Thank you for the kind introduction. I am delighted to join you at this AICPA gathering, particularly because the AICPA is celebrating a special anniversary this year – its 125th. So let me start by congratulating the AICPA on reaching this significant milestone. More than that, let me acknowledge that the AICPA – indeed, that the profession as a whole – continues to make meaningful contributions to the policy discussions of the day that benefit the Commission as we work to shape a regulatory regime that advances the SEC´s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC is better equipped to make informed judgments – to weigh the costs and benefits of our options – when we receive input from those on the ground like you who are impacted by our choices. With input from you and other interested parties – be it through the notice-and-comment process that is a hallmark of our rulemakings or otherwise – we as regulators can evaluate more critically the practical impacts and tradeoffs of choosing one regulatory course over another. Accordingly, as the AICPA plans for the future, I want to encourage your ongoing active engagement in the regulatory process by underscoring how useful it is when you share your perspectives and insights.
I know it comes as no surprise when I tell you that there have been – and still are – numerous regulatory initiatives for the AICPA and others to weigh in on. The Commission´s regulatory agenda, for example, has been populated by a host of rulemakings addressing matters as diverse as over-the-counter derivatives, asset securitization, the "Volcker Rule," credit rating agencies, hedge funds, mutual funds, municipal securities, the custody of investor assets, conflict minerals, corporate governance, executive compensation, equity market structure, and whistleblowers. The PCAOB – over which the SEC exercises oversight – also has been active, with, for example, a standard-setting agenda that includes such topics as the audits of SEC-registered broker-dealers, audit transparency, and auditor communications with audit committees. In addition, the PCAOB has forwarded two noteworthy concept releases – one concerning the auditor´s reporting model and the other concerning auditor independence and audit firm rotation.
This is just a sampling of all the regulatory change that presently is – or that might in the future be – underway.
Given all the developments, I had a lot to choose from in deciding what to cover this afternoon. Ultimately, I selected two topics. The first is the JOBS Act, a relatively recent development; and the second is cost-benefit analysis, which cuts across all rulemakings. I have tried to keep my remarks focused, recognizing that there is much more to say about these topics than I have time for today.
Before saying anything else, now would be a good time for me to pause to remind you that the views I express here today are my own and do not necessarily reflect those of the Securities and Exchange Commission or my fellow Commissioners.
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When addressing a joint session of Congress last year, the President expressed his intent to "cut away the red tape that prevents too many rapidly growing startup companies from raising capital and going public."1 On April 5 of this year, the President signed into law the Jumpstart Our Business Startups (JOBS) Act to do exactly that. Put simply, the goal motivating the legislation is to spur our economy and job creation by making it easier for companies to raise the capital they need to invest and hire. In this way, the JOBS Act is consonant with that aspect of the SEC´s own mission that articulates the goal of facilitating capital formation.
The JOBS Act looks to achieve its purpose by reducing the disclosure obligations and other regulatory burdens that so-called "emerging growth companies" confront when going public, thereby providing what is being called an "IPO on-ramp" for growing businesses. The JOBS Act also relaxes the restriction on general solicitations in private placements under Rule 506 of Regulation D; facilitates "crowdfunding"; makes Regulation A more useful for offering securities; and increases the shareholder threshold at which a private company is forced to report publicly.
Of special interest to accountants and auditors might be that an emerging growth company that takes the IPO on-ramp may include two (instead of three) years of audited financial statements in its registration statement and may include selected financial data for only those periods covered by its financial statements (instead of for five years); does not have to comply with new or revised accounting standards until private companies would have to comply; is exempt from Section 404(b) of Sarbanes-Oxley; and is exempt from any future standard the PCAOB may issue relating to the auditor´s reporting model or mandating audit firm rotation.
I welcome the JOBS Act as a significant step in the right direction. To my mind, three observations capture the promise that the JOBS Act holds for all of us.
First, for a new company to emerge and a smaller firm to take off, more is needed than an entrepreneur´s ingenuity, hard work, and determination. Small business also needs capital. I am optimistic that the JOBS Act will help those businesses that need capital find those investors who want to provide it.
Second, as they continue to grow, smaller enterprises not only hire more people, but they drive new innovations and technologies that lead us to work more productively; that enable us to transact more efficiently; that allow us to relieve and remedy illness and hardship; and that empower us to communicate and network better with each other. In other words, when new and emerging companies get the resources they need to invest and expand, our standard of living improves. Experience has taught us that some of these ventures will go on to become industry leaders and household names.
Third, the JOBS Act stands to benefit investors too, not just issuers. What do I mean by this? In discussions that center on the federal securities laws, it seems as if the goal of capital formation is often pitted against the goal of investor protection – as if to take a regulatory step to ensure that the regulatory regime is properly tailored and flexible enough to promote capital formation necessarily comes at the expense of investor protection. I see it differently. To me, capital formation itself advances core investor goals.
Without question, investors are interested in a regulatory regime that empowers them with information and in other ways shields them from fraud, manipulation, and other abuses. Indeed, for our securities markets to function properly, investors need to be confident that they are adequately informed about their investments, and they need to be secure that their investments will be protected from others´ wrongdoing.
That said, we cannot lose sight of the fact that investors primarily invest so that they can earn income and build wealth. This means that investors need opportunities to invest, and that investors are better served when they are offered more choices. If the regulatory regime stifles capital formation by making it more difficult and costly for businesses to raise funds, investors enjoy fewer investment options and firms investors do invest in may be disadvantaged by a higher cost of capital or, in more extreme cases, an inability to raise capital. All of which is to say that important benefits inure to investors when steps like the JOBS Act are taken to facilitate capital formation. The President expressed a similar sentiment when he signed the legislation, explaining, "B ecause of this bill, start-ups and small business will now have access to a big, new pool of potential investors – namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in."2
In sum, it bears emphasizing that facilitating capital formation is one of the SEC´s fundamental goals and that a steadfast purpose of the federal securities laws is to encourage investment so that businesses can raise the capital they need to drive economic growth and so that investors can enjoy a wide range of opportunities for putting their money to work.
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When considering a rulemaking, the Commission must assess the potential consequences of our regulatory options in a thorough and balanced manner, carefully evaluating the intended benefits of our actions while giving due regard to the potential undesirable effects of our choices. In other words, the Commission must engage in rigorous cost-benefit analysis when fashioning the securities law regime. Regulatory decision making should be supported by data, to the extent available, and demanding economic analysis.
A rigorous cost-benefit analysis enables us to make informed tradeoffs across a range of potential outcomes and thus is the best way of ensuring that the benefits of regulation outweigh the costs. Just as we emphasize the benefits of our rulemakings, we need to identify and consider the potential downsides so that our analysis is not skewed. More to the point, when engaging in cost-benefit analysis, it is critically important to search purposefully for information that actually cuts against one´s own position, instincts, and sensibilities. Considering information that is contrary to one´s own views leads to more informed decision making and helps counteract the risk that a person will become overly committed to his or her own perspectives and beliefs and overconfident that what he or she advances is correct.
Taking a step back, let me add that before a rulemaking is even initiated, we should first ask whether there really is a problem that needs to be addressed. Too often the problem – or at least its severity – is presumed. Instead of too readily accepting that there is a problem, regulators should start by verifying that the perceived problem does in fact exist and then work to understand the problem´s nature, scope, and magnitude. We should not jump ahead and talk about "solutions" until we have carefully studied the purported problem, which we may discover is not such a problem after all.
I have expressed these views several times before in advocating for rigorous cost-benefit analysis at the SEC, including in pressing that the agency should ground its decisions in data as much as possible. Today, I want to make clear that I think that the PCAOB also needs to engage in rigorous cost-benefit analysis of its rules, including its auditing standards. We need to be assured that the potential consequences – both for better and for worse – of a PCAOB rule have been thoroughly evaluated and considered in a balanced way. Otherwise, for example, how can we determine on a reasoned basis whether a PCAOB proposal advances the public interest? Whether a PCAOB rule advances the public interest depends on its practical impacts. Cost-benefit analysis allows us to better anticipate and assess these impacts so that a well-reasoned judgment can be made. Put differently, without such a rigorous analysis, there is a greater risk that a proposed standard or other PCAOB rule could do more harm than good, in which case an alternative approach would be preferable.
Given my views, I am pleased that PCAOB Chairman Doty recently committed in congressional testimony that before advancing a proposal on mandatory audit firm rotation, the PCAOB would carefully analyze not only the benefits, but also the costs and unanticipated consequences that could result.
To avoid any confusion, I want to repeat that I believe that such an analysis should not be limited to the topic of audit firm rotation. Cost-benefit analysis – rooted in data when possible – should be part of PCAOB rulemaking generally.
Insofar as the SEC itself is concerned, I should note that I am pleased that the SEC´s Division of Risk, Strategy, and Financial Innovation and Office of the General Counsel have worked together to develop new guidance for performing economic analysis in the agency´s rulemakings.3 This guidance marks significant progress toward improving the analysis that underpins the Commission´s regulatory initiatives.
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Because the quality of our analysis depends on the quality of the information we have available to analyze, I will conclude by once again encouraging the profession´s active engagement in the SEC´s, as well as the PCAOB´s, rulemakings. Your input, along with the input of others, improves our ability to undertake the kind of rigorous analysis that we should demand of ourselves – an analysis that should focus on both the good and the bad that could come from our regulatory actions so that we can better ensure that our rules do more good than harm.
Thank you.
1 Address by the President to a Joint Session of Congress, available at http://www.whitehouse.gov/photos-and-video/video/2011/09/08/president-obama-presents-american-jobs-act-enhanced-version#transcript.
2 Remarks by the President at JOBS Act Bill Signing, available at http://www.whitehouse.gov/the-press-office/2012/04/05/remarks-president-jobs-act-bill-signing.
3 For more on the economic analysis guidance, see Mary L. Schapiro, Chairman, Securities & Exchange Commission, Testimony Concerning Economic Analysis in SEC Rulemaking, Before the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs of the Committee on Oversight and Government Reform, U.S. House of Representatives (April 17, 2012), available at http://www.sec.gov/news/testimony/2012/ts041712mls.htm.