Silenced or turned off. For those watching online, youre welcome to send questions or comments anytime, emailing speaker at heritage. Org. Leading our conversation this afternoon is david burton, our senior fellow for Economic Policy and heritages institute for economic freedom. Mr. Burton before joining heritage served as general counsel at the National Small business association, also been chief Financial Officer and general counsel of the alliance for retirement prosperity, and was a partner at the argus group, a Public Policy and Government Relations firm. Please join me in welcoming david burton. David. [ applause ] well, thank you for coming. It is my pleasure to introduce to you commissioner michael piwowar. He was appointed to the securities and Exchange Commission by president obama and was sworn in in august of 2013. He was designated by trump to be acting chairman of the commission and served in that capacity from january 23rd of this year to may 4th. His term expires in june of 2018. Previously dr. Piwowar was the chief economist for the banking committee, a principal with the securities and litigation consulting group. He worked at the s. E. C. , in the office of economic analysis, which is now dara, division of economics and risk analysis as an academic scholar on leave from iowa state university. He was a professor of finance at iowa state university. He earned a ba in Foreign Service and International Politics from penn state and mba from georgetown and ph. D. In finance from penn state. Today were not going to have a set presentation, but instead a less formal question and answer format. Im going to ask commissioner piwowar a number of questions to get the conversation rolling and then well open it up to audience questions and answers so that you all can participate in the discussion. Commissioner piwowar, we have a new chairman of the securities and Exchange Commission. What is he like to work with . And what do you think will be the priorities of the reconstituted securities and Exchange Commission . Thank you, david, and thank you heritage for hosting this great event. I look forward to the Great Questions from the folks in the audience. Anybody that has seen a s. E. C. Commissioner speak knows what is coming next. The views i express on my own and do not reflect the views of anyone on the commission or the commissioners. It is awesome working with our new chairman, jay clayton. Thinking back to before the election, the way the commission was headed, we were a commission that was headed by a chair who cared about enforcement first and the dodd frank death march second. We have a new chairman that has come in, chosen by the president , to have an agenda that remembers that we have a threefold mission, not only to protect investors, maintain fair and orderly and efficient markets and to promote Capital Formation. If you saw the press releases when the president announced jay clayton as intent to nominate for the incoming chairman, and change claytons speech last week you see the Capital Formation part of the mission is a broad theme that were going to continue to work on at the s. E. C. In terms of the s. E. C. , are you all taking steps to think through your regulatory agenda and any kind of legislative agenda . Sure. So some of the things that we would like to do, obviously the chairman sets the agenda, but he and i, and the other commissioner, kara stein, working together. Some of it does require legislation. There is a lot we can do that does no require legislation. One example is something we have already done that our new director of the division of corporation and finance bill henman on behalf of the Division Announced i think just about a week or so ago that were going to extend the relief for companies that want to ipo on a confidential basis, they can file on a nonpublic basis so people dont know they started the process on the ipo. It is something that the jobs act added for emerging Growth Companies. We have announced that were extending that for any company and once the ipo regardless of size and the one piece of that people have focus ed on is that not only it extends the confidential filing for initial public offerings, but also for follow on offerings that occur within the first year of an ipo. That was just announced, i believe, about a week and a half ago. We already have companies that have decided to take advantage of that. So we have companies that are filing for an ipo on a confidential basis, and we even have a company that is filed for a confidential filing for a follow on offering. Were already seeing some of the things in that space. There are a number of issues that were looking at. I dont want to front run the chairman in terms of all of the issues. But what is important to know is that the action last week showed that not only are there things we can do at the commission that dont require legislation, but the action last week actually didnt even require a commission vote. There is a number of things that can be done at the staff level and so im very excited that we have bill henman as our new Corporation Finance Division Director as someone who can direct the staff to actually start moving on some of those items. But dont even require a commission vote. So were under active discussion so see what we can do at the staff level, at the commission level, and then thirdly what requires legislation. Regulation d is now the largest single means of raising capital in this country. Accounting for 1. 3 trillion annually. Are there things in your judgment that could be done to improve regulation d . Yeah, i think first of all, and foremost, we need to tell the public that were not going to move forward on some proposed amendments that the commission did in 2013. So when the commission listed the prohibition on general solicitation in 2013, prior to me joining the commission at the same time, they proposed additional amendments that would have some enforcement hooks for things that are sort of like foot faults in the registration process and thats giving people some pause in terms of whether or not thats going to go final or not. Whether some people actually think it is final, so i think we need to do a Public Statement that says that these are that were not going to move forward on these amendments and give people some comfort that they can move forward on the regulation deofferings without being put in the timeout because of that would be good if you can withdraw or even withdraw. That would require Commission Action to do that. But i think there is some things we can do to signal it. I personally have been in venue s like this telling people, i have no interest in moving forward on that and we can rye to withdraw it would be the sensible thing to do. Under regulation d, of course, a Credit Investors can invest in private offerings, but there is also a provision with respect to sophisticated investors that is according to dare analysis rarely used. One reason for that is that the s. E. C. Has infnever provided guidance what constitutes. There has been increasing talk about providing some brightline tests with respect to what constitutes sophistication, for example, the you passed the series seven exam, you have certain private accreditations or pass a test or have a graduate degree in finance or what have you. Do you think there would be some openness to that at the commission or do you think it is best pursued by congress . I dont know in terms of i cant speak on behalf of my fellow commissioners. I for one questioned the premise of having an accredited versus nonaccredited investor definition. The rational for it is that the commission, prior commissions and until we change it, this commission as well too, believes that somehow were protecting investors by prohibiting from them from investing in certain high risk securities. Ive been questioning that premise because as we know high risk also equals high expected return. So what were doing is actually ill use protecting in quotes here, protecting investors from potentially high expected return securities. Look to Silicon Valley and see the unicorns that are out there that are attracting large amounts of private capital, i was just out in San Francisco and the amount of private capital that folks are willing to throw at these companies is amazing. So at least in Silicon Valley it doesnt seem like there is problems with access to capital. But from my perspective, from the investors, main Street Investors arent sharing in these returns to these companies and these companies are taking much longer to go public and in some cases are not even going public. So the average investor is being prohibited from investing in these potential securities. Some people may counter that and say, well, yeah, it is high expected return, but it is too risky to let the average investor invest in. But as you mentioned, what we teach in portfolio analysis class is the benefits of diversification. A lot of these securities would provide diversification for investors in their existing portfolios. Thats been something ive been trying to press the attorneys at the s. E. C. To think about. The s. E. C. Is mostly a lawyer driven agency. And for historical reasons, we have been thinking about risks in terms of individual securities offering. Think about the disclosure environment we have, the risk factors of a particular security, in a prospectus or 10k or some other filing with us. Ive been trying to get people to think more broadly to say, look, it is not just the risk of that security in isolation, but it is risk with a portfolio that a customer already has. And an investor and if this is uncorrelated with what they have, even though it is a higher Risk Security in isolation, it can get portfolio diversification benefits and offer them higher than expected returns. I would like to question the premise of having these artificial distinctions. You raise, i think, a very good point, in that the companies are not going public or going public much later in their life cycle, so a lot of the big gains that are attributable to the entrepreneurial adventures are limited to Credit Investors which is the top 7 roughly of the american people. And that raises the question of what can we do to make it more likely that a company will go public. We now have approximately half the number of Public Companies we had 20 years ago. The number of ipos, whether measured by actual number of offerings or dollar amounts are weighed down, even a couple of years ago, dramatically down compared to where they were 15 years ago. So what sort of things do you think we can do to make being a Public Company more attractive . Yeah, so those statistics that you rattle off, those are the types of statistics when jay clayton met with then president elect donald trump and now president trump, those are the type of statistics that he mentioned to him. And those are the things so shocking to the president that he wanted to have a new chairman at the s. E. C. To come in and try to think about regulatory fixes that we could do to try to improve upon those numbers. So there are those that say, well, there is really nothing the s. E. C. Can do because there is other macro things going on, right. There is huge returns to scale. It is a winner take all. A lot of Tech Companies dont want to go public. They want to get bought by google or those types of things and you hear all the stories. But think i there is things we can do and as evidence of that, look at the jobsant. We expanded the filing to include the unicorns and some other companies too. The jobs act went through, and it allowed for confidential filings for emerging Growth Companies, we had like 80 bioTech Companies that went public within the first year. So that shows that small changes to the Regulatory Framework can have huge effects and so were looking for what are potentially some of those next changes that we could do to help facilitate Capital Formation, which is part of our mission. In terms of what are things that we can do, i for the last three or four weeks, have been on Capital Formation listening tour, cincinnati, new york, Silicon Valley, San Francisco, and the white house during tech week on investing in technology companies, and on a panel talking about how can we increase geographic diversity of venture cap financing to start small, you know, emerging Growth Companies that would want to go fun because most of the venture cap financing is occurring in Silicon Valley, new york, and boston. What we need to do is continuing to listen to people, listening to folks at heritage, various Interest Groups out there, to think about, you know, you tell us what we can do. We can sit around the building in washington, d. C. And try to dream up what we think are important things to do. What is most important for us is to get out there and hear from people and say what are you finding as the impediments to Capital Formation. I mentioned bill henman a couple of times already, new director of the division of Corporation Finance, hes been telling people he wants to accomplish three things. He wants to make the division more efficient, more transparent and more collaborative. On the efficiency front, he wants to challenge the staff to get the review filing process more efficient, quicker review filings, wants to be more transparent in terms of getting out and talking to people, out in Silicon Valley, San Francisco, same time i was, talking to a group of people out there about the expanding the confidential filings and wants to be more collaborative. You think about the last eight years, the relationship between the regulated and the regulators has been very much confrontational. But in the Capital Formation space, thats one that in particular we could benefit from more and more collaboration. So were going to take more meetings with people, were going to listen to more ideas from as many people that want to give us ideas that we can do in terms of things were doing. Truth be told, the staff has been wanting to be more and more collaborative. It needed a change in the tone at the top from a new chairman coming in and saying thisgoing commission. There has been a number of possible culprits identified. One is, ill go into a few others, one is the Disclosure Requirements under regulation sk, s. E. C. Recently released a study that was required by congress. Some of those requirements are also a function of dodd frank, the politically motivated disclosures, for example, with respect to conflict minerals, extraction, ceo pay ratios and so on. Those are my favorites. Yeah. I figured that. Do you think there is room for meaningful improvement in the disclosure regime governing Public Companies at this point . Yes, i jokingly said those are my favorites because when i was acting chairman, i tried to target as the start of the process for us to make the rules less burdensome should congress should not to repeal those. The first best from my perspective would be if Congress Help depoliticize the s. E. C. By getting rid of those special interest motivated disclosures that have nothing to do with materiality, nothing to do with giving investors information they need. The first best would be for congress to repeal those, which would be fantastic. In the absence of that, there are things we can do to try to make it less burdensome as possible. So thats why on conflict minerals and for pay ratio, open and Comment Period on those, to get ba feedback from the publ, we kept hae we kept hearing from folks. We have exemptive authority on a number of spaces, potentially providing some sort of scale disclosure or outright exemptions for Smaller Reporting Companies and some of the ones where the burden of fixed cost of compliance fall disproportionately high. The s. E. C. Estimated that it is 1. 5 million a year in compliance cost to be a Public Company, which means if youre a small company, thats an insurmountable burden. With the normal pe ratio, it is erasing 15 million from shareholders equity right there. One thing striking to me when i was out in Silicon Valley, i met with one of the private companies, unicorn has a 1 billion plus valuation. Their private company, their entire Legal Department is two people. Imagine that for a Public Company. This company had 12 chefs, right . A bunch of millennials. The ratio of chefs to legal was 6 to 1. Probably a good ratio. A good number for us to look at. Require them to disclose that rarb y ratio. Exactly. No. But, you know it was striking to me, imagine a company that size as a Public Company, they would have an army of people on the Legal Department in the Investor Relations and the like. Another thing that is constantly referenced as a problem and, of course, emerging Growth Companies and other jobs act are exempt as the internal controls reporting under the Sarbanes Oxley. You see tremendous number of companies that went private right after Sarbanes Oxley and the decline in Public Companies really dramatically accelerated at that point. Do you see room for improvement there . Perhaps making the emerging Growth Company exemption permanent instead of fiveyear layoff. Or revisiting the threshold for which they have to comply with Sarbanes Oxley. It is clear that Sarbanes Oxley did have benefits for investors and for Public Companies, but the cost side was a lot more than anybody anticipated in the costs are theyre very high fixed costs, no matter what the size of the company is, there are things they all have to do. So those costs fall disproportionately on the Smaller Companies. So i think it would behoove us to find out where that sort of cost benefit ratio is. For large companies, the benefits outweigh the costs in terms of complying. It is okay for them. My preference would be, you know if we had private ordering and companies figured that out. But Sarbanes Oxley has been the law of the land for a long time now. So if we can at least exempt, you know, Smaller Companies up to a certain threshold, and not prohibit them from actually if there are Certain Companies that say, hey, were willing to incur the costs because we think the benefits in terms of the information that is out there or in terms of investors are more comfortable and lowers the cost of capital, fine, let them do that. It would behoove us to see that threshold where we could see where Companies Find it the benefits to justify the costs. Former commissioner troy parides wrote an article called blinded by the light. Premise of the article being that disclosure documents have become so massive that the relevant information is getting lost in hundreds of pages of dense legalese. Or worded differently that disclosure documents now obfuscate rather than inform. Right. The length of 10ks is dramatically increased. Ive seen some estimates that say that, you know, by a factor of two. So do you think it is a fair criticism of reforming regulation sk is going to hurt investors or think can can be done in a way that both simultaneously reduces the burden and improves the accessibility of this information from investors . The latter. I couldnt agree more with former commissioner troy parides on that. If you look at the size of the 10k and find useful information in there, it takes forever to find that information. Somebody recently gave me the perspective of walmart, when walmart went public in the 1960s. The entire prospectus was 28 pages long. And one page said this page was left intentionally blank there is a lot of redundant information. We have some rulemakings in progress that would help clean up some of that. And allow the more Material Information to sort of rise to the top for people to find that information. Unfortunately it has become politicized from a number of folks on the far left that somehow less information, less redundant information is going to be giving less real information to shareholders. We have seen, you know, with the pay ratio and with conflict, there is useless disclosure being thrown in there that is not providing good information to shareholders. Something we need to constantly be vigilant about and we can actually do move forward on real things where we real reforms we can get rid of some of the stuff. Accounting principles, change over time, Industries Change over time, and so it is up to us to keep up with all of those changes. And, you know, to, you know, some of the risk factors become boiler plate, one company adds a risk factor and another company thinks, well, i need to add that same risk factor, now a list of 21 risk factors that are basically all the same with everybody in the same industry rather than giving you good meaningful information. It is interesting to me, you know, historically, where does this notion of materiality come from . It it came from a famous Supreme Court case tsc v northway. They talked about materiality has to you have to have a limit there. Otherwise you are going to if you think everything is material or potentially useful to anybody, there will be what they said was an avalanche of information. Or in troy paredes interpretation, blinded by the light. That was a 90 decision written by Justice Thurgood marshall. Wanting to turn the s. E. C. Into a social Justice Agency for their particular interests rather than having us be an agency which is our statutory mandate, to provide investors with Material Information. Under well, start, i guess, with blue sky laws is a name commonly used for state securities laws. Under current federal law, there is a concept called covered securities, which securities that are covered securities dont have to make 50 different state filings, get approval from 50 different state regulators. Exchange traded securities, generally the largest companies, the exxons and walmarts of the world, are treated as covered security as well as rule 506 regulation d. And crowd funded securities. Others are not and have to comply with the 50 different state securities laws, both in their initial primary offerings and in the secondary markets, except for tier 2 primary offerings. Do you think it makes sense to rationalize that and try to get to a world where small Public Companies are not regulated more than the exxons and walmarts of the world or private offerings . Its something we are looking at. It is something that we are working with the state securities regulators, nasa, National Organization for state securities regulators. We have a wonderful relationship with the state securities regulators. Oftentimes they are sort of the cop on the beat in terms of rooting out fraud on particularly small offerings and also for small Investment Advisers. When i was acting chairman we entered into an informationsharing agreement with the state securities regulators so that we could share more information back and forth about small securities offerings in the reg a space, reg d space and other ones as well. The intent is for us to enter into a more collaborative issue with them to think through the issues and see if we can find a path forward on some of the secondary market trading issues, whether or not, you know, the blue skies laws need to be preempted, whether we can do a workaround for those things. Its something we are in active discussions with right now. Lets change subjects a little bit and talk about title 3 equity crowd funding under the jobs act. In my judgment, its been a disappointment. About 10 million was raised in the first six and a half months according to d. A. R. A. Thats a small fraction of whats raised using other mechanisms. To me its not a great surprise because title 3 really had just about every Regulatory Burden you could think of imposed on both the funding portals and the Small Companies. Yeah. Which, of course, limits its attractiveness since its limited to the smallest companies. 1 million a year. What do you think i mean, do you share my view that its been a disappointment, and what do you think we can do to improve title 3 crowd funding, using the internet to raise money from a large number of investors making very small investments . Yeah, i agree with you that not only has it been a disappointment but its also not a surprise. When it came time for us to finalize the rulemakings i dissented and voted no. The as you mentioned, there is a lot of prescriptive things in terms of funding portals, limitations on how much could be raised. A lot of that is statutory, unfortunately. When the jobs act was working its way through congress, the house passed a sensible crowdfunding provision for the jobs act which basically left a lot of flexibility for the s. E. C. To set up the Regulatory Regime and the justice necessary. When the jobs act went to the senate harry reed decided to just have it go to the floor and allowed only one amendment on the jobs act, the crowd funding amendment. The Merkley Brown amendment was substituted in which doesnt give us very much flexibility at all in terms of allowing for a framework that works. And so that was proving challenging. The reason why i dissented was not only because it was prescriptive but then the majority of the commission at the time decided to make it even more difficult. So there was a question there in terms of ambiguity in terms of the limits of investing. There was a net worth test and an income test. It was ambiguous in the provision as to whether somebody had to meet both of those tests or they could meet either one of those tests. So it was the question was if somebody was required but had a High Net Worth and didnt meet the income test but met the net worth test, could they invest in crowd funding. It was ambiguous. I thought, all right, lets try to get crowd funding off the ground so i preferred it could meet one of the tests. The majority of the commission decided to move forward with a test that you had to meet both of them. Prohibiting a large number of retirees and others who wanted to diversify their portfolio from investing into crowd funding. We could go back and try to change some things where we have flexibility, but i think the first best would be for congress to revisit it. I believe the choice act has the crowd funding freedom act, or bill, thats in there that congressman mchenry is pushing forward. I am a supporter of that. Its small. The other thing is recognizing not only do we have a federal crowd funding framework but each state has their state based frameworks as well. Most but not all states have set up a crowd funding framework allowing Smaller Companies within their state to engage in crowd funding under their statebased framework and not trip the federal crowd funding regulations. If they, at the time, it was offer or sell their securities within the state. We went back at the s. E. C. One of the things i pushed for was making the exemption a safe harbor for them to stay in the stays based crowd funding framework, making it easier by getting rid of the offer language. Now you can offer to anyone. Making it easier to use the internet. When it comes time to sell the securities they have to do Due Diligence to make sure people live in the state. My hope is that, by opening up the ability of the states to open and facilitate statebased crowd funding we will be getting data and information. Again, thats why its good to have the informationsharing agreement with the states, so we can find out, were going to have a diversity in terms of different states have different frameworks, which ones work and which dont. So we can use that information in terms of how do we want to revisit the federal crowd funding framework. Lets talk regulation a. It had become almost a dead letter prior to the jobs act. In 2011 there was exactly one regulation a offering. You cant raise more than 5 million. Regulation a plus is what people have taken to calling the post jobs act regulation a. There is hope that it will enable people to, in effect, access the Public Markets for or enable Small Companies to raise money from ordinary americans. Dara has released data that shows in the first 16 months 81 offerings have been made seeking 1. 5 billion and raised 200 million. Of course, some of that is 1. 5 is really going to get raised, so we really dont know. But, its likely that regulation a plus will ramp up relatively quickly. There is i think probably things that could be done to improve regulation a. One of the most obvious is that, when the Commission Adopted the rule it took the positive step of preempting bluesky registration qualification requirements with respect to socalled tier 2 primary offerings but not secondary offerings. But are there things that you think can be done to improve regulation a and make it better for both the investing public and for issuers . Is that something you think the commission is going to be looking at . Yeah, again on the secondary offerings thats something we are looking at and engaged with the state securities regulators and trying to get as much information as possible. It was interesting, i got a text from one of my old College Roommates who said, were going to try a tier 1 regulation offering. Weve been doing reg d offerings. Ill let you know. So ill have a personal case study from someone. One of the things i was proud of on getting the reg a plus was getting the extension of the tier 1 up to 20 million. The tier 2 goes to 50. I wanted to get both to 50 and lets hold a horse race in terms of which people prefer. Do you want to go through the states or go through the commission on that. We could get a real sort of controlled experiment going. But originally it was proposed to tier 1 to only go to 10 million. We were able to get it up to 20 million. Were just starting to get data in from folks. That will help to guide us in terms of how people are using these offerings. In the tier 2, are they all close to 50 million . If thats the case, maybe we should think about increasing the threshold again. When there was 5 million, there were hardly any offerings over a series of years. Its the cost of doing a 5 Million Offering are not that much different than a 50 Million Offering in terms of the fixed costs but the benefits are much higher for that. Just by increasing the threshold, we are seeing more People Choose this. On the smaller end, on the smaller parts dollar amounts in the offerings, tier 1 and tier 2, what we are seeing, as we talked about, regulation crowd funding is particularly prescriptive, and people arent finding it being potentially useful with regard to crowd funding. Were hearing anecdotes that reg a offerings are actually filling some of that space and sort of crowd funding with a lowercase c. Its broadened its meaning. Right. So people were seeing articles being written and firms and consultants out there talking to people about sort of crowd funding through regulation a. So that might be another mechanism for us. As you mentioned, dara, division of economic risk analysis, has started to collect statistics on that and were starting to analyze that and look at potential ways to either make it easier or increase thresholds. Congress created an office of the Small Business advocate at the s. E. C. Its a little different than the investor advocate but modelled on it to a small degree. When do you think you all will be able to stand that office up . My hope is by the end of the year. So congress authorized it last year. But we had to go through hoops on the appropriations side. It requires this is sort of inside the beltway, whats called reprogramming, dollar amounts. We recently got approval from the appropriators to do that, to try to stand up the office. Next step is to go through the hiring process for the new advocate. Well model that pretty much what we did for the investor advocate. Staff will be involved and the commissioners will be involved in the process. My hope is that we can start that process, moving that forward through the summer and fall and have something announced hopefully by the end of the year. Great. The Financial Industry Regulatory Authority is the primary regulator of broker dealers. It has a budget thats roughly twothirds the size of the s. E. C. And i think its staff is almost 80 of the s. E. C. Yet there is relatively result congressional oversight of finra. And the s. E. C. Oversight of finra has been, in my observation, relatively light. But last october the s. E. C. Created a new office designed to provide oversight of finra. And of course, that was paired with some reforms of the way the s. E. C. Regulates broker dealers. What have you learned about that . What has the s. E. C. Learned about how that office is operating . Do you have any thoughts on how finra could be improved or the s. E. C. s relationship with finra could be improved. There were a couple reasons why we decided to reallocate staff within the commission. The first thing we did was reallocated staff on the exam team from overseeing broker dealers to overseeing Investment Advisers. We have over 12,000 Investment Advisers out there to examine. The number keeps going up year after year. So we needed to reallocate staff from the broker dealer side to the Investment Adviser side. By doing that, we also had conversations with finra and telling them that we are going to rely on their oversight of broker dealers more to help fill that space. Now, of course, we also oversee finra, to your point, and so what we also did was we made some adjustments within the offices in our office compliance, inspections and examinations prior to this move all of our oversight of the selfregulatory organizations, including fin ra, exchange. Pcaob and msrb, were all in one office. Because well be relying on finra more and more on the broker dealer side, we decided to split the office into two, one that focuses just on oversight of finra and the other that focuses on the oversight of the other selfregulatory organizations. In terms of that we are we just did those last year. Looks like we got the balance pretty close to right. Well continue to evaluate the balance to make sure that we got that right. Having said that, obviously finra has a new a new leader in there, robert cook, coming in. He has done a tremendous job on something he calls finra 360. He went on a listening tour, outside of washington, d. C. Met people where they are and listened to criticisms in terms of finra and their transparency and accountability. He is in the middle of that broad review right now. He has announced initiatives hes moving forward with trying to get the voice of more particularly the smaller brokers more involved, in tune with whats going on on capitol hill in terms of potential legislation that would give them greater oversight and doing a tremendous job there. Well continue to see those play out in the future, but well continue to rely on finra more on the bd side but continue to put more resources to make sure theyre doing what theyre supposed to be doing. As long as a year ago, eight months ago, the s. E. C. Put out a very positive noaction letter on Business Brokers but there hasnt been action with respect to finders or, some call them private placement brokers. Just so people in the audience understand, if two main street business people, one says i am trying to raise money and ill offer you a finders fee, but if you make an introduction to an investor that works out and they actually make an investment, the s. E. C. , 16 years ago or so, changed its position and adopted the policy that they should have to register as a broker dealer and in effect be treated the same as merrill lynch. Thats obviously created a great deal of regulatory uncertainty because the American Bar Association task force estimates that as many as 40 of Small Businesses raising money actually use finders anyway because it hasnt been made explicitly illegal. Do you see any openness or do you personally think that that issue should be revisited and try to clarify the rules and allow intermittent small finders to not have to register as a broker dealer . Yes. This issue has been brought to our attention i think almost every year by the Advisory Committee on small emerging companies, by the small government Small Business forum and a number of other folks on this. As you mentioned, we now finally have a chairman who is committed to looking at Capital Formation issues and putting it squarely on on the front burner in terms of our agenda Going Forward. This is an issue i would like to see there are some folks that we had, you know, in prior leadership at the s. E. C. There were folks who said, well, we believe everyone is born a broker dealer until they prove to us otherwise. And the burden is on them. Thats more or less what it is. But we need a space for finders to be able to do their jobs. Its particularly important for Capital Formation for the Smaller Companies, where theyre not going to all of a sudden trip all of the requirements from being a broker dealer, which we can go through the list of those. Force them to rescind the transactions and put their offering at risk. It creates a mess. Creates a mess. We need to find a space where we can carve out finders, limit them to a certain set of activities, as long as theyre within those activities, youre fine. Whether its a safe harbor or Something Like that. Then we can allow for that. Thats something, obviously, i believe we need to move forward on. Great. President trump put out an executive order, number 13781, basically in connection with government reorganizations. It strikes me that there are certain aspects of the s. E. C. That could probably use reorganization. I believe theres 23 direct reports to the chairman now. Do you anticipate that there will be some sort of significant reorganization under the new chairman, either in response to this executive order or for other reasons . The first is identifying all those. I think thats important. The executive order, you know, is a great place for us to identify. As you mentioned there are like 23 direct reports to the chairman. When i was acting chairman, i knew, because whenever i had a senior staff meeting, we only have a few rooms big enough to fit everyone in there. The difficult part of doing a wholescale reorganization is that a number of those direct reports are statutory. That would actually require legislation to give the chairman the authorities to make those changes. And they sort of have been put in piecemeal, right. There is a statute that goes through and says we create the investor advocate or some other position. And then its a direct report. And its like, all right, thats ones all right. But after you do this a number of times, pretty soon you end up with a number of direct reports in there. And so we can do things sort of around the edges within sort of divisions, within offices. You can move people around to try to be more efficient that way. But in terms of the wholesale sort of, you know, changing the direct reports and thinking more creatively about how we want to organize the commission would require legislative changes. Ill ask one more question and then open it to the audience. This is sort of a Good Government question. In almost every other field i work in, there is a lot more Information Available to the public and to policymakers than there is in the securities regulation area. The irs puts out statistics of income and an annual databook on the administration of the agency. The Commerce Department puts out the National Income counts and other information. There is a tremendous amount of data in the health care area. Bureau of labor statistics puts out just about everything you would want to know about the labor market. With all the information we really have on the private Capital Markets, reg a, crowd funding, so on, is periodic but not regular but occasional reports from dera. There is also relatively Little Information there is some on the enforcement side of the s. E. C. , but almost nothing in terms of what kind of provisions are causing the enforcement or the infractions that enforcement engages in. Do you think that there the commission should Start Publishing on a periodic annual basis information such as how much was raised using regulation a, crowd funding, reg d, rule 5, 6 and so forth so you have a time series and can evaluate it. Including the commissioners themselves but also better information about what kinds of things are causing enforcement problems in the real world. Yeah. That is a good idea. I hadnt thought about putting that out on a more regularized basis. We make a conscious effort to put out the statistics. All of our Enforcement Actions are publicly available online. All the votes are available publicly online. They are not categorized so that you know that, for example, it was a private rule 506 offering that was inadequate disclosure, you had no real means of accessing what aspects of the law are not causing problems or are causing problems. There are some academics who collect this data and consulting firms that sort of try to prived t provide the data. In reg d we didnt have any until somebody went through. Now there are a dozen but its very irregular. We dont have a good time series. Thats a good point. Thats something ill take back to think about. On the public side we did we require a number of the filings to be done in xbrl. Structured data format. That allows dera now quarterly goes through all the Public Companies and puts together a database for researchers on a quarterly its a zip file. You can download all this data to do largescale Academic Research on all Public Companies to do crosssectional and time series. They started and backfilled it. Now we have every quarter Going Forward. In the private south bays pace youre suggesting. Even the ipos, the best data is by the university of florida professor. Jay leonard. Yeah. Let me ask for audience questions. Well start with brian. Thank you, david. If you could just, for the benefit of the listeners, say your name and institutional affiliation before you ask the question. Sure. Brian knight from the mer caidis center. Question for the commissioner. What if anything is the s. E. C. Doing to try to address the sort of disruption in innovation coming from technological innovation, quoteunquote, fintech. A couple areas would be the use of distributed ledger for clearance, settlement and recording and the use of quoteunquote, initial coin offerings to arguably try to circumvent the securities laws. What if anything are you guys doing . Do you anticipate standing up something more formal like the project catalyst or the lab cftc . Where is the s. E. C. s head at on this . Last year for the first time we had a roundtable on fintech to try to wrap our arms around this area. I think it was three years ago i went to asia and all the jurisdictions i went to, whether taiwan, japan, hong kong, korea, wanted to talk about fintech. I thought, all right, thats Just Technology and finance. What the heck. There is nothing special going on here. I realized that there was this emerging industry here. Fintech. And there is Something Special about fintech thats different than just adding technology to financial services. It spans the gamut not just across our jurisdiction but across jurisdictions in the Regulatory Framework. Thats one of the difficulties with trying to get off the ground with fintech in the u. S. There are so many different regulators they need to talk to. State regulators, federal regulators. If they securityize and sell to investors they may need to talk to the s. E. C. Whether its keeping track of shareholder registries or trading or clearance and sell. It cuts across all kinds of different industries. In addition to the roundtable we have a task force at the s. E. C. Where its we have people from across division, crossoffices and out in the regions, in San Francisco our Regional Office out there is very helpful in identifying trends going on in the industry. I personally see fintech as transformational. There is a lot of hype in specific things in fintech, but there are a number of things where it can actually transform the efficiency of the Capital Raising process. I was over in kenya last i dont remember and saw the transformational change that came across. Kenya has a higher rate now of Financial Inclusion than the United States because were still talking about the banked and unbanked. We want to get people in banks first and then get them access to various financial services, whereas, kenya, they werent bound by that. They said, lets get people involved and then well Start Talking about financial services. They can actually buy sovereign debt in 30 increments in kenya and earn higher rates of return than putting their money in a bank. There are a number of instances in the world of moving forward on things that are transformational. We need to make sure we are not behind the curve. One of the things ill focus on is making sure our Regulatory Framework is not stifling that innovation. Part of our mandate is Capital Formation. We need to make sure we are not stifling innovation in this area too. When we start having discussions more seriously about the Regulatory Framework. Its highly fragmented. Its difficult for people to manage the process. I think the s. E. C. Is in a prime position to take the lead role because we have the Capital Formation mission, Regional Offices throughout the United States could serve as Intake Centers for the snext generatio of entrepreneurs. Whether its Digital Investment advice. Robo investors. Digital technology. Were watching on whats going on there and astonia, australia, were watching whats going on delaware has committed to doing a number of things on the block chain and learning from all those things. And we have existing players who are also working with fintech. Yeah, there is disruption going on. I learned a new word recently. Coopetition. Thats an exciting area that will benefit consumers and potentially help in the Capital Raising process. Sara lynch with reuters. You mentioned the commission publicizes votes. But they only do administrative proceedings done inhouse. They dont publicize the votes of cases sent to District Court with one exception when reuters and the wall street journal filed a request. Thats gone online but you are not disclosing on an ongoing basis. The general counsel opined that thats privileged information. Do you believe its privileged . Should it be put out on a regular basis . There are difficult sort of legal questions on that, but the fact that it was able to get done through foia, the Commission Won an award recently for being one of the most efficient agencies in terms of requests, responding to foia. It could be done on an ad hoc basis where we know well get the request so we go ahead and put it out there. I dont any reason why we couldnt continue to make the information public. I have nothing to hide. Yes, sir. I am jonathan cohen. Ceo of a Company Called 2020 gene systems based in rockville, maryland, we focus on early cancer detection. Over the years i have taken advantage of raising capital under reg d. Over 250 shareholders so far. We are going to try reg cf later this summer, and we as a leadin reg a plus. The good news is most of the topics that are on my mind have been touched upon by either you or david. I would like to put an exclamation point on a few points. I commend you for your Initiative Getting on the road and listening to entrepreneurs. In addition to being the ceo of a Biotech Company i chair and coown some bioTech Companies. We have done a little bit of work at the s. E. C. I met david in that capacity. A couple years ago i attended a Small Business conference at the s. E. C. There were two or three hundred people. I did not meet a single Small Business person there. It was all lawyers, academics, think tank people, state people. I commend the initiative, but youre not going to hear from Small Business people. I am close to washington, i can come down pretty easily. Getting out on the road, talking to entrepreneurs, particularly in the socalled other 47 states, steve case has said. 75 of Venture Capital is going to Companies Based in three states. So getting out to the other 47, including maryland, talking to ceos and their shareholders, finding out whats on their minds is very important. Its great youre doing it. I hope the other commissioners will do so. Two things you touched on that are important for my company and most other ceos i know who raise capital. One is the broker dealer rules are a tremendous impediment not only to finding capital but the cost of raising capital. It is exorbitant, what we have to pay to angel clubs and groups like that to present. Because theyre not allowed to get any commissions they necessarily have to pay the cost. That is killing companies. That is, i think, the number one priority, liberalizing those rules. Secondly, the accredited investor rules need to be relooked at and liberalized. Yes, sir. David michaels with the wall street journal. So, i know you said you didnt want to get ahead of the chairman on his agenda, commissioner, but since you reopened the docket on pay ratio, and you now have a lot of comments in the docket, is it your belief at this point that the implementation deadline will be delayed . Could you give us some color on how you think thats going to go . And as a second question, at the tail end of mary jo whites tenure she talked about some of the rules she felt could have been finished but there was not a quorum. She mentioned some of the title 7 rules. Whats the fate of title 7 at this point . Is the commission ever going to adopt some of those rules that were apparently ready at the end of her time . There is yeah, so title 7, for those of you who arent familiar with it, it part of dodd frank, deals with overthecounter derivatives. The jurisdiction is split between the ftc and cftc. Theyre revisiting some of the rules, looking at the implementation burdens. I believe the acting chairman has announced theyll start revisiting some of those. The s. E. C. , we have not gone as far on a number of rules since we have the opportunity to move forward on some of those. At the same time, we need to make sure that we work with the cftc to make sure that our rules are harmonized within the they have jurisdiction over swaps. We have security based swap. A number of participants, whether on the dealer or customer said, aide are in both markets. There is an opportunity to work on a more collaborative basis in terms of them revisiting our rules and us moving forward with our rules. So i think youre going to see more collaboration, more cooperation between the two agencies on those rules Going Forward. Ratio . On . Ratio. Staff is looking through the comments right now. We will see what we can move forward on. I was wondering if you could share the top lines from your listening tour, either what people are saying consistently is interfering with Capital Formation or some of the most surprising things you heard that might not have occurred to somebody inside the beltway. I think i already mentioned one. Sort of in Silicon Valley, right, the reason why a lot of these large unicorns are staying private is they can literally make a phone call and get hundreds of millions of dollars in capital. There is enough private capital available. And that on the one hand is nice to hear, but on the other hand, again, being shut out this makes me even more strong in my belief that we need to get the average investor the ability to get involved in a number of those offerings. So i helped to line that up. I think the biggest sort of feedback in terms of positive feedback we got from people was they were very appreciative of just the change in tone at the commission and out of the white house as well too. In terms of recognizing that, you know, we have had the best Capital Markets in the world for a long time but the rest of the world is catching up and we need to make sure that we get the balance right in terms of the cost and the benefits of regulation. For a long time we were the listing venue of choice in terms of Foreign Companies coming to list here. But more and more companies are choosing to avoid the u. S. Capital markets. We need to make sure that we remain as competitive as possible. Got a lot of information from folks in terms of, you know, just do you recognize how burdensome it is to comply with certain regulations, how many different compliance people, how many different lawyers they have to have looking at things and the costs that go into providing information for stuff that is of little or no value to investors. It just sort of reiterated a lot of those things. The finders issue keeps coming up. The issue of that crowd regulation crowd funding is not as workable as one would think but state based is potentially the way to go and also the reg a plus is potentially a way they can do crowd funding in those things as well too. And people were just appreciative of the fact that we could get outside of washington, d. C. , to the point that was made earlier. Washington, d. C. , can be an echo chamber and you keep hearing the same things over and over, but we need to get outside washington, d. C. , and actually listen to the people who are actually subject to our rules and our regulations. And for me its important because, i mean, if you think about our mission, for me its you can say its protecting investors, maintaining fair and efficient markets and promoting Capital Formation. For me its nothing less than helping facilitate the American Dream. The dream of entrepreneurs is to take their entrepreneurial spirit, put it into action. Start a company, raise capital. Hire workers. Bring a product or service to market, thereby increasing the standard of living to customers who buy their product, the employees employed by them and the investors who share in their success. For others, its taking their hardearned savings and investing it in the entrepreneurial spirit of others, taking the investment proceeds, improving the standard of living for themselves for their retirement, their children, for their education, or their community by investing in or by giving the money to the charity of their choice. So, for me, our mission is to make sure were preserving the American Dream by allowing americans to invest in the American Dream by investing in each other. Jw. Commissioner, this has been a great discussion. I want to mention three things that i hear from a lot of Small Businesses looking to go public that we havent talked about yet. It surprises me that they mentioned these. I care about them. But it turns out they care about them to. Proxy advisers and securities class actions. They dont have to worry about them as private companies. There are things the s. E. C. Can do under its own authority, former commissioner gallagher talked about the proposals. Proxy ideas out there. On securities class actions, the gc does amicus briefs, the s. E. C. s gc. And all sorts of things from court fin. Do you think the new gc and director, with Everything Else theyve got going on, will give attention to those vital issues . Yes, all three. For shareholder lawsuits, companies can come to us to ask for relief to put for mandatory arbitration in the charter. There was a company that thought about doing that when the ipo decided to pull back because staff would not give them comfort they could accelerate their filing. I encourage companies to talk to us about is that. On proxy Advisory Firms, i have come to the realization that they need robust regulation. I as someone who worries about high fixed costs of regulation stifling competition in that area, i am worried about were going to just if we regulate too quickly well entrench there is tremendous concentration. Yes. And there is unbelievable conflicts of interest. And we regulate conflicts of interest in a number of ways. Sometimes its disclosure. Sometimes prohibition. I have come to the point where proxy Advisory Firms are either engaged in a business so full of conflicts and theyre so influential in the voting process they need a strong, robust regulation. At a minimum they need to be registered Investment Advisers. I argue they shouldnt be allowed to provide ancillary services such as consulting to companies and we think about managing conflicts in terms of ownership of proxy Advisory Firms. You mentioned the 14 aa process also. If there was an article recently that talked about that the commission at the staff level is providing more noaction relief to not have to require companies to include things in the proxy, the statistics are up on that. I think youll see a staff, with our new Division Director and our new chairman, youll see more and more Companies Come for more noaction relief on that thing as well. In terms of putting things up for a vote, people have talked about votes that keep coming up and dont get a lot of support from people and they have to have a small dollar amount. I think we need to look at increasing at least the resubmission thresholds where shareholders can get a vote on something but if you dont reach a certain threshold you cant keep bringing it up year after year. I think there are some things we can move forward in that space. Last question. There were a number of people this gentleman. Following up on brians question about icos. Whats the s. E. C. s view of these . There seems to be some question as to whether its compliant with securities law. I am interested in your view on that. Yeah. We are we are looking at that. There are a number of different icos out there. This is an area thats, you know, for me just getting up to speed on all the acronyms, first of all. First there is initial coin offerings and distributed autonomous organizations. Thats another one thats kind of in the fin tech space. There is a question of whether or not this is something innovative and okay to do or is it skirting the federal securities laws. Its something we are looking at at the staff level and a lot of the facts and circumstances type issues but there are commonalities in there. There will continue to be movement in the space. So its something that we are obviously paying attention to. Well, thank you very much, commissioner. This concludes our event. [ applause ] commissioner stein and i had two open meetings. We were able to get a number of things done and started on the process of some things we could potentially do in an open meeting. Obviously he has when i came in as acting chairman i didnt have to make personnel changes. I kept a lot of people in their acting roles. So you are seeing a lot of the action, the things he is working on is hiring new division managers. Bill henman and chiefs of counsel and those things. Its a matter of building up staff and moving forward on things. If you look at what we did in the confidential filing space, i think that will have huge impact. That didnt require an open meeting. It just required staff action on that. So i am not surprised or troubled by that. Well be able to do things that will be able to help Capital Markets, whether or not there are certain numbers of open meetings or not. Do you think Capital Formation could be in the first what you were talking about earlier . Have to talk to him. What i mean no. In the speech last week he mentioned we are moving forward on the access fee pilot. Right. So i you know, that timing. We have some factact requirements we need to get done. There are some additional disclosure things started under chair white that are moving forward. And the exact timing is up to him. Right. Well have to see what the timing is. You mentioned on 14 aa that there had been some numbers that indicate the commission has granted more noaction relief recently . Mmhmm. I believe it was in the wall street journal. Was it . Yeah. Okay. I dont read it. [ laughter ] anyway so it was there. Okay. So chairman clayton, in his speech in new york, he had a line in there about urging companies to seek relief, talk to the commission when they have feedback on requirements that they think are onerous, burdensome or immaterial. How much of the agenda Going Forward could be about could be carried out at the staff level just by granting individually tailored relief to issuers . Is that a possibility . It is. We already saw that on the confidential filings, expanding that. Whats interesting with that is, if you think about it, that means that the commission always had that authority, even for emerging Growth Companies, but it took an act of congress to tell the s. E. C. To actually do it. Right . Yeah. That was just limited to emerging Growth Companies. At the staff level we were able to expand it for all companies, foreign and private issuers and for followon offerings in the first year. Thats the piece people are missing that will be really important. Bill hinman talked about how important the first followon offering is to companies in providing that relief for the confidential filing process will be hugely important. As i mentioned, we have already got companies that have already started filing for not only going public but then for the followon offering as well too. So were already seeing an effect. The mandatory arbitration piece, is that one of the things the chairman is also encouraging people to come forward and ask about . Is that part of what do you think it ties in with his speech . I am trying to remember if it was in the speech or not. I wonder if you think youll see more of that or if youre already starting to see the request to include that thats one of the things thats general under what bill hinman talked about in terms of us being more collaborative and talking to people. We can come up with ideas that we think are important but a lot of it is us telling people, come talk to us about what you can do. There is little we can do proactively on mandatory arbitration. A company has to come forward and ask for relief on that. The incident with the Carlisle Group you were referencing. Do you think thats deterred a lot of people from even asking about it . Absolutely. Thats why its so important for us to get out there and say come talk to us. Its a different chairman, Division Director. How is your review of delegate authority going . I guess its not yours anymore. The review is finalized. It was presented to me. It was presented to the chairman. Were going to start to have discussions over whether there needs to be changes in delegations on a number of levels, whether or not additional delegations can be made. So we not only asked the staff to give us a list of all your delegations and whether they were sub delegated from the Division Directors down, but also to ask them, are there instances where you dont currently have delegations where you think it would be useful. I have ideas. There are things i sign off on that i think can be delegated. For me its a tradeoff between efficiency and accountability on these issues. Will the enforcement restriction remain in place where the director has del not some delegated . It has remained in place. It is currently right now. And that that question is going to be part of the broader discussion that were going to have over all these things. So whether certain things should be sub delegations. Certain sub delegations should be coming back. Its all part of a broader discussion. One or two recommendations . Were there recommendations in there . We did i asked the general counsel to talk to each of the Division Directors and office directors. We talked about the senior staff. We said you guys do this, put it all up. Its kind of like a big chart of all the different delegations in terms of what they are, whether there are sub delegations, whether its more sort of what we call ministerial or substantive. Thats the tradeoff between efficiency versus accountability. So that we can have that broader discussion. And so i handed that off to the chairmans office, and theyre reviewing it right now. And well start having the discussion with commissioner stein in terms of can we find a path forward, potentially on a package of things, where we could change its all about getting the balance right. I only have two questions. You tell me. You guys have better information. Who is they . White house had a call. [ laughter ] yeah. A white house official on the call with the press. No guesses . Anybody in this room, a commissioner, a new one . Might be. At least one of them. All right. All righty. Thank you. Thank you all for coming. [ inaudible discussions occurring ]
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