ city in !he Slate of New Jersey. Newark relies heavily on the secure nature of 

Money Market Mutual Funds (MMMF) to issue deb! for projec!S such as new affordable housing and 

improvemen!S to our infra<Jructure. I'm concerned about the changes to the net asset value (NA V) 

accounting methodology. which adversely affec!S our ability to access cash. and the liquidity fees that are 

being imposed on these funds. Shifting the NAY from s1able to floating will be prove to be burdensome 

for cities such as Newark:. 

This piece of legislation alleviates some of the fiscal challenges thai we face. As a result, we have the 

ability to shift our focus to implementing a comprehensive economic de1-elopmen1 strategy. AI a time 

when policies in Washington are geared towards infrastructure improvements, we remain dedicated to 

maximiling the investment in our city. The Consumer Financial Choice and Capital Markets Pro!ection 

Act of 2017 will strengthen Newark's financial wellbeing. 

I look forwand to working with you and supporting youreffoii.Uo help cities such as Newark, and I thank 

you for introducing this important of legislation. 

Sinemly. 

~ ~~ a j/'vr 

OmC:C 0, TM[ lo'.AYOR • 920 BRO.tO STRUT. Roo..! 200, Ntw.utiC, NJ 07102 • TEI.f!PifON( 197 !733~£00 • FA.X 1&731 7.).).3711 • V.WW Cl NlWIJIK.HJ V$