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House Financial Services Subcommittee Roundtable Examining the Impacts of the COVID-19 Pandemic on U.S. Capital Markets

House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets

“Virtual Roundtable – Examining the Impacts of the COVID-19 Pandemic on U.S. Capital Markets”

Tuesday, May 26, 2020

Key Topics & Takeaways

  • Collins Amendment: Quaadman stated that while our well-capitalized banking system has served as an important bulwark throughout the current public health and economic crisis, the Collins Amendment’s interaction with the Basel III capital requirements created incentives that prevent banks from either accepting deposits or lending money out. He continued that this has resulted in the Collins Amendment acting as a friction point in terms of both customers being able to put their money in a safe place and banks pursuing increased lending. Rep. Ann Wagner called on Congress to address this issue in an expedited process.

Panelists

  • Christopher Gerold, President, North American Securities Administrators Association and Bureau Chief of the New Jersey Bureau of Securities
  • Brett Palmer, President, Small Business Investor Alliance
  • Heather Slavkin Corzo, Head of U.S. Policy, Principles for Responsible Investment
  • Tom Quaadman, Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness

Opening Statements                   

Subcommittee Chairman Brad Sherman (D-Calif.)

In his opening statement, Sherman emphasized his hope to convene a subcommittee hearing, with government witnesses, as soon as feasibly possible. Sherman noted that the U.S. capital markets have remained strong in the face of the “stress test” brought about as a result of the COVID-19 pandemic. He then outlined his desire for the subcommittee to focus on matters relating to the requirements, as outlined in the various legislative responses to COVID-19, governing loans to single large corporations, specifically referencing stock-buybacks and shareholder disclosure requirements for public companies.

Rep. French Hill (R-Ark.)

In his opening statement, Hill praised the leadership of the Federal Reserve and the U.S. Treasury for their quick action and establishment of critical facilities in response to the COVID-19 pandemic to calm the markets.

Testimony

Christopher Gerold, President, North American Securities Administrators Association (NASAA) and Bureau Chief of the New Jersey Bureau of Securities

In his statement, Gerold outlined the actions of NASAA in response to the COVID-19 pandemic to assist members in providing limited regulatory relief to ensure continued operations of the financial services industry. He noted NASAA’s support for the Senior Security Act and the draft Empowering States to Protect Seniors from Bad Actors Act. He emphasized that the securities laws and the functioning of our capital markets are not the root cause of the current economic crisis and that these markets have continued to function without much interruption. He encouraged Congress to be skeptical of any proposals to weaken securities laws in the name of the crisis before outlining, in his opinion, certain principles and priorities that Congress should focus on when considering additional legislation, including: 1) increasing transparency in the private marketplace; 2) pausing major SEC rulemakings; and 3) expanding disclosure requirements for public companies.

Brett Palmer, President, Small Business Investor Alliance

In his statement, Palmer outlined the impact of the COVID-19 pandemic on the small business community and praised Congress for their bipartisan efforts to support and sustain small businesses throughout this difficult period. He stated that while there are some problems with the emergency efforts undertaken by Congress and the administration, these efforts served as a successful lifeline for millions. He noted that moving forward, small businesses will require increased flexibility and access to capital, calling upon Congress to remove unnecessary barriers. Specifically, he emphasized the need for more flexibility under the Paycheck Protection Program (PPP) and broad access under the Main Street Lending Facility.

Heather Slavkin Corzo, Head of U.S. Policy, Principles for Responsible Investment

In her statement, Corzo summarized the evolving economic impact of the pandemic and opined that the crisis is exacerbating existing weaknesses in the financial system and broader economy. She continued that there is now an opportunity to build a more sustainable and fair economic system, specifically emphasizing the need for 1) better reporting on how companies are protecting their workers; 2) measures requiring companies that receive government financial support to retain workers via paid sick and family leave; and 3) measures requiring companies that receive financial aid to adopt responsible practices such as limitations on executive pay, bans on stock buybacks, and measures that mitigate their carbon footprint. She concluded that policy responses should strengthen investor protections and transparency.

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

In his statement, Quaadman began with an overview of the policy responses undertaken in response to the COVID-19 pandemic. He then outlined the benefits of encouraging increased private investment in the American economy and praised the SEC for their timely rulemakings in this space. Quaadman spoke in support of swift enactment of the bipartisan “JOBS Act 3.0” and urged avoidance of any legislation that could harm the ability of businesses to grow, specifically noting one-size-fits-all ESG disclosures as well as restrictions on dividends and stock buybacks that could harm investors. He continued that measures to delist Chinese companies from U.S. exchanges warrants further discussion in a different forum.

Question & Answer

Collins Amendment

Rep. Ann Wagner (R-Mo.) emphasized her concern regarding the Collins Amendment and asked Quaadman to elaborate on how amending this provision of Dodd-Frank would help ensure that financial institutions can continue to intermediate relief programs and serve both businesses and consumers during this period. Quaadman stated that while our well-capitalized banking system has served as an important bulwark throughout the current public health and economic crisis, the Collins Amendment’s interaction with the Basel III capital requirements created incentives that prevent banks from either accepting deposits or lending money out. He continued that this has resulted in the Collins Amendment acting as a friction point in terms of both customers being able to put their money in a safe place and banks pursuing increased lending. Quaadman also referenced Federal Reserve Vice Chairman for Supervision Quarles’ support for changes to the Collins Amendment. Wagner concluded by calling on Congress to address this issue in an expedited process.

Federal Reserve Lending Facilities

Reps. Anthony Gonzalez (R-Ohio), Sherman and Hill all asked questions regarding the Fed facilities established in response to the COVID-19 pandemic with Sherman specifically noting his concern with allowing corporate issuers to access the Primary Dealer Credit Facility, thereby allowing such issuers to take advantage of the program without complying with the loan provisions outlined under the CARES Act, such as the restrictions on stock buybacks. Hill emphasized that the Primary and Secondary Corporate Market Credit Facilities are of prime interest to the COVID-19 Congressional Oversight Commission. Gonzalez agreed with Palmer’s opening statement regarding the need for increased flexibility under the PPP program.

Investor Protection

Rep. David Scott (D-Ga.) outlined his concern regarding retail investor scams and asked Gerold what is being done to combat these bad actors. Gerold noted that the SEC, FINRA, and NASAA have all taken individuals steps to protect retail investors in addition to coordinating their enforcement efforts. From a policy perspective, Gerold called upon Congress to support the Senior Security Act as well as the draft Empowering States to Protect Seniors from Bad Actors Act.

China

Reps. Greg Meeks (D-N.Y.) and Gonzalez inquired as to Quaadman’s opinion on the recent legislative efforts regarding the delisting of Chinese companies from U.S. exchanges. Quaadman said that the SEC and PCAOB have often been able to work out reciprocal inspection agreements with foreign jurisdictions that sufficiently address the need for transparency and disclosure. He concluded with his hope that a reciprocal agreement can be reached with China as soon as possible.

SEC Rulemaking

Reps. Steve Stivers (R-Ohio), Bill Foster (D-Ill.), Bryan Steil (R-Wis.) and Sherman asked a variety of questions regarding recent SEC actions and rulemakings with Foster noting that more time will be needed to discuss disclosure requirement issues in light of the recent 45-day extension granted by the SEC. Specifically, Sherman and Stivers inquired as to what changes should be made to the SEC’s acquired fund fees and expenses (AFFE) rule to facilitate increased lending from business development companies (BDCs) to small businesses. Palmer responded that it should be modified so that it accurately represents what the expenses are rather than amplifying fees in ways that prevent BDCs from being on exchanges. He said that while he would prefer for the SEC to do this on their own, congressional action would be welcome if necessary. Stivers then asked the panelists what SEC rulemakings should be made permanent. Quaadman outlined that in terms of permanent changes, he is in favor of scaled disclosure to balance both investor needs as well as the imposed costs for emerging growth companies, extended periods of emerging growth company status, crowdfunding changes, and proxy advisor reform. In response to a question from Steil, Quaadman continued that proxy advisor reforms should rebalance the “playing-field” with increased oversight of their activity.

Miscellaneous

Rep. Tom Emmer (R-Minn.) called for a committee mark-up on his Main Street Growth Act and Hill noted the need to expand the definition of accredited investors as well as exempt crowdfunding from the S-Corp rules.

For more information on this event, please click here.

For an archive of past SIFMA hearing coverage, please click here.