Senate Floor Speech on H.R. 3606

Thursday, March 22, 2012

Mr. President, in a few hours, after votes on two amendments that I hope we will pass, we’re going to vote on final passage of the House of Representatives-passed bill, the so-called jobs bill. I’m going to vote against passage of this bill, because it would remain far too deeply flawed, even if the two amendments were passed, to justify its passage by the Senate. I’m going to vote no on this bill because it will significantly weaken existing protections for investors against fraud and abuse.

The supporters of this bill claim it will help create jobs. They have even titled it the JOBS Act. But there is no evidence it will help create new jobs. There is not one study that its proponents have shown us how repealing provisions that protect us from egregious conflicts of interest in the research coverage of companies with up to $1 billion in revenues will create jobs.  Nor is there any evidence that removing transparency and disclosure requirements for very large companies will create jobs. Nor is there evidence that allowing unregulated stock sales to those unable to assess or withstand high-risk investments will create jobs. Nor is there much else in this bill that will even arguably help create jobs. It will, however, take the cop off the beat relative to the activities of some huge banks and threaten grave damage to the honesty and integrity of our financial markets.

Now, that is a mistake in its own right – we should value honesty and integrity, in markets as in all things, and legislation that creates new opportunities for fraud and abuse should be amended or rejected.

But the damage done by this bill to the integrity of our markets will also work against the purported goal of this bill – the encouragement of investment to create jobs. By making our financial markets less dependable, less transparent, less honest and less accountable, this legislation threatens to discourage investors from participating in capital markets. That damage would make it harder, not easier, for companies to attract the capital they need to grow and to hire new workers.

Our capital markets are the envy of the world. That is in part because we recognize that efficient markets that help businesses raise capital and aim to match up investors and companies, need transparency and financial integrity. But this bill would allow companies to make fewer disclosures, and remove important investor safeguards.  This will increase many types of risks to investors, including the risk of outright fraud.
Let me focus on a few of the many serious flaws in this bill.

First, it harms investors by allowing a wide range of companies to avoid basic requirements for disclosure and transparency. It does so by changing the threshold at which companies are considered large enough, and their stock is widely enough held, to trigger these disclosure requirements. Today, companies are generally required to register with the SEC and meet basic requirements for financial transparency and accountability if they have 500 or more shareholders. The bill before us would raise that exemption to 2,000 or even more shareholders. It would even raise the level at which banks can “deregister” from 300 to 1,200 or more shareholders, regardless of the bank’s size in terms of assets. These changes will allow even very large companies, with several thousand shareholders, to avoid telling regulators, shareholders, and potential shareholders even the most basic information about their finances, and to avoid important accounting standards.

Second, this bill harms investors by allowing companies to make largely unregulated private stock offerings to members of the public. Today, such inherently risky, unregulated offerings cannot be advertised to the public, and are generally limited to shareholders who are financially able to absorb the risks involved. But the House bill allows advertisement of these unregulated offerings to the general public. It will allow TV ads for get-rich-quick schemes with almost no oversight. Advertisers could pitch these risky investments in cold calls to senior citizens centers. That’s why groups such as the AARP are deeply concerned about what these changes will do to senior citizens, who are often the targets of financial fraud and abuse.

Third, this bill abandons a lesson that we learned all too painfully during the dotcom crisis of the 1990s. At that time, investment banks seeking to underwrite initial public offerings – a lucrative line of business – engaged in brazen conflicts of interest. They sought this business by promising companies about to go public that their research analysts – who investors depend on for honest, impartial advice – would give favorable coverage to their stocks in exchange for the underwriting business. In company after company, investors were misled about the strength of new stocks by investment banks engaging in this conflict of interest. This abuse helped feed a stock bubble that, when it burst, wiped out investors, evaporated companies and devastated the economy. The NASDAQ index still, to this day, has not recovered from that bubble. As a result, regulators put up barriers designed to end the conflict. But the House bill before us dissolves those barriers. It is astonishing that we would forget these lessons and allow the return of such blatant conflicts of interest.

Fourth, this bill would allow very large companies – companies with up to $1 billion in annual revenue – to make initial public offerings without complying with basic disclosure and accountability standards. These companies would be able to avoid compliance with accounting and disclosure rules to help give investors accurate information on the company’s finances. They would not have to obey standard accounting rules or have auditors certify that they have adequate internal controls. Many of these rules were adopted in response to high-profile accounting frauds such as Enron and Worldcom. Some were recently enacted in the Dodd-Frank Act in the wake of the financial crisis.

And yet, while our economy is still recovering from the damage of the most recent crisis that arose in large part as a result of deregulation, we are about to consider undoing safeguards we created in its wake. The $1 billion limit of the House bill would allow nearly 90 percent of IPOs to avoid even the most basic disclosure standards. With these provisions, we will essentially ask America’s investors to place their capital at risk almost blindly, with little if any reliable information about the companies seeking their investments. It defies common sense to argue that investors will be more likely to put their money at risk, and therefore help to create jobs, in that kind of environment.

This is a bad bill, and because debate was closed off and amendments severely limited, we will not be able to fix nearly enough  of it. But we will hopefully remedy a few of its flaws. Change to the “crowdfunding” provisions of the House bill is welcome, and I commend Senators Merkley and Bennet and others who crafted this provision, which Senator Reed and Landrieu and I had also incorporated into our substitute bill which was defeated yesterday. This amendment will give investors somewhat greater confidence in a new and potentially useful method of assembling capital.

And I support Senator Reed’s amendment to close an important loophole in current securities law, one the House bill fails to address. With this amendment, it will be harder to evade registration and disclosure requirements by using shareholders of record who exist on paper but who hold shares for large numbers of actual beneficial owners. This, too, was part of our substitute, and its inclusion in the bill would represent an improvement.
But we should not fool ourselves. These improvements, though welcome, are far from sufficient.

We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades. The Council of Institutional Investors warns us that “this legislation will likely create more risks to investors than jobs.”

If we pass this bill, it will allow vast new opportunities for fraud and abuse in capital markets. Rather than growing our economy, we are courting the next accounting scandal, the next stock bubble, the next financial crisis. If this bill passes, we will look back at our votes today with  deep regret. We should not adopt this bill today. We should return it to committee, we should have hearings, we should have opportunities to amend this bill. Adopting this bill will put us in a position of the most massive and mistaken deregulation of our capital markets in decades.