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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks before Government-Business Forum on Small Business Capital Formation


Commissioner Cynthia A. Glassman

U.S. Securities and Exchange Commission

Arlington, Virginia
September 22, 2003

Good morning, and thank you, Gerry, for that introduction. It is a pleasure being here this morning to welcome you to the 22nd Annual Government-Business Forum on Small Business Capital Formation. Let me state, at the outset, that the views I express here today are my own and not necessarily those of the Commission or its staff.

I have worked on small business issues throughout my career as an economist in both the public and private sectors. When I spent a year on loan from the Federal Reserve to the Treasury Department's Office of Capital Markets Legislation in 1980, I was staff liaison to the Small Business Advisory Committee. When I returned to the Fed, I worked on a study of commercial bank lending to small businesses and participated on an interagency task force on small business. Under Chairman Volcker, as the Fed's small business economist, I was also responsible for handling calls and complaints from small business owners. I still haven't forgotten some of the calls I got in those days when the prime rate skyrocketed. Needless to say, the callers were quite unhappy.

When I left the public sector, I continued to work on small business issues as a consultant, focusing on bank lending to small business. In 1996, I testified before Congress on consumer and small business banking issues.
So I am well aware of the importance of small business to our economy. In preparing my remarks for this morning, I came across some powerful statistics from the Small Business Administration ("SBA") that underscore the impact of small business on the U.S. economy. In 2002, under the SBA's definition of small business, there were nearly 23 million small businesses in the United States. As I'm sure you are well aware, these firms

  • represent more than 99.7% of all employers;
  • employ more than half of all private sector employees, including 39% of high-tech professionals;
  • generate 60 - 80% of net new jobs annually; and
  • create more than 50% of nonfarm private gross domestic product.

The requirement for an annual forum, mandated under the Small Business Capital Formation Act of 1980, reflects Congress' recognition of the importance of small business to our economy as a whole. It provides you an opportunity to hear from and interact with our staff and the staffs of other government agencies on issues that are important to small business, and it is our opportunity to hear and learn from you. Another means of communication is available to you through the Office of Small Business Policy within the Division of Corporation Finance. The office has rulewriting functions, provides interpretive advice, and acts as the SEC's small business ombudsman. I encourage you to make use of the resources of this special office.

I want to emphasize the important role that those of you who are from small business issuers, and your advisers, can play in the Commission's rulemaking process. It is critical that small business issuers take advantage of the comment process to inform us of your views on the effectiveness of our proposed rules and the special regulatory burdens and compliance costs that are associated with them. The Commission is very sensitive to the impact of its rules on small business, and the more informed we are about the effect of our rules on small business, the more narrowly we can target our rules to achieve our objectives.

As you know, last year the Commission adopted a number of new rules pursuant to the Sarbanes-Oxley Act of 2002. Even before the enactment of Sarbanes-Oxley, we had begun work on accelerating the filing of quarterly and annual reports, requiring certification of those reports by CEOs and CFOs, and speeding up the disclosure of personal securities trading by corporate insiders. Under Sarbanes-Oxley, we required companies to disclose material off-balance sheet arrangements, added a requirement for companies to disclose whether they have a financial expert on their audit committees, and required an annual report assessing the quality of their internal control over financial reporting.

In each of these areas, we tried to be sensitive to the concerns of small business issuers about cost-effectiveness. I'm sure we didn't satisfy everybody, but we did make a number of accommodations.

  • Public companies with less than $75 million in market capitalization were exempted from the accelerated deadlines for quarterly and annual reports.
  • Public companies with less than $25 million in revenues and $25 million in market capitalization (our definition of "small business issuers") were not required to provide a table of contractual obligations.
  • Small business issuers got an extra six months to comply with the new rule requiring disclosure of whether they have an audit committee financial expert on their audit committees.
  • Public companies with less than $75 million in market capitalization got an additional nine months to comply with the new rules requiring a report on internal control over financial reporting.
  • Small auditing firms with fewer than five public-company audit clients and ten partners are exempt from the audit partner rotation requirements and the prohibitions on providing non-audit services to public company clients.

Now that the flurry of Sarbanes-Oxley rulemaking has subsided, companies both large and small are in the process of adjusting to the new rules, and the Commission is in the process of assessing the effectiveness of the new rules. We are monitoring whether the rules are achieving our objectives, looking out for unintended consequences and seeing whether any changes to the rules need to be made. I've heard anecdotal evidence that some companies are having difficulty finding directors willing to sit on corporate boards and that finding audit committee financial experts has been a particular problem for small business. As the Sarbanes-Oxley rules get fully implemented, these are issues that we need to monitor closely.

We've also heard anecdotal evidence that some smaller public companies may forego their public reporting status rather than comply with the new Sarbanes-Oxley governance requirements. It is important to recognize, however, that good corporate governance and clear and accurate financial reporting are the right objectives, regardless of whether your company is large or small.

But as an economist, I think we need to continue to examine whether we are providing the appropriate incentives. We recognize that it is important for small businesses to grow and prosper; our economy needs the new jobs and new products that small businesses create. Yet some of you are telling us that we do not make it easy enough for small businesses to raise the capital they need to expand. With some exceptions, we generally expect small businesses to comply with the same regulatory requirements that apply to more established companies. And even when a small business makes it to the public company stage, where capital raising should be easier and cheaper, compliance costs — regulatory as well as financial — may act as a disincentive to expansion. Obviously, if that is happening, that is a serious concern.

However, as always, there is another side of the story that we must consider. A large number of the frauds we see in our enforcement actions are perpetrated by small businesses — and investors in small business deserve the same disclosures and protections as investors in bigger business.

Nevertheless, if we are serious about the need to improve the environment for small business capital formation — and I certainly am — it is important that we understand your objectives and priorities among the many recommendations the forum has made, keeping in mind the importance of investor protection to our mission and your reputations.

As a long-time supporter of small business, I will continue to make sure that we take into account the impact of our rules on small businesses. I hope you have a productive forum and I look forward to seeing the results of this year's discussions.

Thank you very much.



Modified: 03/12/2004