U.S. GOVERNMENT PUBLISHING OFFICE

31–435 PDF WASHINGTON : 2018

OVERSIGHT OF THE SEC’S DIVISION 

OF CORPORATION FINANCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

APRIL 26, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–89 

( 

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(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT

BILL HUIZENGA, Michigan, Chairman 

RANDY HULTGREN, Illinois, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

TREY HOLLINGSWORTH, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

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C O N T E N T S 

Page 

Hearing held on: 

April 26, 2018 ................................................................................................... 1 

Appendix: 

April 26, 2018 ................................................................................................... 35 

WITNESSES 

THURSDAY, APRIL 26, 2018 

Hinman, William, Director, Division of Corporation Finance, U.S. Securities 

and Exchange Commission .................................................................................. 5 

APPENDIX 

Prepared statements: 

Hinman, William .............................................................................................. 36 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn: 

Letter from Rep. Maloney to Hon. Jay Clayton, Chairman, SEC ................ 43 

Response letter from Hon. Jay Clayton to Rep. Maloney ............................. 48 

Response letter from Institutional Shareholder Services Inc. ...................... 54 

Letter from Institutional Shareholder Services Inc. ...................................... 61 

Hinman, William: 

Responses to questions for the record from Representatives Hollingsworth 

and Hultgren ................................................................................................. 66 

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OVERSIGHT OF THE SEC’S DIVISION 

OF CORPORATION FINANCE 

Thursday, April 26, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Present: Representatives Huizenga, Hultgren, Wagner, Poliquin, 

Hill, Emmer, MacArthur, Davidson, Budd, Hollingsworth, Maloney, 

Sherman, Lynch, Scott, Ellison, Foster, Meeks, Sinema, Vargas, 

and Gottheimer. 

Also present: Representatives Hensarling and Royce. 

Chairman HUIZENGA. The committee will come to order. Without 

objection, the Chair is authorized to declare a recess of the committee at any time. 

This hearing is entitled, ‘‘Oversight of the SEC’s Division of Corporation Finance.’’ We are very pleased to have Mr. Bill Hinman 

here. 

I do want to take a personal point of privilege, though, here a 

moment. I know it is take your child to work day. 

We have one special guest. One Mr. Donald, young master Donald, over here. Donald McGahn is joining us, and he is going to be 

heading over to the White House. So, if you have a judicial appointment, this isn’t the right Don McGahn you want to get to. The one 

is—he will be—he will be with the other one a little later. 

I know from my own children over the years, it has always been 

a great opportunity. So, we are glad that we can have this day. 

So, I am going to recognize myself now for 3 minutes to give a 

quick opening statement. As we all know, the Securities and Exchange Commission (SEC) has a three-part mission. Protect investors, maintain fair, orderly and efficient markets, and to facilitate 

capital formation. 

Today’s hearing will focus on the policies and procedures of the 

SEC’s Division of Corporation Finance. CorpFin, as the office is 

better known, is responsible for ensuring that investors are provided with materially complete and accurate information in order 

to make informed voting and investment decisions. This includes 

disclosure requirements when the company initially offers its securities to the public and on a continuing and periodic basis. 

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CorpFin also provides interpretive guidance to companies regarding SEC rules and forms and makes recommendations to the Commission on new rules and revisions to existing rules. 

The Division of CorpFin’s activities and responsibilities include 

regularly monitoring and reviewing filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934 to ensure 

compliance with disclosure and accounting requirements, conducting a comprehensive review of the SEC’s rules governing public 

company disclosure, completing rulemakings to implement disclosure-related provisions of the Dodd-Frank Act, and conducting 

oversight of the proxy process, including the activities of proxy advisory firms. 

One of my biggest concerns is the declining number of public 

companies which has led to fewer investment opportunities for 

main street investors. IPOs have historically been one of the most 

meaningful steps in the life cycle of a company. 

Going public not only affords companies many benefits, including 

access to the public capital markets, but IPOs are important to the 

investment public as well. 

Already, the recently enacted Tax Cuts and Jobs Act has 

strengthened our economy at the local, regional, and national level. 

By making our tax code more competitive, we have signaled to the 

world that America is, again, open for business, investment, and 

job creation. 

To build on this success, we must continue with the pro-growth 

reforms that ensure the United States has the strongest, deepest, 

and most liquid markets in the world. 

Unfortunately, from a regulatory standpoint, it has become increasingly apparent that our capital markets are becoming less and 

less attractive to growing businesses, due to the, quote, unquote, 

‘‘one-size-fits-all securities regulations’’ currently in place. 

Let us work together to reverse this negative trend of declining 

IPOs and focus on capital formation. Hard-working families in 

West Michigan and across the nation rely on capital markets to 

save for everything from college to retirement. 

By making capital formation the priority, we can maximize Mr. 

and Mrs. 401K’s return on their investment, expand opportunity, 

and increase job creation and grow our economy. 

The Chair now recognizes the Ranking Member, the gentlelady 

from New York, Mrs. Maloney, for 5 minutes for an opening statement. 

Mrs. MALONEY. Thank you. Thank you so much and thank you 

for holding this important hearing, Mr. Chairman. 

The SEC’s Division of Corporation Finance is hard to believe the 

most important division in the SEC, because it is responsible for 

ensuring that investors have access to all the information they 

need to make informed investment decisions. 

They review the financial statements and disclosures that companies file and ensure that they are both complete and accurate. 

This is critically important because investors simply will not invest 

in a company unless they have confidence in the company’s financial statements, understand the business model, and are aware of 

all the risks that the company faces. 

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The fact that investors all around the world are so eager to invest in the public companies is a testament to the confidence investors have in the disclosure framework that Congress and the SEC 

have developed over the years. 

In my personal view, we shouldn’t make significant changes to 

that disclosure framework lightly. When in doubt, we should err on 

the side of more disclosure, not less. 

But the Division of Corporation Finance has another role, too. It 

also reviews the filings that companies make for their IPOs, when 

they are offering securities to the public for the very first time. 

In these reviews, the SEC staff reviews the company’s IPO filings 

to ensure that the company is complying with the Federal securities law. 

One very important provision that public companies have to comply with is the so-called, quote, ‘‘anti-waiver provision’’ which prohibits companies from waiving compliance with the Federal securities law. 

For example, a company can’t require all its investors to agree 

not to sue them for securities fraud, or to allow the company to file 

their financial statements only once every 2 years, rather than 

every quarter. 

The anti-waiver provision ensures that the basic investor protections in the securities law, including the right to sue companies for 

securities fraud, are guaranteed for all investors. 

So, I was troubled when I read an article in ‘‘Bloomberg’’ in January, that said the SEC staff was laying the groundwork for a 

change that would allow public companies to strip investors of their 

right to sue for securities fraud in court, and instead force all of 

those claims into secret arbitration proceedings. 

Last month, I led a letter to SEC Chairman Clayton which was 

signed by every single Democrat on the Financial Services Committee. 

The Senate has also sent over a letter strongly opposing any effort to allow public companies to insert these forced arbitration 

clauses into their corporate governing documents. 

I ask unanimous consent to place in the record my letter, Mr. 

Chairman. 

Chairman HUIZENGA. Without objection. 

Mrs. MALONEY. Let us be clear about the stakes here. If the SEC 

allows companies to use these forced arbitration clauses, that 

would essentially be the end of any securities fraud cases in public 

courts. It would definitely be the end of class action lawsuits for 

securities fraud. 

So, when the next Enron or WorldCom comes around, shareholders who have been defrauded wouldn’t be able to hold these 

companies accountable in court at all. 

The reason this issue is so important for this hearing is simple. 

If a company that is preparing for an IPO tries to insert the forced 

arbitration clause into its corporate governing documents, it would 

be the staff in the Division of Corporation Finance that would have 

to decide whether that forced arbitration clause violates Federal securities laws. 

For decades, the SEC’s position has been that forced arbitration 

clauses violate the anti-waiver provision of the Exchange Act. 

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So, allowing companies to use these clauses would be an enormous change in policy that would affect every single investor in our 

markets. 

So, I will be very interested to hear Mr. Hinman’s thoughts on 

this, and will expect to hear whether he supports any efforts to reverse the SEC’s long-standing position on the use of forced arbitration clauses in the bylaws of public companies. 

I thank you, Mr. Chairman. 

I yield my remaining seconds to my dear friend and colleague. 

I just had to get that into the record, because I feel it is important. 

But he deserves a lot more time than what I am yielding on. 

Mr. SHERMAN. Bitcoin is a security and it is an investment. Investment protection is your business. Obviously, initial coin offerings. 

The tax bill, that the Chairman refers to, says you could have a 

zero percent tax on the profit of your factory, but only if you move 

that factory to a foreign country. 

I yield back. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

If you would, actually, give me a copy of the letter. I have not 

seen the letter. All right, that will be inserted in. 

So, with that, Mr. Hinman, we welcome you here. I appreciate 

your time and attention. 

I am sorry I was being delinquent. I have 2 minutes remaining 

in which I am going to be recognizing the Vice Chair of the Capital 

Markets Committee, Mr. Hultgren, from Illinois for 5 minutes. 

Mr. HULTGREN. Thanks, Chairman Huizenga. 

Thank you for convening this hearing today. I have been very 

pleased with the new leadership that we have seen at the SEC 

under Chairman Clayton. 

But I do value these opportunities to have the chance to discuss 

the Commission’s work to promote capital formation and investor 

protection. 

My constituents have been extremely happy with the strong economic growth we have seen over the last year. I believe much of 

the growth is attributable to tax reform. But the common sense 

regulatory relief and reform across governments has also been extremely important. 

I am especially pleased that Chairman Clayton has acknowledged the importance of reducing burdens on public companies, in 

order to increase opportunities for all investors. 

One of the challenges I hear about most frequently, from public 

companies or companies interested in going public, is challenges 

with the shareholder proposal process. 

This committee has spent a significant amount of time exploring 

the damaging effects of activist investors using the shareholder 

proposal process to achieve social change. But this is at the detriment of investors who are simply seeking to build wealth. These 

are many of my constituents who are seeking to save for retirement. 

According to proxy monitor in 2017, proposals related to social or 

policy concerns, that did not relate to long-term shareholder value, 

represented over half of the proposals. 

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This committee has advanced a number of legislative proposals 

to address such issues, including a number of provisions of the Financial Choice Act. 

I am interested in hearing about how the Commission can use 

its existing authority to revisit the shareholder resubmission 

thresholds under Rule 14a–8. 

Last March, under the leadership of acting Chairman Piwowar, 

the Commission proposed a new rule to adopt inline XBRL to 

merge traditional unstructured filing submitted by public companies and mutual funds with standardized machine readable XBRL 

formats into a single filing. 

At the time, Ranking Member Maloney and I wrote the Commission to encourage them to pursue this work to modernize these filings. I believe this is important to both investors and market surveillance by the Commission. 

I hope we will be able to discuss this and that maybe you can 

give us an update on this work. 

Thank you, again, Chairman, for holding this hearing. 

I yield back the balance of my time. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, today, we welcome the testimony of Mr. William, Bill, 

Hinman, Director of the SEC’s Division of Corporation Finance. 

Mr. Hinman, you will be recognized for 5 minutes to give an oral 

presentation of your testimony, and, without objection, your written statement will be added into the record. 

So, with that, Mr. Hinman, you are recognized. 

STATEMENT OF MR. WILLIAM HINMAN 

Mr. HINMAN. Thank you very much, Chairman Huizenga, Ranking Member Maloney, and members of the subcommittee. 

Thank you for inviting me to testify on behalf of the SEC’s Division of Corporation Finance. 

Since arriving at the SEC in May 2017, I have felt very privileged to work alongside the division’s dedicated and talented staff. 

As you mentioned, Chairman, the mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Our division oversees the review of the 

disclosures of companies, and we seek to ensure that investors 

have access to the important information they need to make informed voting and investment decisions. 

In addition, the division provides interpretative advice about securities laws and makes recommendations to the Commission for 

rulemaking in areas of disclosure and securities offerings. The division stands ready to collaborate with companies in discussing how 

to comply with Federal securities laws. 

Our reviews of reporting companies monitor and enhance compliance of the disclosure and accounting requirements we enforce. The 

Sarbanes-Oxley Act requires us to review the financial statements 

of reporting companies at least once every 3 years. In addition to 

these mandated reviews, the division selectively reviews filings 

made for other offerings, business combination transactions, and 

proxy solicitations. 

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Due to the declining number of U.S. public reporting companies, 

the division has been considering ways to make the public company 

alternative more attractive. 

To the extent we are able to attract more companies to join our 

reporting system and to do so at an earlier stage, it will ultimately 

benefit those companies, our markets, and investors. 

Companies that go through the evolution from a private company 

to a public company emerge as stronger companies with better disclosure. 

Investors also benefit when there are more public companies in 

which to invest. This is a high priority. We are taking policy and 

rulemaking steps in this effort. For example, in July 2017, the division expanded its non-public review process for draft registration 

statements. 

This expanded policy now applies to all IPOs for all issuers, not 

just emerging growth companies (EGCs). It allows follow-on offerings during that first year of being a public company to be submitted on a draft basis. 

Companies are taking advantage of that process. It saves them 

money. It allows them to better access market windows. 

Under this expanded process, we received draft submissions for 

more than 20 IPOs, and from more than 50 follow-on offerings from 

registrants that would not have qualified for that review process 

under the old rules. We are hearing that this is very helpful. 

Through this process, companies can avoid preparing and filing 

interim financial information for draft filings if that information 

will be superseded by the time it is made public. 

We still perform complete filing reviews. Investors still continue 

to receive the full financial information and other required disclosure at the time companies publicly file. We have also been working to assist companies in their efforts to comply with our rules in 

other areas. 

Over the past months, the Commission or the division has issued 

interpretations of the pay-ratio disclosure requirements, the new 

tax reform law, and cyber security disclosures. 

The division has also been focusing attention on digital assets 

and on initial coin offerings. 

As this area continues to evolve, we are striving for a balanced 

approach, one that encourages capital formation while maintaining 

a strong focus on investor protection. We also are keenly focused 

on the importance of capital formation by small and emerging companies. 

Congress and the Commission have taken steps, in recent years, 

to provide additional capital-raising avenues through Regulation A, 

securities-based crowdfunding, and Regulation D. 

While at the same time we are doing this, we are maintaining 

robust investor protections under those new exemptions. 

We continue to monitor the use of these exemptions, and we engage with a wide range of interested parties at meetings and at 

conferences around the United States to see how they are being 

used. 

We recognize that small companies and investors can also benefit 

from reduced regulatory complexity. We are considering ways to 

harmonize and streamline our exempt offering rules. 

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Further, the division continues to work on reforms to make our 

disclosure regime more effective. Staff is working to finalize a recommendation for the Commission to raise the financial thresholds, 

under which more companies would qualify for scaled disclosures 

as smaller reporting companies. 

We are reviewing our disclosure requirements and Regulations 

S–K and S–X, considering other ways to improve the disclosure regime for both investors and companies. 

In addition to our disclosure reform efforts, we are looking to fulfill other rulemaking responsibilities, including disclosure rules related to resource extraction, conflict minerals, and executive compensation. 

The division is also exploring where there are rules that could 

encourage more companies to go through the IPO process. We are 

thinking about extending the test the waters provision that was enacted in the Jobs Act for emerging growth companies to a wider 

range of participants. 

Thank you very much for inviting me to discuss the division’s activities and responsibilities. I look forward to answering your questions. 

[The prepared statement of Mr. Hinman can be found on page 36 

of the appendix.] 

Chairman HUIZENGA. Thank you. 

With that, I will recognize myself for 5 minutes of questioning. 

So, as you have talked about in this, and I can’t stress enough 

my concern about the number of IPOs that are happening or, 

frankly, not happening. We have about half as many public companies in the U.S. as we did 20 years ago. 

I think that is detrimental to investors. The common investors, 

not institutional investors. I am very pleased to hear you say that 

the division is looking at ways to make the IPO market more vibrant. 

Can you elaborate a little more on the division’s capital formation agenda and discuss your priorities for enacting and encouraging more companies to go and stay public? 

Mr. HINMAN. Sure. Thank you for that question. 

We are doing a number of things. Some things require rulemaking and that is a longer process, which is one of the reasons 

we first did this broadening of the confidential review process. 

We have heard that companies find it much more useful to be 

able to time the public announcement of their offering closer to the 

time they actually expect to go to market. That gives the company 

less exposure to market vagaries. 

That also works in their first year as a public company where 

prior to being S–3 eligible, companies would have to file and wait, 

perhaps as much as a month before they could go to market. 

Now, with the confidential review process, that window is much 

shorter and they have much less exposure to market fluctuations 

during that period. That is helping people achieve more liquidity 

sooner which is good for investors. That is one area. 

We have been trying to streamline our guidance and make it 

more transparent to users. We have done things as simple as putting more of our direct phone numbers in our manuals that the 

public sees so that they can reach people more quickly on issues. 

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Chairman HUIZENGA. Actual live people? 

Mr. HINMAN. Actual— 

Chairman HUIZENGA. Not voice mail— 

Mr. HINMAN. It still may go to voice mail, but it goes at least to 

the right office mailbox. 

Chairman HUIZENGA. Right. 

Mr. HINMAN. Sometimes people pick up their line. 

Chairman HUIZENGA. Yes. 

Mr. HINMAN. But we have, now, identified the people and the 

phone numbers and the areas you might be interested in and made 

that quite public. 

There is an area in which we have had authority for a long time, 

under Rule 3–13 of Regulation S–X, to provide waivers of financial 

statement requirements, when those statements would not serve 

investors but may be very burdensome to prepare. We have reduced the amount of time it takes a company to go through that 

process. 

We have encouraged companies to come to us earlier in the process and not wait and develop an expensive 30-page letter 

explainging why they should receive a waiver, but to talk to us earlier and find out where our head is on that, and see if we can accommodate the request or not, but to save money in the process. 

Of course, on the rulemaking side, we are doing a number of 

things which I can elaborate on if time permits. 

Chairman HUIZENGA. Great. Well, in 2011, there was an IPO 

task force that asked public company CEOs. It was 92 percent of 

them said that the, quote, ‘‘administrative burden of public reporting was a significant challenge to completing an IPO.’’ 

I appreciate that accumulative effect of those being looked at. 

My colleague brought up ICOs. I want to touch on those as well. 

Do you believe that ICOs could be a potential solution to the declining number of IPOs? I want to have you touch on that. You can 

hit on this if you would like, the differences between an ICO and 

an IPO. 

But do you believe that there are any circumstances, instances 

where an initial coin offering should not be regulated as an offering 

of securities? 

Some have discussed the concept of a utility token. If you could 

maybe take the next minute and a half and touch base. 

Mr. HINMAN. Sure. I think the Chairman has made a number of 

statements around the use of this new technology. We very much 

want to see our efforts not stifle innovation in that area. 

We have developed working groups that cross the divisions, my 

division and Trading and Markets, and Investment Management, 

to work with issuers who are interested in complying with our securities offering rules as they explore these new technologies. 

The issues around whether a particular coin offering may involve 

an offering of a security are somewhat complex. But the drafters 

of the 1933 Act were quite wise and added very flexible provisions 

there. 

An instrument that may be called a coin may still have the hallmarks of a security and need to be regulated as such or be offered 

on a registered basis or an exempt basis. We work with issuers 

that are exploring those options. 

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Chairman HUIZENGA. Can you come up with an instance when 

they wouldn’t or shouldn’t be viewed as securities? 

Mr. HINMAN. In theory, there is a time when a coin may achieve 

a decentralized utility in the marketplace. There are some coins 

where you wouldn’t have an issuer to regulate. They operate on 

their own. 

Our rules, which look to protect investors by providing disclosure, generally require some centralized authority to make those 

disclosures. 

In theory, there may be coins where that lack of central actor 

would make it difficult to regulate at least the offering as a securities offering. 

Chairman HUIZENGA. OK. 

Mr. HINMAN. That said, if someone is raising money and they 

have a stake in that, and they are promoting that, that is usually 

the central authority we are looking to for disclosing it. 

Chairman HUIZENGA. My time has expired. 

With that, I recognize the gentlelady from New York for 5 minutes. 

Mrs. MALONEY. Thank you. 

Mr. Hinman, as I mentioned in my opening statement, I led a 

letter to Chairman Clayton that every single Democrat signed, in 

strongly opposing any effort to allow public companies to use forced 

arbitration clauses on their own shareholders. 

If the SEC allowed this, it would, essentially, be the end of securities fraud cases in Federal court. It would deprive shareholders 

of their ability to hold companies accountable for fraud. I think we 

can all agree that this would be an absurd and wrong result. 

Chairman Clayton sent us a response on Tuesday which included 

an analysis by your division at the SEC. 

While I appreciate Chairman Clayton’s and your detailed response and how seriously both of you looked at our letter, I do have 

a question for you. 

If it was actually reported earlier this year by Bloomberg that 

the SEC staff was, quote, ‘‘laying the groundwork to start allowing 

these forced arbitration provisions.’’ 

I want to ask you, are you or any of the staff in the department 

of the division at the SEC actively encouraging companies to submit registration statements with forced arbitration provisions in 

them? 

Mr. HINMAN. So, I think that the letter that you referenced, in 

response to your inquiry and the other committee members’ inquiry, covers that point. This is something that we are not actively 

looking at, in terms of trying to bring something in and address 

this issue. 

It is a complex issue. It involves our laws and regulations. It involves other Federal laws, such as the Federal Arbitration Act and 

State laws. 

As the Chairman’s correspondence noted, if this issue were to 

come over to my division in the context you mentioned, of an IPO 

of a U.S. company, we would not be declaring that registration 

statement effective at the division level. 

We recognize that this is an important issue, that is in the correspondence. We would defer to the entire Commission. 

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Mrs. MALONEY. Then, where did this report in Bloomberg come 

from, that the SEC was actively pursuing this course? 

Mr. HINMAN. I hate to speculate where the press gets some ideas. 

I do know that it correlated to a conference that was held in 

California. The SEC was not in attendance because the Government was shut down. 

I think panel members there were speculating and I think it got 

translated into the article you read. 

Mrs. MALONEY. OK, thank you. 

Last year, this committee marked up the Republicans Choice Act 

which made sweeping changes to the securities law. One provision 

of the act that got a lot of attention would have raised the threshold for shareholders who were allowed to put proposals on the public company’s ballot. 

Currently, a shareholder can submit a proposal, as long as he or 

she has held either $2,000 or 1 percent of the company’s stock for 

at least 1 year. 

The Choice Act would have eliminated the $2,000 threshold and 

would also have lengthened the holding period from 1 year to 3 

years. Which means that in order to submit a proposal, shareholders would need to own at least 1 percent of the company’s stock 

for 3 years. 

This would make it virtually impossible for ordinary shareholders to submit proposals at the largest companies. For example, 

under the Choice Act, for a shareholder to submit a proposal at 

Wells Fargo, he or she would have to own $2.7 billion worth of 

Wells Fargo stock and hold it for 3 years. 

So, my question is, do you believe that only shareholders who 

own more than 1 percent of very large companies, like Wells Fargo, 

should be able to submit shareholder proposals to get voted on at 

annual meetings? Or do you believe that would unfairly restrict the 

ability of small shareholders to participate and try to influence the 

companies that they own? 

Mr. HINMAN. In the shareholder proposal area, in general, we 

don’t have a rule proposal moving forward, at this time. 

The proposal thresholds that you had mentioned are the current 

rules that we are operating under. Those are somewhat aged. They 

haven’t been looked at in, I think, over 20 years, in terms of either 

adjusting those for inflation or otherwise. 

There have, from time to time, been discussions around what 

would the right threshold be? If we were to engage in rulemaking 

there, we would receive comments from a wide range of people and 

consider all of them. 

We do see the value of the shareholder proposal process and giving shareholders access to the proxy to express their opinions. 

So, we would be mindful of that as we develop whatever new or 

updated rule in this area we would come up with. 

Mrs. MALONEY. Thank you. 

My time has expired. Thank you. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

The gentleman from Illinois, Mr. Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Chairman. Thank you, Director. Appreciate you being here. 

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11 

As a proponent of seeing all aspects of our Government innovate 

with technology, I have been closely following the way the Division 

of Corporation Finance has been trying to implement the use of 

machine readable, searchable, structured data formats in its operations. 

To that end, what efficiencies and productivity gains has the division been able to realize in analyzing filings as it has continued 

to innovate with standardized data? 

Mr. HINMAN. The XBRL tagging of information does assist us, as 

we try to review companies. We now have more modern tools to use 

some of those items to screen for certain characteristics of a financial statement. 

So, we have found them to be of value. 

Mr. HULTGREN. Great. 

On March 1st of last year, 2017, Commissioners Piwowar and 

Stein proposed a new rule to adopt inline XBRL to merge the traditional unstructured filings with the standardized machine readable 

XBRL formats into a single filing. 

I authored a letter to the Commission, with Ranking Member 

Maloney and Representative Issa, with whom I had championed 

the Financial Transparency Act to encourage the Commission to 

continue this work. 

I wonder if you could give us an update on where this proposed 

inline XBRL reform stands? 

Mr. HINMAN. It is something we are actively working on. I do expect to get something out in the next 12 months, in that area. 

Mr. HULTGREN. Great, thank you. 

Chairman Clayton has indicated that on the Commission’s 

longer-term agenda is reviewing shareholder engagement in the 

proxy process. This is something that we have touched on a little 

bit already, but I want to go into a little bit different direction. 

The House has passed legislation sponsored by Chairman Duffy, 

that brings long-overdue transparency, supervision, and accountability to proxy advisory firms. 

In November, Chairman Clayton stated that the Commission 

should be, and I quote, ‘‘lifting the hood and taking a hard look at 

whether the needs of shareholders and companies are being met,’’ 

end quote. 

I have heard from a number of companies and shareholders that 

feel their current needs are certainly not being met. There is particular concern regarding proxy advisory firms in the outsized influence they seem to have in the market, yet they are subject to 

a little oversight and are susceptible to conflicts of interest. 

I was particularly concerned, when I was advised of a filing earlier this month from one pharmaceutical company, Abbott Labs. 

That proxy advisory firm they engaged with was, and I quote, 

‘‘aware of the flaws and inaccuracies of its report and has disregarded our attempts to correct them and proceeded to publish a 

flawed and inaccurate report,’’ end quote. 

I wonder if you have any updates for the committee regarding 

when the Commission will be addressing issues like this? Will the 

Commission reopen the comment file of the 2010 proxy plumbing 

concept release? 

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12 

Mr. HINMAN. As you mentioned, this is an area of interest for the 

Chairman. He and I meet periodically with investor groups, the 

funds and the advisory firms themselves, to talk this through. 

We are still gathering information. The Chairman has indicated 

in some of the speeches informally that proxy plumbing is a topic 

of interest for developing some ideas, in terms of what comments 

to ask for in that area. This is certainly on the list of things that 

we are considering. 

In the meantime, we are applying our 2014 guidance which does 

apply more rigor to the process in watching for compliance in that 

area. 

Mr. HULTGREN. Great, thanks. 

SEC’s Rule 14a–8 provides an opportunity for a shareholder owning a small a relatively amount of the company’s securities to have 

his or her proposal placed alongside management’s proposals in 

that company’s proxy material for presentation to a vote at an annual or special meeting of shareholders. 

The rule generally requires the company to include the proposal, 

unless the shareholder has not complied with the rule’s procedural 

requirements or the proposal falls within one of the Rule’s 13 substantive bases for exclusion. 

On September 22, 2016, the Capital Markets Subcommittee held 

a hearing entitled, ‘‘Corporate Governance, Fostering a System 

That Promotes Capital Formation and Maximizes Shareholder 

Value.’’ Where witnesses from the Society of Corporate Secretaries 

and the Business Roundtable provided compelling testimony for 

making updates in order to reduce unnecessary regulatory burdens. 

The Financial Choice Act that has been discussed, proposed a 

number of changes to Rule 14a–8, that I think would be valuable 

for public companies, investors, and our markets. 

I wonder, does the Commission plan to revisit Rule 14a–8? Specifically, what are your views on increasing the resubmission 

threshold under 14a–8? 

Mr. HINMAN. To the extent that we would open 14a–8, which I 

mentioned, that would probably happen in the context of this request for more comment on the wide range of proxy issues. 

In terms of the thresholds, we would look at where they are. 

Both the initial submission threshold and the recent submission 

thresholds, where once a proposal has been voted down, can it be 

submitted again? Those two have not been looked at for some time. 

So, we would be very interested in public comment on those provisions. 

In the meantime, one of the things that we are doing is trying 

to get more input from the companies’ boards on these topics. 

So, we put out a staff legal bulletin this past year, asking for the 

board’s more in-depth analysis. That has created more engagement 

between boards and shareholders. 

Some of these proposals go away after that engagement happens. 

But it allows us to make rulings on whether it is something that 

can be excluded or not, more effectively. 

Mr. HULTGREN. Thanks, Director. I know my time has expired. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The gentleman from California is recognized for 5 minutes. 

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Mr. SHERMAN. I would like to talk about parity between disclosing long positions versus short positions. 

Securities law requires investors or certain investors to disclose 

their long positions 45 days after the end of each quarter. It would 

require institutions to make disclosures within 10 days after their 

position reaches 5 percent of a company’s outstanding shares. 

But there is nothing corresponding for those taking short positions. I am not criticizing short positions, however there is an 

asymmetry of information. 

It is my understanding that several European countries require 

the disclosure of short positions. 

Here, in the United States, the principles that underlie Section 

13 disclosure requirements, applicable investors with long positions, transparency, fairness and efficiency apply equally to investors with significant short positions. 

Moreover, investors with short positions can pursue strategies 

designed to invisibly drive down share prices or rely on regulatory 

processes to challenge the intellectual company—property of a company intending to profit from the uncertainty created. 

To provide transparency to other investors in affected companies, 

would you support extending the existing disclosure requirements 

for long investors, such as those on forms 13–F, Schedule 13–D, 

and Schedule 13–G, to persons with short positions, including any 

agreements or understandings that allow an investor to profit from 

a loss in the value of a security? 

Mr. HINMAN. Thank you for the question. 

There has been some experimentation in the disclosures around 

short positions post-financial crisis. Certain institutions were required to disclose, in real time, their short positions. DERA, our 

economic analysis division, had an opportunity to look at the cost 

benefits there. 

Mr. SHERMAN. I know you have looked at it. Where do you stand? 

Mr. HINMAN. In that provision, I think they concluded that there 

was not a good return cost benefit for real time reporting of all 

transactions. 

Mr. SHERMAN. This—well, long positions aren’t, for the most 

part, real time. Why not throw away the disclosure of long position? Why require one without a cost-benefit analysis and then say 

to the other, oh, we have decided it isn’t worth doing? 

Mr. HINMAN. I—again, I think this is something that DERA 

would need to look at before we did it, because it would have market effects. I haven’t done that work myself. 

Mr. SHERMAN. Let me shift to another issue. 

The Chairman says that the decline in IPOs might be replaced 

by an increase in ICOs initial coin offerings. I think we missed the 

mark in this meeting because we think that the reason for security 

markets is to let people issue and trade and be securities lawyers 

and be government bureau executives, et cetera. 

The reason for security markets is to provide jobs in the real 

economy. An IPO does that. 

An ICO does the opposite. It takes money out of the real economy. It takes people willing to invest in risk and says, don’t use 

that ability to risk. Don’t use those animal spirits to help create a 

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14 

job for a person who needs one, let alone build a factory for thousands. Sit there and trade back and forth in the ICO. 

Now, it is—these are investments. They are—I think it was you 

that said a balanced approach. 

The balance we have in the real economy is, on the one hand, 

we want people to invest in new companies and factories and provide jobs. But on the other hand, we want to protect the investors. 

So, we have a lot of burdens on somebody who wants to build a 

new factory. 

But with the coins, there is no factory. There are no jobs. We 

have no burden on the invest—no investor protection. 

It is—when you strike a balance between those who are trying 

to create a new currency to facilitate drugs, tax evasion, to deprive 

the fed of its ability to market our securities and return a hundred 

billion dollars or so to the U.S. Treasury, all the balances are for 

total investor protection which could be achieved by totally banning. 

Why aren’t you stopping all the ICOs which are clearly unregulated investments? 

Mr. HINMAN. So, when I talked about taking a balanced approach, what we are trying to do is recognize that this new technology, specifically the blockchain technology that underlies it, may 

have some promise. 

Mr. SHERMAN. Oh, I am not saying ban blockchain. Just ban the 

ICOs. 

Mr. HINMAN. OK. Some folks are finding that the ICO instrument allows for a different type of enterprise. One that is more decentralized in which they think has some value. We are— 

Mr. SHERMAN. Charlatans and scammers have always favored 

decentralized new enterprises. 

Chairman HUIZENGA. The gentleman’s time has expired. 

Mr. SHERMAN. I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the Chair recognizes the gentlelady from Missouri, 

Mrs. Wagner, for 5 minutes. 

Mrs. WAGNER. Thank you, Chairman Huizenga. 

Director Hinman, as you noted in your written testimony, your 

role is to support the SEC’s mission to protect investors as well as 

to maintain fair, orderly, and efficient markets. 

To follow up on my colleague, Representative Hultgren’s, questioning, there are some red flags when it come to the—in particular, to the two largest proxy advisor firms who, together, seem 

to control at least 97 percent of the proxy advisory industry. 

Director Hinman, what are the main factors hindering greater 

competition in the proxy advisory industry, do you think? 

Mr. HINMAN. I am not an economist, so it is hard for me to know 

exactly what would hinder more competition there. 

I do know that the service they provide is basically collecting all 

of the proxies that are out there, looking through, and thinking 

about how a particular matter should be voted on. Once someone 

does all that work and there are one or two people supplying that, 

it is hard for a new entrant to come in. 

Mrs. WAGNER. What steps is the division taking to ensure that 

all proxy advisory firm conflicts of interest are properly disclosed? 

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15 

Mr. HINMAN. That was something that we emphasized strongly 

in our legal bulletin that came out in 2014. We, through our Office 

of Inspections, continue to look at how that is being complied with. 

We are seeing better disclosure than what predated that guidance. 

Mrs. WAGNER. What steps is the division taking to ensure that 

public companies have sufficient time to respond to errors or flaws 

that are made in proxy advisory firm recommendations? 

Mr. HINMAN. As I mentioned earlier, we do meet with these 

firms. We have provided feedback around the kinds of concerns you 

are raising. We have seen an increase in the level of some responsiveness. 

We are still monitoring it, but we do think encouraging the firms 

that are providing these services to listen more actively is something we can do and are doing. 

Mrs. WAGNER. Switching topics. I wanted to spend some time 

talking about cyber-security attacks. 

On February 21, 2018, the SEC voted unanimously to approve 

updated interpretive guidance to assist public companies in preparing disclosures about cyber-security risks and incidents. 

How does this guidance expand upon the guidance issued in 

2011? 

Mr. HINMAN. One of the basic differences is where it was issued. 

The original guidance was issued in my division. The updated guidance was approved by the full Commission and, therefore, has more 

weight. 

But, in terms of the substance, there were maybe three or four 

areas that we concentrated on and brought attention to. 

One was disclosure controls. We reminded companies it is very 

important for them to take cyber risk into account when they are 

looking at their disclosure controls, so that if an attack happens 

and when someone in the front line sees that, they raise it to the 

company’s disclosure experts and more consideration is given to 

timely disclosure. 

But we also reminded companies that as that happens, to enforce 

their insider trading policies. So, now that they have a better sense 

of what is going on at the higher level, they are more apt to apply 

their insider trading policies. 

Mrs. WAGNER. Given the increasing number of cyber security 

breaches, such as the Equifax breach, how does this guidance help 

to ensure that companies have the appropriate procedures in place 

to both prevent and respond to cyber-security incidents? 

Mr. HINMAN. What we were trying to do was to emphasize this 

disclosure point. 

We also—one of the other items that is a little different than the 

old guidance was that we said, when a company has cyber risk as 

a material risk that they face, we expect to see disclosures of how 

their board is overseeing that risk. 

So, board oversight, better controls, and more compliance on the 

insider trader policies. 

Mrs. WAGNER. To that point, can you walk me through more of 

the steps you believe that companies should take after they have 

discovered material cyber-security event has occurred? 

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16 

Mr. HINMAN. Sure. After it has been discovered and you have determined it is material, and that may take a little time because 

these companies are attacked daily. One of the reasons we wanted 

this to be elevated was to make that materiality decision that you 

are referencing. 

Once that decision has been made, insiders with knowledge of 

that should not trade. The company, we would expect, would be 

moving to formulating appropriate disclosures. 

Mrs. WAGNER. What disclosure forms do you think they should 

be using, in the event that they have an event related to the cyber 

security breach? 

Mr. HINMAN. Sure. There are a number of ways. The most common we see is Form 8–K. That is something that is not just done 

quarterly or annually, but can be done at the time an event is occurring. 

Mrs. WAGNER. My time has expired. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

The gentleman from Massachusetts is recognized for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

If we could, I would like to stay right on the same topic that the 

gentlelady from Missouri was talking about. 

So, last year, we had an increase of about 80 percent in the number of cyber-attacks. 

As the gentlelady pointed out, we haven’t updated this guidance 

on cyber-security protocol since 2011. So, exponentially increased 

on the number of attacks. 

But last year, if you sort out the significant cyber-attacks on publicly traded companies, it was about 82 of those companies that 

publicly traded that had major cyber-attacks on their systems. 

Only 3 percent, only 3 percent, filed an 8–K to inform the shareholders that their systems have been hacked. 

So, you have 97 percent of the companies that have been hacked 

failed to file an 8–K to let their shareholders know that there had 

been a significant event. 

The problem seems to be on the definition of materiality. The 

legal counsel within the company is nervous about disclosing the 

hack, because share price will drop and there is vulnerability. That 

is an issue. 

But on the other hand, shareholders have a right to know. Also, 

if we don’t do anything about that, I think this trend will continue. 

The companies will not improve their—there is no price to pay. 

There is no accountability. The companies will not improve their 

cyber protections, and we will just keep seeing the volume of these 

hacks continue. 

How do we get at that decisionmaking being made at the corporate level to encourage—you don’t want to punish a company 

that is a victim of a cyber-attack. I understand that. 

But you do want to encourage them to disclose. That is basically 

the mission of the SEC. 

How do we get these companies to come forward so that we will 

know about the attacks in a timely fashion and protect the shareholders and also the entire system because everything is so interconnected? 

Mr. HINMAN. Thank you for the question. 

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17 

We agree that this is an important disclosure issue and that the 

materiality judgment can be a difficult one. But we do expect more. 

As you mentioned, the 2011 guidance has actually been updated 

at the beginning of this year by the full Commission. It highlights 

some of the items I had mentioned. 

Beyond that, we conduct our reviews of companies. This is an 

item of review priority for us. We look at those each year. This is 

one that clearly we are looking at. 

Then, moreover, when we see a hack occur, we will often pick up 

the phone—our review teams that are familiar with that particular 

company may pick up the phone, talk to counsel, and ask to be 

walked through. Is this something that is material? 

You will see things, sometimes, reported in the press. The company has decided it is not material. We sometimes will ask them 

to walk us through that analysis. 

Mr. LYNCH. Yes, it is still—it is still fairly discretionary, however. Timing is important. 

Where—what we are seeing right now is, like I have said before, 

97 percent not filing an 8–K. Not telling people. 

There needs to be some consequences. I was hopeful that the new 

guidance would get at that issue. I am not sure if a legislative solution is the best way to go here. I would rather have the SEC do 

it themselves. It is not happening fast enough, in my opinion. 

But I appreciate your willingness to come here before the committee and help us with our work. I yield back the balance of my 

time. 

Thank you. 

Chairman HUIZENGA. The gentleman yields back. 

With that, the gentleman from Minnesota is recognized for 5 

minutes. 

Mr. EMMER. Thank you, Mr. Chair. 

Director Hinman, welcome to the committee and congratulations 

on your new position. 

You touched on it briefly during your testimony, however can you 

give more detail as to why it is so important for the SEC to encourage more small companies to go public and not just the big ones? 

Mr. HINMAN. We think capital formation at all levels, and the 

small levels, is important for job creation, number one. We think 

it obviously is good for the economy. 

We are very interested in looking at our rules. Over the years 

there has been more and more added to the disclosure requirements. We do want to look at the scaling of those requirements for 

smaller companies. 

We do have a rule actively being considered right now. It has 

been proposed and we will try to finalize it for lifting the limits for 

who qualifies for that scaled reporting. 

Mr. EMMER. When Chairman Clayton came before this committee in the fall, I asked him about the concept of venture exchanges and whether or not the creation of a lower-tier equity market to facilitate the secondary trading of shares of smaller companies, where liquidity challenged securities would entice more early 

stage IPOs. 

Do you have any thoughts on this matter? 

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Mr. HINMAN. Sure. I am not the trading and markets expert. Our 

colleagues in the Division of Trading and Markets actually are focused on the issue. In fact, they had a roundtable earlier this week, 

I believe, to discuss some of the issues smaller companies face in 

terms of developing liquidity in their shares and in smaller company trading. 

Venture exchanges, ideas like that where liquidity is enhanced 

and an exchange is used to do that certainly would provide more 

liquidity. 

I think, again, the Trading and Markets folks are very interested 

in exploring those ideas and that is why they are holding these 

roundtables. 

Mr. EMMER. Wonderful. 

I want to change gears just a little bit. I find that people tend 

to fear what they don’t know. If people who started sailing the 

oceans at the time of Columbus would have believed that the world 

was flat, we never would have had the great discoveries of the new 

world. 

The typical attitude, too, that I get from so many elected officials 

who have no idea what they are talking about—they are ignorant 

on a topic—is that everyone who is involved in the area that they 

maintain their greatest ignorance. That everyone who is participating in that area is either bad or dishonest. Therefore, the elected official must rush in and help people from these. 

I find this a lot when we talk about initial coin offerings. We are 

talking about blockchain technology. There is a lot of ignorance 

about how special this area is. 

Given your division’s jurisdiction, as it relates to crypto currencies and initial coin offerings, do you have any circumstances 

that come to mind that might render a token sale as something 

other than a securities offering? 

Mr. HINMAN. The initial sale—it is quite hard to have an initial 

sale without having a securities offering which is why the Chairman has noted that the initial sale of these may require compliance 

or exemptions. 

Mr. EMMER. Let me ask you a question about that. Is it possible 

that a utility token would not be a security, because it is not done 

for capital formation? 

Mr. HINMAN. It is certainly possible that there are tokens that 

would not have the hallmarks of a security. 

Over time, many of these fundraisings are intended to develop 

networks where a token may be used to buy a good or service. 

That is its only use. It doesn’t have much utility— 

Mr. EMMER. No, I understand. But there is a difference. 

Mr. HINMAN. There are other senses. 

Mr. EMMER. If you can just—this is the difference. I get this all 

the time. People are suggesting that everything that is done in this 

area involves a currency or something like a currency or security. 

But, in fact, a security—or a utility token is nothing more than 

a card, if you would, that would allow you access to a certain platform so that you can participate. 

Is it possible, in your jurisdiction, that that may not qualify as 

something that is a security offering? 

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19 

Mr. HINMAN. We certainly can imagine a token where the holder 

is buying it for its utility and not as an investment. In those cases, 

especially if it is a decentralized network in which it is used and 

there are not central actors that would have information 

asymmetries where they know more than the investors in those tokens. 

Mr. EMMER. Can I—I have to get this in before my time runs out. 

You have stated that, quote, ‘‘sponsors of offerings conducted 

through the use of a distributed ledger or blockchain technology 

must comply with the securities law,’’ close quote. You also stated, 

quote, ‘‘Investors need the essential facts behind any investment 

opportunity, so they can make fully informed decisions.’’ 

How can we improve the regulatory clarity for entrepreneurs 

here in the United States so that their contribution to something 

that may not be a security will not see enforcement actions by the 

SEC? 

Chairman HUIZENGA. I will allow a quick reply. 

Mr. HINMAN. One of the things we are doing is meeting with the 

participants who have these ideas, that think that they may have 

a token that shouldn’t be regulated as a security, to work through 

with them how that may be structured. 

Mr. EMMER. Wonderful. I will follow up in writing. I have a 

bunch of other questions. 

Thank you for your patience, Mr. Chair. 

Mr. HINMAN. The gentleman’s time has expired. 

With that, the gentleman from Georgia, Mr. Scott, is recognized 

for 5 minutes. 

Mr. SCOTT. Thank you, Chairman Huizenga. 

I am very, very pleased to have Mr. Hinman here, because you 

are in the crucible of what we really refer to as wealth building in 

this country. You are the SEC Director of the Division of Corporation Finance and capital formation and public offerings. 

There are basically three ways we build wealth, meaning financial security, and stability, and that is either through a job, your 

business, but most acutely through investments. 

I want to talk to you about the fact that we have some alarming 

news. My excellent staff has done some research that I want to 

bring to your attention. Important research. One, they have informed me that during the past 20 years, the number of new companies deciding not to go public has increased dramatically. 

As a matter of fact, they inform me that in 1997, we had 474 

companies that went public, while only 108 went public in 2017. 

That is astounding. So, with this in mind, I wanted to ask you 

about this expanded use of nonregistered offering exemptions. 

Because I truly believe that it makes sense to expand our security laws to make it easier for our businesses, especially our 

startups, that we rely on. Small business startups are still the driving force. 

From that comes the necessary resources to make those investments through the public and private offering. One other thing I 

want to tell you is that I agree with you, when you said this in 

your testimony. You said, it is far more efficient for retail investors 

to invest in companies through our public markets rather than our 

private markets. 

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20 

Now, that, to me, is very profound. As a matter of fact, I think 

it gives us a nobility of purpose why you are here. 

You went further. You said, the SEC is conducting a look-back 

review of the impact Regulation Crowdfunding and Regulation A 

on capital formation and investment protection. 

So, my question is this. I am very interested to know, first of all, 

what you think about the points I have made. Also, how this lookback is going with you. 

I am curious to know if the SEC is including in its look-back a 

measure of whether our capital markets are operating efficiently, 

from the standpoint of retail investors. 

Mr. HINMAN. Thank you for the question and the comment on 

your observations around the decline in numbers of public companies or companies deciding to do IPOs. We share that concern. 

We do think, as you mentioned I said in my testimony, that public companies are terrific vehicles for the smaller investor to invest 

in. There is more liquidity because of our regulations. There is 

more transparency. 

So, we do share a concern that those numbers are declining, in 

terms of the number of investment options retail investors, in particular, may have. 

In terms of the various ways that our rules are working together 

to, hopefully, encourage people to join the public reporting system, 

you mentioned crowdfunding and Regulation A. 

I think Regulation A, at the time it was expanded by Congress, 

the thought was, this is perhaps, a bit of a roadmap to becoming 

public. It’s still very early days, in terms of experience of Regulation A. 

We have seen some Regulation A issuers get used to the idea of 

providing disclosure and having it reviewed by the SEC. Some of 

those issuers have matured to the point where they have been listed. 

Not all those are great successes in the same way. Not all IPOs 

are great successes. We are monitoring the developments under 

Regulation A carefully. Same with crowdfunding. With 

crowdfunding, we see a lot of activity on the coasts. We see less in 

the middle of the country. We think it would be terrific to have 

more activity there. 

We are looking at ways to stimulate portals interest in folks 

across the country, not just on the coast. 

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

Hinman. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The gentleman from New Jersey, Mr. MacArthur, is recognized 

for 5 minutes. 

Mr. MACARTHUR. Thank you, Chairman. 

Director, thank you for being here. 

Forgive me if I work on fields that have already been plowed. 

But I had to step out for a few minutes, so I don’t know what you 

have been talking about. 

In the Chairman’s opening remarks, he mentioned that primary 

goals are protecting investors, facilitating orderly markets, encouraging capital formation. 

mcarroll on FSR431 with DISTILLER

21 

One of the concerns I have is we have a lot fewer initial public 

offerings than we used to. We have to consider, why is there less 

interest in the public markets? 

One of the things I have observed is that companies engaged in 

interstate commerce, that are traded on public exchanges, have a 

very difficult situation in both State and Federal actions that target them for civil fraud. Not criminal fraud but civil fraud. 

So, for example, an overzealous State attorney general might not 

have a case that rises to the burden of proof to prove civil fraud. 

They will accuse a company anyway and that company can get 

raked over the coals for something that doesn’t even have any intent. 

This is not unique to one State alone. It is not even unique just 

to the States. 

For example, CFPB raked their company, in my district, over the 

coals and ended up losing their actions. But the company lost a billion dollars in market value which hurt all of their main street investors. 

States like New York, California, Connecticut have gone after 

companies and decimated share-holder value. 

That hurts main street investors. It is hard for those companies 

to recover. The moment there is an accusation of anything, they 

have to disclose it because they are publicly traded companies. 

So, I just wanted to ask you if you could comment on the problem. How you see it. The fact that these publicly traded companies 

engaged in interstate commerce all across the country are subjected 

to 50 different standards on civil fraud. 

Could you talk about the problem from your perspective? Do you 

see any solutions? I would be happy to hear those, too. 

Mr. HINMAN. Sure. So, to go to the broader point of fewer public 

companies, one of the reasons—this is one of them. I think there 

are a number of reasons why fewer companies are choosing to go 

public. 

There is the Federal regulatory burden. There are the State regulatory burdens. There is simply more money available in the private sector right now as well. So, the need to seek public funding 

is lower than it would have been in the past. 

So, there are all these different factors going on all at the same 

time. So, to pick one out and to try and weigh it in the equation 

is difficult. 

The point you are raising is not something I have a view on as 

a Federal regulator. The ability to change that landscape would be 

one of Federal statute. That is a Federal preemption question, really, that you are getting to, if you were trying to make a more uniform anti-fraud landscape for public companies. 

Mr. MACARTHUR. Do you see it as a problem? 

Mr. HINMAN. I certainly— 

Mr. MACARTHUR. As part of the—as part of the issue. 

Mr. HINMAN. I certainly see that some companies bear that in 

mind as they decide to go public. It is not a positive factor. 

Mr. MACARTHUR. I agree with you that it is not the only issue. 

I didn’t mean to imply that it was. 

But I know, as a former businessman, it certainly weighed into 

my mind. Just the difficulty of the environment. 

mcarroll on FSR431 with DISTILLER

22 

You mentioned there is more capital available in other mechanisms, like private equity and such. 

But there is a reason more capital is being attracted into that 

space, too. It is because the public markets are less attractive. 

Mr. Chairman, I am happy to yield my remaining time to you, 

if you have any other comments or questions. 

Chairman HUIZENGA. Thank you. Yes, I will take that. 

We are going to go on a slightly different direction from what you 

were having. 

I want to touch base on something that Chair Clayton and CFTC 

Chairman Giancarlo stated. That they, along with their counterparts at the Department of Treasury and Federal Reserve, may 

come to Congress in the coming months, regarding ICOs. 

I am curious what you believe the role for Congress might be in 

that? Is there concern that the Congressional regulatory intervention will chill the ICO market? 

Mr. HINMAN. In terms of what is going on in the landscape right 

now, I think Treasury, through the FSOC committee, is trying to 

gather views from the various regulators, CFTC and us principally. 

But also the banking regulators, everyone that participates in 

FSOC. 

People that have your customer concerns, anti-money laundering 

concerns, our securities law concerns, commodities concerns, to look 

at the overall regulatory touch here. To see if there are gaps and 

to see if there are ways to improve the environment. 

One thing we are trying to do is provide as much guidance as 

we can to the marketplace, so we don’t have a chilling effect. 

But it is still something that is being worked on by all the agencies, and we are trying to coordinate to make sure we don’t stifle 

innovation. 

Chairman HUIZENGA. All right. Thank you. Time has expired. 

With that, the gentleman from North Carolina, Mr. Budd, is recognized for 5 minutes. 

Mr. BUDD. Thank you, Mr. Chairman. Thank you, Director 

Hinman, for your service. The first time out, you are doing a good 

job. 

Chairman HUIZENGA. Thank you. 

Mr. BUDD. So, thank you. 

I want to talk this morning about SEC efforts to facilitate capital 

formation and efforts to increase investment opportunities here at 

home. 

Obviously, this is an issue of importance to me. I have led H.R. 

3903, the Encouraging Public Offerings Act, along with my friend, 

Representative Meeks from New York. That would expand testing 

the waters. 

So, a lot of us on the committee were pleased to see the SEC expand the use submitting of confidential draft filings of last year, 

just from emerging growth companies to all companies. 

In that vein, do you plan on extending the use of testing the waters from these emerging growth companies to all companies as 

well? What steps are the division taking to help facilitate pre-IPO 

communications between businesses and investors? 

Mr. HINMAN. Thank you for that question. 

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23 

As you point out, the test the waters exemptions from Section 5 

have been available for the emerging growth companies. We have 

put on our agenda expanding that. It seems to be working well. 

There are parameters in which those test the waters activities 

take place. We think investors are protected by those. As I said in 

my opening remarks, this is something that we think could make 

a difference, and we will explore it very carefully. 

Mr. BUDD. So, just to clarify, you said it is on your agenda. Is 

there any timeline for expanding that? 

Mr. HINMAN. I don’t think we have it on a specific timeline right 

now. But it is something that we would like to move forward. 

I don’t think it will take an inordinate amount of time to duplicate what we have done for the EGCs for a broader group of folks. 

Mr. BUDD. Very good. 

So, in a speech earlier this year, you stated that your intent is 

to put emerging growth companies and non-EGCs on as level a 

playing as possible. Can you please elaborate on this and how the 

division aims to ensure that this is a level-playing field? 

Mr. HINMAN. One of the primary things would be looking at the 

EGC opportunity to test the waters and broadening that. 

There had been, prior to the revisions we made in the policies, 

certain advantages the EGCs had, in terms of confidential filings, 

which we have spoken about, that has been extended to all. 

Then, as we expanded confidential filings, beyond what the EGCs 

had available, we made sure that both the EGC group and others 

were allowed to file confidentially for their first year. So, we kept 

them on the same level playing field. 

Mr. BUDD. Very good. I appreciate your time. Chairman, I yield 

back. 

Chairman HUIZENGA. The gentleman from North Carolina yields 

back. 

The gentleman from New York, Mr. Meeks, is recognized for 5 

minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Let me ask you a question, Mr. Hinman. Over the years, we have 

seen an increase in the amount of public companies with dual-class 

share structures, including many of the largest tech companies in 

Silicon Valley, like Google, Facebook, Snapchat. 

These structures can create benefits for a company by allowing 

founders to guide a company’s success after going public. But substructures also pose a risk for shareholders who are less able to 

hold boards and CEOs accountable for their failures. 

The SEC’s Investor Advisory Committee recently proposed ways 

of improving disclosures related to dual-class shares. 

So, my question to you is, what is your personal opinion of those 

recommendations and the risk associated with dual-class share 

structures? 

Mr. HINMAN. Thanks for the question. 

You are right, the Advisory Committee did ask us to look at 

those disclosures. I had independently talked with our disclosure 

teams about the disclosures that we are able to receive, when a 

company has a dual-class or a unique structure. 

We are looking for robust disclosure there, so investors understand not just the voting ratios, but things like the life of the armcarroll on FSR431 with DISTILLER

24 

rangement, whether it has a sunset. We are looking for disclosure 

of those provisions. 

The Advisory Committee did not ask us to ban those, in part because the SEC really doesn’t have jurisdiction on this topic, to ban 

or allow. We are a disclosure agency. 

State law generally governs whether a dual class is allowed or 

not or how it may be limited. We look to the State law to see 

whether these are allowed. 

But if they are allowed, we are then focused on disclosure. Our 

jurisdiction in this area has been limited by case law and by the 

statutory structure. 

Mr. MEEKS. So, you don’t believe that the SEC has any plans for 

considering and/or adopting the recommendations? 

Mr. HINMAN. Again, what we can do is focus on the disclosure. 

Because it is case law, that has limited our ability to legislate one 

share one vote. That was done many years ago in a business roundtable case which the SEC did not prevail on. 

We see our focus now as one of disclosure. 

Mr. MEEKS. Let me jump to the other issue in my last 2 minutes. 

Earlier this year, New York’s controller announced that the 

State’s pension fund would oppose reelection of all directors of 

boards that lacked women representation. 

New York was unable to make a similar action with respect to 

boards that lacked racial or ethnic diversity, because the SEC’s 

board diversity rule has not yielded robust disclosures. This has 

been a constant problem and complaint of my office and investors 

that we have talked to nationwide. 

In October, when Chairman Clayton was here, we asked whether 

or not the agency would adopt the proposal from the SEC’s Advisory Committee on small and emerging companies that requires 

companies to specifically list their race, gender, and ethnicity of 

their board members. 

Chairman Clayton made no commitments to adopt these recommendations. Merely stated that the Division of Corporation Finance, your division, will monitor compliance with the current 

rules. 

So, what has been your division’s assessment of compliance with 

the agency’s board diversity rule? Have diversity disclosures been 

adequate, considering shareholder demands for more information? 

Will the Division of Corporation Finance eventually provide a public recommendation to the SEC on whether it should adopt proposals to improve the rule? 

Mr. HINMAN. To start with your last question, the answer would 

be, yes, we will. It is on the Chairman’s rulemaking agenda. This 

is a topic that both he and I view as highly important. 

The old policy in this space has been subject to some criticism 

that it doesn’t get enough useful disclosure. Our division has been 

looking at how that policy has been complied with. 

Some companies, notwithstanding the fact that the disclosure 

doesn’t require specific items, such as gender, race, or ethnicity, to 

be disclosed, had been providing that disclosure. Sometimes in 

graphic forms, tables. 

mcarroll on FSR431 with DISTILLER

25 

We have been looking at how people are approaching the issue. 

We have talked to some of those issuers to find out what has their 

experience been in preparing those kinds of disclosures? 

One thing that we have discovered is that there is some sensitivity to their board members’ privacy issues, in terms of self-identifying on some of these topics. So, we would want to take that into 

account as we develop any new rules here. 

But we are gathering information on this. It is on the rulemaking agenda. It is important to both myself and the Chairman. 

Mr. MEEKS. Thank you very much. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, the gentleman from Maine, Mr. Poliquin, is recognized 

for 5 minutes. 

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

very much, Mr. Hinman, for being here. 

I represent rural Maine. We have a huge Congressional district 

geographically with lots of hard-working folks and small savers 

with 401Ks and IRAs and 529 plans for their kids to go to school 

and to plan for their own retirement. 

So, I am very concerned about small savers and small investors 

in Maine and throughout America, Mr. Hinman. 

Now, there is a bill that I originated called—well it is 1312, H.R. 

1312, which deals with the annual government business forum that 

you folks host every year. 

You get together and you get all these great ideas from folks on 

the public side and the private side, to see if there are ways that 

we can improve the enhancement of capital formation in our economy. 

The bill, sir, which is included in Mr. Crapo’s bill over in the 

Senate, simply requires the SEC to make sure they take a look at 

every recommendation, evaluate them and act upon them. 

Are you familiar with that bill, sir? 

Mr. HINMAN. I have heard of it, yes. 

Mr. POLIQUIN. OK. Do you, right now, go through the process of 

making sure the recommendations from that annual business 

forum are evaluated by the SEC? 

Mr. HINMAN. Certainly. I personally participated in that forum 

in Texas this year. We see the reports, my staff in the small business office receives that and helps compile it and helps to get it 

out. We take all the recommendations under consideration. We are 

always looking for good ideas. 

Mr. POLIQUIN. That is great. 

Since you have personal knowledge of this, Mr. Hinman, I appreciate that very much. 

We just want to make sure that folks that go through the effort, 

like you in your former life, do not let these recommendations 

which could help our economy grow and thrive and companies raise 

more capital. 

They just don’t sit on the shelf somewhere, but they are actually 

evaluated and looked at. Make sure that that information is useful 

to everybody. 

OK. I would like to move on a little bit to data security here, sir. 

On Tuesday, the former Yahoo company paid about $35 million 

in a penalty because you folks determined they misled investors, 

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26 

when it comes to a hacking that took place that disclosed the personal data of hundreds of millions of accounts around the world. 

Are you comfortable that the SEC has the metrics in place such 

that public companies know, in fact, when they should disclose material events like this? 

Mr. HINMAN. We do think we have given very good guidance in 

this space. We don’t use bright line metrics, in part because those 

bright lines sometimes will result in over-inclusive disclosures or 

under-inclusive. 

If someone is on one side, it still might be material to an investor. But they would say, oh, we didn’t have to disclose because we 

didn’t meet the metric. We don’t want to flood the market with 

things that are just noise. 

So, the bright line tests don’t seem to work that well in this 

space. We have used, basically, principle based guidance and have 

elaborated on that in a 30-page Commission-level guidance document most recently. 

Mr. POLIQUIN. I just want to make sure that you folks are giving 

every due consideration for investors, small investors, who have 

taken a position in a company. 

Then, at the same time, making sure that you don’t overly burden companies with this. So, it seems like you are moving down 

that path. 

On a third issue, quickly, sir, if I may, is that there seems to be, 

over the years, the threshold for small groups of political activists 

to take $2,000 positions in companies in order to push a specific 

agenda at a shareholder annual meeting, is something that is a 

concern to companies that are thinking about going public. 

I wonder if you have any input on that. I know the number of 

companies that have gone public over the years has dropped precipitously. 

Also, I notice that Mr. Clayton, in his speech last November, said 

he had a concern about this threshold. 

Do you have any feelings at the SEC where those thresholds may 

or may not be adjusted to make sure folks do have a voice, if they 

own part of a public company? But, at the same time, is not so disruptive and costly for the company, that they hurt small investors 

who actually bought shares in the company also. 

Mr. HINMAN. We are certainly looking at the right balance there. 

You point out the issues in terms of that you want to make sure 

that shareholders still are able to have a voice, and you don’t want 

to overburden a company with trivia. 

Those thresholds haven’t been looked at in quite some time. I 

mentioned earlier today that we do have an interest in looking at 

that. 

The Chairman is going to be seeking more comment in the space. 

He has, as he mentioned in the speech, expressed interest here. I 

expect that will continue. 

Mr. POLIQUIN. Great, thank you. 

With indulgence, Mr. Chairman, please. 

The State of Maine, Mr. Hinman, has a 2.6 percent unemployment rate. I think it is the lowest in the country. Clearly, lower 

taxes for our families and small businesses. It is having a dramatic 

effect. 

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I know you folks are responsible for making sure public companies disclose this good news of more growth and more hiring and 

for their companies. 

Are you comfortable where there is a right balance between making sure they report this great news to their shareholders, but, at 

the same time, not overburdening them with the more costly regulations that would be hurtful? 

Mr. HINMAN. We are very focused on that. 

Mr. POLIQUIN. Thank you, sir. Thank you, Mr. Chairman. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The gentleman from Minnesota, Mr. Ellison, is recognized for 5 

minutes. 

Mr. ELLISON. Thank you, sir. 

Director Hinman, when do you expect to finalize the Executive 

Compensation Rule, Section 953(a), which requires companies to 

detail the relationship between CEO pay and profits? 

Mr. HINMAN. That rule is on the Chairman’s agenda. We don’t 

have a date certain. There isn’t in the statute, unlike some of the 

other Dodd-Frank provisions, a mandated date. 

He has indicated he wants to go through all the executive compensation rules of Dodd-Frank in order. That is one we will get to. 

But he hasn’t set a date for us, yet. 

Mr. ELLISON. When do you expect to finalize the clawback rule 

so that CEOs who jack up their incentive pay to increase profits 

only to have those profits paying, have their incentive pay 

clawback? 

Mr. HINMAN. That is part of that package, so it would be the 

same approach. 

Mr. ELLISON. Any date on that? You can give us a range, like 

next year, like next month? I understand you may not know the 

exact date. But if you can give us some sense because the public 

would like to know, my constituents want to know. 

Mr. HINMAN. Right. I would say it would not be in this fiscal 

year. The short-term agenda is pretty packed. We are trying to 

achieve everything that is on there. 

I would think it would be some time after this fiscal year. 

Mr. ELLISON. When do you think you will finalize the incentivebased compensation guidelines for our large financial institutions? 

Mr. HINMAN. That is part of that package of three compensationrelated initiatives. It fits into that same category. I think the 

Chairman wants to look at those together and take them in order. 

Mr. ELLISON. OK. Do you think they will come all out together 

at the same time or you don’t know? 

Mr. HINMAN. I think he will likely ask us to do these in sequential order. 

Mr. ELLISON. OK. 

Mr. HINMAN. That is up to the Chairman. I haven’t heard what 

the order would be or whether there would be a possibility of soliciting comment collectively. 

Mr. ELLISON. All right. 

I just want to give you a little context for my question. One of 

the lessons that I think we have learned from the great recession 

just 10 years ago, which I still remember very well, is that CEO 

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pay incentives were actually encouraging—CEOs to encourage, engage in activity, I think put a premium on risk-taking. 

If we had a better incentive structure, more risk assessment, create an oversight at the corporate level, we may not have engaged 

in some of the things that really hit our economy hard. 

So, when pay is tied to short-term profits, CEOs will take risks 

that prioritize quick returns. When Congress rolled Dodd-Frank, 

Congress included a number of provisions to ensure CEO pay was 

no longer promoting excessive risk-taking. 

The SEC is charged with propagating the rules here. It has been 

8 years since Dodd-Frank, and we still have the final rules. 

I am not blaming you, personally. But I think that it has been 

plenty enough time. I am disappointed to hear that we are not 

going to be having those rules in this fiscal year. I think that there 

has been more than ample time. 

By the way, the delay has been costly. We have seen some serious banking crises that could have been avoided, in part with better CEO pay regulations. 

Look at Wells Fargo, for example. They were trying to pump up 

profits every quarter by creating fake accounts. I know a lot of 

workers got fired by the people who directed and designed the program. I think the CEO got away with a $173 million severance 

package or something like that. 

Anyway, New York State controller, Thomas DiNapoli, sent a letter to Wells Fargo shareholders last week, in advance of their annual meeting, asking for Wells to disclose their payments in the 

policies. 

I will tell you what he said in that letter. He said, incentive pay 

practices have been identified as contributing to the multiple crises 

at Wells Fargo. 

Investors need to know whether the company is taking steps to 

identify employees’ incentive-based compensation. It could spur 

conduct. It puts the bank, its customers, and investors at risk. 

I will say, the economy, if widespread enough. I don’t believe in 

beating up our witnesses unless they have it coming. I don’t think 

you do. 

But I will say, I hope you take back to the people you work with 

that 8 years is plenty enough. This is a serious thing. It is the law. 

It has to get handled quickly. 

I don’t think the American people can afford to wait much longer. 

I think, until these rules are finalized, CEOs are still getting pay 

packages that misalign their shareholders with their own compensation. I don’t think that is right. 

So, thank you. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The gentleman from Indiana, Mr. Hollingsworth, is recognized 

for 5 minutes. 

Mr. HOLLINGSWORTH. Good morning. I really appreciate you 

being here. 

I will be brief. I want to focus on a very narrow topic that is really important to me, and important to constituents back home, and, 

frankly, important to America as a whole. 

It really has to do with some of our emerging growth companies, 

and specifically those involved in biotech. The economists can 

mcarroll on FSR431 with DISTILLER

29 

tongue in cheek remark that all is required for one to get a drug 

approved in this country is superhuman persistence over 10 years 

and $2 billion. 

Many of these companies are very early stage. Many of these 

companies are very small, in terms of the number of employees, 

even if their market cap is relatively large. Just waiting on approval of drugs, waiting on approvals to be able to get through the 

process. 

One of the things I continue to hear from them is concern about 

404(b) compliance and the cost of 404(b) compliance. 

We have heard testimony in this very room about companies that 

are on the cutting edge of new technology. Cutting edge of new biology and be able to finally cure diseases that ail millions of Americans. But are spending more and more of those dollars that they 

have raised on compliance instead of the search for cures. 

I know that a 2011 SEC study noted that those companies with 

a public float between 75 million and 250 million, spend on average, $840,000 a year on compliance with 404. 

Really, what I wanted to ask you was if there is any look at the 

cost of 404(b) on very, very small companies that are public, and 

the benefits of 404(b) for those very small companies that are public. Whether we can better align those two to ensure that we are 

enabling and empowering them to do more of what they do best, 

serve their customers research technology development products instead of more and more compliance. 

Mr. HINMAN. Thank you for the question. 

We are looking at that very carefully. As I think you probably 

know, today, we draw the line at $75 million market cap, right 

below that 404(b) attestation is not required. 

We are doing some things, scaling disclosures up to the $250 million market cap. That is something where the SEC, in a proposed 

rule, decided we would not move the 404(b). We suggested we 

would not move the 404(b) threshold along with the rest of those 

requirements. 

We are taking a fresh look at that. The life science industry, as 

you mentioned, makes a fair point that this is costly for them. They 

have lots of terrific ways to spend money. 

At the same time, we want to protect investors. We want to have, 

perhaps, a more sophisticated test in this area. So, we want to adjust that market cap. 

We also might look at revenues. If you are a low-revenue company but a higher-market cap, you probably have some promising 

product in the pipeline. You don’t have the revenues, but people 

value you highly. 

You probably also have a simpler set of financial statements. 

Where the requirement is to do a full attestation, maybe that is not 

money well spent. 

We haven’t analyzed that yet. In terms of looking—having DERA 

look at it. Is there a better way to draw the lines here? That is 

something we are quite interested in doing. Your life science industry colleagues have suggested that we do that, and I think that is 

a good idea. 

mcarroll on FSR431 with DISTILLER

30 

Mr. HOLLINGSWORTH. Mr. Hinman, you have stolen all of my 

thunder because that is exactly where I was going, in the hope that 

we would have a more sophisticated test. 

Some of these biotech companies have a billion dollars in float, 

but they have seven employees and they are outsourcing their drug 

trial process. This is expensive to go through. 

We heard some testimony from individuals that were in that same camp. We earn $10 million a year from licensing a few 

things. But we have a billion-dollar float while we wait to go 

through this process. 

We certainly don’t believe that we should be held to the same 

levels as a larger, more operating entity with many more employees, many more moving parts, many more subsidiaries, et cetera. 

So, I really appreciate the fact that you brought that up and 

want to look at a more sophisticated and thorough test to better 

understand what companies can benefit. 

Just one last point, since you stole most of my thunder in the 

middle here, is nothing that you would do, I imagine, would say 

you are absolutely barred and restricted from getting any 404(b) to 

any of these companies. 

If they elected to say, look, it lowers our equity cost of capital, 

if we underwent a 404(b) audit attestation. They could still pursue 

that if they wanted to at any level. 

Mr. HINMAN. You are absolutely right and some companies do 

that. 

Mr. HOLLINGSWORTH. The reality is they can make that as a 

business decision. 

As you well said, and have said on many occasions, disclosure 

can benefit companies as well and ensuring investors feel more 

comfortable with the asset that they own and lowering their equity 

cost of capital. 

I don’t think anything I propose, anything that this committee 

has voted on, anything that I have heard from other testimonies 

says, we should bar companies from doing this at any size. 

But, instead, let us make it up to those companies to determine 

whether it is in their best interest, their investors’ best interest, 

their products best interest to do this or whether it is not at a certain level or not. 

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

today. 

Mr. HINMAN. Thank you. 

Chairman HUIZENGA. The gentleman yields back. 

With that, the Chair recognizes the gentleman from Ohio, Mr. 

Davidson, for 5 minutes. 

Mr. DAVIDSON. Thank you, Chairman. Mr. Hinman, Director 

Hinman, thank you for your testimony today. 

I want to return to the topic of initial coin offerings. I want to 

focus particularly on the Howey Test. 

The Howey Test is used to determine whether an asset is classified as a security and, therefore, subject to Federal securities laws. 

The test was developed by the 1946 Supreme Court case SEC 

versus W.J. Howey Company. 

Do you believe the Howey Test should be—is it adequate for application for crypto currencies? 

mcarroll on FSR431 with DISTILLER

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Mr. HINMAN. I think the principles annunciated there are still 

solid principles, in terms of the factors one would weigh to see if 

an investment contract could be viewed as a security. 

Mr. DAVIDSON. Do you believe that it should be updated or 

changed to better incorporate what is, in fact, a security? 

Mr. HINMAN. Again, I do think the basic principles there are the 

investor giving money or some consideration to a third party to 

have an enterprise take that money and generate a return? That 

feels, to me, like those are pretty flexible and sound hallmarks of 

how to judge whether an instrument is a security. 

Mr. DAVIDSON. As you were speaking with Chairman Huizenga 

earlier, you know, a little concerned by the idea that the SEC 

would inherently be involved in an ICO. But you left some latitude 

to say that, perhaps, it wouldn’t meet. 

When you look at the criteria. There is an investment of money. 

There is an expectation of profits. The investment of money is in 

a common enterprise and any profits come from the efforts of a promoter or third party. 

Some of those offerings of coins, as disclosed currently in white 

papers, are, really, almost like prepaid cards. They are not really 

securities. 

In some cases, they are assets for sure. But is it a security? Is 

it a commodity? As some migrate, is it, really, even a currency? 

I am encouraged by the work of FSOC to try to bridge that understanding. Our office is working to help provide clarity as to 

where those lines should be drawn. Because there isn’t clarity in 

law or it has certainly been tested. 

In one of the ways it has been tested is with SAFTs which is— 

let me get the correct piece of this acronym. Are you familiar with 

this acronym? 

Mr. HINMAN. I am, a Simple Agreement for a Future Token. 

Mr. DAVIDSON. Right, there you go. So, this is a—because there 

is no guarantee that there are future profits to the holder of the 

token. The token would simply be able to be traded at some point. 

Currently, the investment wouldn’t necessarily have a lot of 

value. But at some point it may and then, therefore the token, even 

in the early stages, would be able to be exchanged. 

What is your assessment of the path on SAFT? 

Mr. HINMAN. The number of folks who have tried to raise funds 

through the SAFT technique have an interesting idea. They say 

that they will eventually have a network on which this token may 

be used. If that network is developed, the token may have more 

value than it does on day 1. 

People who are buying into those agreements are hoping that 

that happens, that those developers and other parties are actually 

able to do that. 

So, you have all the hallmarks there. You have, I am getting 

money to the person who is getting me the SAFT. I hope that they 

will develop this network and that it will have more value and give 

me a return. 

So, in early days, before that network exists and before that 

token has real utility, it probably is a security. 

mcarroll on FSR431 with DISTILLER

32 

In theory, there may be a time when the people, the developers 

go away. What you have is a token that can be used. To use your 

Howey analogy. 

In the Howey case, you had a developer putting together this orange grove, tending to it and making it work and selling interest 

in it. 

The court viewed that as an investment contract, because this 

developer knew how this was going to progress. He had more information about it than the people he was selling the contract to. 

Someday, in theory, he could have gone away. People could have 

come in and tended to their groves themselves or parties that participate in these decentralized networks, their equivalent could 

have tended to the grove and those oranges probably wouldn’t be 

securities. 

I think that analogy somewhat works to say, at some point, you 

may have a token that doesn’t represent investment in the efforts 

of others. In this case, the Howey Hill Service— 

Mr. DAVIDSON. Thank you. 

As my time winds down, I would just say there is a clear distinction there between jurisdiction in the SEC and the commodities future trading Commission, I am glad FSOC is paying attention to 

it as is our office. As you can tell, as is our committee. 

So, I look forward to future collaboration. 

My time has expired and I yield. 

Chairman HUIZENGA. The gentleman’s time has expired. 

Seeing now there are members on the other side, we will go to 

Mr. Hill of Arkansas for 5 minutes. 

Mr. HILL. Thank you, Chairman. I appreciate you testifying 

today. Glad to have you before the panel and also glad that you 

bring your years of private-sector experience and transactions to 

the division. That is an important skillset. So, I appreciate your 

public service. 

In my nonpublic service, a lot of that time was spent raising 

money for startup businesses and growth enterprises. Frequently, 

that used the Reg D exemption for raising those dollars. 

A couple of things. On the issue of the definition of accredited investor, I see in your testimony, the division is considering recommending to the Commission proposed amendments to expand the 

definition of accredited investor. So, I commend you for that. 

One of the most frequent frustrations, I think, in normal 506 Reg 

D-type offerings was that you could offer it to the accredited investors and no more than 30, or whatever the number was, nonaccredited investors. 

But in point of fact, due to potential liability, very few lawyers 

would allow their client to offer to so many nonaccredited investors. 

What I found time and time again, it is the inventor. It is the 

scientist. It is the person with the PhD. It is a CPA. It is somebody 

with a CFA. It is somebody who is a registered broker dealer. Who 

wants to participate in the Reg D offering. They certainly have the 

knowledge to do that, but they are excluded due to the net worth 

test or income test. 

So, is one of the things you are considering expanding the definition for professional qualifications or expertise in a particular area? 

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Mr. HINMAN. It is. That expansion of the accredited investor definition, updating it to include folks who may be sophisticated but 

not meet financial tests. It is certainly under consideration as one 

of the items that the Small Business Forum observed as well. 

As I mentioned earlier, we take those comments seriously. 

Mr. HILL. Right. 

Mr. HINMAN. That is something we will be considering. 

Mr. HILL. We have a lot of bipartisan support for that. I appreciate Mr. Schweikert of Arizona being one of the leaders in the 

House on that topic. 

My colleague from Indiana was talking about 404, and I really 

encourage you to—after the decade or so post-Sarbanes-Oxley. 

But, really, the Commission thinks differently about it. We impose this internal control or regime that only maybe a financial institution would have on every public enterprise, regardless of business model and regardless of size with the small cap exemption 

that you noted. 

Really, I would love to see an economic cost benefit analysis of 

who has benefited from that. 

The purpose of it was that Arthur Andersen and Enron were 

running a black box. The transparent internal control process was 

bypassed and the shareholders couldn’t determine what was happening. 

And, yet, 404 was fully present during AIG, I am sure. Some 

would argue AIG was a black box. 

So, I really think we ought to step back and see what is the real 

benefit of this and how can it be customized by industry or by size 

of business. Because I think it has probably far exceeded its benefits and burdened, particularly, our small-cap companies. 

So, I do support expanding of the size exempt from 404. 

I think another one of our industries that has perpetually come 

to the Commission for an exemption is the small broker dealer industry under 404 for a separate audit. 

I wonder your views on if you would be supportive? That is more 

of a regulatory issue for the Commission, but are you supportive 

of some industries that are heavily regulated, like a small B.D., 

small broker dealer, overseen by—of the Commission from being 

exempt from 404? Permanently, although it has been waived many 

times over the last decade. 

Mr. HINMAN. The application of some of these rules to the broker 

dealer community is something that the Division of Trading and 

Markets would be better suited to address. 

So, I wouldn’t want to jump into their space and I hope they 

don’t jump into mine. 

Mr. HILL. Thank you for that. 

You have also talked in your testimony about materiality. It 

seems like there has been real mission creep out in public reporting, and that we are getting beyond a materiality standard. 

Do you, as a—having practiced law for all these years and helped 

many, many companies navigate the public process, do you support 

a materiality standard for our public disclosures and not going beyond that, unless a company wants to go beyond that? 

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Mr. HINMAN. If I understand your question correctly, I think you 

are saying companies just need to disclose what is material and 

that is it. 

We do think that a number of the specific requirements that are 

qualified by materiality, but which remind registrants to describe 

parts of their business, to do certain disclosures with respect to 

their results of operations, the MD&A, all, again, qualified by materiality are helpful. 

We think the issuers find that helpful to have the guidance that 

gives them the sense of what are we, as the securities laws experts, 

saying might be material. 

But we do, in general, think that a materiality standard should 

be applied to disclosures generally. We have a rule that says even 

if we haven’t hit something in our overall requirements, please tell 

us what is material. In practice, I always focus— 

Mr. HILL. Thank you. 

I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

I see no further questions. I would like to thank our witness 

today for your time and your expertise and your attention to this. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

I ask our witness to please respond as promptly as able. I know 

I will be sending in a question regarding—plus. I will just put you 

on notice on that one. 

Again, thank you for your time, Mr. Hinman. We appreciate it. 

The hearing is adjourned. 

[Whereupon, at 11:46 a.m., the subcommittee was adjourned.] 

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