▶ 0:17:49>> good morning. Today the committee meets to discuss how to make it easier for entrepreneurs and small businesses, growing companies and everyday investors to build opportunity through capital formation. Capital formation may sound like a wall street term, at its core it's about main street. It gives local businesses and investors tools to turn good ideas into jobs, growth, and a stronger future for their own communities.
▶ 0:18:21The best ideas do not come just from new york or san francisco or handful of other communities. They come from places in south carolina in communities all across america. Too often access to capital is concentrated in too few places in hand. That means an entrepreneur in south carolina has a harder time accessing capital than someone with the same idea in silicon valley. That should not be the case.
▶ 0:18:53Opportunities should not be dictated by a zip code and should not take wealth to create wealth. My priorities are simple. To expand investment opportunities for everyday americans and increase wealth outside of the hands of the concentrated few. We need help to help companies go public and stake public -- stay public. We need to help small and medium-sized businesses access capital to grow and compete.
▶ 0:19:23That is good news in so many ways. Last congress I introduced the empowering main street in america act, because too many americans lack access to our capital markets. Emsa would have expanded the way everyday americans can invest in businesses and have tailored regulations for companies in every state of -- stage of growth, from a startup and beyond.
▶ 0:19:49Since then, members on both sides of the aisle have put forward commonsense proposals that can help move us in the right direction. I have teamed up with senator warner on legislation to help emerging companies scale and ultimately access public markets.
▶ 0:20:10Senator britt has introduced legislation cosponsored by senator warnock to level the playing field between 403 b's and 401(k) plans, giving 15 million nonprofit employees from hospital workers to teachers access to the same lower-cost investment options as everyday 401(k) savers. Already 13 members of this committee have signed on as cosponsors.
▶ 0:20:37Senator mccormick and senator alsobrooks have introduced legislation to eliminate red that inflates the reported cost of business development. Making it more attractive for investors to pick capital -- put capital in small and middle market businesses. There are more ideas we can build on. That is why this committee is working to update the capital formation package I put together.
▶ 0:21:07Our capital markets should help a company grow from an idea to a small business. From a small business to a larger employer. And maybe one day to the next great public company. That is the point of today's hearing. We want to hear from our witnesses about what is working, what is not working, and where congress should focus our attention to make capital formation even easier.
▶ 0:21:32This committee has shown time and time again that we can work together on serious issues that matter to the american people. Helping a small business grow is not about politics. Giving families a chance to invest is not partisan. Keeping america the best place in the world to build the future should not be controversial. Capital formation should unite us.
▶ 0:21:56Today let's focus on practical solutions for every community, not just a few zip codes. I look forward to hearing the testimony from witnesses. Ranking member, you are not recognize.
▶ 0:22:09Sen. Warren: Thank you, Mr. chairman, for holding this hearing. I believe in markets. Fair and transparent markets promote innovation, power economic growth, give everyone a chance to thrive. The confidence investors at home and around the world place in the integrity of our markets is a critical part of why our nation owes the economy is the envy of the world.
▶ 0:22:35Sen. Warren: But under president trump the corruption is so massive and so unprecedented that it is fundamentally changed our markets, bringing them -- rigging them for the wealthy. Small businesses and communities pay the price. We should be working together to make our markets stronger and ensure they serve american businesses and american families. I know that we share that goal.
▶ 0:23:07Sen. Warren: Our number one job -- number 1 -- should be to put a stop to this corruption and protect investors. Understand the corruption is everywhere. It has been about 15 months since paul atkins was sworn into lead the trump sec. At every turn he has let scammers off the hook and rolled back the rules that protect investors from getting cheated. Corruption, corruption, corruption.
▶ 0:23:38Sen. Warren: Under trump and chair atkins, there is no cop on the beat to protect investors. The sec's enforcement activity dropped 20% last year. Chair atkins could not even say under oath in this room that insider trading is bad. Fraudsters and cheats, it appears that everyone gets a free pass. Chair atkins is making markets more secretive.
▶ 0:24:05Sen. Warren: He is slashing disclosure rules so companies can hide just how risky they have become. He is getting oversight and enforcement tools that help financial cops on the beat go after insider trading, aftermarket manipulation, and other corporate crimes. He is making it easier for executives to silence shareholders. He's making it harder for states to protect their own citizens from being defrauded.
▶ 0:24:35Sen. Warren: Across the board everyday investors are losing. Chair atkins rigs the rules. It's one more example of the corruption over the entire trump administration. This corruption costs american families and retirees. But who wins? Corruption is really profitable for some people.
▶ 0:25:00Sen. Warren: Companies and executives whose business models are built on fraud win, while honest business is lose. Trump's billionaire buddies win, donating big time to trump could mean the sec case against you just suddenly disappears. Another trump friend who one big, elon musk, who briefly became the world's first trillionaire.
▶ 0:25:27Sen. Warren: Got his spacex ipo green lit despite analysts calling the numbers nonsensical. Spacex got an additional boost when elon musk reportedly pushed some index providers to been there rules so tens of millions of americans are forced to have spacex in their retirement funds, even if it injects significant risk. And then president trump himself is the ultimate winner.
▶ 0:25:58Sen. Warren: He made $1.4 billion office major crypto ventures just last year, while nearly a million investors lost out on nearly $4 billion on trump meme coins alone. Now his social media company has come up with a plan to sell wall street firms access to his market moving posts on true social before everyone else gets to see them. And who benefits?
▶ 0:26:29Sen. Warren: Only people who can pay more than $1 million a year for the inside scoop on what trump will be doing. This is a brazen scheme to profit off the presiden -- presidency and it should be flatly illegal. How can americans or the world for that matter trust the honesty of our markets as trump and the sec burn our credibility?
▶ 0:26:57Sen. Warren: Study after study shows corruption significantly reduces growth and investment, even in america. There is a cost of this corruption and we all have a responsibility to rain and in. I have not given up on the original promise of our capital markets. We need to act before our standing in the world craters and our people pay for this for generations to come. Thank you, Mr. chairman.
▶ 0:27:24Chair Scott: Thank you, ma'am. Each witness will be given five minutes for your testimony. We will take your written testimony and put it in the record. I recognize our first witness, miss dalia blass at sullivan and cromwell. You may begin your testimony.
▶ 0:27:44Ms. Blass: Chairman scott, ranking member warren, distinguished members of the committee, thank you for the opportunity to testify today on this important topic. My name is dalia blass, senior investment partner at simon and cromwell. I had the honor of serving at the sec, concluding my tenure as director of the division of investment management. I'm testifying solely on my personal capacity and on behalf of sullivan and cromwell or any clients.
▶ 0:28:12Ms. Blass: I applied members of the committee for advancing key legislative proposals to expand retail access to investment opportunities providing greater tools to save for retirement and other financial goals. My testimony covers a broad set of topics related to today's hearing and I would like to focus my remarks on three main points. First, retail access is about thoughtfully reintroducing access to private market investments for all rather than a subset of retail investors.
▶ 0:28:40Ms. Blass: Coverage of retail access and the use of descriptors such as retailization left the impression we are building bridges to new territories and that is not the case. The historical shift from defined benefit defined contribution plans has a chemically curtailed retail access to private market investments. Compounding this is the decision by more companies to remain private longer. The result is retail investors increasingly are missing out on opportunities for early compounding returns.
▶ 0:29:10Ms. Blass: Second, I believe current regulations undermine retail investor access to private markets. For example, retirement focused products are limited to daily liquid products, permitting products that are more tailored to liquidity needs of plans that provide access to more diversified investment opportunities while maintaining important investment protections.
▶ 0:29:33Ms. Blass: Outside the retirement space, the sec staff limited private fund investors combined with activist target -- targeting those funds has significantly limited the number of listed funds on the market. These funds can provide meaningful access to private investments under important investor protections. The result has been the growth in two related trends.
▶ 0:29:58Ms. Blass: Increasing use of retail focused vehicles that operate outside the protections of the investment company act, while innovative they will always have limitations because they lack the protections of the act. The second is the use of liquidity structures loosely called semi liquid. These funds have been around for decades but have seen a resurgence in alternative spaces. I have a few observations. Despite assertions by the press, they do not have gates.
▶ 0:30:25Ms. Blass: Regulations require them to provide liquidity subject to a pre-disclosed limit. The use of the term semi liquid, while plain english, may create a false sense of and ability to reliably access liquidity. These funds are under will say differently not fit for purpose. With respect to publicly offered funds, key pieces of legislation proposed by this committee would provide much-needed reforms.
▶ 0:30:51Ms. Blass: They would protect the statutory right to invest in alternative assets and correct the technical error that double counts bdc expenses and investors disclosures. Opportunities enhance desk exist to enhance retail access. What is for two protected what is for two protecte from -- revising the high requirement for shareholder meetings for funds which effectively adds costs to fund investors. This brings me to my third and final point.
▶ 0:31:22Ms. Blass: Empowering responsible product innovation which requires an overhaul of the sec's exemptive process. Novel applications can take anywhere from five to 10 years from start to finish, imposing significant cost, uncertainty and material barrier to entry and innovation. Congress amended section 19 be two of the exchange act.
▶ 0:31:49Ms. Blass: It is transparent and promote certainty and holds both regulators and market participants accountable. Congress can look to the process for a similar framework under that 1940 act. My testimony slain so that can work. Thank you for the opportunity to share my views with you and I very much look forward to answering your questions.
▶ 0:32:05Chair Scott: Thank you, ma'am. We will hear from the honorable kenneth bensten, president and ceo of sifma.
▶ 0:32:14Mr. Bensten: Thank you for the opportunity to testify today. On the president and ceo of the securities industry and financial markets association. Sifma has long supported efforts to encourage companies to go public by ensuring the cost and requirements are approved really tailored, allowing issuance without introducing necessary is to investors for the market.
▶ 0:32:38Mr. Bensten: The jobs act passed by congress in 2012 with our support is an example of how legislation can help companies access public markets and secure funding for growth. We believe this benefits not only issuers but also investors by providing greater opportunities to participate in long-term wealth creation. Supporting stronger public markets is not diminishing the role of private markets. Both play an important and complement are a capital formation.
▶ 0:33:02Mr. Bensten: While private markets provide options, policymakers should reverse the long decline in public company listings like ipos. By conducting an initial public offering, a company gains capital that can be used for growth initiatives and invest in innovation and pursue acquisitions and strengthened its overall financial position. Liquidity and public price formation to stay was public markets.
▶ 0:33:27Mr. Bensten: Shares can generally be bought and sold relative -- with relative ease giving investors reflect ability to allocate capital as a financial needs or market conditions change. Public companies into a access to capital markets following equity offerings and debt issuance. While the market value is increasing more than fivefold over the past quarter century, the number of publicly listed companies has moved in the opposite direction.
▶ 0:33:57Mr. Bensten: The was public, the universe has contracted from a possibly 7200 firms 5500 firms over the same period, the decline of nearly 25%. For the average 459 ipos in the 1990's, since 2020 fallen to 196. There is ample evidence that jobs act has expanded access to public capital markets for smaller companies, facilitating capital formation through a more efficient and less burdensome ipo process.
▶ 0:34:25Mr. Bensten: The jobs act expanded access to public markets since its enactment. Companies have raised nearly $440 billion across 2100 offerings. Not withstanding the success of the jobs act, we believe policymakers should continue to evaluate whether existing regulations approved her really balance investor protection with the costs and complexities associated with the company remaining a public committee.
▶ 0:34:52Mr. Bensten: Sifma supports the house passage of the invest act and several measures introduced by members of this committee. We also support the sec's proposed reforms to expand shelf registration eligibility and emergency growth company status, as well as sec efforts to expand research coverage. Congress should consider policies that broaden investment opportunities for retail investors.
▶ 0:35:20Mr. Bensten: Targeted reforms can strength of competitiveness of U.S. capital markets while preserving robust investor protections. I think the committee for holding this hearing and the work by the members to advance important legislation. Sifma stands ready to work with this committee, congress, and other policymakers to advance reforms.
▶ 0:35:38Chair Scott: Thank you. I recognize Mr. mike flood at the U.S. chamber of commerce. You are recognized for up to five minutes.
▶ 0:36:02Mr. Flood: Chairman scott, ranking member warren, members of the committee, thank you for the opportunity to testify on the need to empower main street by enhancing and growing capital markets. The chamber of commerce, the world's largest business organization, represents businesses of all sizes. The substantial majority of which are small businesses.
▶ 0:36:23Mr. Flood: We thank chair scott for leading the charge on capital formation with the empowering mainstreet america act and the broad bipartisan effort by senators of this committee on capital reform -- legislation. Mainstreet depends upon excessive capital markets for economic growth, innovation, job creation, retirement security, and america's ability to lead in the global economy.
▶ 0:36:48Mr. Flood: When businesses can access capital efficiently, they hire more workers, invest in new technologies, and build the products and services that drive the american economy. When investors, including everyday americans, can participate in the growth, wealth is built broadly, not just at the top. The wealth changes lives and enables parents to send their kids to college, families to buy homes, and entrepreneurs to start new businesses.
▶ 0:37:15Mr. Flood: The chamber is here because we believe congress has at time sensitive opportunity to enact meaningful capital formation policy that reflects the needs of today's small businesses, investors, and the overall economy. Strong capital markets are essential to american leadership. The united states is the deepest, most liquid, most innovative capital markets in the world representing approximately 45% of global public equity and fixed income capitalization. Nearly 75% of all U.S.
▶ 0:37:44Mr. Flood: Corporate finance comes from U.S. capital markets. However the capital markets must be enhanced to compete. The number of U.S. public companies has followed by nearly 40% since the 1990's. From over 7800 companies in 1997 to 4700 today. Let's put that in perspective. There are not in a public oven to fully comprise the wilshire 5000. The client is not a market anomaly.
▶ 0:38:11Mr. Flood: It is evidence of the current framework is not working, the costs and complexities to access public markets has outpaced the benefits for far too many companies. Just as important, forward and capital markets offering effective solutions. If the trend continues, you can -- or constituent to lose on access to potential jobs with public companies and options to save for the future. Another answer is expanding small business access to capital.
▶ 0:38:41Mr. Flood: The chamber represents nearly 3 million businesses. But many are recognized in the fortune 500, the others are small and medium-sized enterprises. Small businesses comprise 99.9% of all companies in the united states, 47% of the workforce, and 62% of net job creation since 1995. From start up to ipo and every step in between, the regulatory framework should facilitate, not obstruct access to capital.
▶ 0:39:11Mr. Flood: Smart reforms like halos and raising the advisory threshold for inflation can expand the networks that are crucial to entrepreneurship. Finally, another solution is to strengthen and create more public companies. Investor protection and capital formation are complement her goals. The reforms proposed by this committee such as elevate and allowing companies to submit draft ipo documents to the sec that she both.
▶ 0:39:42Mr. Flood: Finally, we should expand investment opportunities for american investors, workers, and retirees. Capital formation is more than just helping companies raise money. It's about providing every american an opportunity to invest in the growth of both the U.S. public and private markets. For too long the most dynamic investment opportunities have been available only to those who already have both.
▶ 0:40:07Mr. Flood: Smart legislation can target this inequality and maintain strong investor protections. Senator warren, we agree that money and power should not equate to special treatment and that's why we want to provide responsible access to retail investors in the private market. We ask bipartisan momentum. Pass legislation to help millions find an affordable home.
▶ 0:40:37Mr. Flood: Bipartisan support for capital formation legislation is just as overwhelming. Including with the administration. The senate work product has much income of the house-past invest act that passed with a whopping 302 votes. There's no reason why congress cannot come together again to pass bipartisan legislation this year to provide mainstreet businesses better opportunities to grow and thrive, increased public company jobs in america, and allow every new investor
▶ 0:41:09Mr. Flood: Because of their aptitude better opportunities to say for their futures. We accomplish this together, your constituents will be closer to living the american dream. Thank you and I look forward to your questions.
▶ 0:41:19Chair Scott: We will hear from Mr. cantrell dumas, senior researcher at the joint center for political and economic studies. You are recognized for up to five minutes.
▶ 0:41:32Mr. Dumas: Chairman scott, ranking member warren, members of the committee, thank you for the opportunity to testify. My name is cantrell dumas, senior researcher at the joint center for political and economic studies. Founded in 1970, it's a nonprofit, nonpartisan organization that is america's black think tank. We develop policies to improve the economic ability of black americans.
▶ 0:42:02Mr. Dumas: I focus on financial religion and the policies that affect how black families build wealth. After more than a decade of public service experience in service of the federal deposit insurance corporation doing the 2008 -- during the 2008 financial crisis. I have worked as an attorney advising clients on financial transactions. Expanding access to capital is important. Small businesses need financing to start, grow, and hire.
▶ 0:42:33Mr. Dumas: Main street is on both sides of the capital markets. Past derogatory efforts may have made it easier for some firms and investment funds to raise capital. The amount raised tells us little about whether capital reaches black-owned businesses and underserved on to renew her's or low income families have opportunities to build wealth. Black entrepreneurs face a scaling gap. They own 40% of businesses but only 3% with paid employees.
▶ 0:43:01Mr. Dumas: The federal reserve survey only 35% of black-owned businesses that apply for financing received all the funding they sought compared to 56% of white owned firms. These disparities show I capital market policies should be judged not only by how much capital it helps businesses raise but who receives it, what terms, and whether the work is in families are protected. Capital formation and investor protection are not competing objectives.
▶ 0:43:31Mr. Dumas: Reliable information, fair markets, protection against fraud and abuse build confidence makes capital formation possible. These protections are important to black households. In 2022, medium black family wealth was $44,900. Compared with a proximally $285,000 for white families. Black households have less capacity to absorb investment losses, excessive fees in financial misconduct.
▶ 0:43:59Mr. Dumas: Financial policy should help low wealth households build assets while protecting assets they are working to accumulate. When information becomes available and investors are harder to evaluate -- with that in mind, I want to highlight three principles that should guide policy. First, disclosure should reduce information gaps. Large institutional investors may have access to management, professional analyst, and private data services.
▶ 0:44:30Mr. Dumas: Ordinary investors rely heavily on public disclosures. Moving from quarterly to semiannual reporting could have the decisions with less information. The answer should be clear. More information -- the answer should be clear information, not less. We should be cautious about placing private market investments in digital assets and worker retirement accounts.
▶ 0:44:53Mr. Dumas: Private equity and private credit may involve limited disclosure, subjective evaluations, fees, conflicts of interest and conflicts of interest a. Even if congress established clear rules for digital asset markets, there is little evidence crypto is a reliable wealth growing mechanism for ordinary families. Regulatory clarity should not be confused with evidence that crypto belongs in workers retirement accounts. Expanding access to risk is not the same is expanding access to wealth.
▶ 0:45:25Mr. Dumas: Third, consistent enforcement strengthen companies. Rules matter only when they are enforced. Investors must believe they are applying to every participant. Protecting investors is only part of the answer.
▶ 0:45:40Mr. Dumas: And power --at federal small business programs so black-owned businesses and other underserved businesses obtain the capital they need to grow. Our goal should be to ensure capital reaches businesses that need it and workers and families can build and preserve wealth. That requires transparent markets, strong investor protection, consistent enforcement, and clear rules.
▶ 0:46:10Mr. Dumas: Thank you and I look forward to your questions.
▶ 0:46:12Chair Scott: Senator rounds will kick off the question and answer. He senator gets five minutes to ask questions. We are consistent on keeping five minutes five minutes. Senator rounds, you are recognized.
▶ 0:46:27Sen. Rounds: Thank you to all of you for being here today. This is a really important opportunity for us to rethink a little bit about whether or not the existing regulations are appropriate for today and what improvements we can make.
▶ 0:46:43Sen. Rounds: I have appreciated the fact the house of representatives has passed out a product on a bipartisan basis that I believe will help to allow more individuals to invest in equity, to actually invest in businesses that are not there per se and for businesses to accumulate resources to build those businesses.
▶ 0:47:07Sen. Rounds: What I don't want to do is to restrict anyone from being able to invest in it if they have the resources and the savings they put together to do so. Mr. bensten, there is no question as times change and different technologies come forward and as we learned about what regulations work correctly and which ones need to be tweaked, there's no question that has to be review of
▶ 0:47:37Sen. Rounds: Regulations on a regular basis. I believe you indicated the jobs act, probably one of the last time to look at this with regard to capital formation. That was 2012. Here we are, 16 -- 14 years later. We are now looking at it again on a bipartisan basis. Can you talk about the reason why those regulations that were there at that time versus what they are now?
▶ 0:48:06Sen. Rounds: Why we should take a look at maybe updating those regulations?
▶ 0:48:17Mr. Bensten: Thank you, senator. The securities industry is one of the most regulated industries in the american economy. We operate under a rulebook that was set in place 80 years ago coming out of the great depression. Over the years congress has made changes to that through multiple statutes and appropriately so. I think it's important for congress to go back on a periodic basis not just a look at the rulebook the regulators put in place but look at their own laws that they put in place. Markets change, products change, technology comes into place.
▶ 0:48:48Mr. Bensten: Some of the things we are dealing with today in terms of the capital formation, filings of the sec, those were originally done with paper. Now they are done electronically. How we deliver confirms and proxies to clients have changed. Many are proposing going to eat delivery -- e-delivery.
▶ 0:49:16Mr. Bensten: They do the best job they can to the time but they have to go back and say, did it work and what has changed for the markets.
▶ 0:49:21Sen. Rounds: The vast majority can be due on -- can be done on a bipartisan basis. Mr. flood, I appreciated your comments. It's important to talk about the individuals who are trying to invest. I want to find something other than investing in a savings account. They look at where real wealth has developed. You start out with savings.
▶ 0:49:43Sen. Rounds: Once you have some savings where because of the work you are doing as a family and individual, at the end of the month you have got more in your account than what you had to begin with and you pay your bills. At some point you want to take that as an opportunity to grow your own wealth. You want to put it someplace where it could perhaps gain interest or in some cases equity. The markets today allow for two different types.
▶ 0:50:11Sen. Rounds: One is for individuals to invest in privately owned businesses. It might be their own business or might be with a small group. Those have a real opportunity for development. The other is in the markets themselves, the public markets. There's a big cost involved because we are trying to make them as safe as possible for average investors.
▶ 0:50:31Sen. Rounds: Can you talk a little about the real opportunities for someone to invest perhaps a little easier in some of those ipo or pre-ipo programs versus in the markets that we supposedly put up for the general public but are regulated to the point where there is at a cost and perhaps a little lower rate of return on investments? The reason we want to provide more opportunity for small investors to look at both, private type companies and those that are publicly traded.
▶ 0:51:06Sen. Rounds: It is not working. Slide it over to you.
▶ 0:51:10Mr. Flood: I promise I can string a sentence together. I think there are a few opportunities. One is on the investment side. You talked about two technical fixes that bring things into today's world. One is --
▶ 0:51:27Sen. Rounds: I'm going to run out of time.
▶ 0:51:31Mr. Flood: Allowing access by changing exemption. Two, making sure when we talk about -- some call it double counting fees but making sure we rationalize disclosure. Right now it is wrong. Those would be my fixes.
▶ 0:51:52Sen. Warren: Thank you, Mr. chairman. This is about making capital markets stronger. Let start with some recent market news. On saturday, president trump' socials media committee began offering faster access to his social media posts. Two investors who pay up to $100,000 a month. That's over a million dollar a year. Per investor.
▶ 0:52:19Sen. Warren: Let me ask the witness is, raise your hand if you believe the president selling information about our economy and foreign policy to wall street before everyone else gets access to the information is good for the integrity of our capital markets. There we go. I see no hands. Maybe if the republicans on this committee want to strengthen the capital markets, we can start by outlawing what president trump is doing.
▶ 0:52:50Sen. Warren: We know this is wrong. Let's look at another scam. Trumps private equity buddies have a problem. Big investors are starting to head for the exits. His crypto buddies off his crypto buddies o also have a problem with billions in losses for investors.
▶ 0:53:09Sen. Warren: Last august, president trump threw them a lifeline and directed federal agencies to make it easier for private equity, private credit, crypto, and other risky assets to be shoveled into retirement accounts. The idea is to give all those sketchy dealers access to families' 401(k)s. Mr. dumas, you are an expert on black communities.
▶ 0:53:39Sen. Warren: Is pushing these risky assets like crypto and private equity into retirement accounts likely to help families?
▶ 0:53:47Mr. Dumas: Thank you for the question. Not likely. . Private equity is risky because of nondisclosure and customer protections. Digital assets are volatile as well. There is not evidence that says cryptocurrency provides any type of wealth building growth, especially for families.
▶ 0:54:16Mr. Dumas: I think obviously these volatile assets can definitely provide a less wealth opportunity for families.
▶ 0:54:25Sen. Warren: Let's look at another trump administration policy. When you invest in a public company like pepsi or apple, they are required to file basic financial and business information with the sec four times a year. In may, the sec proposed reducing the disclosures to two times a year.
▶ 0:54:46Sen. Warren: Days later, the sec proposed rules that exempt 80% of public companies from disclosures and accountability on what executives get paid. The sec even exempted most companies from the requirement that their auditor must swear the company has systems in place to produce accurate financial information.
▶ 0:55:11Sen. Warren: It is getting less information less often about a company's operations helpful for working people, for mom-and-pop investors, or for black communities?
▶ 0:55:23Mr. Dumas: It is not helpful at all. Disclosure and transparency is vital for confidence in investment. Less information leaves investors in the dark. We need better information in order for investors to have the same information as sophisticated investors. Without that, there's an information gap.
▶ 0:55:47Sen. Warren: Let me do one more. In addition to weakening the rules, trump's sec is simply taking the cop off the beat. Last year enforcement activity dropped by over 20% to its lowest level in nearly 20 years. Mr. dumas, who benefits from the sec fails to enforce the law?
▶ 0:56:11Mr. Dumas: Factors benefit. Without strong enforcement -- bad actors benefit. Without strong enforcement fraudsters can take advantage of everyday americans.
▶ 0:56:24Sen. Warren: Thank you. Every one of these steps is designed to help wall street insiders, big corporations, and president trump himself, not american families. Congress needs to clean this up. Thank you, Mr. chairman. I yield back.
▶ 0:56:45Chair Scott: Condolences at this point. [laughter] let me think about what Mr. flood said earlier. Not wealth, but aptitude. I will ask a question to Mr. bensten. I grew up in poverty in a single-parent household. Wealth creating wealth seems to be something that is consistent but not necessary.
▶ 0:57:12Chair Scott: There are a lot of bright folks with great ideas who need early access. When you look at the investor definition, it should be updated. It's a bipartisan conversation we are not having. Both republicans and democrats seem to appreciate the importance of not just having a wealth definition for whether or not you have the aptitude to be an accredited investor. I would love your thoughts on that topic.
▶ 0:57:41Mr. Bensten: Thank you, Mr. chairman. Congress has gone back and forth and looked at how they should define accredited investor in terms of a quantitative test. There are efforts and legislation to look at it in a qualitative. I think it is appropriate and we think it's appropriate to look at it in terms of other types of sophistication and accreditation and investor may have.
▶ 0:58:06Mr. Bensten: When I was a banker I was a series 763 registrant that requires you to go through multiple financial testing and the like. You have cfa's, what are the most intense financial testings. You might not necessarily have millions of dollars but you are a sophisticated party at that point in time. We think is appropriate for congress to take a look at that and make adjustments based upon the individual investors other accreditations.
▶ 0:58:33Chair Scott: Thoughts on that?
▶ 0:58:38Mr. Flood: When I looked at the proposals, it tends to allow retail investors to access the private markets in three responsible ways. Show you have to do by passing a test. Clearly someone who will take the time to do that is interested in the market and understand the risks. Two, if you allow for a three b access like we allow 401k, there will be a plan. They look at the investment.
▶ 0:59:06Mr. Flood: They will look at the risks and they will carry them and display those to the retail investor. Three, if you can use an advisor, you can go that route. You have all three routes. All three come of the same protections you would have if you invested in the stock market. We will allow an individual to invest in penny stocks, otc, and equities. We are enhancing the controls to allow people in the private markets.
▶ 0:59:35Mr. Flood: I think people understand the risks.
▶ 0:59:40Chair Scott: Ms. blass, entrepreneurs rely on smaller specialized investors to get their first real shot at turning an idea into a company. The rules were written for a different time. One small venture capital funds were expected to stay small and when capital was far more concentrated in major cities.
▶ 1:00:11Chair Scott: That's why I'm proud to work with senators moran, warner, gallego and others on the expanding american opportunity worship act -- entrepreneurship act to update outdated rules, many can reach entrepreneurs and small businesses in south carolina and across the country. Given how much funding sizes and private investing have changed, how would modernizing these outdated rules help more capital reach entrepreneurs, particularly in rural and traditionally underserved regions of the country?
▶ 1:00:41Ms. Blass: Venture capital funds provide critical funding for startups. Unlocking their investment in capital flow for smaller funds would enable them to unlock critical capital funding for smaller entities, for startups, and for our communities. These startups essentially become small businesses which become the backbone of the american economy.
▶ 1:01:06Ms. Blass: The proposals you have that would unlock the investment in capital flow and the liquidity issues investors -- investments for these funds would be critical for capital formation. When you look at that and you look at updating thresholds for all small entities, that in turn would really unlock investments in capital flow for smaller communities.
▶ 1:01:28Chair Scott: Ms. blass makes a good point. I hope this committee has the courage to take on the conversation. I doubt we could lead the charge from bsa to capital formation. We have a litany legislation for a different time that requires for us to take a serious look at which index are thresholds. Mr. van hollen.
▶ 1:01:59Sen. Van Hollen: Thank you for having the hearing focusing on these issues. It's important to make sure our capital markets serve americans effectively, both savers looking to build up retirement and companies looking to raise money. I just want to flag for our colleagues a bipartisan bill introduced and I hope we can move forward at some point entitled the encouraging public offerings act.
▶ 1:02:28Sen. Van Hollen: I introduced that with senator budd, senator warnock, senator alsobrooks. It would make it easier for companies to go public and support strong markets. I hope we can work on that together. Mr. bensten, you would agree that in general businesses that do the kind of activities in the market should be subject to the same kind of regulations?
▶ 1:02:53Mr. Bensten: We support your legislation. Yes sir.
▶ 1:02:59Sen. Van Hollen: We want to have an even playing field. Anybody disagree with that?
▶ 1:03:05Mr. Bensten: We have a rulebook that should apply. Maybe regulations should be based on size but there should be a baseline rulebook, yes.
▶ 1:03:14Sen. Van Hollen: That is how you prevent loopholes and create an even playing field. As I'm sure you are aware, sec chair atkins has said he would like to put out what he calls an innovation exemption from the security laws. We don't know all the details because the sec has not released them.
▶ 1:03:37Sen. Van Hollen: It seems this exemption would carve out certain crypto businesses, like d5 platforms -- de-fi platforms. You wrote that many crypto firms, including these platforms perform the same functions as traditional brokers and exchanges.
▶ 1:04:01Sen. Van Hollen: That means, "crypto intermediary should be subject to identical or at least substantially similar rules and oversight." in other words, the sec exempts crypto and de-fi platforms from security laws, we get an uneven playing field that undermines the markets, right?
▶ 1:04:23Mr. Bensten: Yes. That was in one of the letters we have written on the issue. We believe if you are engaged in the securities business, you are being compensated to engage in similar securities activities whether it is order routing, custody, whatever it may be, the same rules should apply.
▶ 1:04:40Sen. Van Hollen: That seems like common sense to make sure we protect the level playing field. The challenge we have here is the clarity act which is proposed legislation before the senate. It has the same problem. Here is how the wall street journal editorial board put it on tuesday. No left-wing outlet, the wall street journal. I'm putting of the headline.
▶ 1:05:10Sen. Van Hollen: "clarity for crypto, sort of." the senate bill to regulate the digital currency needs changes to reduce risks to the financial system. I think this is a warning for all of us that the bill is not ready for prime time. They say right now that if you read it, you will find the argument is that it will migrate to shadow markets.
▶ 1:05:43Sen. Van Hollen: Investments will migrate to shadow markets with few or no investor protections. You would agree that would be a concern, we do not?
▶ 1:05:51Mr. Bensten: Yes, senator. If I can say two things. I have long said congress should act in this space. Good for congress to be acting. We think the bill that came out of the senate, the banking committee, had a number of good things in it. There were clarifications that needed to be made. Portfolio netting.
▶ 1:06:22Mr. Bensten: Trying to address some of the concerns around what rules apply to de-fi when you determined between a program or computer program versus somebody in the business. The buildout to the ag committee, some things did not carry over. We have some concerns. We have not seen it so we don't really know. We think it's important for congress to set the rules. We agree with the wall street journal editorial from yesterday. I think it's well-written.
▶ 1:06:52Mr. Bensten: You can apply the existing rulebook for the markets for activities being done in the space. However they are being done, digitally, on paper, whatever it should be.
▶ 1:07:05Sen. Van Hollen: It should be technology neutral. That was the point you are making with respect to the quote innovation exception, that same principle applies in this before getting to the conflict of interest and ethics issues which is another huge loophole. Even if we could fix that, we still have this other problem. Thank you, Mr. chair.
▶ 1:07:25Chair Scott: I will note the wall street article -- the journal op-ed focused its attention on the deposit flight risk embedded in the psyche of some of the community banks. Ultimately if you look at the data it reinforces the fact that deposit growth is occurring at about 3% a year over year, even after the passage of the genius act.
▶ 1:07:56Chair Scott: Senator britt.
▶ 1:07:59Sen. Britt: I appreciate you holding this hearing and thinking to the witnesses for being here. I hear you graduated from the university of south alabama. It is on fire. President bonner is doing such a good job. When we talk about capital formation, we are talking of putting americans' savings to work and helping families build a secure future.
▶ 1:08:27Sen. Britt: Today many teachers, nurses, hospital employees, nonprofit workers are being untreated because congress left a technical fix unfinished. These workers often have to save for retirement through 403 b plans which we have discussed today, essentially the nonprofit and public school version of a 401(k). These workers save and work hard but unfortunately we have left some things unfixed.
▶ 1:08:57Sen. Britt: Congress intended to allow for a three b plans to offer collected investment trust. We made the necessary tax law changes secured 2.0. The matching change was left out. It is time for us to do our job. As a result, it is still not working. When we look at this, I think lowering fees means more workers money staying in their account and growing over time.
▶ 1:09:25Sen. Britt: The cit's, collective investment trust, what is that? This is actually a very simple fix and a simple thing. Workers can pool their retirement savings so they can receive lower prices, much like buying in bulk at sam's or costco or whatever it is you go. I want to see this fixed. My guess is every person on this dais uses a cit whether they realize it or not.
▶ 1:09:53Sen. Britt: My whole thing is if it's available to us, it should be available to nurses and firefighters and teachers and public servants. It is time to get this fixed. I have asked for it to be included in the ndaa. I will ask for it to be included when clarity comes to the floor. Senator warnock and I have worked together. We have many members of this committee, republican and democrat, on this bill. I want to see it get done. Mr.
▶ 1:10:19Sen. Britt: Bensten, my bill would not require any employer to offer a cit or any worker to invest in one. It would gently provide the same choice already available through 401(k) plans. Is there any reason congress should continue denying these choices to teachers and nurses and nonprofit workers?
▶ 1:10:42Mr. Bensten: Not at all. Thank you and senator warnock for pursuing this legislation. This is a gap that needs to be corrected. Why this was not done before, I don't know. Ultimately it is up to the plan sponsor to determine what will be in the plan. They have a fiduciary responsibility to the participants. We think this is good legislation in congress -- and hope congress will pass it.
▶ 1:11:11Sen. Britt: Ms. blass, congress removed the tax law barrier to cit's and secure 2.0 left out the law barrier that I explained. Can you explain why the tax fix is not sufficient? We have gotten some pushback on this and more congressional action is needed to finish the job and allow people to utilize this in the way it was intended.
▶ 1:11:36Ms. Blass: Correct. The secure 2.0 fixed the taxpayer but not securities law barriers. For cats, if they would lose their exemption under the investment company act and become unregistered investment companies, they will lose an exemption under the securities act and be engaged in unregistered offerings.
▶ 1:11:59Ms. Blass: Congress needs to fix two statutory sections to enable -- make sure 401(k) and 413 b plans have a level playing field. Cit's are more diversified and could improve importance -- performance. Is important to provide parity between the defined contribution plans and defined benefit plans. Benefit plans today, 70% invest in private markets.
▶ 1:12:29Ms. Blass: Only 4% defined contribution plans have the privilege. It also needs to be equalized.
▶ 1:12:35Sen. Britt: Mr. flood, how would allowing schools, hospitals, and charities to offer the same retirement options as private companies help them recruit workers, strengthen retirement, security, and put a more american savings to work in our economy?
▶ 1:12:50Mr. Flood: I get to offer what everybody else does and I'm giving you the same risk profile to look at. By the way, the person he was curating these choices for you has a fiduciary responsibility for not changing the process by which we choose the investments to show to you. We are just changing the amount of investments you get to invest.
▶ 1:13:09Sen. Britt: I think congress needs to finish the job so let's do it.
▶ 1:13:16Chair Scott: Senator blunt rochester.
▶ 1:13:20Sen. Blunt Rochester: I appreciate today's hearing because capital markets are ultimately about opportunity. There are about helping businesses and helping families build wealth and strengthening our economy. We talk a lot about main street in our committee and making sure our focus is here, not just wall street. This is important because entrepreneurs or small businesses are seeking investment.
▶ 1:13:51Sen. Blunt Rochester: Americans whose savings make those investments possible. Mr. dumas, as congress looks to modernize capital markets, what should we be doing to make sure every day investors benefit alongside businesses seeking investment and how should we measure whether we are succeeding?
▶ 1:14:09Mr. Dumas: I'm all for assets. Providing access to everyday investors. We should step back and make sure this proper guard rails in place for investment production, transparency. People are familiar with the risk profile. That's important any time we talked about providing access to anyone.
▶ 1:14:31Mr. Dumas: I second, there should be some type of data, I mentioned in my written statement, where there's transparency to see whether or not raising capital goes to particular businesses, particularly black-owned businesses or underserved businesses. I think the idea that raising capital without any type of transparency can give an indication that there's inclusion.
▶ 1:14:57Mr. Dumas: I want to make sure that when capital is raised, it's distributed to those who actually need it.
▶ 1:15:02Sen. Alsobrooks: Thank you. Helping families build wealth increasingly means understanding how technology is changing the way financial decisions are made. We're seeing artificial intelligence transform healthcare, our work place, and now investing. Millions of americans are already using a.I. To answer financial questions. Mr.
▶ 1:15:23Sen. Alsobrooks: Dumas, as these tools become more sophisticated, what role should congress play in making sure they help families build wealth without exposing them to new risks?
▶ 1:15:34Mr. Dumas: Good question, senator. I think a.I. Has an opportunity to transform our economy. It has the opportunity to expand opportunities for everyone. But at the same time, I think that especially in the financial markets, we should be careful using a.I. Without understanding the background. A.I. Has the potential to have certain biases, right?
▶ 1:15:56Mr. Dumas: So we just need to, congress needs to understand a.I., provide certain guard rails, provide some type of protection, and inform investors or people who look to a.I. For investment advice to see some type of disclosure, information to let them know that a.I. Could be wrong.
▶ 1:16:12Sen. Alsobrooks: I'm going to open that question up to the rest of the panel if anyone else has any opinions on how we, again, create those safeguards, what we can do in congress. Mr. flood?
▶ 1:16:24Mr. Flood: A.I. Is a tool that's being used, and we've called for publicly -- conversation is solves a lot of problems, but private-public roundtables with agencies to talk about the way a.I. Is being used.
▶ 1:16:39Sen. Alsobrooks: Thank you. Are today's security laws flexible enough to adapt as a.I. Begins playing a larger role in investment advice?
▶ 1:16:47Ms. Blass: One of the things about the securities law is how enduring they have been. You look at a body of law that was adopted back in the 1930's and 1940's, and until today they are the protective backbone of the capital markets. In many ways, yes. But with a.I., it's a tool, it's a tool in progress, it's going to have great potential, as Mr. dumas said, and as Mr. flood said, having a private-public roundtable to better understand the impact and any shortcomings would be fantastic for the capital markets.
▶ 1:17:19Sen. Alsobrooks: Yes?
▶ 1:17:21Mr. Flood: Can I just add, it is a great tool.
▶ 1:17:24Mr. Bensten: It doesn't absolve your responsibility under the 40 act or those instances of giving financial advice. And so firms understand that, and they need to take that into account.
▶ 1:17:37Sen. Alsobrooks: I'm glad you said that. I asked the question, because I think about the fact that a lot of people are going to chatbots and other places to get healthcare information, and you can't depend on a.I. Necessarily for that, and we have, you know, protections. We're looking at how do we protect consumers as well. Another area that we discussed is tokenization and other innovations and market infrastructure. Technology will continue to evolve, but Mr.
▶ 1:18:07Sen. Alsobrooks: Bensten, what marketing integrity principles should never change regardless of how securities are issued, traded or held?
▶ 1:18:20Mr. Bensten: Tokenization is just equities and securities, the latest iteration going from paper to book entry from digitalization to tokenization. In that since the same rules should apply.
▶ 1:18:33Sen. Alsobrooks: Thank you. I yield back.
▶ 1:18:35Chair Scott: Senator ricketts.
▶ 1:18:36Sen. Ricketts: Nebraska businesses are the economic center of communities across my state t. Excessive federal red tape forces many main street businesses to compete on an unlevel playing field. That's why I introduced the elevate act with senator cortez masto and partnered with senator gallego to introduce the halos act. Both bills will make it easier for both enterprises to unlock available capital and drive our local economies forward.
▶ 1:19:03Sen. Ricketts: As has been mentioned here today, the united states has the strongest most trusted capital markets in the world. And because of the regulatory structure that we have in place, our system relies on clear rules, reliable disclosures, and enforcement that is predictable grounded in law. Fair and transparent regulations allow our country to have the most transparent markets in the world much those standards matter even more in a time of competition against communist china. Communist china is not just another foreign market participant.
▶ 1:19:32Sen. Ricketts: Communist china is our greatest external threat. They are a strategic competitor with a state-directed economy. According to the U.S.-china economic and security review commission, roughly 286 china-based companies were listed on U.S. exchanges as of march 2025. Combined together, that represents about $1.1 trillion in market capitalization.
▶ 1:19:53Sen. Ricketts: That means that a meaningful share of american retirement accounts, mutual funds, index funds routinely have exposure and hold these securities in their portfolios.