0001
 1      UNITED STATES SECURITIES AND EXCHANGE COMMISSION 
 2   
 3   
 4   
 5      ADVISORY COMMITTEE ON SMALL AND EMERGING COMPANIES 
 6                            MEETING 
 7   
 8   
 9   
10                   Friday, February 1, 2013 
11   
12   
13   
14   
15                   Multi-Purpose Room LL-006 
16                      100 F Street, N.E. 
17                       Washington, D.C. 
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22   
23   
24                Diversified Reporting Services, Inc. 
25                            (202) 467-9200 
0002
 1                     A P P E A R A N C E S 
 2   
 3   SEC COMMISSIONERS PRESENT: 
 4        Elisse B. Walter, Chairman 
 5        Daniel Gallagher, Commissioner      
 6   
 7   COMMITTEE MEMBERS PRESENT: 
 8        Stephen M. Graham, Co-Chairman 
 9        M. Christine Jacobs, Co-Chairman 
10        Heath Abshure 
11        David A. Bochnowski 
12        John J. Borer, III 
13        Dan Chace 
14        Milton Chang 
15        Shannon L. Greene 
16        Kara B. Jenny 
17        Kathleen A. McGowan 
18        Karyn Smith 
19        Timothy Walsh 
20        Gregory C. Yadley 
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22   
23   
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25   
0003
 1                 A P P E A R A N C E S (cont.) 
 2   
 3   PARTICIPANTS PRESENT: 
 4        Gerald Laporte 
 5        Lona Nallengara 
 6        David Shillman 
 7        Matt Slavin 
 8        Jennifer Zepralka 
 9   	    Kathleen Hanley
10   
11   
12   
13   
14   
15   
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25   
0004
 1                          A G E N D A 
 2   Opening remarks 
 3        M. Christine Jacobs and Stephen M. Graham, 
 4        Co-Chairs                                          5 
 5        Chairman Elisse B. Walter                          9 
 6        Lona Nallengara                                   15 
 7   
 8   Discussion and Consideration of Recommendations: 
 9        Re: increasing tick sizes                         27 
10        Re:  encouraging creation of new exchange         52 
11        Re:  expansion of Commission rules for scaled 
12             disclosures                                  96 
13   
14   Statement of Committee's Opinion                      118 
15   
16   Discussion of Next Steps and Closing Comments         161 
17   
18   Adjournment                                           163 
19   
20   
21   
22   
23   
24   
25   
0005
 1                       P R O C E E D I N G S 
 2             MR. GRAHAM:  Well, why don't we get started?  I 
 3   think we do have a quorum.  Jennifer, is that true? 
 4             All right.  Again, welcome, everyone.  It's 
 5   Diversified Reporting Services, Inc. 
 6   (202) 467-9200 
 7   good to see the Committee, and welcome to the SEC 
 8   Commissioners and staff. 
 9             We intend to take up a number of 
10   recommendations today, as you know, and if these ideas 
11   are ultimately implemented, we feel that these ideas will 
12   result in a significant positive impact on the ability of 
13   smaller public companies to raise and preserve capital. 
14             These are ideas that have been developed over 
15   the course of a number of meetings of this Committee, and 
16   we have put together draft recommendations that you've 
17   all had an opportunity to read that we believe reflect 
18   the consensus of the Committee, at least at the time of 
19   the prior meetings.  So we will discuss them today and 
20   decide what to do with them today. 
21             The first one, of course, is to consider tick 
22   size, and you know, essentially the idea is to 
23   immediately provide for a meaningful increase in tick 
24   size as a necessary step toward encouraging the 
25   reestablishment of an infrastructure designed to increase 
0006
 1   liquidity for small public companies. 
 2             The second recommendation we'll pick up has to 
 3   do with the establishment of a new exchange, which no one 
 4   around here has the authority to direct or probably the 
 5   ability to do, but nonetheless, we think this is an 
 6   important idea which, if effected would enable small 
 7   companies to go public and stay public at a much reduced 
 8   cost without much in the way of a reduction in investor 
 9   protection.  So the idea is to recommend to the SEC to 
10   encourage the establishment of an exchange limited to 
11   accredited or sophisticated investors where disclosure 
12   requirements for listed companies are much less, and 
13   appropriately limited in light of the absence of 
14   retail investors. 
15             And then two more.  Chris, do you want to note 
16   the next two or -- 
17             MS. JACOBS:  Yeah. 
18             MR. GRAHAM:  -- do you want me to keep going? 
19             MS. JACOBS:  No, I'll just jump in for a minute 
20   on the other two recommendations, and again, I want to 
21   thank the entire team for helping us out as we edited and 
22   created the list of exemptions and recommendations for 
23   small reporting companies. 
24             We all know this represents the engine of 
25   growth.  Both the government and the private sector have 
0007
 1   gone on record as saying so, and that our job as a 
 2   Committee is to promote capital formation.  So we've been 
 3   looking for suggestions on and off over the last several 
 4   meetings. 
 5             The recommendations today that you have around 
 6   reporting for small public companies represent a 
 7   compilation of the discussions, and actually we went back 
 8   and pulled the transcripts of our meetings. 
 9             Full disclosure, I wanted to make sure that we 
10   put in front of you, as we begin to edit and create 
11   recommendations, recommendations that were, indeed, 
12   realities for small public companies and create specific 
13   recommendations with the goal being no harm to investors 
14   and reasonable in the relief that it would provide for 
15   the small reporting companies, and recognizing that where 
16   investor protection has to go or where we consider it, we 
17   had to put them into three categories:  nice to have 
18   information, need to know information, and material 
19   disclosures that reasonable investors would need to make 
20   their decisions in and around the stocks. 
21             I will invite those that, throughout those 
22   discussions, invite those folks that have experience or 
23   to bring up examples as we go through because not 
24   everybody on the Committee may be familiar with the ins 
25   and outs of any one of those recommendations. 
0008
 1             The second recommendation or the last one that 
 2   we will consider today is Conflict Minerals.  The 
 3   Committee may recall that the law is, indeed, a mandate 
 4   by Congress that the Securities and Exchange Commission 
 5   has to now implement.  We've discussed its burden, the 
 6   disclosure of the Conflict Minerals issue, and that it 
 7   sort of sets up yet again another subjective process for 
 8   small public reporting companies because what's probably 
 9   going to happen is we, as small companies, are going to 
10   have to hire outsiders who will then interpret the law. 
11             We've discussed this type of thing before as 
12   pertains to 404.  So the recommendation today also says 
13   that Congress should not use the federal securities laws 
14   and the Commission's disclosure requirements as a vehicle 
15   to further humanitarian, social or foreign policy 
16   objectives. 
17             So, again, we will ask for an exemption for the 
18   small reporting companies in and around that session of 
19   Conflict Minerals. 
20             So thank you. 
21             MR. GRAHAM:  Thank you, Chris. 
22             We're pleased to have with us today Elisse 
23   Walter, who is Chairman of the Securities and Exchange 
24   Commission.  Chairman Walter has been a Commissioner 
25   since 2008 and was named Chairman by President Obama in 
0009
 1   December. 
 2             Prior to her appointment as a Commissioner, 
 3   Chairman Walter had a distinguished career at FINRA and 
 4   the NASD, and before that, she served as the General 
 5   Counsel of the CFTC and positions here at the SEC, 
 6   including Deputy Director of the Division of Corporation 
 7   Finance. 
 8             She's also been a strong supporter of small and 
 9   emerging companies and of our Committee's efforts.  
10   Chairman Walter wanted to say a few words before we 
11   begin.  So I will turn the mic over to her. 
12             CHAIRMAN WALTER:  Good morning and thank you so 
13   much for having me here, and welcome.  I'm glad to see 
14   all of you sitting around this square table where you 
15   actually can look at each other as you talk, which I find 
16   very helpful. 
17             And I would like to begin by thanking all of you for 
18   participating in this Advisory Committee on Small and 
19   Emerging Companies.  Your voice is much needed in our 
20   ongoing public/private dialogue with the nation's small 
21   and emerging business community, and your efforts ensure 
22   that the agency's work to protect investors and 
23   facilitate capital formation reflects a clear 
24   understanding of the issues and concerns that you face in 
25   our marketplace today. 
0010
 1             I want each of you to know that your advice on 
 2   our rules, regulations and policies is deeply 
 3   appreciated.  Even your criticism is deeply appreciated, 
 4   although any time you want to give us an "attaboy" we'd 
 5   love to hear it. 
 6             Let me also welcome today all of our guests, 
 7   those who are here in the room with us today and those 
 8   watching online.  I think one of the discouraging things 
 9   or apparently discouraging things about the advent of 
10   online technology is that you look around a room like 
11   this and think, "Oh, not too many were interested," and 
12   that's simply not the case.  You can no longer judge by 
13   crowds in rooms because there are crowds around computers 
14   all around the globe who are eagerly awaiting, listening 
15   to and watching everything that you have to say. 
16             It's my hope that in addition to listening to 
17   the specific discussions that will take place today those 
18   of you who are here or watching will actively participate 
19   in the larger discussions that will continue after 
20   today's meeting adjourns.  Please send us your advice, 
21   recommendations, comments, and in particular -- and I 
22   plead for this -- any empirical data that you can share. 
23             There is no such thing as too much information 
24   or too much data, particularly when it comes to 
25   regulations and policies that impact the small and 
0011
 1   emerging business community that is so critical to our 
 2   nation's economy.   
 3             As was just mentioned, I'm a former staff 
 4   member very proudly, and I was glad to hear the mention 
 5   of Corp Fin because as I sit with my Corp Fin colleagues, 
 6   I'm very proud of the role that I played in Corp Fin in 
 7   the '80s and '90s, and as a Commissioner and now as 
 8   Chairman, I've been engaged in public service for more 
 9   than two decades.  The SEC is the cornerstone and the 
10   heart of my career because I strongly believe in the 
11   agency's mission and the critical role that we play in 
12   leveling the playing field in our nation's capital market 
13   system. 
14             And as I said in the past, I view the 
15   discussions of balancing the desire for easier capital 
16   formation against the need for investor protection as 
17   presenting what I view as a false choice, one that I'm 
18   sure each of you here today must understand.  Surely any 
19   loss of investor confidence is a cost that no one in 
20   today's marketplace can afford to bear.  So we need to 
21   view them as mutually supportive goals, not as competing 
22   goals that need to be balanced against each other. 
23             So as the SEC carries out its mission, I 
24   believe that we regulators must continually strive to 
25   ensure that our regulations and policies are well 
0012
 1   informed.  The decisions we reach today as regulators 
 2   will affect not only today's businesses and investors, 
 3   but tomorrow's as well.  I continue to believe that 
 4   addressing the needs of the small and emerging business 
 5   community consistent with investor protection is the most 
 6   viable path forward. 
 7             Today's agenda reflects the Committee's 
 8   willingness to engage from every angle and to take the lead 
 9   on some of the more complicated market structure and 
10   disclosure questions we face.  As a career regulator, I 
11   greatly appreciate hearing your unique perspective.  
12   Those of us who have chosen to devote our careers to 
13   regulation do not have the same practical, on the ground 
14   viewpoint that all of you do, and we must hear that so 
15   that we can take it into account in making decisions. 
16             At a time when the markets and the regulations 
17   that govern them are evolving at an unprecedented pace, 
18   the tenacity with which you drill down into the issues 
19   which you examine provides us with an enhanced level of 
20   input from the small and emerging business community, and 
21   with this meeting, the Committee has reached a transition 
22   point.   
23             When it was first created, my predecessor, Mary 
24   Schapiro, asked that you examine a series of issues 
25   relating to small business capital formation.  You should 
0013
 1   be proud that you've completed that initial examination 
 2   and more and your work has significantly informed the 
 3   discussion of those issues, many of which found their way 
 4   into the JOBS Act. 
 5             As the Commission tackles the rulemaking 
 6   required under the JOBS Act, it is my hope that once we 
 7   issue rule proposals, particularly on topics such as 
 8   crowdfunding and what we call Reg A+, you will 
 9   provide the Commission with your perspective and 
10   thoughtful analyses of the issues raised by 
11   implementation of the provisions we've proposed. 
12             We at the Commission seek to enhance both 
13   investor protection and capital formation.  Achieving 
14   both goals is a task that we have grappled with for 
15   decades.  Thoughtful input by all market participants, 
16   including the small and emerging business community, 
17   certainly goes a long way towards helping us carry out 
18   this delicate task, and so we look to you to bring the 
19   outside world inside, bridge the gap between regulators 
20   and entrepreneurs, and help us protect the integrity of 
21   the capital markets as they continue to evolve. 
22             Thank you.  I look forward to hearing the 
23   results of today's discussions, and I want to welcome my 
24   colleague, Dan Gallagher.  I don't know, Dan, if you'd 
25   like to say anything, but we'd welcome any remarks that 
0014
 1   you have. 
 2             COMMISSIONER GALLAGHER:  It will shock you and 
 3   everyone else who knows me, too, to say I have nothing to 
 4   say. 
 5             (Laughter.) 
 6             CHAIRMAN WALTER:  I would please like to 
 7   mention that that should be recorded for a -- 
 8             (Laughter.) 
 9             CHAIRMAN WALTER:  I have never heard those 
10   words before, but of course, the same could be said of 
11   me.   
12             COMMISSIONER GALLAGHER:  But I'm happy to be 
13   here, and you guys are doing great work, terrific work.  
14   So keep it up, please. 
15             MR. GRAHAM:  Okay.  Well, thank you both. 
16             A couple of housekeeping matters.  Just to kind 
17   of lay out the expectations, we plan to walk through, of 
18   course, each of the proposed recommendations.  After an 
19   opportunity for discussion, we will finalize those 
20   recommendations and have a vote.  Then we will, to the 
21   extent that the recommendations are passed, we will 
22   prepare final drafts to circulate to the Committee just 
23   to confirm that we got it right, and then we'll pass them 
24   on to the SEC. 
25             We plan to break for lunch at noon.  Lunch is 
0015
 1   on your own.  We'll reconvene and wrap up and talk about 
 2   next steps. 
 3             But before we turn to today's recommendations, 
 4   I thought it might be a good idea to turn to yesterday's 
 5   recommendations, and now we'll hear from Lona Nallengara, 
 6   who since the last time we were together has been named 
 7   Acting Director of the Division of Corporation Finance, 
 8   and Lona is going to talk for a few moments about the 
 9   recommendations the Committee has made to the Commission 
10   in the past and give us an update on where things stand 
11   with respect to those recommendations, and of great 
12   interest to, I'm sure, everyone in the room and closely 
13   related to that, is an update on the Commission's 
14   implementation of the JOBS Act. 
15             So, Lona. 
16             MR. NALLENGARA:  Great.  Thank you, Stephen.  
17             Thank you, everyone, for coming today and all 
18   your efforts you make for this Committee both at these 
19   meetings and in between the meetings. 
20             I think you recognize most of the staff faces 
21   here, Gerry and Jennifer, and I think you all know 
22   Kathleen.  She's an old friend of this Committee, having 
23   attended many meetings.  She's our Deputy Chief Economist 
24   and Deputy Director of our Risk, Strategy and Financial 
25   Innovation Division.  She will be critical as we work 
0016
 1   through -- as you all work through the decimalization/ 
 2   tick size recommendation.  So she is here as well.  We'll 
 3   actually bring others up as we work through the other 
 4   recommendations to help provide some technical advice. 
 5             All of our views today that we express are our 
 6   own views and don't necessarily represent the views of 
 7   the Commission.  So remember that.  I invariably will say 
 8   something I'm not supposed to say.  So particularly with 
 9   two of my bosses here, I want to make sure that you don't 
10   attribute it to them. 
11             COMMISSIONER WALTER:  We hereby give you 
12   amnesty, but just for this meeting. 
13             MR. NALLENGARA:  Thank you. 
14             (Laughter.) 
15             COMMISSIONER GALLAGHER:  Speak for yourself. 
16             (Laughter.) 
17             MR. NALLENGARA:  Chris and Steve asked us, as 
18   Steve mentioned, to run through some of the 
19   recommendations that you have made at prior meetings and 
20   then line them up with the JOBS Act because, as the 
21   Chairman indicated, your first charge that you took up 
22   was looking at recommendations related to many of the 
23   capital formation initiatives that were outlined, or ended 
24   up being outlined, in the JOBS Act. 
25             So let's start.  I thought of orienting this 
0017
 1   discussion more to the JOBS Act titles rather than your 
 2   recommendations, and I could weave in those 
 3   recommendations with the appropriate title. 
 4             So Title I of the JOBS Act, as all of you 
 5   remember, was the IPO on-ramp provisions.  You had all 
 6   talked about the IPO Task Force Report.  You had looked 
 7   at those recommendations in that report, and I think 
 8   there was some general consensus of support for those 
 9   recommendations in the report, but I don't think you 
10   ended up making a recommendation with respect to that. 
11             Title I of the JOBS Act is in place now, 
12   operative today.  Companies are taking advantage of the 
13   benefits and relaxations in some of the requirements, 
14   taking advantage of some of the communication relaxations 
15   that are available as well in Title I.  So there was no 
16   rulemaking required to make those provisions operative.  
17   We provided some interpretive guidance, and I think it's 
18   probably too early to tell what impact that may have had 
19   or that will have in terms of IPOs, but I think everyone 
20   is excited to take advantage of those provisions. 
21             Title II of the JOBS Act was the general solicitation 
22   provision.  You had made a recommendation that lined up 
23   very closely with the Title II provision in the JOBS Act. 
24    The recommendation you made was to lift the restriction on 
25   general solicitation in 506 offerings, but require that 
0018
 1   any purchaser be an accredited investor.  The JOBS Act 
 2   provision was effectively the same thing, with an 
 3   additional provision that required any issuer to verify 
 4   that the ultimate purchaser was, in fact, an accredited 
 5   investor. 
 6             At the end of August of last year, the 
 7   Commission proposed a rule that would implement the Title 
 8   II provision and the comment period for that was opened 
 9   and closed at the beginning of October.  Currently the 
10   staff and the Commission are looking through those 
11   comments to try and put together a recommendation— or the 
12   staff is trying to put together a recommendation for the 
13   Commission to consider in terms of an adopted rule. 
14             Comments on the rule that are available on our 
15   website ranged from a discussion of the mechanism by 
16   which— as the Commission outlined in a proposal— issuers 
17   verify accredited investor status, and there were a 
18   number of commentators who indicated that any rule with 
19   respect to general solicitation should include a 
20   consideration of other issues, other issues related to 
21   how you define an accredited investor, what kind of 
22   materials or what kind of communications should be 
23   permitted as general solicitation, whether the notice 
24   requirement informed— whether there should be changes 
25   to that.  Should that be filed before an offering?  
0019
 1   Should that be made a condition to use the exemption?  
 2   Should other information be included? 
 3             And there were a number of other additional 
 4   issues that some commentators felt were outside the scope 
 5   of this rulemaking and other commentators felt were 
 6   necessarily part of this rulemaking.   
 7             So that's Title II and your recommendation was 
 8   reflected in the JOBS Act, and now we are working towards 
 9   implementation of that with the final rule. 
10             The third title is the crowdfunding title.  
11   That is a provision to allow small issue offerings to any 
12   purchaser, with caps on the amounts that can be raised by a 
13   company and caps on the amount that an individual can 
14   actually purchase.  This is formatted as an online type 
15   of offering to allow smaller companies to raise small 
16   amounts of capital from a number of different investors 
17   with no sophistication or accredited investor status required 
18   for those investors. 
19             This Committee considered the crowdfunding 
20   concept, and I think this Committee declined to make a 
21   recommendation with respect to crowdfunding. 
22             Title IV is what the Chairman referred to as Regulation 
23   “A+”.  Title IV is a small issue exemption.  It's an 
24   exemption that provides for an exemption from 
25   registration for offerings up to $50 million.  The JOBS 
0020
 1   Act provision provides a general outline of what the 
 2   offering mechanics, the private placement exemption 
 3   qualification would provide.  It is thought to be modeled 
 4   on the existing Regulation A exemption.  Regulation A is 
 5   an exemption from registration for offerings up to $5 
 6   million.  As this Committee has discussed, that exemption 
 7   has not been used, has really not been used at all in the 
 8   last number of years. 
 9             Many of the criticisms surrounding the 
10   exemption relate to the small dollar amount and the cost 
11   associated with that exemption, with taking advantage of 
12   that exemption for capital formation, the idea being if 
13   you raise the dollar amount, it makes offerings under that 
14   exemption more palatable. 
15             This Committee recommended a Regulation A type 
16   exemption very similar to what was reflected in the JOBS 
17   Act, but this Committee expressed some skepticism of 
18   whether that exemption even at the $50 million level 
19   would be something that would be a true capital formation 
20   technique and recommended that Commission resources 
21   should not be directed away from focusing on other 
22   capital formation initiatives to put in place a $50 
23   million small issue exemption. 
24             The last two titles that I wanted to talk about 
25   that were reflected in recommendations relate to 12(g) 
0021
 1   thresholds for registration.  So companies that have 
 2   record holders that exceed— prior to the JOBS Act— 500 
 3   holders would be required to effectively become a public 
 4   company.  The JOBS Act increased that threshold to 2,000 
 5   holders for banks and bank holding companies and to 2000 
 6   holders or up to 500 non-accredited investors for all 
 7   other companies, and your recommendations lined up pretty 
 8   closely with those JOBS Act provisions.  You had 
 9   different numbers, but relative consistency with the 
10   JOBS Act provisions. 
11             Those provisions are effective today.  There is 
12   no rulemaking required.  So if you go back and look at 
13   the JOBS Act, many of your recommendations were reflected 
14   in the JOBS Act.  Rulemaking is still required on general 
15   solicitation.  Rulemaking is still required on crowd
16   funding, and rulemaking is still required on the 
17   Regulation A+ exemption. 
18             And as the Chairman indicated, although you may 
19   have not expressed a lot of interest or a lot of 
20   excitement around the crowdfunding regulation or the Reg A+ 
21   exemption, as proposals for those rules come, this 
22   Committee could consider looking at the questions that 
23   the Commission will ask in those recommendations— in 
24   those proposals— and consider whether this Committee 
25   should comment on those rule proposals, consider some of 
0022
 1   the questions we've asked as to whether considerations 
 2   we've taken in structuring those exemptions are ones that 
 3   will foster capital formation or are appropriately 
 4   considering investor protection. 
 5             So I think this Committee should feel that 
 6   they've accomplished quite a lot in their first three 
 7   recommendations.  Those recommendations are reflected in 
 8   the JOBS Act, and those reflect also active rulemakings 
 9   of the Commission, and if you look at the attention from 
10   small companies, they are very excited about general 
11   solicitation.  They're also very excited about crowd 
12  funding, and many are looking towards a new offering 
13   exemption under Reg A+ that could provide a new form 
14   of capital formation for small companies. 
15             Thanks, Steve. 
16             MR. GRAHAM:  Okay.  Thank you, Lona. 
17             So let’s -- 
18             MR. BOCHNOWSKI:  Steve, may I ask? 
19             MR. GRAHAM:  Yes. 
20             MR. BOCHNOWSKI:  I'm sorry.  Dave Bochnowski 
21   here. 
22             Might I ask a question of Lona? 
23             MR. GRAHAM:  Oh, please. 
24             MR. BOCHNOWSKI:  And thank you for that great 
25   report, Lona. 
0023
 1             Relative to the 12(g) thresholds registration, 
 2   I think as bankers are aware -- and I know you are -- 
 3   there was a drafting error in the JOBS Act in that 
 4   savings and loan holding companies were not included by 
 5   name even though the sponsors of the legislation have now 
 6   indicated that it was not their legislative intent to 
 7   exclude savings and loan holding companies. 
 8             I noticed that the Washington Post yesterday 
 9   had a rather extensive article that suggested that over 
10   100 banks have taken advantage of this Committee's 
11   position as well as the legislation and have exited and 
12   are no longer registered. 
13             I wonder what the outlook is, since I believe 
14   that through, I'm told, through rulemaking, the SEC 
15   could, in fact, bring savings and loan holding companies 
16   in, and they could then take advantage of the legislation 
17   as well as this Committee's recommendation. 
18             MR. NALLENGARA:  Thanks for the question, 
19   David. 
20             So on the threshold for registration provisions 
21   in the JOBS Act, there is rulemaking necessary.  The 
22   changes to the thresholds are operative now, but there is 
23   rulemaking required.  There is some rule clean-up we 
24   need to do to make sure that statutory changes line up 
25   with the rule provisions, but you're right.  Savings and 
0024
 1   loans, thrifts have asked, "Why weren't we included as 
 2   part of the JOBS Act provision?"  And we've received 
 3   comment letters to that effect. 
 4             That is something that the staff is considering 
 5   and the Commissioners are considering whether the savings 
 6   and loans, whether the thrifts should be included in 
 7   there.  Part of it is making sure that the appropriate 
 8   protections that were in place that were part of the 
 9   consideration for bank and bank holding companies for 
10   threshold changes are part of the consideration for 
11   savings and loans as well. 
12             So that is something that we are looking at, 
13   and as part of rulemaking related to those two titles 
14   will be considered and will be discussed.  So I think the 
15   short answer is stay tuned.  Hopefully as we work towards 
16   that rulemaking, that is actively being considered. 
17             MR. GRAHAM:  Thank you. 
18             I guess I have a 
19   question, Lona.  Any sense for when we'll actually see 
20   some proposed rules? 
21             MR. NALLENGARA:  That's a great question.  It's 
22   a question I get asked a lot.  I was -- 
23             COMMISSIONER GALLAGHER:  We're listening, Lona. 
24             MR. NALLENGARA:  Yes.  I was hoping that 
25   someone else would get to answer that question.  As you 
0025
 1   know, and we've said this a lot, we have lots to do.  
 2   Congress has given us a big plate to work through.  
 3   There's lots of Dodd-Frank rulemaking left to do, and we 
 4   also have JOBS Act rulemaking. 
 5             I think the Chairman has said this, and 
 6   Commissioner Gallagher, I think, agrees with this, but he 
 7   will most certainly tell me if he doesn't.  I think the 
 8   goal is to work through the congressionally mandated 
 9   rulemakings.  There are Dodd-Frank rulemakings and JOBS 
10   Act rulemakings.  There are lots of other things that the 
11   staff would like the Commission to consider working on, 
12   and I’m sure there's lots of things that the 
13   Commissioners would like to work on, but I think as a 
14   near term priority there are a number of Dodd-Frank and 
15   JOBS Act rulemakings that need to be worked through.  
16             That's what we're working on, and that's what I 
17   think will be the first things coming, but putting a time 
18   frame on that is challenging because there is lots to do, 
19   and there's a lot of other considerations. 
20             MR. GRAHAM:  Okay. 
21             MR. NALLENGARA:  Commissioner, did I -- 
22             COMMISSIONER GALLAGHER:  No, I think that's 
23   fair.  You guys have a lot to work through.  I do think 
24   that within mandates, you know, the Commission should be 
25   using its discretion to pick and choose what's most 
0026
 1   important now, and we all have different views of what 
 2   that could be. 
 3             I mean, for me obviously I think we're woefully 
 4   behind on JOBS Act implementation.  We haven't done, 
 5   quite frankly, anything yet, and we're going to be at the 
 6   one-year anniversary here in a couple months.  So I think 
 7   we've got to get general solicitation nailed down, you 
 8   know, Reg A.  I got an earful out in San Diego from some 
 9   VC folks on Reg A, which isn't something we talk a lot 
10   about, right?  We talk more about crowdfunding, but they 
11   said, you know, "Don't worry about that.  Let's get onto 
12   the Reg A." 
13             So there's a lot to do there.  The mandates, I 
14   think, are pretty clear.  The legislation was hugely 
15   bipartisan in responding to a current crisis as opposed 
16   to one that, you know, may or may not have run its course 
17   that started five or six years ago. 
18             So I think personally I'd like to get the JOBS 
19   Act stuff done as soon as possible, recognizing that 
20   there are other things that we're behind on within Dodd-
21   Frank by way of mandates and where we have authority but 
22   not a mandate or a mandate but not a deadline, and I do 
23   think that we have to use our discretion and push those 
24   things to the back of the line. 
25             MR. GRAHAM:  Okay.  Thank you. 
0027
 1             Any other questions from the Committee? 
 2             (No response.) 
 3             MR. GRAHAM:  Okay.  Let's turn to the first 
 4   proposed recommendation, which is a recommendation with 
 5   regard to increasing tick sizes for securities in smaller 
 6   companies traded on U.S. securities markets. 
 7             There was a question that for decades a small 
 8   IPO has been an engine for job creation and innovation in 
 9   this country.  Also, another question that over the last 
10   decade we have seen a steep decline in small IPOs, but 
11   there's much debate as to the reasons why.  You hear SOX 
12   mentioned.  You hear global analysts' research settlement 
13   mentioned, high frequency trading, and of course, 
14   decimalization. 
15             I don't think there's any one thing you can 
16   point to that says we've seen this decline and that 
17   there's essentially a deterioration of the infrastructure 
18   that supports small companies, nor do I think there's a 
19   magic bullet, but I am of the view that there no longer 
20   exists a healthy ecosystem for smaller cap companies, and 
21   that much can be done to correct the situation by 
22   increasing tick size and essentially restoring, I guess, 
23   the reasonable economics necessary to ensure the support 
24   of investment banks. 
25             As you all know, Section 106(b) of the JOBS Act 
0028
 1   directed the SEC to conduct a study examining the impact 
 2   of the transition to trading in- quoted securities on 
 3   U.S. securities exchanges in one penny increments on the 
 4   number of IPOs; also the impact of decimalization and 
 5   liquidity, and whether there's sufficient economic 
 6   incentive to support trading operations in these 
 7   securities in one penny increments. 
 8             In July, the SEC delivered this mandated report 
 9   to Congress.  As you know, the staff recommended that the 
10   Commission not proceed with specific rulemaking to 
11   increase tick sizes at this time, but recommended that 
12   the Commission should consider additional steps that may 
13   be needed to determine whether such rulemaking should be 
14   undertaken in the future. 
15             We considered the issue of tick sizes at public 
16   meetings on June 8 and again on September 7, and it 
17   seemed to be the consensus that providing economic 
18   incentives to market participants that would encourage 
19   the provisions of trading support to equity securities 
20   and small and mid-cap companies, which includes market 
21   making and providing research analysts, could serve to 
22   increase the liquidity for the equity securities in small 
23   and mid-cap companies, which would enhance the 
24   attractiveness of the IPO market for these companies and 
25   the ability of small and mid-cap companies to raise 
0029
 1   capital.   
 2             We believe that a change in the method of 
 3   determining tick sizes for equity securities or smaller 
 4   exchange listed companies is the type of economic 
 5   incentive market participants may require to provide 
 6   trading support for these securities, and it is necessary 
 7   to increase the liquidity and facilitate IPOs and capital 
 8   formation.   
 9             And so the proposed recommendation is that the 
10   Commission adopt rules to increase tick size for smaller 
11   exchange listed companies in the U.S. that will allow 
12   such companies to choose their own tick size within a 
13   range designated by the Commission.  The way the 
14   recommendation is drafted, it says that we think it would 
15   be a good idea for the Commission to come up with a set 
16   of rules to facilitate this.  It doesn't talk in terms of 
17   doing a pilot study, but I think that's all kind of in 
18   the definition.  I think when you think about it, it does 
19   make sense to have a pilot study just to determine 
20   whether or not this will have the desired effect. 
21             My initial concern was that in order to make 
22   this work you've got to set up a system that's going to 
23   actually encourage people to come back into the markets 
24   and actually make investments required to give the 
25   support that we're looking for, for these smaller 
0030
 1   companies, and if you put something in place that's only 
 2   going to last a little while, that doesn't give time for 
 3   people to make an investment.  It doesn't give time for 
 4   people to get a return on their investment, and it 
 5   doesn't give time for there to really be enough 
 6   experience, if you will, to determine whether or not 
 7   these kinds of changes have the desired effect. 
 8             So I think the way I would modify the draft 
 9   recommendation for you is that we talk in terms of a 
10   pilot study, but that that pilot study should be for some 
11   period of years, and you know, we can talk to people that 
12   are more experienced and smarter than certainly I am to 
13   determine, you know, what that period should be, but it 
14   should be long enough, it should be of sufficient 
15   duration so that we actually give it a chance to 
16   determine whether or not this is something that will help 
17   to bring back this sector. 
18             And so with that, I will open it up to 
19   discussion.  Any comments?  Greg 
20             MR. YADLEY:   Greg Yadley. 
21             I support this recommendation.  We've talked 
22   about the factors relating to why there are fewer IPOs 
23   generally and primarily with respect to smaller 
24   companies, and all the information is very interesting, 
25   but the playing field seems to be to quantify what the 
0031
 1   factors are, and I haven't read much that says this is 
 2   not a contributing factor, and it seems to me that this 
 3   is an easy thing to implement, particularly when some of 
 4   the comments, comment letters received are from market 
 5   participants who are now publicly saying that this is 
 6   important to them, and they think this would help. 
 7             I don't see very much downside, and I think 
 8   that it's appropriate to defer to the Commission's 
 9   judgment as to how best to do this. 
10             It's also important, since the Commission very 
11   timely responded to Congress and did the study for us not 
12   to let grass grow and say it shouldn't be studied.  It 
13   seems like a very meaningful step forward, and it ties 
14   into the later recommendation that we're going to 
15   consider relating to a special marketplace. 
16             MR. GRAHAM:  Thanks, Greg. 
17             MR. ABSHURE:  I have a few questions, and I 
18   have to apologize.  I wasn't at the meeting in San 
19   Francisco.  So these questions might seem somewhat 
20   ignorant, but ignorant questions are what I'm really good 
21   at. 
22             And I guess I did as much research as I could 
23   after I saw this proposal in talking with a number of 
24   people to determine what the issue is and the 
25   relationship of tick size and why this is a concern.  I 
0032
 1   talked with a number of the Commissioners.  I've talked 
 2   to people within industry.  I've talked with people at 
 3   the Hill, and it seems the uniform answer once you drill 
 4   down a little bit is to facilitate analysts' coverage of 
 5   these companies, to incentivize analysts and researchers 
 6   to provide coverage of these small companies. 
 7             So I guess my one question for the group 
 8   because I missed San Francisco, again, and I apologize:  
 9   is that really the case?  Is that what we're looking to 
10   accomplish here, which is to provide more analyst 
11   coverage of these small cap companies? 
12             And once we answer that, I guess the other 
13   question I have is by default is a tick size, certainly a 
14   discretionary tick size within parameters that you allow 
15   a company to choose on its own; is it a more imperfect 
16   measure than the real value of the security that the 
17   decimalization will provide? 
18             And so if somebody could help me with those 
19   questions, I'd really appreciate it. 
20             MR. GRAHAM:  Well -- 
21             MS. JACOBS:  Do you want me to? 
22             MR. GRAHAM:  Yeah, sure, go ahead. 
23             MS. JACOBS:  To recap the discussion in and 
24   around tick size, I don't think is specific to analyst 
25   coverage, but those of us that are associated with the 
0033
 1   public companies, it was liquidity.  Analyst coverage, 
 2   we're hoping that's a fallout, but it is the liquidity of 
 3   the small and micro cap stocks. 
 4             MR. GRAHAM:  Yeah, I think that's right, and 
 5   you know, again, I see it as those two things.  You know, 
 6   to provide -- to give the economics to investment banks, 
 7   to encourage them to hire and retain analysts to provide 
 8   coverage is a big part of this, and I think all these 
 9   things are interrelated, and you know, that would help to 
10   lead to increase liquidity because there's more trading 
11   in the stock since there's more of an economic incentive 
12   to trade in the stock, which of course would lead to 
13   increased capital formation. 
14             It's not my business, but those who are in the 
15   business believe this to be so, and I support at least 
16   the notion to implement a pilot study so that we can 
17   confirm.  We can stop studying and studying and studying. 
18    We can stop debating and debating and debating and, you 
19   know, begin to take steps that may have a positive 
20   effect. 
21             And we're not looking at doing it across the 
22   board.  We're not looking at kind of a one size fits all 
23   situation because I think that's one of the 
24   issues that we have with a lot of regulations, is that 
25   we kind of take the one size fits all 
0034
 1   approach, which just intuitively to me doesn't make 
 2   sense.  If you've got issuers that are 
 3   dramatically different in terms of market cap, in terms 
 4   of who's following them, in terms of the risk 
 5   to the system if something goes wrong with those 
 6   companies, to treat every one of those the same 
 7    just instinctively to me that doesn't make a whole 
 8   lot of sense. 
 9             And so I think that as a result, 
10   coming up with a pilot study that talks about, well, it 
11   increases the tick size with respect to just these 
12   smaller cap companies is something that is well worth 
13   doing. 
14             MR. ABSHURE:  So the idea is that, 
15   in fact, increasing that spread, you know, as a focus 
16   toward liquidity, it makes it more attractive for the 
17   investor, but also provides a means for investment banks, 
18   analysts, whoever else, to follow that.  There's more 
19   room there.  There's more opportunity there for that. 
20             MR. GRAHAM:  That's the theory. 
21             MR. BORER:  Stephen, this is John Borer. 
22             From the perspective of the investment bank, 
23   because I've been with boutique investment banks for 
24   years and years, I think that, Heath, to your point, I 
25   think that the analyst piece is one element of it and 
0035
 1   very important, but even if the tick sizes are increased, 
 2   many of these firms will still have a very tough time 
 3   getting analysts to pick them up. 
 4             But I think it's one way to improve the 
 5   ecosystem for the trading and small firm side of the 
 6   business.  When I say "trading," on one hand you have the 
 7   big wholesalers like the Knight Securities, the 
 8   Susquehannas, et cetera, which trade a lot of the volume 
 9   in the exchanges every day, including in the smaller 
10   companies, and on the other hand, you have the boutiques, 
11   which if anyone is going to follow the smaller companies, 
12   it will be them.  It will not be the wire houses, the big 
13   banks, et cetera, because that's just not part of what 
14   they do. 
15             It may also increase the non-brokerage research 
16   community that get paid either as, you know, registered 
17   investment advisors or as broker-dealers but without 
18   trading operations to provide that information, access to 
19   management, et cetera, because they can get paid by the 
20   buy-side community through commission checks going to 
21   whoever they get paid from. 
22             My view on this is that there's very little or 
23   no recognized, at least in my perspective, downside to 
24   trying this out.  To Stephen's point, I agree.  A pilot 
25                Diversified Reporting Services, Inc. 
0036
 1                           (202) 467-9200 
 2   program that is going to be a limited period, no one is 
 3   going to make the investment.  You can't afford to. 
 4             I go back to Global Settlement where there was 
 5   a very large piece of that that was allocated to a multi-
 6   year requirement for large wire houses to provide 
 7   secondary research to their clients when they purchase 
 8   stocks, and there were a number of boutiques came up.  
 9   They were providing those research services, and I think 
10   almost all of them now have either dissipated, winnowed, 
11   or gone away. 
12             So my view on this is I don't know what a test 
13   period means.  From the way I read our suggestion is we 
14   should try this and then adjust it as we get a little bit 
15   further on.  I think the devil, as has always been 
16   stated, is in the details.  What size companies should 
17   they supply to?  What should the range of tick sizes be?  
18   How should companies be able to decide what those are?  
19   And then how often can those be adjusted by those 
20   companies?  Are they freezing them in place for a while 
21   or can they say, "Well, it's five cents today.  We're not 
22   doing it.  It should be ten cents in 30 days"?   
23             There has got to be some ratchet, I assume, 
24   around how this gets done or else it would be very 
25   confusing.  I'd be interested to know because I haven't 
0037
 1   seen it and my fault if I haven't seen the notices, what 
 2   the input has been from the very high volume wholesale 
 3   trading firms on the street are or some of the electronic 
 4   markets, including the OTC markets because those entities 
 5   likely will not provide any research and those entities 
 6   are not providing the corporate finance and other 
 7   advisory services which the boutiques do, but I think 
 8   they will largely drive the liquidity, meaning the 
 9   allocation of capital to support the trades with a wider 
10   spread if these changes are made. 
11             And I'm not quite sure because I can't speak 
12   from that direction on how those constituents in the market 
13   would react to this if anybody knows. 
14             MR. NALLENGARA:  John, that's a great question, 
15   and as part of the report that we issued over the summer, 
16   one of the recommendations was to get smart people 
17   together and talk about tick size generally, you know, 
18   sort of impact on the market, but also what changes or 
19   what the impact has been on smaller companies, and then 
20   discuss what you could do with that information, how if 
21   you were going to do something, a pilot, for example, how 
22   that would be structured, how you would identify what 
23   companies would be involved and how you would -- you 
24   know, the length of time, all of those questions. 
25             So next week we have a roundtable, which would 
0038
 1   include some of the larger players that you've talked 
 2   about, smaller ones as well, academics who have studied 
 3   this and they will -- they will talk about it as a 
 4   theoretical concept, but also practically how you could 
 5   implement, if you were going to implement something, how 
 6   you would implement some test or pilot program. 
 7             So we don't -- I mean, we've heard anecdotally 
 8   what their thoughts are, but getting their views on the 
 9   concept but also how something like that would be 
10   implemented, and that would include OTC markets as well. 
11    We are sort of looking forward to the discussion and the 
12   input from that group as well as we consider this. 
13             MR. BORER:  One other point, Stephen, is when 
14   we talk about a test period, and I hate to use "pilot" 
15   because that truly implies to me that there's a sunset to 
16   it, what kind of a time period, if any, would the 
17   Committee recommend for something like that?  I think if 
18   you have any time period at all, people may be watching 
19   at the very beginning, see other people doing it, and 
20   then some of that time has run, and the secondary adopters 
21   may not come in, or should this just be open ended and 
22   obviously subject in the future to further, you know, 
23   rulemaking or revisions in how it's being implemented or 
24   used. 
25             MR. GRAHAM:  Well, you know, first of all I'm 
0039
 1   with you in terms of creating enough certainty to get 
 2   people to participate, and whether you call it a pilot 
 3   program or something else, I want to get to the point 
 4   where we provide enough certainty or enough certainty is 
 5   provided so that the participants will get in and make 
 6   the investment and give this a try. 
 7             But at the same time, you know, couch it in 
 8   terms that will make the terms necessary to enable the 
 9   SEC to act as quickly as possible.  So that's kind of, 
10   you know, whatever kind of terminology you need to come 
11   up with to kind of satisfy those objectives, that's kind 
12   of what I'm thinking. 
13             In terms of duration, I think that 
14   the outcome of the roundtable that Lona mentioned, I 
15   think that will help kind of inform us and the 
16   staff as to what might work, but I think you're looking 
17   at a period of time, let's say, two or three years before 
18   you could even hope to see an effect.  If we change this on 
19   Monday, we're not going to see a dramatic change in the 
20   marketplace on Friday.  So this is nothing that's going 
21   to happen overnight, and so I think that you've got to 
22   give it a few years to figure out whether or 
23   not we really are moving the needle, and then beyond that 
24   you've got to give it a few years to see what the effect 
25   is once things really do have an opportunity to kick in. 
0040
 1             And so, what those periods should be, 
 2   I don't know.  Maybe it's five to seven years.  I don't 
 3   know, but I think the important thing is to 
 4   provide the certainty, come up with a framework that 
 5   really gives it an opportunity to work if it's going to 
 6   work, and then part of that is making sure that we have a 
 7   system in place where people feel comfortable making 
 8   investment without worrying about having kind of the rug 
 9   pulled back out from under them once things are up and 
10   running and they've staffed up and began to shore up this 
11   ecosystem that they keep talking about. 
12             MS. JACOBS:  I also think that I'm hoping out 
13   of that meeting that some attention is paid to not just 
14   the action of tick size, but what is the deliverable?  
15   And hopefully the deliverable which will be -- I mean, I 
16   would assume metrics that do demonstrate that we have 
17   changed the average daily trading volume of the small and 
18   micro cap stocks because that's the goal; that once the 
19   deliverables are identified, that then will support how 
20   long the program is.  How long do you need to study what 
21   happens to the liquidity?  Because that's hopefully one 
22   of the deliverables. 
23             Do you see what I mean?  So once we know what 
24   metrics are going to be used to decide how this pilot 
25   program works, that then will help decide how long do we 
0041
 1   have to give it.  Because I went back to the average 
 2   daily trading volume of our shares to the calendar of 
 3   those laws, NMS and ATS, and what happened to our stock, 
 4   and I do not have the time or the resources to look at 
 5   other small and micro cap stocks over that time period of 
 6   '97 to '99 all the way out to 2011; that drop in the 
 7   average daily trading volume was somewhat precipitous, 
 8   but it reached a steady state, and I think that's going 
 9   to be important for us to know, not only when do we see 
10   an effect of increased liquidity, but did we go out some 
11   period of time and see a nadir, i.e., a steady state? 
12             So I'm hoping the deliverables will lead us to 
13   how long should this program be in effect. 
14             MR. BORER:  I believe based on the inputs that 
15   Lona was mentioning, having a bunch of industry 
16   participants in next week and those types of things will 
17   drive or should drive a lot of how this is adopted, but I 
18   would suggest perhaps for consideration that instead of 
19   having on the front end in whatever regulation or 
20   rulemaking is put in place a sunset that this is either 
21   like as with the changes to the shelf filing rules and 
22   doing away with the S-B rules a few years ago that the 
23   Commission come up with something and we recommend 
24   something that is adopted; that it's not people staring 
25   at a withdrawal date, which everybody else can know; and 
0042
 1   then based upon the volume, the liquidity, the market 
 2   participation and, perhaps more importantly, given the 
 3   attrition on Wall Street over the last ten years of 
 4   firms, new market entrants.  You know, go back to when 
 5   the electronic market started coming into place, the 
 6   Archipelagos and the E*Trades, and those types of people 
 7   to drive liquidity a number of years ago.  Those people 
 8   came into the market because opportunities were open with 
 9   respect to how the markets were operating, and so things 
10   were moving off of the New York Stock Exchange and the 
11   American and NASDAQ into these alternative venues, and I 
12   think over time that's been very healthy, and I think if 
13   we circumscribe at all a limit on how long this lasts as 
14   it's set up, we're going to keep people from setting into 
15   it, venture capitalists starting new companies, et 
16   cetera, to do this or to start new brokerage or trading 
17   venues and those types of things as opposed to just as we 
18   go along.   
19             If Rule 419 was changed a number of years ago, 
20   we see something needs to be fixed, let's go deal with 
21   that as opposed to let's try a rule change and then, you 
22   know, five years from now it will stop and then we'll 
23   look at it again.  I just think that would be a better 
24   way to encourage market participation on Wall Street 
25   firms who right now, quite honestly, are very skittish 
0043
 1   and afraid to try new things. 
 2             The big guys, they can put somebody on it and, 
 3    reprogram their computers and see if tick sizes 
 4   make a difference for them, but for the folks down in the 
 5   weeds, which is kind of where we operate, I think that 
 6   that's going to be pretty important. 
 7             MR. GRAHAM:  I agree with 100 percent of 
 8   that.  That's what my gut tells me, too. 
 9             Dan. 
10             MR. CHACE:  So just on this recommendation 
11   generally, I was a bit skeptical of it when I read it and 
12   when we discussed it last time because the only certainty 
13   of it is that transaction costs will increase for 
14   investors, and then it relies on a series of assumptions 
15   beyond that, that liquidity will increase and that that 
16   will drive research coverage and that research coverage 
17   will generate more institutional or retail interest in 
18   these stocks and interest in IPOs. 
19             I've kind of become persuaded in the provision 
20   that's most important, I think, in that is that the 
21   company gets to choose the tick size because there are 
22   micro cap and small cap public companies that don't 
23   really care about the liquidity of their stock and don't 
24   really care about institutional ownership or retail 
25   ownership.  I think it's important to give those 
0044
 1   companies that leeway to not pass that transaction cost 
 2   onto their investors. 
 3             But there's also companies that do care.  So I 
 4   think that that aspect of the recommendation I think is 
 5   pretty critical rather than a one size fits all, and as 
 6   well I would just agree with the comments.  Since I am 
 7   skeptical that the impact will be there, anything that 
 8   makes that less likely to happen, such as a sunset 
 9   provision or a timing that makes those investments 
10   unlikely doesn't make sense.  So I think it's worth 
11   considering making it just a recommendation to allow this 
12   rather than a temporary thing. 
13             MR. GRAHAM:  Thanks, Dan. 
14             Tim. 
15             MR. WALSH:  Good morning.  Just to follow up on 
16   Dan, too, I think he summed it up at least on the buy 
17   side how I feel exactly, too, skeptical, but I think it's 
18   worth a try.  As he mentioned, the only certainty is the 
19   costs are going up.  So as soon as I hear that the costs 
20   are going up and there's a hope we're going to get 
21   better liquidity, research on the other side of tomorrow 
22   I’m a little bit skeptical, and I think the roundtable 
23   next week, the question you have to follow up on, Chris, 
24   is:  what is the deliverable?  Because you could have 
25   something where actual liquidity doesn't get better, but 
0045
 1   relative to where the markets were at the time, they're 
 2   better than they would have been. 
 3             So it's very difficult to quantify two years, 
 4   three years, four years whether this is really going to 
 5   work, but I'm like 55-45 support it. 
 6             MR. GRAHAM:  Thanks, Tim. 
 7             Milton. 
 8             MR. CHANG:  Extrapolating what Dan said, it 
 9   really hinges upon let the market decide.  I wonder if 
10   we have some ways of extrapolating that principle to 
11   determine the tick size. 
12             MR. BORER:  Milton, that's a good point, but I 
13   think as Dan just said if the company has the ability 
14   because they will act in their own best interest and that 
15   will be accomplished by understanding what the 
16   infrastructure ecosystem is that supports them in the 
17   capital markets, which includes what the buy side needs in 
18   order to have a healthy and ongoing participation in the 
19   investment in their companies, I think, as he said, the 
20   one size fits all I don't like. 
21             I think if a company decides, it 
22   isn't working now trading in half penny increments and 
23   let's try five cents so we have a reason that a broker-
24   dealer, you know, a market participant in the middle will 
25   be willing to buy 10,000 shares, hold it in inventory and 
0046
 1   offer it out on the other side because there's a spread 
 2   in there, I think that's where this all starts, and there 
 3   will be a million decisions a day made by hundreds of 
 4   thousands of participants in the end investor, you know, 
 5   as well as the market participants in the middle, the 
 6   dealers and trading infrastructure. 
 7             And as long as there's a rational person, and I 
 8   think it's the issuer who can help decide what that 
 9   should be as opposed to, you know, a black box or even 
10   the dealers doing it because dealers can either decide 
11   they want to make a market or not, and that's something 
12   that they will do based on their best interest, and I 
13   think that that's the way to do it. 
14             So I think whatever we recommend, I think -- 
15   and it's in there right now -- is that it be at the 
16   discretion of the issuing company because if they're 
17   happy and they don't need their stock to have much 
18   attention, trade or provide the infrastructure of Wall 
19   Street a profit, then they don't need to.  Question why 
20   they're public, but that's what they can do.  The ones 
21   that want to encourage and support the infrastructure, I 
22   think, can do it another way. 
23             MR. GRAHAM:  And in that regard and maybe this 
24   is something that we leave to the staff to sort out or 
25   next week's roundtable to provide some input, but what 
0047
 1   might be your thoughts on kind of the limits placed on 
 2   issuers in choosing their own tick size?   
 3             It just seems to me that you would end up with 
 4   a system that might be more chaotic if you had 
 5   20 tick sizes out there.  You're in the business.  You 
 6   probably know whether or not that makes any difference, 
 7   but it would seem to me that it would probably make sense 
 8   to have a range and then some limits within that range, 
 9   maybe only dealing  with round numbers, that 
10   sort of thing or maybe that's something that we don't 
11   need to address in this recommendation. 
12             MR. BORER:  Yeah, I think it would be very 
13   helpful, I think, because the wholesalers in large I 
14   think will drive a lot of the volume that takes place.  
15   So perhaps in the group next week where you have the 
16   market participants in, that would be a good thing to 
17   find out. 
18             I agree.  I think there ought to be some 
19   limitations.  I don't think it should be something that's 
20   like a videogame where you can change your cheat every 
21   time you're, you know, jumping onto the next level and 
22   those types of things, but I think that could be a pretty 
23   short period of time, and I think it should be easily 
24   distributed because trading decisions are made a million, 
25   tens of millions of times a day.  They're pretty easy to 
0048
 1   look when you're making a trade what the tick size is, 
 2   and your dealer will provide that information. 
 3             I think whether it's none, a penny, five cents, 
 4   seven and a half cents, ten cents, those types of things 
 5   make sense because then every company can make up its 
 6   mind, and if we're going to go in discrete, say, penny 
 7   increments as opposed to percentages or something else, 
 8   then that obviously will be impacted pretty dramatically 
 9   by whether it's a one dollar stock or a $100 stock. 
10             You know, the $100 stock is likely not going to 
11   need any type of support in this type of venue.  So it's 
12   most likely to be the smaller ones, but I think 
13   some reasonable rules along those lines would be 
14   pretty easy for people to -- and to evaluate within a 
15   very short period of time, a year afterward, 18 months 
16   afterwards, as to are they really working.  Are the 
17   market participants satisfied with these?  And some of 
18   the things Christine was talking about with respect to 
19   the liquidity being provided and those types of things. 
20             MR. YADLEY:  I'm not sure that except for a few 
21   folks that are in the market there's a lot more we can 
22   say.  The recommendation doesn't address the time frame. 
23    So the only question I have, Stephen and Chris, is do we 
24   want to add something that says we believe sufficient 
25   time should be given and metrics established so that we 
0049
 1   give this a chance to work?  Other than that, I'm ready to 
 2   vote. 
 3             MR. GRAHAM:  Okay.  Good. Chris, did you have 
 4   something? 
 5             MS. JACOBS:  No. 
 6             MR. GRAHAM:  Okay.  Any other comments? 
 7             COMMISSIONER GALLAGHER:  Can I make one quick 
 8   comment? 
 9             It seems just interesting to me coming in on 
10   this, the tail end, the last meeting obviously.  You're 
11   going to vote on this now, but we have the roundtable 
12   next week, and I don't like putting things off.  I'm not 
13   an advocate for putting things off, but I just wonder 
14   whether the learning from next week, which I personally 
15   am looking forward to, will impact any decisions you make 
16   today, not again advocating you don’t take action today, 
17   but that you have some mechanism to bring that 
18   learning into your decision. 
19             And on a related note I would hope that you 
20   would have at least a reporter or some other 
21   representation for this Committee next week at the round 
22  table so that you get it live and somebody is responsible 
23   for reporting back to you. 
24             MR. GRAHAM:  Daniel -- excuse me -- I think 
25   those are good points.  I personally am not concerned 
0050
 1   about voting today and passing a recommendation along the 
 2   lines that we described because I don't think that 
 3   anything coming out of next week's session is going to 
 4   kind of alter that recommendation in a fundamental way.  
 5   I think it will be just like it's not going to be ready 
 6   for the SEC to say, "Okay.  This is it.  We're done." 
 7             There's going to be a decision made as to 
 8   whether this is the recommendation that should be 
 9   followed.  Then there's all the detail, and I think that 
10   the roundtable next week is going to provide that, help 
11   to provide at least some of that detail. 
12             As far as having a member of this Committee be 
13   at that roundtable, I think that's a very good idea.  So 
14   let's see if we can't make that happen or maybe we can 
15   deputize Lona. 
16             COMMISSIONER GALLAGHER:  Just tell us if you 
17   run into any problems. 
18             MS. JACOBS:  And I just want to add in 
19   background this is our third meeting where it has been 
20   discussed.  So we've got about -- I think we've had a 
21   sense it's like, well, this meeting was sort of a get it 
22   up, get it down meeting, and having had the benefit of 
23   all these presenters, some of which I think the February 
24   5th meeting will be hearing for the first time.  We've 
25   already heard; we've seen the presentations; we've had 
0051
 1   them, and I think there's a sense of this Committee that 
 2   they are ready, and I don't know who's going next week. 
 3             COMMISSIONER GALLAGHER:  That makes perfect 
 4   sense.  I mean, a generalized recommendation subject to, 
 5   you know, the nuts and bolts implementation -- 
 6             MS. JACOBS:  Sure. 
 7             COMMISSIONER GALLAGHER:  -- details by the 
 8   staff.  You know, I think you're right that next week 
 9   shouldn't impact that sort of generalized -- 
10             MR. GRAHAM:  And also we'd feel free to amend 
11   any recommendation. 
12             Okay.  Any other comments? 
13             (No response.) 
14             MR. GRAHAM:  So the recommendation then that's 
15   before you is, in effect, the one that was already before 
16   you with certain modifications, and that is that we make 
17   it clear that there's no sunset, but an opportunity for 
18   adjustment as we go along.  It is to underscore that 
19   whatever program is in place has to be of sufficient 
20   duration to give it an opportunity to work. 
21             Related to that is just kind of understanding 
22   the framework within which, you know, all of this happens 
23   so that to the extent you're pushing one part of the 
24   system and something comes out on the other part, you 
25   have to make sure that we're cognizant of other rules 
0052
 1   that might need to be adjusted in this context and that 
 2   although choosing the tick size should be voluntary, kind 
 3   of the range of options should be limited. 
 4             That's what is on the table, and I will propose 
 5   that recommendation and ask for someone to second it. 
 6             MS. SMITH:  Second. 
 7             MR. GRAHAM:  It's been proposed and seconded.  
 8   Any further discussion? 
 9             (No response.) 
10             MR. GRAHAM:  Okay.  All those in favor. 
11             (Chorus of ayes.) 
12             MR. GRAHAM:  All those opposed? 
13             (No response.) 
14             MR. GRAHAM:  Hearing none, the recommendation 
15   carries. 
16             Okay.  The second recommendation is with regard 
17   to encouraging the creation of the new exchange for small 
18   and emerging companies, and although the regulatory 
19   regime under which U.S. equity markets operate permit 
20   flexibility in establishing listing standards, the 
21   Committee believes that these markets often fail to offer 
22   a satisfactory listing venue for small and emerging 
23   companies. 
24             And the failure of the U.S. equity markets to 
25   offer a satisfactory listing venue undermines 
0053
 1   entrepreneurship and weakens the U.S. economy, and so we 
 2   believe that establishing a separate U.S. equity market 
 3   specifically for small and emerging companies where they 
 4   would be subject to a regulatory regime strict enough to 
 5   protect investors but flexible enough to accommodate 
 6   innovation and growth offers promise of providing a 
 7   satisfactory listing venue.   
 8             We're talking about newly public companies.  
 9   We're not talking about going the other way and having 
10   existing companies somehow participate in this 
11   new exchange.  It is seen as something that would be 
12   evolutionary, if you will, where a private company 
13   instead of jumping straight to your standard framework, 
14   if you will, this could be kind of an intermediate step. 
15             A possible future feature of this, of course, 
16   is that you'd limit investor protection or -- pardon me -
17   - investor participation to sophisticated investors who 
18   meet a standard that would be designed to assure that the 
19   regulatory protection afforded these investors is 
20   appropriate. 
21             The business of creating exchanges is not ours. 
22    It's not the SEC's, but clearly the SEC has a role in 
23   terms of regulation, and it would be our recommendation 
24   that the SEC should facilitate and encourage the creation 
25   of such a separate market for small and emerging 
0054
 1   companies in which, again, investor participation would 
 2                Diversified Reporting Services, Inc. 
 3                           (202) 467-9200 
 4   be limited to those who are sophisticated or accredited 
 5   and so that small and emerging companies who are 
 6   initially going public would be subject to a regulatory 
 7   regime strict enough to provide the necessary investor 
 8   protection, but nonetheless would be such that it would 
 9   accommodate innovation or growth by such companies. 
10             So that's in effect the recommendation, and 
11   I'll open it up to discussion.  Any thoughts? 
12             MR. WALSH:  Oh, good.  He's back.  I was going 
13   to ask Lona to maybe give his opinion on this matter 
14   because I'm still a little bit befuddled by it. 
15             MR. NALLENGARA:  I don't have an opinion on 
16   anything. 
17             MR. WALSH:  Your personal opinion then.  How's 
18   that? 
19             MR. NALLENGARA:  But before I do that, David 
20   Shillman is an Associate Director in our Trading and 
21   Markets Division.  If there's anything about exchanges 
22   that I have a question on, as there always is, I always 
23   call Dave.  So we're glad to have Dave join us for any 
24   technical questions we have on this. 
25             So I think the recommendation, just to maybe 
0055
 1   frame this and then Dave can help, there's nothing really 
 2   that would stop -- I don't think there's particular 
 3   rules, our rules, that would prevent an exchange from 
 4   forming a smaller exchange as this described in the 
 5   rules.  So, I think there's likely more 
 6   business considerations around whether an exchange like 
 7   this would be successful, whether there are -- whether 
 8   there's an interest.  I mean, if a security of a company 
 9   that would qualify for an exchange like this, if it's 
10   going to be traded on this exchange, you need market 
11   makers.  You need the infrastructure to develop around 
12   the exchange for that to be successful.  If someone is going 
13   to make a market,  someone's going to take the risk on 
14   quoting a security on that exchange.  There is risk 
15   associated with doing that.  Are they going to do that if 
16   there isn't an appropriate incentive? 
17             And there are examples of smaller exchanges.  
18   So I think the recommendation is crafted not as one 
19   designed for the SEC to actually do anything other than I 
20   think it's an encouragement or to facilitate, but there 
21   isn't any -- and Dave is not correcting me, so I think 
22   I'm right -- there's nothing in our rules that would 
23   prevent something like this from developing, but there is 
24   another piece of this that would be challenging, which is 
25   if you build something like this, will people come and 
0056
 1   actually use it. 
 2             MR. SHILLMAN:  Yeah, I think that's right, and 
 3   just perhaps for your general background in discussing 
 4   this issue, exchanges, we oversee exchanges through the 
 5   rule filing process.  Whenever an exchange wants to make 
 6   a material change with a trading system or soliciting 
 7   standards, they file rules with us.  We put them out for 
 8   comment, and then we either approve them or not depending 
 9   on the input from the commenters and whether they meet 
10   certain statutory standards of,you know, being in public 
11   interest, protection of investors, designed for fraud 
12   manipulation, fair, non-discriminatory and the like. 
13             Listing standards, if an exchange wants to 
14   establish new listing standards, new, more flexible 
15   listing standards, then they are free to file those with 
16   us, and we would then review those to make sure they meet 
17   these general statutory standards. 
18             So as Lona indicated, there's nothing that 
19   would prevent exchanges from developing new sets of 
20   listing standards proposed with us, and you might be 
21   interested in the NASDAQ affiliate.  The BX Venture 
22   Market went through this process with us a few years ago, 
23   and we approved new listing standards for this exchange. 
24    We just focused on smaller companies.  We had 
25   substantially lower, you know, quantitative standards, 
0057
 1   public float, number of shareholders, share price, some 
 2   additional flexibility on governance issues.  So that 
 3   exchange exists.  Those listing standards exist. 
 4             I don't believe that exchange is yet functional 
 5   in part for the business reasons.  Going back to your 
 6   issue number one, unless there is sufficient liquidity 
 7   provision to ensure that trading will occur 
 8   smoothly and effectively, it's difficult to launch these 
 9   businesses. 
10             So as context to your discussion, there is 
11   quite a bit of freedom for the exchange proposed and new 
12   listing standards and I think we have some freedom under 
13   the Exchange Act to approve those, but there are these 
14   overarching business issues of in order to have effective 
15   trading on the exchange, you need liquidity, and how do 
16   you track a liquidity provision? 
17             MR. BORER:  Stephen?  I'm sorry. 
18             MR. GRAHAM:  Go ahead, Greg. 
19             MR. YADLEY:  Yes, this may sound a little form 
20   over substance, but it seems to me that this 
21   recommendation should come after we talk about different 
22   disclosure because I think there are two sides to this.  
23   One is what David just said.  What do the markets require 
24   in terms of the trading activity and sort of the rules of 
25   the game within which people trade, but the product is 
0058
 1   the company, and so the question is:  how do you get good 
 2   companies to be willing to go public? 
 3             And we've been focusing on the burdens.  So it 
 4   seems to me the piece that we would have to address 
 5   before this would be realistic would be the disclosure 
 6   aspects and the regulation, and what can you do to 
 7   protect investors and still not have so many prescriptive 
 8   rules about so many things that require management to 
 9   spend money and take their time. 
10             So I guess that's sort of the same question Tim 
11   had.  This seems like a good idea.  I think, again, it's 
12   one of the things that the SEC could encourage, can't 
13   make happen, but just maybe a little more background on 
14   the recommendation. 
15             MR. NALLENGARA:  Greg, that's another element, 
16   and part of it is listing standards that the exchanges 
17   have responsibility for, the things that Dave mentioned 
18   on market cap and share prices, those types of things, 
19   and then some of the corporate governance requirements 
20   are through listing standards, but many of the things 
21   that I think all of you are talking about for smaller 
22   companies to be able to trade on an exchange may not 
23   necessarily line up exactly with listing standards or may 
24   have a root, you know, in sort of our own rules with 
25   respect to disclosure requirements. 
0059
 1             So part of this discussion is listing standards 
 2   that the exchanges can propose and we will consider, but 
 3   also part of this, I think, is because it feels like it's 
 4   a market for this range of companies where only 
 5   accredited investors can trade, I think -- and I could be 
 6   wrong -- I think we're talking about a different 
 7   disclosure regime for these companies as well, which 
 8   you're right, Greg.  It does bridge.  I mean this sort of 
 9   bridges both your first recommendation and your third 
10   recommendation in creating liquidity for a place for 
11   liquidity for these markets, which tick size is thought 
12   to increase as well as reducing the burdens which a 
13   scaling of disclosure for companies would also 
14   facilitate. 
15             MR. GRAHAM:  Yeah, the devil is always going to 
16   be in the details, but to my way of thinking, the 
17   disclosure aspect is the most important aspect.  The 
18   exchange rule, the listing requirements aspects is 
19   plumbing, and again, the devil is going to be in the 
20   details, but the notion is that we all understand the 
21   regulatory framework that companies that want to be 
22   public are subject to and everything that kind of goes 
23   into putting together an S-1 registration statement, and 
24   we all understand, you know, what is required in the way 
25   of continuous disclosure with the '34 Act reports. 
0060
 1             And then at the other end of the spectrum, we 
 2   know that if you do a 506 offering with solely accredited 
 3   investors there's absolutely no information requirement. 
 4    Can't commit fraud, but there's no information 
 5   requirement. 
 6             And so the idea is that you facilitate 
 7   companies going public that fit somewhere between those 
 8   two ends, and as a result of that, by definition the cost 
 9   of going public would be a hell of a lot less, and the 
10   cost of continuing to be public would be a hell of a lot 
11   less because you would have disclosure requirements that 
12   would be geared toward accredited investors and sophisticated 
13   investors as opposed to trying to make sure that everyone 
14   who might participate in the market is covered. 
15             Now, we have the business issues, and again, 
16   I'm not in the exchange business, and maybe, 
17   presenting this opportunity is something that exchanges 
18   would say "This isn't going to work.  It's a 
19   bad idea."   
20             But to the extent that the exchanges think that 
21   it is a good idea, what we'd be asking for is the 
22   collaboration and cooperation on the part of the SEC to 
23   make sure that, everything that they can do is 
24   done to facilitate the establishment of such an exchange. 
25             MR. ABSHURE:  I guess my real question would be 
0061
 1   what is this failure to offer a satisfactory listing 
 2   venue because until you identify specifically what the 
 3   failures are, you're just throwing darts at what you're 
 4   fixing, and I go back to something that David mentioned 
 5   with the BX Exchange.  We worked with NASDAQ on that for 
 6   two years, if not longer, with the idea that the BX 
 7   was going to be for those companies that didn't hit the 
 8   listing standards on either the big board or NASDAQ, but 
 9   they didn't need to drop all the way down to the pink 
10   sheets. 
11             They got SEC approval, and I don't know what 
12   happened.  You know, I don't know where that went, but in 
13   terms of providing secondary liquidity, we already have a 
14   number of options, between the over-the-counter 
15   bulletin board, pink sheets, things like that, some of 
16   the things that SecondMarket is doing and proposing 
17   and discussing with us right now are very innovative. 
18             SharesPost is the same way.  I'm a little 
19   hesitant to really support encouraging a secondary market 
20   unless I have, I guess, a better grasp on what's the 
21   failure on the alternatives we have out there now.  What 
22   was the failure with BX?  What was the big holdup there? 
23    And this bit about flexible enough to accommodate 
24   innovation and growth, what exactly about the existing 
25   market alternatives inhibit innovation and growth?  
0062
 1   That's another statement I don't understand. 
 2             MR. GRAHAM:  I guess a couple of things.  You 
 3   know, I'm not up on what was done with BX, but was part 
 4   of that a less robust disclosure framework, reducing the 
 5   compliance costs in a significant way? 
 6             MR. ABSHURE:  I think the idea -- and, David, 
 7   correct me if I'm wrong -- but I think the idea was it 
 8   provided a trading outlet for those companies that had 
 9   missed the listing standards for the New York Stock 
10   Exchange or the NASDAQ. 
11             MR. SHILLMAN:  Right.  I think that's right.  
12   These would all be registered public companies, but the 
13   listing standards would be loose and -- 
14             MR. GRAHAM:  Right.  And then the focus of this 
15   recommendation is in essentially reducing the cost of 
16   compliance, and I think SecondMarket and SharesPost 
17   and that sort of thing, I think those are designed for 
18   liquidity and secondary shares and don't provide much in 
19   the way of enabling or encouraging private companies to 
20   go public. 
21             MR. NALLENGARA:  Just sorry to interrupt.  
22   There was a – just to correct, because the BX hasn't failed. 
23    I think there's questions about how 
24   successful it has been.  So still a trading venue that's 
25   available, but the business considerations are ones that 
0063
 1   have posed challenges to sort of the vibrant market that 
 2   may have been -- 
 3             MR. ABSHURE:  But in terms of reducing the cost 
 4   of compliance, which is really just reducing the cost or 
 5   the amount of disclosure when you're talking about 
 6   supporting secondary trading systems, so a periodic 
 7   report done, in other words, your '34 Act-esque 
 8   reporting, I think I would be very, very, very concerned 
 9   if your price of stock was based upon anything other than 
10   material, publicly available information about the 
11   company.  I think that leads itself to market 
12   manipulation, washed trades, things of that nature. 
13             Now, I can't say that I would be opposed to a 
14   more streamlined disclosure standard where you still had 
15   material information about those companies, but at the 
16   point that you start talking about reducing compliance 
17   costs and understanding that all federal securities laws 
18   are a disclosure regime, what you're really saying is 
19   we're going to provide less information, and that always 
20   gives me concern, especially when you're talking about a 
21   market mechanism that's going to set a price for 
22   secondary market trades. 
23             MR. GRAHAM:  Well, you know, again, the devil 
24   is going to be in the details, and the idea not to 
25   provide no disclosure but to kind of understand what that 
0064
 1   disclosure might look at, you know, given the nature of 
 2   the investors who will be participating. 
 3             And so, again, on the one hand you're dealing 
 4   with just your standard 506 accredited investor only 
 5   offering where there are no information requirements to 
 6   full blown, you know, S-1 prospectus-type disclosure, and 
 7   what we're saying is that this new market, the disclosure 
 8   requirements would be streamlined and fall somewhere 
 9   between those two, but there wouldn't be an absence of 
10   disclosure. 
11             MR. YADLEY:  Here's sort of my question, 
12   Stephen, and maybe I'm just missing it.  Is this market 
13   for companies with the class of equity securities registered 
14   under the '34 Act and we're talking about trading those 
15   securities?  Are we talking about pre-'34 Act reporting 
16   companies? 
17             MR. GRAHAM:  We are talking about private 
18   companies going public and once it went public they would 
19   be subject to the '34 Act. 
20             MR. YADLEY:  Okay, and I guess that was the 
21   point I was trying to make earlier, obviously not very 
22   artfully.  I understand the rules around the marketplace, 
23   but fundamentally it's what does the company have to 
24   report.   
25             So if when we get to our next discussion and we 
0065
 1   come up with, to use Heath's words, streamlined or more 
 2   rational or I prefer principles-based disclosures where a 
 3   company is a fully functioning, fully compliant, publicly 
 4   traded company and now what we're going to do is have a 
 5   marketplace that more readily accepts the fact that it's 
 6   untried.  There's not going to be a lot of volume.  Tick 
 7   sizes are bigger.  Maybe the costs of trading are higher. 
 8    There are a lot of things that are going to cause these 
 9   companies not to have the same liquidity as a larger 
10   company.  So let's have an exchange that supports them.  
11   I think that's an excellent idea. 
12             But it calls into question if we do that, would 
13   we even need to limit it to accredited investors, because 
14   if, in fact, the company is providing all material 
15   disclosure, just it's more flexible disclosure, it's more 
16   principles based, there's stuff that, you know, executive 
17   compensation is really important.  It's really 
18   interesting to read.  As a lawyer I get to spend a lot of 
19   time counseling my clients about it, but most investors 
20   don't really care about that and they care about it less 
21   if the company is going someplace, if it's moving ahead, 
22   and Conflict Minerals, which we'll get to again, these 
23   things don't matter, but that's less the market than the 
24   disclosure. 
25             So I'm not opposed to this, but I don't quite 
0066
 1   understand why we'd have to limit it to sophisticated 
 2   investors if, in fact, you have a company that's public 
 3   and can be sued just like any other company for failure 
 4   to comply with the disclosure obligations. 
 5             MS. JACOBS:  And I think what I'd like to do is 
 6   maybe help the Committee and let's go back up to 30,000 
 7   square feet before we get into these issues because every 
 8   one of them is valid, and the devil is going to be in the 
 9   details, is to remember where this one came from.  It 
10   started with a discussion of those Committee members that 
11   were associated closely with existing public companies, 
12   and even statements were made, "I don't even know why 
13   we're public anymore," or, "no company under a billion in 
14   revenue should be on any exchange." 
15             From there it morphed into discussion where you 
16   have the big large cap, which represents the majority of 
17   the value of all exchanges as well as the trading volume, 
18   okay, and the small and micro caps and we're all painted 
19   with the same broad brush.  We're all treated the 
20   same.  We're all regulated, and we have to comply the 
21   same way that G.E. complies.  There's no deference given 
22   to the little guys. 
23             Then the question came up, well, then what do 
24   you do with the new IPOs, and it was viewed at the time 
25   that these current exchanges are an impediment.  Why 
0067
 1   would any IPO company -- the question was:  why would any 
 2   newly listed company want to come on the NYSE or NASDAQ 
 3   and put up with the hassle? 
 4             So that's where this came from.  So I just want 
 5   to put it into perspective, especially, too, if you were 
 6   not part of it.  We're trying to bridge a gap, but not 
 7   necessarily create the infrastructure here.  That's where 
 8   I'm coming from.  I think there's a lot of details.  We 
 9                Diversified Reporting Services, Inc. 
10                           (202) 467-9200 
11   were kind of going on the record as saying we'd like a 
12   day two.  You have the IPO on day one, and you go and you get 
13   your listing, but then you have a day two and what 
14   happens to them after that?  That's where we were coming 
15   from. 
16             MR. BORER:  Stephen, if I could. 
17             MR. GRAHAM:  Yeah. 
18             MR. BORER:  I view the hole in the market today 
19   as not providing another venue for registrants, you know, 
20   reporting companies that are already there but just have 
21   less liquidity or something like that to have another 
22   place to trade.  That exists.  OTC markets do a good job. 
23    There are a lot of electronic venues for that sort of 
24   thing. 
25             I view the hole in the market as being the 
0068
 1   providing greater liquidity for secondary market trading 
 2   of small company securities, and again, I would say 
 3   whether they're equity or other instruments that those 
 4   companies may have between sophisticated, accredited 
 5   investors, if I own a private placement today and someone 
 6   in this room is sophisticated, I can sell that to them, 
 7   and there is a wide range, you know absent fraud, of 
 8   things that I would be required to disclose and the buyer 
 9   to either accept or reject in being willing to do that 
10   transaction.  It happens all the time. 
11             It happens on Wall Street, and it happens at 
12   the pizza parlor.  I think that whether it's 
13   SecondMarket or SharesPost or various venues that exist today 
14   for secondary market trading of anything from MLP, REIT 
15   interest, private REITs, the -- what was the other part I 
16   
17   had -- oh, timeshares, I mean, there's markets for these 
18   things, and there are various disclosures that are 
19   required 
20             I think, and again, because this is not 
21   something that the SEC can make happen, I think it's a 
22   question of do we go on the record to encourage the 
23   development of this market for secondary trading of these 
24   securities when, in fact, the legislators have already 
25   said:  crowdfunding, let's let all of these people buy 
0069
 1   these securities. 
 2             But there's no natural venue for them to be 
 3   able to re-vend them anywhere else, or the same thing 
 4   with the broadening or the doing away hopefully with the 
 5   restrictions on general solicitation.  That will 
 6   theoretically broaden the market and make more efficient 
 7   the distribution of private securities for companies 
 8   whether they be public or private companies.  I think 
 9   here we're largely talking about private companies, to 
10   have the secondary market trading of those securities. 
11             If I think of SecondMarket, they're 
12   principally a venue for trading of either equities of 
13   public securities or derivatives of equities of public 
14   securities, not of -- or maybe of a Facebook pre-public 
15   because there's lots of information or lots of buyers.  
16   There's liquidity and those types of thing, but there's 
17   very little if anything else that provides that, and I 
18   don't think just the talk here about the BX Venture.  
19   That was one that they could create it, but I don't think 
20   anybody was going to show up to play ball because that 
21   market was already being served, in my view, and I 
22   remember when the publicity was going around and they 
23   were doing teach-ins around Wall Street and all of this 
24   with this.  That's already been provided by, you know, 
25   the OTC markets, for example, and it didn't make economic 
0070
 1   sense. 
 2             So you take a company that's trading all its 
 3   volume today even though they were Bulletin Board OTC 
 4   Markets and you say, "If you pay us a listing fee, we'll 
 5   hold you to a higher level of accountability and you can 
 6   come over here." I've never seen any real uptake of that 
 7   yet in spite of all the work that went into it, and it 
 8   was a lot. 
 9             And at the beginning I was quite enthusiastic, 
10   but then when those companies wouldn't be S-3 eligible 
11   and things like that, it really discouraged in my mind a 
12   lot of market participation from the brokerage community. 
13             So I know I've said a lot there, but I think 
14   this is not for public companies.  This is not for 
15   reporting companies.  It may not even be for companies 
16   that ever are going to become reporting, but to create a 
17   secondary market for their securities. 
18             MR. GRAHAM:  Yeah, I guess there are a couple 
19   of things.  One, the first one I may have heard you 
20   wrong, but you know, the idea is that there's kind of a 
21   one-way valve.  An existing public company that's 
22   currently being traded could not move to the new 
23   exchange.  
24             The whole idea is to provide an opportunity for 
25   privately held companies to take kind of an initial and 
0071
 1   less costly step to go public, and that relates to my 
 2   second point, and that is that you've got the development 
 3   of things like SecondMarket and SharesPost, and that's 
 4   great for those who are, looking for liquidity 
 5    in the shares that they have purchased from a privately 
 6   held company, but that does nothing for creating an 
 7   opportunity for a company that is private and wants to go 
 8   public and put themselves in a position to go out and 
 9   raise their own capital. 
10             MR. BORER:  Well, to your first point, I think 
11   if somebody takes advantage of 12(g) and becomes a non-
12   reporting company, my view is this type of venue would be 
13   an appropriate place for the holders of those securities 
14   that are no longer, you know, a publicly reporting 
15   company to take advantage. 
16             Now, they can also show up on the skull and 
17   cross-bones section of the OTC Markets, you know, if they 
18   choose to do that, and that may be, you know, where they 
19   should go.  With respect to the other pieces all around 
20   us, I think anything that encourages greater liquidity, 
21   and again, if the business model doesn't work, and I 
22   would look at whatever the model is of SecondMarket and 
23   say, "Is that working?  Let's try to broaden it and make 
24   it available and encourage it for greater participation." 
25             In my view and from my perch on Wall Street 
0072
 1   over the years, I have generally sensed that the 
 2   regulators, FINRA, SEC, et cetera, have discouraged other 
 3   than, you know, the conventional path for companies to 
 4   gain liquidity.  It's just my opinion.  It's either right 
 5   or wrong. People can disagree with it. 
 6             And even around the issues before Facebook went 
 7   public, some of the press, because I never got behind the 
 8   details, but I knew some of the people where they had 
 9   created these pools, pooled money, you know, under 100 
10   investors, bought Facebook shares, were doing types of 
11   things, I think that was actually healthy if done 
12   properly and within the lines as far as all the fraud 
13   statutes and conflicts of interest go, but to me I sense 
14   that there was a discouragement of that, and it was 
15   deemed to be  not appropriate for individuals, no 
16   matter how wealthy or accredited, to be involved in those 
17   things.  I never saw anything that came from it, but I 
18   think it was more of a press type thing. 
19             I think if you just turn the switch and say 
20   appropriately not regulated but carried out under the 
21   existing laws and then encouraging a venue or deeper 
22   venue, and again, I look at crowdfunding portals. You 
23   see now the venture capitalists are funding crowdfunding 
24   portals, not only crowdfunding portals funding 
25   companies, but the venture capitalists are trying to lead 
0073
 1   that pack.   
 2             I don't know how those will ever make any 
 3   economic sense.  It doesn't seem possible to me, but 
 4   that's up for the market to decide.  I view this as a 
 5   
 6   
 7   
 8   very similar potential exercise to provide liquidity for 
 9   the tens of billions of dollars of securities that are in 
10   the hands of private people, and the companies may never 
11   be using this as a path to get public.  They may fund 
12   themselves until they go sell themselves to a private 
13   equity firm or to a public company as opposed to becoming 
14   public. 
15             MR. GRAHAM:  You're exactly right, and you know 
16   the business better than most of the people in this room, 
17   but I think the idea is to create an environment that 
18   will be receptive to someone who wanted to create this 
19   type of business.  Whether that business would 
20   be successful or whether or not it would work or whether 
21   or not anyone would even make an attempt. I can't speak to 
22   that, but it's one way that might facilitate at least a 
23   partial return of the smaller IPO. 
24             MR. BOCHNOWSKI:  Stephen, Dave Bochnowski here. 
25             I share Greg's concern.  When I look back at 
0074
 1   when we became a public company, while we had our share 
 2   of sophisticated investors, we had a lot who were not, 
 3   and I think whoever -- I would rather see this Paragraph 
 4   4 here, if we're trying to create or suggest that there 
 5   should be a market created that would give more 
 6   liquidity, I don't know that it's our place to limit who 
 7   should be the participants.  I think those who are 
 8   creating that market should decide that, and then follow 
 9   the path of bringing that forward to the SEC. 
10             MR. NALLENGARA:  Steve, I think the members may 
11   be looking at this recommendation from two different 
12   vantage points, one taking from the first conversation on 
13   tick size and how trading in smaller public companies can 
14   be encouraged and liquidity can be encouraged.  That's 
15   one frame of reference in creating a market, a more 
16   vibrant market for those securities, and I think that's 
17   what Greg was mentioning, that these companies were 
18   already public and they already have a '34 Act reporting 
19   obligation.  Why would you change that for trading on 
20   some new market? 
21             I think what John is saying -- 
22             MR. GRAHAM:  And you wouldn't. 
23             MR. NALLENGARA:  Pardon? 
24             MR. GRAHAM:  You wouldn't.  You couldn't. 
25             MR. NALLENGARA:  Right, and what John is 
0075
 1   saying, and I think what, Steve, you're saying, with 
 2   506(c), with an ability to generally solicit to a group 
 3   of accredited investors and potentially a broader pool of 
 4   private capital and a need for liquidity, there may be a  
 5   market or exchanges -- maybe "exchange" isn't the right 
 6   word and maybe it's just a market -- maybe that's another 
 7   or a separate recommendation, the first one being let's 
 8   see what we can do to encourage liquidity in trading on 
 9   exchanges, whether that's NASDAQ, New York Stock 
10   Exchange, BX or some other venue that piggybacks off of 
11   existing '34 Act disclosure requirements and listing 
12   standards, and then separately, is there a -- not using 
13   the word "exchange" -- but is there something that this 
14   Committee can recommend in terms of encouraging the 
15   creation of a market that would allow for private capital 
16   to be traded within the universe of accredited investors or 
17   whatever that universe would be, where quotes can be 
18   made, where people can have an understanding that there 
19   is a market to actually trade this private capital. 
20             So I think some may be bridging, putting both 
21   of these two together and not understanding how it could 
22   work, and one way to consider this is really two things, 
23   one being what can you do to encourage public trading, 
24   you know, trading on the public markets of already 
25   existing public companies.  Tick size is one of them, the 
0076
 1   next recommendation on scaling of disclosure is one of 
 2   them.  There's other market making incentives that we 
 3   can consider as well.  That's one, the other being, in 
 4   the private capital, is there a way to facilitate the 
 5   trading? 
 6             MR. GRAHAM:  And when you say "facilitate the 
 7   trading," you're talking about primary shares as well as 
 8   secondary shares.  Because I don't want to lose sight of 
 9   the primary shares, which is kind of at least the primary 
10   thing that I think a lot of us have been focusing on. 
11             MR. NALLENGARA:  Right. 
12             MR. GRAHAM:  Because we want to enable smaller 
13   companies to form capital.  I mean, this is a capital 
14   formation exercise, or at least is a capital formation 
15   desire.  This may not be the appropriate way to go about 
16   that, but the idea is to get capital to these companies 
17   to create jobs and support innovation and all the rest, 
18   which obviously is different than enabling people to 
19   trade in secondary shares. 
20             MR. NALLENGARA:  Well, I guess the proponents 
21   for markets like this would say if you know, if I'm an 
22   issuer trying to get this group of people to buy my 
23   securities, if I can tell them that there will be a 
24   market for your -- if you buy my stock, you're not going 
25   to be sitting with illiquid stock.  There will be a 
0077
 1   market for it because we will participate in this market. 
 2    We will provide information to this market to qualify 
 3   for whatever the market requirements are. 
 4             The proponents are saying that that 
 5   encouragement that there will be liquidity down the road 
 6   for you may draw in more investors into a company where 
 7   you may be stuck with securities of a private company, 
 8   where your only recourse may be to sell it back or have 
 9   the issuer find you a purchaser. 
10             MR. YADLEY:  Now, I do agree, Stephen, that I'm 
11   not opposed to the concept, and I have represented a 
12   number of companies that are ethical companies, and 
13   they're trying their best, and they're struggling, and 
14   one of the things that happens is that they trip one of 
15   the wires on their lowest public market, and now all of a 
16   sudden they're spending time, you know, going to try and 
17   have a hearing and get more time in order to be able to 
18   comply, and it must have an effect on the brokers and 
19   certainly investors because you have to disclose 
20   obviously.  You've gotten a notice from NASDAQ that you 
21   could be de-listed, and that's the same issue we just 
22   talked about on the sun setting on the other thing. 
23             I mean, that's a bad aspect of this.  What I'm 
24   now, I think, hearing you say, Stephen, is companies go 
25   public.  They do it the right way.  They're not reporting 
0078
 1   companies, and they're filing their '34 Act reports, but 
 2   the marketplace in which they're hoping to have some 
 3   liquidity is now yet another layer of compliance that if 
 4   they default on, they're almost behind the eight ball, 
 5   and the worst thing that will happen to the investors who 
 6   we care about is that the company will be de-listed, and 
 7   now all of a sudden there's no market, and then maybe 
 8   that's an incentive for somebody to go dark, and now 
 9   there's no information. 
10             So conceptually I think this is a good idea, if 
11   I understand what you're saying is that you're going to 
12   make it a little easier for once you've gone through the 
13   drill and the process of going public, you're providing 
14   publicly available information hopefully on time, but yet 
15   all of these other ancillary things that are important 
16   for companies to operate transparently and with good 
17   governance, those are going to be a little more relaxed 
18   as companies go through some period of growth. 
19             MR. GRAHAM:  That's exactly right. 
20             MS. GREENE:  Can I say something real quick? 
21             I think it has taken me this long to remember 
22   what this whole thought process was.  So pull back to 
23   30,000 feet, and Greg just helped with existing public 
24   companies, the one size fits all even at the exchange 
25   level with the big board and with NASDAQ.  Small 
0079
 1   companies like myself can't compete against everybody 
 2   else that's on those exchanges. 
 3             And so I think if you pull back to the 30,000 
 4   foot view, having an exchange designed or -- that's not a 
 5   red-headed stepchild, because I don't -- "Oh, you 
 6   couldn't be a big board guy.  So now you've got to be on 
 7   the secondary stepchild kind of exchange" -- but 
 8   something that's not as rigorous and as expensive and 
 9   geared for the big guys might help those of us that are 
10   public, that have been public for a long time, you know. 
11     
12             This is again kind of like tick size.  There's 
13   an awfully large group of public companies that fit this 
14   small company.  I mean, if you look at the percentages 
15   we're going to get into the next deal, 76 percent of the 
16   public companies have market caps of below 500 million.  
17   So where the value, as Chris said, the value of the 
18   shares that trade and the value of the companies is in a 
19   very select few of companies, maybe a legitimate exchange 
20   for the rest of us not trying to get attention from the 
21   market against the big guys that are trading all the 
22   shares and that have all the stories and have all the 
23   liquidity, maybe on a very simplistic view something like 
24   an exchange designed specifically for companies like ours 
25   would make sense. 
0080
 1             Does that make sense? 
 2             MR. GRAHAM:  That makes sense.  The only issue 
 3   though is that that would help as a process going forward 
 4   in a company's evolution.  It wouldn't help coming back 
 5   the other way because as an existing public company 
 6   you're already operating under an existing disclosure 
 7   framework.  You've got an existing set of investors, and 
 8   there's not going to be a way to tell those investors, 
 9   well, you're no longer qualified to hold my shares 
10   because I'm moving over to this exchange. 
11             But I think, as far as existing 
12   relief is concerned maybe ultimately there is 
13   somewhere down the road where people have figured 
14   out that it makes sense to create an exchange for smaller 
15   public companies that are in a situation 
16   similar to yours, but for now the issues 
17   related to those set of circumstances will be addressed 
18   in the context of our scaled disclosure recommendations. 
19             Tim. 
20             MR. WALSH:  One last question for Lona, Dave.  
21   Has an exchange ever come to you and said, "This is a 
22   good idea.  We really think this is going to work"?  
23   Going back to the business question, that's my only 
24   hesitation.  Everything's great in concept, but -- 
25             MR. SHILLMAN:  The BX market example.  If you're 
0081
 1   referring to an exchange that is designed for smaller 
 2   companies that might not meet the listings in the major 
 3   markets, they have -- and we had the example I mentioned 
 4   earlier, the BX Venture market. 
 5             MR. WALSH:  Right.  That was a few years.  I 
 6   mean anybody recent? 
 7             MR. SHILLMAN:  Nothing -- obviously we couldn't 
 8   talk about any private discussions, but there have been 
 9   no proposals. 
10             MR. NALLENGARA:  But there have been -- I mean, 
11   commentators have talked about and -- but you know, it's 
12   one thing to have a place, and as Shannon mentioned, you 
13   need to get -- you're struggling to get attention.  Part 
14   of it is having -- having the place is one 
15   thing, but getting the attention is the other.  So having 
16   market participants wanting to quote your securities is 
17   an important part of that. 
18             And simply having a venue where the listing 
19   requirements are different or lower may not necessarily 
20   bring the rest of the infrastructure that you may need 
21   for a successful market, a successful trading venue.  So 
22   some commentators just have talked about other incentives 
23   to encourage market making for smaller companies.  That's 
24   something to consider as well. 
25             Because I think the question of whether you can 
0082
 1   bridge the business reasons will be part of any question 
 2   whether a company like Shannon's can get the attention 
 3   from market makers to get more liquidity.  I think you've 
 4   talked about in prior meetings that you don't have a lot 
 5   of trading in your stock and getting more people to 
 6   follow you and to trade and to quote your security would 
 7   be better. 
 8             So that's something I think that could be 
 9   considered as part of a mix of discussion on this topic. 
10             MS. JACOBS:  Tim, your question -- 
11             MR. WALSH:  Well, I guess the question was 
12   limited to investors.  That was my question. 
13             MS. JACOBS:  Tim, one of your questions, your 
14   initial question was discussions.  In my travels in my 
15   panels there has been discussion from outside groups 
16   associated with exchanges and markets, et cetera, that 
17   something needs to be done for the small, the micro cap, 
18   and the newly IPOed companies.  I can't speak for NASDAQ, 
19   but I think it was June 20th of this past summer the NYSE 
20   went on record talking about the small and the micro cap 
21   companies and wanting to do many -- and sort of leaving 
22   the door open for suggestions and relief. 
23             They know we are suffering, but I have had and 
24   heard discussions on the side about what to do with the 
25   newly IPOed, and do they need to come into the same waters 
0083
 1   that the rest of us are in with the NYSE and NASDAQ.  And 
 2   so anecdotally, I have an answer which is, yes, I have 
 3   heard those discussions and those recommendations. 
 4             MR. SHILLMAN:  My understanding was in some of 
 5   the recent discussions that you may be referring to, good 
 6   ideas around the market structure for smaller companies, 
 7   such as tick size or issuers paying market makers to make 
 8   markets or other ways to concentrate liquidity, give some 
 9   sort of trading priority or other incentives to those 
10   market makers that are taking the risk to follow a 
11   company, to put its quote out there when there at least 
12   now is not a lot of trading. 
13             So I've heard suggestions around market 
14   structure ideas.  I've not heard much recent discussion 
15   on the listing standards side of it though. 
16             MR. GRAHAM:  So to kind of summarize, I think 
17   the objective that we're talking about, to just kind of 
18   keep going back to 30,000 feet, but so let's go back 
19   there for a second, and that is that the IPO 
20   engine is suffering.   For decades the small IPO 
21   has been driving growth and innovation in this country.  
22   Over the last decade we've seen a significant decline in 
23   small IPOs.  That's a trend, and it's a trend that has 
24   not been reversed. 
25             You know, historically these are the companies 
0084
 1   that have driven the bulk of job growth in 
 2   this country, and so we think it's important just from 
 3   kind of an overall economic wellbeing of this country 
 4   that we find a way to kind of reinvigorate that market, 
 5   and it's not going to happen with one thing.  I think 
 6   that you need a number of ideas, and maybe the best idea 
 7   hasn't been articulated by anyone just yet.  Oftentimes 
 8   you've got to come up with ideas that eventually prove to 
 9   be bad ideas so you can kind of trigger good ideas. 
10             But what we're talking about is trying to 
11    add to the toolbox of what may be possible and 
12   having those who have a role in the system to do whatever 
13   can be done to create the kind of environment that would 
14   be receptive to the return of the smaller IPO. 
15             And in terms of what form that might take, 
16   we're talking in the context of a new exchange.  Maybe 
17   that's not something that anyone would decide 
18   to build a business around.  Maybe once we get  general 
19   solicitation taken care of in the context of what 
20   recommendations have already been made by this Committee 
21   and that already are reflected in the JOBS Act in terms 
22   of general solicitations in the context of a 506 
23   offering, maybe there's something that's added to that 
24   which would help to facilitate the capital formation on 
25   the part of companies that continue to be private. 
0085
 1             But as far as this set of issues is concerned, 
 2   there's not much that we can do other than to share 
 3   ideas, support those ideas that we think might make sense 
 4   and to encourage those that do have a role in helping 
 5   those ideas kind of come to fruition in the event 
 6   somebody decides to pursue them, you know, encouraging 
 7   them to do what they can to cooperate and 
 8   facilitate. 
 9             MR. BORER:  Stephen. 
10             MR. GRAHAM:  Yeah. 
11             MR. BORER:  I would be interested, and I'm not 
12   sure whether for competitive or other reasons they might 
13   not be interested in participating, but I know, for 
14   example, that SecondMarket has been represented in the 
15                Diversified Reporting Services, Inc. 
16                           (202) 467-9200 
17   audience at these Committee meetings several times over 
18   the last year.  I would think it might be valuable to 
19   hear from a market participant of someone like that, 
20   their perspective on what the impediments or other things 
21   that may be helpful and encouraging the development of 
22   that market, and again, I'm talking about private 
23   securities, secondary trading. 
24             It's to Lona's point.  This is not a venue just 
25   like, you know, NASDAQ doesn't go out and do an IPO.  
0086
 1   It's done by market participants, underwriters, 
 2    brokerage firms and things like that.  It's the 
 3   secondary venue that allows for trading, and without the 
 4   secondary market, the primary issuance of private or 
 5   public securities is just not going to take place.  It 
 6   will not happen. 
 7             Oftentimes people come to us and say, "Oh, nice 
 8   private placement.  You know, what if six months in I 
 9   want to sell my warrants?  I don't want to exercise.  
10   They run for five years.  There's a very good imbedded 
11   derivative value there.  I don't want to give up that 
12   value.  What do I do with them?" 
13             We tell them you come back to us.  We will find 
14   an appropriate buyer on the other side.  We will make it 
15   a market, an over-the-counter market, find you a buyer on 
16   the other side, somebody who participated in the same 
17   transaction or somebody who is into delta hedging and 
18   likes those types of things on a public company. 
19             Oftentimes we'll pick up the phone and we'll 
20   call SecondMarket to see what they have on the other 
21   side of that because they're -- this is not a commercial. 
22    I have nothing to do with them, but it has provided a 
23   level of secondary liquidity that is not available on any 
24   of the exchanges, OTC Markets or just for us calling up 
25   other brokerage firms because they're not involved and 
0087
 1   there really are not very many clearing houses in the 
 2   middle. 
 3             I think to the extent we could get some 
 4   information, it might be very helpful in guiding 
 5   encouragement or recommendation or let's let it lay as it 
 6   is right now because there's no market for it, but I do 
 7   think there's a hole, as I said earlier, in that 
 8   secondary trading which encourages capital formation at a 
 9   very currently inefficient end of the marketplace. 
10             MR. YADLEY:  Stephen, sort of picking up on 
11   that and going back to the thrust at least in your mind, 
12   I think, of this recommendation which is an emerging 
13   growth company on ramp, newly public company, have a 
14   little bit more hospitable venue than exists, but I agree 
15   with John.  My reason for reluctance in supporting our 
16   recommendation on 3(b), Reg A+ is, okay.  So you've 
17   raised the money, but if you're not going to be public, 
18   what's the use.  Why not do a private placement? 
19             And if you're going to be public, you want 
20   liquidity.  So maybe a subset of this of a separate 
21   recommendation would be because the Commission gets to 
22   think about and propose rules on what kind of information 
23   should be available under the new 3(b)(2) exemption, 
24   there you don't have to do everything that even an 
25   emerging growth company has to do theoretically.  You can 
0088
 1   go out and raise $50 million or you can generally 
 2   solicit.  You can take indications of interest first, and 
 3   now what? 
 4             A market won't develop if all that's out there 
 5   is a once a year financial statement, but maybe those 
 6   companies don't need '34 Act regulation.  They need 
 7   something, and if that something is less than what the 
 8   big markets require, then this market for limited numbers 
 9   of investors who are able to better evaluate the lower 
10   level of information to me would make sense.  So I don't 
11   know if that's something that you think we ought to think 
12   about. 
13             MR. GRAHAM:  Help me with that because it 
14   sounds like you are essentially kind of rearticulating 
15   what we've been discussing but in a different way, but in 
16   the context of 3(b)(2). 
17             MR. YADLEY:  Yeah, I think we're all coming at 
18   this from our own different perspectives, and Lona said a 
19   minute ago, you know, and I think, John, your focus is on 
20   a private company and do we ensure liquidity for these 
21   companies which are still in a really early growth stage, 
22   and then we have the new IPO companies, and then we have 
23   the companies like Chris' and Shannon's that are already 
24   out there in no man's land and need to find help.  We've 
25   agreed one size doesn't fit for all.  I think this 
0089
 1   recommendation reflects all of those concerns and 
 2   probably needs to be broken down and thought about 
 3   separately. 
 4             So my last point was we do have pretty fertile 
 5   ground and pretty untrod ground on Reg A+ because 
 6   what, there were 28 Reg As in 2011 or something like 
 7   that?  So there's a model, but there's certainly not any 
 8   after-market secondary trading model there.  Maybe in 
 9   support of less than $50 million public offering via 
10   exemption we could craft the kind of disclosure rules 
11   that would be enough for accredited investors and support 
12   a marketplace that would be beyond some of these private 
13   markets but less than an exchange. 
14             MR. ABSHURE:  And then, in fact, I think the 
15   framework for what you're describing is already there.  
16   From what I've heard the big concern is for these 
17   companies, whether they're pre-IPO companies or companies 
18   in which you want to facilitate some sort or secondary 
19   trading, you have to have information requirements.  You 
20   can't have a secondary market without it. 
21             However, what you have under the new Reg A+ 
22   is authorization for the Commission to develop both 
23   '33 Act-Lite and '34 Act-Lite reporting requirements.  So 
24   I think that type of obligation could be placed directly 
25   at Lona's feet to have knocked out in about a week and a 
0090
 1   half. 
 2             And I think the other differences between Reg 
 3   A and 506 offerings or other private offerings, of 
 4   course, the Reg A securities are not restricted 
 5   securities.  So you're not going to have a holding 
 6   period.  You're going to be able to tout the liquidity of 
 7   those securities, and especially if a market develops for 
 8   those. 
 9             Now, I do believe the distinction will be with the 
10   Reg A securities are— you can sell those to unaccredited 
11   investors.  That's the only other distinction I can think 
12   of. 
13             MR. YADLEY:  Well, that's good.  I know 
14   obviously where you're coming from, and a beneficial 
15   distinction here is that there is an offering process in 
16   Reg A+.  So it's not a full-blown registration 
17   system, but I know the fear of state regulators and all 
18   concerned people, is do a private placement and maybe 
19   this group of accredited investors gets what it wants and 
20   negotiates the information it wants, but then if it's 
21   just out there and the company doesn't have any 
22   continuing reporting obligations that may not 
23   be good for every person. 
24             MR. ABSHURE:  Exactly, because whenever you talk 
25   about, as I said before, whenever you talk about making 
0091
 1   the process cheaper and easier on the issuer, inevitably 
 2   what you're saying is a politically acceptable way of 
 3   saying we're going to provide the investor less 
 4   information or a different type of information. 
 5             What makes us comfortable about Reg A is that 
 6   the SEC retains the ability to determine what should be 
 7   disclosed on both your  '33 Act 
 8   side and the periodic reports.  Obviously if the 
 9   provision within Reg A is that the SEC has the 
10   discretion to require '34 Act-Lite reporting, well, 
11   that's to facilitate secondary trading.  It's the only 
12   reason it's there. 
13             So I don't think that we have an issue with '34 
14   Act trading, and in fact, if Reg A could be tweaked to 
15   fill this hole, I think it's a fabulous idea. 
16             MR. YADLEY:  I love fabulous ideas. 
17             MR. GRAHAM:  Yeah, I think, any 
18   system we come up with I would envision some 
19   level -- devil is in the details -- to be determined, but 
20   some level of appropriate disclosure under the '34 Act. 
21             MR. YADLEY:  A practical consideration, and I 
22   hate to get bogged down with practical considerations, 
23   but, in fact, there are issues in lightening up the '34 
24   Act.  We'll get to that.  Some are appropriate, but there 
25   is inertia and there is concern about backing off.  
0092
 1   Starting over, be it in the new world of 506 with general 
 2   solicitation or Reg A, I think, allows the SEC to use 
 3   its knowledge and creativity, which is there, and sort of 
 4   create a new model, and I understand the realities of 
 5   trying to back off of the regime that we've had since 
 6   1934 because there are lots of people who say, "Well, if 
 7   you do that, this, this, this." 
 8             Here it's not a blank piece of paper, but it is 
 9   an opportunity to start and get input from this Committee 
10   and other committees and interest groups. 
11             MR. GRAHAM:  Okay. 
12             MR. ABSHURE:  But I do think you keep the stair 
13  -step approach, and at the top you always have the full-
14   blown disclosure that we have now so we can maintain our 
15   reputation of having the gold standard when it comes to 
16    the world's markets. 
17             You know, I don't think any state regulator is 
18   opposed to a stair step, a more formal business 
19   development cycle, but I think at the top we've always 
20   got to keep the best. 
21             MR. YADLEY:  Sure, and hopefully investors will 
22   demand the best at the top, and that's why it's there. 
23             MR. GRAHAM:  Any other comments? 
24             MR. ABSHURE:  Well, a couple of things.  Again, 
25   what we're trying to do is to come up with ways to 
0093
 1   facilitate private companies going public 
 2   helping to ensure that there is a framework that will 
 3   encourage those companies that otherwise would not have 
 4   gone public to go public, and we know everything that 
 5   goes into that. 
 6             It has been made clear from this discussion 
 7   that there are a number of issues all interrelated about 
 8   companies' ability to do an initial public offering, how 
 9   that is tied to liquidity in the secondary shares, how 
10   we're developing existing markets that are currently 
11   providing that kind of liquidity.  And maybe there are 
12   ways to somehow reengineer things so that the existence 
13   of that level of liquidity, you know, can be used to 
14   somehow create additional liquidity or enhance the 
15   ability of private companies to raise capital. 
16             But perhaps there are things around the edges 
17   that can be done in the context of developing the 
18   framework around Reg A+.  Perhaps there's things 
19   that can be done around 506 as we complete that 
20   rulemaking, and so as far as the recommendation that is 
21   on the table, you know, I'd be inclined to modify it to 
22   recognize those other areas where this overall 
23   objective can be achieved. 
24             Again, we can't do much more as a Committee, 
25   and the  SEC can't do much more other than be a 
0094
 1   facilitator in the event that someone wants to, you know, 
 2   pursue some of these avenues, and of course, a big part 
 3   of that is coming up with an appropriate disclosure 
 4   framework. 
 5             But it seems to me that what we should do as a 
 6   Committee is to, you know, recommend that the Committee 
 7   do what it can do to help facilitate these things to the 
 8   extent that others come along and say, "This is a 
 9   business that we think is worth trying to develop." 
10             Any thoughts? 
11             MR. YADLEY:  One suggestion might be because 
12   the recommendation, I think, is well framed in general, 
13   would be maybe in the preamble try and fit in some of 
14   these other thoughts that we've discussed showing that 
15   this could appeal to and be attractive to market 
16   participants and investors from a number of fronts, 
17   including a newly public company as well as under the new 
18   rules to be developed for Reg A+. 
19             And you might want to add it to private 
20   offerings as well, but that probably muddies things up.  
21   Maybe we ought to consider that separately. 
22             MR. BORER:  To the point that I think was being 
23   referred to there, I think that this is as important to 
24   issuers, to companies trying to build themselves a 
25   capital base because of the secondary liquidity than it 
0095
 1   is to the companies and anything they can do for 
 2   themselves. 
 3             Now, maybe some market develops where companies 
 4   are allowed to subscribe to this service to provide 
 5   secondary liquidity through means and would undertake, 
 6   you know, a relationship with this market.  It's not an 
 7   exchange clearly, you know.  It's a bulletin board 
 8   posting, those types of things, because most of these 
 9   transactions would probably still take place between 
10   registered dealers that are, you know, highly regulated 
11   by FINRA and SEC. 
12             And I think that having something in here that 
13   recognizes the fact that this isn't so much for the 
14   issuers in primary, but in secondary benefit it would be 
15   because it's providing liquidity in their securities 
16   after they've already been distributed.  I think that's 
17   where the biggest impact would be here for the earlier 
18   stage companies, not for under Reg A and those types of 
19   things because just to use another analogy, 144A 
20   wouldn't work unless there was Portal in the ability -- 
21   in the after-market for institutions to be able to trade 
22   these things. 
23             So I think if we recognize that in there, at 
24   least in just some kind of tone, that might be helpful. 
25             MR. GRAHAM:  Okay.  So with John's latest 
0096
 1   modification and the changes that I outlined, I propose 
 2   the recommendation as modified. 
 3             PARTICIPANT:  Second. 
 4             MR. GRAHAM:  Any further discussion? 
 5             (No response.) 
 6             MR. GRAHAM:  All those in favor? 
 7             (Chorus of ayes.) 
 8             MR. GRAHAM:  Any opposed? 
 9             (No response.) 
10             MR. GRAHAM:  Okay.  The recommendation carries. 
11             It is a little bit before lunch.  So before 
12   going to the third recommendation, let's break for lunch 
13   and start up again at 1:15, 1:15. 
14             Okay.  Thank you. 
15             (Whereupon, at 11:50 a.m., a lunch recess was 
16   taken.) 
17                A F T E R N O O N  S E S S I O N 
18             MR. GRAHAM:  Okay.  Let's reconvene. 
19             So the next recommendation is with regard to 
20   the expansion of Commission rules providing for scaled 
21   disclosure and other requirements for small public 
22   companies.  And as you know, the SEC has provided for  
23   simplified disclosure in reporting for smaller issuers 
24   for more than 30 years, and under the current Commission 
25   rules, small reporting companies have certain scaled 
0097
 1   disclosure and reporting requirements available to them. 
 2             Kind of the threshold issue that we might, you 
 3   know, have is simply with the definition of smaller 
 4   reporting company.  Right now that definition is 
 5   companies with a common public equity float to $75 
 6   million, with some alternatives, but the main thing is 
 7   the $75 million number, and we were thinking that it 
 8   would make sense to raise that number, and the 
 9   recommendation as you recall talks in terms of  $250 
10   million. 
11             As you're also aware the JOBS Act created a new 
12   category of company called "emerging growth company," to 
13   which certain scaled disclosure and other requirements 
14   apply at the time of the company's IPO and for a specified 
15   period, namely, until kind of the character changes in 
16   the way that is outlined or it has been a public company 
17   
18   for five years. 
19             And an emerging growth company is defined as a 
20   company with total annual gross revenues of less than $1 
21   billion.  The JOBS Act includes a start date condition 
22   for fitting into this category, and only companies whose 
23   IPOs occurred after December 8, 2011 may be considered an 
24   emerging growth company. 
25             So the scaled disclosure requirements available 
0098
 1   to smaller reporting companies overlap with those available 
 2   to emerging growth companies, but the provisions are 
 3   not identical, and you know, certain companies that are 
 4   smaller reporting companies that have revenue considerably 
 5   less than $1 billion, there are some things that they may 
 6   not take advantage of simply by the fact that they went 
 7   public at the wrong time. 
 8             We talked a lot about this the last time we got 
 9   together in San Francisco, and we were of the view at 
10   least at that time and I think that view has continued 
11   that expanding the scaling and other regulatory relief 
12   provided to smaller reporting companies to include some of 
13   the regulatory relief provided to emerging growth 
14   companies under the JOBS Act would be helpful to 
15   facilitate innovation and job creation by these 
16   companies. 
17             We also believe that regulatory relief should 
18   be provided to the smaller reporting companies with respect 
19   to certain of the Commission's other disclosure 
20   requirements that place a disproportionate burden on 
21   smaller reporting companies in terms of the cost of and the 
22   time spent on compliance with these requirements. 
23             We also believe that the current, again, 
24   threshold is too low and that expanding the companies that could 
25   qualify would further encourage the more robust smaller 
0099
 1   company participation in the capital markets without 
 2   adverse effects in investor protection. 
 3             In coming up with the $250 million number, I 
 4   can't say that it was necessarily scientific.  I think we 
 5   can hear from the staff as to what might serve as a 
 6   rationale for that number and how the original $75 
 7   million number was arrived at in the first place.  
 8             I will note that according to data provided by 
 9   the staff, in 2011 there were approximately 8,100 
10   operating companies that filed annual reports on Form 
11   10-Ks, and approximately 59 percent of those companies had 
12   a float of less than 75 million.  So you're looking at 
13   smaller reporting companies equaling about 59 percent of 
14   the companies that were listed. 
15             And the staff estimates that about 11 percent 
16   had a public float between 75 million and 250 million, 
17   which means that by bumping up the number to 25 million 
18   would add another 11 percent to that 59 percent.  I think 
19   of certainly particular interest is that when you look at 
20   companies with market caps of up to a billion, they make 
21   up 72 percent of the listed companies, but only five 
22   percent of the total market cap, and the top seven 
23   percent of listed companies make up about 75 percent of 
24   the market cap of listed companies. 
25             In looking at the structure that has resulted, 
0100
 1   we now have kind of these three buckets:  smaller reporting 
 2   companies, emerging growth companies, and companies that, 
 3   you know, maybe would be considered emerging growth 
 4   companies, but they had their IPOs on a date earlier than 
 5   December 8, 2011, and I think one of the primary things 
 6   that we are asking, you know, be done is that there be a 
 7   cost-benefit analysis to just really kind of understand 
 8   the impact of a lot of this disclosure, of any 
 9   disclosure, any disclosure regime that is proposed to 
10   maintain; that we really try to understand the impact on 
11   smaller companies. 
12             So in terms of recommendations, we would, 
13   again, revise the definition of smaller reporting company 
14   in Rule 405 and Item 10 of Regulation S-K to include issuers  
15   with a public float of up to $250 million, and that would also       include 
16   non-accelerated filers. 
17             So that's kind of changing the rules, if you 
18   will, of who fits into these various buckets, and I think 
19   it would help to kind of rationalize the system that we 
20   currently have that, again, is smaller reporting companies, 
21   emerging growth companies and companies that would have 
22   been smaller or would have been emerging growth companies 
23   but they went public too soon. 
24             Once you have those buckets, then it's the 
25   whole notion of scaled disclosure and what do we do 
0101
 1   about that, and the recommendations outline a number of 
 2   points in that regard, and I would just, you know, bear 
 3   in mind and we'll hear from those who are kind of at the 
 4   front lines in terms of dealing with these issues, but I 
 5   know that, you know, you have to be careful about saying 
 6   that it's an either/or proposition, that we either have 
 7   disclosure that is not costly or we protect investors, 
 8   and you know, again, I guess that shouldn't be looked at 
 9   as a false choice, but nonetheless what we're looking at 
10   are a set of requirements that in order to comply are 
11   pretty expensive, and we've clearly decided 
12   that in the smaller reporting company regime there are some 
13   things that are appropriate for these smaller companies 
14   where the regulations don't have to be quite as robust. 
15             And so that's kind of where we're 
16   going this afternoon, looking at some of these ideas and 
17   deciding whether or not these changes do 
18    make sense.  But I understand that each one of 
19   these requirements has a cost associated with it, and 
20   again, just because there's a cost associated with it 
21   doesn't mean we don't do it because there is the investor 
22   protection aspect. 
23             And I think that underlying all of this -- and 
24   it's always easier said than done -- but underlying all 
25   of this is we're looking at things where you can draw the 
0102
 1   conclusion that all things considered, you know, this is 
 2   disclosure that isn't necessarily required to enable an 
 3   informed investment decision when it comes to the smaller 
 4   companies that we're talking about. 
 5             And someone I am sure has done the numbers, but 
 6   again, there is a cost associated with each one of these 
 7   requirements, and when you look at the thousands of 
 8   companies that are out there that are incurring these 
 9   costs and you multiply saving those costs by those 
10   thousands, it's a big number, and it's a big number that 
11   could be used to create jobs.  It's a big number that we could 
12   use to grow companies and support innovation. 
13             So you know, maybe individually a lot of these 
14   things may not amount to much, and maybe each one does, 
15   but certainly collectively I think we're talking about 
16   things that could have a significant impact on job 
17   creation and just the health of this sector. 
18             As far as the specific recommendations are 
19   concerned, again, the idea is to revise the disclosure 
20   and other rules applicable to smaller reporting companies, 
21   to incorporate exemptions from the requirements which are 
22   available to emerging growth companies under the JOBS 
23   Act.  The first one is the requirement to conduct shareholder 
24   advisory votes on executive compensation and on the 
25   frequency of those votes.  The second is a requirement to 
0103
 1   provide disclosure about and conduct shareholder advisory 
 2   votes on golden parachutes. 
 3             Then there's a requirement in Dodd-Frank to 
 4   provide disclosure of the ratio of the median annual 
 5   total compensation of all employees of the issuer to the 
 6   annual total compensation of the CEO. 
 7             Then there's a requirement to provide 
 8   disclosure of the relationship between executive 
 9   compensation and other issuer financial performance, and 
10   then in the case of new or revised financial accounting 
11   standards that have different compliance dates for public 
12   and private companies that smaller reporting companies 
13   could take advantage of the private company date. 
14             That any rules of the Public Company Accounting 
15   Oversight Board requiring mandatory audit firm rotation 
16   or an auditor discussion and analysis, to be exempt from 
17   that; that the Commission revise the material contracts 
18   exhibit filing requirement in Item 601(b)(10) of Regulation S-K to 
19   provide that smaller reporting companies will not be 
20   required to file schedules or similar attachments unless 
21   those schedules or attachments contain information which 
22   is material to investment decisions and which is not 
23   otherwise disclosed in the actual agreement or the 
24   disclosure document. 
25             And finally the suggestion that the Commission 
0104
 1   revise its rules to provide an exemption for smaller 
 2   reporting companies for the requirement to submit 
 3   information in XBRL format for periodic reports and other 
 4   public filings. 
 5             I thought that it might make sense if we just 
 6   kind of go back and kind of tick through the 
 7   recommendations that are outlined, and, well, let's see. 
 8    I think the first one we want to do, let's take 
 9   separately the definition of smaller reporting company.  
10   So, again, the suggestion is that we change that 
11   definition from 75 million to 250 million, and so I will 
12   throw that out for comment. 
13             Yes? 
14             MR. YADLEY:  Do we know how long the 75 has 
15   been intact?   
16             MR. GRAHAM:  Matthew and Gerry? 
17             MR. LAPORTE:  Yeah, it was 2006, early 2007, I 
18   think. 
19             MR. YADLEY:  Okay.   
20             MR. LAPORTE:  Maybe 2008, but it has been a few 
21   years. 
22             MR. GRAHAM:  And how was that number arrived 
23   at? 
24             MR. LAPORTE:  The release says that it was 
25   similar to the $75 million figure that was already in the 
0105
 1   rules for use of Form S-3. 
 2             MR. GRAHAM:  So -- 
 3             MR. LAPORTE:  It was a number the Commission 
 4   had used before. 
 5             MR. GRAHAM:  Okay. 
 6             MR. NALLENGARA:  I don't think we know exactly 
 7   the root of $75 other than it was a number that was used 
 8   before.  We can track that.  We can track down the 
 9   source, the reason $75 was chosen. 
10             MR. GRAHAM:  Okay. 
11             MR. YADLEY:  And it was also a change from the 
12   prior definition that related to revenues and other 
13   things.  So it was qualitative. 
14             MR. GRAHAM:  So it's like a lot of these 
15   numbers.  You know, correct me if I'm wrong, but like a 
16   lot of these numbers, it's hard to come up 
17   with a precise formula or kind of 
18   the one you would use and apply to kind of come up with a 
19   number.  I think a lot of it does involve judgment and 
20   just kind of thinking about the 
21   size of particular companies and within the context of 
22   those companies and what they're doing and their 
23   compensation, what the compensation structure of a 
24   company like that, et cetera, might be, and just coming 
25   up with a number. 
0106
 1             MR. NALLENGARA:  And at least I've found that 
 2   although it's instructive, but it may not be always 
 3   entirely determinative to go back to why, what the 
 4   reasons were for selection of a particular threshold when 
 5   it was originally put in without considering what other 
 6   things you should consider as part of that.  Five years 
 7   ago, ten years ago, 15 years ago something may have been 
 8   important in determining what a threshold was.  The 
 9   markets have changed.  The individuals buying and selling 
10   the securities have changed.  The companies have changed. 
11    What was a small company 20 years ago or what was a big 
12   company 20 years ago may not be a big company now. 
13             So thinking about it in terms of what a 
14   threshold means today is equally as important as why a 
15   threshold was selected years ago. 
16             MR. GRAHAM:  Exactly.  I think you're exactly 
17   right because you have to take the context of when that 
18   determination was made, but it still might be kind of 
19   instructive, you know, how you might go about coming up, 
20   you know, deriving a number for today's circumstances, 
21   but certainly that's part of deciding whether 
22   or not $250 makes sense, and the argument would 
23   follow those lines. 
24             That things have changed.  The markets have 
25   changed.  How you might define what's big and what's 
0107
 1   small may have changed, and as a 
 2   result it seems to make sense to us at least that 75 is 
 3   too small.  Probably 500 is too big, and far as 
 4   what's just right, I think you look at data points, but I 
 5   think at the end of the day it's going to be a judgment 
 6   call, and right now we're looking at 250 million.   
 7             MR. BORER:  I think, Stephen, in my 
 8   perspective, my view on this point, we may have discussed 
 9   this as we were going through various things over the 
10   last year on scaled disclosure and, you know, the JOBS 
11   Act implementation and those types of things.  I think a 
12   way that it would be instructive to look at is why did 
13    Congress decide that a substantially higher number 
14   would be good for companies that are coming to market 
15   fresh, and not deal with the already seasoned group of 
16   companies that are public which have a number that is 
17    less than ten percent of the billion dollar, I 
18   think, number. 
19             It's less relevant to me where did 75 come from 
20   in the first place because somebody else who's spoken 
21   legislatively has said then because of the IPO on-ramp 
22   report and all these things which encourage them to do 
23   various of these things have said it's a lot higher.  So 
24   even 250 is still very pedestrian in light of a billion 
25   dollars. 
0108
 1             One other quick question I had and maybe 
 2   somebody with the statistics who came up with these could 
 3   help is, is there a sense of, say, of the 59 percent that 
 4   are below 75 million, how many of those, in fact, do go 
 5   through and comply with the higher disclosure 
 6   obligations? 
 7             Because I've been in board rooms before where 
 8   they've said, "Well, we're at 70.  We don't need to do 
 9   this, but if we're back above 75, then we'll have to go 
10   and do it again," and you know, the experts who do these 
11   things, the outside consultants and those types of things 
12   would have to restart that process. 
13             Is there any other statistics?  Anybody gone 
14   through and looked at that metric? 
15             MR. NALLENGARA:  We don't have that, but part 
16   of the -- well, we don't have that here, but part of the 
17   challenge of getting that information is a company may 
18   have that market cap, may not view themselves or check 
19   off that they're a smaller reporting company, and even if 
20   they do they may choose in certain areas to provide 
21   additional information that they may not otherwise have 
22   to provide, whether it's because they think it's good 
23   information to provide or whether some investor has said, 
24   "I'd like to see a certain type of information." 
25             So for us to go and see all the companies that 
0109
 1   are below 75, what they're actually doing, that may be a 
 2   more manual pick-and-shovel process that would be more 
 3   challenging for us to be able to do, to have a 
 4   real sense of what companies below that are actually 
 5   doing that because many of them would have not been smaller 
 6   reporting companies but for a stock price drop, and they 
 7   will just continue to report as not a smaller reporting 
 8   company.  So there will be some muck in those numbers. 
 9             MR. YADLEY:  I think also from some securities 
10   lawyers' perspectives it was a new set of rules to learn 
11   and the lawyers and the accountants and the analysts were 
12   all familiar with other rules, and so a lot of companies 
13   almost by default, I think, that were close just didn't 
14   bother to learn those rules. 
15             Another point of reference, the Small Business 
16   Advisory Committee that issued its final report, I think, 
17   in April '07 was looking at 75 million as a break point, 
18   but I think that was picking up at the time, which is 
19   ancient history now, but something like 85 or 87 percent 
20   of the then registered public companies.  Does that ring 
21   a bell, Lona or Gerry? 
22             I think it was something on that magnitude.  
23   I'm not sure there's any real magic to this, except that 
24   75 million is way too small, and 250 seems like a good 
25   place to start, and again, if it works for 250 and 
0110
 1   there's a demonstration that there are companies that 
 2   another couple hundred million more are more like smaller 
 3   companies than bigger companies, I think it can always be 
 4   changed again. 
 5             So I think this is a good place to start, 250. 
 6             MR. NALLENGARA:  Just to John's question on the 
 7   IPO on-ramp, the billion dollars, remember that's a 
 8   revenue number, not a market cap, and I'm not sure what 
 9   data was used or what analysis was undertaken to set that 
10   number.  I'm sure lots, lots, lots, so much was done to 
11   do that, but that number, remember it's not a permanent 
12   place you sit, right?  It's five years, and at the most 
13   it's five years and then you come out, and it's a 
14   different sort.  The emerging growth company is to 
15   incentivize companies to consider IPOs, and at some point 
16   you stop being an emerging growth company. 
17             So, one, it's revenue.  Number two, it's 
18   finite, and this being a place, you know, something to 
19   consider, a company that's going to be in a certain spot 
20   or expected to be in a certain spot for a longer period 
21   of time, and to encourage companies like that to continue 
22   to be public companies in that size.  So maybe 
23   a billion dollar number or that big number may not be 
24   appropriate for consideration, I guess, or it might be, 
25   but keep in mind that it is a finite period for the 
0111
 1   billion dollars. 
 2             MR. BORER:  A question on that though.  To the 
 3   extent that someone goes public under the JOBS Act 
 4   provisions and has the scaled disclosure for the five 
 5   years, the five years expires and they have a $173 
 6   million market cap, I assume they then would fall under 
 7   this other provision. 
 8             MR. GRAHAM:  Absolutely. 
 9             MR. BORER:  Right.  Okay. 
10             MR. GRAHAM:  Absolutely. 
11             MR. BORER:  And if they went public and they 
12   never expected to be at the higher number, they could 
13   initiate just under this, if we set it at 250, under 
14   these provisions as well, correct? 
15             MR. GRAHAM:  Just be a smaller reporting company 
16   and just be done with it. 
17             MR. BORER:  Right.  Okay.  Thanks. 
18             MS. McGOWAN:  I just wanted to voice that I am 
19   in agreement with the 250.  If you think that a smaller 
20   biotech company comes out at 70 or 75 million and they 
21   need some room to grow, the 250 sounds like a reasonable 
22   number. 
23             I was also wondering if we could add to the 
24   proposal that we have 100 or $100 million in sales or -- 
25   I'm sorry -- revenue, if that could be something that we 
0112
 1   could add in.  At one point it was in there and then it 
 2   came out and I was wondering if that could go back in for 
 3   revenue. 
 4             You were at 250 million or revenue of up to 
 5   $100 million.  If you hit either of those qualifications 
 6   you would be a smaller reporting company. 
 7             MS. JACOBS:  I don't recall the 100 million in 
 8   revenue.  I need some help.  Do you recall it? 
 9             MS. McGOWAN:  I'm sorry.  It was 50 million.  
10   Could we make that -- it was in there and now it has come 
11   out.  It's in Section 2. 
12             MR. GRAHAM:  Yeah. 
13             MS. McGOWAN:  After considering that. 
14             MR. GRAHAM:  So in other words, the way that 
15   was set up was that it was 75 million, but if for some 
16   reason you couldn't figure out your float -- 
17             MS. McGOWAN:  Right. 
18             MR. GRAHAM:  -- then you revert to the 50 
19   million. 
20             MS. McGOWAN:  You revert. 
21             MR. GRAHAM:  And I would think that a similar 
22   system would be set up in this context. 
23             MS. McGOWAN:  Okay. 
24             MR. GRAHAM:  That the number is 250, but if for 
25   whatever reason you can't figure out your public float, 
0113
 1   then you can fall back to a revenue number, and let's 
 2   drop it to 100. 
 3             MS. McGOWAN:  Okay.  Thank you. 
 4             MR. GRAHAM:  Any others? 
 5             MS. JACOBS:  Are you sure that -- 
 6             MR. GRAHAM:  It works. 
 7             MS. JACOBS:  Fifty million on 75? 
 8             MR. GRAHAM:  A hundred and 250. 
 9             MS. JACOBS:  I don't know that the 100 is high 
10   enough.  That's what I'm doing. 
11             MR. YADLEY:  I think 100 million sounds good.  
12   I mean, revenue -- and I think public float is the better 
13   number as the base number because revenue, depending on 
14   what kind of company it is, of course, may not really 
15   reflect.  It may be a big number, but it's commissions or 
16   dollars going through.
17             But I think if we're going up, 100 million is 
18   pretty small, I think, for purposes of having disclosure. 
19    So I'm -- 
20             MR. GRAHAM:  I think that sounds right, and 
21   it's going to be a default number anyway.  It's seldom 
22   going to be used I would imagine. 
23             Any other comments? 
24             MS. GREENE:   If they're using a billion 
25   dollars on the JOBS Act five-year ramp for revenue, 100 
0114
 1   million, knowing that most companies would know what 
 2   their public float is so that it's irrelevant, but 
 3   doesn't $100 million in revenue seem really small? 
 4             MR. GRAHAM:  No, because again, as Lona 
 5   was pointing out a moment ago, it's a little bit apples 
 6   to oranges because we're talking about setting up a 
 7   permanent system where as long as you qualify, you're 
 8   there forever versus the JOBS Act regime that 
 9   sets up a system to kind of get people on and up and 
10   running, and five years later it's over. 
11             MS. GREENE:  Okay. 
12             MR. CHANG:  Should the number be on valuation 
13   rather than float?  Because now you can play games on how 
14   much do you let it go public with, percentage of the 
15   company. 
16             MR. GRAHAM:  I'm inclined, you know, not to 
17   think so.  I think you play games with valuation, too.  
18   I'm not sure to what extent -- I'm not sure to what 
19   extent going in that direction would make sense.  Do you 
20   have a thought on that? 
21             MR. NALLENGARA:  On valuation, you have to 
22   check it.  It's a lot easier to determine your market cap 
23   than it would be -- you'd have to hire somebody around 
24   here to do it, I guess, on an every year basis.  I'm not 
25   sure.  So that's one question on whether valuation is. 
0115
 1    Is a practical method to do it? 
 2             And I guess the other, and this is a question 
 3   for you, we're talking about public reporting 
 4   obligations.  So this is the reporting obligations you 
 5   really have to your public shareholders.  Are you focused 
 6   on -- you know, do you care about the ownership as part 
 7   of this question?  Are you concerned about the ownership 
 8   of all the security holders?  Are you concerned about the 
 9   float that you have publicly offered? 
10             That's another question to consider. 
11             MR. CHANG:  But the point I think is, I think, that we 
12   are addressing these issues because of the resource 
13   availability of the company, and so if the market cap is 
14   very large, then theoretically they have more resources, 
15   right?  See, they need less help. 
16             MR. GRAHAM:  Right. 
17             MR. YADLEY:  Yeah, I think Lona's last point is 
18   the most persuasive at least for me, is that the 
19   regulation is there to protect somebody, and that somebody 
20   primarily ought to be people not close to the company who 
21   might otherwise, to make an analogy of the private 
22   placements, have an ability to know what's going on.  So 
23   it's the public shareholders, and the public float is 
24   probably the best number, the best metric to be able to 
25   gauge that, even though imperfect. 
0116
 1             MR. GRAHAM:  Okay.  Okay.  Well, I think it 
 2   might make sense to at least take this separately before 
 3   I go down to the specific recommendations.  So I would 
 4   like to recommend that we adopt a recommendation to move 
 5   the threshold from 75 to 250. 
 6             PARTICIPANT:  Second. 
 7             MR. GRAHAM:  Those in favor? 
 8             (Chorus of ayes.) 
 9             MR. GRAHAM:  Opposed? 
10             (No response.) 
11             MR. GRAHAM:  Okay.  Carries. 
12             Okay.  So now -- 
13             MR. CHACE:  Can I just ask a quick question? 
14             MR. GRAHAM:  Yeah. 
15             MR. CHACE:  Could somebody just remind me what 
16   the key provisions or the key scaled disclosures are that 
17   you'd be expanding from the smaller reporting companies, 
18   if that makes sense, not the items that we've outlined, 
19   but what the scaled disclosure that smaller reporting 
20   companies currently enjoy that you'd be expanding to the 
21   larger market cap group? 
22             MS. JACOBS:  CD&A is one.  There a --  
23                Diversified Reporting Services, Inc. 
24                           (202) 467-9200 
25             MR. GRAHAM:  We've got a list.  I don't have 
0117
 1   that list committed to memory. 
 2             MR. YADLEY:  The material ones or -- 
 3             MR. GRAHAM:  Can we -- 
 4             MR. YADLEY:  Jennifer will walk us -- 
 5             MS. ZEPRALKA:  If I can remember them all.  I 
 6   haven't looked at them lately.  It would be you could do 
 7   two years of financials instead of three.  And, Gerry, 
 8   jump in if I'm getting this wrong.  I think the selected 
 9   financial data is not required, the whole table. 
10             MR. YADLEY:  Right, nor supplemental -- 
11             MS. ZEPRALKA:  Or supplemental financial data. 
12             MR. YADLEY: -- financial information. 
13             MS. ZEPRALKA:  There's no CD&A in the exec comp 
14   disclosures.  There are fewer exec comp disclosures.  
15   They don't have to do all the same tables that the larger 
16   companies need to do.  MD&A, you could just cover the 
17   years that are covered in your financial statements if 
18   you choose to do two years instead of three years of 
19   financials. 
20             What am I forgetting?  That's the biggest -- 
21             MR. YADLEY:  I think the comp committee report, 
22   some other minor things.  I think those are -- 
23             MR. NALLENGARA:  So, Dan, in terms of things 
24   that you care about based on what you said at other 
25   meetings, I think I guess that you're going to get less 
0118
 1   financial information.  I think you've indicated in the 
 2   past you haven't been -- in your real job, you haven't 
 3   been concerned about executive compensation information, 
 4   but there's less of that. 
 5             You know, the three years versus two years, 
 6   once you've reported once, it's not a -- I think it's 
 7   executive compensation information that really helps the 
 8   smaller reporting company, those tables and the narrative 
 9   discussions around those, particularly the new CD&A 
10   disclosures can be time consuming, and so I think in the 
11   end that's where the bulk of it is. 
12             Kara, is that -- am I getting it?  Yeah. 
13             MR. GRAHAM:  And as far as the financial 
14   reporting is concerned, I think that as a practical 
15   matter that requirement would change or be less, but I 
16   think as a practical matter, as Lona is suggesting, that 
17   maybe sometimes there's a one-year gap, but I think most 
18   of the times there's never a gap because outside of the 
19   fact the company is not required to do it, they do it 
20   anyway because it's a marketing issue. 
21             Okay.  So let's walk through the 
22   recommendations.  The first one that shows up, this is in 
23   the draft recommendation.  This would be the bullets 
24   under Paragraph 2.  The first one we talk about the 
25   auditor attestation requirement, the 404(b).  I think 
0119
 1   that both -- correct me if I'm wrong, guys -- but I think 
 2   that both smaller reporting companies and emerging growth 
 3   companies are currently exempt from that, and this is 
 4   just by way of noting that this would be a 
 5   benefit, but that companies in that third bucket would 
 6   now get by virtue of the fact that we have -- well, we 
 7   haven't done it, but should the threshold be raised from 
 8   75 to 250, then there are companies that are currently, 
 9   you know, outside of the definition of emerging growth 
10   company by virtue of the fact that when they went public, 
11   they're going to take advantage of that. 
12             So that's just kind of a point of clarification 
13   of why that's there. 
14             The second recommendation has to do with the 
15   requirement to conduct shareholder advisory votes and 
16   executive comp and the frequency of those votes.  The 
17   smaller reporting companies are exempt, and emerging growth 
18   companies are exempt until they cease to be emerging 
19   growth companies. 
20             MS. JACOBS:  No, a clarification.  Say on Pay, 
21   it starts in 2013.  This is the one -- 
22             MR. GRAHAM:  Oh, now they're not losing it.  
23   They're not losing it, right, right, right. 
24             MS. JACOBS:  Yeah.  The smaller reporting 
25   companies have had an exemption -- 
0120
 1             MR. GRAHAM:  Right. 
 2             MS. JACOBS:  -- until this year.  Emerging 
 3   companies get it as part of the definition.  So the issue is 
 4   Say on Pay for smaller reporting public companies is, we 
 5   have been exempt from CD&A because the market caps are 
 6   below 75.  Now you have a shareholder vote on Say 
 7   on Pay and frequency on Say on Pay, which is incredibly 
 8   expensive because you've not had to put out the expensive 
 9   and detailed CD&A, and yet your pay packages have to go 
10   to shareholders for a vote, and then that vote is how 
11   often the shareholders want to weigh in on the vote, and 
12   you're in a position now of campaigning, and it is a 
13   distraction.  It is incredibly expensive because you do 
14   have to now begin to create the tables and the exhibits 
15   which typically go into a CD&A, which would let folks 
16   vote, and there is an additional complication of now you 
17   have ISS and Glass-Lewis weighing in on small and micro 
18   cap companies of which they are not really able to digest 
19   because this is a big influx of work. 
20             And so we have an additional distraction and 
21   expense of having to have people now monitoring and 
22   watching and working and trying to get the ISS 
23   recommendations in place, the Glass-Lewis recommendations 
24   in place, as well as the expense of the disclosures.  And 
25   so the question here is:  could we have a level playing 
0121
 1   field wherein the smaller reporting companies, if you fall 
 2   below that threshold, do not have to go through the 
 3   burden and the expense of shareholder outreach? 
 4             And that's the background for Say on Pay and 
 5   frequency. 
 6             MR. NALLENGARA:  So what it is, you've got to 
 7   go to your shareholders and ask them what they think of 
 8   your compensation package, and it's not a determinative 
 9   vote.  It's an advisory vote.  The Board takes that back 
10   and decides what they do with what the shareholders say. 
11             The next one on golden parachutes is the same 
12   concept.  It just deals with compensation packages in 
13   connection with the business combination transaction.  
14   So, again, it's an advisory vote.  Go with your 
15   shareholders.  Check their temperature.  If they all vote 
16   no in those votes, you're going to have to do something 
17   with it.  You're going to have to respond to that.  You 
18   have to respond to that vote. 
19             So what Chris identified is that the cost 
20   associated with putting that information together -- you 
21   know, proponents for this stuff say it encourages 
22   engagement with your shareholders.  It gets you talking 
23   to your shareholders about your compensation.  Some would 
24   say it more closely aligns your compensation with 
25   performance because you have to, as Chris said, sell your 
0122
 1   compensation package. 
 2             So, but, Chris identified that that takes work. 
 3             MS. JACOBS:  Right.  Every public company that 
 4   has to go through this exercise right now would say, you 
 5   know, there's no boilerplate.  Everything has to be 
 6   created from scratch, which is a burden.  It's expensive, 
 7   and your largest shareholders know where comp is.  
 8   Believe me, they do, and for some of us— I don't know 
 9   about the other public companies, but I mean, you've had 
10   comp disclosures in there before.  Your large shareholders, 
11   you're assuming you've got quarterly conference calls.  
12   You have interactions with your large shareholders.  
13   Believe me, we know who they are and we talk to them and 
14   they know what's up with compensation. 
15             So it just seems that you've got to be kidding. 
16    If the JOBS Act up to a billion dollars in revenue, 
17   we're just trying to level the playing field.  That's it. 
18             MS. JENNY:  I can't agree with you more.  I 
19   think the practical application of this from a cost and a 
20   time perspective would just detract from actually running 
21   the business, and the reality of it is that you're 100 
22   percent right.  If you are running your business, you 
23   speak to your investors; you speak to your shareholders, 
24   and there's dialogue, and there's nothing that's new or 
25   surprising. 
0123
 1             And if you were to put compensation in there 
 2   that was actually put up for discussion or feedback, to 
 3   me it would be mind blowing that every single person 
 4   would come back because you would have had to make some 
 5   major change that would have probably had to be 8-K-able 
 6   at some point or something to create that sort of a 
 7   change. 
 8             So I just think the practical application of it 
 9   and the cost for small businesses would be -- you know, I 
10   don't think you'd get the benefit of what you really 
11   wanted to get for the effort that you'd be putting in. 
12             MR. YADLEY:  Let me underscore this because 
13   this is something as a securities lawyer I really like 
14   for the reason that Chris said, is that it's not anything 
15   off the shelf.  I mean, I have to engage with the client, 
16   and they need to spend a lot of time, and I attend their 
17   board meetings, and a lot of things that there's 
18   consensus on among the compensation committee now has to 
19   sort of be described more formally, and even something as 
20   simple as, well, we benchmark; well, wait a minute.  What 
21   do you mean by benchmark?  Because for big companies, 
22   benchmarking means something. 
23             Well, no, we don't really benchmark.  We look 
24   at what some other companies our size and in our industry 
25   do. 
0124
 1              He said, "Okay.  Well, tell me more about 
 2   that." 
 3             And it almost can become confrontational, 
 4   except I'm a really nice guy and my clients are all 
 5   really nice, and we get through it, and the next year we 
 6   may not have to do that, but by the next year, I mean, it 
 7   doesn't stay fresh very long because things happen, and 
 8   as the economy changes, you evaluate it.  It's almost 
 9   like some of the internal controls where they're there 
10   and everybody understands them, but to document them is a 
11   really huge, expensive deal, and every time you change it 
12   it's a huge expensive deal, and is it something that 
13   people really care about? 
14             The other thing is with smaller companies 
15   management tends to own more stock.  There tends to be 
16   fewer shareholders, and hopefully, especially if 
17   companies make good disclosure and they do well, there's 
18   a longer time line where people are looking for them to 
19   be profitable. 
20             With the focus on large companies of "what have 
21   you done for me this quarter and what are you going to do 
22   for me next quarter," compensation becomes very important 
23   because that's the hammer that the institutional 
24   investors really have. 
25             And then as Lona mentioned, even though it's 
0125
 1   only an advisory vote, if you get a strong advisory vote 
 2   that says we don't like your compensation package," now 
 3   that's another very interesting board meeting where you 
 4   have to counsel them.  "Okay.  Your shareholders don't 
 5   like it.  So now let's listen and think what does that 
 6   mean and what does it mean not just for disclosure, but 
 7   for these 15 executives that have been working really 
 8   hard, and we didn't have a great year and, you know, 
 9   somebody put you in a box because it may not even be that 
10   the compensation is excessive, but the mix of 
11   compensation isn't what's really important to the 
12   institutional investors this year, or maybe the equity 
13   part of the award is, quote, too large but makes sense 
14   for this company.  You'd rather pay in equity then -- 
15   there's a lot of very individual decisions that as the 
16   disclosure becomes more formalized and becomes much 
17   longer, it really is a burden, and given my experience 
18   from the lawyer side, it's not the most important thing 
19   on investors' minds. 
20             MR. GRAHAM:  Any other comment? 
21             (No response.) 
22             MR. GRAHAM:  Chris, do you want to do CEO 
23   pay relative to all employees? 
24             MS. JACOBS:  Okay.  Does that assume then that 
25   there was a discussion on golden parachutes?  That was our 
0126
 1   next item.   
 2             MR. GRAHAM:  Lona kind of wrapped -- 
 3             MS. JACOBS:  I mean, Lona kind of wrapped it 
 4   up.  They're one and the same. 
 5             MR. GRAHAM:  Right. 
 6             MS. JACOBS:  Okay.  The next one is disclosure 
 7   of the ratio, median annual total comp of all employees 
 8   to the issuer.  This is not adopted yet.  We're assuming 
 9   that it will be adopted, and so this is a bit of the 
10   preemptive that -- for those of you who are not familiar 
11   with this, this is sort of an internal benchmarking, if 
12   you will, of CEO comp to compensation of the employees of 
13   the company. 
14             Now, my understanding, and you all can fill in 
15   the blanks, this is going to be a tough one because how 
16   that ratio is determined, there appears to be a lot of 
17   comment.  In my world there is a lot of comment in and 
18   around how is that determined.  Does it include equity, 
19   no equity, et cetera? 
20             Where we're coming from, and I'm speaking 
21   internal to our public companies, whatever good was 
22   intended in this ratio, and again, this type of 
23   disclosure, I don't know how it's possibly going to 
24   outweigh the costs and the disruption in-house.  It 
25   appears almost as if this is a shareholder activist issue 
0127
 1   versus one that a reasonable investor would need to 
 2   determine how they behave where their investments are 
 3   concerned. 
 4             MR. NALLENGARA:  And, again, I think this is 
 5   one of those things that take on much greater importance 
 6   when you're talking about companies where the CEO 
 7   compensation is in the tens of millions as opposed to 
 8   what you typically might find in the context of the 
 9   smaller reporting company. 
10             And I think there was mention of this, but just 
11   to reiterate, and you guys correct me if I'm wrong, but 
12   this is something that doesn't -- it's not currently a 
13   requirement.  It will be a requirement under Dodd-Frank, 
14   assuming that those rules are ultimately implemented. 
15             MR. GRAHAM:  Yes. 
16             MR. NALLENGARA:  So we're already saying that 
17   emerging growth companies are excluded, and what we're 
18   recommending is that we include smaller reporting 
19   companies. 
20             MR. GRAHAM:  Right.  Discussion? 
21             (No response.) 
22             MS. JACOBS:  Silence.  Okay. 
23             MR. GRAHAM:  Okay. 
24             MR. CHACE:  You know, just all of these are 
25   pretty noncontroversial to me in terms of things that are 
0128
 1   low value add from an investor perspective. 
 2             MS. JACOBS:  Okay. 
 3             MR. CHACE:  So rather than comment on each one 
 4   I just say generally speaking every one of them is 
 5   something that, I mean, while in some cases can be 
 6   interesting, isn't central to an investment decision in 
 7   my opinion. 
 8             MR. NALLENGARA:  I'm not sure if you want -- 
 9   I'm happy to offer the perspective that proponents of 
10   these provisions have made in terms of why some of these 
11   provisions are helpful for investors and why they -- 
12             MR. GRAHAM:  But helpful for investors in the 
13   context of a smaller reporting company as opposed to -- 
14             MR. NALLENGARA:  Well, I'm just -- I would just 
15   be offering what proponents for these provisions have 
16   articulated as why these provisions are -- some may see 
17   these provisions as not helpful, not material for 
18   investors.  That's what some of the folks that are 
19   challenging sort of the usefulness, the materiality of 
20   these provisions, and investors don't need this 
21   information or they're not looking for this information. 
22             Others may say that investors are looking for 
23   this information or may find this information helpful in 
24   making determinations of compensation and the scope of 
25   compensation and incentives of executives. 
0129
 1             So there is a viewpoint that this information, 
 2   both pay ratio, pay for performance, which is the next 
 3   one, and even the Say on Pay are for investors, that is, 
 4   information or a viewpoint that they would like to have 
 5   because it gives them the sense of compensation 
 6   questions.  It allows them to understand, you know, if 
 7   there's a big ratio, if there's a big disparity in median 
 8   pay versus CEO pay.  What does that say about 
 9   compensation incentives?  What does it say about how a 
10   CEO is being compensated? 
11             So there is a perspective on whether there is 
12   some value to shareholders here, but that's the 
13   articulated view. 
14             MR. GRAHAM:  But is that all companies? 
15             MR. NALLENGARA:  Yeah, that's a question for 
16   all of you to determine. 
17             MR. GRAHAM:  Right. 
18             MR. NALLENGARA:  Whether the investors in the 
19   companies we're talking about, whether that's the kind of 
20   information they need or it's the kind of information 
21   they want. 
22             MR. YADLEY:  I think, Steve, subject to being 
23   able to complete the agenda as you and Chris have put it 
24   out, I think it adds a little more force to our 
25   recommendation if Lona does that and we conclude that, 
0130
 1   okay, that's great, but we don't think it applies to 
 2   these companies.  
 3    
 4             MR. GRAHAM:  We think that's great, Lona, but 
 5   we don't think it applies. 
 6             (Laughter.) 
 7             MR. BORER:  I have a question. 
 8             MR. NALLENGARA:  The dismissal of my views are 
 9   a regular occurrence for me.  So I'm used to it. 
10             MR. BORER:  You said you didn't have opinions. 
11             MR. NALLENGARA:  I don't, absolutely not.  I 
12   have no -- 
13             MS. JACOBS:  To Dan's point, if the rest of the 
14   Committee is comfortable with what he just said, we can 
15   skip then to material contracts, finish that list rather 
16   than take it unit by unit, unless somebody had a 
17   statement in and around any specific one. 
18             MR. CHACE:  I just clarify what I said before, 
19   too.  I think certainly in certain cases this information 
20   can be material, and it can be in certain instances, but 
21   in the aggregate and given the cost, I think it's less 
22   material. 
23             MS. JACOBS:  And you know, Dan, to your point, 
24   it is additive, every single one of them right on down to 
25   conflict minerals. You don't get economies of scale from 
0131
 1   your regulations, and it is additive.  So thank you for 
 2   making the point. 
 3             MR. GRAHAM:  Okay.  Shall we skip down then to 
 4   the recommendation with respect to material agreements? 
 5             And again, the idea is to revise those 
 6   requirements to provide that smaller reporting companies 
 7   will not be required to file schedules or exhibits to 
 8   material contracts unless those schedules or attachments 
 9   contain material information that not otherwise disclosed 
10   in the document or in the disclosure document. 
11             A comment on that? 
12             MR. BORER:  I have a question real quick.  How 
13   easy is it -- I don't have a dog in this hunt, but just 
14   as a business person -- how easy is it to define what is 
15   material or not?  Who does that?  Do you need to hire an 
16   outside consultant to tell you whether it is or not? 
17             MR. GRAHAM:  Yes. 
18             MR. BORER:  Or is that just the internal 
19   financial control people within a company? 
20             MS. JACOBS:  Right.  It typically -- well, in a 
21   little company, almost everything must be determined to 
22   be material.  You know, a million dollars to us, our 
23   attorneys and auditors will tell us it's material, and so 
24   this gets to be a real cluttered landscape with the 
25   little companies that seek to comply, but these 
0132
 1   attachments, and these legends, and these things that must be 
 2   Edgarized, et cetera, it is, some of them, a very 
 3   specific burden. 
 4             It's very dangerous to a small company who must 
 5   put in an attachment to go along with your material 
 6   contract.  Now, in the real world, for those of us that 
 7   are public, we can apply to the SEC for a reprieve, more 
 8   money, more time, and really an incredible hassle, but to 
 9   have to include your customer list or what percent of 
10   business that customer is or in some cases maybe a bank 
11   account or a number that can do legitimate harm to the 
12   little guy, that's what this is about. 
13             MR. GRAHAM:  Yeah, and I think in terms of 
14   determining what is material, I meant there's some 
15   contracts that are material by definition, and then as you 
16   know, there are going to be contracts that are going to 
17   require a judgment call just like any other disclosure. 
18             There is some lack of clarity, and so once 
19   you've made that call and once you are dealing with a 
20   contract that is material, there's some lack of clarity 
21   as to what extent do you have to file everything that's 
22   attached to it, and that's what this is intended to 
23   address. 
24             MR. BORER:  Is this issue of materiality in the 
25   context that we're discussing it the same when you're 
0133
 1   deciding what is material to a company as opposed to 
 2   where this is material to an investment decision? 
 3             MR. GRAHAM:  Same thing. 
 4             MR. BORER:  It is? 
 5             MR. GRAHAM:  Same thing as the -- 
 6             MR. BORER:  Because that's in the mind of the 
 7   investor.  Is it material?  And you have to decide what's 
 8   material to them as opposed to when you're talking with 
 9   your accountants about is some number a certain 
10   percentage of something and therefore, you know, there's 
11   a problem with your financial statements or something 
12   like that. 
13             MR. GRAHAM:  Sometimes it's kind of hard to 
14   separate those two. 
15             MR. YADLEY:  Some of this is prescriptive.  I 
16   mean, as Chris was saying, it's the exhibits and the 
17   schedules which can be, you know, a lot of contracts as 
18   you all know in business, it's basically a master 
19   agreement which sets out a bunch of garbage, and then a 
20   lot of detailed information, some of which in technical 
21   agreements, communications agreements and so on will just 
22   be pages and pages of numbers which are pretty 
23   meaningless, but it's a material contract, and others of 
24   it is confidential.   
25             The other thing Chris was referring to is to 
0134
 1   apply for confidential treatment on this, which the SEC 
 2   staff is perfectly agreeable and reasonable and 
 3   businesslike in addressing that, but it's nothing that, 
 4   you know, your reviewer can just over the phone say, 
 5   "Yeah, yeah, you don't have to put that." 
 6             I mean it's a process, and it ends up taking 
 7   time, and time is money, and so I think it's pretty 
 8   important, and then when you Edgarize it, there's just a 
 9   cost every time you add another ten pages. 
10             MR. BOCHNOWSKI:  Stephen, I'd like to add.  If 
11   we could get some guidance as to what materiality really 
12   means because, again, as a small company, we all might 
13   agree or disagree as to something that's material.  It's 
14   kind of like the old definition of pornography.  You know 
15   it when you see it, but if you're in that gray area, you 
16   know, the words that maybe Greg has spoken to some of his 
17   clients is out of an overabundance of caution we ought to 
18   do this, and then you run into the cost because we're 
19   being cautious as opposed to really knowing the 
20   definition. 
21             MR. GRAHAM:  Well, you're not going to really 
22   know that definition.  That's going to be up to your 
23   securities lawyer, whoever is advising you on disclosure, 
24   and it's not something that we can come up with kind of a 
25   black and white definition for.  You're going to look at 
0135
 1   things that are going to, in your view, impact the 
 2   company in a material way, and the things that in your 
 3   view would just kind of change the total mix of 
 4   information out there that investors are considering in 
 5   deciding whether or not to buy or sell your stock. 
 6             And then you're going to fall back on 
 7   experience and judgment.  And there are always securities 
 8   lawyers or securities litigators out there that are 
 9   willing to help you define that. 
10             MS. JACOBS:  Yeah, but in the small reporting 
11   world I'll bet our list is much larger than, say, a 
12   J&J's. 
13             MR. GRAHAM:  It could be, but my -- 
14             MS. JACOBS:  Do you know what I mean? 
15             MR. GRAHAM:  -- my real point is that that's 
16   not the point of this recommendation 
17             MS. JACOBS:  Right. 
18             MR. GRAHAM:  The point of this recommendation 
19   is materiality is already there.  That's something that 
20   we have to deal with.  We've always dealt with it. 
21             MS. JACOBS:  Right. 
22             MR. GRAHAM:  We're going to keep dealing with 
23   it, but the question is once you've made that 
24   determination that a contract is material, what do you do 
25   with the exhibits.  That's all that this is referring to. 
0136
 1   XBRL? 
 2             MS. JACOBS:  XBRL, the background for those of 
 3   you -- is everybody, all of the Committee members, 
 4   familiar with XBRL?  It's a reporting format that we all 
 5   have to comply to.  We're looking for common language on 
 6   our financial statements, but now we have the additional 
 7   task of then tagging footnotes and exhibits, et 
 8   cetera.  So the CFOs at the table will, I'm sure, have 
 9   plenty to say about XBRL. 
10             In preparation for today, there was an article 
11   that came out January 22nd in the Wall Street Journal by 
12   Columbia Business School that talked about the 
13   reliability of the data coming into question, the 
14   simplicity and the intent of this particular toolbox for 
15   investors.  It's not simple to use. Less than ten 
16   percent of investors have used XBRL.  There is a lack of 
17   user tools and the authors even question the stability of 
18   the underlying taxonomy. 
19             Now, to take those statements then and distill 
20   them down for the small reporting companies, it started 
21   out tens of thousands of dollars, but it's ended up to be 
22   tens more because every time there is an update for XBRL, 
23   we have to go into a tizzy, but there's something that 
24   perhaps the authors and the folks that launched this hadn’t 
25   been contemplated, and that's what it's done to the 
0137
 1   closing of the books of the small reporting companies 
 2   because we have to Edgarize. 
 3             So that's one turn.  That's one exercise.  Now, 
 4   we are doing Edgar and XBRL.  Small reporting companies 
 5   do not have the in-house expertise to comply.  So we 
 6   outsource, which is yet another expense.  All right? 
 7             So we've outsourced the XBRL, but for that to 
 8   be correct --  and let me talk about investors.  There's 
 9   nothing that we small reporting companies would like to 
10   do more, there's nothing we wouldn't do to avoid a 
11   restatement, and this has added to the risk and the 
12   burden of the small companies one more level of the 
13   ability to make very grave errors because you not only 
14   had the Edgar part of it.  That has to be correct.  That 
15   has to be edited, turned, et cetera.  Now we've laid 
16   another layer of this on top where we're outsourcing. 
17             It does go with our financials, and data entry 
18   by these outsourcing folks that we have to pay, and now 
19   we have to correct their work, and we have to be able to 
20   correct and have several turns with our outsourcer, has 
21   shrunk the window of our ability to close by up to five 
22   days.  So our world just went like this, which is an 
23   incredible, expensive burden with nothing at the end of 
24   this except a misstatement, and if less than ten percent 
25   of the investors have looked or are using this, then what 
0138
 1   is the utility, and isn't this identified as a 
 2   disproportionate burden on a small company?  
 3             When you have a public float, an average daily 
 4   trading volume of less than 28,000 or whatever the small 
 5   caps have, to have this kind of a burden thrown on us and 
 6   our investors not caring, we've not had one single 
 7   request in and around XBRL.  So if less than ten percent 
 8   of the shareholders or investors are looking at it, it 
 9   has turned out to be a very frightening, costly burden 
10   for the little companies, and that's why it's here. 
11             So I would be glad to hear what the rest of the 
12   Committee says. 
13             MS. GREENE:  Ditto to what Chris said. 
14             MS. JACOBS:  What?   
15             MS. GREENE:  Ditto. 
16             MS. JACOBS:  The gallery. 
17             MS. GREENE:  Yeah, because it does.  It shrinks 
18   the time because you've got to get stuff out to your 
19   outsourced XBRL people.  So your window to file on time 
20   without problems, you just shrunk that window 
21   considerably to get it out to them and back in order to 
22   file on time. 
23             So everything Chris said -- 
24             MS. JACOBS:  Did you outsource? 
25             MS. GREENE:  Absolutely. 
0139
 1             MR. NALLENGARA:  If there was a way to prepare 
 2   your, let's take a 10-Q for example; if there was a way to 
 3   prepare your 10-Q, at the same time that you prepared 
 4   your 10-Q you could tag the information.  What this does 
 5   is it -- what this XBRL does is you have your document 
 6   and you tag certain financial information and through 
 7   this tool analysts, investors can pull the information 
 8   and sort the information in a way that they can use it.  
 9   They can do comparative analysis across companies.  So in 
10   theory this is for analysts and for investors trying to 
11   compare companies.  They can compare like information 
12   similarly, not questioning the cost associated with that. 
13             But how would it change -- and this is a 
14   question for us.  Matt Slavin is part of the group that's 
15   sort of responsible for our XBRL effort, and he can -- 
16   help me here.  How would that change that five days 
17   you're talking about if you could do it at the same time 
18   rather than create your document, send it off to somebody 
19   and have them go and tag all the information? 
20             MS. JENNY:  I think the question is the people 
21   on our finance teams that are preparing -- finance 
22   departments that are preparing and reviewing disclosures 
23   with our outside counsel, with our auditors, from my 
24   understanding the XBRL has been much more of a -- it’s 
25   not the same background.  It's more of a technology in 
0140
 1   the sense that you're tagging.  It's almost not the same 
 2   skill set that the person has who's actually writing the 
 3   financials. 
 4             If there was a way to bridge that where you're 
 5   writing your financials and there's just some sort of 
 6   easy mapping that those of us who aren't developers -- 
 7             MR. NALLENGARA:  Right, right. 
 8             MS. JENNY: -- could follow, then that would not 
 9   be as burdensome, but when you start talking about 
10   something that has to be bringing tables in and exporting 
11   -- 
12             MR. NALLENGARA:  right. 
13             MS. JENNY: -- most, at least from my 
14   experience, the people who are actually drafting, writing 
15   disclosures, all of us, that's not our core competency or 
16   something that we feel comfortable with. 
17             So I think that's the way to minimize the 
18   timing. 
19             MR. SLAVIN:  No, I understand that.  What we 
20   have seen with companies that have been doing this for a 
21   while is that the effort up front is a lot larger, and so 
22   companies that have already been through the phase-in 
23   process have found that after they have submitted their 
24   10-K for the first time in detail tag, that they tend to 
25   go more into a maintenance mode with a lot less effort 
0141
 1   around this. 
 2             Now, the smaller reporting companies are still 
 3   in their phase-in.  They're actually at the point where 
 4   they're about to submit 10-K.  So this is, you know, the 
 5   most challenging time, the highest level of effort.  But 
 6   we have seen and the financial executive research group 
 7   did a survey recently that stated this, that they found 
 8   that after they got through this that the level of effort 
 9   had reduced, and they went into more of a maintenance 
10   mode.  So they weren’t doing as much work. 
11             So essentially when they had to create what 
12   they call an extension taxonomy, after that effort it was 
13   more or less just rolling it forward for the new quarter 
14   and then making some changes, and if there was a new 
15   taxonomy with some new accounting standards updates, that 
16   would roll in.  That would be some effort, but it 
17   wouldn't be that large effort that they put in during 
18   their phase-in, and the small reporting companies are 
19   about to go through what is really the toughest filing 
20   right now. 
21             MS. JACOBS:  But I think, too, in closing our 
22   books it's tough, it’s tougher.  We don't have staffs who can 
23   automatically adapt.  Small reporting companies, I don't 
24   know about you all, but I mean, these are groups that 
25   maybe have less than five people, and I don't see it 
0142
 1   because we do a lot of transactions, and I'm going to ask 
 2   you all to weigh in. 
 3             We do a lot of transactions throughout the 
 4   quarter that oftentimes are material.  They are 
 5   important, and we need to work with our auditors that we 
 6   are accounting for it correctly.  And don't get me wrong. 
 7    Our financials and the accuracy is nonnegotiable in our 
 8   world.  That's the world we live in.  So I want them to 
 9   be correct. 
10             But oftentimes there are negotiations going 
11   down right to the final hour with our auditors over 
12   transactions and things that have happened throughout the 
13   quarter.  The slightest change where this tagging is 
14   concerned, including the footnotes, and I just don't see 
15   the relief because, again, this is one of these things 
16   where had we had a say, I would have said, "For God's 
17   sake, can we have four years' reprieve, work out all the 
18   bugs with the big guys that can afford to work it out 
19   with you and then give it to the small reporting 
20   companies when it's running smooth?" 
21             But it isn't and we're not, and I think there's 
22    just a disproportionate amount of not only costs, but 
23   disruption, and I think the risk to investors, frankly, 
24   is larger because if we have misstatements, because we 
25   don't have 60 people to put on this, you know, I'm trying 
0143
 1   to protect our investors and make it good for them, too, 
 2   which is not putting us into a box where we make errors. 
 3             MR. SLAVIN:  Well, one of the things that we're 
 4   actively assessing is something called inline XBRL, and 
 5   the idea is that this would be an option where your XBRL 
 6   is essentially imbedded in your HTML, your Form 10-K or Q 
 7   so that when you're creating one, you're creating the other 
 8   so that the data in one is the data in the other.  And we 
 9   see this as simplifying the creation process, and what 
10   we've seen is that companies that are starting to use 
11   disclosure management solutions, more and more of them 
12   are becoming available in the market, are finding that 
13   they're actually having efficiencies in some cases with 
14   their process, and we think that this inline is going to 
15   potentially have an impact on that and also on the 
16   reliability of the data in terms of there would be 
17   potentially less errors as a result of having to support 
18   two different documents that say the same thing.  Here 
19   you've got one with the information imbedded in it. 
20             MR. NALLENGARA:  I don't think -- 
21             MS. JACOBS:  We did that, too.  We want to make 
22   sure that all -- we don't become -- we don't get so 
23   wrapped up in the technology and the potential for the 
24   technology and lose sight of the fact of ten percent of 
25   investors have used it.  Let's not lose sight of the 
0144
 1   utility of it, and if the investors are not going to use 
 2   it, then why are we doing it? 
 3             MR. NALLENGARA:  Well, I don't think we're 
 4   questioning all of the costs and the time associated with 
 5   that.  We recognize that it's costly.  We recognize that 
 6   it's time consuming, and we recognize that there's -- 
 7   that we need to do -- and we're focused on looking at 
 8   those challenges, and we're also focused on looking at 
 9   the report that Columbia Business School put out on the 
10   usefulness of the data. 
11             Some of that I'm not sure how much that looks 
12   at, how much third party data is sourced from XBRL data. 
13    Folks here may be getting data from third parties that 
14   aggregate XBRL data and they may not realize; they may 
15   not realize that. 
16             We also know that there are some providers.  
17   Some of the providers have errors in the way they are 
18   recording some of your XBRL data, and to the extent that 
19   there are errors in that data, it makes the usability of 
20   the data challenged, and so users of the XBRL data are 
21   questioning why would you use it if there's going to be 
22   errors. 
23             So we need to do work on helping providers get 
24   better at what they're doing.  We also need to do work on 
25   facilitating all of you in your use of, in your 
0145
 1   collecting and preparing this XBRL data.  So we 
 2   absolutely recognize that there's work to do. 
 3             MS. JACOBS:  Well, yeah, that's the -- we are 
 4   not saying throw out baby, the bath water, all of it.  
 5   We're saying, "Would you extend this to your smaller 
 6   reporting companies?" 
 7             Shannon, Kara? 
 8             MS. GREENE:  Yeah, I was just sitting here 
 9   thinking.  I have yet to hear -- I mean, I think I  
10   understand what the concept of XBRL was, which was 
11   somehow it would make comparisons between different 
12   companies easier, but you know, part of the whole theme 
13   of the discussion is the one size doesn't fit all.  I 
14   don't think you can take -- I mean, you put my current 
15   assets footnote or my inventory footnote against anybody 
16   else's, I mean, whatever, I mean, how stupid is that?  
17   It's totally irrelevant. 
18             The investors, our investors, the people that 
19   are looking at us don't look at some big computerized 
20   thing and go, "Oh, you know, oh, yeah, they really stand 
21   out against an IBM or a GM or whatever."  I mean, 
22   everything that happens with my investors, it's very 
23   manual.  It's very hands on.  They're calling management, 
24   and they're dissecting financial statements, and they're 
25   spending the hours in your office doing your due 
0146
 1   diligence.  You can't put a bunch of machine language in 
 2   a big pot and then separate it all and say, you know, 
 3   here's this company standing up against this one because 
 4   I don't think small cap investors look at it that way.   
 5             Maybe the big guys, maybe the Fidelities of the 
 6   world that look at the IBMs do and they run charts and 
 7   they show up on technical radar screens or whatever, but 
 8   people that invest in small companies aren't investing 
 9   because my inventory ratio against IBM's is something.  
10   They're looking at every single line individually, and 
11   they're reading the spirit of the footnote and they're 
12   talking to management on the phone. 
13             It's not a boiler plate, put it all in to make 
14   it easier to compare you against somebody else.  So at 
15   the end of the day, maybe eventually costs will go down. 
16    The providers will get better.  The tagging gets easier 
17   or whatever, but as Chris said, I don't see my staff, 
18   since it's just me, and I'm not a tech.  I don't want to 
19   be an IT person.  So, you know, I don't ever see us doing 
20   the XBRL stuff in-house.  I think it's always going to be 
21   outsourced. 
22             So when your outsourcing anything, you're 
23   provider says, "Hey, you've got to give me more than 15 
24   minutes to take your final information and turn it into 
25   something to get ready for you to file."  You're going to 
0147
 1   always have to give them time just like we would expect, 
 2   just like attorneys or accountants. 
 3             So at the end of the day we're still talking 
 4   about our 45-day or 90-day crunch on 10-Qs and 10-Ks is 
 5   tight anyway because we're so small.  You back out five, 
 6   six, seven, ten days, and I'm with Chris.  We're 
 7   scrambling, hoping I sent them a final document, hoping 
 8   there are no changes at the end because then we're 
 9   looking at, you know, are we going to be late in filing 
10   or what. 
11             So I still don't see how for companies our size, I 
12   don't see the benefit of throwing us up against the wall 
13   with a bunch of other people because our investors and 
14   the people that potentially invest in us don't look at it 
15   like that.  They look at each individual company 
16   individually and very manually, not some automated what 
17   sticks on the wall against everybody else. 
18             MR. BORER:  You know, my guess, the charge of 
19   this Committee is not to decide whether it was a good 
20   idea in the first place or necessarily whether the 
21   intended beneficiaries of it are benefitting from it.  
22   It's sort of what are the burdens on small companies in 
23   light of, and the SEC and others can decide whether the 
24   risks, and if the rules are supposed to enhance investor 
25   protection through greater disclosure, I don't see how 
0148
 1   this does it.  It makes it easier for Bloomberg, 
 2   Thompson, Capital IQ, and a bunch of business school 
 3   people to do big studies of financials and ratios and 
 4   all those other kinds of things.  I don't think it makes 
 5   it.  That's my opinion. 
 6             Our charge here is, is it something that we 
 7   should exempt these small companies from for a period of 
 8   time?  Is that the question? 
 9             MR. GRAHAM:  Yes. 
10             MR. BORER:  Okay.  That seems pretty 
11   straightforward.  We probably discussed that sufficiently. 
12             MR. SLAVIN:  If I just may add some of the 
13   feedback that we've received from investors and, indeed, 
14   in the Columbia surveys that they are interested in this 
15   data because they do not currently have access to this 
16   information for smaller reporting companies and they see 
17   that as benefitting them and even pointing out in the 
18   study that the information in the financial statement 
19   footnotes is of interest to them. 
20             MR. GRAHAM:  Any other comment?  Greg. 
21             MR. YADLEY:  No, I was just going to ask a 
22   question of Matt.  I hear the same thing from my clients. 
23   I'm wondering because I don't know how this works in 
24   practice.  The investors that are interested in smaller 
25   public companies, would there be a small amount of 
0149
 1   information, you know, really sort of top line stuff that 
 2   would allow them to do some particular ratios, you know, 
 3   profitability, margins, you know, four or five things 
 4   rather than the entire financial statements?  Because at 
 5   least theoretically would that be helpful? 
 6              Chris, if the Commission is not prepared to 
 7   dispense with this and exempt smaller companies entirely, 
 8   if you had to send it to your provider and they only had 
 9   to tag ten lines rather than all the financial statements 
10   and the footnotes and everything, would that -- or am I 
11   just splitting hairs here and it's not a good question? 
12             MS. JACOBS:  No, I think that along with the 
13   other suggestion of, you know, look.  When these sweeping 
14   changes come in would you give the little companies -- 
15   give them a runway?  Give them four to five years.  Work 
16   the bugs out with the big guys who can afford the work 
17   with the SEC to fix it. 
18             I'm not on the page of saying, "I want to deny 
19   investors anything."  I'm in the cost-benefit mode with 
20   the benefit of doing it every day.  But in this 
21   particular instance, I don't think it's ready.  I don't 
22   know that being partially there would solve the issue of 
23   us signing up for outsourcing and the rest of it.  I 
24   think I'd rather say let's exempt it, work the bugs out, 
25   and look at putting it into place at a later date 
0150
 1   because, to what has already been said, small reporting 
 2   companies and companies our size, the investors, they 
 3   enjoy a very close relationship with us, and they buy the 
 4   story.  They buy the story first and the financials. 
 5             They don't come looking for us unless it's a 
 6   big index fund like Fidelity or Vanguard, who have to buy 
 7   our stock, but for the most part our large holders are 
 8   folks that have bought into the story.  Then they look at 
 9   our financials, and they're not going to benchmark us 
10   necessarily.  They're either already in the medical 
11   device sector or service sector or whatever. 
12             I don't know, again, what utility that would 
13   have for the base and the type of investors that the 
14   micro caps have because the information is there, but 
15   they buy our story first or our challenges or our sector, 
16   and a lot of times, Greg, they're going to come in and 
17   they already know what the medical device sector is or 
18   what the service sector or what your gross margins ought 
19   to be or your operating income, and again, I've had no 
20   indication whatsoever, and I've asked the top three 
21   shareholders if they have looked at or used it as 
22   pertains to our company, and all of them have said no. 
23             MR. BORER:  That sounds logical. 
24             MR. GRAHAM:  Okay.  Any other comment? 
25             (No response.) 
0151
 1             MR. GRAHAM:  I guess what I'd like to do is 
 2   move that we adopt the -- 
 3             MR. YADLEY:  Excuse me, Stephen.  I didn't have 
 4   another comment on that, but generally would it be good 
 5   to add an additional new Paragraph 6 at the end which 
 6   picks up some of the language of the introductory Point 
 7   7?  These are all very specific, and I agree with them 
 8   and intend to vote for this, but where the Committee 
 9   recommends that the Commission review its rules as they 
10   pertain to smaller reporting companies, the other 
11   disclosure requirements that place a disproportionate 
12   burden on smaller companies in terms of cost and time 
13   spent on compliance without a corresponding benefit to 
14   investors, and considering enacting new rules, providing 
15   an initial exemption and phase-in period so that smaller 
16   reporting companies will have the benefit of larger 
17   companies' experience implementing such new rules.  I 
18   mean, just so that we've gone on record as saying we've 
19   looked at these specific rules relating to emerging 
20   growth companies because they're out there and they don't 
21   quite line up, but there are other rules that also ought 
22   to be looked at and certainly new rules there ought to 
23   be. 
24             And the Commission does do this.  I mean, they 
25   do cost-benefit.  They look at disproportionate effects 
0152
 1   on smaller companies, but underscore that they should do 
 2   that and, in particular, sweeping changes, however we 
 3   want to term that, that there be an initial exempt period 
 4   and phase-in just sort of as a new mindset. 
 5             MR. GRAHAM:  Greg, I think that that's a great 
 6   idea.  Let's -- 
 7             MS. JACOBS:  That's a great follow-on point to 
 8   make. 
 9             MR. GRAHAM:  Where would we add that, Greg?  
10   I'm sorry. 
11             MS. JACOBS:  Here. 
12             MR. YADLEY:  After the XBRL just add another -- 
13             MR. GRAHAM:  Oh, we're adding a new number, 
14   adding a new Number 6. 
15             MS. JACOBS:  Adding a Number 6. 
16             MR. GRAHAM:  I was looking for that Number 6 
17   that you were adding to.  Okay. 
18             MS. JACOBS:  Sort of a follow-on statement. 
19             MR. GRAHAM:  Got it.  Okay.  I move that we 
20   adopt these recommendations as modified. 
21             MR. BOCHNOWSKI:  Second. 
22             MR. GRAHAM:  All those in favor. 
23             (Chorus of ayes.) 
24             MR. GRAHAM:  Opposed? 
25             (No response.) 
0153
 1             MR. GRAHAM:  Okay.  The last one is really kind 
 2   of something that we all, I think, feel is important, and 
 3   we feel a little bit frustrated that there is not a whole 
 4   lot that we can do about it.  And that relates to the 
 5   situation we find ourselves in with the Conflict Minerals 
 6   requirements. 
 7             You know, we've noted that in recent years 
 8   legislation has been proposed or enacted that would 
 9   require or does require or directs the Commission to 
10   amend its rules and forms to impose disclosure 
11   requirements on issuers relating to matters that the 
12   Committee believes is outside the scope of the mission of 
13   the Commission, and again, we're all familiar and we 
14   spent some time discussing Conflict Minerals at our last 
15   meeting. 
16             Notwithstanding the fact this is something that we 
17   recognize that is not within the power of the 
18   Commission to provide relief in this regard, we're 
19   looking at an act of Congress.  Nonetheless we wanted to 
20   go on record and note that, at least in our view, Congress 
21   should take action to exempt small businesses from these 
22   provisions that are imposing disclosure obligations on 
23   smaller reporting companies that relate to Conflict 
24   Minerals. 
25             It seems to us that this is an example of 
0154
 1   Congress working at cross-purposes, where attention is 
 2   focused on things like the JOBS Act in an effort to 
 3   enable companies to obtain capital and to preserve 
 4   capital, and then those kinds of efforts are followed by 
 5   establishing a disclosure regime that imposes a lot of 
 6   costs and thousands of smaller issuers requiring 
 7   compliance with requirements that are there to further 
 8   policy or social or humanitarian ideas, where, you know, 
 9   separately it might be a good policy; it might make a 
10   whole lot of sense, but to use the disclosure regime to 
11   kind of further those policies kind of strikes us as 
12   misplaced because, again, you're imposing certainly a 
13   tremendous collective burden on smaller reporting companies 
14   by imposing those requirements without a corresponding 
15   benefit in terms of generating information that is useful 
16   to those who invest in those companies. 
17             So, discussion? 
18             MR. BORER:  Stephen, just a quick question.  
19   This is one that to me in my mind is a little bit 
20   different than many of the things we've dealt with.  This 
21   is us telling Congress that we don't like or would 
22   encourage them to take a different approach to something. 
23             MR. GRAHAM:  You're exactly right.  This is 
24   different. 
25             MR. BORER:  I'm not sure if we have a protocol 
0155
 1   officer in this.  When I studied parliamentary procedure, 
 2   there were certain things that you could do and certain 
 3   things that you couldn't, and I, by the way, as most 
 4   people know, I have opinions and I don't mind expressing 
 5   them.  This is on the Internet.  So the Internet must be 
 6   true. 
 7             What does this accomplish?  I happen to agree 
 8   it's a very, very nicely worded and a sincere approach 
 9   and makes a point here.  What do we accomplish by doing 
10   this?  Do we send this to the head of the Senate Finance 
11   Committee and -- 
12             MR. NALLENGARA:  I can speak to the -- 
13             MR. BORER:  Thank you. 
14             MR. NALLENGARA:  -- protocol.  Your charter 
15   instructs you to make recommendations to the Commission 
16   on— broadly — small business questions, capital formation, 
17   all the stuff that we've been talking about, and as you 
18   can see, the three other recommendations here are 
19   characterized as recommendations.  The ones before them 
20   were characterized as recommendations. 
21             This is different.  This is a "the Committee 
22   believes."  So as a technical matter you're charged with 
23   giving us recommendations, giving the Commission 
24   recommendations within a narrow scope. 
25             Now, the question is:  within that scope are 
0156
 1   you allowed to make a statement as to your belief?  
 2   That's an open question on whether as a technical matter 
 3   you are permitted to agree as a group that this is what 
 4   your belief is because it's not necessarily a 
 5   recommendation to the Commission. 
 6             Now, on your question as what does it do, I 
 7   think you're just expressing a view.  When you're making 
 8   specific recommendations to us on things that we should 
 9   look at, if it's an active rulemaking, it informs our 
10   active rulemaking.  It informs part of the comment 
11   letter, you know, the comments that we receive on a rule. 
12    It would be part of what we consider.  The rule writing 
13   teams would read and review those and consider those 
14   among the comments. 
15             This really isn't asking us to do anything.  
16   There's nothing we're working on right now that relates 
17   to this specifically.  So it really is just what that is. 
18    It's a statement of the belief of the Committee. 
19             MR. BOCHNOWSKI:  Stephen, I think -- 
20             MR. GRAHAM:  Yes, David. 
21             MR. BOCHNOWSKI:  First of all, I'm in total 
22   agreement with the issue in Conflict Minerals, but when 
23   we as a group tell Congress what they should not do, they 
24   should not use federal securities laws in the 
25   Commission's disclosure requirements, when I read this, I 
0157
 1   just focused on federal securities laws and I wrote in: 
 2   sanctions, embargos, and national security. 
 3             There might be a set of circumstances under 
 4   which all of that is appropriate. 
 5             MR. GRAHAM:  Right.  And so right now -- 
 6             MR. BOCHNOWSKI:  I'd hate to have this come 
 7   back to us. 
 8             MR. GRAHAM:  Well, I'm not going to concern 
 9   myself with sanctions and embargos, at least not yet, but 
10   one thing that we clearly are concerned with and we spent 
11   a lot of time talking about, and that is just the burden 
12   of compliance and the cost that that means, you know, to 
13   individual companies and the overall cost to the system 
14   when you aggregate the cost that is experienced by all 
15   the companies kind of fitting into these categories. 
16             And so it certainly is something that I think 
17   frustrates us as a Committee, and that was the impression 
18   that I had after the Committee's discussion in San 
19   Francisco on this subject.  And as you might recall, I was 
20   personally not in favor of doing very much in this 
21   regard, you know, for the reasons that have been 
22   articulated. 
23             This is Congress acting.  There's not a lot 
24   that the SEC can do.  As far as any recommendation that 
25   we can come up with, there's not a lot in the way of 
0158
 1   teeth with respect to that.  But it seemed to be the 
 2   consensus of the Committee that the Committee wanted to 
 3   go on record in this way, and we have formulated a 
 4   recommendation accordingly, and that's kind of where we 
 5   are and we can go forward with it or not, but that's kind 
 6   of why it's on the table and kind of its effect. 
 7             MR. YADLEY:  As an alternative, maybe we could 
 8   reformulate “Recommendation 1” that the Committee urges the 
 9   Commission to share with the Oversight Committees the 
10   Committee's belief that this provides disproportionate 
11   costs with not commensurate benefit, and then delete the 
12   second one, which we sort of have up in the preamble 
13   anyway as our thoughts, and the Commission can in 
14   whatever form it deems desirable or not say, "Hey, you 
15   know, we had this Advisory Committee and this was 
16   something that they felt for very little benefit." 
17             And I know Chris shared that at our first 
18   meeting the particular impact it could have on a small 
19   company like yours just because you used one of those 
20   minerals. 
21             MS. JACOBS:  I do, rhodium and tantalum. 
22             MR. GRAHAM:  Okay.  There's data with that. 
23             MR. BOCHNOWSKI:  Sure, and I was going to 
24   suggest something very similar, which is in Paragraph 2, 
25   just to limit us to this specific issue, that in the case 
0159
 1   of Conflict Minerals the Congress should not be using.  
 2   Either one is fine.  I just didn't want to have us 
 3   appear, Stephen, to be pushing back to Congress that we 
 4   weren't in sync with other objectives they might have in 
 5   other arenas. 
 6             MR. GRAHAM:  Fair enough. 
 7             MR. BORER:  Well, tacking a little bit here, 
 8   I'm not familiar with the whole provisions of Dodd-Frank. 
 9    I don't know who is.  Is there a way that we could 
10   recommend to the Commission within the terms of this 
11   provision that the enforcement or implementation of this 
12   requirement on disclosure, is there flexibility that 
13   would reduce the burden on companies, whether they be 
14   small or other types of companies that would allow us to 
15   phrase this back to the Commission and say, "Here's how 
16   it's currently being implemented."   
17             So you have a software company in Silicon 
18   Valley with six employees has to do certain disclosures 
19   whether they're even required to disclose if they're 
20   public on Conflict Minerals when clearly it wouldn't 
21   apply to them or not.  Is there something within the four 
22   walls that we could recommend? 
23             MR. GRAHAM:  We thought about that.  We bounced 
24   it off of Lona and others, and -- 
25             MR. NALLENGARA:  It's hard where the Commission 
0160
 1   is being sued on these two Dodd-Frank provisions on the 
 2   rulemaking.  So we're sort of stuck.  Really we won't be 
 3   able to sort of talk through that kind of analysis with 
 4   you.  We are embargoed.  So it's just not something we 
 5   can talk about. 
 6             So Greg's proposal is an interesting one.  I 
 7   mean, remember because this is a Federal Advisory 
 8   Committee, your draft recommendation is on our website, 
 9   and also people know you have this draft recommendation 
10   out there.  So expressing your view, you've expressed the 
11   view.  Everyone knows it's a draft recommendation, but 
12   Greg's proposal also is something to consider as well. 
13             MR. BORER:  So if I can just ask one more quick 
14   question, I'll go back to law school and propose a 
15   hypothetical 
16             MR. NALLENGARA:  Yes. 
17             MR. BORER:  If you weren't embargoed with your 
18   hands tied, generally would there be flexibility in how 
19   the rulemaking has been done here? 
20             MR. NALLENGARA:  I -- I -- 
21             MR. BORER:  Okay.  It was a hypothetical 
22   because this may be one we want to sit on. 
23             MR. NALLENGARA:  I mean "embargoed" is just a 
24   word I used because -- 
25             MR. BORER:  I understand. 
0161
 1             MR. NALLENGARA:  -- David did as well.  But we 
 2   can't.  Everyone asks these questions about, you know, 
 3   interpretive questions about these rules.  We're sort of 
 4   in a place where we can't talk about it or at least the 
 5   three of us can't. 
 6             MR. BORER:  Well, the question comes down to 
 7   should we expose our thoughts to Congress.  I think 
 8   they're probably sincerely felt amongst this committee, 
 9   and I think that's more the issue here as opposed to the 
10   substance of does Conflict Minerals apply to small 
11   companies and is it a good use of resources? 
12             MR. GRAHAM:  Yeah, and I think the sense in San 
13   Francisco is that we should expose our thoughts to 
14   Congress, but this is a Committee, and so it's on the 
15   table and we can all vote on it. 
16             I was initially not in favor because I thought 
17   it was kind of pointless because it just kind of lacked 
18   any real authority, but I've come around to at least see 
19   it as not harmful and possibly helpful that a Committee 
20   that is charged with looking at the regimes that we 
21   currently impose on smaller or public companies and to what 
22   extent it might make sense and to what extent, you know, 
23   the cost involved is appropriate, that you know, but for 
24   the fact that it's coming directly from Congress, this is 
25   precisely the sort of thing that we're talking about. 
0162
 1             And so I think it does make some sense to 
 2   express a view. 
 3             Any other comments? 
 4             MS. JACOBS:  We need a motion. 
 5             MR. GRAHAM:  We need a motion. 
 6             MS. JACOBS:  So moved. 
 7             PARTICIPANT:  Second. 
 8             MR. GRAHAM:  With Greg's modification? 
 9             MS. JACOBS:  Yeah.  Second? 
10             MS. JACOBS:  Greg. He seconded. 
11             MR. GRAHAM:  Favor? 
12             (Chorus of ayes.) 
13             MR. GRAHAM:  Opposed? 
14             (No response.) 
15             MR. GRAHAM:  Okay.  Thank you all. 
16             What we will do is redraft these 
17   recommendations and send them out to you so that we can 
18   confirm that we got it right and that everyone is on the 
19   same page.  Once that's done, we'll send them on to the 
20   Commission. 
21             As far as our next meeting is concerned, I 
22   think we've tentatively blocked out May 1st.  So you 
23   might want to put that on your calendar.  It would be in 
24   Washington. 
25             And in terms of developing an agenda for that 
0163
 1   meeting, I think a lot would depend on what happens 
 2   between now and then in terms of things like new proposed 
 3   rules coming down that might be of interest to this 
 4   Committee that we might want to comment on. 
 5             So unless anyone else has anything for the good 
 6   of the order, I will entertain a motion to adjourn. 
 7             PARTICIPANT:  So moved. 
 8             MR. GRAHAM:  Second? 
 9             Okay.  We're done.  Thank you. 
10             (Whereupon, at 2:57 p.m., the meeting was 
11   concluded.) 
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 1   
 2                  PROOFREADER'S CERTIFICATE
 3   
 4   In the Matter of:   MEETING OF ADVISORY COMMITTEE
 5                       FOR SMALL AND EMERGING COMPANIES
 6   File Number:        OS-265-27
 7   Date:               Friday, February 1, 2013
 8   Location:           Washington, DC
 9   
10   
11        This is to certify that I, Maria E. Paulsen, 
12   (the undersigned), do hereby swear and affirm 
13   that the attached proceedings before the U.S. 
14   Securities and Exchange Commission were held 
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16   original, complete, true and accurate transcript 
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20   
21   
22   ____________________     ____________________
23   (Proofreader's Name)           (Date)
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 1   
 2                   REPORTER'S CERTIFICATE
 3   
 4   
 5   I, Mary Jo Mitchell, reporter, hereby certify that the 
 6   foregoing transcript of 163 pages is a complete, true and
 7   accurate transcript of the testimony indicated, held on
 8   February 1, 2013, at Washington, D.C. in the matter of:  
 9   MEETING OF ADVISORY COMMITTEE FOR SMALL AND EMERGING
10   COMPANIES.
11   
12   I further certify that this proceeding was recorded by me,
13   and that the foregoing transcript has been prepared under my
14   direction.
15   
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18                                Date: __________________________
19                   Official Reporter: __________________________
20                   Diversified Reporting Services, Inc.         
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0166
 1   
 2   
 3   
 4   Diversified Reporting Services, Inc.
 5   1101 Sixteenth Street, N.W.
 6   2nd Floor
 7   Washington, DC  20036
 8   
 9   
10   In the Matter of:   MEETING OF ADVISORY COMMITTEE
11                       FOR SMALL AND EMERGING COMPANIES
12   File Number:        OS-265-27
13   Date:               Friday, February 1, 2013
14   Location:           Washington, DC
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