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Statement of Commissioner Piwowar at Open Meeting Regarding Amendments to Smaller Reporting Company Definition

June 28, 2018

Today’s meeting is going to be a long one, so I will keep my remarks brief.  I support the adoption of this rulemaking.  But, I would be remiss if I did not express my disappointment about what we could have accomplished today had we truly focused our efforts on capital formation.

I am speaking, of course, of the amendments that I would have liked to see to the accelerated filer definition under Section 404 of the Sarbanes-Oxley Act of 2002 and the associated exemption for smaller issuers.[1]  According to the Commission’s own release adopting the smaller reporting company (“SRC”) definition in 2008,[2] these changes are inextricably linked to the SRC regime, and I believe that they should have been included with the rules we are considering today.  I know that I am joined in my disappointment by the majority of commenters on the proposed rule;[3] by our colleagues at the Treasury Department;[4] by members of Congress;[5] by present and former Commissioners;[6] by practitioners and academics[7] too numerous to count; and by many of our colleagues here at the Commission.

I would have liked to cast a vote today—in my last open meeting as a Commissioner—for a serious reform oriented toward capital formation.  Unfortunately, the Commission has missed yet another opportunity in this regard.[8]

We should not delude ourselves into thinking that this rulemaking will appreciably advance the cause of capital formation.  In this, I agree with our colleagues in the Division of Economic and Risk Analysis (“DERA”).  Successive drafts of their economic analysis have each evinced no empirical basis for a belief that today’s rulemaking, standing alone, will have any significant impact on capital formation.  Let me be perfectly clear: What we are voting on today is equivalent to a technical or conforming amendment to an as-yet-to-be-adopted rulemaking on Section 404(b), nothing more and nothing less.  This rulemaking is a sidecar without a motorcycle.

In their careful and thorough cost-benefit analysis, our colleagues in DERA are surely correct when they describe the economic effects of this rulemaking as “modest.”[9]  However, because it is also clear that any potential negative effects on investor protection are even more modest,[10] I believe that my affirmative vote is justified on balance.  The Hippocratic Oath applies just as well to Commissioners as to physicians, and today, we are doing no harm.

I feel compelled to describe my vote in this manner because, in my judgment, it is simply untenable to support today’s rulemaking on a capital formation rationale.  Rather, I base my vote on the more modest ground that the compliance cost savings under this rule can be better deployed by affected registrants to more valuable economic uses.  This is not nothing, but it is so much less than we could have achieved today had the Commission chosen to lead.

There is some good news, however, in today’s release.  As stated on the cover page, Chairman [Jay] Clayton has “directed the staff to formulate recommendations to the Commission for possible additional changes to the ‘accelerated filer’ definition that, if adopted, would have the effect of reducing the number of registrants that qualify as accelerated filers.”[11]  Unfortunately, I will no longer be serving as a Commissioner when these recommendations and the ensuing proposal are submitted to the Commission for a vote.  Nevertheless, I applaud Chairman Clayton and Director [Bill] Hinman for their commitment to place Section 404(b) reforms before the Commission in the immediate future.  I look forward to cheering on the Commission from the outside when it takes up the missing half of this rulemaking, and to seeing the positive effects on capital formation begin after that final step is taken.

Thank you.  I have no questions.


[1] See 15 U.S.C. § 7262(b) and (c).

[2] See Smaller Reporting Company Regulatory Relief and Simplification, 73 Fed. Reg. 934, 935-6 (Jan. 4, 2008) (“The amendments we are adopting will result in the substantive changes highlighted below.  The new provisions: . . . [c]ombine elements relating to the accelerated filer definition with qualifying standards for the smaller reporting company determination and transition provisions to promote uniformity and consistency with current regulations and, therefore, simplify regulation.”)

[3] See Amendments to Smaller Reporting Company Definition: Final Rule (“SRC Final Release”), Release No. 33-[ ], 34-[ ], File No. S7-12-16 (June 28, 2018), pp. 27-30.

[4] U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Capital Markets 35 (Oct. 2017), (“Increased regulatory burdens under federal securities laws since the enactment of the Sarbanes-Oxley Act appear to have had a disproportionate impact on smaller companies when compared to their larger counterparts, despite measures to limit such effects.  For instance, the annual attestation by outside auditors of management’s report on the effectiveness of internal controls under Section 404(b) of the Sarbanes-Oxley Act imposes significant costs for smaller public companies.”).

[5] See, e.g., Chairman Jeb Hensarling, Remarks of Chairman Jeb Hensarling to the Economic Club of New York (Jun. 7, 2016), (“Other pro-growth measures include . . . the expansion of the Sarbanes-Oxley 404(b) auditing exemption for smaller public companies . . . .”).

[6] See, e.g., Commissioner Hester M. Peirce, Tossing Fish and Catching Capital: Remarks at the 38th Annual Northwest Securities Institute CLE at the Washington State Bar Association (May 4, 2018), (“[W]e put lots of requirements on our public companies.  Some of these requirements may be disproportionately burdensome for small companies.  The most notable example is the auditor attestation of internal controls required under Section 404(b) of the Sarbanes-Oxley Act.  For smaller companies with few decision-makers where a fairly rudimentary set of internal controls is entirely adequate, the additional expense presented by 404(b) is unnecessary and counterproductive.  For a pre-revenue company, such as a drug company going through human trials, the bill for a 404(b) audit can be particularly painful.”).

[7] See, e.g., Prof. Hal S. Scott, Director Hal S. Scott testifies on Sarbanes-Oxley 404 (Jun. 5, 2007),

[8] See Commissioner Michael S. Piwowar & Commissioner Hester M. Peirce, Letter of Commissioners Piwowar and Peirce on Regulation A Offering Amount Limitation (Apr. 11, 2018), (“Today, our colleagues have informed [Hon. Michael Crapo, Chairman, Committee on Banking, Housing, and Urban Affairs] that they have ‘determined not to propose to increase the $50 million offering limit set forth in Section 3(b)(2) [of the Securities Act of 1933] at this time.’  In our view, this decision of the majority of the Commission misses an opportunity.”); Commissioner Michael S. Piwowar, Statement at Open Meeting on Investment Company Liquidity Disclosure (Mar. 14, 2018), (“I support this recommendation to improve the reporting and disclosure of liquidity information by investment companies.  Nevertheless, I am disappointed that the Commission is missing a golden opportunity.”).

[9] See SRC Final Release, at 57.

[10] Id.  (“Taken together, our empirical analysis suggests that, for most of the newly eligible SRCs under the final rules, scaled disclosures may generate a modest, but statistically significant, amount of cost savings in terms of the reduction in compliance costs, a modest, but statistically significant, deterioration in some of the proxies used to assess the overall quality of information environment, and a muted effect on the growth of the registrant’s capital investments, investments in R&D, and assets.”).

[11] Id., at 1.

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