U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

94–757 PDF 2016

S. HRG. 114–16 

CAPITAL FORMATION AND REDUCING SMALL 

BUSINESS BURDENS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING LEGISLATIVE PROPOSALS ON CAPITAL FORMATION THAT 

WERE CONSIDERED IN THE HOUSE LAST CONGRESS THAT WOULD 

HELP CAPITAL FORMATION AND REDUCE BURDENS FOR SMALLER 

BUSINESSES 

MARCH 24, 2015 

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

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MICHAEL CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT

MIKE CRAPO, Idaho, Chairman 

MARK R. WARNER, Virginia, Ranking Democratic Member 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

JERRY MORAN, Kansas 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

ELIZABETH WARREN, Massachusetts 

JOE DONNELLY, Indiana 

GREGG RICHARD, Subcommittee Staff Director 

MILAN DALAL, Democratic Subcommittee Staff Director 

(II)

C O N T E N T S 

TUESDAY, MARCH 24, 2015 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Warner ................................................................................................ 2 

WITNESSES 

Thomas Quaadman, Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ....................................................................... 3 

Prepared statement .......................................................................................... 20 

Responses to written questions of: 

Senator Vitter ............................................................................................ 51 

William H. Spell, President, Spell Capital Partners, on behalf of the Small 

Business Investor Alliance .................................................................................. 5 

Prepared statement .......................................................................................... 24 

Marcus M. Stanley, Policy Director, Americans for Financial Reform ............... 6 

Prepared statement .......................................................................................... 43 

Responses to written questions of: 

Senator Vitter ............................................................................................ 52 

John C. Partigan, Partner and Securities Practice Group Leader, Nixon 

Peabody ................................................................................................................. 8 

Prepared statement .......................................................................................... 46 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Written statement of the Biotechnology Industry Organization, submitted 

by Chairman Crapo .............................................................................................. 73 

Written statement of the Coalition for Derivatives End-Users, submitted by 

Chairman Crapo ................................................................................................... 80 

Written statement of XBRL US, submitted by Chairman Crapo ........................ 82 

Written statement submitted by Jessica B. Pastorino, President, M&A Securities Group, Inc. ..................................................................................................... 86 

(III)

(1) 

CAPITAL FORMATION AND REDUCING SMALL 

BUSINESS BURDENS 

TUESDAY, MARCH 24, 2015 

U.S. SENATE, SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee convened at 2:33 p.m., in room 538, Dirksen 

Senate Office Building, Hon. Mike Crapo, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. Good afternoon. This hearing of the Subcommittee on Securities, Insurance, and Investments will come to 

order. 

Today’s hearing will focus on several legislative proposals that 

would help capital formation and reduce burdens for smaller businesses. My goal is to work with Senator Warner and with other 

Senators on the Banking Committee to identify legislative proposals that help small business grow and succeed and work to 

move a package of such proposals through the Senate. 

The bills being discussed in today’s hearing were considered in 

the House of Representatives last Congress, and most of them 

passed with a voice vote or with very strong bipartisan support. 

Some of these bills have also been introduced in the Senate. 

Senator Warner and Senator Toomey introduced legislation to 

allow companies to expand employee ownership. Senator Kirk has 

introduced legislation that would end the double regulation of 

small business investment companies last Congress. 

Others are aimed at aiding the SEC in its mission. The SEC is 

tasked with protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. However, the SEC 

has a long list of ‘‘to do’’ items, and the Congress can help in 

prioritizing this list through oversight and legislation. This includes completing the Regulation A rules from the JOBS Act—I 

think you are probably in agreement with that, Senator Warner— 

modernizing disclosure requirements, and improving access to capital for small companies. 

At this time, I will include for the record, if there is no objection, 

testimony and letters from the Biotechnology Industry Organization, the Coalition for Derivatives End-Users, and XBRL US on 

several of these legislative proposals. Without objection—— 

Senator WARNER. Without objection. 

2 

Chairman CRAPO. They are entered into the record. 

At our previous hearing, we explored whether a venture exchange would help emerging companies get access to capital and 

what steps should be taken. Today’s hearing continues this Subcommittee’s work on how to improve America’s capital markets, encourage job creation, and reduce regulatory burdens for business. 

I look forward to hearing from our witnesses on these legislative 

proposals. 

Senator Warner. 

STATEMENT OF SENATOR MARK R. WARNER 

Senator WARNER. Thank you, Chairman Crapo, for holding this 

hearing. I think, because of our long affiliation, association, if anything can be done bipartisan together, this may be the pair to start 

it. 

And, as somebody who still can claim that I have spent longer 

in the private sector and longer on the emerging growth company 

side of the fence than I have on the elected official side of the fence, 

this is a subject that is near and dear to my heart. 

I want to echo what Senator Crapo has said. I want to thank him 

again for the hearing we held last week on venture exchanges. I 

think it is an interesting idea. I think there are some challenges 

around it, but I think it is a very interesting idea. And, I know that 

we are looking at a series of bills today that I am looking forward 

to the panel’s comments on. 

I will note that perhaps just holding this hearing may have 

spurred the SEC into action. If you are not going to take credit, we 

ought to jointly take credit. My understanding is that tomorrow, 

the SEC will be voting to go ahead and move the Reg A Plus regulations forward, something that I wish would have happened earlier. I hope that they will not only take that step, but go ahead and 

move forward on the crowdfunding, finalization of those regulations. Crowdfunding has both an upside and a downside, I know, 

but the sooner we can get it out into the marketplace and learn, 

I think, the better. 

As also was mentioned, I have been one of the cosponsors of a 

bill with Senator Toomey to make sure that growing companies 

have an opportunity to share that growth with employees, raising 

the standard that had been set back more than a decade ago to, 

I think, a more modern standard. And, candidly, the notion of employee participation in companies, I think, is both good policy and 

good for our overall economy. Of course, I still welcome the panel’s 

comments on this legislation. 

Another bill under consideration today is meant to further assist 

the emerging growth companies during the IPO process, and I am 

anxious to hear some pros and cons and what happens in terms of 

the due diligence during that process. 

I note that we will be discussing two bills today in the realm of 

derivatives regulation. Used appropriately, derivatives can be an 

important risk mitigation tool. But, if unregulated, derivatives can 

also, as Warren Buffett famously said, become financial weapons of 

mass destruction, and I still believe that there is a great deal of 

that sector 5 years after Dodd-Frank that still needs some further 

review. 

3 

I have got a number of questions for witnesses on the prudence 

of one of the particular bills, but I also hope the Subcommittee will 

look at derivatives regulation more generally at a future date. I 

think it would be something that the Subcommittee should take a 

fresh look at. We have really not, I do not believe, in the last 5 

years since Dodd-Frank taken a look at that sector, and maybe, 

Mr. Chairman, it might be the subject of a hearing if you decide. 

In particular, I am open, as you are, to finding ways that we can 

both cut down some of the bureaucracy, speed the ability to get 

capital to growth companies. I remember the Kauffman Foundation’s statistics that say that more than 50 percent of all the net 

new jobs that have been created in the last 30 years in this country 

have come from startups. Those startups have got to have access 

to capital. 

So, Mr. Chairman, thank you for holding this hearing, and I look 

forward to the panel’s comments. 

Chairman CRAPO. Thank you very much, Senator Warner. 

Today’s witnesses are Mr. Thomas Quaadman, Vice President of 

the U.S. Chamber’s Center for Capital Markets Competitiveness; 

Mr. Bill Spell, President of Spell Capital Partners; Mr. Marcus 

Stanley, Policy Director of Americans for Financial Reform; and 

Mr. John Partigan, Partner and Securities Practice Group Leader 

at Nixon Peabody. 

Your written testimony for each of you has been entered into the 

record and will be here entered into the record and we encourage 

you each to try to wrap up your initial comments in 5 minutes. 

There will be a clock going, so we encourage you to pay attention 

to it, so we will have plenty of time for our questions and your responses. 

With that, Mr. Quaadman, why do you not begin. 

STATEMENT OF THOMAS QUAADMAN, VICE PRESIDENT, CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE 

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

Warner, Members of the Subcommittee. First off, I would like to 

thank you for this hearing and also for the continued bipartisan 

leadership of this Subcommittee on moving forward on bills important to capital formation. 

What is true of any company is that there has to be the ability 

to grow from small to large and that companies need to have the 

tools to be able to access that growth and also to be able to engage 

in reasonable risk taking. Sometimes, Government policies get in 

the way of that, and there was a bipartisan recognition several 

years ago with the JOBS Act that some of those impediments needed to be pushed aside, and I want to commend the Senate and the 

House for doing just that. 

Since we have seen a partial implementation of the JOBS Act— 

I want to stress partial—we have seen a very steady rise in IPOs, 

and for the first time in 14 years, we actually saw the number of 

public companies in the United States rise. 

But, the long-term trends are not good. We have with entrepreneurs, particularly with young entrepreneurs, the public company model is no longer an attractive model. We also have a treVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
4 

mendous number of outflows of public companies, as well, so that 

when somebody like Michael Dell says that he no longer will operate a public company, that means that there is something wrong. 

We have to take a closer look at that. 

So, legislation and setting priorities for the SEC is an important 

item on our agenda. And, what should be noted with all the bills 

that you have here, because these are bipartisan bills that we have 

supported, it is important to note that these are all issues that the 

SEC could modernize existing regulations, but they have not done 

so and have only moved in the past when Congress has forced them 

to move. 

So, just sort of ticking down the list here, with the Reg A bill, 

Senator Warner, I agree with you. I think you should get a press 

release ready. You know, I think it is—we have a situation here 

where, with the open meeting tomorrow, we are going to have the 

Reg A update finalized, hopefully. And, while that is a victory, it 

is also an example why there is a need for Congressional prodding 

to get something done. 

With the Disclosure Modernization and Simplification Act, we 

have a corporate disclosure system that is based in a 1930s foundation and it is paper-bound. We need to update both the corporate 

disclosures and the delivery systems to meet the needs of 21st century investors as well as a global capital market. 

Now, I want to just state, too, that Chair White and Keith Higgins, who is the Director of Corporation Finance, have started the 

ball rolling on this with their Disclosure Effectiveness Project, and 

I think they should be commended for it. However, we want to 

make sure that that is a project that does not die through bureaucratic inertia. You only have to look at the concept release on proxy 

voting that has been 5 years old to see, you know, something with 

good intentions die on the vine. 

With the Encouraging Employee Ownership Act, that will actually effectuate a JOBS Act reform. We had Rule 701, number of 

shareholders, that threshold rise through the JOBS Act. However, 

the actual dollar amount was not adjusted. So, the bill here would 

actually take that number from $5 to $10 million, which reflects inflation since Rule 701 was implemented in 1988. And that is, as 

you said, Senator Warner, that is an important way for a growing 

company to keep and reward its employees. For a growing company, employees are their strongest asset. 

The Improving Access to Capital for Emerging Growth Companies, it is a needed change for emerging growth companies in the 

JOBS Act portal to go out and attract second-stage financing. 

With the SBIC Advisers Relief Act and the Holding Company 

Registration Thresholds Equalization Act, both codify Congressional intent of Dodd-Frank and the JOBS Act. 

With the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act, you know, businesses are increasingly 

looking to be acquired. As I said, they are not looking to necessarily 

become public companies. This will provide certainty around that 

process and it is something that we support. 

With the Treatment of Affiliates of Non-Financial Firms that Use 

a Centralized Treasury Unit, this is a narrowly tailored bill that 

codifies Congressional intent, allowing a nonfinancial company to 

5 

use derivatives without clearing to mitigate risk and lock in prices. 

I think it should be noted that with the proposed legislation, a financial company cannot access that CTU exemption. 

The Swaps Data Reporting and Clearinghouse Indemnification 

Corrections Act, that is a change that is needed to clarify international differences of law to facilitate better information sharing 

and coordination amongst national regulators. That is an important piece in terms of global market. 

So, again, I want to thank the Subcommittee and Chairman 

Crapo for your leadership on this. We look forward to working with 

you to developing these into a core package of JOBS Act 2.0 bills, 

and I am happy to take your questions. 

Chairman CRAPO. Thank you. 

Mr. Spell. 

STATEMENT OF WILLIAM H. SPELL, PRESIDENT, SPELL CAPITAL PARTNERS, ON BEHALF OF THE SMALL BUSINESS INVESTOR ALLIANCE 

Mr. SPELL. Good afternoon, Chairman Crapo, Ranking Member 

Warner, and members of the Senate Banking Subcommittee on Securities, Insurance, and Investment. My name is Bill Spell and I 

am President of Spell Capital Partners, a private equity firm in 

Minneapolis, Minnesota. Our firm manages three funds, two of 

which are small funds that engage in equity investing, and one of 

which is a Small Business Investment Company, SBIC, that engages in mezzanine debt finance. 

I am here today representing the Small Business Industrial Alliance, which is the trade association of lower and middle-market 

private equity funds, SBICs, and business development companies 

and their institutional investors. SBI members provide vital capital 

to small- and medium-sized businesses across the country. 

I am a Minnesota native, attended college at the University of 

Minnesota and went on to receive an MBA from my alma mater 

a few years later. I continued my relationship with the University 

of Minnesota years later, serving as an adjunct lecturer at the 

Carlson School of Management. 

I began my career at a regional investment bank in Minnesota 

and for over 7 years engaged in corporate finance investment banking work. In 1988, I formed my own investment firm with the goal 

of making control equity investments in small industrial manufacturing businesses in the Midwest. Since that time, we have had a 

strong record of growing businesses, increasing employment, and 

providing a return to our investors. 

Recently, we decided to pursue an SBIC license and were approved by the Small Business Administration in March 2013. 

Today, we advise total assets under management of about $170 

million, with approximately $85 million of those assets in our SBIC 

fund. We currently employ a staff of 16 people in Minneapolis. Our 

SBIC fund has been examined twice by the SBA since we were licensed in 2013. 

Spell Capital is focused on helping small businesses grow and 

providing them the capital and management assistance with which 

to accomplish that goal. Unfortunately, some of the regulatory burdens we face, notably the cost and burden of registration with the 

6 

SEC, which duplicates many of the costs and time burdens of complying with the SBA regulations in the SBIC program, have diminished both the time and funds we can allocate to our core mission. 

I believe balanced regulation oversight is a good thing. However, 

when regulatory oversight is duplicative and redundant, that regulatory balance between investor protection and capital formation is 

lost. 

Compliance costs have a disproportionate impact on smaller 

funds like mine. Small business investors commonly have very few 

employees, sometimes as few as two. Small business investment 

funds, such as Spell Capital, generally do not have legal departments, compliance teams, or extra employees to adhere to a complicated regulatory routine. Adding additional overhead expenses 

for regulatory compliance damages the ability of small business 

funds, such as Spell Capital, to operate profitably and prevents 

them from dedicating all their time, energy, and capital to helping 

small businesses grow. 

The cost of registration and additional compliance functions is 

high for smaller funds because their management fees are low 

when compared to much larger funds. However, smaller funds face 

many of the same compliance and reporting levels as larger funds. 

Absent the infrastructure of larger funds, smaller funds often have 

to pay outside counsel to help with initial and ongoing compliance 

costs. 

Therefore, as a consequence of these regulatory burdens on Spell 

Capital’s mission to help small business, I am here to strongly support a bipartisan bill called the SBIC Advisers Relief Act. An identical bipartisan bill, H.R. 432, was introduced in the House on January 21, 2015, by Representatives Blaine Luetkemeyer and Carolyn Maloney. In the 113th Congress, this bill passed the House Financial Services Committee 56 to zero and was approved by the 

House on a voice vote. Senators Mark Kirk and Joe Manchin introduced the Senate companion to the bill in the 113th Congress. 

My testimony here today will explain the need for this legislation 

and why the solutions and clarifications it makes to the DoddFrank Act are necessary to ensure that smaller funds will be able 

to continue focusing on small business investing rather than filling 

out redundant regulatory paperwork. I would like to thank the 

Subcommittee for examining this bill today, and I especially want 

to thank the sponsors of this legislation and to urge support for the 

bill’s introduction in the Senate during the 114th Congress. 

Thank you. 

Chairman CRAPO. Thank you. 

Dr. Stanley. 

STATEMENT OF MARCUS M. STANLEY, POLICY DIRECTOR, 

AMERICANS FOR FINANCIAL REFORM 

Mr. STANLEY. Chairman Crapo and Ranking Member Warner, 

thank you for the opportunity to testify before you today on behalf 

of Americans for Financial Reform. 

Before turning to the specific bills under consideration today, I 

would like to make a general comment regarding capital formation. 

AFR does not believe that the SEC’s capital formation mandate 

fundamentally conflicts with its mission of investor protection. EfVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
7 

fective capital formation requires investor trust in the markets and 

also requires that markets channel investor capital to its best use. 

When investors put their money into a penny stock scheme or purchase securities on the basis of fraudulent accounting or on the 

basis of misleading descriptions of their true risk, capital is likely 

to be misallocated. 

The numerous financial scandals of the last two decades have led 

to enormous amounts of capital being misallocated and have done 

grave damage to investor trust in the markets. A failure to place 

a high priority on the SEC’s investor protection mission will also 

harm its mission of ensuring effective capital formation. 

AFR supports legislation eliminating swaps data indemnification 

requirements, H.R. 742. Progress in derivatives data reporting has 

been slow. There are many reasons for this, but the indemnification requirements in Dodd-Frank are one factor involved. The replacement of indemnification requirements with a simpler confidentiality agreement would be beneficial in encouraging needed sharing of derivatives data between different jurisdictions and entities. 

AFR opposes H.R. 2274, legislation exempting M&A brokers from 

broker-dealer registration. While a much narrower version of this 

legislation could be acceptable, this bill is flawed. It lacks provisions to prevent bad actors from taking advantage of exemptions 

from registration. It would exempt acquisitions of companies with 

gross revenues up to $250 million, which goes far beyond any reasonable definition of a small local business. There is no effective 

provision to prevent transfer to a shell company, so the exemption 

could be used in a private equity-type transaction. The bill could, 

thus, interfere with ongoing SEC investigations of potential abuses 

in private equity involving unregistered broker-dealer activities. 

The legislation is also unnecessary, as SEC has already taken administrative action to exempt true M&A brokers from broker-dealer 

registration. 

We would also point out that numerous registered broker-dealers 

who comply fully with SEC conduct requirements are already active in arranging deals, and this legislation would expose them to 

competition from unregulated entities that would not have to comply with important investor protections, such as suitability standards. 

AFR also opposes H.R. 5471, legislation that would expand exemptions from Dodd-Frank derivatives clearing requirements for financial affiliates of commercial entities. While commercial entities 

using derivatives to hedge legitimate commercial risk are already 

exempted from clearing requirements, financial entities can only 

qualify if they are hedging risk on behalf of an affiliated commercial company and are acting as the agent of the commercial affiliate. This legislation would remove these limitations and leave in 

place only a requirement that the financial entity is somehow mitigating the risks of a commercial affiliate. 

But, many purely financial trades can be interpreted to somehow 

mitigate risks for a related commercial affiliate. This legislative 

change would, thus, greatly reduce the ability of the CFTC to ensure that derivatives clearing requirements are properly applied in 

all cases. As the nonpartisan Congressional Research Service stated in an analysis of this bill, it could potentially allow large banks 

8 

to trade swaps with other large banks and not be subject to the 

clearing or exchange trading requirements as long as one of the 

banks had a nonfinancial affiliate. 

There are some cases in which affiliates of commercial entities 

may genuinely be hedging commercial risks but may not, in the 

narrowest sense, be acting as an agent of the commercial affiliate. 

The CFTC has already provided extensive and robust administrative ‘‘no action’’ relief, allowing such affiliated central treasury 

units to make use of the clearing exemption. 

AFR also opposes legislation to expand exemptions for adviser 

registration for SBIC funds. It is likely that this change would affect only a relatively small number of advisers whose funds are not 

large. For this reason, we do not place as high a priority on this 

bill as the previous two bills discussed. However, we object to carving more advisers out of new Dodd-Frank registration requirements as these requirements are already proving effective in creating needed investor protections. We are also concerned that the 

legislation would weaken State investor protection oversight of 

SBIC funds. 

AFR does not at this time have positions on the other bills under 

consideration by the Subcommittee. However, my written testimony offers some additional comments on the Disclosure Modernization and Simplification Act of 2014. We question whether the 

mandate in this bill is an appropriate priority for agency resources 

and also express our view that greater investment in machine 

readable disclosures in order to change disclosure from disconnected documents into searchable open data would be a much 

greater benefit to investors than the regulation called for in that 

bill. 

Thank you for the opportunity to testify. 

Chairman CRAPO. Thank you. 

Mr. Partigan. 

STATEMENT OF JOHN C. PARTIGAN, PARTNER AND 

SECURITIES PRACTICE GROUP LEADER, NIXON PEABODY 

Mr. PARTIGAN. Chairman Crapo, Ranking Member Warner, and 

Members of the Subcommittee, thank you for inviting me to testify 

today. I am a partner at Nixon Peabody and the Chair of the firm’s 

Securities Practice Group. I have been practicing corporate and securities law for more than 25 years and have advised public and 

private companies, including Wegmans, for over 15 years, on a 

range of securities issues. 

I am here to speak about Wegmans’ support for S. 576, the Encouraging Employee Ownership Act, and how this bill updates SEC 

Rule 701. On behalf of Wegmans, I would like to thank Senators 

Toomey and Warner for introducing the Act. 

Wegmans is a privately held, family owned company. It is an 

American success story. In 1916, John Wegman started the company with a produce pushcart. A year later, his brother, Walter, 

joined him. Today, Wegmans operates 85 stores in seven States 

and has almost 44,000 employees. 

Wegmans is the recipient of numerous awards. My testimony 

lists a number of them, but I would like to highlight just one. 

Every year since its inception, Wegmans has been ranked among 

9 

Fortune Magazine’s 100 ‘‘Best Companies To Work For’’. Wegmans 

is extremely proud of this recognition because it is a reflection of 

how the company treats its employees, and having broad employee 

stock ownership is a key to the success of the company. This is 

manifest in its philosophy that if Wegmans takes care of its employees, its employees will take care of the customers and the bottom line will take care of itself. 

I would like to provide a brief description of Rule 701 and then 

discuss S. 576. Rule 701 was adopted in 1988. It provides an exemption from SEC registration requirements for private companies 

to offer their own securities to employees pursuant to a written 

compensation plan. The exemption is not available for capital raising purposes. 

Rule 701 offerings are often an important component of companies planning to attract and retain talent, a key to the success of 

any business, but especially for smaller or newer companies that 

may offer stock or stock options as they are attracting early stage 

financing and need to preserve their cash. 

Under Rule 701, a company must provide investors with a copy 

of the plan document. In addition, because the offering remains 

subject to the antifraud rules, a company must also disclose the information that a reasonable investor would expect to receive from 

the company about the investment before making an investment 

decision. 

In 1999, when Congress provided new authority, the SEC 

amended Rule 701 and created a two-tier disclosure regime. For 

sales of $5 million and below during a 12-month period, the existing disclosures remained in place. For sales greater than $5 million 

during a 12-month period, the SEC created new enhanced disclosures. These enhanced disclosures, among other things, require the 

provision of audited financial statements, if available, no older than 

180 days. 

In its 1999 rulemaking, the SEC explained that because the compensated individual has some business relationship over a long period of time with the securities issuer, the amount and type of disclosure required for this person, the employee, is not the same as 

for a typical investor with no particular connection with the issuer. 

Even at the time of the enhanced disclosures, the American Bar 

Association warned about the risks of requiring privately held companies to disclose their confidential financial information. 

Simply put, any assertion that the enhanced disclosures are not 

burdensome or problematic is wrong. The bottom line is that privately held companies are faced with a decision whether to limit 

compensatory grants and sales to employees to stay under the 

threshold or risk the dissemination of highly confidential information. 

This is what the Encouraging Ownership Act would fix. It would 

raise the threshold for enhanced disclosure to $10 million, accounting for inflation. This is a sensible and balanced adjustment that 

continues to address the SEC’s concerns by requiring two levels of 

disclosure. 

Thank you. 

Chairman CRAPO. Thank you, Mr. Partigan. 

10 

I would like to start out, first, with Mr. Quaadman and Mr. 

Stanley. It appears that there is a difference of opinion between the 

two of you with regard to H.R. 5471 and whether it is limited to 

nonfinancial end-users. It is my understanding that the exemption 

in the legislation is only intended to apply if the centralized treasury unit is hedging the commercial risk of a nonfinancial entity, an 

entity that otherwise could hedge its own risk directly without 

clearing. In such cases, the end-user would not be denied the enduser clearing exception. 

Mr. Quaadman, is that your understanding of how H.R. 5471 

works? 

Mr. QUAADMAN. Yes, Mr. Chairman. We share the same reading 

of the bill and we think it works the same way. 

Chairman CRAPO. All right. And, again, Mr. Quaadman, Mr. 

Stanley references a CRS report that suggests that the legislation 

may create a broader exemption. Are you familiar with that report? 

Mr. QUAADMAN. Yes, I have read it. 

Chairman CRAPO. And, apparently in the report, there is an example used to show how that could occur. Could you respond to 

that? 

Mr. QUAADMAN. Yes. You know, the example that used there is 

a typical Rube Goldberg example, which is unrealistic in actual 

practice. If you are a financial company, you would not be able to 

avail yourself of that exemption. And, if you are a financial company—the nonfinancial company, as you said, you would be able to 

use the CTU process in that way. So, we did not think that the 

CRS report was accurate and it is not the way that a corporation 

will use derivatives to mitigate risk. 

Chairman CRAPO. All right. Thank you. 

And, Mr. Stanley, I would like you to have an opportunity to respond, and also, could you explain why it is that you believe the 

text of this legislation would create a broader exemption than what 

we were discussing. 

Mr. STANLEY. Sure. I guess I would say, first, that if you have 

ever looked at the organization chart for one of the major bank 

holding companies, one of the systemically significant bank holding 

companies, it does have a Rube Goldberg look to it. So, I think we 

have got to watch out for the way Rube Goldberg things can happen here. 

I think a critical difference between this legislation and the ‘‘no 

action’’ relief that the CFTC has already provided is that the 

CFTC’s ‘‘no action’’ relief stated that the company at the top of the 

conglomerate, in other words, the company that owned the commercial affiliate and the central treasury unit, could not itself be 

a financial entity, such as a bank or a systemically significant 

bank. This legislation is not limited in that way. 

So, what the CRS report, I think, was picking up on is that if 

you have a bank, and we know that these major global banks have 

thousands of different affiliates, if one of those legal entities under 

the bank is a commercial affiliate, then you could have a financial 

affiliate under the bank claiming to be mitigating risk for an affiliated commercial entity, another commercial entity that is under 

that same holding company. And, what we are concerned about is 

that that mitigating risk is just too vague in terms of the legal auVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
11 

thority that it gives to the CFTC and that you could have examples, say, for example, if you had a bank with a commercial affiliate in Brazil, you could have another financial affiliate that was, 

for example, buying credit default swaps under Brazilian debt and 

there would be a claim that it was mitigating risk in some general 

sense for that commercial affiliate. 

Chairman CRAPO. Well, thank you. I understand your point. 

Would you agree, though, that if the language could be crafted adequately, that it would be appropriate to provide that a nonfinancial 

entity—frankly, that a centralized treasury unit that is hedging the 

commercial risk of a nonfinancial entity should be allowed to do so? 

Mr. STANLEY. Yes, if it is genuinely hedging that commercial 

risk, and we do believe that there are ways this legislation, the language in this legislation could be crafted to be reasonable. Frankly, 

we think that given that the CFTC has shown its willingness to accommodate, that perhaps just legislative language that clarifies 

and makes clear the CFTC’s discretion to accommodate central 

treasury models would be a better alternative. 

Chairman CRAPO. I would appreciate any suggested language 

you might have in that regard. 

In the minute or so I have left, let me move to another issue. Mr. 

Spell, it also appears that there is a difference between you and 

Mr. Stanley with regard to the SBIC Adviser Relief Act, and probably we will only have time for you to respond, Mr. Spell, but I will 

come back, Mr. Stanley, when I get my next chance. Could you respond to Mr. Stanley’s concern that he has raised with regard to 

the concern that the legislation does not adequately protect against 

the potential for investor abuse in private equity markets. 

Mr. SPELL. Yes, sir, Mr. Crapo. You know, I am not familiar with 

any type of abuses in the private equity industry. The SBA regulation of SBICs is stringent and thorough and they have the ability 

to shut down any SBIC fund managers that do anything inappropriate or illegal. And, when I got into this business in 1988, there 

were just a handful of private equity managers. Now, there are 

thousands and they manage hundreds of billions of dollars. Money 

would not flow into that industry if this was plagued with abuse. 

Chairman CRAPO. Well, thank you. My time has expired. I will 

come back in another round. 

Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman, and I appreciate 

you asking on the H.R. 5471 because I was going to ask kind of 

the same question. 

I guess I would—Mr. Quaadman, I am sympathetic to your argument, but I have to agree with Dr. Stanley that some of these large 

financial institutions, the level of complexity that they go to is pretty extraordinary, and I would love to see if there could be some 

way that we could come up with language that might meet both 

concerns. I guess I would ask you, should there be any limitations 

on clearing exemptions for nonfinancial institutions? 

Mr. QUAADMAN. Well, Senator Warner, the Chamber’s position is, 

if you are going to use a derivative or hedging for financial speculation, that should go through clearing. Our members and the Corporate End-User Coalition, we use derivatives to lock in prices and 

mitigate risk. That is what derivatives are intended for. 

12 

Senator WARNER. I understand. 

Mr. QUAADMAN. So, that is where we believe that this should go. 

So, we agree that there should be, you know, with the CTU legislation, it should only apply to nonfinancials, which is how we ready 

that. 

I would also just say, too, with the Volcker Rule, I think it would 

be extremely difficult for a bank to have a commercial unit be able 

to use derivatives in this manner. 

Senator WARNER. Well, Dr. Stanley, quickly, because I want to 

get to a series of other questions. 

Mr. STANLEY. I think it is important to note that although this 

legislation is about mitigating commercial risk, it permits a financial entity, not just a commercial entity, a financial entity, which 

is what a so-called central treasury unit is, to access the clearing 

exemption, and that is precisely why we are so concerned about it, 

because it permits a financial entity to access the clearing exemption based on a claim it makes, so—— 

Senator WARNER. You did say, I think, that somewhere between 

the legislation and the ‘‘no action’’ letter, there might be some—and 

I appreciate, Chairman Crapo, you getting them to that point. 

Mr. Partigan, let me just—I, obviously, strongly support the legislation that you have discussed, and we have got about 5.7 million 

small private companies in the United States. If we move this 

number, and, frankly, just move it up with inflation from $5 million to $10 million, do you have any sense of how many more employees or companies might be able to participate? 

Mr. PARTIGAN. Well, I think for companies like Wegmans, they 

run up against that limit. So, you could have twice the number of 

employees participating in stock grant programs as well as stock 

purchase programs, and then you can expand that by the number 

of privately held companies that share employee stock with their 

employees. 

Senator WARNER. Let me move, and Mr. Spell, one of the things 

that I would agree with, and Dr. Stanley, I guess I would like to 

get your quick comment, because I would like to get a couple more 

in, I think the SBIC program 20 years ago had a lot of problems. 

I think there is a much higher level of scrutiny now on SBICs. I 

am not exactly sure where the line should be drawn. But, when you 

are thinking at that 150 number and the nonability to aggregate, 

there is a—do you have some suggestion on how private equity 

managers can—it is a lot of compliance cost. There has not been 

a history outside of what was long ago in the SBICs before the SBA 

cleaned up the process that you would be willing to accommodate. 

Mr. SPELL. Yes, and we would be happy to talk to you about 

that. I think we were just very impressed, and it lined up with 

some of what our pension fund members have seen, with what the 

SEC found when it did these inspections of private equity companies and found that over half had either violations of law or material weaknesses in controls. So, that is our concern. 

Senator WARNER. I would like to see that. 

Let me get to the H.R. 3623, and Mr. Chairman, you have got 

quite a collection of legislation here, so they are all pretty complicated and—— 

Chairman CRAPO. All good stuff. 

13 

[Laughter.] 

Senator WARNER. That is what we hope to get to. You know, it 

seems to me, somebody who has been through the registration 

process, that the idea that if you somehow pass through that billion 

dollar total gross revenue limit during the registration process, 

that you could still become an emerging growth company and that 

you should not have to disrupt the IPO process. Is there any concern across the panel on that? 

[Witnesses shaking heads side to side.] 

Senator WARNER. What about the change, the 6-day change on 

the period between the public filing and the start of the road show? 

I mean, I am not exactly sure—since most folks file and it is usually 30 or 40 days, conceptually, I get it, but why is this so high 

on the list? 

Mr. QUAADMAN. I was with just a—I was with a group of CFOs 

from bio companies about a month ago and we were doing a round 

of visits. They did talk about this issue with road shows and being 

able to go out sooner as being very helpful, and there was some 

concern with the JOBS Act, that the JOBS Act gets them to a certain point, but there were concerns about how they can get to the 

next stage. So, I think this is a helpful way to make the JOBS Act 

better, more efficient, but also to get them to second stage financing. 

Senator WARNER. Well, Mr. Chairman, I appreciate this, and I 

am going to ask Senator Donnelly to sit in now. I have got an intel 

meeting. But, I look forward to seeing—these are technical in nature, most of this legislation, and I would love to see if we can find 

some bipartisan collaboration, and I would, again, welcome all of 

us to—it would be nice to work on some things where we can actually get to yes. Thank you, Mr. Chairman, for holding this hearing. 

Chairman CRAPO. Thank you, Senator Warner. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman, and thank you also 

for holding this hearing today and talking about the number of 

bills that we have that could be very important to the investors 

and, frankly, to building a healthier economy long-term in our 

country. 

I come from the great State of South Carolina, where our Governor and our legislature have worked very hard to create a business-friendly environment and it is really paying off dividends and 

growing more jobs in our economy, which is fantastic. 

I would like to use this opportunity to highlight the success of 

the Greenville Chamber of Commerce and their work with UCAN, 

which is the Upstate Carolina Angel Network, a network that is accredited investors that has invested over $11 million in South 

Carolina startups since 2008. Private offerings are a useful tool to 

raise capital. 

Still, I think we need to do more to permit South Carolina’s 

small cap and emerging growth companies to access public markets. This is especially important as banks and credit unions face 

heavier regulatory burdens that reduce access to lending and increase cost. 

Mr. Chairman, we heard this morning from some of the banks. 

I think Regions, in particular, talked about how their regulatory 

14 

burden from a cost perspective is around $200 million, which 

means that the pricing and the availability of credit is going down, 

down, down. And, they talked about having over 150 employees 

dedicated only to the regulatory responsibilities, that they have 

hired more folks lately for the regulatory burden than they have 

for lending purposes, which I think is quite remarkable and truly 

unfortunate. 

In the area of capital formation, our path forward should be a 

little easier. Reduce costs that present unnecessary burdens to access to capital. 

Securities regulation should be sensible. The SEC should balance 

its investor protection and capital formation missions and not do 

one at the expense of the other. One way to achieve that balance 

is to improve disclosure effectiveness by scaling it based on the size 

or the complexity of the issuer. 

I am pleased to see that the SEC is making overtures in this direction, and Mr. Quaadman, can you elaborate on disclosure overload and why scaling disclosure may make it a more useful tool to 

retail investors, especially to retail investors in my home State of 

South Carolina? 

Mr. QUAADMAN. Sure. Thank you very much, Senator Scott, and 

that is a very thoughtful question. When you take a look at the 

proxy as it exists today, it currently has exploded to about 100 or 

more pages. So, what we have seen is as the proxy has increased 

tremendously, retail shareholder rates have dropped precipitously, 

to as low as 5 percent, in some cases. So, we have large institutional investors by law are required to vote and retail investors just 

do not vote. So, this means that the corporations themselves are 

not getting the adequate voice of their investors. So, being able to 

scale disclosures, being able to make sure that disclosures are readable and understandable is very important. 

And, what is also interesting, as well, is that Professor Larcker 

from Stanford University also came out with a survey in the last 

few weeks that 55 percent of institutional investors are having the 

same problem. So, we are having a systemic problem, that the 

more that we are disclosing, the less it is understandable. 

Senator SCOTT. I will say that the—and I oftentimes receive disclosures in the mail from a number of the companies that I have 

invested in, and I will tell you that the absolutely—and I am sure 

the paper companies are really happy—my ability to actually go 

through it all is difficult, and I have spent some time in business, 

and I will tell you that it just seems to be remarkable and perhaps 

counterproductive, frankly. 

Mr. Partigan, many small businesses in South Carolina use stock 

to compensate employees. I think this is a good thing. Stock-based 

compensation eases the pressure on companies’ cash and gives the 

employee a small stake in the future of the company, or as I would 

like to think of it, as a bigger motivating factor for the success of 

the company. Some people have argued that raising the Rule 701 

threshold—I think Mr. Spell spoke about the fact that there has 

not been a change since 1988, when it went into place, $5 million. 

It is not necessary because employees can just sign confidentiality 

agreements to prevent the publication of sensitive information 

15 

about the employer. In your estimation, is this a feasible approach 

from a business perspective? 

Mr. PARTIGAN. No, I do not think so. The concern is if you do not 

raise the threshold and the company were to exceed it, they would 

have to give full financial statements to all the employees participating in the program, including former employees that are participants in the program. And, the concern is that that—even if you 

have an employee sign a confidentiality agreement, that information could find its way into the hands of a competitor, which would 

harm a company. And, remember, this is only for privately held 

companies. 

Senator SCOTT. Yes. 

Mr. PARTIGAN. So, that information is not otherwise available, 

and one of the reasons they have remained private is to keep that 

information confidential. 

Senator SCOTT. Thank you. 

Chairman CRAPO. Thank you, Senator Scott. 

Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman, and thanks to all 

of you for being here. 

Mr. Spell, the SBIC was created back in 1958. We wanted to facilitate the flow of capital to small businesses, and I was wondering 

if you could talk a little bit about the success of the SBIC program 

since it was created and how you see it benefiting small businesses. 

Mr. SPELL. Senator Donnelly, I appreciate your question. The 

SBIC plays a critical role in providing capital to small- and medium-sized businesses, businesses that sometimes cannot get that 

capital from more traditional sources. We at Spell Capital have invested in approximately 105 transactions in the last 27 years and 

we have actually, in the last year and a half, have made 12 investments through our SBIC vehicle. We have actually realized 2 of 

those 12 just recently to everybody’s success—our investors and the 

company’s. 

We at Spell Capital have utilized this program to provide needed 

funds to those businesses. We actually have made investments over 

the years in Indiana in a non-SBIC investment. Back in 1999 in 

your State of Indiana, we invested capital in a business doing 

about $18 million in sales, had about 50 employees. In 2007, after 

some nurturing and blood, sweat, and tears along the way, when 

we sold that business to a large corporation, it had almost 600 employees and was doing over half-a-billion dollars in sales. So, we 

are very proud of what we—— 

Senator DONNELLY. So, are you saying it pays to invest in Indiana, sir? 

[Laughter.] 

Mr. SPELL. Actually, I am. 

Senator DONNELLY. Very good. 

Mr. SPELL. Indiana is a great place to do business, sir. 

Senator DONNELLY. The SBIC Advisers Relief Act, as you look at 

this, if it were enacted, what do you see as the most important benefits and what do you see as the risks on this? 

Mr. SPELL. You know, twice the regulation just means twice the 

cost. It does not mean twice the protections. That is the key here. 

16 

And, all we are asking for is to remove the duplicative, redundant 

reporting requirements. 

Senator DONNELLY. OK. Thank you. 

And, Dr. Stanley, in regards to expanding exemptions from derivatives clearing requirements, and you indicated that that is opposed, as you look at this, you know, one of the things that has always struck me is how we want to make sure that for those who 

want to hedge for commercial purposes, that they have the ability 

to do it, that they are not hamstrung, and that those who do it for 

speculative purposes, that they obviously go down a different track 

in terms of regulation and such. 

When you look at this, and you talk about your opposition, could 

you flesh that out a little bit for me. 

Mr. STANLEY. Sure. Excuse me. I am testifying through a cold 

here. 

Senator DONNELLY. Do you want me to ask someone else? 

[Laughter.] 

Mr. STANLEY. No, that is fine. So, as I said, our fundamental concern here is that this is—this legislation would permit financial entities, central treasury units, which are financial entities, potentially owned by a parent company that is a bank or a systemically 

significant financial entity, to access the clearing exemption just on 

the basis of a claim that they were mitigating risk for a commercial 

entity, and we saw in the London Whale case, for example, there 

were claims there made that JPMorgan’s unit in London was hedging and mitigating risk based on commercial loans, but those 

turned out to be flawed, the internal controls that were just not 

there to tie the derivative to a specific risk that was being hedged. 

And, we are concerned, especially with the under-funding of the 

CFTC, that if you reduce the CFTC’s authority in this area and you 

open up the door to permitting financial entities, potentially financial entities owned by parent companies that are banks or other financial entities, to access the clearing exemption, that there are 

dangers there. 

But, as I said, the CFTC has provided administrative accommodation here, and we are quite willing to work with people in this 

to make sure those safeguards are present in this statute. 

Senator DONNELLY. I am just about out of time. I have one more 

question, and anyone who wants to take a swing at it can do so. 

In the IPO markets, and especially as you look toward smaller 

businesses and such, obviously, IPOs slowed down significantly 

during the most economically challenging times we had. As you 

look at it, do you think IPOs are back now, and if not, what do you 

think would be the main reason? But, overall, do you think they 

are playing as prominent a role as they were before? 

Mr. QUAADMAN. Senator Donnelly, I do think we have seen an 

uptick, a significant uptick, in IPOs in the last couple years, and 

I want to say that part of that is that the JOBS Act is opening up 

some of that. We also had some pent-up demand, too, because from 

2007 to 2011, we had a very sluggish IPO market. So, I think that 

is beginning to turn around some. 

What is—and this is what I said in my opening statement, as 

well—we are concerned, however, that with a lot of the other rules, 

that as companies go from that emerging growth company into 

17 

being a full-fledged public company, that as other regulations start 

to attach there, that you have an outflow problem. So, I think what 

we are doing is we are making tremendous progress on the inflow 

issues. We have to see if we can sort of cutoff the tap on the outflow, as well. 

Senator DONNELLY. OK. Thank you very much. Thank you, Mr. 

Chairman. 

Chairman CRAPO. Thank you. 

Most of the questions I was going to ask have been covered by 

the other Senators. I did want to talk briefly with a couple of you 

about mergers and acquisitions issues. As you know, the House of 

Representatives last Congress passed the Small Business Mergers, 

Acquisitions, Sales, and Brokerage Simplification Act by a vote of 

422 to zero. And, Mr. Stanley, you have raised concerns about the 

threshold in that Act and the need for bad actor language. Could 

you clarify. 

Mr. STANLEY. Yes. I mean, I do not think anyone would be opposed to legislation that someone who put an advertisement in a 

paper seeking a buyer for a local restaurant or something like that 

should not be subject to broker-dealer regulation. That is just common sense. But, $250 million in revenues is a very large company, 

and when you combine that with the lack of shell company provisions, you could really get significant private equity business and 

some really complex broker deals falling under this registration exemption. And, we are concerned about the lack of oversight in 

those cases, and also, as you said, the lack of a bad actor provision. 

Chairman CRAPO. Thank you. 

Mr. Quaadman, would you like to comment on that issue. 

Mr. QUAADMAN. Sure, on both issues, Senator. Number one, you 

know, I think the $250 million threshold is actually a reasonable 

threshold. Congress through Dodd-Frank actually exempted companies up to $700 million from SOX 404(b) internal controls. So, there 

has already been a public policy declaration as to what the line is 

there. So, we are actually somewhat well below that line. 

With the bad actor language, in the original version of the bill 

that Congressman Heinzinger introduced in the House, there was 

bad actor language that prohibited anybody, you know, a broker 

who was suspended or under some sort of problem with the SEC. 

My understanding is, is that some of that language was inadvertently deleted by Legislative Counsel. So, I believe it was certainly 

the intent of the drafters of that legislation to have it in there and 

we would agree that it should be in there. 

Chairman CRAPO. All right. Do either of the other two witnesses 

want to jump in on this issue? 

[No response.] 

Chairman CRAPO. Senator Donnelly, have you got another question, or should we wrap it up? 

Senator DONNELLY. I am thinking, we have got great minds in 

front of us and could get great economic advice. I will just throw 

this out real quick. What do you think is—you know, we are talking about for small businesses and such, what do you think is one 

of the most—if you had one thing to tell us, the most important 

thing we can do here to help our small businesses continue and 

have success? If you could each give me your best idea. 

18 

Mr. QUAADMAN. Well, first off, I think it is part of what you are 

doing right now. What I think needs to happen is there needs to 

be pressure put on the SEC that they will periodically go in and 

review their rules and modernize them. The reason why we are 

here today, the reason why Congress passed the JOBS Act 3 years 

ago, is because the SEC does not do that. So, I think it is a matter 

of sort of, you know, kicking the cobwebs out there and getting 

them to do their job, and if there is Congressional pressure that is 

needed to do that, that is what I think should happen. 

Senator DONNELLY. Mr. Spell, you have worked with an awful lot 

of family businesses, midsized small businesses. As you look here, 

what is the most important thing, for those owners, for you? And, 

on my end, it is somewhat selfish, because I see this as an opportunity to create more jobs in our State, more people put to work. 

So, what do you see as the most important thing we can do to continue safety and stability, but at the same time help out these business owners? 

Mr. SPELL. Sure. Thank you, Senator. I would say it is the redundant and duplicative regulations that burden small businesses 

and then reforms in the tax code. You know, between the corporate 

rate and the pass through rate, most small businesses pay the pass 

through rate. And, if we can get some kind of relief and simplification of the code, that would be huge. 

Senator DONNELLY. OK. Dr. Stanley. 

Mr. STANLEY. Well, I would say attention to the financial stability mission of the committee, because small businesses are hit 

first and hit hardest when there is that kind of broader economic 

instability. 

Senator DONNELLY. You know, just on that one point, when the— 

being from a working—I used to represent a Congressional district 

in Indiana, a blue collar district in many respects, and when the 

largest financial corporations in America ran into terrible trouble, 

all of a sudden, there was no floor plan in—there was no inventory 

financing. There was no floor plan financing for our local businesses, and that is how Main Street, basically, cut the back of the 

baseball bat when it swung around. So, I did not mean to interrupt 

you, but go ahead. 

Mr. STANLEY. No, you just reinforced what I was saying. That 

was my point exactly. 

Senator DONNELLY. OK. 

Mr. PARTIGAN. I think the biggest issue is access to capital for 

small business, in particular, where there is a lot of job growth. It 

would be nice if our financial institutions were more willing to 

lend. I think that would be really helpful, if there is anything you 

can do to make even debt financing more available for small businesses to encourage that. Also, this crowdfunding rule proposal 

that the SEC has issued, I think that could be very helpful for 

some new businesses to get started if it is implemented in an effective way. 

Senator DONNELLY. Thank you all very much. 

Chairman CRAPO. Thank you. And, before wrapping up, Senator 

Donnelly’s questions have prompted one, maybe an observation as 

opposed to a question from me. I really appreciated those answers, 

and it seems to me that reform of our tax code and regulatory reVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
19 

form are probably two of the most important things we could get 

done. I know those are big issues, but there are big rewards available, I think, if we can tackle those kinds of issues, and I appreciate that very much. And, the other observation is just, Mr. 

Quaadman, you indicated that one thing would be to have the SEC 

review its rules regularly. Interestingly, we are working on some 

legislation right now, which is not in the mix here because it has 

not been drafted yet, or dropped yet, to expand or at least clarify 

that the EGRPRA process, the Economic Growth—I have to look at 

the words for these acronyms—the Economic Growth and Regulatory Paperwork Reduction Act, which requires certain of our financial regulators to review their rules and regulations, does not 

apply to many, and actually, SEC is not in that group, and I am 

not sure we should put them in that group, but, at least, maybe 

the same kind of requirement should be imposed. Do you have any 

thoughts on that, Mr. Quaadman? 

Mr. QUAADMAN. Yes, and Senator, you can have several hearings 

on this. 

[Laughter.] 

Mr. QUAADMAN. I agree with you. That is critical. And, the SEC 

has some very specific cost-benefit things that they are supposed 

to do when they write rules. However, I do want to just say, we 

are beginning to see with Basel III, with Dodd-Frank, we are beginning to actually see some very specific consequences that are 

starting to hit Main Street businesses, and the banking regulators 

under the Riegle Act are supposed to do an economic analysis 

whenever they write a rule. They have yet to do an economic analysis on any of the Dodd-Frank rulemakings they have done, including Basel III. So, when you start to see now that banks are turning 

away business deposits because those count against their liquidity 

coverage ratio, we could have caught some of those problems, as we 

had suggested, under Riegle Act analysis. So, I think legislation 

like that that puts more teeth into regulatory reform so we can 

stop these unforseen consequences is critical for future economic 

growth. 

Chairman CRAPO. Well, I agree with that, and as a matter of 

fact, as I am sure you are aware, all Dodd-Frank rules and regulations were basically ignored by the EGRPRA process that is underway right now, which, by the way, is something we are addressing 

in the legislation that we are drafting right now. But, the point is 

that we should have economic analysis and we should have regular 

review of the rules and regulations that we are dealing with. I 

would like to thank all of our witnesses for coming here today and 

for spending the time that you have. Both your written testimony 

and your testimony here at the hearing is very carefully reviewed 

and is very helpful to us. In fact, you may even receive some questions after the hearing from some of us and we would appreciate 

you responding to those, if you would. This hearing is adjourned. 

[Whereupon, at 3:32 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

20 

1The Thakor Study can be accessed at: http://www.centerforcapitalmarkets.com/wpcontent/ 

uploads/2013/08/sourcesofcapitallreport1103.pdf. 

PREPARED STATEMENT OF THOMAS QUAADMAN 

VICE PRESIDENT, CENTER FOR CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER

OF COMMERCE

MARCH 24, 2015 

Chairman Crapo, Ranking Member Warner, and Members of the Securities, Insurance, and Investments Subcommittee. My name is Tom Quaadman, vice president of the Center for Capital Markets Competitiveness (CCMC) at the U.S. Chamber of Commerce (Chamber). The Chamber is the world’s largest business federation, representing the interests of more than three million businesses and organizations of every size, sector, and region. I appreciate the opportunity to testify before 

the Subcommittee today on behalf of the businesses that the Chamber represents. 

I. Need for Diverse Forms of Capital in a Free Enterprise System 

In 2011, the Chamber released a study by Professor Anjan Thakor of Washington 

University entitled, Sources of Capital and Economic Growth: Interconnected and 

Diverse Markets Driving U.S. Competitiveness (Thakor Study). 1 The Thakor Study 

found that a key factor for small business success and resulting growth and job creation is their ability to access capital. The Thakor Study had five key conclusions: 

1. A robust, efficient, and diverse financial system facilitates economic growth; 

2. In terms of their financing choices individual entrepreneurs are largely limited 

to debt financing for raising capital; 

3. As businesses grow they can access both debt and equity financing and the mix 

of these two, called the ‘‘capital structure’’ decision, is an important choice 

every business makes; 

4. A rich diversity of financing sources is provided by the U.S. financial system; 

and 

5. The U.S. financial system is highly connected and what happens to one financing source causes spillover effects in other parts of the system. So for example, 

if excessive regulation restricts access to, or the operation of, the IPO and secondary markets for publicly traded companies, the resulting loss of liquidity 

will act as a disincentive to private equity and venture capital activity as well. 

Therefore, the more efficient and diverse capital markets are, the more new companies are launched, the larger the number of publicly listed companies, the better 

overall management of risk, greater availability of consumer credit and more people 

that have well-paying jobs. In other words a diverse, well-developed and efficient 

system of capital formation is necessary for robust economic growth and increased 

employment. 

Over the past several years we have seen our capital markets lose efficiency with 

a resulting decline in the number of businesses becoming public companies, as well 

as a sharp drop in the number of public companies overall. Many reasons exist for 

these outcomes—the financial crisis, stale regulatory systems that fail to keep up 

with the needs of a 21st century economy and legislative and regulatory initiatives 

that are changing fundamental practices that have been in place for decades. 

What has not changed is the need for new businesses and growing businesses to 

acquire capital. However, if those capital needs are not met, the next big idea or 

next successful business will simply wither on the vine and blow away with the 

wind. 

We had 14 straight years of a decline in the number of public companies in the 

United States. Last year was the first year since the tech bubble burst that a resurgent IPO market allowed the number of public companies in the United States to 

grow. The Jumpstart Our Business Startups Act (JOBS Act) was an important factor in that turn around. But more needs to be done as our economy is not hitting 

its long-term growth potential. The Chamber welcomes this hearing and supports 

the bipartisan effort to take the next step and remove some of the roadblocks that 

are inhibiting growth by America’s Main Street businesses. 

II. Legislative Proposals 

1. Regulation A Bill H.R. 701 Setting Rulemaking Deadline 

The modernization of Regulation A (Reg. A) has the potential to be a real game 

changer for businesses that wish to seek public financing but may not be prepared 

to bear the full costs of an initial public offering. The current $5 million cap for Reg. 

21 

2See SEC Release Nos. 33-9497; 34-71120; 3902493; File No. S7-11-13 found at: http:// 

www.sec.gov/rules/proposed/2013/33-9497.pdf. 3GAO report can be found at: http://www.gao.gov/assets/600/592113.pdf. 

A offerings—originally set in 1992—has proven to be too low to elicit serious consideration from companies. In fact, as the Securities and Exchange Commission (SEC) 

pointed out in its proposal to implement Title IV of the JOBS Act, from 2009 

through 2012, there were only 19 qualified Reg. A offerings, for a total offering 

amount of $73 million. 2

Moreover, the complexity and inconsistencies between various State registration 

requirements has proven to be a major impediment to Reg. A offerings. This was 

one of the central findings from a Government Accountability Office report in 2012 

and has been a consistent message coming from small businesses looking to gain 

access to public markets. 3

The Chamber understands that a coalition of State securities regulators has proposed a multistate ‘‘coordinated review program’’ intended to streamline State registration under Reg. A by completing registration reviews within 21 days. While this 

initiative is commendable, we are concerned that reliance upon an untested and 

unproven review program will only add complexities and further delay any kind of 

widespread utilization of Reg. A. As a general matter, we have also found through 

experience that, despite the best of intentions, achieving the concurrence of multiple 

regulators within 21 days is just not a reasonable expectation. The SEC’s Reg. A 

proposal also included a number of important disclosure and investor protection provisions which makes registration in multiple States unnecessary and unduly burdensome. 

Indeed, as Reg. A offerings open the pathway for businesses to access capital markets that are national in nature we believe that deference should be given to the 

SEC. However, the SEC has failed to act and we think that it is important for Congress to set a policy goal and prevent a needed modernization from dying a bureaucratic death. 

We believe that the SEC should act swiftly to finalize its Reg A rulemaking, and 

should maintain its proposed definition of a ‘‘qualified purchaser’’ for Tier 2 offerings 

under the proposal, which would effectively preempt State registration requirements 

while maintaining the States’ ability to enforce against wrongdoing. 

H.R. 701 passed the House of Representatives during the 113th Congress by a 

vote of 416–6. The Chamber strongly supports the 114th Congress taking up a similar bipartisan measure. 

2. Swaps Data Repository and Clearinghouse Indemnification Act (H.R. 742) 

The Chamber is also supportive of language that would help to further harmonize 

swaps data and reporting rules across jurisdictions by removing an unworkable requirement from the Commodity Exchange Act (CEA). The provision requires foreign 

regulators that seek to obtain access to U.S. swap data repositories to agree to indemnify swap data repositories, the Commodity Futures Trading Commission 

(CFTC) and the SEC for expenses that arise from litigation relating to the information from the U.S. swap data repositories. 

This creates a significant barrier to global data harmonization, as foreign jurisdictions are unwilling to agree to the indemnification or have laws or regulations that 

would prevent them from agreeing to such an indemnification. Accordingly, this legislative correction is crucial for global regulatory harmonization and information 

sharing and could also reduce complexity and costs for U.S. companies that operate 

abroad, while still requiring that regulators meet specified confidentiality requirements for such data. 

We support the bipartisan language from H.R. 742, the Swap Data Repository and 

Clearinghouse Indemnification Correction act of 2013, which the House of Representatives passed in the 113th Congress by a vote of 420–2. 

3. Holding Company Registration Threshold Equalization Act (S. 972/H.R. 801) 

This legislation fixes what could best be described as an oversight regarding Title 

VI of the JOBS Act. Title VI included a provision modernize the 12(g) shareholder 

thresholds, which require companies to go public once they hit a certain number of 

shareholders. For banks, the new registration requirement is set at 2,000 shareholders, while they would be allow to ‘‘deregister’’ if they cross below 1,200 shareholders. 

Regrettably, despite the clear intent of Congress, the SEC did not interpret the 

law so as to allow savings and loan holding companies to take advantage of the new 

thresholds. Savings and loans perform nearly identical functions as do a bank and, 

since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection 

22 

Act (Dodd-Frank), are overseen by the same regulators. While there may have been 

historical reasons for a lending institution to structure itself as a savings and loan 

as opposed to a bank, today there is essentially no difference between the operations 

or regulatory oversight between the two. 

In December 2014, the SEC did propose extending the new 12(g) thresholds to 

savings and loans, however a rule in this area is not final and savings and loans 

do not have the same statutory protection under this provision that banks do. H.R. 

801 passed the House of Representatives during the 113th Congress by a vote of 

417–4. The Chamber fully supports a permanent fix to this oversight from Congress 

that will ensure Congressional intent is carried out. 

4. Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act (S. 

1923/H.R. 2274) 

This bill would allow mergers and acquisitions (M&A) brokers to electronically 

register with the SEC and not be subject to the full requirements for registration 

imposed upon a full-service broker, provided that such M&A brokers limit their activities to transactions involving an ‘‘eligible privately held company.’’ 

This legislation would simplify registration requirements for such M&A brokers, 

but also includes a number of important safeguards that provide for investor protection and orderly markets. For example, the bill would require disclosure of relevant 

information to clients and to the owner of an eligible privately held company who 

is offered a stock for stock transfer, and would not exempt M&A brokers from the 

existing prohibitions designed to block securities law violators from entering the 

business. 

H.R. 2274 passed the House of Representatives during the 113th Congress by a 

vote of 422–0. The Chamber strongly supports the 114th Congress acting on this 

bipartisan measure. 

5. Improving Access to Capital for Emerging Growth Companies Act (H.R. 3623) 

This legislation would build upon the success of the JOBS Act by providing 

emerging growth companies (EGCs) with expanded opportunities to raise capital. 

The bill would facilitate follow-on offerings made by EGCs and also allow business 

to maintain their EGC status for a period of time following their initial registration 

with the SEC. It would also reduce the number of days that a business must wait 

until after its registration to commence a ‘‘road show,’’ which would increase the 

likelihood of a successful IPO launch. 

The Chamber supports each of these innovative provisions and appreciates the 

Committee’s interest in exploring more ways for EGCs to access the capital markets. 

As multiple studies have shown, job creation expands significantly once a company 

goes public. While the number of companies now going public is still below the level 

seen in the mid-1990s, last year saw the largest number of IPOs since 2000. This 

is a positive trend that was driven in no small part by the JOBS Act, and we urge 

Congress to continue focusing on ways to make the public markets more attractive 

for growing companies. 

6. The SBIC Advisors Relief Act (S. 2765/H.R. 4200) 

This legislation would correct an unintended yet harmful consequence of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 

that triggers registration under the Investment Advisers Act of 1940 (Advisers Act) 

for advisers to small business investment companies (SBICs) and venture capital 

funds. Congress has explicitly provided an exemption under the Advisers Act for individuals for advice either an SBIC or a venture capital fund. However, advisers 

who happen to advise both an SBIC and venture capital fund are currently being 

required to register under the Advisers Act. 

Congress exempted SBIC and venture capital fund advisers for good reason, and 

there is simply no valid argument for requiring someone to register simply because 

they advise both. SBICs and venture capital funds are a vital source of capital in 

our economy, and unnecessary regulatory requirements inhibit their ability to invest 

in American businesses. This bill would codify Congressional intent and allow 

SBICs and venture capital funds to continue to play their important role in our 

economy. 

The Chamber also supports a provision this legislation that would avoid unnecessary regulatory duplication at the State level, as well as a provision that would exclude SBIC assets from the calculation to determine whether someone who advises 

a private equity fund should have to register with the SEC. These are common 

sense measures will address issues that can be harmful to small businesses, which 

oftentimes do not have vast resources to deal with legal complexities. 

23 

4 Ernst & Young report can be found at: http://www.ey.com/Publication/vwLUAssets/ 

ToThePointlBB2367lDisclosureOverloadl21June2012/$FILE/ 

TothePointlBB2367lDisclosureOverloadl21June2012.pdf. 5The investors surveyed had a total of $17 trillion under management. The study can be 

found at: http://www.gsb.stanford.edu/faculty-research/publications/2015-investor-surveydeconstructing-proxy-statements-what-matters. 6The study on Corporate Disclosure Effectiveness can be found at: http:// 

www.centerforcapitalmarkets.com/wpcontent/uploads/2014/07/ 

CCMClDisclosurelReformlFinall7-28-20141.pdf. 

7. The Disclosure Modernization and Simplification Act (H.R. 4569) 

In the eight decades since the securities laws were enacted, public company disclosure requirements have increasingly expanded and more complex, as evidenced 

by the voluminous annual and quarterly reports filed today. A 2012 report by Ernst 

& Young estimated that the average number of pages in annual reports devoted to 

footnotes and Management’s Discussion and Analysis (MD&A) has quadrupled over 

the last 20 years. Should this trend continue, companies would be devoting roughly 

500 pages to MD&A by the year 2032. 4

This expansion and increased complexity of disclosure has contributed to the phenomenon of ‘‘disclosure overload,’’ whereby investors are so inundated with information it becomes difficult for them to determine the most salient factors they need 

to make informed voting and investment decisions. Retail investors are particularly 

vulnerable, as they typically don’t have an army of analysts or lawyers to pore 

through SEC filings of the companies they invest in. In fact, it is the number one 

reason why retail shareholder participation has dropped to levels as low as 5 percent. Effectively, because of this ‘‘overload’’ retail shareholders have become 

disenfranchised. 

And retail shareholders aren’t alone. A recent study by Professor David Larcker 

found that 55 percent of institutional investors surveyed 5 felt the proxy was too 

long and 48 percent believe the proxy is too difficult to read and understand. 

The Chamber has welcomed the efforts by SEC Chair White and SEC Corporation 

Finance Director Keith Higgins to start a project to address these long outstanding 

issues. Last year the Chamber released a report proposing several disclosures that 

are obsolete that should be removed or modified. 6 However, we are concerned that 

the SEC project is being delayed by inertia. 

The Disclosure Modernization and Simplification Act would address this issue by 

requiring the SEC to eliminate any outdated, duplicative, or unnecessary and to further scale disclosure requirements for EGCs and other small issuers. We fully support this approach, as it would focus the SEC on some of the more noncontroversial 

items that could be addressed and ensure that our disclosure systems are modernized. 

8. Encouraging Employee Ownership Act (S. 576) 

In 1988, the SEC adopted Rule 701, which gives private companies the opportunity to sell securities to employees under certain compensatory benefit or compensation plans without having to incur the costs of SEC registration. This exemption allows private businesses to offer compensation plans that help incentivize and 

retain personnel, while employees are given an opportunity to participate in the success of their employer via an ownership stake. The 1988 rule adopted a threshold level of $5 million for Rule 701 securities sales, 

above which mandated disclosures are required that treat employee sales more like 

public offerings. Such disclosure of confidential financial information to the public 

could have deleterious consequences and raise the costs of such offerings for private 

companies. Moreover, the current threshold—now nearly three decades old—does 

not account for the JOBS Act’s 12(g) exemption. Modernizing the rule would therefore help the 12(g) provisions included in the JOBS Act to reach their full potential. 

Importantly, S. 576 also includes a provision that would index Rule 701 for inflation once the new threshold is enacted. The Chamber strongly supports this provision as it would help Rule 701 keep continuous pace with the growth and size of 

the American economy, and mitigate the chances that the exemption again becomes 

outdated in the future. 

Modernizing Rule 701 will produce benefits for American private businesses as 

well as workers who will have increased opportunity to build wealth by investing 

in the companies that they work for. 

9. Treatment of Affiliates of Nonfinancial Firms That Use a Central Treasury Unit 

The Chamber supports legislation that would prevent swaps executed by a centralized treasury unit (CTU) of a commercial end-user from being subject to clearing 

requirements for market-facing swaps. Specifically, we support the language of H.R. 

24 

1317, a Moore-Stivers-Gibson-Fudge bill whose predecessor passed the House of 

Representatives by voice vote in the 113th Congress with no member speaking 

against or expressing opposition to the bill. Without this critical bipartisan language, end-users and consumers would face increased costs and companies may be 

forced to abandon proven and efficient methods for managing their risks through 

CTUs. This language would not assist financial companies and would not apply to 

speculative trades. 

Many nonfinancial end-users utilize CTUs as a risk-reducing, best practice to centralize and net the hedging needs of their nonfinancial affiliates. Section 723 of the 

Dodd-Frank Act makes the end-user clearing exception available only to those separate CTUs that ‘‘act on behalf of the [affiliate] and as an agent.’’ However, most enduser CTUs act in a ‘‘principal’’ capacity in order to net exposures and consolidate 

hedging expertise and would not be eligible for the relief provided in Section 723. 

While the Commodity Futures Trading Commission staff has issued no-action relief allowing some end-user CTUs to use the clearing exemption, the relief does not 

correct the problematic language in the Dodd-Frank Act. Staff no-action relief does 

not provide the certainty that corporate treasurers need to plan, as it can be removed or modified by the staff at any time. Further, the existing language in Section 723, which is referenced in regulatory proposals on margin for uncleared swaps, 

puts corporate boards in the difficult position of approving the decision not to clear 

swaps despite the inapplicability of the statutory exemption. 

III. Need for Action 

It should be remembered these bills are necessary because the SEC has been slow 

or unwilling to modernize these regulations in the past. While the SEC has a renewed focus, legislation is still needed to keep the regulators feet to the fire and 

prevent inertia from asserting itself. Regulatory inertia would mean that the problems will fester and American competiveness will fall even further behind. 

If these bills are not passed and if the JOBS Act is not fully implemented economic growth and job creation will continue to underperform and stagnate for years 

to come. The problem that has existed before, during and after the financial crisis 

is that our securities regulations reflect a pre-World War II economy at worst or 

the stagflation economy of the mid-1970s at best. 

In other words our current regulatory apparatus for capital formation is at least 

two to four generations removed from the realities of today’s economy and wholly 

unprepared for the competitive demands for the next decade. 

The bills today are geared towards increasing IPOs and early stage financing, but 

more should also be done to address the precipitous and relentless decline of the 

number of public companies in the United States. The SEC must undertake a review and action to address policies and regulations that are obsolete in a 21st century economy. As we have seen with the JOBS Act and with the proposed legislation 

that is the subject of today’s hearing, Congress sometimes has to direct the SEC to 

take action that it may not want to do, but that it should do. 

IV. Conclusion 

The Chamber views these bills as important blocks building on the foundation of 

the JOBS Act. This package of legislation will help our economy reach its full 

growth potential allowing businesses to grow and create jobs. But these bills can 

do more than that, they can also push the regulators to be more forward leaning 

and proactive in keeping up with the dynamics needed to create and sustained an 

atmosphere conducive for growth. This formula will allow entrepreneurs to take the 

reasonable risks to start new businesses forged on the anvil of innovation. This will 

help keep current what has been the formula for success allowing the United States 

economy to grow at unprecedented levels throughout its history. More importantly, 

these bills, along with the full implementation of the JOBS Act are necessary for 

American businesses to succeed in an ever increasing competitive global economy. 

I am happy to take any questions that you may have at this time. 

PREPARED STATEMENT OF WILLIAM H. SPELL 

PRESIDENT, SPELL CAPITAL PARTNERS, ON BEHALF OF THE SMALL BUSINESS

INVESTOR ALLIANCE

MARCH 24, 2015 

Good afternoon Chairman Crapo, Ranking Member Warner, and Members of the 

Senate Banking Committee Subcommittee on Securities, Insurance, and Investment. 

My name is William Spell and I am President of Spell Capital Partners, a private 

equity firm in Minneapolis, Minnesota. Our firm manages three funds, two of which 

25 

are small funds that engage in equity investing and one of which is a small business 

investment company (SBIC) that engages in mezzanine debt finance. I am here 

today representing the Small Business Investor Alliance (SBIA), which is the trade 

association of lower middle market private equity funds, SBICs, and business development companies (BDCs) and their institutional investors. SBIA members provide 

vital capital to small- and medium-sized businesses across the country. I am also 

here to express my support for the SBIC Advisers Relief Act. 

Before I delve into the details of why I am here testifying today, it might make 

sense to share a little of my background, and the background of Spell Capital Partners. I am a Minnesota native, attended college at the University of Minnesota, and 

went on to receive an MBA from my alma mater a few years later. I continued my 

relationship with the University of Minnesota years later, serving as an adjunct lecturer at the Carlson School of Management. I began my career at a regional investment bank in Minnesota and for over 7 years engaged in corporate finance investment banking work. In 1988, I formed my investment firm with the goal of making 

control equity investments in small industrial manufacturing businesses in the Midwest. Since that time, Spell Capital has stayed true to its roots, continuing to provide financing to small, entrepreneurial companies while working with those companies to grow employment, revenues, and provide a return to our investors. We have 

had a strong record of success in that endeavor, and I estimate in the investments 

we have made, we have increased employment significantly during our tenure. 

After 25 years of managing smaller funds that invest in small manufacturing 

companies, we decided to pursue an SBIC license, which was approved by the Small 

Business Administration (SBA) in March 2013. Today, we advise total ‘‘Assets 

Under Management’’ (AUM) of approximately $171 million, with approximately $85 

million of those assets in our SBIC fund. We currently employ a staff of 16 people 

in Minneapolis, Minnesota, to run our operations. Our SBIC fund has been examined twice by the SBA since we were licensed in 2013. 

At Spell Capital, a large percentage of our investments are directly made in conjunction with entrepreneurs and business owners, often with no other equity funds 

involved in the transaction. This allows us to work closely with the small businesses 

we invest in, providing management expertise to help them professionalize and grow 

their businesses, hiring employees and supporting their communities along the way. 

The type of financing we typically provide is used by these small companies for 

growth capital—hiring, building new facilities—and to accomplish ownership transitions—allowing the operators of these businesses to continue their success by passing them along to the next generation of owners. Spell Capital is focused on helping 

small businesses grow, and providing them the capital and management help with 

which to accomplish that goal. Unfortunately, some of the regulatory burdens we 

face, notably the cost and burden of registration with the Securities and Exchange 

Commission (SEC), which duplicates many of the costs and time burdens of complying with the SBA regulations in the SBIC program, have diminished both the 

time and funds we can spend engaged in providing capital and management expertise to small businesses. 

As a result of the burdens on Spell Capital’s mission of small business investment, a mission in place since 1988, I am here to strongly support a bipartisan bill 

called the SBIC Advisers Relief Act. An identical bipartisan bill, H.R. 432, was introduced in the House on January 21, 2015, by Congressman Blaine Luetkemeyer 

(R-MO). In the 113th Congress, this bill passed the House Financial Services Committee 56–0, and was approved by the House on a voice vote. Senators Mark Kirk 

(R-IL) and Joe Manchin (D-WV) introduced the Senate companion (S. 2765) to the 

bill in the 113th Congress. My testimony here today will walk you through the elements of this legislation, and why the solutions and clarifications it makes to the 

Dodd-Frank Act are necessary to ensure that smaller funds will be able to continue 

focusing on small business investing, rather than filling out regulatory paperwork. 

I would like to thank the Subcommittee for examining this bill today and I especially want to thank the sponsors of the legislation. 

I. What Is an SBIC? 

Before discussing the benefits of the SBIC Advisers Relief Act, it makes sense to 

provide a quick overview of what exactly is an SBIC. SBICs are privately owned, 

managed, and operated equity investment funds that make long-term investments 

in U.S. small businesses and are licensed by the SBA. SBICs are highly regulated 

private funds that invest exclusively in domestic small businesses with at least 25 

percent of their investments in even smaller enterprises. The program was created 

in 1958 to help overcome the scale challenges associated with small business investment, and in so doing spearheaded creation of the thriving venture capital industry 

we see in the country today. Given their clear public benefit, SBIC funds are the 

26 

only explicitly permitted investment under the Volcker Rule that was set out in 

statute. 

Currently, there are over 294 licensed SBICs across the country with over $22 bil- lion in total assets. In Fiscal Year 2014, SBICs invested more than $5.2 billion in 

capital in domestic small businesses, adding to the $63 billion in total investments 

in small businesses provided since 1958. Well-known companies such as Costco, 

Apple, Federal Express, Outback Steakhouse, and Callaway Golf received SBIC financing when they began, growing into successful, profitable companies and employing thousands of Americans. SBICs also are based in many areas where traditional 

private equity is not, with funds based in Tennessee, Louisiana, Pennsylvania, Arkansas, Illinois, Nebraska, Kansas, Virginia, Rhode Island, New York, New Jersey, 

Massachusetts, and Indiana, among others. The full list of SBICs in States represented by the Committee is available in an addendum to my testimony. 

II. Dodd Frank Prompted a Significant Change in How SBIC Advisers and 

Private Fund Advisers Were Regulated 

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank), passed in 2010, the landscape for investment advisers changed dramatically 

for private equity funds. In writing Dodd-Frank there was discussion, and amendments were adopted, with the express intent of avoiding duplicative regulation and 

reporting by SBICs. Unfortunately, as the bill evolved there were drafting oversights that inadvertently undercut the premise of not redundantly regulating SBICs 

and preventing the resulting drain on the resources of small business investors. The 

changes required many private equity funds to register with the SEC as investment 

advisers, and smaller private equity advisers to provide limited reporting to the 

SEC or register with their State securities regulator. Registration for these smaller 

funds is not just filling out a few forms; it is a new way of life. SEC registration 

is expensive and, in many cases, the investment adviser rules are not very applicable to private equity funds dealing in nonpublic securities, which is common with 

small funds. 

The initial cost to register with the Securities and Exchange Commission (SEC) 

is often in excess of $100,000. Annual costs to comply with SEC investment adviser 

rules are often $50,000 or more per year. SBIA supports exempting small business 

investors from the Investment Advisers Act. The $150 million threshold that triggers SEC registration is too low and, at a minimum, should be raised. It is illustrative that one of the authors of Dodd-Frank, former Congressman Barney Frank, 

27 

1Deborah Cohen, ‘‘Frank Pushes for Change to PE Registration Rule in Dodd-Frank-Reuters’’, 

Middle Market Growth, January 22, 2015, available at: http://www.middlemarketgrowth.org/ 

frank-pushes-change-pe-registration-rule-dodd-frank-reuters/. 

recently stated that Congress should consider amending the $150 million threshold 

with which private equity firms must register with the SEC; while further highlighting that ‘‘in the crisis situation, we erred on the side of maybe being too inclusive.’’ 1

Dodd-Frank created a new ‘‘Assets Under Management’’ or AUM test to determine 

the regulatory burden on investment advisers to private funds. Other types of fund 

advisers are specifically exempt from registration, such as venture funds (VC) and 

SBICs, but only if they ‘‘solely’’ advise those funds. The following chart explains the 

requirements: 

The chart above explains the confusing and inconsistent framework that is currently in place due to the changes to the investment adviser regulation under DoddFrank. The SBIC Advisers Relief Act aims to clarify these inconsistencies and proVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00031 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 32415602.eps
28 

2Most private equity limited partnership agreements (LPAs) require costs associated with 

SEC registration and ongoing regulatory compliance to be charged as a management expense, 

being paid by the management fee, rather than a fund cost. Management fees are typically 2 

percent of the total AUM of the funds being advised, and cover the costs of operating the investment adviser, paying staff and for office space, deal sourcing and due diligence, as well as other 

expenses. 

vide relief for smaller funds which are disproportionately impacted by duplicative 

and costly regulation. This bill is vital for a number of particular reasons. 

Small business investors commonly have very few employees, sometimes as few 

as two. Small business investment funds, such as Spell Capital, generally do not 

have legal departments, compliance teams, or extra employees to spare adhering to 

a complicated regulatory regime that is not designed for its type of investing. Adding additional overhead expenses for regulatory compliance teams and services damages the ability of small business investment funds to operate profitably and prevents them from dedicating all their time, energy, and capital to helping small businesses grow. 

The cost of registration and additional compliance functions is high for smaller 

funds because their management fees 2 (which are a function of assets under management) are low when compared to much larger funds; however, smaller funds face 

many of the same compliance and reporting levels as larger funds. Absent the infrastructure of larger funds, smaller funds often have to pay outside counsel to help 

with initial and ongoing compliance costs. 

Due to the relatively high compliance expense, managers of smaller funds are left 

with two choices—raise far more capital for their next fund to cover the fees for the 

added compliance costs or exit the business. Larger funds invest in larger companies, generally not small businesses. Neither option delivers a positive result for 

continuing the flow of capital to small businesses. For every $1 that we spend on 

compliance issues, that is $1 less that we have to further our mission to deploy capital and to help grow the economy. Therefore, all the time and money that is tied 

up by regulatory compliance will hinder economic growth and job creation. 

The SBIC Advisers Relief Act seeks to eliminate duplicative regulation that imposes significant burdens and costs on small business investment funds by clarifying 

and eliminating inconsistencies in the regulatory framework in the Dodd-Frank Act. 

These modest changes are technical corrections that will ensure that small business 

investment will not be penalized and pushed out of the marketplace, and America’s 

small businesses will receive the capital they need. 

III. The SBIC Advisers Relief Act (H.R. 432) 

The SBIC Advisers Relief Act is a commonsense, bipartisan, and effective clarification of the investment adviser regulation that will enhance the ability of small 

business investors to concentrate on making investments, rather than filling out 

forms. It concentrates on three targeted changes to current law. First, the legislation prevents venture funds from losing their exemption from SEC registration 

when entering the SBIC program. Second, the legislation helps advisers to both private equity funds and SBICs by removing the SBIC capital, which is already regulated by the SBA, from the AUM calculation for SEC registration. Third, the legislation prevents the duplicative registration of SBICs by Federal and State securities 

regulators and returns SBICs to their original sole regulator—SBA. 

1. Eliminating the Barrier for Venture Funds To Utilize the SBIC Program 

The new ‘‘exempt reporting adviser’’ (ERA) regime for venture funds in DoddFrank failed to provide sufficient guidance to the SEC on how to treat dual advisers 

of both venture and SBIC funds. The Dodd-Frank Act states that the SEC cannot 

register advisers that ‘‘solely’’ advise SBIC funds. The SEC then applied the term 

‘‘solely’’ to mean that if an adviser oversaw a single penny outside of SBIC fund assets, then duplicative regulation was triggered. This was not the Congressional intent of Dodd-Frank and serves no practical investor protection or public benefit. As 

a result, while advisers to venture funds may remain ERA advisers if they only advise a venture fund, if they also enter the SBIC program with another venture fund, 

they are now required to register—a much more expensive proposition. As a result, 

venture funds are effectively penalized with additional costs if they choose to add 

an investment vehicle for domestic small business investments. This legislation 

would allow venture fund advisers to remain ERAs if they choose also to advise an 

SBIC fund. 

This provision is particularly important when it comes to encouraging VC fund 

advisers to enter the SBIC program. As part of the Obama administration’s ‘‘StartUp America Initiative’’, in 2012, the SBA implemented a new Early-Stage SBIC program to promote innovation and job creation by encouraging private sector investVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00032 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
29 

ment in job-creating early stage small businesses. The purpose of the program is 

to target a gap in investment for early-stage companies outside the traditional venture areas of California, Massachusetts, and New York. If a VC fund adviser chooses 

to utilize the Early-Stage SBIC program, under current law, they will lose their exemption from SEC registration and be subject to the cost and burden of SEC registration. Congressman Mick Mulvaney (R-SC) put it best at a hearing on the legislation last Congress when he described the issue, explaining that ‘‘If A, you don’t 

have to register with the SEC, if B, you don’t have to register with the SEC, but 

if A+B, you do have to register with the SEC.’’ Clearly, such an approach to securities regulation doesn’t make much sense, nor is it protecting many investors. 

a. The Regulatory Contradiction Faced by Noro-Moseley Partners 

One of SBIA’s members, Noro-Moseley Partners (Noro-Moseley), is a venture fund 

investment adviser founded in 1983, and based in Atlanta, Georgia. The fund has 

seven employees. Noro-Moseley is now investing in its 7th fund and focuses its investments on venture and early growth stage healthcare and IT companies across 

the United States. Noro-Moseley currently has four funds still operating, one small 

VC fund in wind down, one VC fund with about $150 million in AUM, one EarlyStage SBIC, and a parallel VC fund with $110 million in AUM split between the 

two parallel funds, for a final tally of $260 million AUM. Noro-Moseley received its 

Early-Stage SBIC license in 2013, as one of the first VC funds entering this new 

SBIC program. When entering the program, they were advised by their attorneys 

that the SEC was likely to provide relief from SEC registration due to this very 

issue. Unfortunately, the SEC declined to provide such relief, after initial positive 

conversations. As a result, Noro-Moseley, because they entered the SBIC program 

and lost their VC ‘‘solely’’ exemption, was forced to spend over $100,000 in initial 

costs to register with the SEC, plus $25,000-to-$50,000 for annual, ongoing compliance costs. These are costs and time that could be better spent seeking out VC investments and getting capital to small businesses. Also, Noro-Moseley, themselves, 

have expressed doubt about whether they would have entered the SBIC program 

had they known they would be required to register with the SEC and incur the related compliance costs and burdens. 

2. Exempting SBIC Capital From the SEC AUM Registration Threshold 

Advisers that advise both SBIC funds and private funds, including Spell Capital, 

have to include the AUM of the SBIC fund in addition to the private fund they manage in calculating the threshold for SEC registration. This legislation would exempt 

already federally regulated SBIC capital from being included in the triggering calculation for SEC registration for those advisers jointly advising both SBIC and other 

small private funds, and prevent these advisers from being penalized for raising a 

large SBIC fund specifically formed to invest in domestic small businesses. 

a. The Impact on Spell Capital Partners 

My firm, Spell Capital Partners, would be directly helped by this provision in the 

SBIC Advisers Relief Act. Our focus, as I stated previously, is on staying small and 

investing in small, entrepreneurial companies primarily in the manufacturing space. 

We currently employ a staff of 16 people in Minneapolis, Minnesota. Our SBIC fund 

has been examined twice by the SBA since we were licensed in March 2013. Our 

funds have created thousands of jobs and invested in many companies since we 

formed over 25 years ago. Currently, we have 21 companies in our portfolio that we 

have invested debt, equity, or, in some cases, both. Some of these include Norshield 

Security Products, a maker of force protection doors, windows, guard booth products 

(used in U.S. Embassy sites) based in Montgomery, Alabama; Tech Cast, an industrial forging and casting company based in Myerstown, Pennsylvania; Animal Adventures, a maker of stuffed animal toys based in Minnesota, New York, and Washington State; American Card Services, a specialty printer of plastic gift cards with 

offices in Missouri and Illinois; and Las Vegas Color Graphics, which engages in 

commercial printing and data management based in Las Vegas, Nevada. 

Spell advises three funds: Fund III, a private fund with about $39 million AUM; 

Fund IV with $46 million AUM; and an SBIC with $86.6 million AUM. Under the 

current SEC AUM calculation, we are required to register with the Commission as 

we have over $171 million AUM with the SBIC capital included. All of our investors 

are accredited investors and include high net worth individuals, banks, insurance 

companies, family offices, and foundations. We received our SBIC license in March 

2013, and have had an onsite examination by the SBA twice in that time period 

with no concerns raised. We have never had an SEC examination; despite, until recently, being an ERA. We will soon be filing a Form ADV to register with the Commission and expect our initial registration costs, calculated in both time and finanVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00033 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
30 

cial costs, to be $75,000-to-$100,000, with annual estimated ongoing compliance 

costs to be $50,000-to-$80,000. 

These increased compliance costs and time wasted take away the capital we could 

be using to source small business deals and impose an unnecessary duplicative regulatory burden on Spell Capital. The SBIC capital we are advising is thoroughly examined and regulated by the SBA, while the private capital in our non-SBIC funds 

will still continue to be looked at by the applicable SEC or State regulator. The key 

here is that with this bill, all of the capital we oversee and our investment adviser 

will continue to be regulated in full by one sole regulator, rather than the enhanced 

oversight of SEC regulation. This legislation will save us immense compliance- and 

time-based costs that will allow our team to focus on what we do best—investing 

in innovative small companies in the manufacturing center, which often do not have 

much access to capital. 

b. The Impact on SBIC Advisers With Either Private or SBIC Funds in Wind 

Down 

In addition to the impact on Spell Capital and other funds like it, this legislation 

will resolve issues that other SBIA funds, including Merion Investment Partners in 

Radnor, Pennsylvania, and Patriot Capital in Baltimore, Maryland, have faced. 

One of these issues is that, oftentimes, advisers to an SBIC will have a vestigial 

private fund that is winding down. This can result in having to take on the new 

regulatory compliance burdens as the fund is closing out and little to no money is 

coming in. If the SBIC fund has $150 million of capital in it and even one dollar 

in a fund that has run its course and is closing out, then full SEC registration is 

triggered. This is despite the fact that the bulk of the capital is in the SBIC and 

subject to SBA oversight. SEC registration is not adding investor protections in 

cases like these. 

Another issue that will arise is when an adviser just to SBICs is winding down 

one of their SBIC funds. Once the SBIC has paid off their SBA debentures and is 

winding down, the license is generally terminated. There is still a small remaining 

pool of private capital it is returning to investors, but it is harvesting investments 

and not making new ones in that fund. This investment adviser, if they have a larger SBIC that they are also advising that is over $150 million AUM, then will be 

forced to register because without a current SBIC license the fund that is almost 

closed is classified as a private fund, despite being in wind down and returning the 

rest of its capital to its private investors. Often this wind down can take 1 to 2 

years. These issues would both be resolved through the SBIC Advisers Relief Act 

by eliminating the SBIC capital from the AUM calculation and eliminating the registration burden for these funds, while preserving oversight as an ERA or State-registered adviser during that wind down period. Registration is not adding investor 

protections in cases like these. 

3. Duplicative Registration of SBICs 

The authors of Dodd-Frank specifically prevented the SEC from registering advisers that solely advise SBIC funds, recognizing the need for only one regulator and 

identifying the lower pain thresholds of small business investors. However, this section of Dodd-Frank inadvertently opened up SBIC funds, regulated by the SBA since 

1958, to duplicative regulation because it was silent on the concept of State regulation of federally licensed SBIC funds. Duplicative regulation at the Federal level 

was considered and rejected. Unfortunately, it was erroneously assumed that this 

issue was settled, but State regulation of federally licensed SBICs was not expressly 

prohibited. We now have confusion, costs, and doubled regulatory burdens. A small 

number of State securities regulators have reserved the right to interpret DoddFrank as giving them authority to regulate the advisers of federally licensed SBICs 

which have less than $100 million in AUM. The SBIC Advisers Relief Act would 

return SBIC advisers solely advising SBIC funds below $100 million in AUM to Federal oversight by their licensing agency, the SBA. States would still have authority 

to register advisers not solely advising SBICs. 

a. Duplicative Regulation by State and Federal Governments 

Another one of SBIA’s members, Diamond State Ventures (Diamond State), a fund 

named as the SBIC of the Year in 2011 by the SBA, recently was impacted by this 

very issue in the State of Arkansas. Diamond State, based in Little Rock, has been 

involved in the SBIC program since 1999, and the team has successfully been licensed three times by the SBA to operate an SBIC, most recently in February 2014. 

The fund’s investors are predominately banks (70 percent), along with pension 

funds, private foundations, and a few high net worth individuals. Diamond State is 

the sole SBIC in the State of Arkansas, a State underserved by private equity and 

small business investing. Diamond State has three employees. Since inception, DiaVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00034 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
31 

3 Note: There is no exemption for in-State investment advisers to private funds in the State 

of Arkansas: http://www.nasaa.org/industry-resources/investment-advisers/ia-switch-resources/state-investment-adviser-registration-information/arkansas/. 4 ‘‘The IA Switch, a Successful Collaboration To Enhance Investor Protection’’, North American Securities Administrators Association, May 2013, p. 11, available at: http:// 

www.nasaa.org/wp-content/uploads/2011/08/IA-Switch-Report.pdf. 

mond State has made over 18 investments in small businesses located in the State 

of Arkansas, employing over 2,300 Arkansans and investing over $40 million in Arkansas companies. Diamond State is currently under the $100 million AUM threshold that would be required to avoid State registration. If they were above this 

threshold, they would be exempt from SEC registration and would remain solely 

regulated by the SBA. 

Because of the murkiness of the securities laws across the States, when Diamond 

State raised their most recent federally licensed SBIC fund in January 2014, they 

consulted with the Arkansas Securities Commissioner to make sure they were staying on the straight and narrow. They were informed that because Arkansas did not 

have a ‘‘private adviser’’ exemption, they would be required to register with the 

State regulator, 3 in addition to the regulation and oversight they already receive 

by the SBA. It is important to note that the SBA has conducted an on-site examination of Diamond State every year since 1999, and conducted a rigorous licensing review of the entire team each time they have been licensed by the SBA. In the midst 

of determining whether registration applied to Diamond State, the fund spent over 

$50,000 in legal fees trying to figure out how to apply the State securities regulations to their federally licensed SBIC fund, which were designed to apply to brokerage firms and retail investment advisers, not advisers to private equity funds or 

SBICs. Further costs in time and money were imposed as the then two-person team 

spent the majority of their time for over 3 months working on this regulatory issue, 

rather than out searching for potential small business investments. In the end, the 

fund will have spent thousands of dollars to prepare for a potential exam with an 

Arkansas examiner who likely will have little to no understanding or experience 

with the regulations and requirements of the Federal SBIC program or how this 

type of firm is required to operate. 

There are inconsistent and confusing standards across the States. Some of the 

States that do not have an exemption have expressed to SBICs in their State that 

they recognize the existing SBIC registration exemption in Dodd-Frank and the legislative intent to avoid duplicative regulation so they don’t need to formally register 

at the State level. Given that these States have had since July 2010 (when the investment adviser switch implementation began 4) to update their laws, it seems unlikely they are planning on updating them in the near future. Moreover, many 

States that do exempt registration for SBIC funds over $100 million AUM under 

a ‘‘federally covered’’ adviser section of their State securities laws end up forcing the 

funds to enter a different regime at the State level because, technically, those funds 

are not registered with the SEC due to their SEC exemption in Dodd-Frank. This 

illustrates the immense confusion about the silence on this issue in Dodd-Frank and 

promotes significant regulatory uncertainty for funds. Congress intended for the 

SBA to be the sole regulator of SBICs, but did not make that clear in the drafting 

of the statute. This bill will provide the technical correction needed to provide clarity and consistency. 

IV. SBICs Are Heavily Regulated by the SBA 

SBICs are heavily regulated and closely supervised by SBA. This review and oversight starts before an applicant is permitted to file a formal license application with 

SBA and continues until such time as that license is surrendered or revoked. SBIC 

management undergoes an extensive background check prior to licensing. The regulatory regime has similarities to, but is also much more intense than, that applicable to other private funds that are regulated by the SEC. It is important to note 

that in contrast to the SEC and State securities regulators, the SBA reviews not 

only the investment adviser operations, it evaluates and vets the entire management team of the investment adviser and examines the operations and investments 

of the fund entity as well. Ultimately, if the SBA feels that an SBIC is being operated poorly, it can step in and force that fund into SBA liquidation—something that 

is not the case with a private fund regulated by the SEC or a State securities regulator. 

The SBIC regulatory regime consists of an in-depth examination and review of the 

fund’s management prior to licensing covering stringent investment rules, operational requirements, record keeping, reporting, examinations, conflict of interest 

rules, and other significant requirements. For a more in-depth understanding of the 

32 

rigorous regulatory regime imposed on SBIC funds, we have provided a helpful addendum to this testimony. 

V. SBIA Recommendation: Pass the SBIC Advisers Relief Act 

Due to the tailored nature of this legislation, the necessity to clarify the elements 

of Dodd-Frank to eliminate duplicative regulation, and the fact that all of these 

funds will continue to be subject to regulation once this legislation passes, Congress 

and this Committee should act swiftly to pass the SBIC Advisers Relief Act. 

33 

34 

35 

36 

37 

38 

39 

40 

41 

42 

43 

PREPARED STATEMENT OF MARCUS M. STANLEY 

POLICY DIRECTOR, AMERICANS FOR FINANCIAL REFORM

MARCH 24, 2015 

Mr. Chairman and Members of the Committee, thank you for the opportunity to 

testify before you today on behalf of Americans for Financial Reform. AFR is a coalition of more than 200 national, State, and local groups who have come together to 

advocate for strong and effective financial regulation. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, faith based, and 

business groups. 

Before turning to the specific bills under consideration today, I would like to make 

some general points regarding the topic of the hearing. Today’s hearing addresses 

‘‘capital formation,’’ which is of course a central part of the SEC’s mission. However, 

AFR does not believe that the agency’s capital formation mandate conflicts with its 

mission of investor protection. Effective capital formation requires that investors entrust their capital to the market without demanding prohibitive risk premiums. Perhaps even more critically, it requires that markets channel investor capital to its 

highest and best use. When investors put their money into a pump-and-dump penny 

stock scheme, that money was not effectively used in capital formation. When investors purchased securities on the basis of fraudulent accounting, or on the basis of 

misleading descriptions of the true risks of the ‘‘toxic’’ mortgage assets at the heart 

of the financial crisis, their capital was misallocated and economic harm was done. 

Furthermore, after these scandals came to light, they contributed to loss of faith in 

our financial markets and to a potential rise in the future risk premium demanded 

by investors in order to supply capital, or even an unwillingness to supply capital 

for risky projects at all. In sum, then, a failure to place a high priority on the SEC’s 

investor protection mission will also harm its mission of ensuring effective capital 

formation. 

This perspective shapes our views on the bills under consideration today. I will 

now turn to discussing those bills in detail. I will discuss five of the nine bills under 

consideration. AFR supports the legislation eliminating swaps data indemnification 

requirements (H.R. 742 from the 113th Congress). We oppose three bills: 

• Legislation exempting mergers and acquisition brokers from broker-dealer registration (H.R. 2274 from the 113th Congress). 

• Legislation that would expand exemptions from Dodd-Frank derivatives clearing requirements for financial affiliates of commercial entities (H.R. 5471 from 

the 113th Congress). 

• Legislation that would expand exemptions from adviser registration for advisers 

to certain funds that combine monies from small business investment companies (SBICs) and private equity or venture capital. (H.R. 4200 from the 113th 

Congress). 

Although we do not have a formal position on legislation requiring the SEC to 

modify Reg SK disclosures (H.R. 4569 in the 113th Congress), I will briefly speak 

on that bill as well. 

Eliminating Swaps Data Indemnification Requirements: AFR SUPPORTS 

For some years AFR has been concerned with the slow pace at which domestic 

and international regulators are implementing derivatives data reporting mandates 

under the Dodd-Frank Act. The requirement that derivatives data be reported to 

regulators in a form that can be aggregated and used to measure total risk exposures across the financial system is an important part of the improved capacity to 

monitor systemic risk that should be created by new financial regulations. Clear, 

consistent, and usable derivatives data would be extremely beneficial to both banking and market regulators in controlling risk, and could create important indirect 

benefits for financial institutions themselves, many of which still face issues in their 

own internal systems for aggregating risk exposures. 

Unfortunately, progress in derivatives data reporting has been slow, and much of 

the data collected does not appear to be in a form that can be aggregated. There 

are many reasons for this slow progress, but it is clear that the ability to share derivatives data between different national regulators and data repositories is crucial 

for effective data reporting. It appears that the indemnification requirements in 

Dodd-Frank are creating a barrier to such information sharing. The replacement of 

these indemnification requirements with a simpler confidentiality agreement, as 

proposed in H.R. 742, would be beneficial in encouraging needed sharing of derivatives data between different jurisdictions and entities. We thus favor this legislation. 

44 

1 North American Securities Administrators Association, ‘‘NASAA Letter to Senators Manchin 

and Vitter Re S 1923’’, September 8, 2014. 2 Buccacio, Katherine, ‘‘Republicans Look To Ease PE Regulatory Burden’’, Private Equity 

Manager, January 13, 2015; Morgenson, Gretchen, ‘‘Private Equity’s Free Pass’’, New York 

Times, September 27, 2014. 3Securities and Exchange Commission, ‘‘No-Action Letter Re M&A Brokers’’, January 31, 

2014 [Revised February 4, 2014]. 4 United States Permanent Subcommittee on Investigations, ‘‘Wall Street Bank Involvement 

With Physical Commodities, Majority and Minority Staff Report’’, Permanent Subcommittee on 

Investigations, United States Senate, November 20, 2014. 

Exemption of Merger and Acquisition Brokers From Dealer Registration: 

AFR OPPOSES 

This legislation (H.R. 2274 from the 113th Congress) would eliminate SEC brokerdealer registration requirements for merger and acquisition brokers. While a much 

narrower version of this legislation could be acceptable, AFR opposes this bill, since 

it has multiple flaws: 

• It lacks needed investor protections such as provisions to prevent bad actors 

from taking advantage of exemptions from registration to evade enforcement of 

securities laws. 1

• The legislation applies the M&A broker exemption far too broadly, to any acquisition of a company with gross revenues of $250 million or less. This goes far 

beyond transactions involving the purchase of local small businesses, and would 

permit numerous deals involving companies of significant size to avoid brokerdealer oversight. 

• The lack of an effective provision to prevent transfer to a shell company means 

that the broker could effectively also take control of the transferred company 

in a private-equity type transaction. 

The potential application to private equity is concerning, as the exemption from 

broker-dealer registration would restrict the SEC in policing this complex area and 

interfere with ongoing SEC investigation of potential abuses in private equity involving unregistered broker-dealer activities. 2

This legislation is also unnecessary, as the SEC has already taken administrative 

action to exempt merger and acquisition brokers from broker-dealer registration, 

while preserving capacity to enforce needed investor protections. 3

Finally, we would also point out that numerous registered broker-dealers who 

comply fully with SEC broker-dealer conduct requirements are active in arranging 

deals to sell companies, and this overly broad legislation would expose them to competition from unregulated entities that would not have to comply with important investor protection requirements such as suitability standards. We believe this is inappropriate. 

Expanding Exemptions From Derivatives Clearing Requirements: AFR OPPOSES 

The requirement that standardized derivatives transactions be cleared through a 

central counterparty is a fundamental financial system safeguard established by the 

Dodd-Frank Act. 

While commercial entities using derivatives to hedge legitimate commercial risk 

are already exempted from clearing requirements, financial entities can only qualify 

if they are hedging risk on behalf of an affiliated commercial company and are acting as the agent of the commercial affiliate. This legislation (H.R. 5471 from the 

113th Congress) would remove these limitations and leave in place only a requirement that the financial entity is somehow hedging or mitigating the risks of a commercial affiliate. As many purely financial trades can be interpreted to somehow 

‘‘mitigate the risks’’ of the broader corporate group, including commercial affiliates, 

this limitation is vague and nonspecific. 

This seemingly technical change could have far-reaching implications. There are 

numerous major financial entities that have commercial affiliates and could claim 

that there was some relationship between their derivatives activities and mitigating 

risk for some commercial affiliate. For example, the Senate Permanent Subcommittee on Investigations has recently documented that the major Wall Street 

banks often combine commodity production and trading activities, and that these ‘‘financial companies often traded in both the physical and financial markets at the 

same time, with respect to the same commodities, frequently using the same traders 

on the same trading desk.’’ 4 This legislative change would significantly reduce the 

ability of the CFTC to police risk management for this kind of comingling of commercial and financial activities, both at major banks and at commercial companies 

45 

5 Congressional Research Service, ‘‘CRS In Focus: H.R. 37 Derivatives Provision May Create 

Broader Exemption’’, January 26, 2015. 6 Commodity Futures Trading Commission, Division of Clearing and Risk, ‘‘No-Action Relief 

for Swaps Entered Into by Eligible Treasury Affiliates’’, CFTC No-Action Letter 13-22, June 14, 

2013; Commodity Futures Trading Commission, Division of Clearing and Risk, ‘‘Further No-Action Relief for Swaps Entered Into by Eligible Treasury Affiliates’’, CFTC No-Action Letter 14- 

44, November 26, 2014. 7 Bowden, Andrew, ‘‘Spreading Sunshine in Private Equity’’, SEC Office of Compliance Inspections and Examinations, Speech at Private Equity International (PEI), Private Fund Compliance 

Forum 2014 New York, NY, May 6, 2014. 

like General Electric that have large financial subsidiaries such as GE Capital. As 

the nonpartisan Congressional Research Service stated in an analysis of this bill, 

it ‘‘could potentially allow large banks to trade swaps with other large banks and 

not be subject to the clearing or exchange-trading requirements as long as one of 

the banks had a nonfinancial affiliate.’’ 5

There are cases in which financial affiliates of commercial entities may genuinely 

be hedging the production-related risks of commercial affiliates but may not in a 

narrow sense be acting ‘‘as an agent’’ of the commercial affiliate. Through administrative action, the CFTC has already permitted such affiliated ‘‘central treasury 

units’’ (CTUs) to make use of the clearing exemption in a wide range of cases. 6 The 

agency has thus made clear that it is taking a broad interpretation of what it means 

to hedge ‘‘on behalf of the [commercial affiliate] and as an agent,’’ and is eager to 

accommodate legitimate hedging needs. But if this restriction were eliminated entirely, as this legislation would do, then the CFTC would be dramatically limited 

in its ability to address attempts by financial entities to evade risk management requirements by claiming that they were mitigating the risk of commercial affiliates, 

an evasion that would be invited by this legislation. 

We oppose this legislation and believe statutory change is unnecessary. If Congress wishes to make some statutory change in this area, it should be limited to 

clarifying the CFTC’s discretionary authority to accommodate the CTU model on a 

carefully controlled basis. There should be no general reduction in CFTC authority 

to manage this complex area of derivatives regulation. 

Expand Exemptions From Advisor Registration for SBIC Funds: AFR OPPOSES 

An important change made by the Dodd-Frank Act was the new requirement that 

most advisors to private funds such as hedge and private equity (PE) funds must 

register with the Commission under the ’40 Act. We are strong supporters of this 

provision, both for its investor protection benefits and its systemic risk benefits in 

creating greater financial system transparency. This new requirement has already 

begun to create improvements in investor protection, as initial SEC inspections of 

newly registered PE fund managers found violations of law or material weaknesses 

in controls at over half of advisors examined. 7

Currently, fund advisors who manage less than $150 million in combined assets 

are exempted from this registration provision. Combined assets are defined as private equity or hedge fund assets plus assets from Small Business Investment Companies (SBICs) and venture capital (VC). However, advisors who manage solely 

SBIC or VC money are completely exempted. 

This legislation (H.R. 4200) alters these provisions so that only private equity or hedge fund assets would be counted toward the $150 million line. Advisors combining SBIC with PE money would be exempted even if their total funds exceeded 

$150 million, so long as total PE assets were under $150 million. It is likely that 

this change would affect only a relatively small number of advisors. However, we 

object on principle to carving more advisors out of these new registration requirements, especially given what we have learned over the last year about the potential 

for widespread investor abuses in private equity markets. We are also concerned 

that the legislation would weaken State investor protection oversight of SBIC funds. 

AFR does not at this time have positions on the other bills under consideration 

by the Committee. But I would like to briefly comment on ‘‘The Disclosure Modernization and Simplification Act of 2014’’, legislation that requires the SEC to modify Reg SK disclosures. There is no issue in principle with updating or simplifying 

investor disclosures as long as no material information is lost. The SEC has ample 

authority to do this, and was last required to examine the issue in 2013 under the 

JOBS Act. It has a current task force working on this issue, marking the fifth time 

a task force or initiative has studied this issue over the past two decades. 

Given the large amount of SEC work on this issue that has already taken place 

and continues to take place, as well as the numerous other critical priorities for the 

agency, including the completion of the roughly 40 percent of Dodd-Frank rules that 

46 

remain incomplete, we question whether this is an appropriate priority for agency 

resources. We are also concerned that the legislation instructs the agency to ‘‘eliminate’’ disclosure requirements under Reg SK when important parts of Reg SK—notably the disclosures for asset-backed securities—were recently shown to be inadequate during the financial crisis and are being strengthened under the Dodd-Frank 

Act. A sensible review of disclosures should ask what needs to be improved, not simply what needs to be eliminated. 

This is not the only issue with the bill. As currently written, this bill requires 

rulemaking after 6 months, although the study to determine what if any rule 

changes are necessary or appropriate takes place over 12 months. This seems inappropriate. 

Finally, on the issue of disclosures, we believe that greater investment in implementing machine-readable disclosures would be of much greater benefit to investors 

and possibly issuers than any reasonable ‘‘simplification’’ or ‘‘scaling’’ of disclosures 

could possibly be. There is significant private sector interest in assisting investors 

in analyzing machine-readable data, and likely also assisting issuers to generate 

and file such data. But the potential benefits here cannot be fully realized until the 

SEC has transformed its disclosure system from disconnected documents into 

searchable open data. 

Thank you for the opportunity to testify. I am happy to answer further questions. 

PREPARED STATEMENT OF JOHN C. PARTIGAN 

PARTNER AND SECURITIES PRACTICE GROUP LEADER, NIXON PEABODY

MARCH 24, 2015 

I. Introduction 

Chairman Crapo, Ranking Member Warner, and distinguished Members of the 

Subcommittee, thank you for inviting me to testify. 

I am a partner in the Washington, DC, office of Nixon Peabody LLP and the chair 

of the firm’s national securities practice group. Prior to moving to Washington, I 

practiced securities law in Rochester, New York. 

I have been practicing corporate and securities law for more than 25 years. I am 

a member of the District of Columbia Bar Association and the New York State Bar 

Association. I have served as a member of the NASDAQ Listings Qualifications 

Panel (2004–2014), and have advised public and private companies on a range of 

securities issues. I am a graduate of Albany Law School, J.D., and Willamette University, B.S. 

I understand the Committee will examine a number of bills, and I of course, applaud your efforts to find bipartisan legislation addressing particular regulatory 

issues. I am here to speak on two related issues: (1) Wegmans Food Market, Inc.’s 

(Wegmans) support for S. 576, Encouraging Employee Ownership Act; and (2) how 

S. 576 updates the Securities and Exchange Commission’s (SEC) Rule 701. 

On behalf of Wegmans, I would like to thank Senators Toomey and Warner for 

introducing the Encouraging Employee Ownership Act. This bipartisan legislation 

will allow privately held companies, like Wegmans, to continue to provide and expand ownership opportunities without having to risk the public release of competitively sensitive company information. 

I have worked with Wegmans for more than 15 years, among other things assisting the company in its employee investment plan and the program design. 

Wegmans is proud that a key component of its recruitment and retention efforts 

is designing programs that allow employees to share in the success of the company. 

The employee investment plan is one example of this shared success. In addition 

to sharing in the success, the program allows participants to build wealth. Finally, 

as is the case with many employee ownership programs, the Wegmans’ program 

helps create an environment of innovation and loyalty. 

II. About Wegmans 

History 

Wegmans is a privately held, family owned company. It is an American story. In 

1916, John Wegman started his company with a produce pushcart. A year later his 

brother Walter joined him in the operations. In 1921, John and Walter Wegman 

purchased the Seel Grocery Co. and expanded operations to include general groceries and bakery operations. Since its beginnings, Wegmans has remained, and will 

remain, a privately held company. 

Currently, Danny Wegman is CEO, and Colleen Wegman, his daughter, is president. Robert Wegman, Danny’s father, was chairman until his death in April 2006. 

47 

1See, http://www.harrisinteractive.com/Insights/2015RQ100MostVisibleCompanies.aspx. 2See, http://fortune.com/best-companies/. 3 Id. 

Wegmans operates 85 stores: 46 in New York, 16 in Pennsylvania, 7 in New Jersey, 

6 in Virginia (with the newest Wegmans set to open in Alexandria, Virginia, in June 

of this year), 7 in Maryland, and 3 in Massachusetts. Wegmans employs almost 

44,000 people. 

Wegmans’ Points of Pride 

In February 2015, Wegmans was ranked number one for Corporate Reputation 

among the 100 most visible companies according to the Harris Poll Reputation 

Quotient (RQ®). 1 Wegmans is the only company to be ranked in the top five on all 

six reputation dimensions of social responsibility, emotional appeal, products and 

services, vision and leadership, financial performance, and workplace environment. 

Wegmans believes that its inclusion in each of these categories is a direct result of 

the dedication of its employees. 

Every year since its inception 18 years ago, Wegmans has been ranked among 

FORTUNE magazine’s 100 ‘‘Best Companies To Work For’’, and has ranked among 

the top five for 9 consecutive years—Wegmans is the only company in America that 

has accomplished this—and among the top 10 best companies to work for, for 11 

consecutive years. As a result, Wegmans is in FORTUNE’s Hall of Fame. In the recently released rankings, Wegmans was seventh on the 2015 FORTUNE list, and 

the number one retailer. 2

Wegmans is extremely proud of this continued recognition and inclusion on the 

‘‘Best Companies To Work For’’, because it is a reflection of how the company treats 

its employees. Two-thirds of the scoring for the FORTUNE score comes from a survey that is both anonymous and random. The FORTUNE survey participants include Wegmans’ full- and part-time employees, and employees from all of its facilities, including stores, warehouses, farms, offices, and manufacturing plants. 3

Finally, and while I could go on, I will stop here with one final award note; a national consumer magazine recently ranked Wegmans as the best supermarket chain 

in the United States. 

These accolades are the result of the dedication and efforts of Wegmans’ employees, including many that Wegmans is trying to reward with ownership opportunities. 

Wegmans, like other privately held companies, has made the strategic decision to 

remain private. Wegmans has found this structure to be a competitive advantage 

as the company competes against our country’s largest grocery chains, companies 

like Wal-Mart/Sam’s Club, Target, Giant, Kroger, Costco, Albertsons, SuperValu, 

and Whole Foods. 

By remaining privately held, Wegmans can focus on long-term results and customer service. This belief in the long-term nature of the company is manifest in its 

philosophy that if Wegmans takes care of its employees, its employees will take care 

of the customers, and the bottom line will take care of itself. 

One example of this philosophy is the fact that Wegmans has never had a layoff. 

Wegmans does not pay periodic bonuses. Rather Wegmans, like many privately 

held companies, stresses the long-term decision making that leads to a stronger 

company, not just next quarter, or even next year, but in the next decade and beyond. 

Allowing privately held companies to provide ownership opportunities helps increase this long-term focus, which, in turn, creates a more engaged group of employees since they benefit directly from the company’s long-term success. Even more important, programs like SEC Rule 701 allow privately held companies to share the 

increased wealth from the success of the company rather than just keeping it in the 

hands of the company founders and families. 

III. SEC Rule 701 

Before I describe what S. 576 does, and why I believe it is a modest and sensible 

update to an already popular SEC rule, I want to provide a brief description of Rule 

701 and its history. 

Introduction to Rule 701: Why Was Rule 701 Created? How Does It Operate? 

Rule 701, which was introduced in 1988, provides an exemption from SEC registration requirements, under the Securities Act of 1933, for private companies, private subsidiaries of public companies, and foreign private issuers to offer their own 

securities—including stock options, restricted stock, and stock purchase plan interVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00051 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
48 

4See, https://www.sec.gov/rules/final/33-7645.htm. 5See, 17 C.F.R. §230.701(d)(2). 6See, Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996). 

7See, https://www.sec.gov/rules/final/33-7645.htm. 8See, 17 C.F.R. §230.701(e). 

ests—as part of written compensation plans or agreements to employees, directors, 

officers, general partners, and certain consultants and advisors. 

In the absence of Rule 701, many privately held companies offering such securities would be required to register the sale of these securities with the SEC regardless of the fact that they are for compensatory purposes and not capital raising. 

Rule 701 may be used only by an issuer that is not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, and is not an investment company registered or required to be registered under the Investment Company Act of 1940. 

The offer and sale of securities under Rule 701 must be for compensatory purposes, that is, the offer must be made pursuant to either a written compensatory 

benefit plan or a written contract relating to compensation established by the company or its parent or majority-owned subsidiaries. 4 Rule 701 offerings are not used 

for capital raising purposes, but are, nevertheless, often an important component of 

companies planning to attract and retain talent—a key to the success of any business. This is particularly true of newer companies that may offer stock and stock 

options as they are attracting early-stage financing and need to preserve cash and 

demonstrate the commitment to the company of key employees. 

Under Rule 701, the aggregate sales price or amount of securities sold or options 

granted in reliance on the rule during any consecutive 12-month period generally 

cannot exceed the greater of the following: (1) $1,000,000; (2) 15 percent of the total 

assets of the issuer, measured at the issuer’s most recent balance sheet date; or (3) 

15 percent of the outstanding amount of the class of securities being offered and 

sold in reliance on this section, measured at the issuer’s most recent balance sheet 

date. 5

A company must provide investors a copy of the compensatory benefit plan or the 

contract, as applicable. In addition, because the offering remains subject to SEC 

Rule 10b-5, the SEC’s antifraud rules, a company must provide Rule 701 employeeinvestors with disclosure adequate to satisfy the antifraud provisions of the Federal 

securities laws. Generally, this means that a company offering Rule 701 securities 

must adhere to a reasonable investor standard when determining the information 

provided to investors. In a nutshell, the reasonable investor standard is what disclosure information a reasonable investor would expect to receive from the company 

about the investment before making an investment in the company. 

The Enhanced Disclosures 

In 1996, the National Securities Markets Improvement Act (NSMIA) was signed 

into law. 6 NSMIA included provisions that provide the SEC with unlimited Rule 

701 exemptive authority. Prior to the enactment of NSMIA, the SEC was restricted 

to allow no more than $5 million per year for exempt transactions like Rule 701. 

In 1999, when the SEC issued amended rules for Rule 701 under its new NSMIA 

authority, it created a new two-tier disclosure regime. For sales of $5 million and 

below, the existing 1988 disclosures requirements remained in place, with the SEC 

noting it ‘‘had not found instances of abuse of Rule 701, nor [had it] become aware 

of investor complaints. Rather, investors have enjoyed the benefits of being compensated with the securities of the company for which they are employed or provide 

services. Therefore, we have found that Rule 701 has been consistent with investor 

protection in the past.’’ 7

Nevertheless, because the SEC was expanding the program and had concerns that 

it was eliminating the $5 million cap, it created a regime of enhanced disclosure for 

yearly sales in excess of $5 million. These enhanced disclosures include: (1) a summary plan description if the plan is an ERISA plan or a summary of the material 

terms if it is not; (2) risk factors associated with the investment; and (3) financial 

statements, no older than 180 days, required under Regulation A. 8

Why Is S. 576 Necessary? 

S. 576 is a simple and balanced approach to raising this outdated threshold for 

the enhanced disclosures. Specifically, S. 576 instructs the SEC to increase the level, 

from $5 million to $10 million, at which the Rule 701 enhanced disclosures are required. 

Simply put, any assertion that the enhanced disclosures are not burdensome or 

problematic is wrong. There are significant concerns about confidential information 

49 

9See, https://www.sec.gov/rules/final/33-7645.htm. 10See, ‘‘Comments of Task Force on Small Business Issuers and the Subcommittee on Employee Benefits, Executive Compensation and Section 16 of the Committee on Federal Regulation of Securities of the Section of Business Law of the American Bar Association’’, available 

at, http://www.sec.gov/rules/proposed/s7598/liftin8.htm; see also, Comments of David 

Greenlee, available at, http://www.sec.gov/rules/proposed/s7598/greenle1.txt. 11See, Bureau of Labor Statistics CPI inflation calculator, available at, http://www.bls.gov/ 

data/inflationlcalculator.htm, the purchasing power of $5 million in 1988 dollars is 

$10,005,748 in 2014 dollars. 12See, H.R. Rep. No. 104-622 at 38; S. Rep. No. 104-293 at 16. 13See, ‘‘SEC Government-Business Forum on Small Business Capital Formation’’, Nov. 21, 

2013, report available at, http://www.sec.gov/info/smallbus/gbfor32.pdf, pp. 14–15. 14See, http://www.forbes.com/sites/sageworks/2013/05/26/4-things-you-dont-know-aboutprivate-companies/. 

getting outside a privately held company, while these disclosures provide little additional insight to employees. 

The SEC noted in its 1999 rulemaking, ‘‘[b]ecause the compensated individual has 

some business relationship, perhaps extending over a long period of time, with the 

securities issuer, that person will have acquired some, and in many cases, a substantial amount of knowledge about the enterprise. The amount and type of disclosure required for this person is not the same as for the typical investor with no particular connection with the issuer.’’ 9

In the same rulemaking, the American Bar Association, Subcommittee on Employee Benefits, Executive Compensation and Section 16 (ABA Subcommittee) submitted comments expressing concern about the new disclosure requirements. The 

ABA Subcommittee stated that, ‘‘[m]ost private issuers keep confidential their financial conditions and results. Having to provide this information to employees (and 

often former employees) as a condition to the exemption risks having this information come into the possession of a company’s competitors.’’ The comments went on 

to note that, ‘‘[r]equiring that these employees be provided with financial information could result in serious injury to the company, one that it would be naive to 

think could be avoided with a confidentiality agreement.’’ 10

Since 1999, when the ABA Subcommittee comments were submitted, the potential 

for leaks and the public release of highly confidential information has only grown. 

One need only to read the news to understand that organizations, including the U.S. 

Government, struggle to keep sensitive data protected from hackers and dissemination. 

Wegmans and other privately held companies are faced with the decision whether 

to limit compensatory grants and sales to employees to stay under the $5 million 

enhanced disclosure threshold or risk the dissemination of highly confidential financial information. 

Why Raise the Enhanced Disclosure Threshold to $10 Million? 

If the disclosure threshold had been adjusted for inflation since 1988, it would be 

roughly $10 million today. 11 As the SEC noted in its 1999 rulemaking, the legislative history of NSMIA supported a prompt increase of the Rule 701 threshold to not 

less than $10 million. 12 Both the Senate Committee on Banking, Housing, and 

Urban Affairs Report and the House of Representatives Committee on Commerce 

Report, suggested that Congress wanted the Rule 701 threshold raised to not less 

than $10 million, and neither report makes mention of additional disclosures being 

a part of that increase. Finally, the most recently published SEC Government-Business Forum on Small Business Capital Formation included, among its recommendations, that the SEC ‘‘raise the dollar threshold for triggering the required disclosures pursuant to a Rule 701 offering from $5 million to no less than $10 million.’’ 13

This is what the Encouraging Employee Ownership Act would do. It is a sensible 

and balanced inflation adjustment that continues to address the SEC’s original concerns by requiring disclosures for stock grants and sales above a certain level, while 

recognizing that employees know their companies. 

IV. Conclusion 

Wegmans and many of the Nation’s estimated 5.7 million 14 privately held companies operate under the conviction that being privately held is the best model for 

them. It would be unfortunate to punish their employees by restricting their ownership opportunities because of a failure to update an outdated threshold. Privately 

held businesses that want to offer additional ownership opportunities are stuck with 

a no-win decision: Do we risk losing good employees or do we risk the public release 

of our confidential business information? If Congress passes S. 576, the employeeVerDate Nov 24 2008 14:20 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00053 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\03-24 PM CAPITAL FORMATION AND REDUCING SMALL BUSINESS 
50 

investors of privately held companies will benefit because their employers will no 

longer face this no-win decision. 

Thank you again for the opportunity to testify today. I look forward to answering 

any questions that the Committee Members may have. 

51 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM THOMAS QUAADMAN 

Q.1. Mr. Quaadman, as Chairman of the Small Business Committee, I have the responsibility to investigate Government actions 

that are harmful to small business, including regulations that affect SBICs and venture capital funds. 

What are some of the reasons the Chamber of Commerce recommends exempting advisers to SBIC and venture capital funds 

from the Investment Advisers Act of 1940? 

A.1. Small business investment companies (SBICs) and venture 

capital funds both play a vital in our economy, providing billions 

of dollars’ worth of capital to small businesses that are looking to 

expand their operations and hire new workers. 

SBICs are privately owned equity funds that are licensed with 

the Small Business Administration (SBA) and currently hold over 

$20 billion worth of investments in U.S.-based companies. SBICs 

are closely regulated by the SBA and are limited in terms of what 

they can borrow. SBICs undergo regular examinations from the 

SBA, and are an important source of capital for American businesses. Venture capital (VC) funds also play a critical role in our 

economy, particularly when it comes to providing ‘‘early stage’’ 

funding to nascent businesses. Many advisers to venture capital 

funds also advise SBICs, which benefit from the expertise that VC 

professionals can offer. 

The Dodd-Frank Act did away with the so-called ‘‘private fund’’ 

exemption under the Investment Advisers Act and instead granted 

explicit exemptions to SBIC advisers, VC advisers, as well as private equity fund advisers under a certain threshold. Regrettably, 

the way the law has been interpreted, an individual that happens 

to advise both an SBIC and a VC fund would have to register with 

the SEC. This is not what Congress intended, and there is simply 

no valid reason for advisers to register (a costly and burdensome 

process) simply because they happen to advise both. The SBIC Advisers Relief Act would carry out Congressional intent and ensure 

that advisers to SBICs and VC funds do not have to deal with unnecessary and burdensome red tape. 

Q.2. Given the complexity and volume of disclosure and reporting 

requirements, it appears to create the phenomenon you described 

in your testimony as ‘‘disclosure overload.’’ What criteria would you 

recommend is used to simplify these requirements while still maintaining discernable transparency to investors? 

A.2. The Chamber believes that ‘‘disclosure overload’’ has become 

a real concern for investors, as the length and complexity of quarterly and annual reports has increased over the years. We believe 

that the SEC can act swiftly in order to address some outdated or 

duplicative disclosure requirements in SEC filings (e.g., historical 

stock prices, which can now be searched easily on a computer or 

smartphone), while also focusing on long-term reforms that will 

bring the disclosure regime into the 21st Century. 

As the SEC goes about the disclosure reform project, we believe 

that the guiding principle for determining what should (or 

shouldn’t) be disclosed in SEC filings is materiality. As the Supreme Court explained nearly 40 years ago in TSC Industries vs. 

52 

Northway, a fact is material if ‘‘there is a substantial likelihood 

that a reasonable shareholder would consider it important before 

deciding how to vote. In other words, a fact is not material if an 

investor might find it important; rather it should depend on whether a reasonable person would find it important to their decision 

making. 

Focusing on materiality will ensure that investors do not become 

increasingly overloaded with information that may or may not be 

material to their decision making. It will also help ensure that our 

disclosure regime does not become a tool for special interests to use 

when trying to drive an idiosyncratic agenda (e.g., ‘‘shaming’’ disclosures such as conflict minerals) that are unrelated to enhancing 

investor decision making. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM MARCUS M. STANLEY 

Q.1. Given the lack of cumulative, industrywide derivative data reporting as you mentioned in your testimony, can you provide specific reasons why this data reporting has been slow? Can you clarify what a clear, consistent, and usable derivatives data system 

would consist of? 

A.1. There appear to be many reasons for slow progress in derivatives data reporting. These include the presence of multiple competing private entities in the derivatives data space which did not 

have consistent data formats, a failure by regulators to specify 

clear and standardized data formats and data items and require 

their use in reporting, the inherent complexity of derivatives contracts, and privacy laws in some Nations that restrict or limit the 

sharing of data. Americans for Financial Reform has submitted two 

comments to regulators in this area, which are attached to this response. 

A full response to the question of what a clear, consistent, and 

usable derivatives data system would consist would be involved 

and technically complex. However, important goals for such a system would include the following: 

• It should permit regulators to aggregate the derivatives exposures of counterparties throughout the financial system, using 

a consistent and universal counterparty identifier such as the 

LEI. 

• Regulators should be able to examine how such exposures 

might change under stressed conditions. This requires that detailed information on individual derivatives contracts be reported, including how payment commitments change upon 

counterparty default. Reporting of only aggregated or netted 

exposures, with the aggregation modeling performed by reporting entities, would not be adequate. 

• Data should be available to private parties to assist in proper 

risk aggregation and modeling within the financial system, including risk analysis and aggregation by banks and financial 

market utilities. AFR also supports the development of a public 

use license for the analysis of swaps data by academics and 

53 

others studying systemic risk, subject to proper confidentiality 

protections. 

Q.2. You mention that the indemnification requirements in DoddFrank are slowing the process for information sharing and could be 

replaced with a simpler confidentiality agreement. How specifically 

does a confidentiality agreement help to improve the pace of information sharing and how does a confidentiality agreement solve the 

problem of derivatives currently being in a form that can’t be aggregated? Can you elaborate on what changes to the indemnification requirements in Dodd-Frank that would help improve this 

process? 

A.2. It is our understanding that the requirement that foreign financial regulators indemnify U.S. regulators against any litigation 

resulting from information sharing, as well as the requirement that 

other U.S. agencies provide indemnification to the SEC or CFTC 

before gaining access to data, is creating barriers to sharing of derivatives data. The replacement of the indemnification requirement 

by a simple confidentiality requirement is likely to make it simpler 

for regulators to pool their derivatives data and arrive at an information sharing arrangement that permits the global aggregation of 

derivatives risks. We do not believe that this change alone will address most of the barriers to effective derivatives reporting discussed in the response to the first question. It would be a small but 

helpful change. 

Please feel free to contact me for any further discussion of these 

issues. 

54 

55 

56 

57 

58 

59 

60 

61 

62 

63 

64 

65 

66 

67 

68 

69 

70 

71 

72 

73 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

WRITTEN STATEMENT OF THE BIOTECHNOLOGY INDUSTRY 

ORGANIZATION, SUBMITTED BY CHAIRMAN CRAPO 

74 

75 

76 

77 

78 

79 

80 

WRITTEN STATEMENT OF THE COALITION FOR DERIVATIVES ENDUSERS, SUBMITTED BY CHAIRMAN CRAPO 

81 

82 

WRITTEN STATEMENT OF XBRL US, SUBMITTED BY CHAIRMAN CRAPO 

83 

84 

85 

86 

WRITTEN STATEMENT SUBMITTED BY JESSICA B. PASTORINO, 

PRESIDENT, M&A SECURITIES GROUP, INC. 

87 

88