Mr. President, there is no state that has suffered more from the job losses of the Great Recession than my state of Michigan. You do not have to ask a Michiganian twice if he or she believes Congress should take action to increase the speed of the jobs recovery. So I am ready to consider any legislation that promises more opportunity for the workers of this country.
Unfortunately, the legislation the House has sent to us, which is promoted as a job creation bill, is no such thing. In the name of job creation, the House bill would severely weaken investor and taxpayer protections in the nation’s securities laws. In the name of putting Americans to work, the House bill would hand a series of special favors to influential special interest groups.
The House bill reflects a disturbing failure to learn the lessons of the recent and all-too-painful past. It defies belief that after the worst financial crisis in generations, a crisis brought on by the failure to effectively police our financial markets, Congress would consider removing vital obstacles to fraud and abuse.
The House bill would take a series of steps that would undermine the integrity of the financial markets. We should not go down that road, and we need not. Working with Senator Reed, Senator Landrieu, Senator Brown and others, I have participated in an effort to make common-sense changes that would give small, innovative companies more tools to access the capital they need. But we do that without putting the stability of our economy and the interests of American investors and taxpayers at risk. Let me lay out some of the problems with the House bill and how the Reed-Landrieu-Levin amendment would address them.
The House bill would lower barriers to fraud that are now present in so-called “Regulation A” stock offerings. These are offerings that are exempt from SEC registration requirements. The House bill would expose retail investors, those with no expertise or resources to assess the risks of participating in the unregulated market, to massive potential fraud and abuse. It does not even require that companies making offerings under Regulation A provide audited financial statements. The Regulation A process may be appropriate for very small companies, but the House bill provides few meaningful limits to its use. Instead, the House bill would allow even large companies to avoid meaningful oversight year after year.
I’ve worked with my colleagues to fix this problem by ensuring that these offerings are limited to only once every three years, and that investors in these offerings get an accurate picture of the company’s finances through audited financial statements.
In the name of giving smaller companies greater access to the initial public offering market, the House bill would create a new class of company, called an “emerging growth company,” and would strip from investors in such companies more than a dozen important investor protections.
Some of these protections involve transparency. The House bill would weaken corporate governance provisions that we enacted less than two years ago in the Dodd-Frank Act, including disclosures on executive pay. The House bill would exempt these companies from having to comply with changes to accounting standards. It would repeal the protections put in place after the dotcom bubble burst. These protections require financial firms to separate research analysts who advise clients on whether to invest in initial public offerings from sales teams. The House bill provides that companies with up to $1 billion in annual revenues would not have to get an outside auditor to check their internal controls. So, what happens if one of these companies is cooking the books? Who’s going to catch it?
We learned with Enron and Worldcom why we need meaningful checks on how companies prepare their financial statements. The vast majority of financial restatements –corrections to bad information given to the investing public – are made by medium and small companies. Investors in these companies should have the confidence that the financial statements on which they base their decisions are accurate.
These provisions of the House bill are bad enough, given the chronic problem in financial markets with poor and misleading financial disclosure. But to make matters worse, the bill would open this collection of loopholes to companies with up to $1 billion in annual revenues – a level that would include well over 80% of all IPOs. Financial regulators, associations of individual investors, many of the largest pension plans in the country, securities experts, and the Chamber of Commerce all have raised alarm bells about that $1 billion threshold as well as the many problems that would follow from the House bill.
Just this week the SEC took a series of enforcement actions against fraudsters seeking to victimize investors in pre-IPO offerings. As one SEC official noted: “The newly emerging secondary marketplace for pre-IPO stock presents risk for even savvy investors.” The House bill threatens to bring the same level of risk and instability that plagues pre-IPO trading to the IPO market itself, changes that, rather than building support for IPOs, might make the IPO market so risky that it dampens investor interest.
The amendment some of us have been working on would accept the premise that some small, newly public companies could benefit from somewhat relaxed requirements as they adjust to the public marketplace. But our amendment would limit these benefits to smaller companies, those with under $350 million in annual revenues. And our amendment would not exempt these companies from nearly so many critical investor protections. For example, we would not remove protections designed to protect the integrity of the research that’s available to investors. Nor would it exempt them from any new accounting rules. Nor would it exempt them from requirements regarding important executive pay disclosures and shareholder input on executive pay packages. Our amendment would provide flexibility for smaller, newly public companies to adjust to the public markets, but leave in place the investor protections that ensure our public markets remain the best in the world.
The House bill would also allow companies – or fraudsters posing as legitimate companies – to solicit investors directly through the Internet. As written, the House bill would offer investors almost no protection from fraudulent schemes and fake investment opportunities. Although these websites (often called “intermediaries” or “funding portals”) are the only entities capable of making sure that a company seeking to sell stock on its site is real, the House exempts them from any real regulation or liability. And the same is true with the issuing company. Labor groups, seniors organizations, regulators, and securities experts all warn us that this measure is an open invitation to fraud. One group calls it the “boiler room legalization act.”
So we have many problems with these provisions of the House bill. But we also believe that so-called “crowdfunding” – in which small start-ups can access pools of capital from small investors, usually over the Internet – has the potential to provide opportunity for truly small businesses to get additional capital they need to grow. That’s why we build upon the work of Senators Merkley and Bennet to create a platform for raising money through the Internet, but we make sure that it has the necessary investor and consumer protections. In fact, legitimate crowdfunding sites have made it clear to us that they, like us, are concerned about the House bill, and they too want the additional protections we provide. Our amendment makes sure that funding portals are subject to meaningful regulation, and that the companies that use them to raise capital are too. Our amendment would — unlike the House bill — require comprehensive disclosures to investors about the company and the risks of such investments. If this new way of investing in small companies is to succeed, then investor protections like the ones embodied in the Merkley-Bennet provisions, which we included in our amendment, are vital to giving investors the confidence to participate.
The House bill also attempts to remove regulations on so-called private offerings. By allowing issuers of private offerings to market their stock to the general public – on billboards and the Internet, in visits to retirement homes or late-night television ads – this provision would dangerously lower our defenses against fraud. We’ve seen this movie before – in the 1990s, regulators lowered the barriers to general solicitation for private offerings, and within years reversed their error because of widespread fraud and abuse.
Some have complained that the existing restrictions on solicitation for private offerings are too narrow and impede business’s access to capital. That seems unlikely given the nearly $1 trillion a year in private offering activity. If there are yet more worthy investments going unfunded because of unneeded investor protections, the SEC’s regulations should be updated for the internet age.
The Reed-Landrieu-Levin amendment would direct the SEC to revise its rules to allow companies to offer and sell shares to accredited investors. It then directs the SEC to make sure that those who offer or sell these securities take reasonable steps to verify that the purchasers actually are accredited investors. It requires the SEC to revise its rules to make sure that these sales tactics are appropriate. There will be no billboards or cold calls to senior living centers under our amendment. I wish I could say the same about the House bill.
There is little evidence that the reduced investor protections and invitations to fraud in the House bill will make any meaningful contribution to job growth. We do not have one study on any of the provisions of the House bill establishing that even one job would be created. If such a study existed, I’m sure we would have seen it. The simple reality is that repealing federal securities laws—and that is clearly the intent of the House bill—does not create jobs.
In fact, a former chief accountant of the SEC was quoted recently as saying this jobs bill was no jobs bill at all. He said: “This would be better known as the bucket-shop and penny-stock fraud reauthorization act of 2012.”
Taken together, these and other provisions in the House bill send a false message: that in order to grow the economy, we must subject our senior citizens to more fraud, we must put pension funds and church endowments at greater risk of fleecing, we must create more threats to the financial stability of American families.. The America I know and believe in is capable of growing its economy without these unnecessary risks.
Indeed, it is fraud and financial abuse that have repeatedly brought our economy to its knees. We opened the door to fraud and abuse in the savings and loan industry, and precipitated a crisis that destroyed 750 financial institutions, cut the number of new homes built in this country by nearly half, and devastated entire communities. We dropped the barriers to fraud through financial statements and in swaps markets, opening the door to the predations of the so-called “smartest guys in the room” – the criminal executives of Enron. We lowered the barriers to heedless risk and conflicts of interest in the financial system, and paved the road to the greatest financial crisis since the 1930s.
Over the last ten years, on a bipartisan basis, the Permanent Subcommittee on Investigations, which I chair, has held hearing after hearing and issued report after report on the Enron crisis, accounting and securities fraud, and the more recent subprime mortgage crisis. Our investigations exposed how some American corporations, their accountants, and banks were willing to dupe investors and, even after their wrongdoing came to light, walk away with huge paychecks, while workers, investors, and the American economy at large paid the price. Enron was the seventh largest U.S. corporation before its crash bankrupted employees, pensions, and investors. It lied about its earnings and did so with the help of its accountants and banks. Goldman Sachs sold securities through public and private offerings that didn’t fully inform investors about what they were buying. The wrongdoing our subcommittee has uncovered over the years offers powerful evidence that investors deserve protection against abuses when they invest their hard-earned dollars in U.S. capital markets.
There is a rising wave of concern among market experts that the House legislation’s effect might be precisely the opposite of its supporters’ stated intent; that instead of boosting the ability of companies to find capital so they can grow, these changes would hurt the market for investing in new companies by making that market too risky. If we remove meaningful transparency and fraud safeguards, SEC Chairman Schapiro wrote just a few days ago, “investors will lose confidence in our markets, and capital formation will ultimately be made more difficult and expensive.”
The question for the champions of ever-lower regulatory barriers is this: Did those rollbacks of regulatory protections help our economy grow? Did they create jobs? Ask a family that was wiped out in the financial crisis. Ask an investor who lost everything to Enron. Ask one of the 8.6 million American workers who lost their jobs in a financial crisis created on Wall Street, one we have yet to fully overcome.
Mr. President, in November of 1999, this body debated another piece of financial legislation, one whose supporters claimed would lead to boundless new economic opportunities for our country. That bill repealed the Glass-Steagall Act, lowered barriers to concentration in the financial industry, and removed the wall that had separated investment banking from commercial banking since the aftermath of the Great Depression.
Senator Byron Dorgan came to this floor and issued a warning. “It may be that I am hopelessly old-fashioned,” he said. “But I just do not think we should ignore the lessons learned in the 1930s. … I also think we will, in 10 years time, look back and say: We should not have done that because we forgot the lessons of the past.”
Ten years after Senator Dorgan’s remarks, almost to the day that he predicted, America’s economy hit rock-bottom, with the lowest mark of employment during the Great Recession.
Old fashioned sounds pretty good these days. I hope to be as old fashioned as Senator Dorgan, who warned us that lowering the barriers that protect us from financial catastrophe can only destroy jobs. I hope the Senate will turn away from the House bill that threatens fraud, abuse and renewed crisis, and embrace reforms that give our innovative companies the chance to compete without endangering investor confidence or the stability of our economy.