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75–590 PDF 2012

THE JOBS ACT IN ACTION PART II: OVERSEEING 

EFFECTIVE IMPLEMENTATION THAT CAN GROW 

AMERICAN JOBS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES 

AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS 

OF THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 28, 2012 

Serial No. 112–169 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

DAN BURTON, Indiana 

JOHN L. MICA, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

MICHAEL R. TURNER, Ohio 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

CONNIE MACK, Florida 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

ANN MARIE BUERKLE, New York 

PAUL A. GOSAR, Arizona 

RAU ́ L R. LABRADOR, Idaho 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

JOE WALSH, Illinois 

TREY GOWDY, South Carolina 

DENNIS A. ROSS, Florida 

FRANK C. GUINTA, New Hampshire 

BLAKE FARENTHOLD, Texas 

MIKE KELLY, Pennsylvania 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

EDOLPHUS TOWNS, New York 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

DENNIS J. KUCINICH, Ohio 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

MIKE QUIGLEY, Illinois 

DANNY K. DAVIS, Illinois 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

CHRISTOPHER S. MURPHY, Connecticut 

JACKIE SPEIER, California 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

ROBERT BORDEN, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman 

FRANK C. GUINTA, New Hampshire, Vice 

Chairman 

ANN MARIE BUERKLE, New York 

JUSTIN AMASH, Michigan 

PATRICK MEEHAN, Pennsylvania 

JOE WALSH, Illinois 

TREY GOWDY, South Carolina 

DENNIS A. ROSS, Florida 

MIKE QUIGLEY, Illinois, Ranking Minority 

Member 

CAROLYN B. MALONEY, New York 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

JACKIE SPEIER, California 

JIM COOPER, Tennessee 

(III) 

C O N T E N T S 

Page 

Hearing held on June 28, 2012 ............................................................................... 1 

WITNESSES 

The Honorable Mary Schapiro, Chairman, U.S. Securities and Exchange Commission 

Oral Statement ................................................................................................. 4 

Written Statement ............................................................................................ 7 

APPENDIX 

The Honorable Patrick McHenry, a Member of Congress from the State 

of North Carolina, Opening Statement .............................................................. 40 

(1) 

THE JOBS ACT IN ACTION PART II: OVERSEEING EFFECTIVE IMPLEMENTATION 

THAT CAN GROW AMERICAN JOBS 

Wednesday, June 28, 2012 

HOUSE OF REPRESENTATIVES

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES, AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS, 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 9:35 a.m., in Room 

2247, Rayburn House Office Building, Hon. Patrick T. McHenry 

[chairman of the subcommittee] presiding. 

Present: Representatives McHenry, and Quigley. 

Staff Present: Ali Ahmad, Majority Deputy Press Secretary; Will 

L. Boyington, Majority Staff Assistant; Drew Colliatie, Majority 

Staff Assistant; Brian Danes, Majority Professional Staff Member; 

Peter Haller, Majority Senior Counsel; Christopher Hixon, Majority 

Deputy Chief Counsel, Oversight; Jeff Wease, Majority Deputy 

CIO; Jaron Bourke, Minority Director of Administration; Kevin 

Corbin, Minority Deputy Clerk; Jason Powell, Minority Senior 

Counsel; Brian Quinn, Minority Counsel; and Davida Walsh, Minority Counsel. 

Mr. MCHENRY. The Subcommittee on TARP, Financial Services 

and Bailouts of Public and Private Programs will come to order. 

In today’s hearing, we are going to hear from the Chairman of 

the Securities and Exchange Commission, and, as we know from all 

the headlines in the newspapers today, this is the largest news in 

the world. But in all seriousness, we are very grateful for Chairman Schapiro’s presence here today. She has always been forthcoming and forthright. 

As is the tradition of the Oversight and Government Reform 

Committee, we are going to read the mission statement of this 

Committee so we can keep that in mind for today’s proceedings. 

The Oversight Committee mission statement: We exist to secure 

two fundamental principles: first, Americans have the right to 

know that the money Washington takes from them is well spent 

and, second, Americans deserve an efficient, effective government 

that works for them. Our duty on the Oversight and Government 

Reform Committee is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers, because taxpayers have a right to know what they get from their government. 

We will work tirelessly in partnership with citizen watchdogs to deVerDate Aug 31 2005 14:13 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\75590.TXT APRIL
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liver the facts to the American people and bring genuine reform to 

the Federal bureaucracy. 

I will now recognize myself for five minutes for the purposes of 

an opening statement. 

Approximately three years into an economic recovery, America’s 

labor and capital markets continue to face unprecedented challenges. The U.S. unemployment rate has now been above 8 percent 

for 40 consecutive months and nearly 24 million Americans are either unemployed or underemployed. 

Since the beginning of the 112th Congress, the Oversight Committee has remained committed to identifying and modernizing outdated securities regulations that limit job growth and access to capital, which, as we know, is a lifeblood of our economy. 

Today’s hearing advances our efforts as we welcome the Securities and Exchange Commission Chairman Mary Schapiro to address these major Commission reforms urged by this Commission, 

such as the SEC’s new policy on cost-benefit analysis, which we 

welcome, and implementation of the JOBS Act, which we want to 

remain vigorously committed to exercising oversight so we know 

what is happening with Commission proceedings. As I said at the 

opening, I certainly appreciate Chairman Schapiro’s willingness to 

engage in this oversight, as well as being forthright on her views 

on all of this. We know it is a Commission with five members, but 

the Chairman obviously has significant sway. 

During the Subcommittee hearing in April of this year, Chairman Schapiro committed to the policies and principles of a staff 

guidance document and the use of cost-benefit analysis in the Commission’s rulemaking. As I said, we welcome that. I think that is 

a significant step and we certainly appreciate that. 

Chairman Schapiro’s dedication to vigorous cost-benefit analysis, 

particularly after former SEC Inspector General David Kotz issued 

a critical report on cost-benefit analysis procedures at the Commission, as well as a number of other lawsuits. We appreciate the fact 

that the Commission acted swiftly and that Chairman Schapiro 

went even further and published this document and made it public 

to market participants and those that care about what the SEC 

does. 

We want to talk about that today and we want to give you an 

opportunity to explain where things stand with the cost-benefit 

analysis memo and how that is moving forward. But also we want 

to make sure that the American people know what is happening 

with the SEC’s actions when it comes to the JOBS Act, portions of 

which were built around the efforts of this Subcommittee and a letter from Chairman Issa to Chairman Schapiro in March of last 

year. That was a very positive exchange and the type of reforms 

the American people can be proud of. 

In particular, Title III of the JOBS Act I have a personal interest 

in, as well as millions of small businesses around the Country, and 

it is based off of legislation I sponsored here in the House which 

is, in essence, crowdfunding, and it creates a new federal securities 

exemption to permit equity-based crowdfunding. After I introduced 

the crowdfunding bill in the House, we went through the Financial 

Services Committee. 

3 

My colleague on this Subcommittee, Carolyn Maloney, who also 

serves on the Financial Services Committee, raised a number of 

concerns in our first hearing. We tried to work together to craft an 

addition to deal with this fraud question and to put in place what 

we thought was finely crafted legislative language that would protect against fraudsters and, at the same time, give the SEC the 

power to make those rules and do it in a cost-effective way. It was 

a bipartisan bill. I was very proud to work with Carolyn Maloney 

on that legislation, and I think, based on that collaboration, that 

is a big reason why we were able to get over 400 votes for this bill 

coming out of the House. I think that is also why the President endorsed this idea not just in his jobs speech, but in the legislation 

we crafted in the House. 

Well, unfortunately, I think a few Senators, with some final 

changes that they made to the JOBS Act, were misinformed and 

misunderstood the opportunity the crowdfunding allows for and the 

nature of crowdfunding and, as such, there was an eleventh hour 

change to the JOBS Act, in Title III of the JOBS Act that deals 

with crowdfunding, that causes some concerns. We had a hearing 

earlier this week, and I am sure, Chairman Schapiro, you and your 

staff saw some of what came out of that hearing, and there were 

concerns about the legislative language, but there was broad consensus that the SEC can create rules and do so in a cost-effective 

way to allow crowdfunding to take place so that small issuances 

don’t have the heavy regulatory burden that the large issuances in 

our markets bear. 

Now, the large issuances certainly have a greater capacity to 

bear those costs than the smaller issuances. That is just economic 

reality. So I will have a number of questions about this 

crowdfunding piece of the JOBS Act. I am very concerned about 

that implementation and making sure that it is done in a cost-effective way so that small issuances can actually occur and do so in 

a way that is economically feasible. 

I certainly appreciate your willingness to be here. I thank you for 

your public service very sincerely. You have had a very long career 

in public service and have done so in a very honorable way, and 

I certainly appreciate that. 

With that, I recognize Mr. Quigley, the Ranking Member. 

Mr. QUIGLEY. Thank you, Mr. Chairman. Despite its importance, 

good morning, I do predict we will have a ratings dip in about 15 

minutes. 

I also want to thank Chairman Schapiro, who has been a regular 

witness at this Committee and has been exceptionally generous 

with her time. It is a great benefit to the Committee to hear your 

testimony and we especially appreciate it during this very busy 

time at the SEC. 

As you know, Congress passed two major reforms of security 

laws and regulations over the last two years: in 2010, Congress 

passed, and the President signed into law, the Dodd-Frank Wall 

Street Reform and Consumer Protection Act and, of course, earlier 

this year Congress passed, and the President signed, the JOBS Act, 

and, again, I appreciate the Chairman of this Committee’s role in 

that legislation, the Subcommittee. 

4 

But the Acts are two sides of the same coin and will both be important to job creation and our economic recovery. The SEC has 

significant responsibilities under each Act to promulgate new rules. 

This process is necessarily careful and deliberate. Congress has 

made it clear that rules should be evaluated according to their cost 

and their benefits. With regard to the JOBS Act in particular, I 

hope the SEC carefully considers how best to protect investors 

while achieving our goals in passing that law. 

Going forward, I am confident in Chairman Schapiro and the 

SEC, even as they deal with short time lines. However, I think it 

is important that Congress keep in mind the SEC’s substantial responsibilities when considering its budget and resources. 

So I want to thank the Chairman and thank our witness for her 

testimony. 

Mr. MCHENRY. It is the policy of the Oversight and Government 

Reform Committee to swear in all witnesses, so the Chairman has 

risen. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth, and nothing but 

the truth? 

[Witness responds in the affirmative.] 

Mr. MCHENRY. Let the record reflect that Chairman Schapiro answered in the affirmative. 

We will now recognize the Chairman of the Securities and Exchange Commission, Mary Schapiro. 

STATEMENT OF THE HONORABLE MARY SCHAPIRO, 

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Thank you, Chairman McHenry, Ranking Member Quigley. I appreciate the opportunity to testify regarding our 

implementation of the JOBS Act, as well as economic analysis in 

SEC rulemaking. 

In the two months since my last testimony on these issues, we 

have continued to work hard to implement the new statutory provisions and to ensure that our rulemaking fully incorporates appropriate and rigorous economic analysis. 

As you know, the JOBS Act makes significant changes to the federal securities laws. It changes the IPO process for emerging 

growth companies; requires the Commission to modify the ban on 

general solicitation in advertising; directs the Commission to implement exemptions for crowdfunding offerings and unregistered public offerings of up to $50 million; and increases the number of holders of record that trigger public reporting. The JOBS Act also requires that the Commission conduct several studies and prepare reports for Congress. 

The Commission’s commitment to the successful implementation 

of the JOBS Act is evident from our actions to date. Where provisions of the law were effective upon enactment, we have already 

provided information and guidance to the public to assure those 

provisions are put in place in an orderly and effective manner. For 

example, on the day of enactment we posted on the Commission’s 

website procedures for submitting draft registration statements for 

confidential review, and that very day we received the first conVerDate Aug 31 2005 14:13 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\75590.TXT APRIL
5 

fidential registration statement from an emerging growth company 

using those procedures. 

We set up email boxes on the SEC website through which the 

public can submit comments on JOBS Act provisions before we 

even issue any proposed rules. Already we have received substantial constructive feedback from a wide range of interested parties. 

And soon after enactment the staff prepared and posted on the 

Commission’s website several sets of frequently asked questions 

about matters ranging from the law’s IPO on-ramp to its new registration and de-registration requirements. The extensive information the staff has made available is easily and clearly accessible on 

the SEC’s website and feedback from companies and their advisors 

has been extremely positive. 

Where provisions of the law required rulemaking, we formed 

intra-agency rule writing teams which are meeting with interested 

parties, considering public comments, and preparing recommendations for the Commission. 

As I have mentioned previously, some of the rulemakings have 

unrealistically short deadlines. For example, the 90-day deadline 

for revising Rule 506 and Rule 144(a) to allow for general solicitation with the statutory requirement for reasonable steps to verify 

accredited investor status for Rule 506 offerings simply does not 

provide time for drafting a new rule with a rigorous economic analysis, considering public input, and reviewing a proposed final rule 

at the Commission level. We have, however, made significant 

progress on a recommendation and economic analysis, and hope 

that the Commission will be in a position to act in the near future. 

With respect to the crowdfunding provisions, the staff is already 

crafting the many rules required by the Act, has published frequently asked questions, and is evaluating the more than 80 public 

comments already received. We are doing our best to meet the ambitious JOBS Act deadline of 270 days to complete the required 

rulemaking. 

As I mentioned in earlier testimony, economic analysis is an integral part of all rulemakings, including JOBS Act rulemaking. The 

staff guidance for March is being followed for both rule recommendations already in process and those at the earliest stages 

of development. Since the guidance was implemented, the Commission has approved three final rules. Each of these rules included 

economic analyses consistent with the guidance. 

In addition to implementing the guidance, we are strengthening 

our rule writing teams by hiring additional economists. In the near 

future, 16 Ph.D. economists will be joining the Commission to assist in rule writing, and we have requested an additional 20 economist positions as part of our 2013 budget request. And, of course, 

this supplements the already 23 economists we have who are devoted exclusively to rule writing. Our ability, of course, to fill future positions will depend on the resources provided by Congress. 

In conclusion, we are making significant progress in implementing the JOBS Act and are providing significant guidance to 

the public to ensure its provisions are workable and comprehensible. Further, the economic analysis guidance is informing our 

rulemaking and will continue to do so going forward. 

6 

And I would, of course, be pleased to answer any questions you 

have. 

[Prepared statement of Ms. Schapiro follows:] 

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Mr. MCHENRY. Thank you, Chairman Schapiro. Thank you for 

your testimony. 

Members may have seven days to submit opening statements for 

the record. 

I will now recognize myself for five minutes. 

In your written statement, Chairman Schapiro, you said something very encouraging: On the same day the President signed the 

JOBS Act into law, the staff received a confidentially submitted 

registration statement from an emerging growth company that 

used the new procedures the staff had posted earlier. That was fast 

action, right? That is positive. 

And by its nature you have entrepreneurs who are waiting; they 

want to act; they want to use this. You outline in your opening 

statement that one of the things you have done on crowdfunding 

is to inform market participants that it is not yet available; the 

rules have not yet been crafted. Clearly, entrepreneurs want to 

participate, want to be active. 

So, to that end, there is another provision within the JOBS Act, 

which is the lifting of the general solicitation ban. As you outline 

in your statement, you believe that the July 4th deadline will not 

be met. Is that correct? 

Ms. SCHAPIRO. That is correct, Mr. Chairman. 

Mr. MCHENRY. When do you foresee this happening? 

Ms. SCHAPIRO. I expect that in the next two days we will actually 

publically publish the timeline for the Commission consideration of 

lifting the general solicitation ban, and I expect that it will be done 

this summer. 

I think it is important to note that if it were as simple as just 

eliminating the general solicitation ban, and I read the transcript 

from the prior hearing, so I understand that there was some discussion about this, that would be a relatively straightforward thing 

to do. But, of course, the statute actually requires that we require 

issuers to take steps, reasonable steps to verify that purchasers of 

the securities are in fact accredited investors, using whatever 

means the Commission determines appropriate. 

Taking steps to verify means there are probably lots of alternatives for doing that. Under our cost-benefit analysis guidance, we 

have to actually look at the different alternatives and weigh the 

costs and benefits of different alternatives for verification of accredited investor status. So we want to create something that is workable and usable. That is absolutely our goal. But it is a bit more 

challenging a rulemaking than it might seem on the surface because of that extra statutory requirement. 

With that said, the staff is significantly along in both the economic analysis and the rule drafting, and will come before the 

Commission this summer. 

Mr. MCHENRY. Okay. Well, in context of this, entrepreneurs are 

waiting, and we would urge you to move forward with that. 

Now, there is also a deadline of December 31st for the Section 

III of the JOBS Act, which is the crowdfunding portion. Do you 

foresee meeting this deadline? 

Ms. SCHAPIRO. I don’t foresee not meeting the deadline. The staff 

is working very hard on it. There are lots of rules, as you know. 

I know that you weren’t happy about all of the rules that were 

24 

added, the requirements, but we are working already on the issuer 

disclosure requirements, which are fairly straightforward, but also 

the intermediary and funding portal requirements of the statutory 

provisions. So I think it is challenging, but I don’t have a reason 

to tell you at this point that we won’t make that deadline. 

Mr. MCHENRY. When will you issue a timeline for this rulemaking? 

Ms. SCHAPIRO. We haven’t formally issued a timeline. We don’t 

normally formally issue specific timelines. We did, under DoddFrank, give general ranges of three-month periods during which we 

hoped to get certain rules across the finish line or proposed. Because this one has a pretty short time frame, we need to get proposals to the Commission in the next several months so we can 

have a comment period and then take it to final. 

I will say we have benefitted enormously in this one in particular 

from the advanced comment period that we had. I believe we have 

gotten close to 80, if I am remembering the correct rule, comment 

letters about how we ought to implement these rules. We have had 

multiple meetings with funding portals, with associations that represent the crowdfunding industry, and with individuals. So that is 

really helping to short-circuit some of the process in the sense that 

we are building up a base of knowledge very quickly at the SEC 

for handling this. 

Mr. MCHENRY. So due to the potential costs associated with the 

layers of lawyers and accountants and financial intermediaries, 

and on and on and on, on crowdfunding, we had testimony earlier 

this week that one expert believes that, because of that layering on 

of the Senate provisions inserted on crowdfunding, that if the rules 

are not implemented correctly at the SEC, the crowdfunding could 

be ‘‘stillborn.’’ That is a pretty strong statement. 

But after conducting a rigorous cost-benefit analysis on 

crowdfunding rules under the JOBS Act, if you believe that these 

costs would render impracticable some or all of the uses of 

crowdfunding, basically price out small issuances, will you commit 

to telling this Committee immediately that that is the case? 

Ms. SCHAPIRO. I absolutely would. But our goal is to create a 

workable exemption. This exemption exists under statute. Our approach is going to be to follow the language of the statute, but to 

create exemptions that actually can make crowdfunding work. And 

my personal belief is that the requirement to using intermediary 

can be enormously helpful here because it can routinize a lot of the 

things that people might be concerned that they need to have lawyers to do for them or accountants to do for them. 

So I think it will be both an investor confidence issue to use an 

intermediary, will give people some confidence that there is a regulated entity in this process somewhere; but I think it will also 

make it much easier for entrepreneurs to navigate the exemption 

and its requirements. 

So we will be very sensitive to these issues about cost and I will, 

of course, come back to Congress if we think there are things that 

are statutorily required that make it unworkable, but I am optimistic that we can write the rules that satisfy both the needs of 

small businesses to be able to use this effectively and efficiently, 

but also have basic investor protections in place. 

25 

Mr. MCHENRY. Even small issuances? 

Ms. SCHAPIRO. Yes, even small issuances. 

Mr. MCHENRY. Okay. Thank you. 

I will now recognize Mr. Quigley. 

Mr. QUIGLEY. Thank you, Mr. Chairman. 

To the other side of that coin, Ms. Schapiro, I supported the 

JOBS Act and the crowdfunding provisions in it, but all the questions I asked are still what we are concerned about today, because 

many of the investors in crowdfunding are going to be comparatively unsophisticated, and there is information asymmetry or disparity there. How do you take that into consideration on the SEC 

side, because they are perhaps particularly vulnerable for the lack 

of sophistication or expertise of practice and investing in this sort 

of project? 

Ms. SCHAPIRO. Congressman, I think it is a very fair question 

and I want to say that the version of the bill as passed did build 

in a number of investor protections, including disclosure requirements for issuers, the use of intermediaries who are subject to 

oversight of the SEC or a self-regulatory organization. 

But also there are requirements for intermediaries to take measures to reduce the risks of fraud in these transactions, so those requirements will obviously be built out in the rules, but they include 

background checks, for example, on people who are associated with 

the issuer. And then I can tell you that we will monitor very closely 

how the exemptions are used, and if problems arise we will address 

those very quickly. 

It is our goal, obviously, to protect investors and I think everybody clearly shares the goal of having this be a useful exemption, 

and if it is fraught with fraud, it won’t be useful for anybody. So 

we understand that balance. We will work very hard to get it right, 

but I do think the statutory provisions build in some basic investor 

protections that will be very helpful. 

Mr. QUIGLEY. Thank you. You are have often asked about costbenefit analysis. It is hard to quantify everything, put everything 

we might need into the issue of investor confidence, but earlier this 

week we had a hearing on this matter and Professor John Coffee 

of Columbia University Law School testified, he said the greatest 

enemy of job creation today is not over-regulation, but the loss of 

investor confidence. In particular, ‘‘American investors have lost 

confidence in the initial public offerings process and the integrity 

of the mechanisms for capital raising.’’ I want to get his quote 

right. 

As this process went on, I think it was March 13th, you wrote 

a letter to Senate Banking Committee Chairman Tim Johnson, and 

the Ranking Member, Senator Shelby. You said something similar: 

We must balance our responsibility to facilitate capital formation 

with our obligation to protect investors and our markets. I am concerned that we lack a clear understanding of the impact that the 

legislation’s exemptions would have on investor protection. 

If your concerns and the point that Professor Coffee made are as 

accurate as they seem, how does the SEC take into consideration 

in this cost-benefit analysis, how do you put a dollar figure on lost 

investor confidence? 

26 

Ms. SCHAPIRO. It is notoriously hard to quantify the benefits of 

any regulation. How do you quantify the benefits of preventing a 

fraud? How do you quantify the benefits of somebody who is 

burned—— 

Mr. QUIGLEY. Because it is not just the dollars they lost, which 

some people—— 

Ms. SCHAPIRO. No. It is their unwillingness to ever engage with 

the markets again—— 

Mr. QUIGLEY. And people that are out there are just not putting 

their dollars in. 

Ms. SCHAPIRO. Exactly. It is a concern about the integrity of the 

marketplace, whether they are placed at a competitive disadvantage vis-a-vis institutions; whether they are getting accurate and 

honest information from issuers; whether the market structure 

itself is tilted against the individual investor and in favor of the institutional investor. And those are all things we worry about all the 

time because, at the end of the day, investor confidence is the oxygen that the markets survive on, and if we lose it, it is extraordinarily hard to regain it. 

And if you look at one very specific example I like to use, after 

the flash crash of May 6, when the markets plummeted very quickly and companies traded $40 a share to $0.02 a share, we saw net 

outflows from equity mutual funds every single week for about 

eight or nine months because people just said this is not a marketplace for me; I don’t have confidence in its integrity. That was a 

market structure issue, not an information disclosure issue, but, 

nonetheless, we know market confidence matters enormously, and 

investor confidence. 

It is hard to quantify and the GAO, in a recent study, recognized 

how difficult it is to quantify the benefits of investor confidence. 

Where we can’t quantify it, we will talk about it qualitatively and 

we will talk about why it matters, and we will talk about the larger 

economic crisis and what that has done to investor confidence and 

use that as part of our analysis. 

Mr. QUIGLEY. Thank you. 

I yield back. 

Mr. MCHENRY. I recognize myself for a second round of questions. 

My colleague referenced your letter of March 13th to Chairman 

Tim Johnson and the Ranking Member of the Senate Banking, 

Housing and Urban Affairs Committee, Richard Shelby. You outlined a number of concerns you have with the legislation, the JOBS 

Act that we passed, and in particular you have a number of concerns with the legislation that I wrote that was inserted into the 

JOBS Act on crowdfunding. Was this letter in response to a letter 

sent to you? 

Ms. SCHAPIRO. No, Mr. Chairman, it was not. 

Mr. MCHENRY. So it was unsolicited? 

Ms. SCHAPIRO. It was unsolicited. These were my views that I 

thought were important for me personally to express to the Senate 

Banking Committee. 

Mr. MCHENRY. Do you have my address? And I only say this in 

a joking fashion because I have seen you a number of times. You 

have been before this Committee a number of times. I appreciate 

27 

you being forthright with me. And as the Chairman of the Securities and Exchange Commission, or if you were just a citizen, I 

would respond to your letter. I would read your letter. In fact, I 

read your letter at the time, and had you raised these objections 

to me or—I don’t want to speak for my colleague from New York, 

Carolyn Maloney, but we would have addressed these provisions in 

the bill that we passed out of the House with over 400 votes. I 

think the President would have liked to have heard that before he 

issued a statement of administrative policy on my crowdfunding 

bill. And, finally, this is right before the Senate takes this issue up 

and you outline these concerns. 

Chairman Schapiro, I would welcome your input to my legislation in an effort for me to fix it, and I would welcome your engagement in this process, but when I see this, I view that as being sideswiped by a regulatory body at the eleventh hour. This caused me 

great concern, and I don’t think that was the most responsible action for you to take. The more responsible thing I would encourage 

you to do is to communicate so we can fix it coming out of the 

House and address these concerns. 

I amended half of my bill, over half of my bill because of a concern that a colleague of mine across the aisle had. If the Chairman 

of the Securities and Exchange Commission came to me with concerns about legislation I was writing that the Securities and Exchange Commission was going to write rules based upon, I would 

absolutely, absolutely take that into account. 

So I just want to express to you my deep regret that you didn’t 

address this earlier or to me. And to send an unsolicited letter to 

the Senate at the eleventh hour is, I don’t think, the best way to 

go. If you were responding to some letter, I think that would maybe 

be more valid, but in the future I would like you to address that, 

especially if I have anything to do with the legislation. I would certainly welcome it. 

Ms. SCHAPIRO. Mr. Chairman, I appreciate that and I will absolutely make sure that, with future bills, that I talk to you or to the 

sponsors of those bills in advance. I did testify about some concerns 

we had with respect to a number of provisions. I don’t know whether they were directly incorporated in legislation at the time, but 

with respect to the capital raising process and the small business 

capital raising process in particular, but I hear your point. 

Mr. MCHENRY. Thank you. 

Now, earlier this week, Mr. Cartwright testified before the Subcommittee and he said, ‘‘After all, the SEC had sufficient authority 

to do almost everything the JOBS Act did without any legislation 

at all. Unfortunately, the JOBS Act was necessary precisely because the SEC did not believe in the need for what the JOBS Act 

seeks to accomplish.’’ 

The reason why I say this in context with your letter earlier is 

you have testified since the JOBS Act became law that you would 

abide by the law. But your letter to Tim Johnson and Richard Shelby exhibits that you didn’t like the law as it was written. So do you 

believe that the SEC had the authority to make these changes that 

are within the JOBS Act? 

Ms. SCHAPIRO. Mr. Chairman, my letter raised some specific 

issues and concerns I had that I thought should be addressed in 

28 

final legislation that I believe were important for investor protection and, frankly, important for successful capital raising so that 

we could avoid the potential for fraud or misconduct. But I have 

also, as you rightly point out, said many times that it is the law 

of the land; we will implement it faithfully; and I think every action we have taken to date demonstrates exactly that. 

The positive feedback we are getting from the small business 

community, from our small business advisory committee, and even 

some of the witnesses last week, Mr. Cartwright in particular, who 

made the point of saying the SEC seems to be doing this with fervor and with—those weren’t his words, but with real commitment. 

So I think everything we are doing demonstrates our fidelity to the 

statute and to accomplishing the goals of the statute. 

I would have to go through. I think there are some things the 

SEC could have done on its own, certainly could have even done 

when Mr. Cartwright was general counsel of the SEC, but I 

couldn’t tell you, off the top of my head, whether every single thing 

that is in the JOBS Act could have been done without a legislative 

change. We would be happy to do that analysis and provide it for 

the record. 

Mr. MCHENRY. I am more interested in you doing the rulemaking that is currently obligated. 

Ms. SCHAPIRO. I am too. I would like to make this work. 

Mr. MCHENRY. So, again, to this crowdfunding piece. Now, the 

structure of crowdfunding is different in many respects. We have 

great experience with charitable crowdfunding, gift-based 

crowdfunding. The nature of somebody investing $20 in the local 

coffee shop that they go to every day, they want to own a piece of 

it, is structurally and motivationally different than somebody investing $10,000 in the Facebook IPO. Do you agree with that? 

Ms. SCHAPIRO. Absolutely. 

Mr. MCHENRY. So sort of the lower dollar issuances structurally 

are very different; the motivation is different by investors. Is that 

something that you would foresee the SEC incorporating, that 

structural difference? 

Ms. SCHAPIRO. Well, I think certainly there will be many structural differences between offerings done through a crowdfunding 

exemption and a full-blown public offering that is done like 

Facebook or another large company, so we will see that play out 

in disclosure requirements, with respect to sales practices. In all 

sorts of ways there will be many structural differences. 

Mr. MCHENRY. The regulation of portals, as opposed to brokerdealers, you will take that into account as well? 

Ms. SCHAPIRO. Yes. The statute accounts for funding portals to 

be—a funding portal could be a broker-dealer, and we know of 

broker-dealers who are interested in doing this. But we also know 

of entities that are doing funding for charitable and other endeavors, as you point out, that are also interested in expanding into 

being crowdfunding portals under the JOBS Act, and we would expect them to be regulated differently. There are some limitations 

on their business, but the statute is quite clear that they should 

be regulated differently. 

Mr. MCHENRY. Okay, so the SEC will take that into account. 

29 

Ms. SCHAPIRO. We absolutely will, and we will obviously also put 

all of this out for comment. And the portals have been in to see us, 

a number of them, already, to talk about the things that they think 

are actually important to include, because I think they believe that 

they can perform a real service here and support entrepreneurs 

who want to utilize the crowdfunding exemption to do it successfully; and they want repeat business, so they want it to be successful, and we hear that from them over and over again, that they 

want this to work. 

Mr. MCHENRY. And to that end we heard from one portal who 

was represented by a gentleman, David Hillel-Tuch, who testified 

that ‘‘every securities market and/or offering has a potential for 

fraud, but crowdfunding structures help minimize that risk. 

Crowdfunding is highly transparent and there is substantial feedback from other community participants, the crowd. The crowd 

helps police players and keeps them honest. Portals provide a clear 

and central location for communication by potential investors to 

analyze and share their views on offerings. The web-based structure also allows portals and regulators to provide risk disclosure 

and investor education. In addition, we expect portal operators to 

undertake a gatekeeping role in authenticating issuer identity and 

requiring minimum standards for issuers.’’ 

And this is before rules have even been written he outlines this. 

So do you agree that inherently the structure of crowdfunding, because of the structure of crowdfunding, there are significant protections against fraud? 

Ms. SCHAPIRO. I think, in a sense, it depends. I think those are 

important protections. Many of those are actually captured in the 

statute and I think they are very important. But I think we can 

also have a situation where a portal isn’t policing the issuer, and 

isn’t ensuring that proceeds aren’t transmitted before they should 

be, and isn’t ensuring that there is disclosure. 

And that is why the rules actually matter, that we capture those 

very ideas that are also in the statute in the rulemaking regime 

so that all portals are subject to it because, frankly, as you know, 

one that decides that the rules don’t apply to them and anything 

goes and allows fraud to happen will hurt every single honest one 

that is out there, and that is why the regulatory regime matters; 

and we can’t just assume that because people have approached 

crowdfunding responsibly in the charitable context, that when this 

business is opened up, and there is the opportunity to solicit many 

millions of investors, that everyone will still continue to play by 

those high ethical standards, and that is what the regulatory regime is there to do. 

Mr. MCHENRY. I would say with billions of dollars already operating in this environment, with minimal fraud, that it shows that 

light touch regulation, transparency, basic rules of the road, would 

be sufficient, can be sufficient to that end of mitigating fraud. 

To a different provision, the Minority recommended a witness, 

John Coffee of Columbia University Law School, and I had a few 

questions. Incidentally, he offered this and I thought it was very 

interesting. Innocent and material exemption. That is Rule 508 in 

Reg D. So it is done for accredited investors currently, if I am to 

understand correctly. So this innocent and material exemption 

30 

could be applied to crowdfunding issuances. Do you foresee that 

and would you support that? 

Ms. SCHAPIRO. I can’t predict what the Commission will do, but 

we—— 

Mr. MCHENRY. Would you support it? 

Ms. SCHAPIRO. The staff and I have talked about it. We think it 

makes a lot of sense. I obviously want to explore it a little bit further, but as an initial reaction I think something like that does 

make sense. We are not looking to catch people with footfalls, so 

insignificant deviations from the requirements of the exemption 

shouldn’t blow the exemption, from my view, and it has worked in 

other contexts. So we would absolutely be looking at that. 

Mr. MCHENRY. Great. That is a great answer. 

Now, in terms of the structure of the bill, we have small 

issuances and we have a graduated scale up to $1 million, the idea 

being that smaller issuances under $100,000 are a little different 

than issuances of $900,000. Do you foresee and would you support 

the rulemaking that, in essence, categorizes issuances based on 

their size? 

Ms. SCHAPIRO. I think it is a very good question and it is something that we have not made any decisions about. At a minimum, 

it is something we could ask questions about in a proposing release, about whether we should create some kind of scale for different size issuances. As you know, we have a lot of comfort with 

scale disclosure at the SEC in other contexts. Title I, the IPO onramp, has a number of scale disclosure provisions in it that we 

think are very manageable from our perspective, so it is something 

we would definitely be looking at. 

Mr. MCHENRY. With that, I will now recognize Mr. Quigley for 

14 and a half minutes. 

Mr. QUIGLEY. Actually, I just have one area of interest, Madam 

Chairman. The other day we talked about leapfrogging and the 

pressures the SEC faces to deal with these two major bills, DoddFrank and the JOBS Act, and that there was a concern that there 

was pressure on you to leap ahead and get to the rules completed 

that aren’t due yet, when there are rules dealing with Dodd-Frank 

that haven’t been completed and past deadlines. Do you feel this 

pressure? And how do you address the political realities out there 

of getting all these done on a timely basis? 

Ms. SCHAPIRO. Well, we absolutely feel the pressure and I wish 

we could be moving more quickly to get all of these rules completed 

at the agency, but we have tried to prioritize based on deadlines 

for Dodd-Frank. We have either proposed or adopted three-quarters 

of the more than 90 rules that we are required to do; we have done 

14 of the 20 or so studies. And this summer I expect we will complete several more of the rules. The biggest piece that is left are 

the over-the-counter derivatives rules, which we would hope to—— 

Mr. QUIGLEY. That is on Dodd-Frank. 

Ms. SCHAPIRO. That is Dodd-Frank. 

Mr. QUIGLEY. And the biggest part left on JOBS Act? 

Ms. SCHAPIRO. JOBS Act? I would say probably the General Solicitation Rule, Reg. A, and the crowdfunding exemption. So there 

are pieces of all of those. We will endeavor to meet the end-of-theyear deadline for crowdfunding. General Solicitation had a 90-day 

31 

deadline and Regulation A doesn’t actually have a deadline, but it 

is a very significant rulemaking. So we do the best we can with our 

staff, and balancing many of the JOBS Act requirements fall to the 

Corporation Finance Division. 

They also have responsibility for the asset-backed securities rulemaking that is going on under Dodd-Frank, as well as conflict minerals in the Congo, extractive industries disclosure rules, and all 

the compensation disclosure rules, including pay ratio. So there is 

a huge burden in that one division and they are doing a phenomenal job and they are pushing things through, but we just keep 

our noses to the grindstone and try to turn things out as best we 

can, roughly prioritizing based on the statutory deadlines. 

Mr. QUIGLEY. Well, good luck with all that, as they say, and I 

thank you for your service. 

Mr. MCHENRY. I thank my colleague. 

I have a few questions on cost-benefit analysis, and I am going 

to start by saying that I appreciate your prompt action on cost-benefit analysis, and the draft guidance that you have put forward and 

you have made public, that you testified that the Commission staff 

is abiding by currently is a welcome sign, and I think that is a good 

government initiative and showed strong leadership on your part 

to make that happen, and I do appreciate it. And like I said at the 

very beginning, you have had a distinguished career in public service that is a rarity in this day, to have a career in public service 

and maintain your reputation at the same time. 

So with this cost-benefit analysis I just have some questions on 

that. And we do appreciate, when we have document requests, that 

you and your staff comply to the best of your capacity to do that, 

and that is helpful. That doesn’t make headlines, but we certainly 

appreciate it. You do have a very fine staff and we are very grateful, and my interaction with the Commission staff, and the commissioners, for that matter, that we have integrity in this body, and 

that is very important not just for our oversight role, but for the 

public, I mean, to have confidence in the markets. And that is obviously a challenge with some of the things that we have seen in the 

past with market failures and fraud that occurs in our public markets, just like fraud occurs, and lawbreaking happens in society. 

In our letter to you on May 23rd, we asked whether job creation 

specifically will be considered in economic analysis, and in your response from June 11th you said, in performing the foregoing analyses with respect to particular rulemaking, the Commission may 

need to consider the impact of the rule on job creation, economic 

growth, and competitiveness of the U.S. exchanges and issuances. 

So I want to understand the word may. Now, I am not a lawyer, 

so the difference between may and shall is very significant. I want 

to understand why it is may consider job creation. 

Ms. SCHAPIRO. Sure. I think we don’t really look at our economic 

analysis as going specifically to that one factor, but we must consider burdens on competition of our rules and we must consider 

whether our rules will promote efficiency, competition, and capital 

formation. And if you equate capital formation potentially to job 

creation, it will certainly be covered in that. 

So I think we don’t separately pull out a line and say this will 

create X number of jobs or this will hurt X number of jobs, but we 

32 

would talk about if our rule might cause people to reorganize their 

businesses in such a way that they avoid our rule and, therefore, 

move overseas. That would obviously have an impact on jobs in the 

United States. So it is a broader inquiry that we must do, but we 

don’t single out job creation necessarily as a specific factor. So I 

think that is the reason for the use of the word may. 

Mr. MCHENRY. Is there a distinction between must and shall? 

And I am not trying to do this as trivia, just in—— 

Ms. SCHAPIRO. Not to me. 

Mr. MCHENRY. Okay. 

Ms. SCHAPIRO. I think generally things are written as shall in 

rules and legislation, and I take it as a directive. 

Mr. MCHENRY. Okay. So when we are talking about economic 

growth, most people think about economic growth in terms of job 

creation, and that, to me, is a question. You outline, as well, the 

Commission is hiring 16 economists and asked for funding to hire 

an additional 20 more in 2013. It is also interesting, because we 

asked this as well, in contrast, in fiscal year 2012 the Commission 

hired 67 new attorneys. Fourteen more have specific start dates 

within the next few months, an additional 24 candidates have been 

offered positions or are pending background checks, and another 65 

positions are under active recruitment. So that is a total hiring of 

170 folks. This is a more than 10 to 1 ratio of attorneys, lawyers 

versus economists. 

So given that recognition that economic analysis must be done, 

there is still this great prioritization of hiring attorneys. 

Ms. SCHAPIRO. I am happy to address that. And I should add we 

have, in addition to the 16 Ph.Ds who are joining us this summer, 

we already have 23 economists working on economic analysis just 

in our Division of Risk Strategy and Financial Innovation. We have 

other economists who do risk modeling and quantitative analysis. 

But you are right, we hire more lawyers than we do economists, 

although this is, I think, the largest ramp up in economists in the 

agency’s history, because we are, everyone needs to remember, a 

law enforcement agency as well, and we bring in the neighborhood 

of more than 700 enforcement cases every year to try to remedy 

violations of the federal securities laws. 

And the other thing that is important is that we have a lot of 

accountants who also both support the enforcement initiatives, but 

also oversee FASB and the accounting standards setting. 

The lawyers we are hiring come to us with very specific experiences really critical to the agency’s ability to carry out its mission, 

so we have been hiring people from hedge funds and private equity 

funds with expertise in broker-dealer risk and operations, structured finance expertise, trading backgrounds, expertise in exchange 

traded funds and derivatives. So we have lawyers who are responsible for much of the market structure, the investment company 

regulation, and the corporate finance disclosure review regulation, 

and we need them to do our jobs and we need them, obviously, very 

much to do the enforcement work. 

Mr. MCHENRY. I certainly understand that and, as I mentioned, 

the current guidance on economic analysis is on your website, and 

you making that public is appreciated and commendable, as well. 

In our panel that we had, we had four panelists earlier this week, 

33 

they all lauded this, and it is rare that you can get four individuals 

testifying before this Subcommittee and agree on anything, so that 

is a very positive thing. And this is binding on staff now? 

Ms. SCHAPIRO. Yes, it is. 

Mr. MCHENRY. Okay. And is this the final rule? 

Ms. SCHAPIRO. It is the operative document right now. The staff 

is following this guidance as it is published on the website. We 

have asked the commissioners if they have comments and additions 

or changes that they would like to see, and we are working through 

that process to see if there are views that the Commission would 

like to have expressed, in which case it could become a Commission 

document, the Commission could actually vote on it. But right now 

this is the operative way forward for the staff in the rule writing 

divisions. 

Mr. MCHENRY. Will you make those comments public? 

Ms. SCHAPIRO. Any changes we make to the document we would 

certainly make public. 

Mr. MCHENRY. And would you explain why those changes were 

made? Would you commit to doing that as well? 

Ms. SCHAPIRO. If it is permissible to do that, if there is not some 

rule that prohibits it. 

Mr. MCHENRY. Okay. Some law or rule? 

Ms. SCHAPIRO. Yes, you know, deliberative process or something. 

Mr. MCHENRY. I am very interested because if it is applicable 

now to the staff and binding on the staff now, then any changes 

could endanger the analysis that is already out there and impact, 

so we would have pre-memo and then have this sort of interregnum 

here that we are currently in, apparently. So the concern there is 

that with any changes—— 

Ms. SCHAPIRO. We explain why. 

Mr. MCHENRY. Yes. 

Ms. SCHAPIRO. That seems fair to me. So, as I said, I have no 

objection, not having been told yet by the general counsel’s office 

that there is a reason we can’t do that. 

But I just want to add I think this guidance—— 

Mr. MCHENRY. Well, they are proximate, so I am sure I can just 

look at faces and determine. 

Ms. SCHAPIRO.—this guidance, I am enormously proud of it and 

I am enormously proud of the staff work that went into it because, 

frankly, I think it informs good policymaking, and that is what we 

need to be about; and it really forces us to go through the kind of 

process you would hope that policymakers would engage in before 

they pass rules that can have a very profound effect on many people. 

Mr. MCHENRY. You released a memo to us with one of our document requests, and it is a memo dated—if we can put it up on the 

slide. This is a draft of October 31st of last year, and you released 

this. It looks like a completed draft. And, go to the next page, this 

deals with President Obama’s Executive Order that outlines that 

independent agencies are supposed to develop a plan for a retrospective of existing regulations, and this was a directive, well, more 

of a presidential request of sorts to independent agencies saying 

you should be doing this and looking back at rules. 

34 

I don’t mean this as a gotcha, we can certainly provide you with 

the memo, but what was interesting is that it outlines in a timely 

fashion from the President’s instruction to independent agencies 

from July of last year, this draft was from October 31st and it outlines the elements of the plan. 

And if we go to the next page here. So we are publishing a plan 

on the Commission’s website. Has that been done? 

Ms. SCHAPIRO. Excuse me. No, Mr. Chairman. That requires the 

Commission to approve the plan, and the Commission has not yet 

voted to approve the plan. 

Mr. MCHENRY. Has it been brought up at a Commission meeting 

or is it still—— 

Ms. SCHAPIRO. It has not been brought up at a meeting; it was 

provided to the commissioners, I believe, October 31st of 2011 for 

their comment, their input, their changes, their views, and that 

process has gone very slowly and we don’t have all of their views 

incorporated into it. 

But I should hasten to add that that does not mean we are not 

doing many things that are already in the plan, because the plan 

incorporated a number of current processes that had been ongoing 

at the Commission for years, like the 10-year regulatory flexibility 

act analysis and responses to requests for relief and guidance, or 

rulemaking petitions that ask us to revisit rules. Our Advisory 

Committee has raised rules with us that give them concerns. We 

have roundtables where rules are raised for us to review. 

We obviously have lots and lots of meetings with industry, and 

they are not shy about telling us about rules that they think we 

need to look at. So a lot of these processes are going on, but you 

are right, we have not published the retrospective rule review because the Commission has not yet voted to do so. I am perfectly 

comfortable with it as it is and would vote to go forward. 

Mr. MCHENRY. Will this be on the agenda for incoming months? 

Ms. SCHAPIRO. I think if we can’t break it loose, we will need to 

put it on a public meeting agenda at some point, yes. 

Mr. MCHENRY. Well, it was interesting because—and I do appreciate this, and I mean this sincerely, that you have released this. 

We requested documents dealing with this and you freely submitted it to us, and I think it is a reasonable draft and it was done 

in a timely fashion to when the President requested it, and, to me, 

part of it says we will put this on the website, we will make this 

public. 

And I want to put this on the slide, because the fact you support 

it—this is an important slide. One more after this. We will take 

several steps to enhance public understanding of our retrospective 

review processes and to engage in more active public outreach 

seeking input for our identification of rules for review and our conduct of such reviews, including—and you go through a number of 

things, public outreach and on and on and on. 

So it is a good memo, and I think the fact that the staff came 

forward, that you support it, is a very positive thing, and I think 

it would be helpful to the market to see this process that you have 

outlined and done it in accordance with the President’s Executive 

Order. 

35 

Ms. SCHAPIRO. Well, I agree with that, Mr. Chairman. In fact, I 

would point out that in developing this document we went out to 

the public twice, in March of 2011, where we asked for public input 

on reviewing existing rules, especially rules that impacted smaller 

businesses, and then again in September we invited public comment specifically on how we should develop this plan. So it was 

done with some care and some thought, so I will endeavor to see 

if I can get it broken loose. 

Mr. MCHENRY. Thank you. I appreciate that. As I said, I know 

you are one of five commissioners, but the chairman has significant 

sway. 

Ms. SCHAPIRO. I hope that is true. 

Mr. MCHENRY. So dealing with cost-benefit analysis, so the SEC 

is going forward. 

We can take the slides down. 

The SEC has put forward this memo; it is binding on the staff 

to actually look at the costs and the benefits of rulemaking. It is 

done in a way that I think economists would say is appropriate and 

rigorous. The procedures, going forward, for a review process are 

significantly different than the previous Commission’s process for 

economic analysis, which has been viewed as more or less perfunctory, rather than essential and essential check-off in order for a 

rule to go forward. You can tell the memo I think is good, in my 

opinion. 

But there are also self-regulatory agencies, and these SROs, 

FINRA, PCAOB, the Municipal Securities Rulemaking Board, these 

SRO rules are subject to Commission approval and, as such, I believe that they should be subject to the same economic analysis 

that the current guidance demands. Do you think that SROs 

should do cost-benefit analysis in their rules? 

Ms. SCHAPIRO. It is a very good question. You know, there are 

32 self-regulatory organizations, and they file something around 

2,000 rules with us every year. So just the volume is quite extraordinary. And I think many of the rules, 77 percent of the rules, in 

fact, go effective immediately upon filing with the SEC. Of those 

that are left, a number have to do with new products, new lines 

of business, particularly for exchanges. 

And in Dodd-Frank Congress very much streamlined the process 

for those remaining rules in a way that would actually bolster 

those businesses’ ability to get to market faster, encourage innovation, and speed. So engaging in a full-blown cost-benefit analysis 

for each of those rules could defeat the purposes that were just put 

in place, of making us go very quickly to approve those rules in 

order to allow them to get to market quickly. 

Mr. MCHENRY. Now, it is a small number that are non-ministerial and non-procedural in nature. Would you say that major and 

significant rulemaking? 

Ms. SCHAPIRO. Well, I think there is probably a way to talk about 

it where it does make sense. I think there are probably some category of rules where more analysis ought to be done. The do an 

analysis of burdens on competition in SRO rules, and we at the 

SEC, in approving those rules, are in fact required to do what we 

call the ECCF analysis, efficiency, competition, and capital formation analysis, when we are looking at SRO rules. So there is that 

36 

which is already done. But there is probably a small subset of SRO 

rules where further analysis, we should be talking about that. I 

don’t disagree with that. 

I do think it would be a mistake to have a blanket requirement 

across all SRO rules because the analysis can take a very long time 

and, again, many of them are more routine and operational, and 

probably don’t call for that kind of an effort. 

I would just also add, as you know, under the JOBS Act, the 

PCAOB rules that would apply to emerging growth companies have 

to be determined by the SEC to be necessary in the public interest 

and promote efficiency, competition, and capital formation, so there 

is that addition. 

Mr. MCHENRY. And to that point the question of public interest. 

Look, I am in your wheelhouse right now; I am talking about an 

SRO and I am talking about the SEC, and you have great expertise 

with your prior experience, your previous job with FINRA, of 

course. So you have great experience with this. So there is certainly rulemaking from the SROs that should take into account the 

draft guidance that you have put forward for the economic analysis. 

Now, how can the SEC rule determine whether or not something 

is in the public interest? Let’s just set aside the ministerial part. 

Let’s set aside sort of paperwork provisions and some basic procedures that so many of these rules, by their nature, the SROs can 

react faster than a government regulatory body in adapting those 

wide variety of rules. So how can you determine if it is in the public interest if there hasn’t been an economic analysis done on significant rules? 

Ms. SCHAPIRO. Well, the SROs are required to discuss the reason 

for the rule, the justification of the rule, what benefits they believe 

the rule will bring to different constituencies. They are required to 

discuss the potential impact of the rule change on competition. 

When we put the rules out for—this is a very important part of the 

process, is when we put the rules out for comment and commenters 

give their views on the burdens on competition or the necessity for 

the rule, we then work with the SRO staffs to make sure they respond to those comments in any final rule approach. 

I don’t want to leave the impression there is nothing there for 

SRO rules; there is. I think the question is on whether on rules 

that have a more major, profound impact we should be seeking 

more economic analysis I think is a fair question for us to look at. 

Mr. MCHENRY. So if we can go to the slide on the dissent from 

SRO rulemaking, it reads: Any rulemaking, whether by a self-regulatory organization such as the MSRB, which is the Municipal Securities Rulemaking Board, or by the Commission itself should be 

the product of a careful and balanced assessment of the potential 

consequences that could arise. The decisionmaking process that led 

to the Commission’s approval of the MSRB’s proposed rule changes 

fall short of meeting the benchmark. The Commission has a fundamental oversight role with respect to SROs, and an undue deference to an SRO in the SRO rulemaking process undercuts the 

basic structure of that regulatory relationship. 

37 

Now, I understand this is a dissent; the majority, three commissioners, you being one of them, were on the other side of this. If 

you could respond to that, I would appreciate it. 

Ms. SCHAPIRO. Sure. I think what I would say is that the majority of the Commission believed the rule did adequately address the 

commenter’s concerns and did an adequate analysis for us to conclude that the rule was appropriate. I will also say, though, that 

this rule was about to become effective by operation of the calendar, because at the outside we only have 240 days to approve or 

disapprove a rule, and then it goes into effect. 

So that said, I think we will always be willing to try to improve 

the analysis of SRO rules and rule filings, and obviously we have 

all read the dissent. Don’t agree with it, but we have all read it, 

and we will strive to do more. 

Mr. MCHENRY. Okay. Thank you. I did want to give you the opportunity to comment on that. 

So I just have a couple other provisions within the JOBS Act 

that I just want to get your feedback on. 

Will you exempt Reg. A from the shareholder cap under 12G of 

the Exchange Act? Do you foresee that? 

Ms. SCHAPIRO. So I understand from the expert that we will consider it, but there was not an explicit exemption provided in the 

statute. But it is something we will consider. 

Mr. MCHENRY. Well, do you believe that the SEC has that authority to provide for that exemption? 

Ms. SCHAPIRO. Yes. 

Mr. MCHENRY. Okay. 

Ms. SCHAPIRO. I am told. 

Mr. MCHENRY. Okay. Okay. And, again, I am not trying to play 

gotcha, and if I go back to questions about SROs, you can play 

gotcha with us. 

Ms. SCHAPIRO. I wouldn’t do that. And, obviously, we can always 

supplement the record, I assume, on that point. 

Mr. MCHENRY. Absolutely. 

Ms. SCHAPIRO. But the Reg. A rulemaking, which is going to be 

a significant one, is one that does not have a time limit, so we have 

prioritized general solicitation and crowdfunding. 

Mr. MCHENRY. Excellent. Very good. Okay, so to accredited investors. Accreditation is obviously unnecessary in the case of transactions among family members, so will the Commission create an 

exemption to the accreditation requirement, if it applies to the 

1500 additional investors, in cases where the shares are transferred or sold to children or grandchildren or family members, in 

cases where shares are received as gifts or inheritance? 

Ms. SCHAPIRO. I don’t think we have made any decision about 

that. It is certainly something we will look at. 

Mr. MCHENRY. If you could comment on that for the record. 

Ms. SCHAPIRO. Sure. 

Mr. MCHENRY. Thank you. 

And the increase to the registration threshold for banks from 500 

to 2,000 shareholders, it failed to include S&L institutions, so will 

the Commission correct this apparent oversight? 

Ms. SCHAPIRO. Well, this is an issue I have spoken with a number of members of Congress about and our staff has met with the 

38 

Community Bankers Association, and we are in the process right 

now of trying to understand the similarities and differences, frankly, between thrift and bank holding companies so that we can understand, for example, what types of reports thrifts file, as banks 

do, with their regulators, whether shareholders have access to 

them. We are also talking with the OCC about that. So it is an 

issue that is still open. I understand the deep interest in it. 

I will say that we have done the research to say that we believe 

there are about 114 thrift and S&L holding companies that are registered right now under the Exchange Act, and of those about 86 

have fewer than 1200 shareholders of record and could delist. So 

given that large a universe, I think we probably need to approach 

this through rulemaking, rather than through a one-off exemptive 

process or something. But it is very much on our radar right now. 

Mr. MCHENRY. Okay. Okay. Thank you. I appreciate that and I 

appreciate your willingness to comment on that. 

Then I would be remiss if I didn’t ask about money market 

funds. And I know you have made enormous comments on this, but 

we are talking about a $2.5 trillion industry, so there is strong opposition from the industry, as well as some State and municipal 

treasurers, as well, and what that would do to liquidity, especially 

in this time where we are looking to what is happening in Europe 

and the implications that that obviously has on world markets and 

liquidity in the world market. So I would give you an opportunity 

to comment, please. 

Ms. SCHAPIRO. I would be happy to. And as you have rightly 

pointed out, I can talk for a very long time on this very subject because I feel very strongly about it. 

The American taxpayer was on the hook when the Reserve Fund 

broke the buck in the form of a guarantee of money market funds, 

which at that time were over a $3 trillion industry in the United 

States, and my view is the American taxpayer should never be put 

in that position again. One way to ensure that is to try to deal with 

the structural weaknesses that exist in money market funds in a 

way that allows their value to actually float to reflect the value of 

the underlying securities, just like any other mutual fund, so this 

event of breaking the buck is not a monumental event that causes 

people to run for the doors. 

And that is the second weakness, is that as the value of a money 

market fund moves towards $0.99, away from the true $1.00 value, 

there is a huge incentive to get your money out at $1.00 and leave 

the losses concentrated in those slower moving small business and 

retail investors who are left in the money market fund, and the potential to create a panic is extraordinary. 

In 2008, when Reserve broke the buck, within a matter of a couple days $300 billion was pulled out of money market funds, and 

it was really only stopped because the Treasury and the Fed 

stepped in with a guarantee program and a liquidity facility, and 

I think before we have another crisis, I hope we never do, but in 

the event we do, I think it would be wise for us to have taken the 

steps to bolster the resiliency of money market funds to withstand 

or to prevent runs. They are very valuable tools. They are used by 

retail investors, by businesses, by State and local governments, as 

you pointed out, and we think they can be made stronger and betVerDate Aug 31 2005 14:13 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\75590.TXT APRIL
39 

ter by either having a small capital buffer to absorb those small 

variations in price or to have their value actually float. 

Mr. MCHENRY. So the Commission has a 337-page proposal, as 

we read, I believe it was yesterday in Bloomberg, I believe. So the 

staff proposal, did it go through the economic analysis? 

Ms. SCHAPIRO. This is a proposal to the Commission, so nothing 

has been made public or published, but it contains an extensive 

economic analysis, yes. 

Mr. MCHENRY. Okay, it does. And it is an either or, either float 

the nav or hold more capital and curb redemptions? 

Ms. SCHAPIRO. Those would be choices that funds could choose 

between. 

Mr. MCHENRY. Okay. Okay. And from what we have heard and 

read, there is not a unity of thought on the Commission quite yet. 

Ms. SCHAPIRO. Not quite yet. And I am ever the optimist, and 

now that they have a document to look at and obviously it is going 

to take a little time to read it and absorb it and have conversations 

with the staff about it, we will see where we go from there. But 

I am optimistic that people will think that this is something that 

needs to be publicly aired and discussed and debated. 

Mr. MCHENRY. Okay. Thank you. 

Chairman Quigley, if you have any final comments or any final 

time you would like. 

Mr. QUIGLEY. I thank you again for your service and appreciate 

your coming back again and again. 

Mr. MCHENRY. And two final things of note. Would you be willing to come back in September and give us an update? We will be 

happy to work with your schedule. We know you obviously keep a 

very hectic and busy schedule, and we do appreciate your willingness to submit to congressional oversight. 

Ms. SCHAPIRO. Of course, I am more than happy to come back. 

Mr. MCHENRY. Thank you. I appreciate it. And again, I have said 

this a number of times, but I do appreciate your public service and 

I do appreciate your willingness to be open and transparent and 

engage in this conversation, this discussion. To that end, I would 

love to give you any opportunity to address anything that I have 

not raised or any comments or any corrections or additions you 

would like to make. 

Mr. QUIGLEY. Although that would be hard to imagine. 

[Laughter.] 

Ms. SCHAPIRO. I can’t think of anything. Thank you. 

Mr. MCHENRY. Thank you. Look, I deeply care about this and the 

work that the SEC does. I want to make sure it is done correctly 

and the American people know what is happening in this process 

so there is some certainty in the marketplace about the process, 

the procedures of the SEC. 

And the final comment I would make to the ability to raise capital in this Country is that entrepreneurs are waiting for these opportunities that will come out of the rulemaking that you are undertaking. Your work is important and it has an enormous impact 

on large and small businesses and economic growth, and entrepreneurs are waiting, and we are certainly interested in the work 

you are doing and certainly appreciate your willingness to work 

40 

with the public and work with interested parties, get their feedback 

and make sure that these rules are done well. 

So thank you for your testimony. Thank you for being here today. 

This hearing is now adjourned. 

[Whereupon, at 10:53 a.m., the subcommittee was adjourned.] 

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