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[Senate Hearing 114-16]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 114-16

         CAPITAL FORMATION AND REDUCING SMALL BUSINESS BURDENS

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                 SECURITIES, INSURANCE, AND INVESTMENT

                                 OF THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

    EXAMINING LEGISLATIVE PROPOSALS ON CAPITAL FORMATION THAT WERE 
CONSIDERED IN THE HOUSE LAST CONGRESS THAT WOULD HELP CAPITAL FORMATION 
               AND REDUCE BURDENS FOR SMALLER BUSINESSES

                               __________

                             MARCH 24, 2015

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
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                 Available at: http: //www.fdsys.gov /
                 
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MICHAEL CRAPO, Idaho                 SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

         Subcommittee on Securities, Insurance, and Investment

                      MIKE CRAPO, Idaho, Chairman

          MARK R. WARNER, Virginia, Ranking Democratic Member

BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
TIM SCOTT, South Carolina            ELIZABETH WARREN, Massachusetts
BEN SASSE, Nebraska                  JOE DONNELLY, Indiana
JERRY MORAN, Kansas

               Gregg Richard, Subcommittee Staff Director

          Milan Dalal, Democratic Subcommittee Staff Director

                                  (ii)

                            C O N T E N T S

                              ----------                              

                        TUESDAY, MARCH 24, 2015

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Warner...............................................     2

                               WITNESSES

Thomas Quaadman, Vice President, Center for Capital Markets 
  Competitiveness, U.S. Chamber of Commerce......................     3
    Prepared statement...........................................    20
    Responses to written questions of:
        Senator Vitter...........................................    51
William H. Spell, President, Spell Capital Partners, on behalf of 
  the Small Business Investor Alliance...........................     5
    Prepared statement...........................................    24
Marcus M. Stanley, Policy Director, Americans for Financial 
  Reform.........................................................     6
    Prepared statement...........................................    43
    Responses to written questions of:
        Senator Vitter...........................................    52
John C. Partigan, Partner and Securities Practice Group Leader, 
  Nixon
  Peabody........................................................     8
    Prepared statement...........................................    46

              Additional Material Supplied for the Record

Written statement of the Biotechnology Industry Organization, 
  submitted by Chairman Crapo....................................    73
Written statement of the Coalition for Derivatives End-Users, 
  submitted by Chairman Crapo....................................    80
Written statement of XBRL US, submitted by Chairman Crapo........    82
Written statement submitted by Jessica B. Pastorino, President, 
  M&A Securities Group, Inc......................................    86

                                 (iii)

 
         CAPITAL FORMATION AND REDUCING SMALL BUSINESS BURDENS

                              ----------                              

                        TUESDAY, MARCH 24, 2015

                                       U.S. Senate,
        Subcommittee on Securities, Insurance, and 
                                        Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee convened at 2:33 p.m., in room 538, 
Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of 
the Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. Good afternoon. This hearing of the 
Subcommittee on Securities, Insurance, and Investments will 
come to order.
    Today's hearing will focus on several legislative proposals 
that would help capital formation and reduce burdens for 
smaller businesses. My goal is to work with Senator Warner and 
with other Senators on the Banking Committee to identify 
legislative proposals that help small business grow and succeed 
and work to move a package of such proposals through the 
Senate.
    The bills being discussed in today's hearing were 
considered in the House of Representatives last Congress, and 
most of them passed with a voice vote or with very strong 
bipartisan support. Some of these bills have also been 
introduced in the Senate.
    Senator Warner and Senator Toomey introduced legislation to 
allow companies to expand employee ownership. Senator Kirk has 
introduced legislation that would end the double regulation of 
small business investment companies last Congress.
    Others are aimed at aiding the SEC in its mission. The SEC 
is tasked with protecting investors, maintaining fair, orderly, 
and efficient markets, and facilitating capital formation. 
However, the SEC has a long list of ``to do'' items, and the 
Congress can help in prioritizing this list through oversight 
and legislation. This includes completing the Regulation A 
rules from the JOBS Act--I think you are probably in agreement 
with that, Senator Warner--modernizing disclosure requirements, 
and improving access to capital for small companies.
    At this time, I will include for the record, if there is no 
objection, testimony and letters from the Biotechnology 
Industry Organization, the Coalition for Derivatives End-Users, 
and XBRL US on several of these legislative proposals. Without 
objection----
    Senator Warner. Without objection.
    Chairman Crapo. They are entered into the record.
    At our previous hearing, we explored whether a venture 
exchange would help emerging companies get access to capital 
and what steps should be taken. Today's hearing continues this 
Subcommittee's work on how to improve America's capital 
markets, encourage job creation, and reduce regulatory burdens 
for business. I look forward to hearing from our witnesses on 
these legislative proposals.
    Senator Warner.

              STATEMENT OF SENATOR MARK R. WARNER

    Senator Warner. Thank you, Chairman Crapo, for holding this 
hearing. I think, because of our long affiliation, association, 
if anything can be done bipartisan together, this may be the 
pair to start it.
    And, as somebody who still can claim that I have spent 
longer in the private sector and longer on the emerging growth 
company side of the fence than I have on the elected official 
side of the fence, this is a subject that is near and dear to 
my heart.
    I want to echo what Senator Crapo has said. I want to thank 
him again for the hearing we held last week on venture 
exchanges. I think it is an interesting idea. I think there are 
some challenges around it, but I think it is a very interesting 
idea. And, I know that we are looking at a series of bills 
today that I am looking forward to the panel's comments on.
    I will note that perhaps just holding this hearing may have 
spurred the SEC into action. If you are not going to take 
credit, we ought to jointly take credit. My understanding is 
that tomorrow, the SEC will be voting to go ahead and move the 
Reg A Plus regulations forward, something that I wish would 
have happened earlier. I hope that they will not only take that 
step, but go ahead and move forward on the crowdfunding, 
finalization of those regulations. Crowdfunding has both an 
upside and a downside, I know, but the sooner we can get it out 
into the marketplace and learn, I think, the better.
    As also was mentioned, I have been one of the cosponsors of 
a bill with Senator Toomey to make sure that growing companies 
have an opportunity to share that growth with employees, 
raising the standard that had been set back more than a decade 
ago to, I think, a more modern standard. And, candidly, the 
notion of employee participation in companies, I think, is both 
good policy and good for our overall economy. Of course, I 
still welcome the panel's comments on this legislation.
    Another bill under consideration today is meant to further 
assist the emerging growth companies during the IPO process, 
and I am anxious to hear some pros and cons and what happens in 
terms of the due diligence during that process.
    I note that we will be discussing two bills today in the 
realm of derivatives regulation. Used appropriately, 
derivatives can be an important risk mitigation tool. But, if 
unregulated, derivatives can also, as Warren Buffett famously 
said, become financial weapons of mass destruction, and I still 
believe that there is a great deal of that sector 5 years after 
Dodd-Frank that still needs some further review.
    I have got a number of questions for witnesses on the 
prudence of one of the particular bills, but I also hope the 
Subcommittee will look at derivatives regulation more generally 
at a future date. I think it would be something that the 
Subcommittee should take a fresh look at. We have really not, I 
do not believe, in the last 5 years since Dodd-Frank taken a 
look at that sector, and maybe, Mr. Chairman, it might be the 
subject of a hearing if you decide.
    In particular, I am open, as you are, to finding ways that 
we can both cut down some of the bureaucracy, speed the ability 
to get capital to growth companies. I remember the Kauffman 
Foundation's statistics that say that more than 50 percent of 
all the net new jobs that have been created in the last 30 
years in this country have come from startups. Those startups 
have got to have access to capital.
    So, Mr. Chairman, thank you for holding this hearing, and I 
look forward to the panel's comments.
    Chairman Crapo. Thank you very much, Senator Warner.
    Today's witnesses are Mr. Thomas Quaadman, Vice President 
of the U.S. Chamber's Center for Capital Markets 
Competitiveness; Mr. Bill Spell, President of Spell Capital 
Partners; Mr. Marcus Stanley, Policy Director of Americans for 
Financial Reform; and Mr. John Partigan, Partner and Securities 
Practice Group Leader at Nixon Peabody.
    Your written testimony for each of you has been entered 
into the record and will be here entered into the record and we 
encourage you each to try to wrap up your initial comments in 5 
minutes. There will be a clock going, so we encourage you to 
pay attention to it, so we will have plenty of time for our 
questions and your responses.
    With that, Mr. Quaadman, why do you not begin.

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

    Mr. Quaadman. Thank you, Chairman Crapo, Ranking Member 
Warner, Members of the Subcommittee. First off, I would like to 
thank you for this hearing and also for the continued 
bipartisan leadership of this Subcommittee on moving forward on 
bills important to capital formation.
    What is true of any company is that there has to be the 
ability to grow from small to large and that companies need to 
have the tools to be able to access that growth and also to be 
able to engage in reasonable risk taking. Sometimes, Government 
policies get in the way of that, and there was a bipartisan 
recognition several years ago with the JOBS Act that some of 
those impediments needed to be pushed aside, and I want to 
commend the Senate and the House for doing just that.
    Since we have seen a partial implementation of the JOBS 
Act--I want to stress partial--we have seen a very steady rise 
in IPOs, and for the first time in 14 years, we actually saw 
the number of public companies in the United States rise.
    But, the long-term trends are not good. We have with 
entrepreneurs, particularly with young entrepreneurs, the 
public company model is no longer an attractive model. We also 
have a tremendous number of outflows of public companies, as 
well, so that when somebody like Michael Dell says that he no 
longer will operate a public company, that means that there is 
something wrong. We have to take a closer look at that.
    So, legislation and setting priorities for the SEC is an 
important item on our agenda. And, what should be noted with 
all the bills that you have here, because these are bipartisan 
bills that we have supported, it is important to note that 
these are all issues that the SEC could modernize existing 
regulations, but they have not done so and have only moved in 
the past when Congress has forced them to move.
    So, just sort of ticking down the list here, with the Reg A 
bill, Senator Warner, I agree with you. I think you should get 
a press release ready. You know, I think it is--we have a 
situation here where, with the open meeting tomorrow, we are 
going to have the Reg A update finalized, hopefully. And, while 
that is a victory, it is also an example why there is a need 
for Congressional prodding to get something done.
    With the Disclosure Modernization and Simplification Act, 
we have a corporate disclosure system that is based in a 1930s 
foundation and it is paper-bound. We need to update both the 
corporate disclosures and the delivery systems to meet the 
needs of 21st century investors as well as a global capital 
market.
    Now, I want to just state, too, that Chair White and Keith 
Higgins, who is the Director of Corporation Finance, have 
started the ball rolling on this with their Disclosure 
Effectiveness Project, and I think they should be commended for 
it. However, we want to make sure that that is a project that 
does not die through bureaucratic inertia. You only have to 
look at the concept release on proxy voting that has been 5 
years old to see, you know, something with good intentions die 
on the vine.
    With the Encouraging Employee Ownership Act, that will 
actually effectuate a JOBS Act reform. We had Rule 701, number 
of shareholders, that threshold rise through the JOBS Act. 
However, the actual dollar amount was not adjusted. So, the 
bill here would actually take that number from $5 to $10 
million, which reflects inflation since Rule 701 was 
implemented in 1988. And that is, as you said, Senator Warner, 
that is an important way for a growing company to keep and 
reward its employees. For a growing company, employees are 
their strongest asset.
    The Improving Access to Capital for Emerging Growth 
Companies, it is a needed change for emerging growth companies 
in the JOBS Act portal to go out and attract second-stage 
financing.
    With the SBIC Advisers Relief Act and the Holding Company 
Registration Thresholds Equalization Act, both codify 
Congressional intent of Dodd-Frank and the JOBS Act.
    With the Small Business Mergers, Acquisitions, Sales, and 
Brokerage Simplification Act, you know, businesses are 
increasingly looking to be acquired. As I said, they are not 
looking to necessarily become public companies. This will 
provide certainty around that process and it is something that 
we support.
    With the Treatment of Affiliates of Non-Financial Firms 
that Use a Centralized Treasury Unit, this is a narrowly 
tailored bill that codifies Congressional intent, allowing a 
nonfinancial company to use derivatives without clearing to 
mitigate risk and lock in prices. I think it should be noted 
that with the proposed legislation, a financial company cannot 
access that CTU exemption.
    The Swaps Data Reporting and Clearinghouse Indemnification 
Corrections Act, that is a change that is needed to clarify 
international differences of law to facilitate better 
information sharing and coordination amongst national 
regulators. That is an important piece in terms of global 
market.
    So, again, I want to thank the Subcommittee and Chairman 
Crapo for your leadership on this. We look forward to working 
with you to developing these into a core package of JOBS Act 
2.0 bills, and I am happy to take your questions.
    Chairman Crapo. Thank you.
    Mr. Spell.

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

    Mr. Spell. Good afternoon, Chairman Crapo, Ranking Member 
Warner, and members of the Senate Banking Subcommittee on 
Securities, Insurance, and Investment. My name is Bill Spell 
and I am President of Spell Capital Partners, a private equity 
firm in Minneapolis, Minnesota. Our firm manages three funds, 
two of which are small funds that engage in equity investing, 
and one of which is a Small Business Investment Company, SBIC, 
that engages in mezzanine debt finance.
    I am here today representing the Small Business Industrial 
Alliance, which is the trade association of lower and middle-
market private equity funds, SBICs, and business development 
companies and their institutional investors. SBI members 
provide vital capital to small- and medium-sized businesses 
across the country.
    I am a Minnesota native, attended college at the University 
of Minnesota and went on to receive an MBA from my alma mater a 
few years later. I continued my relationship with the 
University of Minnesota years later, serving as an adjunct 
lecturer at the Carlson School of Management.
    I began my career at a regional investment bank in 
Minnesota and for over 7 years engaged in corporate finance 
investment banking work. In 1988, I formed my own investment 
firm with the goal of making control equity investments in 
small industrial manufacturing businesses in the Midwest. Since 
that time, we have had a strong record of growing businesses, 
increasing employment, and providing a return to our investors.
    Recently, we decided to pursue an SBIC license and were 
approved by the Small Business Administration in March 2013. 
Today, we advise total assets under management of about $170 
million, with approximately $85 million of those assets in our 
SBIC fund. We currently employ a staff of 16 people in 
Minneapolis. Our SBIC fund has been examined twice by the SBA 
since we were licensed in 2013.
    Spell Capital is focused on helping small businesses grow 
and providing them the capital and management assistance with 
which to accomplish that goal. Unfortunately, some of the 
regulatory burdens we face, notably the cost and burden of 
registration with the SEC, which duplicates many of the costs 
and time burdens of complying with the SBA regulations in the 
SBIC program, have diminished both the time and funds we can 
allocate to our core mission.
    I believe balanced regulation oversight is a good thing. 
However, when regulatory oversight is duplicative and 
redundant, that regulatory balance between investor protection 
and capital formation is lost.
    Compliance costs have a disproportionate impact on smaller 
funds like mine. Small business investors commonly have very 
few employees, sometimes as few as two. Small business 
investment funds, such as Spell Capital, generally do not have 
legal departments, compliance teams, or extra employees to 
adhere to a complicated regulatory routine. Adding additional 
overhead expenses for regulatory compliance damages the ability 
of small business funds, such as Spell Capital, to operate 
profitably and prevents them from dedicating all their time, 
energy, and capital to helping small businesses grow.
    The cost of registration and additional compliance 
functions is high for smaller funds because their management 
fees are low when compared to much larger funds. However, 
smaller funds face many of the same compliance and reporting 
levels as larger funds. Absent the infrastructure of larger 
funds, smaller funds often have to pay outside counsel to help 
with initial and ongoing compliance costs.
    Therefore, as a consequence of these regulatory burdens on 
Spell Capital's mission to help small business, I am here to 
strongly support a bipartisan bill called the SBIC Advisers 
Relief Act. An identical bipartisan bill, H.R. 432, was 
introduced in the House on January 21, 2015, by Representatives 
Blaine Luetkemeyer and Carolyn Maloney. In the 113th Congress, 
this bill passed the House Financial Services Committee 56 to 
zero and was approved by the House on a voice vote. Senators 
Mark Kirk and Joe Manchin introduced the Senate companion to 
the bill in the 113th Congress.
    My testimony here today will explain the need for this 
legislation and why the solutions and clarifications it makes 
to the Dodd-Frank Act are necessary to ensure that smaller 
funds will be able to continue focusing on small business 
investing rather than filling out redundant regulatory 
paperwork. I would like to thank the Subcommittee for examining 
this bill today, and I especially want to thank the sponsors of 
this legislation and to urge support for the bill's 
introduction in the Senate during the 114th Congress.
    Thank you.
    Chairman Crapo. Thank you.
    Dr. Stanley.

STATEMENT OF MARCUS M. STANLEY, POLICY DIRECTOR, AMERICANS FOR 
                        FINANCIAL REFORM

    Mr. Stanley. Chairman Crapo and Ranking Member Warner, 
thank you for the opportunity to testify before you today on 
behalf of Americans for Financial Reform.
    Before turning to the specific bills under consideration 
today, I would like to make a general comment regarding capital 
formation. AFR does not believe that the SEC's capital 
formation mandate fundamentally conflicts with its mission of 
investor protection. Effective capital formation requires 
investor trust in the markets and also requires that markets 
channel investor capital to its best use. When investors put 
their money into a penny stock scheme or purchase securities on 
the basis of fraudulent accounting or on the basis of 
misleading descriptions of their true risk, capital is likely 
to be misallocated.
    The numerous financial scandals of the last two decades 
have led to enormous amounts of capital being misallocated and 
have done grave damage to investor trust in the markets. A 
failure to place a high priority on the SEC's investor 
protection mission will also harm its mission of ensuring 
effective capital formation.
    AFR supports legislation eliminating swaps data 
indemnification requirements, H.R. 742. Progress in derivatives 
data reporting has been slow. There are many reasons for this, 
but the indemnification requirements in Dodd-Frank are one 
factor involved. The replacement of indemnification 
requirements with a simpler confidentiality agreement would be 
beneficial in encouraging needed sharing of derivatives data 
between different jurisdictions and entities.
    AFR opposes H.R. 2274, legislation exempting M&A brokers 
from broker-dealer registration. While a much narrower version 
of this legislation could be acceptable, this bill is flawed. 
It lacks provisions to prevent bad actors from taking advantage 
of exemptions from registration. It would exempt acquisitions 
of companies with gross revenues up to $250 million, which goes 
far beyond any reasonable definition of a small local business. 
There is no effective provision to prevent transfer to a shell 
company, so the exemption could be used in a private equity-
type transaction. The bill could, thus, interfere with ongoing 
SEC investigations of potential abuses in private equity 
involving unregistered broker-dealer activities. The 
legislation is also unnecessary, as SEC has already taken 
administrative action to exempt true M&A brokers from broker-
dealer registration.
    We would also point out that numerous registered broker-
dealers who comply fully with SEC conduct requirements are 
already active in arranging deals, and this legislation would 
expose them to competition from unregulated entities that would 
not have to comply with important investor protections, such as 
suitability standards.
    AFR also opposes H.R. 5471, legislation that would expand 
exemptions from Dodd-Frank derivatives clearing requirements 
for financial affiliates of commercial entities. While 
commercial entities using derivatives to hedge legitimate 
commercial risk are already exempted from clearing 
requirements, financial entities can only qualify if they are 
hedging risk on behalf of an affiliated commercial company and 
are acting as the agent of the commercial affiliate. This 
legislation would remove these limitations and leave in place 
only a requirement that the financial entity is somehow 
mitigating the risks of a commercial affiliate.
    But, many purely financial trades can be interpreted to 
somehow mitigate risks for a related commercial affiliate. This 
legislative change would, thus, greatly reduce the ability of 
the CFTC to ensure that derivatives clearing requirements are 
properly applied in all cases. As the nonpartisan Congressional 
Research Service stated in an analysis of this bill, it could 
potentially allow large banks to trade swaps with other large 
banks and not be subject to the clearing or exchange trading 
requirements as long as one of the banks had a nonfinancial 
affiliate.
    There are some cases in which affiliates of commercial 
entities may genuinely be hedging commercial risks but may not, 
in the narrowest sense, be acting as an agent of the commercial 
affiliate. The CFTC has already provided extensive and robust 
administrative ``no action'' relief, allowing such affiliated 
central treasury units to make use of the clearing exemption.
    AFR also opposes legislation to expand exemptions for 
adviser registration for SBIC funds. It is likely that this 
change would affect only a relatively small number of advisers 
whose funds are not large. For this reason, we do not place as 
high a priority on this bill as the previous two bills 
discussed. However, we object to carving more advisers out of 
new Dodd-Frank registration requirements as these requirements 
are already proving effective in creating needed investor 
protections. We are also concerned that the legislation would 
weaken State investor protection oversight of SBIC funds.
    AFR does not at this time have positions on the other bills 
under consideration by the Subcommittee. However, my written 
testimony offers some additional comments on the Disclosure 
Modernization and Simplification Act of 2014. We question 
whether the mandate in this bill is an appropriate priority for 
agency resources and also express our view that greater 
investment in machine readable disclosures in order to change 
disclosure from disconnected documents into searchable open 
data would be a much greater benefit to investors than the 
regulation called for in that bill.
    Thank you for the opportunity to testify.
    Chairman Crapo. Thank you.
    Mr. Partigan.

STATEMENT OF JOHN C. PARTIGAN, PARTNER AND SECURITIES PRACTICE 
                  GROUP LEADER, NIXON PEABODY

    Mr. Partigan. Chairman Crapo, Ranking Member Warner, and 
Members of the Subcommittee, thank you for inviting me to 
testify today. I am a partner at Nixon Peabody and the Chair of 
the firm's Securities Practice Group. I have been practicing 
corporate and securities law for more than 25 years and have 
advised public and private companies, including Wegmans, for 
over 15 years, on a range of securities issues.
    I am here to speak about Wegmans' support for S. 576, the 
Encouraging Employee Ownership Act, and how this bill updates 
SEC Rule 701. On behalf of Wegmans, I would like to thank 
Senators Toomey and Warner for introducing the Act.
    Wegmans is a privately held, family owned company. It is an 
American success story. In 1916, John Wegman started the 
company with a produce pushcart. A year later, his brother, 
Walter, joined him. Today, Wegmans operates 85 stores in seven 
States and has almost 44,000 employees.
    Wegmans is the recipient of numerous awards. My testimony 
lists a number of them, but I would like to highlight just one. 
Every year since its inception, Wegmans has been ranked among 
Fortune Magazine's 100 ``Best Companies To Work For''. Wegmans 
is extremely proud of this recognition because it is a 
reflection of how the company treats its employees, and having 
broad employee stock ownership is a key to the success of the 
company. This is manifest in its philosophy that if Wegmans 
takes care of its employees, its employees will take care of 
the customers and the bottom line will take care of itself.
    I would like to provide a brief description of Rule 701 and 
then discuss S. 576. Rule 701 was adopted in 1988. It provides 
an exemption from SEC registration requirements for private 
companies to offer their own securities to employees pursuant 
to a written compensation plan. The exemption is not available 
for capital raising purposes.
    Rule 701 offerings are often an important component of 
companies planning to attract and retain talent, a key to the 
success of any business, but especially for smaller or newer 
companies that may offer stock or stock options as they are 
attracting early stage financing and need to preserve their 
cash.
    Under Rule 701, a company must provide investors with a 
copy of the plan document. In addition, because the offering 
remains subject to the antifraud rules, a company must also 
disclose the information that a reasonable investor would 
expect to receive from the company about the investment before 
making an investment decision.
    In 1999, when Congress provided new authority, the SEC 
amended Rule 701 and created a two-tier disclosure regime. For 
sales of $5 million and below during a 12-month period, the 
existing disclosures remained in place. For sales greater than 
$5 million during a 12-month period, the SEC created new 
enhanced disclosures. These enhanced disclosures, among other 
things, require the provision of audited financial statements, 
if available, no older than 180 days.
    In its 1999 rulemaking, the SEC explained that because the 
compensated individual has some business relationship over a 
long period of time with the securities issuer, the amount and 
type of disclosure required for this person, the employee, is 
not the same as for a typical investor with no particular 
connection with the issuer. Even at the time of the enhanced 
disclosures, the American Bar Association warned about the 
risks of requiring privately held companies to disclose their 
confidential financial information.
    Simply put, any assertion that the enhanced disclosures are 
not burdensome or problematic is wrong. The bottom line is that 
privately held companies are faced with a decision whether to 
limit compensatory grants and sales to employees to stay under 
the threshold or risk the dissemination of highly confidential 
information.
    This is what the Encouraging Ownership Act would fix. It 
would raise the threshold for enhanced disclosure to $10 
million, accounting for inflation. This is a sensible and 
balanced adjustment that continues to address the SEC's 
concerns by requiring two levels of disclosure.
    Thank you.
    Chairman Crapo. Thank you, Mr. Partigan.
    I would like to start out, first, with Mr. Quaadman and Mr. 
Stanley. It appears that there is a difference of opinion 
between the two of you with regard to H.R. 5471 and whether it 
is limited to nonfinancial end-users. It is my understanding 
that the exemption in the legislation is only intended to apply 
if the centralized treasury unit is hedging the commercial risk 
of a nonfinancial entity, an entity that otherwise could hedge 
its own risk directly without clearing. In such cases, the end-
user would not be denied the end-user clearing exception.
    Mr. Quaadman, is that your understanding of how H.R. 5471 
works?
    Mr. Quaadman. Yes, Mr. Chairman. We share the same reading 
of the bill and we think it works the same way.
    Chairman Crapo. All right. And, again, Mr. Quaadman, Mr. 
Stanley references a CRS report that suggests that the 
legislation may create a broader exemption. Are you familiar 
with that report?
    Mr. Quaadman. Yes, I have read it.
    Chairman Crapo. And, apparently in the report, there is an 
example used to show how that could occur. Could you respond to 
that?
    Mr. Quaadman. Yes. You know, the example that used there is 
a typical Rube Goldberg example, which is unrealistic in actual 
practice. If you are a financial company, you would not be able 
to avail yourself of that exemption. And, if you are a 
financial company--the nonfinancial company, as you said, you 
would be able to use the CTU process in that way. So, we did 
not think that the CRS report was accurate and it is not the 
way that a corporation will use derivatives to mitigate risk.
    Chairman Crapo. All right. Thank you.
    And, Mr. Stanley, I would like you to have an opportunity 
to respond, and also, could you explain why it is that you 
believe the text of this legislation would create a broader 
exemption than what we were discussing.
    Mr. Stanley. Sure. I guess I would say, first, that if you 
have ever looked at the organization chart for one of the major 
bank holding companies, one of the systemically significant 
bank holding companies, it does have a Rube Goldberg look to 
it. So, I think we have got to watch out for the way Rube 
Goldberg things can happen here.
    I think a critical difference between this legislation and 
the ``no action'' relief that the CFTC has already provided is 
that the CFTC's ``no action'' relief stated that the company at 
the top of the conglomerate, in other words, the company that 
owned the commercial affiliate and the central treasury unit, 
could not itself be a financial entity, such as a bank or a 
systemically significant bank. This legislation is not limited 
in that way.
    So, what the CRS report, I think, was picking up on is that 
if you have a bank, and we know that these major global banks 
have thousands of different affiliates, if one of those legal 
entities under the bank is a commercial affiliate, then you 
could have a financial affiliate under the bank claiming to be 
mitigating risk for an affiliated commercial entity, another 
commercial entity that is under that same holding company. And, 
what we are concerned about is that that mitigating risk is 
just too vague in terms of the legal authority that it gives to 
the CFTC and that you could have examples, say, for example, if 
you had a bank with a commercial affiliate in Brazil, you could 
have another financial affiliate that was, for example, buying 
credit default swaps under Brazilian debt and there would be a 
claim that it was mitigating risk in some general sense for 
that commercial affiliate.
    Chairman Crapo. Well, thank you. I understand your point. 
Would you agree, though, that if the language could be crafted 
adequately, that it would be appropriate to provide that a 
nonfinancial entity--frankly, that a centralized treasury unit 
that is hedging the commercial risk of a nonfinancial entity 
should be allowed to do so?
    Mr. Stanley. Yes, if it is genuinely hedging that 
commercial risk, and we do believe that there are ways this 
legislation, the language in this legislation could be crafted 
to be reasonable. Frankly, we think that given that the CFTC 
has shown its willingness to accommodate, that perhaps just 
legislative language that clarifies and makes clear the CFTC's 
discretion to accommodate central treasury models would be a 
better alternative.
    Chairman Crapo. I would appreciate any suggested language 
you might have in that regard.
    In the minute or so I have left, let me move to another 
issue. Mr. Spell, it also appears that there is a difference 
between you and Mr. Stanley with regard to the SBIC Adviser 
Relief Act, and probably we will only have time for you to 
respond, Mr. Spell, but I will come back, Mr. Stanley, when I 
get my next chance. Could you respond to Mr. Stanley's concern 
that he has raised with regard to the concern that the 
legislation does not adequately protect against the potential 
for investor abuse in private equity markets.
    Mr. Spell. Yes, sir, Mr. Crapo. You know, I am not familiar 
with any type of abuses in the private equity industry. The SBA 
regulation of SBICs is stringent and thorough and they have the 
ability to shut down any SBIC fund managers that do anything 
inappropriate or illegal. And, when I got into this business in 
1988, there were just a handful of private equity managers. 
Now, there are thousands and they manage hundreds of billions 
of dollars. Money would not flow into that industry if this was 
plagued with abuse.
    Chairman Crapo. Well, thank you. My time has expired. I 
will come back in another round.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and I appreciate 
you asking on the H.R. 5471 because I was going to ask kind of 
the same question.
    I guess I would--Mr. Quaadman, I am sympathetic to your 
argument, but I have to agree with Dr. Stanley that some of 
these large financial institutions, the level of complexity 
that they go to is pretty extraordinary, and I would love to 
see if there could be some way that we could come up with 
language that might meet both concerns. I guess I would ask 
you, should there be any limitations on clearing exemptions for 
nonfinancial institutions?
    Mr. Quaadman. Well, Senator Warner, the Chamber's position 
is, if you are going to use a derivative or hedging for 
financial speculation, that should go through clearing. Our 
members and the Corporate End-User Coalition, we use 
derivatives to lock in prices and mitigate risk. That is what 
derivatives are intended for.
    Senator Warner. I understand.
    Mr. Quaadman. So, that is where we believe that this should 
go. So, we agree that there should be, you know, with the CTU 
legislation, it should only apply to nonfinancials, which is 
how we ready that.
    I would also just say, too, with the Volcker Rule, I think 
it would be extremely difficult for a bank to have a commercial 
unit be able to use derivatives in this manner.
    Senator Warner. Well, Dr. Stanley, quickly, because I want 
to get to a series of other questions.
    Mr. Stanley. I think it is important to note that although 
this legislation is about mitigating commercial risk, it 
permits a financial entity, not just a commercial entity, a 
financial entity, which is what a so-called central treasury 
unit is, to access the clearing exemption, and that is 
precisely why we are so concerned about it, because it permits 
a financial entity to access the clearing exemption based on a 
claim it makes, so----
    Senator Warner. You did say, I think, that somewhere 
between the legislation and the ``no action'' letter, there 
might be some--and I appreciate, Chairman Crapo, you getting 
them to that point.
    Mr. Partigan, let me just--I, obviously, strongly support 
the legislation that you have discussed, and we have got about 
5.7 million small private companies in the United States. If we 
move this number, and, frankly, just move it up with inflation 
from $5 million to $10 million, do you have any sense of how 
many more employees or companies might be able to participate?
    Mr. Partigan. Well, I think for companies like Wegmans, 
they run up against that limit. So, you could have twice the 
number of employees participating in stock grant programs as 
well as stock purchase programs, and then you can expand that 
by the number of privately held companies that share employee 
stock with their employees.
    Senator Warner. Let me move, and Mr. Spell, one of the 
things that I would agree with, and Dr. Stanley, I guess I 
would like to get your quick comment, because I would like to 
get a couple more in, I think the SBIC program 20 years ago had 
a lot of problems. I think there is a much higher level of 
scrutiny now on SBICs. I am not exactly sure where the line 
should be drawn. But, when you are thinking at that 150 number 
and the nonability to aggregate, there is a--do you have some 
suggestion on how private equity managers can--it is a lot of 
compliance cost. There has not been a history outside of what 
was long ago in the SBICs before the SBA cleaned up the process 
that you would be willing to accommodate.
    Mr. Spell. Yes, and we would be happy to talk to you about 
that. I think we were just very impressed, and it lined up with 
some of what our pension fund members have seen, with what the 
SEC found when it did these inspections of private equity 
companies and found that over half had either violations of law 
or material weaknesses in controls. So, that is our concern.
    Senator Warner. I would like to see that.
    Let me get to the H.R. 3623, and Mr. Chairman, you have got 
quite a collection of legislation here, so they are all pretty 
complicated and----
    Chairman Crapo. All good stuff.
    [Laughter.]
    Senator Warner. That is what we hope to get to. You know, 
it seems to me, somebody who has been through the registration 
process, that the idea that if you somehow pass through that 
billion dollar total gross revenue limit during the 
registration process, that you could still become an emerging 
growth company and that you should not have to disrupt the IPO 
process. Is there any concern across the panel on that?
    [Witnesses shaking heads side to side.]
    Senator Warner. What about the change, the 6-day change on 
the period between the public filing and the start of the road 
show? I mean, I am not exactly sure--since most folks file and 
it is usually 30 or 40 days, conceptually, I get it, but why is 
this so high on the list?
    Mr. Quaadman. I was with just a--I was with a group of CFOs 
from bio companies about a month ago and we were doing a round 
of visits. They did talk about this issue with road shows and 
being able to go out sooner as being very helpful, and there 
was some concern with the JOBS Act, that the JOBS Act gets them 
to a certain point, but there were concerns about how they can 
get to the next stage. So, I think this is a helpful way to 
make the JOBS Act better, more efficient, but also to get them 
to second stage financing.
    Senator Warner. Well, Mr. Chairman, I appreciate this, and 
I am going to ask Senator Donnelly to sit in now. I have got an 
intel meeting. But, I look forward to seeing--these are 
technical in nature, most of this legislation, and I would love 
to see if we can find some bipartisan collaboration, and I 
would, again, welcome all of us to--it would be nice to work on 
some things where we can actually get to yes. Thank you, Mr. 
Chairman, for holding this hearing.
    Chairman Crapo. Thank you, Senator Warner.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman, and thank you also 
for holding this hearing today and talking about the number of 
bills that we have that could be very important to the 
investors and, frankly, to building a healthier economy long-
term in our country.
    I come from the great State of South Carolina, where our 
Governor and our legislature have worked very hard to create a 
business-friendly environment and it is really paying off 
dividends and growing more jobs in our economy, which is 
fantastic.
    I would like to use this opportunity to highlight the 
success of the Greenville Chamber of Commerce and their work 
with UCAN, which is the Upstate Carolina Angel Network, a 
network that is accredited investors that has invested over $11 
million in South Carolina startups since 2008. Private 
offerings are a useful tool to raise capital.
    Still, I think we need to do more to permit South 
Carolina's small cap and emerging growth companies to access 
public markets. This is especially important as banks and 
credit unions face heavier regulatory burdens that reduce 
access to lending and increase cost.
    Mr. Chairman, we heard this morning from some of the banks. 
I think Regions, in particular, talked about how their 
regulatory burden from a cost perspective is around $200 
million, which means that the pricing and the availability of 
credit is going down, down, down. And, they talked about having 
over 150 employees dedicated only to the regulatory 
responsibilities, that they have hired more folks lately for 
the regulatory burden than they have for lending purposes, 
which I think is quite remarkable and truly unfortunate.
    In the area of capital formation, our path forward should 
be a little easier. Reduce costs that present unnecessary 
burdens to access to capital.
    Securities regulation should be sensible. The SEC should 
balance its investor protection and capital formation missions 
and not do one at the expense of the other. One way to achieve 
that balance is to improve disclosure effectiveness by scaling 
it based on the size or the complexity of the issuer.
    I am pleased to see that the SEC is making overtures in 
this direction, and Mr. Quaadman, can you elaborate on 
disclosure overload and why scaling disclosure may make it a 
more useful tool to retail investors, especially to retail 
investors in my home State of South Carolina?
    Mr. Quaadman. Sure. Thank you very much, Senator Scott, and 
that is a very thoughtful question. When you take a look at the 
proxy as it exists today, it currently has exploded to about 
100 or more pages. So, what we have seen is as the proxy has 
increased tremendously, retail shareholder rates have dropped 
precipitously, to as low as 5 percent, in some cases. So, we 
have large institutional investors by law are required to vote 
and retail investors just do not vote. So, this means that the 
corporations themselves are not getting the adequate voice of 
their investors. So, being able to scale disclosures, being 
able to make sure that disclosures are readable and 
understandable is very important.
    And, what is also interesting, as well, is that Professor 
Larcker from Stanford University also came out with a survey in 
the last few weeks that 55 percent of institutional investors 
are having the same problem. So, we are having a systemic 
problem, that the more that we are disclosing, the less it is 
understandable.
    Senator Scott. I will say that the--and I oftentimes 
receive disclosures in the mail from a number of the companies 
that I have invested in, and I will tell you that the 
absolutely--and I am sure the paper companies are really 
happy--my ability to actually go through it all is difficult, 
and I have spent some time in business, and I will tell you 
that it just seems to be remarkable and perhaps 
counterproductive, frankly.
    Mr. Partigan, many small businesses in South Carolina use 
stock to compensate employees. I think this is a good thing. 
Stock-based compensation eases the pressure on companies' cash 
and gives the employee a small stake in the future of the 
company, or as I would like to think of it, as a bigger 
motivating factor for the success of the company. Some people 
have argued that raising the Rule 701 threshold--I think Mr. 
Spell spoke about the fact that there has not been a change 
since 1988, when it went into place, $5 million. It is not 
necessary because employees can just sign confidentiality 
agreements to prevent the publication of sensitive information 
about the employer. In your estimation, is this a feasible 
approach from a business perspective?
    Mr. Partigan. No, I do not think so. The concern is if you 
do not raise the threshold and the company were to exceed it, 
they would have to give full financial statements to all the 
employees participating in the program, including former 
employees that are participants in the program. And, the 
concern is that that--even if you have an employee sign a 
confidentiality agreement, that information could find its way 
into the hands of a competitor, which would harm a company. 
And, remember, this is only for privately held companies.
    Senator Scott. Yes.
    Mr. Partigan. So, that information is not otherwise 
available, and one of the reasons they have remained private is 
to keep that information confidential.
    Senator Scott. Thank you.
    Chairman Crapo. Thank you, Senator Scott.
    Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman, and thanks to 
all of you for being here.
    Mr. Spell, the SBIC was created back in 1958. We wanted to 
facilitate the flow of capital to small businesses, and I was 
wondering if you could talk a little bit about the success of 
the SBIC program since it was created and how you see it 
benefiting small businesses.
    Mr. Spell. Senator Donnelly, I appreciate your question. 
The SBIC plays a critical role in providing capital to small- 
and medium-sized businesses, businesses that sometimes cannot 
get that capital from more traditional sources. We at Spell 
Capital have invested in approximately 105 transactions in the 
last 27 years and we have actually, in the last year and a 
half, have made 12 investments through our SBIC vehicle. We 
have actually realized 2 of those 12 just recently to 
everybody's success--our investors and the company's.
    We at Spell Capital have utilized this program to provide 
needed funds to those businesses. We actually have made 
investments over the years in Indiana in a non-SBIC investment. 
Back in 1999 in your State of Indiana, we invested capital in a 
business doing about $18 million in sales, had about 50 
employees. In 2007, after some nurturing and blood, sweat, and 
tears along the way, when we sold that business to a large 
corporation, it had almost 600 employees and was doing over 
half-a-billion dollars in sales. So, we are very proud of what 
we----
    Senator Donnelly. So, are you saying it pays to invest in 
Indiana, sir?
    [Laughter.]
    Mr. Spell. Actually, I am.
    Senator Donnelly. Very good.
    Mr. Spell. Indiana is a great place to do business, sir.
    Senator Donnelly. The SBIC Advisers Relief Act, as you look 
at this, if it were enacted, what do you see as the most 
important benefits and what do you see as the risks on this?
    Mr. Spell. You know, twice the regulation just means twice 
the cost. It does not mean twice the protections. That is the 
key here. And, all we are asking for is to remove the 
duplicative, redundant reporting requirements.
    Senator Donnelly. OK. Thank you.
    And, Dr. Stanley, in regards to expanding exemptions from 
derivatives clearing requirements, and you indicated that that 
is opposed, as you look at this, you know, one of the things 
that has always struck me is how we want to make sure that for 
those who want to hedge for commercial purposes, that they have 
the ability to do it, that they are not hamstrung, and that 
those who do it for speculative purposes, that they obviously 
go down a different track in terms of regulation and such.
    When you look at this, and you talk about your opposition, 
could you flesh that out a little bit for me.
    Mr. Stanley. Sure. Excuse me. I am testifying through a 
cold here.
    Senator Donnelly. Do you want me to ask someone else?
    [Laughter.]
    Mr. Stanley. No, that is fine. So, as I said, our 
fundamental concern here is that this is--this legislation 
would permit financial entities, central treasury units, which 
are financial entities, potentially owned by a parent company 
that is a bank or a systemically significant financial entity, 
to access the clearing exemption just on the basis of a claim 
that they were mitigating risk for a commercial entity, and we 
saw in the London Whale case, for example, there were claims 
there made that JPMorgan's unit in London was hedging and 
mitigating risk based on commercial loans, but those turned out 
to be flawed, the internal controls that were just not there to 
tie the derivative to a specific risk that was being hedged.
    And, we are concerned, especially with the under-funding of 
the CFTC, that if you reduce the CFTC's authority in this area 
and you open up the door to permitting financial entities, 
potentially financial entities owned by parent companies that 
are banks or other financial entities, to access the clearing 
exemption, that there are dangers there.
    But, as I said, the CFTC has provided administrative 
accommodation here, and we are quite willing to work with 
people in this to make sure those safeguards are present in 
this statute.
    Senator Donnelly. I am just about out of time. I have one 
more question, and anyone who wants to take a swing at it can 
do so. In the IPO markets, and especially as you look toward 
smaller businesses and such, obviously, IPOs slowed down 
significantly during the most economically challenging times we 
had. As you look at it, do you think IPOs are back now, and if 
not, what do you think would be the main reason? But, overall, 
do you think they are playing as prominent a role as they were 
before?
    Mr. Quaadman. Senator Donnelly, I do think we have seen an 
uptick, a significant uptick, in IPOs in the last couple years, 
and I want to say that part of that is that the JOBS Act is 
opening up some of that. We also had some pent-up demand, too, 
because from 2007 to 2011, we had a very sluggish IPO market. 
So, I think that is beginning to turn around some.
    What is--and this is what I said in my opening statement, 
as well--we are concerned, however, that with a lot of the 
other rules, that as companies go from that emerging growth 
company into being a full-fledged public company, that as other 
regulations start to attach there, that you have an outflow 
problem. So, I think what we are doing is we are making 
tremendous progress on the inflow issues. We have to see if we 
can sort of cutoff the tap on the outflow, as well.
    Senator Donnelly. OK. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Crapo. Thank you.
    Most of the questions I was going to ask have been covered 
by the other Senators. I did want to talk briefly with a couple 
of you about mergers and acquisitions issues. As you know, the 
House of Representatives last Congress passed the Small 
Business Mergers, Acquisitions, Sales, and Brokerage 
Simplification Act by a vote of 422 to zero. And, Mr. Stanley, 
you have raised concerns about the threshold in that Act and 
the need for bad actor language. Could you clarify.
    Mr. Stanley. Yes. I mean, I do not think anyone would be 
opposed to legislation that someone who put an advertisement in 
a paper seeking a buyer for a local restaurant or something 
like that should not be subject to broker-dealer regulation. 
That is just common sense. But, $250 million in revenues is a 
very large company, and when you combine that with the lack of 
shell company provisions, you could really get significant 
private equity business and some really complex broker deals 
falling under this registration exemption. And, we are 
concerned about the lack of oversight in those cases, and also, 
as you said, the lack of a bad actor provision.
    Chairman Crapo. Thank you.
    Mr. Quaadman, would you like to comment on that issue.
    Mr. Quaadman. Sure, on both issues, Senator. Number one, 
you know, I think the $250 million threshold is actually a 
reasonable threshold. Congress through Dodd-Frank actually 
exempted companies up to $700 million from SOX 404(b) internal 
controls. So, there has already been a public policy 
declaration as to what the line is there. So, we are actually 
somewhat well below that line.
    With the bad actor language, in the original version of the 
bill that Congressman Heinzinger introduced in the House, there 
was bad actor language that prohibited anybody, you know, a 
broker who was suspended or under some sort of problem with the 
SEC. My understanding is, is that some of that language was 
inadvertently deleted by Legislative Counsel. So, I believe it 
was certainly the intent of the drafters of that legislation to 
have it in there and we would agree that it should be in there.
    Chairman Crapo. All right. Do either of the other two 
witnesses want to jump in on this issue?
    [No response.]
    Chairman Crapo. Senator Donnelly, have you got another 
question, or should we wrap it up?
    Senator Donnelly. I am thinking, we have got great minds in 
front of us and could get great economic advice. I will just 
throw this out real quick. What do you think is--you know, we 
are talking about for small businesses and such, what do you 
think is one of the most--if you had one thing to tell us, the 
most important thing we can do here to help our small 
businesses continue and have success? If you could each give me 
your best idea.
    Mr. Quaadman. Well, first off, I think it is part of what 
you are doing right now. What I think needs to happen is there 
needs to be pressure put on the SEC that they will periodically 
go in and review their rules and modernize them. The reason why 
we are here today, the reason why Congress passed the JOBS Act 
3 years ago, is because the SEC does not do that. So, I think 
it is a matter of sort of, you know, kicking the cobwebs out 
there and getting them to do their job, and if there is 
Congressional pressure that is needed to do that, that is what 
I think should happen.
    Senator Donnelly. Mr. Spell, you have worked with an awful 
lot of family businesses, midsized small businesses. As you 
look here, what is the most important thing, for those owners, 
for you? And, on my end, it is somewhat selfish, because I see 
this as an opportunity to create more jobs in our State, more 
people put to work. So, what do you see as the most important 
thing we can do to continue safety and stability, but at the 
same time help out these business owners?
    Mr. Spell. Sure. Thank you, Senator. I would say it is the 
redundant and duplicative regulations that burden small 
businesses and then reforms in the tax code. You know, between 
the corporate rate and the pass through rate, most small 
businesses pay the pass through rate. And, if we can get some 
kind of relief and simplification of the code, that would be 
huge.
    Senator Donnelly. OK. Dr. Stanley.
    Mr. Stanley. Well, I would say attention to the financial 
stability mission of the committee, because small businesses 
are hit first and hit hardest when there is that kind of 
broader economic instability.
    Senator Donnelly. You know, just on that one point, when 
the--being from a working--I used to represent a Congressional 
district in Indiana, a blue collar district in many respects, 
and when the largest financial corporations in America ran into 
terrible trouble, all of a sudden, there was no floor plan in--
there was no inventory financing. There was no floor plan 
financing for our local businesses, and that is how Main 
Street, basically, cut the back of the baseball bat when it 
swung around. So, I did not mean to interrupt you, but go 
ahead.
    Mr. Stanley. No, you just reinforced what I was saying. 
That was my point exactly.
    Senator Donnelly. OK.
    Mr. Partigan. I think the biggest issue is access to 
capital for small business, in particular, where there is a lot 
of job growth. It would be nice if our financial institutions 
were more willing to lend. I think that would be really 
helpful, if there is anything you can do to make even debt 
financing more available for small businesses to encourage 
that. Also, this crowdfunding rule proposal that the SEC has 
issued, I think that could be very helpful for some new 
businesses to get started if it is implemented in an effective 
way.
    Senator Donnelly. Thank you all very much.
    Chairman Crapo. Thank you. And, before wrapping up, Senator 
Donnelly's questions have prompted one, maybe an observation as 
opposed to a question from me. I really appreciated those 
answers, and it seems to me that reform of our tax code and 
regulatory reform are probably two of the most important things 
we could get done. I know those are big issues, but there are 
big rewards available, I think, if we can tackle those kinds of 
issues, and I appreciate that very much. And, the other 
observation is just, Mr. Quaadman, you indicated that one thing 
would be to have the SEC review its rules regularly. 
Interestingly, we are working on some legislation right now, 
which is not in the mix here because it has not been drafted 
yet, or dropped yet, to expand or at least clarify that the 
EGRPRA process, the Economic Growth--I have to look at the 
words for these acronyms--the Economic Growth and Regulatory 
Paperwork Reduction Act, which requires certain of our 
financial regulators to review their rules and regulations, 
does not apply to many, and actually, SEC is not in that group, 
and I am not sure we should put them in that group, but, at 
least, maybe the same kind of requirement should be imposed. Do 
you have any thoughts on that, Mr. Quaadman?
    Mr. Quaadman. Yes, and Senator, you can have several 
hearings on this.
    [Laughter.]
    Mr. Quaadman. I agree with you. That is critical. And, the 
SEC has some very specific cost-benefit things that they are 
supposed to do when they write rules. However, I do want to 
just say, we are beginning to see with Basel III, with Dodd-
Frank, we are beginning to actually see some very specific 
consequences that are starting to hit Main Street businesses, 
and the banking regulators under the Riegle Act are supposed to 
do an economic analysis whenever they write a rule. They have 
yet to do an economic analysis on any of the Dodd-Frank 
rulemakings they have done, including Basel III. So, when you 
start to see now that banks are turning away business deposits 
because those count against their liquidity coverage ratio, we 
could have caught some of those problems, as we had suggested, 
under Riegle Act analysis. So, I think legislation like that 
that puts more teeth into regulatory reform so we can stop 
these unforseen consequences is critical for future economic 
growth.
    Chairman Crapo. Well, I agree with that, and as a matter of 
fact, as I am sure you are aware, all Dodd-Frank rules and 
regulations were basically ignored by the EGRPRA process that 
is underway right now, which, by the way, is something we are 
addressing in the legislation that we are drafting right now. 
But, the point is that we should have economic analysis and we 
should have regular review of the rules and regulations that we 
are dealing with. I would like to thank all of our witnesses 
for coming here today and for spending the time that you have. 
Both your written testimony and your testimony here at the 
hearing is very carefully reviewed and is very helpful to us. 
In fact, you may even receive some questions after the hearing 
from some of us and we would appreciate you responding to 
those, if you would. This hearing is adjourned.
    [Whereupon, at 3:32 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                 PREPARED STATEMENT OF THOMAS QUAADMAN
   Vice President, Center for Capital Markets Competitiveness, U.S. 
                          Chamber of Commerce
                             March 24, 2015
    Chairman Crapo, Ranking Member Warner, and Members of the 
Securities, Insurance, and Investments Subcommittee. My name is Tom 
Quaadman, vice president of the Center for Capital Markets 
Competitiveness (CCMC) at the U.S. Chamber of Commerce (Chamber). The 
Chamber is the world's largest business federation, representing the 
interests of more than three million businesses and organizations of 
every size, sector, and region. I appreciate the opportunity to testify 
before the Subcommittee today on behalf of the businesses that the 
Chamber represents.
I. Need for Diverse Forms of Capital in a Free Enterprise System
    In 2011, the Chamber released a study by Professor Anjan Thakor of 
Washington University entitled, Sources of Capital and Economic Growth: 
Interconnected and Diverse Markets Driving U.S. Competitiveness (Thakor 
Study). \1\ The Thakor Study found that a key factor for small business 
success and resulting growth and job creation is their ability to 
access capital. The Thakor Study had five key conclusions:
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     \1\ The Thakor Study can be accessed at: http://
www.centerforcapitalmarkets.com/wpcontent/uploads/2013/08/
sourcesofcapital_report1103.pdf.

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

  2.  In terms of their financing choices individual entrepreneurs are 
        largely limited to debt financing for raising capital;

  3.  As businesses grow they can access both debt and equity financing 
        and the mix of these two, called the ``capital structure'' 
        decision, is an important choice every business makes;

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

  5.  The U.S. financial system is highly connected and what happens to 
        one financing source causes spillover effects in other parts of 
        the system. So for example, if excessive regulation restricts 
        access to, or the operation of, the IPO and secondary markets 
        for publicly traded companies, the resulting loss of liquidity 
        will act as a disincentive to private equity and venture 
        capital activity as well.

    Therefore, the more efficient and diverse capital markets are, the 
more new companies are launched, the larger the number of publicly 
listed companies, the better overall management of risk, greater 
availability of consumer credit and more people that have well-paying 
jobs. In other words a diverse, well-developed and efficient system of 
capital formation is necessary for robust economic growth and increased 
employment.
    Over the past several years we have seen our capital markets lose 
efficiency with a resulting decline in the number of businesses 
becoming public companies, as well as a sharp drop in the number of 
public companies overall. Many reasons exist for these outcomes--the 
financial crisis, stale regulatory systems that fail to keep up with 
the needs of a 21st century economy and legislative and regulatory 
initiatives that are changing fundamental practices that have been in 
place for decades.
    What has not changed is the need for new businesses and growing 
businesses to acquire capital. However, if those capital needs are not 
met, the next big idea or next successful business will simply wither 
on the vine and blow away with the wind.
    We had 14 straight years of a decline in the number of public 
companies in the United States. Last year was the first year since the 
tech bubble burst that a resurgent IPO market allowed the number of 
public companies in the United States to grow. The Jumpstart Our 
Business Startups Act (JOBS Act) was an important factor in that turn 
around. But more needs to be done as our economy is not hitting its 
long-term growth potential. The Chamber welcomes this hearing and 
supports the bipartisan effort to take the next step and remove some of 
the roadblocks that are inhibiting growth by America's Main Street 
businesses.
II. Legislative Proposals
1. Regulation A Bill H.R. 701 Setting Rulemaking Deadline
    The modernization of Regulation A (Reg. A) has the potential to be 
a real game changer for businesses that wish to seek public financing 
but may not be prepared to bear the full costs of an initial public 
offering. The current $5 million cap for Reg. A offerings--originally 
set in 1992--has proven to be too low to elicit serious consideration 
from companies. In fact, as the Securities and Exchange Commission 
(SEC) pointed out in its proposal to implement Title IV of the JOBS 
Act, from 2009 through 2012, there were only 19 qualified Reg. A 
offerings, for a total offering amount of $73 million. \2\
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     \2\ See SEC Release Nos. 33-9497; 34-71120; 3902493; File No. S7-
11-13 found at: http://www.sec.gov/rules/proposed/2013/33-9497.pdf.
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    Moreover, the complexity and inconsistencies between various State 
registration requirements has proven to be a major impediment to Reg. A 
offerings. This was one of the central findings from a Government 
Accountability Office report in 2012 and has been a consistent message 
coming from small businesses looking to gain access to public markets. 
\3\
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     \3\ GAO report can be found at: http://www.gao.gov/assets/600/
592113.pdf.
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    The Chamber understands that a coalition of State securities 
regulators has proposed a multistate ``coordinated review program'' 
intended to streamline State registration under Reg. A by completing 
registration reviews within 21 days. While this initiative is 
commendable, we are concerned that reliance upon an untested and 
unproven review program will only add complexities and further delay 
any kind of widespread utilization of Reg. A. As a general matter, we 
have also found through experience that, despite the best of 
intentions, achieving the concurrence of multiple regulators within 21 
days is just not a reasonable expectation. The SEC's Reg. A proposal 
also included a number of important disclosure and investor protection 
provisions which makes registration in multiple States unnecessary and 
unduly burdensome.
    Indeed, as Reg. A offerings open the pathway for businesses to 
access capital markets that are national in nature we believe that 
deference should be given to the SEC. However, the SEC has failed to 
act and we think that it is important for Congress to set a policy goal 
and prevent a needed modernization from dying a bureaucratic death.
    We believe that the SEC should act swiftly to finalize its Reg A 
rulemaking, and should maintain its proposed definition of a 
``qualified purchaser'' for Tier 2 offerings under the proposal, which 
would effectively preempt State registration requirements while 
maintaining the States' ability to enforce against wrongdoing.
    H.R. 701 passed the House of Representatives during the 113th 
Congress by a vote of 416-6. The Chamber strongly supports the 114th 
Congress taking up a similar bipartisan measure.
2. Swaps Data Repository and Clearinghouse Indemnification Act (H.R. 
        742)
    The Chamber is also supportive of language that would help to 
further harmonize swaps data and reporting rules across jurisdictions 
by removing an unworkable requirement from the Commodity Exchange Act 
(CEA). The provision requires foreign regulators that seek to obtain 
access to U.S. swap data repositories to agree to indemnify swap data 
repositories, the Commodity Futures Trading Commission (CFTC) and the 
SEC for expenses that arise from litigation relating to the information 
from the U.S. swap data repositories.
    This creates a significant barrier to global data harmonization, as 
foreign jurisdictions are unwilling to agree to the indemnification or 
have laws or regulations that would prevent them from agreeing to such 
an indemnification. Accordingly, this legislative correction is crucial 
for global regulatory harmonization and information sharing and could 
also reduce complexity and costs for U.S. companies that operate 
abroad, while still requiring that regulators meet specified 
confidentiality requirements for such data.
    We support the bipartisan language from H.R. 742, the Swap Data 
Repository and Clearinghouse Indemnification Correction act of 2013, 
which the House of Representatives passed in the 113th Congress by a 
vote of 420-2.
3. Holding Company Registration Threshold Equalization Act (S. 972/H.R. 
        801)
    This legislation fixes what could best be described as an oversight 
regarding Title VI of the JOBS Act. Title VI included a provision 
modernize the 12(g) shareholder thresholds, which require companies to 
go public once they hit a certain number of shareholders. For banks, 
the new registration requirement is set at 2,000 shareholders, while 
they would be allow to ``deregister'' if they cross below 1,200 
shareholders.
    Regrettably, despite the clear intent of Congress, the SEC did not 
interpret the law so as to allow savings and loan holding companies to 
take advantage of the new thresholds. Savings and loans perform nearly 
identical functions as do a bank and, since the passage of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), are 
overseen by the same regulators. While there may have been historical 
reasons for a lending institution to structure itself as a savings and 
loan as opposed to a bank, today there is essentially no difference 
between the operations or regulatory oversight between the two.
    In December 2014, the SEC did propose extending the new 12(g) 
thresholds to savings and loans, however a rule in this area is not 
final and savings and loans do not have the same statutory protection 
under this provision that banks do. H.R. 801 passed the House of 
Representatives during the 113th Congress by a vote of 417-4. The 
Chamber fully supports a permanent fix to this oversight from Congress 
that will ensure Congressional intent is carried out.
4. Small Business Mergers, Acquisitions, Sales and Brokerage 
        Simplification Act (S. 1923/H.R. 2274)
    This bill would allow mergers and acquisitions (M&A) brokers to 
electronically register with the SEC and not be subject to the full 
requirements for registration imposed upon a full-service broker, 
provided that such M&A brokers limit their activities to transactions 
involving an ``eligible privately held company.''
    This legislation would simplify registration requirements for such 
M&A brokers, but also includes a number of important safeguards that 
provide for investor protection and orderly markets. For example, the 
bill would require disclosure of relevant information to clients and to 
the owner of an eligible privately held company who is offered a stock 
for stock transfer, and would not exempt M&A brokers from the existing 
prohibitions designed to block securities law violators from entering 
the business.
    H.R. 2274 passed the House of Representatives during the 113th 
Congress by a vote of 422-0. The Chamber strongly supports the 114th 
Congress acting on this bipartisan measure.
5. Improving Access to Capital for Emerging Growth Companies Act (H.R. 
        3623)
    This legislation would build upon the success of the JOBS Act by 
providing emerging growth companies (EGCs) with expanded opportunities 
to raise capital. The bill would facilitate follow-on offerings made by 
EGCs and also allow business to maintain their EGC status for a period 
of time following their initial registration with the SEC. It would 
also reduce the number of days that a business must wait until after 
its registration to commence a ``road show,'' which would increase the 
likelihood of a successful IPO launch.
    The Chamber supports each of these innovative provisions and 
appreciates the Committee's interest in exploring more ways for EGCs to 
access the capital markets. As multiple studies have shown, job 
creation expands significantly once a company goes public. While the 
number of companies now going public is still below the level seen in 
the mid-1990s, last year saw the largest number of IPOs since 2000. 
This is a positive trend that was driven in no small part by the JOBS 
Act, and we urge Congress to continue focusing on ways to make the 
public markets more attractive for growing companies.
6. The SBIC Advisors Relief Act (S. 2765/H.R. 4200)
    This legislation would correct an unintended yet harmful 
consequence of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) that triggers registration under the 
Investment Advisers Act of 1940 (Advisers Act) for advisers to small 
business investment companies (SBICs) and venture capital funds. 
Congress has explicitly provided an exemption under the Advisers Act 
for individuals for advice either an SBIC or a venture capital fund. 
However, advisers who happen to advise both an SBIC and venture capital 
fund are currently being required to register under the Advisers Act.
    Congress exempted SBIC and venture capital fund advisers for good 
reason, and there is simply no valid argument for requiring someone to 
register simply because they advise both. SBICs and venture capital 
funds are a vital source of capital in our economy, and unnecessary 
regulatory requirements inhibit their ability to invest in American 
businesses. This bill would codify Congressional intent and allow SBICs 
and venture capital funds to continue to play their important role in 
our economy.
    The Chamber also supports a provision this legislation that would 
avoid unnecessary regulatory duplication at the State level, as well as 
a provision that would exclude SBIC assets from the calculation to 
determine whether someone who advises a private equity fund should have 
to register with the SEC. These are common sense measures will address 
issues that can be harmful to small businesses, which oftentimes do not 
have vast resources to deal with legal complexities.
7. The Disclosure Modernization and Simplification Act (H.R. 4569)
    In the eight decades since the securities laws were enacted, public 
company disclosure requirements have increasingly expanded and more 
complex, as evidenced by the voluminous annual and quarterly reports 
filed today. A 2012 report by Ernst & Young estimated that the average 
number of pages in annual reports devoted to footnotes and Management's 
Discussion and Analysis (MD&A) has quadrupled over the last 20 years. 
Should this trend continue, companies would be devoting roughly 500 
pages to MD&A by the year 2032. \4\
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     \4\ Ernst & Young report can be found at: http://www.ey.com/
Publication/vwLUAssets/ToThePoint_BB2367_DisclosureOverload_21June2012/
$FILE/TothePoint_BB2367_DisclosureOverload_21June2012.pdf.
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    This expansion and increased complexity of disclosure has 
contributed to the phenomenon of ``disclosure overload,'' whereby 
investors are so inundated with information it becomes difficult for 
them to determine the most salient factors they need to make informed 
voting and investment decisions. Retail investors are particularly 
vulnerable, as they typically don't have an army of analysts or lawyers 
to pore through SEC filings of the companies they invest in. In fact, 
it is the number one reason why retail shareholder participation has 
dropped to levels as low as 5 percent. Effectively, because of this 
``overload'' retail shareholders have become disenfranchised.
    And retail shareholders aren't alone. A recent study by Professor 
David Larcker found that 55 percent of institutional investors surveyed 
\5\ felt the proxy was too long and 48 percent believe the proxy is too 
difficult to read and understand.
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     \5\ The investors surveyed had a total of $17 trillion under 
management. The study can be found at: http://www.gsb.stanford.edu/
faculty-research/publications/2015-investor-survey-deconstructing-
proxy-statements-what-matters.
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    The Chamber has welcomed the efforts by SEC Chair White and SEC 
Corporation Finance Director Keith Higgins to start a project to 
address these long outstanding issues. Last year the Chamber released a 
report proposing several disclosures that are obsolete that should be 
removed or modified. \6\ However, we are concerned that the SEC project 
is being delayed by inertia.
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     \6\ The study on Corporate Disclosure Effectiveness can be found 
at: http://www.centerforcapitalmarkets.com/wpcontent/uploads/2014/07/
CCMC_Disclosure_Reform_Final_7-28-20141.pdf.
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    The Disclosure Modernization and Simplification Act would address 
this issue by requiring the SEC to eliminate any outdated, duplicative, 
or unnecessary and to further scale disclosure requirements for EGCs 
and other small issuers. We fully support this approach, as it would 
focus the SEC on some of the more noncontroversial items that could be 
addressed and ensure that our disclosure systems are modernized.
8. Encouraging Employee Ownership Act (S. 576)
    In 1988, the SEC adopted Rule 701, which gives private companies 
the opportunity to sell securities to employees under certain 
compensatory benefit or compensation plans without having to incur the 
costs of SEC registration. This exemption allows private businesses to 
offer compensation plans that help incentivize and retain personnel, 
while employees are given an opportunity to participate in the success 
of their employer via an ownership stake.
    The 1988 rule adopted a threshold level of $5 million for Rule 701 
securities sales, above which mandated disclosures are required that 
treat employee sales more like public offerings. Such disclosure of 
confidential financial information to the public could have deleterious 
consequences and raise the costs of such offerings for private 
companies. Moreover, the current threshold--now nearly three decades 
old--does not account for the JOBS Act's 12(g) exemption. Modernizing 
the rule would therefore help the 12(g) provisions included in the JOBS 
Act to reach their full potential.
    Importantly, S. 576 also includes a provision that would index Rule 
701 for inflation once the new threshold is enacted. The Chamber 
strongly supports this provision as it would help Rule 701 keep 
continuous pace with the growth and size of the American economy, and 
mitigate the chances that the exemption again becomes outdated in the 
future.
    Modernizing Rule 701 will produce benefits for American private 
businesses as well as workers who will have increased opportunity to 
build wealth by investing in the companies that they work for.
9. Treatment of Affiliates of Nonfinancial Firms That Use a Central 
        Treasury Unit
    The Chamber supports legislation that would prevent swaps executed 
by a centralized treasury unit (CTU) of a commercial end-user from 
being subject to clearing requirements for market-facing swaps. 
Specifically, we support the language of H.R. 1317, a Moore-Stivers-
Gibson-Fudge bill whose predecessor passed the House of Representatives 
by voice vote in the 113th Congress with no member speaking against or 
expressing opposition to the bill. Without this critical bipartisan 
language, end-users and consumers would face increased costs and 
companies may be forced to abandon proven and efficient methods for 
managing their risks through CTUs. This language would not assist 
financial companies and would not apply to speculative trades.
    Many nonfinancial end-users utilize CTUs as a risk-reducing, best 
practice to centralize and net the hedging needs of their nonfinancial 
affiliates. Section 723 of the Dodd-Frank Act makes the end-user 
clearing exception available only to those separate CTUs that ``act on 
behalf of the [affiliate] and as an agent.'' However, most end-user 
CTUs act in a ``principal'' capacity in order to net exposures and 
consolidate hedging expertise and would not be eligible for the relief 
provided in Section 723.
    While the Commodity Futures Trading Commission staff has issued no-
action relief allowing some end-user CTUs to use the clearing 
exemption, the relief does not correct the problematic language in the 
Dodd-Frank Act. Staff no-action relief does not provide the certainty 
that corporate treasurers need to plan, as it can be removed or 
modified by the staff at any time. Further, the existing language in 
Section 723, which is referenced in regulatory proposals on margin for 
uncleared swaps, puts corporate boards in the difficult position of 
approving the decision not to clear swaps despite the inapplicability 
of the statutory exemption.
III. Need for Action
    It should be remembered these bills are necessary because the SEC 
has been slow or unwilling to modernize these regulations in the past. 
While the SEC has a renewed focus, legislation is still needed to keep 
the regulators feet to the fire and prevent inertia from asserting 
itself. Regulatory inertia would mean that the problems will fester and 
American competiveness will fall even further behind.
    If these bills are not passed and if the JOBS Act is not fully 
implemented economic growth and job creation will continue to 
underperform and stagnate for years to come. The problem that has 
existed before, during and after the financial crisis is that our 
securities regulations reflect a pre-World War II economy at worst or 
the stagflation economy of the mid-1970s at best.
    In other words our current regulatory apparatus for capital 
formation is at least two to four generations removed from the 
realities of today's economy and wholly unprepared for the competitive 
demands for the next decade.
    The bills today are geared towards increasing IPOs and early stage 
financing, but more should also be done to address the precipitous and 
relentless decline of the number of public companies in the United 
States. The SEC must undertake a review and action to address policies 
and regulations that are obsolete in a 21st century economy. As we have 
seen with the JOBS Act and with the proposed legislation that is the 
subject of today's hearing, Congress sometimes has to direct the SEC to 
take action that it may not want to do, but that it should do.
IV. Conclusion
    The Chamber views these bills as important blocks building on the 
foundation of the JOBS Act. This package of legislation will help our 
economy reach its full growth potential allowing businesses to grow and 
create jobs. But these bills can do more than that, they can also push 
the regulators to be more forward leaning and proactive in keeping up 
with the dynamics needed to create and sustained an atmosphere 
conducive for growth. This formula will allow entrepreneurs to take the 
reasonable risks to start new businesses forged on the anvil of 
innovation. This will help keep current what has been the formula for 
success allowing the United States economy to grow at unprecedented 
levels throughout its history. More importantly, these bills, along 
with the full implementation of the JOBS Act are necessary for American 
businesses to succeed in an ever increasing competitive global economy.
    I am happy to take any questions that you may have at this time.
                                 ______
                                 
                 PREPARED STATEMENT OF WILLIAM H. SPELL
  President, Spell Capital Partners, on behalf of the Small Business 
                           Investor Alliance
                             March 24, 2015
    Good afternoon Chairman Crapo, Ranking Member Warner, and Members 
of the Senate Banking Committee Subcommittee on Securities, Insurance, 
and Investment.
    My name is William Spell and I am President of Spell Capital 
Partners, a private equity firm in Minneapolis, Minnesota. Our firm 
manages three funds, two of which are small funds that engage in equity 
investing and one of which is a small business investment company 
(SBIC) that engages in mezzanine debt finance. I am here today 
representing the Small Business Investor Alliance (SBIA), which is the 
trade association of lower middle market private equity funds, SBICs, 
and business development companies (BDCs) and their institutional 
investors. SBIA members provide vital capital to small- and medium-
sized businesses across the country. I am also here to express my 
support for the SBIC Advisers Relief Act.
    Before I delve into the details of why I am here testifying today, 
it might make sense to share a little of my background, and the 
background of Spell Capital Partners. I am a Minnesota native, attended 
college at the University of Minnesota, and went on to receive an MBA 
from my alma mater a few years later. I continued my relationship with 
the University of Minnesota years later, serving as an adjunct lecturer 
at the Carlson School of Management. I began my career at a regional 
investment bank in Minnesota and for over 7 years engaged in corporate 
finance investment banking work. In 1988, I formed my investment firm 
with the goal of making control equity investments in small industrial 
manufacturing businesses in the Midwest. Since that time, Spell Capital 
has stayed true to its roots, continuing to provide financing to small, 
entrepreneurial companies while working with those companies to grow 
employment, revenues, and provide a return to our investors. We have 
had a strong record of success in that endeavor, and I estimate in the 
investments we have made, we have increased employment significantly 
during our tenure.
    After 25 years of managing smaller funds that invest in small 
manufacturing companies, we decided to pursue an SBIC license, which 
was approved by the Small Business Administration (SBA) in March 2013. 
Today, we advise total ``Assets Under Management'' (AUM) of 
approximately $171 million, with approximately $85 million of those 
assets in our SBIC fund. We currently employ a staff of 16 people in 
Minneapolis, Minnesota, to run our operations. Our SBIC fund has been 
examined twice by the SBA since we were licensed in 2013.
    At Spell Capital, a large percentage of our investments are 
directly made in conjunction with entrepreneurs and business owners, 
often with no other equity funds involved in the transaction. This 
allows us to work closely with the small businesses we invest in, 
providing management expertise to help them professionalize and grow 
their businesses, hiring employees and supporting their communities 
along the way. The type of financing we typically provide is used by 
these small companies for growth capital--hiring, building new 
facilities--and to accomplish ownership transitions--allowing the 
operators of these businesses to continue their success by passing them 
along to the next generation of owners. Spell Capital is focused on 
helping small businesses grow, and providing them the capital and 
management help with which to accomplish that goal. Unfortunately, some 
of the regulatory burdens we face, notably the cost and burden of 
registration with the Securities and Exchange Commission (SEC), which 
duplicates many of the costs and time burdens of complying with the SBA 
regulations in the SBIC program, have diminished both the time and 
funds we can spend engaged in providing capital and management 
expertise to small businesses.
    As a result of the burdens on Spell Capital's mission of small 
business investment, a mission in place since 1988, I am here to 
strongly support a bipartisan bill called the SBIC Advisers Relief Act. 
An identical bipartisan bill, H.R. 432, was introduced in the House on 
January 21, 2015, by Congressman Blaine Luetkemeyer (R-MO). In the 
113th Congress, this bill passed the House Financial Services Committee 
56-0, and was approved by the House on a voice vote. Senators Mark Kirk 
(R-IL) and Joe Manchin (D-WV) introduced the Senate companion (S. 2765) 
to the bill in the 113th Congress. My testimony here today will walk 
you through the elements of this legislation, and why the solutions and 
clarifications it makes to the Dodd-Frank Act are necessary to ensure 
that smaller funds will be able to continue focusing on small business 
investing, rather than filling out regulatory paperwork. I would like 
to thank the Subcommittee for examining this bill today and I 
especially want to thank the sponsors of the legislation.
I. What Is an SBIC?
    Before discussing the benefits of the SBIC Advisers Relief Act, it 
makes sense to provide a quick overview of what exactly is an SBIC. 
SBICs are privately owned, managed, and operated equity investment 
funds that make long-term investments in U.S. small businesses and are 
licensed by the SBA. SBICs are highly regulated private funds that 
invest exclusively in domestic small businesses with at least 25 
percent of their investments in even smaller enterprises. The program 
was created in 1958 to help overcome the scale challenges associated 
with small business investment, and in so doing spearheaded creation of 
the thriving venture capital industry we see in the country today. 
Given their clear public benefit, SBIC funds are the only explicitly 
permitted investment under the Volcker Rule that was set out in 
statute.
    Currently, there are over 294 licensed SBICs across the country 
with over $22 billion in total assets. In Fiscal Year 2014, SBICs 
invested more than $5.2 billion in capital in domestic small 
businesses, adding to the $63 billion in total investments in small 
businesses provided since 1958. Well-known companies such as Costco, 
Apple, Federal Express, Outback Steakhouse, and Callaway Golf received 
SBIC financing when they began, growing into successful, profitable 
companies and employing thousands of Americans. SBICs also are based in 
many areas where traditional private equity is not, with funds based in 
Tennessee, Louisiana, Pennsylvania, Arkansas, Illinois, Nebraska, 
Kansas, Virginia, Rhode Island, New York, New Jersey, Massachusetts, 
and Indiana, among others. The full list of SBICs in States represented 
by the Committee is available in an addendum to my testimony.

II. Dodd Frank Prompted a Significant Change in How SBIC Advisers and 
        Private Fund Advisers Were Regulated
    Under the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank), passed in 2010, the landscape for investment advisers 
changed dramatically for private equity funds. In writing Dodd-Frank 
there was discussion, and amendments were adopted, with the express 
intent of avoiding duplicative regulation and reporting by SBICs. 
Unfortunately, as the bill evolved there were drafting oversights that 
inadvertently undercut the premise of not redundantly regulating SBICs 
and preventing the resulting drain on the resources of small business 
investors. The changes required many private equity funds to register 
with the SEC as investment advisers, and smaller private equity 
advisers to provide limited reporting to the SEC or register with their 
State securities regulator. Registration for these smaller funds is not 
just filling out a few forms; it is a new way of life. SEC registration 
is expensive and, in many cases, the investment adviser rules are not 
very applicable to private equity funds dealing in nonpublic 
securities, which is common with small funds.
    The initial cost to register with the Securities and Exchange 
Commission (SEC) is often in excess of $100,000. Annual costs to comply 
with SEC investment adviser rules are often $50,000 or more per year. 
SBIA supports exempting small business investors from the Investment 
Advisers Act. The $150 million threshold that triggers SEC registration 
is too low and, at a minimum, should be raised. It is illustrative that 
one of the authors of Dodd-Frank, former Congressman Barney Frank, 
recently stated that Congress should consider amending the $150 million 
threshold with which private equity firms must register with the SEC; 
while further highlighting that ``in the crisis situation, we erred on 
the side of maybe being too inclusive.'' \1\
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     \1\ Deborah Cohen, ``Frank Pushes for Change to PE Registration 
Rule in Dodd-Frank-Reuters'', Middle Market Growth, January 22, 2015, 
available at: http://www.middlemarketgrowth.org/frank-pushes-change-pe-
registration-rule-dodd-frank-reuters/.
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    Dodd-Frank created a new ``Assets Under Management'' or AUM test to 
determine the regulatory burden on investment advisers to private 
funds. Other types of fund advisers are specifically exempt from 
registration, such as venture funds (VC) and SBICs, but only if they 
``solely'' advise those funds. The following chart explains the 
requirements:

    The chart above explains the confusing and inconsistent framework 
that is currently in place due to the changes to the investment adviser 
regulation under Dodd-Frank. The SBIC Advisers Relief Act aims to 
clarify these inconsistencies and provide relief for smaller funds 
which are disproportionately impacted by duplicative and costly 
regulation. This bill is vital for a number of particular reasons.
    Small business investors commonly have very few employees, 
sometimes as few as two. Small business investment funds, such as Spell 
Capital, generally do not have legal departments, compliance teams, or 
extra employees to spare adhering to a complicated regulatory regime 
that is not designed for its type of investing. Adding additional 
overhead expenses for regulatory compliance teams and services damages 
the ability of small business investment funds to operate profitably 
and prevents them from dedicating all their time, energy, and capital 
to helping small businesses grow.
    The cost of registration and additional compliance functions is 
high for smaller funds because their management fees \2\ (which are a 
function of assets under management) are low when compared to much 
larger funds; however, smaller funds face many of the same compliance 
and reporting levels as larger funds. Absent the infrastructure of 
larger funds, smaller funds often have to pay outside counsel to help 
with initial and ongoing compliance costs.
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     \2\ Most private equity limited partnership agreements (LPAs) 
require costs associated with SEC registration and ongoing regulatory 
compliance to be charged as a management expense, being paid by the 
management fee, rather than a fund cost. Management fees are typically 
2 percent of the total AUM of the funds being advised, and cover the 
costs of operating the investment adviser, paying staff and for office 
space, deal sourcing and due diligence, as well as other expenses.
---------------------------------------------------------------------------
    Due to the relatively high compliance expense, managers of smaller 
funds are left with two choices--raise far more capital for their next 
fund to cover the fees for the added compliance costs or exit the 
business. Larger funds invest in larger companies, generally not small 
businesses. Neither option delivers a positive result for continuing 
the flow of capital to small businesses. For every $1 that we spend on 
compliance issues, that is $1 less that we have to further our mission 
to deploy capital and to help grow the economy. Therefore, all the time 
and money that is tied up by regulatory compliance will hinder economic 
growth and job creation.
    The SBIC Advisers Relief Act seeks to eliminate duplicative 
regulation that imposes significant burdens and costs on small business 
investment funds by clarifying and eliminating inconsistencies in the 
regulatory framework in the Dodd-Frank Act. These modest changes are 
technical corrections that will ensure that small business investment 
will not be penalized and pushed out of the marketplace, and America's 
small businesses will receive the capital they need.
III. The SBIC Advisers Relief Act (H.R. 432)
    The SBIC Advisers Relief Act is a commonsense, bipartisan, and 
effective clarification of the investment adviser regulation that will 
enhance the ability of small business investors to concentrate on 
making investments, rather than filling out forms. It concentrates on 
three targeted changes to current law. First, the legislation prevents 
venture funds from losing their exemption from SEC registration when 
entering the SBIC program. Second, the legislation helps advisers to 
both private equity funds and SBICs by removing the SBIC capital, which 
is already regulated by the SBA, from the AUM calculation for SEC 
registration. Third, the legislation prevents the duplicative 
registration of SBICs by Federal and State securities regulators and 
returns SBICs to their original sole regulator--SBA.
1. Eliminating the Barrier for Venture Funds To Utilize the SBIC 
        Program
    The new ``exempt reporting adviser'' (ERA) regime for venture funds 
in Dodd-Frank failed to provide sufficient guidance to the SEC on how 
to treat dual advisers of both venture and SBIC funds. The Dodd-Frank 
Act states that the SEC cannot register advisers that ``solely'' advise 
SBIC funds. The SEC then applied the term ``solely'' to mean that if an 
adviser oversaw a single penny outside of SBIC fund assets, then 
duplicative regulation was triggered. This was not the Congressional 
intent of Dodd-Frank and serves no practical investor protection or 
public benefit. As a result, while advisers to venture funds may remain 
ERA advisers if they only advise a venture fund, if they also enter the 
SBIC program with another venture fund, they are now required to 
register--a much more expensive proposition. As a result, venture funds 
are effectively penalized with additional costs if they choose to add 
an investment vehicle for domestic small business investments. This 
legislation would allow venture fund advisers to remain ERAs if they 
choose also to advise an SBIC fund.
    This provision is particularly important when it comes to 
encouraging VC fund advisers to enter the SBIC program. As part of the 
Obama administration's ``Start-Up America Initiative'', in 2012, the 
SBA implemented a new Early-Stage SBIC program to promote innovation 
and job creation by encouraging private sector investment in job-
creating early stage small businesses. The purpose of the program is to 
target a gap in investment for early-stage companies outside the 
traditional venture areas of California, Massachusetts, and New York. 
If a VC fund adviser chooses to utilize the Early-Stage SBIC program, 
under current law, they will lose their exemption from SEC registration 
and be subject to the cost and burden of SEC registration. Congressman 
Mick Mulvaney (R-SC) put it best at a hearing on the legislation last 
Congress when he described the issue, explaining that ``If A, you don't 
have to register with the SEC, if B, you don't have to register with 
the SEC, but if A+B, you do have to register with the SEC.'' Clearly, 
such an approach to securities regulation doesn't make much sense, nor 
is it protecting many investors.
            a. The Regulatory Contradiction Faced by Noro-Moseley 
                    Partners
    One of SBIA's members, Noro-Moseley Partners (Noro-Moseley), is a 
venture fund investment adviser founded in 1983, and based in Atlanta, 
Georgia. The fund has seven employees. Noro-Moseley is now investing in 
its 7th fund and focuses its investments on venture and early growth 
stage healthcare and IT companies across the United States. Noro-
Moseley currently has four funds still operating, one small VC fund in 
wind down, one VC fund with about $150 million in AUM, one Early-Stage 
SBIC, and a parallel VC fund with $110 million in AUM split between the 
two parallel funds, for a final tally of $260 million AUM. Noro-Moseley 
received its Early-Stage SBIC license in 2013, as one of the first VC 
funds entering this new SBIC program. When entering the program, they 
were advised by their attorneys that the SEC was likely to provide 
relief from SEC registration due to this very issue. Unfortunately, the 
SEC declined to provide such relief, after initial positive 
conversations. As a result, Noro-Moseley, because they entered the SBIC 
program and lost their VC ``solely'' exemption, was forced to spend 
over $100,000 in initial costs to register with the SEC, plus $25,000-
to-$50,000 for annual, ongoing compliance costs. These are costs and 
time that could be better spent seeking out VC investments and getting 
capital to small businesses. Also, Noro-Moseley, themselves, have 
expressed doubt about whether they would have entered the SBIC program 
had they known they would be required to register with the SEC and 
incur the related compliance costs and burdens.
2. Exempting SBIC Capital From the SEC AUM Registration Threshold
    Advisers that advise both SBIC funds and private funds, including 
Spell Capital, have to include the AUM of the SBIC fund in addition to 
the private fund they manage in calculating the threshold for SEC 
registration. This legislation would exempt already federally regulated 
SBIC capital from being included in the triggering calculation for SEC 
registration for those advisers jointly advising both SBIC and other 
small private funds, and prevent these advisers from being penalized 
for raising a large SBIC fund specifically formed to invest in domestic 
small businesses.
            a. The Impact on Spell Capital Partners
    My firm, Spell Capital Partners, would be directly helped by this 
provision in the SBIC Advisers Relief Act. Our focus, as I stated 
previously, is on staying small and investing in small, entrepreneurial 
companies primarily in the manufacturing space. We currently employ a 
staff of 16 people in Minneapolis, Minnesota. Our SBIC fund has been 
examined twice by the SBA since we were licensed in March 2013. Our 
funds have created thousands of jobs and invested in many companies 
since we formed over 25 years ago. Currently, we have 21 companies in 
our portfolio that we have invested debt, equity, or, in some cases, 
both. Some of these include Norshield Security Products, a maker of 
force protection doors, windows, guard booth products (used in U.S. 
Embassy sites) based in Montgomery, Alabama; Tech Cast, an industrial 
forging and casting company based in Myerstown, Pennsylvania; Animal 
Adventures, a maker of stuffed animal toys based in Minnesota, New 
York, and Washington State; American Card Services, a specialty printer 
of plastic gift cards with offices in Missouri and Illinois; and Las 
Vegas Color Graphics, which engages in commercial printing and data 
management based in Las Vegas, Nevada.
    Spell advises three funds: Fund III, a private fund with about $39 
million AUM; Fund IV with $46 million AUM; and an SBIC with $86.6 
million AUM. Under the current SEC AUM calculation, we are required to 
register with the Commission as we have over $171 million AUM with the 
SBIC capital included. All of our investors are accredited investors 
and include high net worth individuals, banks, insurance companies, 
family offices, and foundations. We received our SBIC license in March 
2013, and have had an onsite examination by the SBA twice in that time 
period with no concerns raised. We have never had an SEC examination; 
despite, until recently, being an ERA. We will soon be filing a Form 
ADV to register with the Commission and expect our initial registration 
costs, calculated in both time and financial costs, to be $75,000-to-
$100,000, with annual estimated ongoing compliance costs to be $50,000-
to-$80,000.
    These increased compliance costs and time wasted take away the 
capital we could be using to source small business deals and impose an 
unnecessary duplicative regulatory burden on Spell Capital. The SBIC 
capital we are advising is thoroughly examined and regulated by the 
SBA, while the private capital in our non-SBIC funds will still 
continue to be looked at by the applicable SEC or State regulator. The 
key here is that with this bill, all of the capital we oversee and our 
investment adviser will continue to be regulated in full by one sole 
regulator, rather than the enhanced oversight of SEC regulation. This 
legislation will save us immense compliance- and time-based costs that 
will allow our team to focus on what we do best--investing in 
innovative small companies in the manufacturing center, which often do 
not have much access to capital.
            b. The Impact on SBIC Advisers With Either Private or SBIC 
                    Funds in Wind Down
    In addition to the impact on Spell Capital and other funds like it, 
this legislation will resolve issues that other SBIA funds, including 
Merion Investment Partners in Radnor, Pennsylvania, and Patriot Capital 
in Baltimore, Maryland, have faced.
    One of these issues is that, oftentimes, advisers to an SBIC will 
have a vestigial private fund that is winding down. This can result in 
having to take on the new regulatory compliance burdens as the fund is 
closing out and little to no money is coming in. If the SBIC fund has 
$150 million of capital in it and even one dollar in a fund that has 
run its course and is closing out, then full SEC registration is 
triggered. This is despite the fact that the bulk of the capital is in 
the SBIC and subject to SBA oversight. SEC registration is not adding 
investor protections in cases like these.
    Another issue that will arise is when an adviser just to SBICs is 
winding down one of their SBIC funds. Once the SBIC has paid off their 
SBA debentures and is winding down, the license is generally 
terminated. There is still a small remaining pool of private capital it 
is returning to investors, but it is harvesting investments and not 
making new ones in that fund. This investment adviser, if they have a 
larger SBIC that they are also advising that is over $150 million AUM, 
then will be forced to register because without a current SBIC license 
the fund that is almost closed is classified as a private fund, despite 
being in wind down and returning the rest of its capital to its private 
investors. Often this wind down can take 1 to 2 years. These issues 
would both be resolved through the SBIC Advisers Relief Act by 
eliminating the SBIC capital from the AUM calculation and eliminating 
the registration burden for these funds, while preserving oversight as 
an ERA or State-registered adviser during that wind down period. 
Registration is not adding investor protections in cases like these.
3. Duplicative Registration of SBICs
    The authors of Dodd-Frank specifically prevented the SEC from 
registering advisers that solely advise SBIC funds, recognizing the 
need for only one regulator and identifying the lower pain thresholds 
of small business investors. However, this section of Dodd-Frank 
inadvertently opened up SBIC funds, regulated by the SBA since 1958, to 
duplicative regulation because it was silent on the concept of State 
regulation of federally licensed SBIC funds. Duplicative regulation at 
the Federal level was considered and rejected. Unfortunately, it was 
erroneously assumed that this issue was settled, but State regulation 
of federally licensed SBICs was not expressly prohibited. We now have 
confusion, costs, and doubled regulatory burdens. A small number of 
State securities regulators have reserved the right to interpret Dodd-
Frank as giving them authority to regulate the advisers of federally 
licensed SBICs which have less than $100 million in AUM. The SBIC 
Advisers Relief Act would return SBIC advisers solely advising SBIC 
funds below $100 million in AUM to Federal oversight by their licensing 
agency, the SBA. States would still have authority to register advisers 
not solely advising SBICs.
            a. Duplicative Regulation by State and Federal Governments
    Another one of SBIA's members, Diamond State Ventures (Diamond 
State), a fund named as the SBIC of the Year in 2011 by the SBA, 
recently was impacted by this very issue in the State of Arkansas. 
Diamond State, based in Little Rock, has been involved in the SBIC 
program since 1999, and the team has successfully been licensed three 
times by the SBA to operate an SBIC, most recently in February 2014. 
The fund's investors are predominately banks (70 percent), along with 
pension funds, private foundations, and a few high net worth 
individuals. Diamond State is the sole SBIC in the State of Arkansas, a 
State underserved by private equity and small business investing. 
Diamond State has three employees. Since inception, Diamond State has 
made over 18 investments in small businesses located in the State of 
Arkansas, employing over 2,300 Arkansans and investing over $40 million 
in Arkansas companies. Diamond State is currently under the $100 
million AUM threshold that would be required to avoid State 
registration. If they were above this threshold, they would be exempt 
from SEC registration and would remain solely regulated by the SBA.
    Because of the murkiness of the securities laws across the States, 
when Diamond State raised their most recent federally licensed SBIC 
fund in January 2014, they consulted with the Arkansas Securities 
Commissioner to make sure they were staying on the straight and narrow. 
They were informed that because Arkansas did not have a ``private 
adviser'' exemption, they would be required to register with the State 
regulator, \3\ in addition to the regulation and oversight they already 
receive by the SBA. It is important to note that the SBA has conducted 
an on-site examination of Diamond State every year since 1999, and 
conducted a rigorous licensing review of the entire team each time they 
have been licensed by the SBA. In the midst of determining whether 
registration applied to Diamond State, the fund spent over $50,000 in 
legal fees trying to figure out how to apply the State securities 
regulations to their federally licensed SBIC fund, which were designed 
to apply to brokerage firms and retail investment advisers, not 
advisers to private equity funds or SBICs. Further costs in time and 
money were imposed as the then two-person team spent the majority of 
their time for over 3 months working on this regulatory issue, rather 
than out searching for potential small business investments. In the 
end, the fund will have spent thousands of dollars to prepare for a 
potential exam with an Arkansas examiner who likely will have little to 
no understanding or experience with the regulations and requirements of 
the Federal SBIC program or how this type of firm is required to 
operate.
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     \3\ Note: There is no exemption for in-State investment advisers 
to private funds in the State of Arkansas: http://www.nasaa.org/
industry-resources/investment-advisers/ia-switch-resources/state-
investment-adviser-registration-information/arkansas/.
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    There are inconsistent and confusing standards across the States. 
Some of the States that do not have an exemption have expressed to 
SBICs in their State that they recognize the existing SBIC registration 
exemption in Dodd-Frank and the legislative intent to avoid duplicative 
regulation so they don't need to formally register at the State level. 
Given that these States have had since July 2010 (when the investment 
adviser switch implementation began \4\) to update their laws, it seems 
unlikely they are planning on updating them in the near future. 
Moreover, many States that do exempt registration for SBIC funds over 
$100 million AUM under a ``federally covered'' adviser section of their 
State securities laws end up forcing the funds to enter a different 
regime at the State level because, technically, those funds are not 
registered with the SEC due to their SEC exemption in Dodd-Frank. This 
illustrates the immense confusion about the silence on this issue in 
Dodd-Frank and promotes significant regulatory uncertainty for funds. 
Congress intended for the SBA to be the sole regulator of SBICs, but 
did not make that clear in the drafting of the statute. This bill will 
provide the technical correction needed to provide clarity and 
consistency.
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     \4\ ``The IA Switch, a Successful Collaboration To Enhance 
Investor Protection'', North American Securities Administrators 
Association, May 2013, p. 11, available at: http://www.nasaa.org/wp-
content/uploads/2011/08/IA-Switch-Report.pdf.
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IV. SBICs Are Heavily Regulated by the SBA
    SBICs are heavily regulated and closely supervised by SBA. This 
review and oversight starts before an applicant is permitted to file a 
formal license application with SBA and continues until such time as 
that license is surrendered or revoked. SBIC management undergoes an 
extensive background check prior to licensing. The regulatory regime 
has similarities to, but is also much more intense than, that 
applicable to other private funds that are regulated by the SEC. It is 
important to note that in contrast to the SEC and State securities 
regulators, the SBA reviews not only the investment adviser operations, 
it evaluates and vets the entire management team of the investment 
adviser and examines the operations and investments of the fund entity 
as well. Ultimately, if the SBA feels that an SBIC is being operated 
poorly, it can step in and force that fund into SBA liquidation--
something that is not the case with a private fund regulated by the SEC 
or a State securities regulator.
    The SBIC regulatory regime consists of an in-depth examination and 
review of the fund's management prior to licensing covering stringent 
investment rules, operational requirements, record keeping, reporting, 
examinations, conflict of interest rules, and other significant 
requirements. For a more in-depth understanding of the rigorous 
regulatory regime imposed on SBIC funds, we have provided a helpful 
addendum to this testimony.
V. SBIA Recommendation: Pass the SBIC Advisers Relief Act
    Due to the tailored nature of this legislation, the necessity to 
clarify the elements of Dodd-Frank to eliminate duplicative regulation, 
and the fact that all of these funds will continue to be subject to 
regulation once this legislation passes, Congress and this Committee 
should act swiftly to pass the SBIC Advisers Relief Act.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                PREPARED STATEMENT OF MARCUS M. STANLEY
            Policy Director, Americans for Financial Reform
                             March 24, 2015
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify before you today on behalf of Americans for 
Financial Reform. AFR is a coalition of more than 200 national, State, 
and local groups who have come together to advocate for strong and 
effective financial regulation. Members of our coalition include 
consumer, civil rights, investor, retiree, community, labor, faith 
based, and business groups.
    Before turning to the specific bills under consideration today, I 
would like to make some general points regarding the topic of the 
hearing. Today's hearing addresses ``capital formation,'' which is of 
course a central part of the SEC's mission. However, AFR does not 
believe that the agency's capital formation mandate conflicts with its 
mission of investor protection. Effective capital formation requires 
that investors entrust their capital to the market without demanding 
prohibitive risk premiums. Perhaps even more critically, it requires 
that markets channel investor capital to its highest and best use. When 
investors put their money into a pump-and-dump penny stock scheme, that 
money was not effectively used in capital formation. When investors 
purchased securities on the basis of fraudulent accounting, or on the 
basis of misleading descriptions of the true risks of the ``toxic'' 
mortgage assets at the heart of the financial crisis, their capital was 
misallocated and economic harm was done. Furthermore, after these 
scandals came to light, they contributed to loss of faith in our 
financial markets and to a potential rise in the future risk premium 
demanded by investors in order to supply capital, or even an 
unwillingness to supply capital for risky projects at all. In sum, 
then, a failure to place a high priority on the SEC's investor 
protection mission will also harm its mission of ensuring effective 
capital formation.
    This perspective shapes our views on the bills under consideration 
today. I will now turn to discussing those bills in detail. I will 
discuss five of the nine bills under consideration. AFR supports the 
legislation eliminating swaps data indemnification requirements (H.R. 
742 from the 113th Congress). We oppose three bills:

    Legislation exempting mergers and acquisition brokers from 
        broker-dealer registration (H.R. 2274 from the 113th Congress).

    Legislation that would expand exemptions from Dodd-Frank 
        derivatives clearing requirements for financial affiliates of 
        commercial entities (H.R. 5471 from the 113th Congress).

    Legislation that would expand exemptions from adviser 
        registration for advisers to certain funds that combine monies 
        from small business investment companies (SBICs) and private 
        equity or venture capital. (H.R. 4200 from the 113th Congress).

    Although we do not have a formal position on legislation requiring 
the SEC to modify Reg SK disclosures (H.R. 4569 in the 113th Congress), 
I will briefly speak on that bill as well.
Eliminating Swaps Data Indemnification Requirements: AFR SUPPORTS
    For some years AFR has been concerned with the slow pace at which 
domestic and international regulators are implementing derivatives data 
reporting mandates under the Dodd-Frank Act. The requirement that 
derivatives data be reported to regulators in a form that can be 
aggregated and used to measure total risk exposures across the 
financial system is an important part of the improved capacity to 
monitor systemic risk that should be created by new financial 
regulations. Clear, consistent, and usable derivatives data would be 
extremely beneficial to both banking and market regulators in 
controlling risk, and could create important indirect benefits for 
financial institutions themselves, many of which still face issues in 
their own internal systems for aggregating risk exposures.
    Unfortunately, progress in derivatives data reporting has been 
slow, and much of the data collected does not appear to be in a form 
that can be aggregated. There are many reasons for this slow progress, 
but it is clear that the ability to share derivatives data between 
different national regulators and data repositories is crucial for 
effective data reporting. It appears that the indemnification 
requirements in Dodd-Frank are creating a barrier to such information 
sharing. The replacement of these indemnification requirements with a 
simpler confidentiality agreement, as proposed in H.R. 742, would be 
beneficial in encouraging needed sharing of derivatives data between 
different jurisdictions and entities. We thus favor this legislation.
Exemption of Merger and Acquisition Brokers From Dealer Registration: 
        AFR OPPOSES
    This legislation (H.R. 2274 from the 113th Congress) would 
eliminate SEC broker-dealer registration requirements for merger and 
acquisition brokers. While a much narrower version of this legislation 
could be acceptable, AFR opposes this bill, since it has multiple 
flaws:

    It lacks needed investor protections such as provisions to 
        prevent bad actors from taking advantage of exemptions from 
        registration to evade enforcement of securities laws. \1\
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     \1\ North American Securities Administrators Association, ``NASAA 
Letter to Senators Manchin and Vitter Re S 1923'', September 8, 2014.

    The legislation applies the M&A broker exemption far too 
        broadly, to any acquisition of a company with gross revenues of 
        $250 million or less. This goes far beyond transactions 
        involving the purchase of local small businesses, and would 
        permit numerous deals involving companies of significant size 
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        to avoid broker-dealer oversight.

    The lack of an effective provision to prevent transfer to a 
        shell company means that the broker could effectively also take 
        control of the transferred company in a private-equity type 
        transaction.

    The potential application to private equity is concerning, as the 
exemption from broker-dealer registration would restrict the SEC in 
policing this complex area and interfere with ongoing SEC investigation 
of potential abuses in private equity involving unregistered broker-
dealer activities. \2\
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     \2\ Buccacio, Katherine, ``Republicans Look To Ease PE Regulatory 
Burden'', Private Equity Manager, January 13, 2015; Morgenson, 
Gretchen, ``Private Equity's Free Pass'', New York Times, September 27, 
2014.
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    This legislation is also unnecessary, as the SEC has already taken 
administrative action to exempt merger and acquisition brokers from 
broker-dealer registration, while preserving capacity to enforce needed 
investor protections. \3\
---------------------------------------------------------------------------
     \3\ Securities and Exchange Commission, ``No-Action Letter Re M&A 
Brokers'', January 31, 2014 [Revised February 4, 2014].
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    Finally, we would also point out that numerous registered broker-
dealers who comply fully with SEC broker-dealer conduct requirements 
are active in arranging deals to sell companies, and this overly broad 
legislation would expose them to competition from unregulated entities 
that would not have to comply with important investor protection 
requirements such as suitability standards. We believe this is 
inappropriate.
Expanding Exemptions From Derivatives Clearing Requirements: AFR 
        OPPOSES
    The requirement that standardized derivatives transactions be 
cleared through a central counterparty is a fundamental financial 
system safeguard established by the Dodd-Frank Act.
    While commercial entities using derivatives to hedge legitimate 
commercial risk are already exempted from clearing requirements, 
financial entities can only qualify if they are hedging risk on behalf 
of an affiliated commercial company and are acting as the agent of the 
commercial affiliate. This legislation (H.R. 5471 from the 113th 
Congress) would remove these limitations and leave in place only a 
requirement that the financial entity is somehow hedging or mitigating 
the risks of a commercial affiliate. As many purely financial trades 
can be interpreted to somehow ``mitigate the risks'' of the broader 
corporate group, including commercial affiliates, this limitation is 
vague and nonspecific.
    This seemingly technical change could have far-reaching 
implications. There are numerous major financial entities that have 
commercial affiliates and could claim that there was some relationship 
between their derivatives activities and mitigating risk for some 
commercial affiliate. For example, the Senate Permanent Subcommittee on 
Investigations has recently documented that the major Wall Street banks 
often combine commodity production and trading activities, and that 
these ``financial companies often traded in both the physical and 
financial markets at the same time, with respect to the same 
commodities, frequently using the same traders on the same trading 
desk.'' \4\ This legislative change would significantly reduce the 
ability of the CFTC to police risk management for this kind of 
comingling of commercial and financial activities, both at major banks 
and at commercial companies like General Electric that have large 
financial subsidiaries such as GE Capital. As the nonpartisan 
Congressional Research Service stated in an analysis of this bill, it 
``could potentially allow large banks to trade swaps with other large 
banks and not be subject to the clearing or exchange-trading 
requirements as long as one of the banks had a nonfinancial 
affiliate.'' \5\
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     \4\ United States Permanent Subcommittee on Investigations, ``Wall 
Street Bank Involvement With Physical Commodities, Majority and 
Minority Staff Report'', Permanent Subcommittee on Investigations, 
United States Senate, November 20, 2014.
     \5\ Congressional Research Service, ``CRS In Focus: H.R. 37 
Derivatives Provision May Create Broader Exemption'', January 26, 2015.
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    There are cases in which financial affiliates of commercial 
entities may genuinely be hedging the production-related risks of 
commercial affiliates but may not in a narrow sense be acting ``as an 
agent'' of the commercial affiliate. Through administrative action, the 
CFTC has already permitted such affiliated ``central treasury units'' 
(CTUs) to make use of the clearing exemption in a wide range of cases. 
\6\ The agency has thus made clear that it is taking a broad 
interpretation of what it means to hedge ``on behalf of the [commercial 
affiliate] and as an agent,'' and is eager to accommodate legitimate 
hedging needs. But if this restriction were eliminated entirely, as 
this legislation would do, then the CFTC would be dramatically limited 
in its ability to address attempts by financial entities to evade risk 
management requirements by claiming that they were mitigating the risk 
of commercial affiliates, an evasion that would be invited by this 
legislation.
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     \6\ Commodity Futures Trading Commission, Division of Clearing and 
Risk, ``No-Action Relief for Swaps Entered Into by Eligible Treasury 
Affiliates'', CFTC No-Action Letter 13-22, June 14, 2013; Commodity 
Futures Trading Commission, Division of Clearing and Risk, ``Further 
No-Action Relief for Swaps Entered Into by Eligible Treasury 
Affiliates'', CFTC No-Action Letter 14-44, November 26, 2014.
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    We oppose this legislation and believe statutory change is 
unnecessary. If Congress wishes to make some statutory change in this 
area, it should be limited to clarifying the CFTC's discretionary 
authority to accommodate the CTU model on a carefully controlled basis. 
There should be no general reduction in CFTC authority to manage this 
complex area of derivatives regulation.
Expand Exemptions From Advisor Registration for SBIC Funds: AFR OPPOSES
    An important change made by the Dodd-Frank Act was the new 
requirement that most advisors to private funds such as hedge and 
private equity (PE) funds must register with the Commission under the 
'40 Act. We are strong supporters of this provision, both for its 
investor protection benefits and its systemic risk benefits in creating 
greater financial system transparency. This new requirement has already 
begun to create improvements in investor protection, as initial SEC 
inspections of newly registered PE fund managers found violations of 
law or material weaknesses in controls at over half of advisors 
examined. \7\
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     \7\ Bowden, Andrew, ``Spreading Sunshine in Private Equity'', SEC 
Office of Compliance Inspections and Examinations, Speech at Private 
Equity International (PEI), Private Fund Compliance Forum 2014 New 
York, NY, May 6, 2014.
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    Currently, fund advisors who manage less than $150 million in 
combined assets are exempted from this registration provision. Combined 
assets are defined as private equity or hedge fund assets plus assets 
from Small Business Investment Companies (SBICs) and venture capital 
(VC). However, advisors who manage solely SBIC or VC money are 
completely exempted.
    This legislation (H.R. 4200) alters these provisions so that only 
private equity or hedge fund assets would be counted toward the $150 
million line. Advisors combining SBIC with PE money would be exempted 
even if their total funds exceeded $150 million, so long as total PE 
assets were under $150 million. It is likely that this change would 
affect only a relatively small number of advisors. However, we object 
on principle to carving more advisors out of these new registration 
requirements, especially given what we have learned over the last year 
about the potential for widespread investor abuses in private equity 
markets. We are also concerned that the legislation would weaken State 
investor protection oversight of SBIC funds.
    AFR does not at this time have positions on the other bills under 
consideration by the Committee. But I would like to briefly comment on 
``The Disclosure Modernization and Simplification Act of 2014'', 
legislation that requires the SEC to modify Reg SK disclosures. There 
is no issue in principle with updating or simplifying investor 
disclosures as long as no material information is lost. The SEC has 
ample authority to do this, and was last required to examine the issue 
in 2013 under the JOBS Act. It has a current task force working on this 
issue, marking the fifth time a task force or initiative has studied 
this issue over the past two decades.
    Given the large amount of SEC work on this issue that has already 
taken place and continues to take place, as well as the numerous other 
critical priorities for the agency, including the completion of the 
roughly 40 percent of Dodd-Frank rules that remain incomplete, we 
question whether this is an appropriate priority for agency resources. 
We are also concerned that the legislation instructs the agency to 
``eliminate'' disclosure requirements under Reg SK when important parts 
of Reg SK--notably the disclosures for asset-backed securities--were 
recently shown to be inadequate during the financial crisis and are 
being strengthened under the Dodd-Frank Act. A sensible review of 
disclosures should ask what needs to be improved, not simply what needs 
to be eliminated.
    This is not the only issue with the bill. As currently written, 
this bill requires rulemaking after 6 months, although the study to 
determine what if any rule changes are necessary or appropriate takes 
place over 12 months. This seems inappropriate.
    Finally, on the issue of disclosures, we believe that greater 
investment in implementing machine-readable disclosures would be of 
much greater benefit to investors and possibly issuers than any 
reasonable ``simplification'' or ``scaling'' of disclosures could 
possibly be. There is significant private sector interest in assisting 
investors in analyzing machine-readable data, and likely also assisting 
issuers to generate and file such data. But the potential benefits here 
cannot be fully realized until the SEC has transformed its disclosure 
system from disconnected documents into searchable open data.
    Thank you for the opportunity to testify. I am happy to answer 
further questions.
                                 ______
                                 
                 PREPARED STATEMENT OF JOHN C. PARTIGAN
      Partner and Securities Practice Group Leader, Nixon Peabody
                             March 24, 2015
I. Introduction
    Chairman Crapo, Ranking Member Warner, and distinguished Members of 
the Subcommittee, thank you for inviting me to testify.
    I am a partner in the Washington, DC, office of Nixon Peabody LLP 
and the chair of the firm's national securities practice group. Prior 
to moving to Washington, I practiced securities law in Rochester, New 
York.
    I have been practicing corporate and securities law for more than 
25 years. I am a member of the District of Columbia Bar Association and 
the New York State Bar Association. I have served as a member of the 
NASDAQ Listings Qualifications Panel (2004-2014), and have advised 
public and private companies on a range of securities issues. I am a 
graduate of Albany Law School, J.D., and Willamette University, B.S.
    I understand the Committee will examine a number of bills, and I of 
course, applaud your efforts to find bipartisan legislation addressing 
particular regulatory issues. I am here to speak on two related issues: 
(1) Wegmans Food Market, Inc.'s (Wegmans) support for S. 576, 
Encouraging Employee Ownership Act; and (2) how S. 576 updates the 
Securities and Exchange Commission's (SEC) Rule 701.
    On behalf of Wegmans, I would like to thank Senators Toomey and 
Warner for introducing the Encouraging Employee Ownership Act. This 
bipartisan legislation will allow privately held companies, like 
Wegmans, to continue to provide and expand ownership opportunities 
without having to risk the public release of competitively sensitive 
company information.
    I have worked with Wegmans for more than 15 years, among other 
things assisting the company in its employee investment plan and the 
program design.
    Wegmans is proud that a key component of its recruitment and 
retention efforts is designing programs that allow employees to share 
in the success of the company. The employee investment plan is one 
example of this shared success. In addition to sharing in the success, 
the program allows participants to build wealth. Finally, as is the 
case with many employee ownership programs, the Wegmans' program helps 
create an environment of innovation and loyalty.
II. About Wegmans
History
    Wegmans is a privately held, family owned company. It is an 
American story. In 1916, John Wegman started his company with a produce 
pushcart. A year later his brother Walter joined him in the operations. 
In 1921, John and Walter Wegman purchased the Seel Grocery Co. and 
expanded operations to include general groceries and bakery operations. 
Since its beginnings, Wegmans has remained, and will remain, a 
privately held company.
    Currently, Danny Wegman is CEO, and Colleen Wegman, his daughter, 
is president. Robert Wegman, Danny's father, was chairman until his 
death in April 2006. Wegmans operates 85 stores: 46 in New York, 16 in 
Pennsylvania, 7 in New Jersey, 6 in Virginia (with the newest Wegmans 
set to open in Alexandria, Virginia, in June of this year), 7 in 
Maryland, and 3 in Massachusetts. Wegmans employs almost 44,000 people.
Wegmans' Points of Pride
    In February 2015, Wegmans was ranked number one for Corporate 
Reputation among the 100 most visible companies according to the Harris 
Poll Reputation Quotient (RQ'). \1\ Wegmans is the only 
company to be ranked in the top five on all six reputation dimensions 
of social responsibility, emotional appeal, products and services, 
vision and leadership, financial performance, and workplace 
environment. Wegmans believes that its inclusion in each of these 
categories is a direct result of the dedication of its employees.
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     \1\ See, http://www.harrisinteractive.com/Insights/
2015RQ100MostVisibleCompanies.aspx.
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    Every year since its inception 18 years ago, Wegmans has been 
ranked among FORTUNE magazine's 100 ``Best Companies To Work For'', and 
has ranked among the top five for 9 consecutive years--Wegmans is the 
only company in America that has accomplished this--and among the top 
10 best companies to work for, for 11 consecutive years. As a result, 
Wegmans is in FORTUNE's Hall of Fame. In the recently released 
rankings, Wegmans was seventh on the 2015 FORTUNE list, and the number 
one retailer. \2\
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     \2\ See, http://fortune.com/best-companies/.
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    Wegmans is extremely proud of this continued recognition and 
inclusion on the ``Best Companies To Work For'', because it is a 
reflection of how the company treats its employees. Two-thirds of the 
scoring for the FORTUNE score comes from a survey that is both 
anonymous and random. The FORTUNE survey participants include Wegmans' 
full- and part-time employees, and employees from all of its 
facilities, including stores, warehouses, farms, offices, and 
manufacturing plants. \3\
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     \3\ Id.
---------------------------------------------------------------------------
    Finally, and while I could go on, I will stop here with one final 
award note; a national consumer magazine recently ranked Wegmans as the 
best supermarket chain in the United States.
    These accolades are the result of the dedication and efforts of 
Wegmans' employees, including many that Wegmans is trying to reward 
with ownership opportunities.
    Wegmans, like other privately held companies, has made the 
strategic decision to remain private. Wegmans has found this structure 
to be a competitive advantage as the company competes against our 
country's largest grocery chains, companies like Wal-Mart/Sam's Club, 
Target, Giant, Kroger, Costco, Albertsons, SuperValu, and Whole Foods.
    By remaining privately held, Wegmans can focus on long-term results 
and customer service. This belief in the long-term nature of the 
company is manifest in its philosophy that if Wegmans takes care of its 
employees, its employees will take care of the customers, and the 
bottom line will take care of itself.
    One example of this philosophy is the fact that Wegmans has never 
had a layoff.
    Wegmans does not pay periodic bonuses. Rather Wegmans, like many 
privately held companies, stresses the long-term decision making that 
leads to a stronger company, not just next quarter, or even next year, 
but in the next decade and beyond.
    Allowing privately held companies to provide ownership 
opportunities helps increase this long-term focus, which, in turn, 
creates a more engaged group of employees since they benefit directly 
from the company's long-term success. Even more important, programs 
like SEC Rule 701 allow privately held companies to share the increased 
wealth from the success of the company rather than just keeping it in 
the hands of the company founders and families.
III. SEC Rule 701
    Before I describe what S. 576 does, and why I believe it is a 
modest and sensible update to an already popular SEC rule, I want to 
provide a brief description of Rule 701 and its history.
Introduction to Rule 701: Why Was Rule 701 Created? How Does It 
        Operate?
    Rule 701, which was introduced in 1988, provides an exemption from 
SEC registration requirements, under the Securities Act of 1933, for 
private companies, private subsidiaries of public companies, and 
foreign private issuers to offer their own securities--including stock 
options, restricted stock, and stock purchase plan interests--as part 
of written compensation plans or agreements to employees, directors, 
officers, general partners, and certain consultants and advisors.
    In the absence of Rule 701, many privately held companies offering 
such securities would be required to register the sale of these 
securities with the SEC regardless of the fact that they are for 
compensatory purposes and not capital raising.
    Rule 701 may be used only by an issuer that is not subject to the 
reporting requirements of Section 13 or Section 15(d) of the Exchange 
Act, and is not an investment company registered or required to be 
registered under the Investment Company Act of 1940.
    The offer and sale of securities under Rule 701 must be for 
compensatory purposes, that is, the offer must be made pursuant to 
either a written compensatory benefit plan or a written contract 
relating to compensation established by the company or its parent or 
majority-owned subsidiaries. \4\ Rule 701 offerings are not used for 
capital raising purposes, but are, nevertheless, often an important 
component of companies planning to attract and retain talent--a key to 
the success of any business. This is particularly true of newer 
companies that may offer stock and stock options as they are attracting 
early-stage financing and need to preserve cash and demonstrate the 
commitment to the company of key employees.
---------------------------------------------------------------------------
     \4\ See, https://www.sec.gov/rules/final/33-7645.htm.
---------------------------------------------------------------------------
    Under Rule 701, the aggregate sales price or amount of securities 
sold or options granted in reliance on the rule during any consecutive 
12-month period generally cannot exceed the greater of the following: 
(1) $1,000,000; (2) 15 percent of the total assets of the issuer, 
measured at the issuer's most recent balance sheet date; or (3) 15 
percent of the outstanding amount of the class of securities being 
offered and sold in reliance on this section, measured at the issuer's 
most recent balance sheet date. \5\
---------------------------------------------------------------------------
     \5\ See, 17 C.F.R. 230.701(d)(2).
---------------------------------------------------------------------------
    A company must provide investors a copy of the compensatory benefit 
plan or the contract, as applicable. In addition, because the offering 
remains subject to SEC Rule 10b-5, the SEC's antifraud rules, a company 
must provide Rule 701 employee-investors with disclosure adequate to 
satisfy the antifraud provisions of the Federal securities laws. 
Generally, this means that a company offering Rule 701 securities must 
adhere to a reasonable investor standard when determining the 
information provided to investors. In a nutshell, the reasonable 
investor standard is what disclosure information a reasonable investor 
would expect to receive from the company about the investment before 
making an investment in the company.
The Enhanced Disclosures
    In 1996, the National Securities Markets Improvement Act (NSMIA) 
was signed into law. \6\ NSMIA included provisions that provide the SEC 
with unlimited Rule 701 exemptive authority. Prior to the enactment of 
NSMIA, the SEC was restricted to allow no more than $5 million per year 
for exempt transactions like Rule 701.
---------------------------------------------------------------------------
     \6\ See, Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
---------------------------------------------------------------------------
    In 1999, when the SEC issued amended rules for Rule 701 under its 
new NSMIA authority, it created a new two-tier disclosure regime. For 
sales of $5 million and below, the existing 1988 disclosures 
requirements remained in place, with the SEC noting it ``had not found 
instances of abuse of Rule 701, nor [had it] become aware of investor 
complaints. Rather, investors have enjoyed the benefits of being 
compensated with the securities of the company for which they are 
employed or provide services. Therefore, we have found that Rule 701 
has been consistent with investor protection in the past.'' \7\
---------------------------------------------------------------------------
     \7\ See, https://www.sec.gov/rules/final/33-7645.htm.
---------------------------------------------------------------------------
    Nevertheless, because the SEC was expanding the program and had 
concerns that it was eliminating the $5 million cap, it created a 
regime of enhanced disclosure for yearly sales in excess of $5 million. 
These enhanced disclosures include: (1) a summary plan description if 
the plan is an ERISA plan or a summary of the material terms if it is 
not; (2) risk factors associated with the investment; and (3) financial 
statements, no older than 180 days, required under Regulation A. \8\
---------------------------------------------------------------------------
     \8\ See, 17 C.F.R. 230.701(e).
---------------------------------------------------------------------------
Why Is S. 576 Necessary?
    S. 576 is a simple and balanced approach to raising this outdated 
threshold for the enhanced disclosures. Specifically, S. 576 instructs 
the SEC to increase the level, from $5 million to $10 million, at which 
the Rule 701 enhanced disclosures are required.
    Simply put, any assertion that the enhanced disclosures are not 
burdensome or problematic is wrong. There are significant concerns 
about confidential information getting outside a privately held 
company, while these disclosures provide little additional insight to 
employees.
    The SEC noted in its 1999 rulemaking, ``[b]ecause the compensated 
individual has some business relationship, perhaps extending over a 
long period of time, with the securities issuer, that person will have 
acquired some, and in many cases, a substantial amount of knowledge 
about the enterprise. The amount and type of disclosure required for 
this person is not the same as for the typical investor with no 
particular connection with the issuer.'' \9\
---------------------------------------------------------------------------
     \9\ See, https://www.sec.gov/rules/final/33-7645.htm.
---------------------------------------------------------------------------
    In the same rulemaking, the American Bar Association, Subcommittee 
on Employee Benefits, Executive Compensation and Section 16 (ABA 
Subcommittee) submitted comments expressing concern about the new 
disclosure requirements. The ABA Subcommittee stated that, ``[m]ost 
private issuers keep confidential their financial conditions and 
results. Having to provide this information to employees (and often 
former employees) as a condition to the exemption risks having this 
information come into the possession of a company's competitors.'' The 
comments went on to note that, ``[r]equiring that these employees be 
provided with financial information could result in serious injury to 
the company, one that it would be naive to think could be avoided with 
a confidentiality agreement.'' \10\
---------------------------------------------------------------------------
     \10\ See, ``Comments of Task Force on Small Business Issuers and 
the Subcommittee on Employee Benefits, Executive Compensation and 
Section 16 of the Committee on Federal Regulation of Securities of the 
Section of Business Law of the American Bar Association'', available 
at, http://www.sec.gov/rules/proposed/s7598/liftin8.htm; see also, 
Comments of David Greenlee, available at, http://www.sec.gov/rules/
proposed/s7598/greenle1.txt.
---------------------------------------------------------------------------
    Since 1999, when the ABA Subcommittee comments were submitted, the 
potential for leaks and the public release of highly confidential 
information has only grown. One need only to read the news to 
understand that organizations, including the U.S. Government, struggle 
to keep sensitive data protected from hackers and dissemination.
    Wegmans and other privately held companies are faced with the 
decision whether to limit compensatory grants and sales to employees to 
stay under the $5 million enhanced disclosure threshold or risk the 
dissemination of highly confidential financial information.
Why Raise the Enhanced Disclosure Threshold to $10 Million?
    If the disclosure threshold had been adjusted for inflation since 
1988, it would be roughly $10 million today. \11\ As the SEC noted in 
its 1999 rulemaking, the legislative history of NSMIA supported a 
prompt increase of the Rule 701 threshold to not less than $10 million. 
\12\ Both the Senate Committee on Banking, Housing, and Urban Affairs 
Report and the House of Representatives Committee on Commerce Report, 
suggested that Congress wanted the Rule 701 threshold raised to not 
less than $10 million, and neither report makes mention of additional 
disclosures being a part of that increase. Finally, the most recently 
published SEC Government-Business Forum on Small Business Capital 
Formation included, among its recommendations, that the SEC ``raise the 
dollar threshold for triggering the required disclosures pursuant to a 
Rule 701 offering from $5 million to no less than $10 million.'' \13\
---------------------------------------------------------------------------
     \11\ See, Bureau of Labor Statistics CPI inflation calculator, 
available at, http://www.bls.gov/data/inflation_calculator.htm, the 
purchasing power of $5 million in 1988 dollars is $10,005,748 in 2014 
dollars.
     \12\ See, H.R. Rep. No. 104-622 at 38; S. Rep. No. 104-293 at 16.
     \13\ See, ``SEC Government-Business Forum on Small Business 
Capital Formation'', Nov. 21, 2013, report available at, http://
www.sec.gov/info/smallbus/gbfor32.pdf, pp. 14-15.
---------------------------------------------------------------------------
    This is what the Encouraging Employee Ownership Act would do. It is 
a sensible and balanced inflation adjustment that continues to address 
the SEC's original concerns by requiring disclosures for stock grants 
and sales above a certain level, while recognizing that employees know 
their companies.
IV. Conclusion
    Wegmans and many of the Nation's estimated 5.7 million \14\ 
privately held companies operate under the conviction that being 
privately held is the best model for them. It would be unfortunate to 
punish their employees by restricting their ownership opportunities 
because of a failure to update an outdated threshold. Privately held 
businesses that want to offer additional ownership opportunities are 
stuck with a no-win decision: Do we risk losing good employees or do we 
risk the public release of our confidential business information? If 
Congress passes S. 576, the employee-investors of privately held 
companies will benefit because their employers will no longer face this 
no-win decision.
---------------------------------------------------------------------------
     \14\ See, http://www.forbes.com/sites/sageworks/2013/05/26/4-
things-you-dont-know-about-private-companies/.
---------------------------------------------------------------------------
    Thank you again for the opportunity to testify today. I look 
forward to answering any questions that the Committee Members may have.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM THOMAS QUAADMAN

Q.1. Mr. Quaadman, as Chairman of the Small Business Committee, 
I have the responsibility to investigate Government actions 
that are harmful to small business, including regulations that 
affect SBICs and venture capital funds.
    What are some of the reasons the Chamber of Commerce 
recommends exempting advisers to SBIC and venture capital funds 
from the Investment Advisers Act of 1940?

A.1. Small business investment companies (SBICs) and venture 
capital funds both play a vital in our economy, providing 
billions of dollars' worth of capital to small businesses that 
are looking to expand their operations and hire new workers.
    SBICs are privately owned equity funds that are licensed 
with the Small Business Administration (SBA) and currently hold 
over $20 billion worth of investments in U.S.-based companies. 
SBICs are closely regulated by the SBA and are limited in terms 
of what they can borrow. SBICs undergo regular examinations 
from the SBA, and are an important source of capital for 
American businesses. Venture capital (VC) funds also play a 
critical role in our economy, particularly when it comes to 
providing ``early stage'' funding to nascent businesses. Many 
advisers to venture capital funds also advise SBICs, which 
benefit from the expertise that VC professionals can offer.
    The Dodd-Frank Act did away with the so-called ``private 
fund'' exemption under the Investment Advisers Act and instead 
granted explicit exemptions to SBIC advisers, VC advisers, as 
well as private equity fund advisers under a certain threshold. 
Regrettably, the way the law has been interpreted, an 
individual that happens to advise both an SBIC and a VC fund 
would have to register with the SEC. This is not what Congress 
intended, and there is simply no valid reason for advisers to 
register (a costly and burdensome process) simply because they 
happen to advise both. The SBIC Advisers Relief Act would carry 
out Congressional intent and ensure that advisers to SBICs and 
VC funds do not have to deal with unnecessary and burdensome 
red tape.

Q.2. Given the complexity and volume of disclosure and 
reporting requirements, it appears to create the phenomenon you 
described in your testimony as ``disclosure overload.'' What 
criteria would you recommend is used to simplify these 
requirements while still maintaining discernable transparency 
to investors?

A.2. The Chamber believes that ``disclosure overload'' has 
become a real concern for investors, as the length and 
complexity of quarterly and annual reports has increased over 
the years. We believe that the SEC can act swiftly in order to 
address some outdated or duplicative disclosure requirements in 
SEC filings (e.g., historical stock prices, which can now be 
searched easily on a computer or smartphone), while also 
focusing on long-term reforms that will bring the disclosure 
regime into the 21st Century.
    As the SEC goes about the disclosure reform project, we 
believe that the guiding principle for determining what should 
(or shouldn't) be disclosed in SEC filings is materiality. As 
the Supreme Court explained nearly 40 years ago in TSC 
Industries vs. Northway, a fact is material if ``there is a 
substantial likelihood that a reasonable shareholder would 
consider it important before deciding how to vote. In other 
words, a fact is not material if an investor might find it 
important; rather it should depend on whether a reasonable 
person would find it important to their decision making.
    Focusing on materiality will ensure that investors do not 
become increasingly overloaded with information that may or may 
not be material to their decision making. It will also help 
ensure that our disclosure regime does not become a tool for 
special interests to use when trying to drive an idiosyncratic 
agenda (e.g., ``shaming'' disclosures such as conflict 
minerals) that are unrelated to enhancing investor decision 
making.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM MARCUS M. STANLEY

Q.1. Given the lack of cumulative, industrywide derivative data 
reporting as you mentioned in your testimony, can you provide 
specific reasons why this data reporting has been slow? Can you 
clarify what a clear, consistent, and usable derivatives data 
system would consist of?

A.1. There appear to be many reasons for slow progress in 
derivatives data reporting. These include the presence of 
multiple competing private entities in the derivatives data 
space which did not have consistent data formats, a failure by 
regulators to specify clear and standardized data formats and 
data items and require their use in reporting, the inherent 
complexity of derivatives contracts, and privacy laws in some 
Nations that restrict or limit the sharing of data. Americans 
for Financial Reform has submitted two comments to regulators 
in this area, which are attached to this response.
    A full response to the question of what a clear, 
consistent, and usable derivatives data system would consist 
would be involved and technically complex. However, important 
goals for such a system would include the following:

    It should permit regulators to aggregate the 
        derivatives exposures of counterparties throughout the 
        financial system, using a consistent and universal 
        counterparty identifier such as the LEI.

    Regulators should be able to examine how such 
        exposures might change under stressed conditions. This 
        requires that detailed information on individual 
        derivatives contracts be reported, including how 
        payment commitments change upon counterparty default. 
        Reporting of only aggregated or netted exposures, with 
        the aggregation modeling performed by reporting 
        entities, would not be adequate.

    Data should be available to private parties to 
        assist in proper risk aggregation and modeling within 
        the financial system, including risk analysis and 
        aggregation by banks and financial market utilities. 
        AFR also supports the development of a public use 
        license for the analysis of swaps data by academics and 
        others studying systemic risk, subject to proper 
        confidentiality protections.

Q.2. You mention that the indemnification requirements in Dodd-
Frank are slowing the process for information sharing and could 
be replaced with a simpler confidentiality agreement. How 
specifically does a confidentiality agreement help to improve 
the pace of information sharing and how does a confidentiality 
agreement solve the problem of derivatives currently being in a 
form that can't be aggregated? Can you elaborate on what 
changes to the indemnification requirements in Dodd-Frank that 
would help improve this process?

A.2. It is our understanding that the requirement that foreign 
financial regulators indemnify U.S. regulators against any 
litigation resulting from information sharing, as well as the 
requirement that other U.S. agencies provide indemnification to 
the SEC or CFTC before gaining access to data, is creating 
barriers to sharing of derivatives data. The replacement of the 
indemnification requirement by a simple confidentiality 
requirement is likely to make it simpler for regulators to pool 
their derivatives data and arrive at an information sharing 
arrangement that permits the global aggregation of derivatives 
risks. We do not believe that this change alone will address 
most of the barriers to effective derivatives reporting 
discussed in the response to the first question. It would be a 
small but helpful change.
    Please feel free to contact me for any further discussion 
of these issues.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

              Additional Material Supplied for the Record
WRITTEN STATEMENT OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION, SUBMITTED 
                           BY CHAIRMAN CRAPO
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

WRITTEN STATEMENT OF THE COALITION FOR DERIVATIVES END-USERS, SUBMITTED 
                           BY CHAIRMAN CRAPO
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       WRITTEN STATEMENT OF XBRL US, SUBMITTED BY CHAIRMAN CRAPO
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

  WRITTEN STATEMENT SUBMITTED BY JESSICA B. PASTORINO, PRESIDENT, M&A 
                         SECURITIES GROUP, INC.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
```