Tom Quaadman

Tom Quaadman headshot
Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness

Thomas Quaadman is executive vice president of the U.S. Chamber Center for Capital Markets Competitiveness (CCMC). The Center was established in March 2007 to advocate legal and regulatory policies for the U.S. capital markets to advance the protection of investors, promote capital formation, and ensure U.S. leadership in the financial markets in the 21st century. Quaadman oversees the Center’s policy and lobbying operations. He also works with CCMC staff to create and execute legislative, regulatory, and judicial strategies to reform the financial regulatory system and support policies for efficient capital markets.

Quaadman headed the Chamber’s efforts on the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Start-Ups Act (JOBS Act). In addition, he formed and managed several coalitions, including the Corporate Governance Coalition for Investor Value and the FIRCA coalition on the convergence of domestic and international accounting rules. In directing the Chamber’s work on corporate governance, Quaadman led successful efforts to overturn the SEC’s proxy access rules and have a portion of the Conflict Minerals Rule declared unconstitutional.  

He has testified on a number of occasions before congressional committees on issues covering capital formation, financial reporting, and corporate governance. He also led the business outreach efforts for the Working Group on U.S. RMB Clearing and Trading. In 2012, Treasury & Risk magazine named Quaadman as one of the top 100 influential people in finance.

Quaadman graduated cum laude from New York Law School and is a graduate of the College of Staten Island. He is a member of the New York and Connecticut state bars. Quaadman and his wife, Tara, and their children, Creighton and Alexandra, reside in Alexandria, Virginia.

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Testimony: Ensuring Effectiveness, Fairness, and Transparency in Securities Law Enforcement 

Wednesday, June 13, 2018 - 2:15pm
Tom Quaadman

House Committee on Financial Services, Subcommittee on Capital Markets, Securities and Investment 
Thomas Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce 

The U.S. Chamber of Commerce is the world’s largest business federation, representing the interests of more than three million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. The Chamber is dedicated to promoting, protecting, and defending America’s free enterprise system. 

More than 96% of Chamber member companies have fewer than 100 employees, and many of the nation’s largest companies are also active members. We are therefore cognizant not only of the challenges facing smaller businesses, but also those facing the business community at large. 

Besides representing a cross-section of the American business community with respect to the number of employees, major classifications of American business—e.g., manufacturing, retailing, services, construction, wholesalers, and finance—are represented. The Chamber has membership in all 50 states. 

The Chamber’s international reach is substantial as well. We believe that global interdependence provides opportunities, not threats. In addition to the American Chambers of Commerce abroad, an increasing number of our members engage in the export and import of both goods and services and have ongoing investment activities. The Chamber favors strengthened international competitiveness and opposes artificial U.S. and foreign barriers to international business. 

Chairman Huizenga, Ranking Member Maloney, and members of the Subcommittee on Capital Markets, Securities, and Investment: my name is Tom Quaadman, executive vice president of the Center for Capital Markets Competitiveness (“CCMC”) at the U.S. Chamber of Commerce (“Chamber”). 

The Chamber views a strong and fair Securities and Exchange Commission (“SEC”) as a critical and essential element needed for efficient capital markets. Having a strong securities regulator is necessary for investors and businesses to have the certainty needed to transfer capital for its best use with an expectation of return. This allows market participants to engage in reasonable risk taking on a fair playing 

field. A rigorous enforcement regime ensures efficient markets by rooting out fraudsters and other bad actors, but if not properly calibrated, it will also serve to discourage legitimate businesses that may be seeking growth capital. This is an especially acute issue in light of the declining number of public companies—in the past twenty years, the number of U.S. public companies has been cut in half. 

The Chamber has become increasingly focused on ensuring that the SEC remains the premier securities regulator and is well-positioned for the challenges of a twenty-first century economy. As members of this Subcommittee know, capital markets have fundamentally changed since the SEC was created during the Great Depression of the 1930s. Additionally, managerial challenges within the agency have at times created obstacles that have prevented the SEC from acquiring the appropriate expertise and deploying its resources for the best use, undercutting its ability to evolve with changing markets and oversee them. Of particular importance to today’s hearing, changes in enforcement practices have created fundamental issues of due process and fairness that are at the heart of any legal proceeding under our constitutional form of government. Relatedly, it has sometimes been difficult for the SEC to focus on all of the elements of its tripartite mission—promoting investor protection, facilitating capital formation, and maintaining fair, orderly, and efficient markets. We believe SEC Chairman Jay Clayton is aware of these issues and we commend him for his efforts to overcome them. 

Over the years, the Chamber has identified shortcomings in our financial regulatory structure that make it harder for businesses to acquire the capital needed to grow and prosper. As far back as 2007, the Chamber released a report, the Report and Recommendations of the Commission on the Regulation of U.S. Capital Markets in the 21st Century, and a report in 2011, the U.S. Capital Markets Competitiveness, the Unfinished Agenda, to identify problems and the shortfalls of our financial regulatory system and the difficulty this puts on the United States to compete in a global economy. 

The Chamber has also offered solutions. For example, in 2009, we issued a report, Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission, and in 2011, the U.S. Securities and Exchange Commission: a Roadmap for Transformational Reform, that contained 51 recommendations for managerial reforms and regulatory enhancements to help the SEC acquire the knowledge and expertise needed to better understand and oversee the markets and products it regulates. 

Of particular relevance to today’s hearing, in July 2015 the Chamber issued a report, Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices (“Chamber SEC enforcement report”), which made 28 specific recommendations to improve SEC enforcement and due process. 

The Chamber’s 2015 SEC enforcement report reviewed the practices of the SEC Enforcement Division, changes in strategy and practice by the SEC, the evolving use of administrative proceedings, and the adequacy of rules of practice. This paper was the culmination of almost two years of effort that included a survey of more than 75 companies to identify areas where there was a perceived ambiguity or lack of clarity in the process. We conducted extensive interviews with a wide range of more than 30 former SEC officials, legal experts, and corporate counsels to develop specific recommendations. We included the ideas that have broad support from those who generously participated in this process. 

The Chamber’s 2015 enforcement report recommended a wide variety of structural and procedural changes to the SEC’s enforcement process. At a high level, our recommendations focused on: 

  • Providing a structure for the choice of forum decision that incorporates due process protection; 
  • Strengthening the “Wells Process” so that defendants in SEC investigations have a more robust ability to marshal a defense before the SEC commences litigation; 
  • Clarifying the SEC policy on admissions of liability in settled cases; 
  • Reducing duplication in regulatory enforcement; 
  • Rationalizing the “broken windows” enforcement policy and the need for alternative methods of resolving matters; 
  • Improving oversight by the SEC commissioners over the SEC enforcement staff; and 
  • Streamlining and improving the efficiency of the SEC investigation process, including with respect to document requests, production, and preservation. 

To describe a few of these recommendations in greater detail, oversight of the SEC Enforcement program by the five presidentially-appointed commissioners remains an area that we believe is critical. Macro-level Commission oversight of the overall enforcement program, in terms of priorities and areas of emphasis, allocation of resources, and periodic assessment of effectiveness has traditionally been extremely limited. Given the importance of the SEC’s enforcement program, a macro-level oversight process is required. First, there must be systematic collection of quantitative and qualitative information on the program operations. Second, there must be a regular periodic process for presenting this information to the Commission in a manner that provides them with a meaningful, not a pro forma, opportunity to provide input and direction. 

To this end, we recommended that the Division of Enforcement should submit a quarterly management report to the five commissioners containing productivity and efficiency metrics developed by the agency’s Division of Economic and Risk Analysis. The commissioners should receive quarterly oversight briefings on the enforcement program, with an emphasis on “national priority” investigations, investigations raising novel or complex legal questions, oldest active investigations, post-mortem analysis of litigated cases decided not in favor of the SEC, and new or emerging areas warranting investigation. We also recommended that the SEC improve transparency of its enforcement regime to place the public and regulated entities on notice as to emerging regulatory issues and enforcement priorities. For example, we recommended that the SEC should publish annually a report on its enforcement program, provide a public comment period on relevant issues, and conduct an annual public roundtable to discuss the report and the operations of its enforcement program. 

We also offered several recommendations in the 2015 report to improve the efficiency and effectiveness of the SEC investigation process. The agency’s investigation process is the largest program at the SEC. It is also the most opaque. The Commission provides very limited information on the process, except when a formal enforcement action is filed. The process is often long and costly, both to the SEC and to persons and entities that are the subjects of the investigation. Because the great majority of SEC investigations are closed without any action taken, these substantial costs are incurred by significant numbers of persons and entities that are never charged with committing violations. For public companies that are unable to raise capital because of the uncertainties associated with an open SEC investigation or that suffer large share-price decreases upon the announcement of an investigation, the consequences can be significant. By improving the efficiency of the investigation process, the SEC would make more effective use of its limited resources and, at the same time, reduce the substantial costs incurred by persons and entities that are subjected to the process. There, our recommendations focused on the importance of better internal management of the process and on ways to streamline the document production process. 

In the 2015 report, we also advocated for improving the efficiency of the investigative process. Improving management of the investigative process requires greater internal controls over the duration of investigations, the metrics that are used to evaluate and incentivize the staff, the problems resulting from staff turnover, and the case closing process. Additionally, the report recommended a review and changes in the rules of practice to make due process enhancements, creating a right of removal to district court under appropriate circumstances and strengthening the Wells process by which defendants mount a defense to the staff and commissioners before the commissioners vote to commence litigation. 

Reducing duplication in regulatory enforcement was another theme of the Chamber’s 2015 enforcement report. As we noted in the report, regulation of the financial markets in the United States has historically involved multiple entities, including multiple agencies at the federal level (the SEC, U.S. Commodity Futures Trading Commission, and the Department of Justice), multiple self-regulatory organizations (SRO), and at the state level, a state securities regulator and a state attorney general. For businesses engaged across the financial sector, prudential supervision can mean multiple examinations by more than one SEC regional office in addition to a designated SRO, and the multiple federal banking regulators. Globalization of the securities markets has added one more layer of foreign regulation for multinational companies. 

When companies respond to allegations of improper activities, management’s focus is necessarily diverted from the day-to-day running of its business. That is a consequence of doing business in a regulated society. But, we believe there should be some understanding on government’s part that, in the current era, firms are frequently subject to multiple domestic and foreign regulators. Responding to multiple regulators with respect to the same conduct or transaction is not, and should not be allowed to become, a regular attribute of doing business. It is counterproductive—and damaging to shareholders—to subject firms and individuals serially to multiple SEC inquiries or multiple regulators and self-regulators for the same alleged misconduct. 

Regulatory duplication occurs on three different levels—duplicative or overlapping investigations and exams by different offices of the SEC; duplicative or overlapping efforts within the United States at the federal and state levels; and most recently, duplicative or overlapping efforts internationally. Of course, there is a limit to what the SEC can accomplish with regard to duplication at the federal level, the federal and state levels, or the international level, given the sovereignty or independence of other enforcement authorities that can pursue the same (or similar) conduct that the SEC can pursue. There are limits to the agency’s ability to cabin all duplicative proceedings. 

However, in preparing the 2015 report, it became clear the scope of the problem appears to be increasing. For example, during the preparation of our 2015 enforcement report, we learned from multiple interviewees of firms that were regulated by the SEC, FINRA, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Consumer Financial Protection Bureau, that they frequently experienced upward of 60 regulatory examinations each year. We have also observed a growing trend of state enforcement agencies bringing state charges that are substantially the same as those brought against the same defendant by their federal enforcement counterparts. 

To remedy this situation, the 2015 report recommended the SEC take steps to eliminate duplicative and overlapping enforcement responses within the Commission and by multiple enforcement authorities against the same individuals or entities for effectively the same misconduct. In this respect, we believe the SEC should take a leadership role among regulatory bodies at the federal, state, and international levels to reduce or eliminate duplicative and overlapping investigations and enforcement actions for the same conduct. 

To this end, the 2015 Chamber enforcement report recommends that, within the United States, the SEC should: 

Consider greater use of memoranda of understanding with one or more other enforcement authorities to avoid “duplication of efforts, unnecessary burdens on businesses, and ensuring consistent enforcement” of securities-related requirements; 

  • Seek to proceed jointly with other enforcement authorities at the early stages of an investigation; 
  • Coordinate non-cause examinations with other regulatory agencies and self-regulatory organizations; 
  • Before commencing an enforcement action, contact other agencies to try to file a single action reflecting the common interest of multiple regulators; 
  • Consider standing down, or utilizing a deferred prosecution agreement, where effective action already has been taken (or commenced) by another enforcement authority; 
  • Develop mutual coordination agreements with domestic enforcement authorities, and jointly pledge to eliminate, where appropriate, duplicative enforcement actions; and 
  • Pursue special efforts to eliminate or diminish the extensive duplication of efforts that occurs on the part of state and local enforcement authorities. 

As we noted in the 2015 report, it would be a mistake to misinterpret any of these recommendations as calling for changes that would either weaken enforcement or erect any process barriers that would impede vigorous action by the SEC. This 2015 report proposed changes that would both further maintain a tough-as-nails efforts to punish and deter fraud while ensuring that honest market participants benefit from a clear and predictable process. The Chamber firmly believes that investors, market participants, and the SEC all benefit from this approach. 

We are encouraged that the SEC has been moving forward on some of the Chamber’s recommendations. The SEC continues to integrate trial lawyers into the investigative process at an early stage. Similarly, the SEC has also adopted incremental changes to its rules of practice for administrative proceedings. This responds to a specific recommendation in our 2015 report. And the SEC appears to have begun focusing on programmatically more important cases in lieu of pursuing so-called “broken windows,” a strategy that has previously strained agency resources and sent a mixed message to the markets. 

To his credit, Chairman Clayton has also begun to put his own mark on enforcement priorities at the SEC. We applaud his efforts to focus on “Mr. and Mrs. 401(k)” by launching a Retail Strategy Task Force. As Chairman Clayton has noted, retail investors are more vulnerable to fraud schemes than institutional or other sophisticated investors. And we commend the agency’s efforts to focus on cybersecurity. Indeed, the Enforcement Division’s new Cyber Unit has already taken important strides to combat cyber-fraud in our capital markets. 

Our discussion regarding relevant legislation being considered at today’s hearing is discussed in further detail below. 

H.R. 5037, the Securities Fraud Act of 2018 

As noted above, reducing duplicative enforcement was a major theme of the Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices. Responding to multiple regulators with respect to the same conduct or transaction is not, and should not be allowed to become, a regular attribute of doing business. It is counterproductive—and damaging to shareholders—to subject firms and individuals serially to multiple SEC inquiries, self-regulatory organizations, or multiple state regulators or attorneys general, for the same alleged misconduct. 

But a more pernicious problem exists within the scope of securities enforcement, and that is state authorities acting as de facto national regulators for companies who list their shares on a national securities exchange. It is worth remembering that the SEC itself was created to establish a system of national securities regulation and enforcement for entities engaged in interstate commerce. States should not be able to substitute their powers for those that are rightfully reserved for a federal regulator. State attorneys general in particular certainly have a right to protect their residents from all types of criminal conduct, frauds, and scams – but that does not mean that a single state elected official should be allowed to impact all aspects of a national economy. 

Emblematic of this problem is New York State’s Martin Act, a law enacted in 1921 to facilitate the prosecution of “bucket shops” and other scams directed at small investors. For 80 years, the law was used responsibly by New York attorneys general to protect residents from stock scams or other frauds. 

However, in the last decade, the Martin Act was weaponized by New York attorneys general. This was largely due to the fact that the Martin Act does not require the attorney general to prove fraudulent intent, and does not even require prosecutors to show that anyone has been injured or that any securities transaction actually took place. 

Because New York is home to thousands of U.S.-listed public companies, the Martin Act effectively anoints the state attorney general a national regulator for these businesses engaged in interstate commerce. In the Constitution, the Federal Government has sole domain over issues involved in interstate commerce. The Martin Act harms certainty by allowing one state to set policies that compete with the SEC. 

Introduction of the Securities Fraud Act of 2018 is an important step towards rebalancing securities enforcement as it relates to nationally listed public companies. The legislation clarifies and reaffirms federal law’s supremacy and Congress’s authority over interstate commerce (including our national securities markets). It limits the authority of state officials to establish national regulations, while ensuring that they can continue to protect the residents of their state. This bill would preserve the ability of the New York Attorney General to bring cases under the Martin Act. However, civil cases would be required to be heard in federal court and the intent to defraud proved. These requirements are wholly consistent with the history of the federal securities laws, and would also help prosecutors prioritize important enforcement cases against bad actors. We believe that efforts in this area should not harm the ability of state securities administrators to prosecute crimes such as boiler rooms or pump and dump schemes. 

The Chamber appreciates Rep. MacArthur’s work on this important legislation, and we look forward to working with all members of the Financial Services Committee as it advances through the legislative process. 

H.R. 2128, the Due Process Restoration Act of 2017 

The Chamber supports the Due Process Restoration Act of 2017, with a suggested amendment described in more detail below. This legislation would provide respondents in SEC administrative proceedings the right to have their case removed to federal district court if the SEC is seeking both a cease and desist order and a monetary penalty. 

As noted above, a major concern identified during the development of the Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices was the increased and wide-spread use of administrative proceedings for enforcement cases. Since enactment of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act – which expanded the SEC’s authority to use administrative proceedings – we began to see such proceedings used as the primary means of the SEC prosecuting enforcement cases under its non-criminal powers. This has created an imbalance within the system that endangers the rights of defendants and undermines the use of appropriate enforcement tools, while raising important questions regarding the separation of powers between the executive and judicial branches of government. 

In 2016, the SEC adopted a series of amendments to its rules of practice that were intended to address many of the concerns raised over the agency’s increased use of administrative forums.1 While these amendments were a small step in the right direction, the protections afforded defendants in administrative proceedings still fall well short of those provided in an Article III court, and the due process standards provided by the Federal Rules of Evidence and the Federal Rules of Civil Procedure.2 For example, the number of depositions allowed to be taken by respondents in administrative proceedings and the amount of time respondents has to build a defense still pale in comparison to what is provided for in federal district court. 

We believe that the Due Process Restoration Act of 2015 is an important step forward in restoring the balance between the appropriate uses of administrative proceedings and preserving the due process rights of defendants. This bill, if passed, would allow defendants, within parameters, to have the option to take a case to district court. We believe this bill would allow for the SEC to use administrative proceedings as they have been used historically, while allowing defendants all available options. If the SEC rules of practice are amended to allow for a fair process of discovery, administrative proceedings would be a fair and level playing field. The right of removal would not, in our opinion, burden court dockets. 

Nevertheless there is one amendment we would suggest making to H.R. 2128 as it moves through the legislative process. The legislation changes the burden of proof that the SEC must use in an administrative proceeding to a “clear and convincing” standard. We believe the burden of proof should be the same in an administrative proceeding or a district court case. While we understand the thought behind the use of a clear and convincing standard, this can have unforeseen consequences that may not help defendants or appropriate enforcement activities. 

The Chamber believes that the passage of the Due Process Restoration Act of 2017, with our suggested amendment, as well as further changes to the SEC’s rules of practice, would allow for both fair due process and strong enforcement policies. 

We ask that the Subcommittee and House consider both of these bills expeditiously in order to provide American businesses with greater enforcement certainty that encourages them to compete, thrive, and create jobs. 

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

1 https://www.sec.gov/rules/final/2016/34-78319.pdf 
2 See e.g. U.S. Chamber comment letter on proposed amendments to rules of practice, available at: https://www.sec.gov/comments/s7-18-15/s71815-12.pdf


The Chamber’s mission is to advance human progress through an economic, political and social system based on individual freedom, incentive, initiative, opportunity and responsibility. 

U.S. Chamber testimony on fueling capital and growth on Main Street

Wednesday, May 23, 2018 - 10:15am
Tom Quaadman

The U.S. Chamber of Commerce is the world’s largest business federation, representing the interests of more than three million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. The Chamber is dedicated to promoting, protecting, and defending America’s free enterprise system.

More than 96% of Chamber member companies have fewer than 100 employees, and many of the nation’s largest companies are also active members. We are therefore cognizant not only of the challenges facing smaller businesses, but also those facing the business community at large.

Besides representing a cross-section of the American business community with respect to the number of employees, major classifications of American business—e.g., manufacturing, retailing, services, construction, wholesalers, and finance—are represented. The Chamber has membership in all 50 states.

The Chamber’s international reach is substantial as well. We believe that global interdependence provides opportunities, not threats. In addition to the American Chambers of Commerce abroad, an increasing number of our members engage in the export and import of both goods and services and have ongoing investment activities. The Chamber favors strengthened international competitiveness and opposes artificial U.S. and foreign barriers to international business.

Chairman Huizenga, Ranking Member Maloney, and members of the Subcommittee on Capital Markets, Securities, and Investment. My name is Tom Quaadman, executive vice president of the Center for Capital Markets Competitiveness (“CCMC”) at the U.S. Chamber of Commerce (“Chamber”).

This hearing, “Legislative Proposals to Help Fuel Capital and Growth on Main Street” is a continuation of this Committee’s good work over the last several years to help provide growing businesses with the capital they need to create jobs, expand, and innovate. I am pleased to provide testimony on behalf of Chamber members regarding several of the proposals that are being considered today.

As members of this Committee are aware, the post-recession recovery over the last decade was extremely weak by historical standards. From 2010-2017, for example, gross domestic product (GDP) in the United States failed to achieve 3% growth in any given year, well below the post-World War II historical norm. To put the importance of 3% growth into perspective, if our economy moved from 2.5% growth to 3% growth, average annual incomes would rise by $4,200 and 1.2 million jobs would be created over the next decade. These are simply statistics, but underlying them is the opportunity for millions of Americans to create a better life for themselves and their families.

Not only was the post-recession recovery historically weak, it was also remarkably uneven across the country. A striking 2016 report from the Economic Innovation Group found that 50% of post-crisis new business creation occurred across only twenty counties in the United States.1 Coupled with the fact that new business creation itself has been a fraction of what it was in previous recoveries, these statistics show that large swaths of the United States have largely been left out of any economic upswing over the last decade. Congress and regulatory agencies must continue to be focused on pro-growth initiatives that help create and sustain wealth for households and communities all across the country.

Fortunately, action has already been taken this Congress that will help reverse these trends. The historic tax reform package signed by President Trump in December 2017 is already producing positive benefits for American households and businesses.2 By lowering rates and making our tax system more globally competitive, business leaders are investing back in their businesses, rewarding their employees, and hiring more workers.

1 “The New Map of Economic Growth and Recovery” Economic Innovation Group, May 2016.
2 See e.g. U.S. Chamber Tax Reform Map https://www.uschamber.com/tax-reform

Additionally, the House of Representatives is scheduled this week to vote on S. 2155, the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” following Senate passage of the legislation in March. This legislation is the culmination of bipartisan work in both the House and Senate to move bank regulation away from the “one-size-fits-all” approach that has regrettably taken hold in the post-financial crisis era. S. 2155 will help small and regional banks better serve their communities around the country, and will ultimately contribute to stronger economic growth.

But we believe Congress should not merely rest on its laurels, and should continue to pursue pro-growth and pro-opportunity policies that help growing businesses access capital. The Financial Services Committee – as well as the full House of Representatives - has already passed dozens of bipartisan bills this Congress that we believe merit further action and should ultimately make it to the President’s desk before the end of this year. The Chamber strongly supports many of these bills and is optimistic that the House and Senate can work together to craft a bipartisan capital formation package.

The legislative proposals being discussed at today’s hearing also present opportunities to advance bipartisan legislation this Congress that will modernize the rules and regulations that apply to public companies in the United States.

The Need to Modernize the Public Company Model

The public company has been a key source of strength and growth which has helped make the United States economy the strongest and most prosperous in world history. When businesses go public, jobs are created and new centers of wealth are formed. A 2012 study done by the Kauffman Foundation found that for the 2,766 companies that went through the IPO process between 1996 and 2010, employment cumulatively across these business increased by 2.2 million jobs, while total revenue increased by over $1 trillion.3

The public capital markets are also not static and help to support innovation. Only about 12% of the Fortune 500 companies in 1955 were still on the list in 2014, while the other 88% have either gone out of existence, merged with another company, or fallen out of the Fortune 500.4 This system of creative destruction has forced businesses to change with the times, or be replaced by new entrants with innovative

3 Post-IPO Employment and Revenue Growth for U.S. IPOs June 1996-2010 https://www.kauffman.org/what-we-do/research/2012/05/postipo-employment-... june-19962010
4 Mark Perry, AEIdeas, August 18, 2014

ideas and products that meet the needs of consumers and an ever-changing marketplace.

Regrettably, the public company model has become increasingly unattractive to businesses. In the 20 years from 1996-2016, the number of public companies in the United States dropped in 19 of those years. The one year where there was an increase is attributable to the passage of the Jumpstart our Business Startups Act (“JOBS Act”) that was spearheaded by this Subcommittee. To put it in even starker measures, an article last year by the Wall Street Journal pointed out that we have roughly the same number of public companies today as we did in 1982. 5 Since 1982, the United States population has grown by 40% and the real GDP has increased by 160%, yet the number of public companies has remained stagnant.

No one single event or regulation lies at the heart of the public company crisis. Like straw upon a camel’s back, the burdens and reporting requirements associated with being a public company today have steadily accumulated over the years, to the point where many businesses are rejecting a model that was once the ultimate dream of American entrepreneurs. The JOBS Act was a great first step towards arresting this worrisome trend, and we have already seen tangible results from the law’s implementation. For example, in 2013 – the first full calendar year after the JOBS Act was passed – 226 initial public offerings (IPOs) were listed in the United States (the highest number since 2004), followed by 291 in 2014. 6 While the IPO market has since cooled, the vast majority of companies that are going public are doing so using provisions of the JOBS Act.

5 “America’s Roster of Public Companies is Shrinking Before our Eyes” Wall Street Journal January 6, 2017

To help promote policy solutions that would build off the success of the JOBS Act, eight organizations – the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet, and the U.S. Chamber – recently released a report entitled Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public. This report includes 22 recommendations that encompass five general categories:

1) Enhancements to the JOBS Act; 2) Recommendations to encourage more research of emerging growth companies (EGCs) and other small public companies; 3) Improvements to certain corporate governance, disclosure, and other regulatory requirements; 4) Recommendations related to financial reporting and; 5) Recommendations related to equity market structure

The full report is included as an addendum to this testimony. While these eight organizations all represent different facets of the American economy, we all share a common concern that the decline in public companies presents serious long term growth and job creation challenges for the United States economy if it is left unaddressed. We appreciate that the Subcommittee has put forward a number of pieces of draft legislation that incorporate many of the recommendations in our report. Our comments on several of these measures are included below.

H.R. 5756, to require the Securities and Exchange Commission to adjust certain resubmission thresholds for shareholder proposals

H.R. 5756 would adjust the levels of support that a proposal from a public company shareholder must receive before it is resubmitted in a subsequent year. The current “resubmission rule” under Rule 14a-8 of the 1934 Securities Exchange Act allows a company to exclude a proposal from its proxy statement if it failed to receive the support of:

  • 3% of shareholders the last time it was voted on (if voted on once in the past five years)
  • 6% of shareholders the last time it was voted on (if voted on twice in the past five years) · 10% of shareholders the last time it was voted on (if voted on three or more times in the past five years)

6 https://www.sec.gov/info/smallbus/acsec/giovannetti-presentation-acsec-0...

In other words, a shareholder proponent is able to continuously resubmit a proposal even if – in some instances – over 90% of shareholders have voted against it on more than one occasion. The shareholder proposals system under Rule 14a-8 was originally established as a means to facilitate communication between shareholders and management, and to ensure that shareholders maintained a voice in how a particular company was run. Over the years, however, the shareholder proposal system has devolved into a mechanism that special interests use to advance idiosyncratic agendas at the expense of other investors. To put this into perspective, according to the Manhattan Institute, during the 2016 proxy season fully half of all proposals submitted to Fortune 250 companies dealt with some type of social or public policy related matter – not issues fundamental to enhancing the long term value of public companies.7 Not only does this misuse of the system cost shareholders in terms of legal and other fees, but it serves to distract management and company boards from focusing on long term strategy – both issues that can be particularly impactful to small or midsize public companies.

In 1997, the Securities and Exchange Commission (SEC) proposed a rule that would have changed the current 3%/6%/10% system to a more reasonable 6%/15%/30% system. Such modified thresholds would still allow eligible shareholders to submit proposals on various issues, however it would limit the number of times that the vast majority of shareholders would be forced to pay the costs in order to register their opposition. H.R. 5756 simply adopts what the SEC proposed in 1997, which we believe would properly balance the interest of issuers with ensuring that shareholders maintain their voice in corporate matters.

H.R. 5054, the Small Company Disclosure Simplification Act of 2018

This legislation would provide a temporary and optional exemption for small issuers from the eXtensible Business Reporting Language (XBRL) requirements administered by the SEC. While XBRL was created in order to move way from a paper-based system of financial disclosures, it remains a work in progress and has experienced a number of growing pains. As a result, it has proven to be yet another hurdle placed in front of growing business that are looking to gain access to America’s robust capital markets.

7 An Annual Report on Corporate Governance and Shareholder Activism September 27, 2016 (J. Copland and M. O’Keefe) https://www.manhattan-institute.org/sites/default/files/pmr_2016.pdf

H.R. 5054 would afford the SEC time to fix some of the deficiencies associated with XBRL. The optional exemption for EGCs and small issuers appropriately grants company boards and their shareholders the ultimate authority to decide whether or not using XBRL is in the best long term interest of the company. This is preferable to a top-down mandate from the SEC for issuers of all sizes to comply with a system that is clearly facing a number of short-term issues.

Furthermore, Congress made it clear when the JOBS Act was passed that the bifurcation of securities regulation can help promote capital formation for small companies. This is why Congress created an “on-ramp” in Title I of the JOBS Act and excluded EGCs from a number of onerous mandates that were inhibiting their ability to grow and create jobs. H.R. 5054 is consistent with this approach, and the Chamber supports its adoption.

H.R.__, to provide a five year extension of certain exemptions and reduced disclosure requirements for companies that were emerging growth companies and would continue to be emerging growth companies but for the five year restriction on emerging growth companies, and for other purposes.

The Chamber strongly supports this draft legislation, which would simply extend many of the exemptions afforded to EGCs under the IPO “on-ramp” of Title I of the JOBS Act from five years to ten years. These exemptions include an allowance for confidential reviews of registration statements by SEC staff, simplified executive compensation disclosures, and exemptions from certain provisions under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank Act”), including say on pay and say on frequency requirements, and the “pay ratio” disclosure mandate. The vast majority of EGCs have taken advantage of many of these exemptions, which have helped reduce reporting and compliance burdens without compromising important investor protections. As companies continue to mature five years after going public, extending these targeted exemptions to ten years would likely further incentivize businesses to go public in the first place. This is especially timely and critical as many companies that went public soon after the JOBS Act was passed are now reaching their five-year time limitation, and yet are still sensitive to becoming subject to full reporting requirements that are more appropriate for large, established issuers. Importantly, these exemptions would remain completely optional – companies would be free to begin reporting some of this information if they felt it was in the best interest of their shareholders and the long-term performance of the company.

H.R.__, to direct the Securities and Exchange Commission to revise Rule 163 under the 1933 Securities Act to apply the exemption offered in such section to communications made by underwriters and dealers acting by or on behalf of well-known seasoned issuers

Well-known seasoned issuers, or “WKSIs,” are issuers that have a demonstrated reporting history with the SEC, meet certain market capitalization thresholds, and are generally widely followed in the marketplace. Because of this status, WKSIs are under certain conditions permitted to engage in oral or written communications with potential investors without violating the “gum jumping” provisions of the 1933 Securities Act. In 2009, the SEC proposed allowing underwriters or dealers to engage in such communications on behalf of WKSIs.8 While current rules allow issuers to engage in pre-filing communications, underwriters are often best positioned to “test the waters” prior to an offering. Allowing WKSIs to authorize an underwriter or dealer to communicate about offerings of the issuer’s securities prior to the filing of a registration statement would help these companies better gauge investor interest before having to expand the time and resources to file a formal registration statement. While the SEC’s response to the financial crisis overtook Rule 163 reform as a priority and the 2009 proposal was never finalized, we believe this remains an important initiative that will help issuers raise capital. The Chamber strongly supports the draft legislation, which would simply codify into statute the SEC’s 2009 proposal.

H.R.__, to direct the Securities and Exchange Commission to conduct a study with respect to research coverage of small issuers before their initial public offerings, and for other purposes

One major issue that has developed in the public capital markets over the last two decades is a steady decrease in the level of analyst coverage of small public companies. According to Capital IQ, 61% of all companies listed on a major exchange with less than a $100 million market capitalization have no research coverage at all. Notwithstanding provisions of the JOBS Act intended to increase research, EGCs and other small issuers still have trouble obtaining analyst coverage today. The draft legislation would simply direct the SEC to conduct a long-overdue study on this issue and to develop recommendations on how to increase the amount of research that is conducted on small public companies. The bill would require the SEC to examine its own rulebook, as well as that of the Financial Industry Regulatory Authority (FINRA), state and federal liability concerns, the 2003 Global Research Analyst Settlement, and the Markets in Financial Instruments Directive (MiFID II). The Chamber supports this legislation, which will help the public better understand how current regulations may be restricting the flow of information to investors regarding small issuers. The bill should also produce helpful recommendations that Congress or the SEC can act upon in the future.

8 Release No. 33-9098 Revisions to Rule 163, 74 Fed. Reg. 68545 (December 28, 2009).

H.R.__, to remove the limitation on large accelerated filers qualifying as an emerging growth company, and for other purposes

The Chamber supports this draft legislation which would remove the counterproductive “phase out” rules which cause a great deal of uncertainty regarding EGC status for public companies. Under the JOBS Act, an issuer will cease to be an EGC if they happen to cross the public float threshold that constitutes a “large accelerated filer” under Securities Exchange Act Rule 12b-2. Thus a company that happens to be highly valued in the market – but which may have revenues that fall well below the EGC threshold of $1 billion per year – could lose their EGC status and many of the regulatory exemptions that come with it. In 2014, for example, some 30% of EGCs that went public in 2012 complied with the internal controls requirements of Sarbanes Oxley Section 404(b) because they became large accelerated filers.9 Importantly, the draft bill also grants the SEC the authority to establish a public float threshold (above the current $700 million, which constitutes a large accelerated filer) that a company would have to trigger before losing status as an EGC. This would help ensure that EGC status is reserved only for smaller public companies.

H.R.__, to require the Securities and Exchange Commission to revise the definition of a qualifying portfolio company to include an emerging growth company, for purposes of the exemption from registration for venture capital fund advisers under the Investment Advisers Act of 1940

The Dodd-Frank Act included an exemption for certain venture capital funds from a requirement to register as a registered investment adviser (RIA). However, the SEC’s implementing regulation for this exemption provided for a definition of a venture capital fund that was unnecessarily narrow and failed to take into account many aspects of the venture capital industry. For example, many growth equity funds – which often times are large investors in EGCs and other small companies – are left out of the definition of a venture capital fund. The Chamber supports the draft legislation, which would allow shares of EGCs to be considered “qualifying investments” for purposes of RIA exemption determinations. This would allow growth equity and other venture capital funds to continue to play a critical role in providing capital to EGCs around the time they are considering an IPO.

9 The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape. Latham & Watkins April 5, 2014

H.R.__, to increase the threshold for mutual funds before triggering diversified fund limits from ten percent of voting shares to fifteen percent

The Chamber supports this draft legislation which would modestly increase the amount that a mutual fund could hold in a single security and still maintain status as a “diversified” fund. Currently, mutual funds qualify as diversified under the Investment Company Act of 1940 if they hold no more than 5% of their assets in any single company, or 10% of the voting shares in a company. Mutual funds provide an important source of capital and liquidity for the shares of EGCs and small companies, however the 10% limit on an investment in a single company constrains the ability of funds to provide this capital. As explained in a 2017 paper on small IPOs, “As a diversified fund’s [assets under management] grows, efforts to deploy new fund flows into a small issuer will increasingly be constrained by this 10% position limit, meaning a large fund’s investment in the company will represent a diminishing fraction of the fund’s AUM.”10 We believe that modestly increasing this threshold from 10% to 15% will allow diversified mutual funds to continue to invest in EGCs or small issuers even as their assets under management continue to grow.

H.R.__, the Streamlining Disclosure Options to Reduce Redundant Disclosures to Investors Act

Over the decades since the securities laws were enacted, and especially in more recent years, the disclosure documents that companies file with the SEC have continued to expand, as reflected by the lengthy annual and quarterly reports, as well as proxy statements provided to investors. As many have pointed out, disclosure documents are laden with much information that is obsolete, unnecessarily repetitive, or otherwise not useful to investors. This problem can be especially acute for EGCs and small public companies, which often times don’t have the same level of compliance resources as large established companies, and can be especially burdened by our outdated disclosure regime. According to the 2011 report of the IPO Task Force, 92% of public company CEOs stated that the “administrative burden of public reporting” was a significant challenge to completing an IPO and becoming a public company.11

10 The Small IPO and Investment Preferences of Mutual Funds (Robert Bartlett III, Paul Rose, Steven Davidoff Solomon) July 28, 2017 at 9. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2718862
11 Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Job Market Back on the Road to Growth Available at: https://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf

This draft legislation, which the Chamber strongly supports, would simply give issuers the option of reporting quarterly information in a different format than is currently required by Form 10-Q. For example, issuers could distribute a press release that contains quarterly financial results – which would provide investors with important information – instead of the lengthier 10-Q that often times contains repetitive information that has already been disclosed. Importantly, issuers would still be required to notify investors of any significant events through Form 8-K, so the legislation would not deprive shareholders or the public of material information that is critical for investment and voting decisions.

H.R.__, the Main Street Growth Act

The Chamber also supports this draft legislation circulated by Rep. Emmer, which would establish the legal framework for the creation of “venture exchanges.” There is little doubt that investors have benefited from many of the technological and other changes in our equity markets over the last two decades, which have helped reduce trading costs, increased liquidity, and made markets more efficient. However, many of these benefits have not been distributed evenly across the equity markets. The trading environment for many small and midsize public companies – including EGCs – remains less liquid and fragmented as compared to the overall equity market. We believe that policymakers should move away from a “one size fits all” regulatory model and tailor market structure to help boost the trading of EGCs and other small issuers.

While the JOBS Act did a great deal to help EGCs raise capital in primary offerings, it did comparatively little to address the secondary market trading in these companies. The Main Street Growth Act seeks to remedy this issue by providing a tailored trading platform for EGCs and stocks with distressed liquidity. Companies that choose to list on a venture exchange would have their shares traded on a single venue, thereby concentrating liquidity and exempting these shares from rules that are more appropriate for deeply liquid and highly valued stocks. Venture exchanges would also be afforded the flexibility to develop intelligent “tick sizes” that could help incentivize market makers to trade in the shares of companies listed on the exchange. Importantly, both the creation of the venture exchange and the decision to list on such an exchange are completely optional – the bill would not mandate that companies that meet certain criteria trade on a venture exchange. We believe this legislation is an important step towards properly tailoring market structure rules for small issuers.

Conclusion

We appreciate the work of the Capital Markets, Securities, and Investment Subcommittee on these important bills and issues. The Chamber is prepared to work with the Subcommittee on a bipartisan basis to achieve many of these reforms that would modernize the public company regulatory regime in the United States. We must be successful in these efforts to spur economic growth that stimulates investment and creates good paying jobs.