[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





                    OVERSIGHT OF THE SEC'S DIVISION
                         OF TRADING AND MARKETS

=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 26, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-88
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ANN WAGNER, Missouri
LUKE MESSER, Indiana















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 26, 2014................................................     1
Appendix:
    June 26, 2014................................................    35

                               WITNESSES
                        Thursday, June 26, 2014

Luparello, Hon. Stephen, Director, Division of Trading and 
  Markets, U.S. Securities and Exchange Commission...............     8

                                APPENDIX

Prepared statements:
    Luparello, Hon. Stephen......................................    36

              Additional Material Submitted for the Record

Luparello, Hon. Stephen:
    Written responses to questions for the record submitted by 
      Representative Messer......................................    47
    Written responses to questions for the record submitted by 
      Representative Fincher.....................................    50
    Written responses to questions for the record submitted by 
      Representative Stivers.....................................    56

 
                    OVERSIGHT OF THE SEC'S DIVISION
                         OF TRADING AND MARKETS

                              ----------                              


                        Thursday, June 26, 2014

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:19 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Neugebauer, 
Huizenga, Mulvaney, Ross, Wagner, Messer; Maloney, Lynch, 
Perlmutter, Scott, Himes, Foster, Carney, and Sewell.
    Ex officio present: Representative Waters.
    Chairman Garrett. Good morning.
    Today's hearing of the Capital Markets and Government 
Sponsored Enterprises Subcommittee is hereby called to order. 
Today's hearing is entitled, ``Oversight of the SEC's Division 
of Trading and Markets.'' And I welcome the panel. After 
looking yesterday where it was an elongated two-panel hearing, 
I welcome our one witness, Mr. Luparello, to the Capital 
Markets Subcommittee hearing today, and I look forward to your 
testimony.
    We will begin with opening statements. And I recognize 
myself for 6 minutes.
    Today's hearing will focus on the activities of the 
Division of Trading and Markets of the Securities and Exchange 
Commission.
    Director Luparello, welcome, and thank you for your 
testimony that you provided in writing and the testimony that 
you are going to present today.
    The Division of Trading and Markets at the SEC, as you 
know, has a broad swath of responsibility and authority over 
activities that represent some of the core functions of the 
U.S. capital markets.
    Specifically, the Division sits at the epicenter, if you 
will, of our Nation's equity, fixed-income, and derivatives 
marketplaces.
    The SEC is reforming or considering reforms of all three of 
those markets. These changes will dramatically change the way 
that investors invest, issuers raise capital, and businesses 
hedge their risk.
    First, let's look at the equity markets. Let me thank you 
again for participating in the roundtable that we held, I guess 
a little over a year ago up in New York City.
    The roundtable, as you know, served as a substantive 
starting point for Members and other attendees to learn about 
the evolution of the rules governing equity markets today.
    I think it was a very informative discussion we had there 
and provided a solid foundation from which to better comprehend 
the current challenges faced by the various market participants 
as well as the potential impact rule changes could have.
    And to that end, by the way, Chair White gave a speech 
recently where she outlined a number of prospective changes to 
various market practices in an attempt to address some of the 
issues most frequently highlighted as concerns.
    And so, when she did that, I applauded her, and I continue 
to applaud her for her continued focus on our Nation's equity 
markets.
    But I caution that moving too quickly or in an ad hoc 
manner without thinking through all of the possible 
consequences could, as I say, do more harm than good.
    It is so critical, then, that besides just addressing 
specific narrow issues being faced by market participants, that 
the Commission conduct a fundamental review and challenge many 
of the central assumptions regarding the rationale of its 
overall regulatory regime.
    Let me provide perhaps two specifics areas where I would 
like to see more attention from the Commission.
    First, the world is vastly different, we all agree, from 
1975, when Congress amended the Exchange Act in response to one 
dominant equities exchange at the time.
    We live in a world of demutualized exchanges where all 
market centers are for-profit, providing similar functions, yet 
they are competing under very different regulatory umbrellas.
    The SEC should take the time, therefore, to thoroughly 
analyze the situation and eventually make changes that put 
these varying market participants on, as I always say, a more 
level playing field.
    Second, Reg NMS, as the order protection rule, is a very 
heavy-handed rule dictating explicitly how venues and orders 
are supposed to interact with each other in the marketplace.
    Now, this has been highlighted by a number of the 
commentators, including some of our previous panelists here, as 
one of the significant factors underlining market practices 
and, also, behavior.
    So I look forward to discussing these issues, as well as 
Chair White's recent proposals, during the questioning period 
that we will have after the testimony.
    Next, in regard to fixed income, many argue that this is 
often a part of the marketplace that is overlooked compared to 
the equity markets.
    Our corporate and municipal bond markets have literally 
trillions of dollars of outstanding issuances, and they provide 
investment opportunities for millions of investors, but these 
markets are very different than our equity markets.
    Chair White gave a speech on Friday outlining some 
proposals seeking additional practices and price transparency 
for investors in these less liquid markets than the equity 
markets.
    So I believe increasing transparency and competition for 
the benefit of the investors is appropriate, and I'm interested 
to see more specifics on how these new proposals that she is 
talking about will actually work.
    All that said, I do worry that the Commission's reform 
potentially robs from Peter to pay Paul, as they say. 
Specifically, how do we help investors in the corporate bond 
market if we improve pricing transparency, on the one hand, but 
if we reduce liquidity through the Volcker Rule, on the other 
hand?
    Requiring additional transparency for markets that the 
Commission made less liquid and where investors have to pay 
wider spreads is not a net win for the investors at the end of 
the day.
    A greater investor protection in this market would be to 
ensure greater liquidity and better ways for investors to get 
in and out of the positions. That is what liquidity is about.
    The SEC then needs to closely examine on an ongoing basis 
the impact of the Volcker Rule on the liquidity in the 
corporate bond market and keep policymakers well-informed of 
this important information.
    Finally, regarding derivatives, the Commission took a very 
important step yesterday in finalizing rules that specify how 
market participants that have affiliates overseas will be 
impacted under the SEC's Title VII regime.
    So I applaud the rigorous and thoughtful process that the 
Commission undertook when finalizing those rules, and I am also 
hopeful that the new leadership over at the CFTC, some of which 
we just swore in the other day, will allow this process to go 
forward and to follow suit and formalize their guidance which 
they have had in the past under a rule now so that the force of 
law will not be in question.
    Finally, another issue that has continued to be one of much 
debate is the proper regulatory approach for broker-dealers.
    Recently, one of the Commissioners gave a speech 
essentially saying that the SEC is now a systemic risk 
regulator, and that statement caught us by surprise.
    It is my understanding that Congress created the SEC as a 
markets regulator with three-part function of: protecting the 
investors; maintaining fair, orderly, and efficient markets; 
and facilitating capital formation.
    I served on the Dodd-Frank Act conference committee, and 
nowhere in that do I recall the mission of the SEC actually 
changing to a systemic risk regulator.
    So I am very concerned that the Division of Trading and 
Markets actually might be losing one of its primary 
responsibilities, which is oversight of broker-dealers.
    It appears that the Federal Reserve--without any proper 
authority whatsoever from Congress, what they are trying to 
spread is a regulatory and bailout net over even the broader 
marketplace and over the broker-dealer community as well.
    So we must stop enlarging the government's safety net and, 
instead, remove moral hazard and reinstate market discipline.
    The Division of Trading and Markets has many important 
tasks at hand. Other issues that I have not gone into in 
detail, but are nonetheless important, are: regulating clearing 
agencies and transfer agents; overseeing FINRA and other SROs; 
determining whether or not to change the duty of care for 
broker-dealers; and conducting oversight of the out-of-control 
and anti-investor Security Investor Protection Corporation.
    So, Director, thank you for taking on this very difficult 
assignment and also for being here today. This subcommittee 
wants to make sure we work closely with you in the future and 
also with Chair White and the rest of the Commission as well as 
you carry out your important duties.
    With that, I now recognize the ranking member of the 
subcommittee, the gentlelady from New York, Mrs. Maloney, for 5 
minutes.
    Mrs. Maloney. Thank you, Chairman Garrett, for holding this 
very important and timely hearing.
    And welcome, Mr. Luparello.
    Mr. Luparello also participated in your meeting on trading 
and markets that you held in New York earlier, which was 
tremendously informative and a fine experience for all of us 
who were fortunate enough to attend.
    The SEC has a critical role in our economy because it is 
responsible for overseeing and regulating the Nation's capital 
markets.
    Without vibrant capital markets, companies would have a 
difficult time raising money to expand their businesses and 
create jobs, and our economy would be stalled.
    The SEC's mission is to simultaneously protect investors, 
encourage capital formation by businesses that are seeking to 
grow, and maintain fair, orderly, and efficient markets.
    Balancing these overlapping objectives is a difficult job, 
but I believe the SEC has performed admirably under Chair 
White, who, incidentally, is from the great City of New York.
    And I look forward to hearing your testimony as well.
    There is, however, one common theme that runs through each 
of the SEC's three missions. In order to accomplish any of the 
SEC's three missions, investors have to feel confident in the 
fairness and integrity of our capital markets.
    If they are not confident that they will get a fair shake, 
they will not put their money at risk in our capital markets 
and they will not invest in U.S. companies.
    I have always said that markets run more on confidence than 
on capital, and I believe that is particularly important right 
now.
    Over the past decade, the incredible advances in 
technology, along with major overhauls of the regulatory 
framework for trading stocks, has fundamentally changed our 
equity market structure.
    Some market participants have seen some huge benefits from 
these changes, particularly retail investors. They have seen 
their trading costs fall to some of the lowest levels on 
record.
    And other market participants have not fared as well. The 
lower trading costs for retail investors has come at the 
expense of certain brokers and intermediaries. This is all to 
be expected.
    Any fundamental overhaul of our market structures has 
winners and losers, but these changes in our market structure 
have at the very least caused many market participants to take 
a step back and question whether they are still getting a fair 
shake.
    That is why I think confidence is so important right now. 
If there are problems, we need to fix them, because investors' 
confidence can disappear in the blink of an eye.
    I was pleased to hear Chair White say in our April hearing 
in response, really, to the chairman's question that the U.S. 
stock market is not, in fact, rigged, as some have claimed.
    And I will say that almost all of the market participants 
that I speak to have expressed tremendous appreciation for the 
SEC's careful, data-driven approach to market structure issues.
    I was also pleased to see that just last night, the SEC 
announced a pilot program that will test whether wider tick 
sizes will increase capital formation for smaller companies.
    This committee passed unanimously a bill last November that 
required the SEC to conduct such a pilot program, and that 
passed the House overwhelmingly.
    So I am pleased to see that the SEC has shown a willingness 
to work with this committee on these important and other very 
complex market structure issues.
    I look forward to working with our witness, Mr. Luparello, 
who recently took over as the Director of the SEC's Division of 
Trading and Markets.
    Even though he has only been on the job for a few short 
months, his Division has already announced several major 
initiatives, and I look forward to hearing from him today.
    Thank you very much. And I yield back the balance of my 
time.
    Chairman Garrett. The gentlelady yields back. Thank you 
very much.
    We now turn to the vice chairman of the subcommittee, Mr. 
Hurt, for 2 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. And thank you for 
holding today's hearing to conduct oversight over the SEC's 
Division of Trading and Markets.
    While the SEC's Division of Trading and Markets has a 
number of consequential initiatives on its agenda, including 
the review of our equity market structure, I am particularly 
interested in hearing about issues related to the self-
regulatory organizations.
    I am encouraged by SEC Chair White's recent comments that 
the Commission's review of equity market structure will include 
an examination of the nature of our self-regulatory model.
    However, some, including SEC Commissioner Gallagher, 
suggested that over time SROs have changed dramatically from 
self-regulatory to quasi-governmental and now operate more like 
an additional branch of government.
    Congress delegated specific responsibilities to these 
entities, and they should not be immune from our scrutiny. It 
is important for this subcommittee to look closely at the 
current structure of the SROs, their role in our financial 
regulatory system, whether their operations are sufficiently 
transparent and accountable, and finally, if changes are 
necessary to ensure that they meet the standards and 
responsibilities imposed by Congress.
    I am pleased to see several of the SROs implementing more 
robust processes for economic analysis in their rulemaking.
    It is incumbent upon the SEC and Congress to ensure that 
these cost-benefit standards are rigorously applied. Congress 
and the SEC should also promote similar policies for the 
remaining SROs, instead of a reliance on ad hoc measures.
    I look forward to working with my colleagues on this 
subcommittee to critically examine the SROs in our framework of 
self-regulation in financial markets today.
    I want to thank Mr. Luparello for appearing before our 
subcommittee. I look forward to your testimony.
    And thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Garrett. I thank the gentleman. And the gentleman 
yields back.
    We will go to Mr. Lynch now for 2 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    And thank you, Ranking Member Maloney.
    And welcome, Director Luparello.
    Mr. Luparello, you are at the helm of the Securities and 
Exchange Commission's Division of Trading and Markets at a time 
of great importance.
    Currently, our capital markets face many challenges, 
including, most importantly, I think, high-frequency trading, a 
subset of algorithmic trading, and you have mentioned that 
extensively in your written remarks.
    The rise of algorithmic trading, whereby computer 
algorithms make trading decisions, creates both new 
opportunities and challenges for U.S. investors and regulators.
    As highlighted in Michael Lewis' book, ``Flash Boys,'' 
advancements in the speed of information are allowing high-
frequency traders to front-run trades and exploit market 
fragmentation for profit without providing socially useful 
intermediation between investment capital and the companies who 
can put that capital to use.
    Now, I am not sure if using the term ``rigged'' is proper, 
that our markets are rigged, but I do know that there are two 
firms: Virtu Financial, which traded heavily in the market for 
5 years without a losing day, which is incredible; and 
Tradebot, which traded for over 4 years without a losing day in 
the market.
    So maybe ``rigged'' isn't the proper term, but let's just 
say the current structure of the market favors high-frequency 
traders over average investors. And maybe that is why we are 
seeing a lot of investors walk away from the market, because 
they believe it is rigged.
    I, along with many of my colleagues in Congress, am 
particularly concerned about abuses in the markets caused by 
this practice.
    Both the Senate Banking Committee and the Senate Permanent 
Subcommittee on Investigations recently held hearings to 
examine disruptions in the market caused by high-frequency 
trading. And I think this committee could do the same.
    In a recent speech, SEC Chair Mary Jo White addressed the 
public's growing concern about high-frequency trading and 
proposed recommendations for new rules.
    I would like to hear your thoughts today about how that 
might be accomplished.
    Thank you for the time, Mr. Chairman, and your indulgence. 
I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Foster is recognized for 3 minutes.
    Mr. Foster. Thank you, Chairman Garrett. I appreciate your 
holding this hearing.
    Mr. Luparello, I appreciate your appearing before this 
committee to discuss the complex and important issues around 
market structure.
    I believe it is easy to make the case that technology has 
largely benefited retail investors who have seen spreads 
between bid and ask prices narrow to historically low levels.
    Ironically, one of the main challenges in market structure 
is protecting the interests of large institutional investors 
who are sophisticated participants and are normally thought of 
as being fully capable of taking care of themselves.
    One analogy that I like to use when thinking about high-
frequency trading and dark pools is the example of Disney 
World. Forty years ago, Disney Corporation bought up large 
blocks of swampland in central Florida using anonymous shell 
corporations and paying the current market price. Was that 
fair?
    If Disney had attempted this in a State where the prices 
and beneficial owners behind real estate transactions were 
immediately made public, then land speculators would have 
jumped in, buying up parcels of land nearby with the intent of 
selling them back to Disney at a profit. Would that have been 
fair?
    The point I am trying to illustrate is that while dark 
pools sound bad to the public because of the implication of 
opacity, forcing every transaction into the open would create 
winners and losers.
    I agree with Chair White that our equities markets are not 
rigged. But it is clear that, with 11 exchanges and 40 
alternative trading systems, the market is overly fractured and 
there is a lack of transparency in many respects.
    This competition helps keep trading fees low for investors, 
but it also incentivizes routing two exchanges that pay the 
most for their orders.
    It is also clear that many of the current market 
regulations were developed in a world before the equity markets 
were dominated by computer algorithms.
    And, yet, it is absolutely clear that not enough 
information is provided to market participants to know about 
how their trades are routed and executed.
    Additional measures should be taken to ensure that 
alternative trading systems disclose harmonized digestible 
information about how they operate and whether or not they are 
really offering price improvements from the lit market.
    So as you embark on a comprehensive review of our equity 
market structure, including issues like order times and 
consolidated data feeds, I urge you to use a data-driven 
approach to bring about more transparency. Market forces and 
transparencies are often the best disinfectant.
    Thank you. I yield back.
    Chairman Garrett. Thank you.
    And the gentleman yields back.
    We will now turn to our witness. Mr. Stephen Luparello is 
the Director of the Division of Trading and Markets at the U.S. 
Securities and Exchange Commission. Mr. Luparello, we can now 
turn to you, finally, and hear your testimony.
    There are two things I always say: one is to make sure you 
bring the microphone close enough to you because we can't hear 
otherwise; and, of course, your entire written testimony will 
be made a part of the record.
    You are now recognized for 5 minutes, Mr. Luparello, and 
thank you for being with us.

    STATEMENT OF THE HONORABLE STEPHEN LUPARELLO, DIRECTOR, 
 DIVISION OF TRADING AND MARKETS, U.S. SECURITIES AND EXCHANGE 
                           COMMISSION

    Mr. Luparello. Chairman Garrett, Ranking Member Maloney, 
and members of the subcommittee, thank you for inviting me to 
testify on behalf of the U.S. Securities and Exchange 
Commission regarding the Division of Trading and Markets' 
activities and responsibilities.
    The mission of the Division is to support the Commission's 
mandate by fostering investor protection and establishing and 
maintaining standards for fair, orderly, and efficient markets.
    To this end, the Division is responsible for the rules that 
apply to many of the major participants in the U.S. securities 
markets. We also oversee the rulemaking activities of the 
exchanges, clearing agencies, and FINRA in their capacity as 
self-regulatory organizations; monitor risks at large broker-
dealers and clearing agencies; and assist the Commission with 
major international regulatory coordination efforts.
    Under the Dodd-Frank and JOBS Acts, the Division has 
primary responsibility for more than 30 separate mandatory 
rulemaking initiatives and studies under the two statutes, as 
well as the ongoing oversight and the implementation they 
require.
    These new responsibilities include the creation of a 
regulatory structure for securities-based swaps, the regulation 
and monitoring of clearing agencies designated as systemically 
important, the prohibition of proprietary trading by insured 
depository institutions and their affiliates as part of the 
Volcker Rule, and the development of rules for intermediaries 
engaged in crowdfunding.
    Although the Division's day-to-day and long-term focus 
cover a wider set of initiatives and mandates, I want to 
highlight a few of the key areas of responsibility and 
summarize our current efforts in each.
    First, the Division is playing a lead role in the 
comprehensive review of equity market structure recently 
described by Chair White to ensure that the U.S. equities 
markets remain the strongest in the world.
    This initiative includes a review of the evolution of 
market practices over the last decade and the role of 
Commission rules, including Regulation NMS, in that evolution 
and the need for any adjustments to that structure.
    Chair White has directed the Division to take a number of 
specific actions related to high-frequency trading, market 
transparency, and order handling, and has recommended that the 
Commission create a Market Structure Advisory Committee to 
review specific initiatives and rule proposals.
    Beyond this, the Division is working with FINRA and the 
exchanges to advance several initiatives, including efforts to 
minimize consolidated data latency and enhanced transparency 
and the extent to which such latency exists, clarify how 
exchanges themselves use data feeds for regulatory and routing 
purposes, and review order types offered by the exchanges to 
clarify their operation.
    Another important part of the review is developing 
recommendations to improve the market for smaller issuers, as a 
core guiding principle of our review is the recognition that, 
when considering market structure, one size certainly does not 
fit all.
    To this end, the Commission is continuing its evaluation of 
decimalization rules, including its consideration of a tick-
size pilot that would widen the quoting and trading increment 
for certain smaller company securities and exploring other 
competitive market structure alternatives for smaller cap 
issuers.
    In addition, last year, at Chair White's request, each of 
the exchanges, FINRA, and the clearing agencies prepared action 
plans to strengthen critical market infrastructure.
    These entities currently are working to implement these 
plans, including through several important measures that should 
be completed in the very near future.
    Additionally, in March 2013, the Commission proposed Reg 
SCI to improve the Commission's oversight of market 
infrastructure.
    As proposed, the rule would require exchanges, clearing 
agencies, and other critical market participants to have in 
place policies and procedures reasonably designed to help 
ensure that their systems are robust, secure, and compliant.
    Beyond the many important market initiatives, the Division 
is working to fulfill the Dodd-Frank Act Title VII mandate to 
establish a new regulatory regime for security-based swaps, 
which historically have traded over-the-counter.
    These rules are intended to achieve a number of goals, 
including facilitating the centralized clearing of swaps with 
the intent of reducing counterparty risk, increasing 
transparency for regulators and market participants, and 
addressing capital and margin requirements for security-based 
swap dealers and major security-based swap participants.
    To date, the Commission has proposed all of the rules 
required by Title VII, adopted a number of final rules and 
interpretations, and provided a road map for the further 
implementation of its Title VII rulemaking, and has taken other 
actions to provide legal certainty to market participants 
during the implementation process.
    Just yesterday, the Commission adopted rules regarding the 
application of Title VII to cross-border activity. Division 
staff continues to work to develop recommendations for final 
rules required by Title VII and has been actively engaged in 
discussions with domestic and foreign regulators regarding the 
direction and coordination of international derivatives 
regulation.
    The Division is also continuing its efforts to establish 
rules pursuant to Title VIII of the Dodd-Frank Act, which 
requires the Commission to increase regulation of financial 
market utilities and financial institutions engaged in payment 
clearing and settlement activities that are designated as 
systemically important.
    Finally, the Division and other SEC staff are considering 
how to recommend the Commission use its authority under the 
Dodd-Frank Act to adopt rules establishing a uniform fiduciary 
standard for conduct for broker-dealers and investment advisors 
when providing personalized investment advice about securities 
to retail customers.
    To more fully inform the Commission's decision on this 
issue, Chair White has directed the Division to work with its 
colleagues in DERA and the Division of Investment Management to 
evaluate potential options in light of the information 
available for the Commission's consideration.
    Thank you again for inviting me to discuss the Division's 
activities and responsibilities, and I look forward to 
answering your questions.
    [The prepared statement of Mr. Luparello can be found on 
page 36 of the appendix.]
    Chairman Garrett. Thank you very much. We appreciate your 
testimony.
    I now recognize myself for 5 minutes for questions.
    I am going to begin with the same question that I asked 
Chair White: Director, are the markets rigged?
    Mr. Luparello. That is an easy question to start with.
    No. The markets are not rigged. There are clearly things 
about the markets that require further attention and perhaps 
some regulatory response or enhanced transparency, and the 
Commission and the Division are focused on that. But 
fundamentally, the markets are fair for investors.
    Chairman Garrett. So when the issue of investor confidence 
is raised, should investors have confidence in the markets?
    Mr. Luparello. I think it is fair to worry about investor 
confidence, even if you think the markets are not rigged.
    The extent to which there is a perception that it is rigged 
is maybe--it is not as important as whether the markets are 
actually rigged, but it is obviously a very important thing for 
the Commission.
    So one of the things we have to do in our policymaking is 
do things that reassure participants in the market that the 
markets are fundamentally fair to them.
    Chairman Garrett. Okay. This may be a segue; I don't know.
    Chair White, just recently, in her speech the other day, 
touched on some of the proposals that you--one of the proposals 
was the creation of a market advisory committee. And I presume 
such an advisory committee is supposed to serve as a resource, 
if you will, of information from stakeholders and the like.
    And I assume that the purpose of it is to provide that 
information as you go forward--you and the entire SEC goes 
forward with the other recommendations that she and you are 
considering. Is that correct?
    Mr. Luparello. That is correct.
    Chairman Garrett. And she didn't really elaborate. She just 
spoke one or two sentences in her speech.
    So is this advisory committee being put together by her or 
is this being put together by the entire Commission? How does 
that work? Maybe you could flesh it out, if you will, a little 
bit.
    Mr. Luparello. I will flesh it out to the extent I can.
    Chairman Garrett. Okay.
    Mr. Luparello. The committee will be a committee that will 
be consistent with the obligations of the Federal Advisory 
Committee Act.
    Chairman Garrett. Okay.
    Mr. Luparello. At this point, the staff is presenting a 
recommendation to the entire Commission, which will include the 
mandate, the charter, and the proposed participants.
    Chairman Garrett. Okay.
    Mr. Luparello. And, to that point, the entire Commission 
will have an opportunity to vote on the--
    Chairman Garrett. So, where do the people come from? Who 
makes the recommendations to serve on this? Is that from Chair 
White or is it from the whole Commission?
    Mr. Luparello. The recommendations in the first instance 
will be made by staff--
    Chairman Garrett. By staff.
    Mr. Luparello. --on Trading and Markets and others. But, 
obviously, the Commission will have input into that.
    Chairman Garrett. The Commission.
    Mr. Luparello. Yes.
    Chairman Garrett. Okay.
    A whole slew of issues are being run through here today.
    Other people have raised, and we have talked about in this 
committee previously, Reg 611, also known as the trade-through 
rule, as an area some people say needs extensive, thorough 
review, and other people push away and say not.
    One of the people who says that it does need further review 
is Andy Kessler, in a recent Wall Street Journal piece--I 
remember reading that the other day--and across the Chamber, 
Senator John McCain. In his opening statement at the Permanent 
Subcommittee on Investigation hearing on market structure, he 
also said it does.
    What is your take on this? Is this an area that is going to 
be one of the primary focuses of the SEC for review?
    Mr. Luparello. The Chair, in her speech, laid out what I 
think you can basically categorize as short-term initiatives 
and longer-term initiatives.
    Chairman Garrett. Okay.
    Mr. Luparello. Clearly, the study of Reg NMS, broadly, but 
specifically the issue of the trade-through rule is one that is 
very much on our agenda.
    Unlike the shorter-term issues, I think the staff tends to 
think that there is more study and more discussion that needs 
to go on. There are obviously some benefits that have come with 
Reg 611 in terms of competition.
    Obviously, there is also a substantial amount of 
fragmentation that has come with it. That is a very difficult 
issue to balance.
    Chairman Garrett. Yes.
    Mr. Luparello. It is very much on our agenda, but at this 
point I don't think we have reached a conclusion.
    Chairman Garrett. Okay. So one other question. I have 50 
seconds here to go.
    There is an issue about dealing with best execution and 
whether you are enforcing and modernizing that whole system. 
Right?
    And also tied to that is the issue of disclosure 
requirements on that. So there is an issue there as far--as you 
do that, whether that has a conflict of interest as far as the 
broker is concerned.
    So, in 26 seconds: first, address that; and second, if you 
are going to be addressing those couple of issues there and 
that point, the other issue is: Are you getting into the weeds 
too much on these specific issues before you do a more holistic 
analysis of the overall market structure before getting down 
into trying to fix those pieces of it?
    Mr. Luparello. You touched on it perfectly, which is that 
so many of these issues are fundamentally interrelated.
    Chairman Garrett. Right.
    Mr. Luparello. And to try to look at them in a stovepipe 
means you are probably going to have as many unintended 
consequences as intended consequences.
    Chairman Garrett. Exactly.
    Mr. Luparello. There is a very important sort of 
overarching analysis of how much best execution drives a 
variety of things, whether it is the need for the trade-through 
rule or further disclosure on payment for order flow or things 
like maker-taker pricing. All of those issues, I think we will 
look at together.
    Again, I think it is important for confidence and, because 
of a variety of smaller fixes, that we move quickly on the 
shorter-term initiatives.
    But we will, on the longer-term initiatives, look at all 
these things together and not attempt to sort of pick them 
apart in ways that are artificial.
    Chairman Garrett. Good luck. I appreciate that.
    The gentlelady from New York is now recognized for 5 
minutes.
    Mrs. Maloney. Thank you very much.
    The chairman started with his first question to Chair 
White. I am going to begin with mine.
    I asked, ``Are the markets rigged?'' And Chair White said, 
``Absolutely not.'' And I said, ``Some of my constituents think 
they are.''
    So, that goes to the confidence issue. And they think they 
are because of books that have been written alleging it, 
statements by people alleging it, and basically, that some 
people have access to information before other people and that 
gives them an unfair advantage.
    I truly do believe that confidence is an important part of 
markets, and if people don't have confidence that it's fair and 
that they have a fair shot, the same shot that anyone else has, 
it will hurt our markets.
    So I am wondering, what could we do to address this concern 
that some people have? I am sure your office is getting the--my 
office is getting it. You have to be getting these allegations.
    Mr. Luparello. We do. And we obviously take them very 
seriously. And we are borderline inundated on it. But that is 
our job.
    I think the answer to that is going to be different for 
different segments of the marketplace. Clearly, at the retail 
end, there is a lot that is good and works well for the market.
    By all available metrics, retail investors are doing better 
now than they have ever done in the past. That is mostly 
driven, obviously, by technology.
    But there are certain things that lead to confidence 
concerns. One of those is stories around the different access 
to information.
    We are working with the exchanges and the SIPs to make sure 
that everything is being done to deal with the issue of SIP 
data latency, for example.
    And we are doing things around order types--
    Mrs. Maloney. Dealing with--pardon me--what? Entry?
    Mr. Luparello. I'm sorry. Data latency.
    Mrs. Maloney. Data latency. I see.
    Mr. Luparello. So doing a variety of things that reinforce 
fundamental fairness of the market is going to be our first 
step.
    Institutions have different issues and concerns around 
whether the market works well for them, and part of that is 
around some level of transparency of what happens in dark 
pools.
    And we are going to pursue an initiative that deals with 
greater transparency of routing of institutional orders. That 
exists on the retail side.
    It is also worth looking at this time whether that rule, 
which has been in place for 10 or 12 years, could use some 
modernization.
    But there are a variety of things we can do to bring 
transparency to the market and attempt to communicate well to 
retail investors about the fundamental fairness in the market.
    Mrs. Maloney. In Chair White's speech earlier this month, 
she said she was directing the staff to develop an ``anti-
disruptive trading rule.''
    And the purpose of this rule, according to her statement 
that day, is to limit the use of ``aggressive destabilizing 
trading strategies in vulnerable market conditions.''
    Can you walk us through what you would consider to be an 
``aggressive short-term trading strategy?''
    Mr. Luparello. I can at a high level. The specifics of that 
rule are still a topic of conversation and in development.
    But, as is generally thought, there are three types of 
strategies that together form what people think of as high-
frequency trading, and there is a lot of gray area around those 
margins. So, I don't like to get too invested in it.
    Mrs. Maloney. What is an aggressive short-term trading 
strategy that she is talking about?
    Mr. Luparello. One of the strategies is when a trader, 
based on a signal, aggressively takes liquidity on the same 
side of the market at multiple times and it is--as compared to 
a market-making strategy, where you are more passive and 
providing liquidity on both sides. This is a strategy that sees 
weakness on either the bid side or the offer side and takes 
liquidity in sequence.
    What the Chair was talking about was developing a rule 
where, whether or not that's illegal now--and I think, in most 
cases, we would all agree that it is not illegal--whether there 
are times when the market is vulnerable and subject to 
volatility that you restrict a subset of traders from executing 
strategies like that during short periods of time.
    That writ large is what the anti-disruptive trading rule 
would look like.
    Mrs. Maloney. How would you distinguish between an 
aggressive trading strategy and the more legitimate trading 
strategies that major institutional investors and retailers 
follow? Do you differentiate based on the type of investor or 
based on the market conditions? How do you differentiate?
    Mr. Luparello. Those are very important details.
    In our early thinking, I think it is based on a strategy in 
a very short period of time that is liquidity taking on one 
side of the market when the market itself is somewhat fragile, 
all those terms still to be defined.
    Mrs. Maloney. My time has expired.
    Chairman Garrett. Thank you. Good question.
    The vice chairman of the subcommittee, the gentleman from 
Virginia, Mr. Hurt, is recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    And, again, I thank Mr. Luparello for appearing today.
    As we undertake a review of the equity market structure in 
this country, I wanted to talk a little bit about the self-
regulatory organizations generally. Obviously, they play an 
important role, a rulemaking role.
    I am a member of the Virginia State Bar and, as an 
attorney, as a member of a State regulatory organization 
charged with the creation of rules as well as the enforcement 
of those rules, I certainly understand the virtues of SROs 
generally.
    But I want to talk to you about your view on the evolution 
of SROs. Are they making good rules? Are they going through 
rigorous analysis to reach those rules? And what about 
transparency and accountability?
    Clearly, those are issues that I think promote the--
certainly the response--promote the things that the SEC should 
be worried about: transparency; capital formation; and investor 
protection. And so, they play a critical role there.
    Can you talk a little bit about that evolution and where 
they are now and where you could see room for improvement?
    Mr. Luparello. Absolutely. And when talking about SROs, 
clearly there are--the exchanges are also self-regulatory 
organizations.
    It is a very important issue, one that we are looking at 
more long-term. Your question is, I think, more specifically 
pointed at the broader rulemaking SROs, specifically FINRA and 
the Municipal Securities Rulemaking Board (MSRB).
    I think all of those points are extraordinarily important 
both in terms of the ability to have input into the rulemaking 
process as well as ensuring a level of confidence about that 
rulemaking process.
    Both FINRA and the MSRB, on significant rulemakings over 
the past few years, have added layers of opportunities for 
comment.
    So, as a general matter, when they are doing rules, first 
they subject them to their own internal notice and comment 
process.
    And then, after that, if there are major tweaks, they 
sometimes repeat that process and then eventually come to the 
Commission, where it goes through a separate notice-and-comment 
process.
    So we are comfortable with that level. One of the things is 
there is no specific obligation on the SROs to have that 
internal notice-and-comment process.
    I think they tend to think it improves the quality of their 
product and so are committed to it. But that is one of the 
things that I think we would like to stay vigilant on and make 
sure they stay committed to that.
    They have also--and this is a fairly recent development--
embraced more careful, more specific cost-benefit analysis in 
their rulemaking. I think that is something that, backsliding, 
I think we would think would be a very bad idea.
    I think, having spent a decent amount of time at FINRA, I 
always feel the need a little bit to defend the quality of the 
rulemaking process.
    And that early round of communications through notice and 
comment, as well as going through the committee process, often 
had a very, very strong cost-benefit component.
    And so, I would like to think that most of the rulemaking, 
even without an explicit cost-benefit obligation, had gone 
through some fairly careful cost-benefit analysis. That said, 
making that routinized and making that obligatory is, I think, 
a fundamentally good idea.
    When we at the Commission get rule filings from MSRB and 
FINRA, the two most important things were, obviously, we want 
to make sure it is good public policy, but we also want to make 
sure it is consistent with their statutory obligations and it 
does pass cost-benefit muster.
    Mr. Hurt. Talk a little about the role of the SEC.
    Do you think the SEC conducts robust oversight over these 
agencies? And is there room for improvement there?
    Mr. Luparello. The oversight of the SROs is the 
responsibility of our Office of Compliance Inspections and 
Examinations (OCIE).
    So I am a little bit more comfortable talking about being 
the overseen as opposed to the overseer. But there are 
substantial resources that are committed to overseeing the 
SROs.
    One of the things that came out of the Dodd-Frank Act was 
an obligation on the Commission to have a more routine 
oversight structure with the securities associations, of which 
FINRA is the only one I know that exists and is robust.
    And, look, especially FINRA has a very broad mandate, a 
very complicated program, and increasing the touch points and 
paying attention to it is something that you have to do 
basically all the time because there are just so many different 
moving parts.
    But I know both the Commission, again through the OCIE 
Staff, as well as the folks at FINRA, are very committed to 
that ongoing relationship.
    Mr. Hurt. I see my time is about to expire, so I will yield 
back the balance of it.
    Thank you, sir.
    Chairman Garrett. The gentleman yields back 7 seconds.
    And I now recognize the gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Chairman, and Ranking 
Member Maloney. I appreciate the opportunity to join with you 
today on the issues that you have identified dealing with the 
SEC.
    I have an issue that is very important to me that I have 
been trying to advance. I have a bill, H.R. 1627, the 
Investment Adviser Examination Improvement Act, which would 
authorize the SEC to levy user fees to cover the costs of an 
increase in the frequency of examinations of investment 
advisers.
    The Investment Advisory Committee of the Commission has 
endorsed this legislation, which is one of the recommendations 
that SEC staff originally provided in the study required in 
Section 914 of Dodd-Frank.
    From your perspective, do user fees represent a scaleable 
and workable way for the Commission to improve investor 
protection?
    Mr. Luparello. I think, at a high level, the Chair and the 
Commission, as well as the staff, remain very concerned about 
the coverage of investment advisors from an examination 
standpoint, especially as compared to broker-dealers, and those 
statistics are well-known.
    We continue to be supportive of any solution that allows 
for a greater coverage of investment investors that is, 
frankly, consistent with the statute.
    Ms. Waters. Section 911 of the Dodd-Frank Act provides that 
each time the Investor Advisory Committee submits a finding or 
recommendation to the Commission, the SEC shall promptly issue 
a public statement assessing the finding or recommendation of 
the committee and disclosing the action, if any, it intends to 
take with respect to the recommendation.
    Does the Commission plan on responding to this 
recommendation from the Investor Advisory Commission?
    Mr. Luparello. Congresswoman, I am afraid that is an area 
of the Commission's responsibility, specifically the Division 
of Investment Management, that is outside my scope, and I can't 
speak to it. I'm sorry. I can find out the answer, though.
    Ms. Waters. All right. Let me just wrap this up, Mr. 
Chairman, by saying that the examinations are done for the 
investor advisors once every 12 years.
    That is all they can expect to have to respond to in terms 
of an examination, which means only 8 percent of the exams are 
being done.
    And so, this is a very important issue, and I am hopeful 
that everything possible can be done to continue to advance it.
    And if user fees probably are the only way that we can get 
the resources to do the examinations, of course, I am hoping 
that everyone will support the idea of user fees.
    Mr. Luparello. I couldn't agree more with your observation.
    Ms. Waters. Thank you. I yield back the balance of my time.
    Chairman Garrett. Thank you.
    The gentleman from Texas is recognized for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. And thank you for 
having this important hearing.
    Mr. Luparello, in a recent speech Commissioner Gallagher 
had an interesting observation. He stated that when people ask 
him how the SEC should respond to Michael Lewis' ``Flash 
Boys,'' which focuses, as you know, on striking, tells about 
the high-frequency trading in equities, his response is, we 
still need to respond to Lewis' 1989 classic, ``Liar's Poker,'' 
which is a vivid description of the bond market structure 
issues that are still present today.
    I agree with him. That scenario is one we haven't really 
looked at in the past.
    And when I look at the allocation of resources at the SEC, 
you have hundreds of staffers in your division that are devoted 
to oversight of the equity and options market.
    And I believe there are six employees in the Office of 
Municipal Securities and, amazingly, no staffers focused on the 
corporate bond market.
    Given that debt financing is nearly $15 trillion of the 
market, why has the SEC allocated such a small amount of its 
resources to those markets?
    Mr. Luparello. Overall, I entirely share your concern and 
support Commissioner Gallagher's observation. Let me just 
correct you every so slightly.
    While Trading and Markets does not have a subsection that 
is solely focused on the fixed-income market, specifically, the 
corporate fixed-income market, there are a number of people for 
whom that is their responsibility.
    But overall, I couldn't agree more. Obviously, we have a 
lot of work to do on equity market structure. We also have a 
lot of work to do creating a market structure for over-the-
counter derivatives.
    But fixed-income, especially given how investing appetites 
are going to change going forward, is only going to become more 
and more of a retail market and more and more worthy of our 
interest and investigation.
    The Chair did give a speech within the past few days where 
she outlined at least some preliminary thoughts on how to 
address market structure in the fixed-income space. That work 
is going to come out of my division, and it is something we 
take very seriously.
    Mr. Neugebauer. I think I have heard people say that there 
is probably less efficiency in the bond markets than in the 
equity markets.
    Would you agree with that statement?
    Mr. Luparello. Yes, 100 percent.
    Mr. Neugebauer. Yes.
    So somebody is paying for inefficiency?
    Mr. Luparello. Part of that inefficiency comes with the 
fact that it is just fundamentally a less liquid market. But 
there is certainly some transparency that we would like to 
explore bringing to that market.
    Mr. Neugebauer. Turning to the Volcker Rule, in, I think, 
October of 2011 and January of 2012, the agencies received 
nearly 18,000 comments voicing opinions on a rule and, at the 
prodding of the White House and the Treasury Department, the 
rule was completed at the end of last year.
    Now, a lot of us felt like the initial rule that was put 
out was pretty vague, which prompted a lot of questions about 
it.
    And then, when the rule came back out, a lot of us were 
hoping that it would be re-proposed and be opened back up for 
comment, but that was not the case.
    And so, I think the industry felt like they were left with 
a lot of unanswered questions, and there continues to be, as 
I'm am sure you are aware, a growing number of concerns about 
the enforcement and how the rule is going to be interpreted.
    So tell me kind of, what the game plan is here. You have 
the Volcker Rule working group. But how are people going to 
have the opportunity to respond to those in a timely manner? 
And have you worked out who makes the final decision where you 
have a multi-agency Commission here looking over that process?
    Mr. Luparello. Obviously, coordination is important. And 
the working group, which has representatives from the five 
regulatory agencies, meets constantly and is committed to 
consistency.
    One would hope that commitment to consistency doesn't come 
with a cost of being slow in terms of getting guidance out, and 
my observation in my short time there is that has not been the 
case.
    So, as I said, the agencies are committed to doing these 
things completely consistently.
    We have started putting out responses to frequently asked 
questions. Three additional ones went up within the past couple 
of weeks. I think there are six now. Our view obviously is that 
is a living document that we will continue to try to populate 
to the greatest extent possible.
    Also, in our examination programs we are reaching out and 
having those conversations to try to get additional questions 
from entities that will be covered by the Volcker Rule so we 
can give them as much guidance as we possibly can. The 
extension of the conformance date also gives us a little bit 
more of a window to get that done.
    Mr. Neugebauer. So are these interpretations--are they 
being made public so that everybody gets a look at them?
    Mr. Luparello. Absolutely.
    Mr. Neugebauer. And what about the minutes of the working 
group and how they are making those decisions and how they are 
coming to those conclusions? Any transparency there?
    Mr. Luparello. Complete transparency on the FAQs that are 
on our Web site and the Web sites of the other four agencies. I 
am afraid I don't know the answer to your question.
    Chairman Garrett. The gentleman's time has expired.
    We will give a little leeway to the gentleman from 
Massachusetts, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    Mr. Luparello, I want to go back to the speech that Chair 
Mary Jo White gave back at Sandler O'Neill on June 5, 2014.
    She mentioned that the SEC is assessing the extent to which 
specific elements of the high-frequency trading environment may 
be working against investors rather than for them. This was 
about a month ago.
    Have we made any progress on that?
    Mr. Luparello. The Enforcement Division obviously has a 
number of--
    Mr. Lynch. Could you pull that microphone closer? My 
hearing is not good.
    Mr. Luparello. Neither is mine. So I apologize. And I could 
hear you perfectly. I apologize for the microphone being too 
far away.
    Obviously, if the Commission's staff in the Enforcement 
Division believes that there are market participants who are 
violating existing rules, that is subject to very careful 
investigation and enforcement. There have been a small number 
of cases, but I think, to be perfectly frank, the vast majority 
of high-frequency trading activity exists inside what is 
currently considered legal trading.
    The Chair brought forward a number of initiatives, all of 
which are in development, including the one we had spoken about 
just briefly on the anti-disruptive trading rule being one that 
is very much directed at the conduct you are looking at.
    That is something that is a very high priority for the 
Division to come up with a recommendation to the Commission in 
the very near future, but we have not presented that to the 
Commission yet.
    Mr. Lynch. All right. Thank you.
    Let me ask you--she also raised the issue of eliminating 
the exception right now from FINRA registration for dealers 
that trade in off-exchange venues.
    Are we making any progress on that?
    Mr. Luparello. That is actually--that is half of two 
pieces, the other of which is to clarify that certain market 
participants that trade at a certain level need to register as 
broker-dealers.
    Then, having clarified that obligation to register as 
broker-dealers, if they participate in the over-the-counter 
markets, which clearly most high-frequency traders do because 
that is where dark pool volume gets reported, they would need 
to register as FINRA members.
    Those proposals are in development. Again, I think we are 
hoping to get them to the Commission soon.
    Mr. Lynch. She also talked about the volume of trading 
being done in dark pools versus on lit exchanges and mentioned 
that there might be some way to put a little bit more light on 
some of these dark pools.
    Are there any concrete steps in that direction?
    Mr. Luparello. Specifically, those proposals would call for 
enhanced transparency in terms of the business operations of 
ATSs.
    It is not so much changing the mix of lit quotes versus 
dark quotes, but basically the business operations, how they 
execute orders, how their fees work--
    Mr. Lynch. A lot of dark pools are not ATSs, though.
    Mr. Luparello. No. They are ATSs.
    Mr. Lynch. Are you doing anything in that regard?
    Mr. Luparello. Yes.
    I'm sorry. They are ATSs.
    So it would basically be looking back at our ATS rulemaking 
of 10 or 12 years ago and modernizing it, enhancing the level 
of disclosure about the business operations of ATSs, including, 
importantly, the mix of participants in the ATSs and then 
making that information publicly available.
    Again, I feel like I am repeating myself, but that one is 
also in development.
    Mr. Lynch. No. I understand.
    And it sort of leads to--the last question I have is, in 
her speech the Chair actually brought up a couple of 
enforcement cases where broker conflicts--because of the maker-
taker fee structure, where some brokers were getting enhanced 
fees if they sent their trades in a certain direction.
    There was a conflict there with the general duty to place 
the best trade for an investor. She had a couple of fraud 
enforcement actions that she mentioned.
    What are we doing in that area to try to manage those 
conflicts for the brokers?
    Mr. Luparello. Maker-taker is a very important issue. It is 
a very complex issue, one that we have been studying for a 
while, and will continue to study.
    I will say, however, that if a broker is routing his 
customer orders based only on the desire to obtain rebates or 
avoid fees without making sure that he is meeting his 
overarching obligation of best execution, I think that would 
clearly violate our existing rule set.
    Mr. Lynch. Thank you.
    I have exhausted my time. I yield back.
    Chairman Garrett. Thank you.
    The gentleman's time has expired.
    Mr. Ross is recognized for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Mr. Luparello, in reviewing your opening statement, you 
talk about providing technical assistance to the Department of 
Labor with regard to their definition of ``fiduciary'' and 
specifically as to the practical application of making sure 
investors have proper guidance with regard to ERISA.
    I have some grave concerns over that.
    First of all, it gives rise to a new cause of action. As a 
lawyer, that is great. As a litigator, it is even better. But I 
think that it directly and adversely impacts the investors.
    Because I think, once you put that standard in there and 
you have an exodus of broker-dealers from the market, you still 
have a demand for that advice, and I think you create a more 
volatile investment market because of it.
    And my concerns are: What technical assistance are you 
providing? And do you feel that there should be a fiduciary 
definition with regard to investments with ERISA for broker-
dealers?
    Mr. Luparello. The Chair has asked the staff of Trading and 
Markets, as well as the staff of Investment Management, to come 
up with some proposals on that very issue, the standard of 
care, whether you can continue to have separate standards of 
care for different distribution venues or whether you need a 
single standard of care and whether that single standard of 
care is--
    Mr. Ross. And I think that is appropriate.
    I think there also should be a cost-benefit analysis 
because I think you are going to see, again, an exodus in the 
market of the broker-dealers. And, I think there are standards 
of care. There are standards of care just by way of common law.
    There is misfeasance, malfeasance, and negligence. And 
there are errors and omissions policies out there that cover 
that for some of these professional broker-dealers.
    So I am just very concerned that moving in this direction 
is going to do more harm to the investment market of those who 
want to engage in it than it will do as a benefit.
    Mr. Luparello. I completely agree.
    And in developing our recommendations, cost clearly is an 
issue. We also worry about investor choice.
    As for the guidance, the technical assistance we are giving 
the Department of Labor, that is mostly in terms of providing 
them our understanding of how the market operates. Obviously, 
their decision-making process is one over which we don't have 
any control.
    Mr. Ross. Thank you.
    Turning to the Volcker Rule again, the Volcker Rule will 
take place about the same time as the Basel III capital 
requirements are going to be imposed--what may very well be--
when they may very well be imposed.
    My concern--and I want to know if it is a concern of 
yours--is whether there is going to be an impact on interest 
rates for corporate borrowers because of Basel III and the 
Volcker Rule.
    Mr. Luparello. Obviously, we are concerned about and 
carefully look at liquidity in the marketplace. Even if we 
didn't, the Chair has asked us to provide information on a 
quarterly basis, I believe, of--
    Mr. Ross. Because that could impact our markets pretty 
significantly. It might be--
    Mr. Luparello. Absolutely. We have--
    Mr. Ross. --a little bit more regulation than we might need 
there.
    With regard to the Volcker Rule and the exemption for 
municipal and State debt as well as sovereign debt, because 
these types of investments, these types of debt, if you will, 
may fluctuate in the market, do you think that there is more 
advantage to the larger banks to take riskier investments 
because they will be protected as being exempted from the 
Volcker Rule?
    Mr. Luparello. I will be honest with you, Congressman. It 
is not an area that I have spent enough time studying to 
provide an insightful point of view.
    Mr. Ross. But I guess Congress exempted certain debt of 
State and municipal debt, but then the regulatory environment 
added sovereign debt.
    And that has me concerned because I think that those are 
gambles that--I don't know how many people want to invest in 
the City of Detroit right now, but that is an exempted debt 
under the Volcker Rule.
    Let's see. Lastly, the United States remains the only 
developed country to implement a restriction on proprietary 
trading.
    Will U.S. corporations face higher borrowing costs and be 
placed at a competitive disadvantage with regard to their 
foreign counterparts?
    Mr. Luparello. Clearly, that is something we plan on 
studying and plan on continuing to communicate about with this 
subcommittee.
    Mr. Ross. I appreciate your insight on that.
    And I will yield back the balance of my time.
    Chairman Garrett. Thank you.
    The gentleman yields back the remainder of his time.
    Mr. Perlmutter is recognized for 5 minutes.
    Mr. Perlmutter. I thank the kinder and gentler chairman for 
my 5 minutes.
    Mr. Luparello, thank you for being here today. I just have 
kind of a series of questions about different kinds of rules 
that are out there.
    In the lead-up to the crash of 2008, there were a couple of 
rules that were not in place that I think ultimately were then 
put back into place, and I would like to know what their status 
is.
    What is the status of naked short sales and the uptick 
rule? Do those exist or exist in some form or another?
    Mr. Luparello. I will look for my staff folks over my 
shoulder to tap me on the shoulder if I am wrong.
    But I understand that the--to the best of my recollection, 
the short sale rule exists, but it exists only during certain 
times of market stress. So, the short-sale tick-test rule 
exists only in narrow instances.
    Mr. Perlmutter. In sort of times of--
    Mr. Luparello. Right.
    Mr. Perlmutter. --where the market is diving, in effect?
    Mr. Luparello. When the market is already directionally 
going--when it is already directionally going down.
    Mr. Perlmutter. Okay. Thanks.
    Talk to me about--and explain to the committee, if you 
would, because--this exchange-traded funds and leveraged 
exchange-traded funds and how those might have an effect on the 
overall market if things were to go sour.
    Mr. Luparello. I think we talk about market structure for 
equities and we talk about market structure for fixed income 
and derivatives.
    But exchange-traded funds is an enormously important part 
of the market. It is something that my staff spends a lot of 
time on, as well as the Division of Investment Management, 
studying whether there are aspects of that from a market 
structure standpoint that we need to look at.
    There is also obviously--
    Mr. Perlmutter. So what is an exchange-traded fund?
    Mr. Luparello. It is any number of products that either 
represent a basket of securities or some other reference asset 
that you can trade intraday. It is basically like a mutual fund 
except that there is pricing during the day.
    There is not always perfect transparency around the 
components of it. And so, the arbitrage between the components 
and the ETF are very, very important.
    Mr. Perlmutter. So in the SEC's sort of overview of these 
funds and the trading of these funds, what are you seeing 
today?
    Because I have seen kind of an increase in articles about 
potential problems, one part of the market saying, ``No. There 
is no problem here,'' others saying, ``Well, we had better 
watch this.''
    Mr. Luparello. I think, from a market structure standpoint, 
it is certainly worthy of further attention.
    I think we are also always worried about whether some of 
these products are complex and being sold to investors who 
don't actually understand the complexity and that they create 
separate sales practice issues.
    That is another part of it to which we need to pay very 
close attention.
    Mr. Perlmutter. Can you tell us what the--a couple of years 
ago, Mr. McHenry sponsored a bill on crowdfunding for small 
purchasers, small investors.
    And there are fears about--part of your job, obviously, is 
being a policeman, making sure that people aren't taken 
advantage of, there isn't fraud in the marketplace.
    So, you have been tasked with some rulemaking on 
crowdfunding. What is the status of that?
    Mr. Luparello. The proposed rules were published in October 
of last year, I believe, and we received a number of very 
thoughtful comments. The staff is working on it.
    There are issuer obligations that are embedded in the 
rulemaking that are the responsibility of the Division of 
Corporation Finance.
    The intermediary obligations, whether that is broker-dealer 
obligations or funding portal obligations, are our 
responsibility.
    We are working through it to the best of our ability and 
hope to get a recommendation to the Commission very soon.
    Mr. Perlmutter. All right. Thank you, Mr. Chairman. I yield 
back.
    Chairman Garrett. Thank you.
    Mrs. Wagner is recognized for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman.
    And I thank Director Luparello for being here.
    I want to continue the discussion on the fiduciary standard 
of conduct and, in your own words, consider whether and, if 
so--I underscore ``if so''--you will adopt rules establishing a 
uniform standard.
    To me, the most critical issue raised by the potential 
fiduciary rulemaking is whether the new rules will, in fact, 
hurt low- and moderate- and middle-income individuals' access 
and affordable financial advice.
    And I appreciated your statement to Congressman Ross about 
the concerns of cost and choice in that investor market.
    Dodd-Frank required the SEC, I know, to study whether to 
subject broker-dealers to a fiduciary standard. However, the 
SEC's 2011 study ``failed to identify whether retail investors 
are systemically being harmed or disadvantaged under one 
regulatory regime as compared to the other.'' This was, of 
course, according to Commissioners Paredes and Casey.
    Without investor harm, Director Luparello, is there any 
basis to conclude that a uniform standard would, in fact, 
enhance investor protection?
    Mr. Luparello. I think clearly, one needs to identify a 
benefit to stand up against the cost. The Commission before my 
time, but in the recent past, put out a request for further 
information around a variety of these issues. It is something 
that we continue to study very carefully.
    But I think it is a fair question that you need to identify 
a real benefit before you start to analyze the costs and 
benefits of these things.
    Obviously, there are certain aspects of the fiduciary 
standard which provide enhanced investor protection. But again, 
cost and choice are things that have to be balanced against 
that.
    Mrs. Wagner. And I appreciate that.
    Following up on that 2011 study, Chair White, I know, told 
the committee in 2013 that she would do that request for 
information to better inform the rulemaking. What were the 
results of that request for information?
    Mr. Luparello. I think, to a certain extent, the level of 
information that flowed in was less than the staff thought it 
was going to be.
    And so, one of the questions we have is: If we are going to 
come up with recommendations, will there be a need for a new 
round of information-gathering?
    Mrs. Wagner. And that was my understanding, that there 
really was not much feedback there. And I continue to be 
concerned about, again, this being a solution in search of a 
problem.
    Has any of the information helped inform your thoughts on 
how--thoughts on this potential rulemaking? And how that would 
be played out?
    Mr. Luparello. Clearly, all input we get is important 
input. But it is all part of a multifaceted analysis that 
includes multiple divisions of the Commission.
    So, again, any input we can get is going to be helpful 
input. What the final recommendation is and how much that input 
is going to drive that is still something that is being--
    Mrs. Wagner. I know that the SEC found in 2008 that 
investors were somewhat confused about whether they were 
dealing with broker-dealers or investment advisers. However, 
they did not identify any specific harm.
    Is the only solution to impose a fiduciary standard of care 
on broker-dealers or could any issues be fixed by, let's say, 
amending existing FINRA rules?
    Mr. Luparello. One of the questions is whether there are 
enhancements to existing rules for broker-dealers and--as well 
as recognition of some of the existing rules on broker-dealers 
that deal specifically with conflicts. That is always an option 
that I think has to be considered.
    Mrs. Wagner. Good.
    One source of confusion for investors might be the variety 
of titles that brokers and investment advisors use.
    Would a simple way to fix the problem be to clarify which 
titles they can use, sir?
    Mr. Luparello. I don't know if that would entirely solve 
investor confusion.
    I can say that years ago, I was involved in a project where 
there were a variety of titles that were being used, especially 
around advice to senior citizens, that were, basically, 
fundamentally baseless.
    And so FINRA has in the past attempted, as well as other 
regulators, to crack down on the misleading use of titles. 
Whether you get to specificity around the words that can be 
used and that solves investor confusion is certainly worthy of 
additional consideration--
    Mrs. Wagner. In my limited time, Chair White recently said 
the rulemaking was a high priority and she wanted to make a 
decision this year. So, she asked the staff for options.
    What other options have the staff suggested to the 
Commission?
    Mr. Luparello. The development of those options is still in 
process, but I think you have touched on what the variety of 
choices could be.
    Mrs. Wagner. And will you be able to report back to us some 
of those options at some point in time, sir?
    Mr. Luparello. I believe I need to report to my Chair, 
first. But, yes, absolutely.
    Mrs. Wagner. Wonderful. Thank you. I appreciate it.
    I yield back, Mr. Chairman.
    Chairman Garrett. The gentlelady yields back.
    Mr. Scott is now recognized.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Mr. Luparello, when Securities and Exchange Commission 
Chair White appeared before our committee, I expressed some 
concerns about what is referred to as the lack of order 
competition and I asked her what her plans are to deal with 
market structure.
    And I want to make a note that I am somewhat encouraged by 
the recent announcements of the items that you intend to take 
action on before the end of the year. However, it appears that 
much of this is low-hanging fruit and does not directly address 
my concerns that I addressed to her about order competition.
    So let me ask you: What is your plan to address some of the 
bigger market structure issues such as the increased level of 
dark trading that even the SEC has recognized as having a 
negative impact on price discovery?
    Mr. Luparello. I think your characterization of the Chair's 
plan is fair and, frankly, what she would articulate as well, 
that there are a variety of initiatives that the staff is ready 
to move on quickly and that there are others that deserve, 
frankly, a little bit more study, a little bit more 
interaction--
    Mr. Scott. What would be some of those you want to move on 
quickly?
    Mr. Luparello. The ones we would want to move on quickly 
are an anti-disruptive trading rule, the registration of all 
high-frequency traders as broker-dealers, the requirement that 
those that trade over the counter become FINRA members, 
enhanced disclosures on the business operations of ATSs and 
enhanced disclosures on the routing of institutional orders.
    The issue you touch on is an extraordinarily important 
one--right?--that there is an extraordinary amount of 
fragmentation in the marketplace these days, some of which 
leads to positive competition and lower costs, but some of it 
clearly can lead to degraded opportunities for lit quoting and 
for order interaction.
    That is a very important balance and one that we desire to 
get--
    Mr. Scott. But are you all assessing point by point the 
negative impacts on price discovery?
    Mr. Luparello. Absolutely. So as we study NMS--and, again, 
I don't want to refer to it as a long-term study--what--our 
next plan is to put out a series of White Papers, work very 
closely with a variety of participants, including our Market 
Structure Advisory Committee, once it is stood up and 
operational, to look at these issues.
    I tend to like to think of that one in the context of the 
trade-through rule, that a lot of these things come with the 
fragmentation of those venues.
    And so we will look at--we are very much going to look at 
that. That is one of our most important longer-term issues.
    Mr. Scott. Okay. Let me share very quickly, this is a 
rather startling observation. But today, only 63 percent of 
trades are conducted in what is referred to as lit markets, 
where we can see them. Now, that means 37 percent are in dark 
pools. It means that investors are not seeing the true depth of 
the liquidity behind the stocks.
    So while high-frequency traders will, what you refer to, 
ping the market by sending out a bid to see if there is a 
response from the dark pools, this is not possible for all 
investors.
    How does this affect an investor's ability to even price a 
stock? And is this a significant advantage for some 
participants over others?
    Mr. Luparello. It is certainly worthy of study. And I 
completely agree with the importance of those statistics.
    That said, it is probably worth noting that, of that 37 
percent, a significant portion are actually retail investors 
getting good-quality executions very quickly done. That doesn't 
at all touch on the issue of whether we have quote degradation 
that we need to worry about.
    But one of the things we need to do as we study is to make 
sure that some of the better features of the markets, including 
how retail investors experience both high-quality and rapid 
executions, doesn't get degraded or, frankly, if it does get 
degraded, it is a decision we are making with our eyes wide 
open.
    So, yes, it is, I think, just sort of troubling on its face 
that such a large percentage of activity happens off of lit 
markets and there are more headwinds than there are 
encouragements to quote in lit markets. But, to a certain 
extent, that has come to the benefit of certain retail 
investor-type trades.
    It is a very complex issue, one that we plan on studying 
very carefully.
    Mr. Scott. Thank you very much.
    The lack of order competition is a very, very serious 
issue.
    Mr. Luparello. I could not agree more.
    Mr. Scott. Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    The remaining gentleman on our side, Mr. Mulvaney, is now 
recognized.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Mr. Luparello, let's talk a little bit about litigation and 
liability, which I used to know something about in a previous 
life.
    One of the things that Dodd-Frank did--I think it was 
Section 921(a)--is give the SEC the ability, but not the 
obligation, to limit the use of arbitration in securities 
litigation.
    I used to do a little of that. I have been on the 
plaintiffs' side of that, and I have been on the defendants' 
side of that. And while it was certainly different than going 
through the court system--the ordinary court system, I have to 
tell you that I liked parts of it. It was a lot quicker. It was 
a lot easier. And for both sides, it was usually a lot cheaper.
    I recognize the fact, again, that it was different than 
going through ordinary litigation. There were certain tools 
that were not available to me, for example, as a plaintiffs' 
lawyer, that would be in the courts. But, conversely, it was a 
trade-off there of having it be easier, quicker, to do.
    So, I guess, now that you have this ability to limit--or to 
possibly limit the use of arbitration, I have to ask you: 
What's wrong with arbitration? What is the SEC's stance on 
arbitration within financial securities litigation?
    Mr. Luparello. I can't help but sort of flash back a little 
bit to my extended tenure at FINRA, where we ran the dispute 
resolution forum and worked very hard to make sure that it 
worked as efficiently as possible, but felt a certain need to 
defend the arbitration program as a viable alternative.
    Obviously, the statute provides the Commission the 
authority, but not the obligation, to act. As a general matter, 
in its oversight capacity, the Commission spends a substantial 
amount of time with FINRA making sure that forum is run as 
carefully and fairly and transparently as it possibly can be.
    Obviously, there have been a lot of enhancements made to 
that forum, I think very much to the benefit, over the past few 
years.
    The Commission hasn't particularly--hasn't taken a position 
on Section 921 at this point, to the best of my knowledge. And 
while I am relatively new and have had a variety of 
conversations with the Chair, that is one that I still haven't 
had.
    Mr. Mulvaney. And just to clarify one thing--because I 
understand a little bit of the history of how it ended up in 
Dodd-Frank--is it the opinion of the SEC that arbitration 
contributed to the financial crisis?
    Mr. Luparello. Not to my knowledge.
    Mr. Mulvaney. Okay. Thank you very much.
    Let's talk about a different, but somewhat related, topic, 
which is the liability of exchanges.
    My understanding is that exchanges, when they perform their 
regulatory functions, have certain immunities from liability; 
when they perform their commercial functions, they don't.
    I think this has become relevant in the last couple of 
weeks and months as NASDAQ has sought to assert its immunity 
vis-a-vis the Facebook IPO and that what we might be seeing, is 
an attempt by certain exchanges to sort of blur the lines, to 
make that which is commercial appear regulatory in order to 
avail oneself of immunity from liability.
    Has the SEC looked at this issue? I don't think you have 
expressed any opinions on it yet. Do you expect to do so in the 
near future?
    Mr. Luparello. SRO immunity is a creature of case law and, 
like any good litigator, one tries to expand that protection 
based on the facts.
    The SRO status of exchanges--and you described the issue 
perfectly--is the difference between the commercial and the 
regulatory, and it is certainly on our agenda to do.
    I think, when we think about the SRO status of exchanges, 
we are thinking about two different issues, one of which is the 
competitive playing field between exchanges and other venues 
that do things that look an awful lot like exchanges.
    But part of it is analyzing the SRO obligations and 
protections that go with being an SRO that the exchanges 
currently enjoy.
    So that is an issue we are going to continue to look at.
    Specifically on the Facebook litigation, to my knowledge, I 
don't know that we have been asked to opine and I don't know 
that we--
    Mr. Mulvaney. I am not asking you to opine--I used that 
only as an example.
    So I guess my last question is this: Can we expect the SEC 
to provide some guidance in the near future and say, ``This is 
regulatory and this is commercial?''
    Mr. Luparello. Perhaps in the context of studying the SRO 
issue more broadly, which is one of our longer-term 
initiatives, that will be something that we opine on.
    At this point, I think giving specific guidance is probably 
not in the near--is not going to happen in the near future.
    Mr. Mulvaney. Thank you, Mr. Luparello.
    I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Foster is recognized for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman.
    One example of the current system for not incentivizing 
maybe the best behavior is the proliferation of order types 
that are designed to capture rebates from the exchanges. Reg 
NMS put in place a uniform, one-size-fits-all, 30-mils fee cap 
for all stocks.
    And this rebate model has arguably increased liquidity for 
active named stocks, but some would say that it actually made 
those stocks more costly for institutional investors. It also 
has perhaps pushed transactions to off-exchange venues as 
investors try to avoid these fees.
    My question is: Is the Commission contemplating--or should 
it contemplate a pilot program to reduce the market fee access 
cap, perhaps alongside the tick-size pilot, particularly for 
very liquid stocks? And specifically, what would you think of 
tiered access fees based on the liquidity?
    Mr. Luparello. I think those are all--first of all, I 
completely agree with the observations.
    Maker-taker in certain areas of the market is definitely 
tied inextricably to the growth of complex order types. In the 
short term, we have asked the exchanges to go back and do an 
inventory of their order types, make sure they understand how 
all their order types work and how those order types--whether 
or not those order types are consistent with how they were 
described to us in the first instance.
    We have given them a deadline of November to come back with 
that study, which, given the complexity in the growth and order 
types, is a challenge.
    Maker-taker and the issue of potential broker conflicts 
married, of course, to the fact that does, I think, pretty 
clearly drive a substantial amount of volume from on exchange 
to off exchange is something that we are going to consider.
    I don't know at the end of the day that we will decide to 
go with a pilot, but I think certainly a pilot is one of the 
options. And, again, I think the way you articulated it that--
and sort of consistent with our notion of one size not fitting 
all, clearly maker-taker has a different impact at the more 
liquid end of the market than it does at the less liquid end of 
the market.
    So, I can't say we have reached any conclusions yet. There 
is a lot of work to do there. But I think the issues that you 
have articulated are ones that are both very much at top of the 
book for us, but also somewhat consistent with how we are 
thinking about it.
    Mr. Foster. Are there alternatives you are considering in 
addition to pilot programs? You could obviously just adopt 
something market-wide, but it seems like it mitigates the risk 
if it starts with a pilot program.
    Mr. Luparello. It is certainly too early to tell in terms 
of our thinking. And so I will just cite what others have 
cited, which I think are worthy of further analysis.
    Obviously, a maker-taker pilot with trade at the most 
liquid end of the market.
    The other thing is looking at perhaps quoting in subpennies 
versus quoting in pennies, which would have a natural 
compression aspect on maker-taker, as well as just considering 
the consequences of banning it outright.
    I think these are all things that we are going to think 
about over the next few months.
    Mr. Foster. Are you thinking of changes to the attribution 
rules?
    Basically, it is my understanding that when a trade is made 
public, the venue is not made public in most or maybe all 
instances, whereas other countries, in fact, do it differently, 
where the venue is also made public.
    This may allow third parties or the participants themselves 
a better view of whether you are actually getting the best 
deals on which venues.
    Mr. Luparello. I think that is especially true with dark 
pools. There still is a fair amount of opacity whether an over-
the-counter trade was a dark pool trade versus just an 
internalized trade of a broker-dealer.
    FINRA has made some steps going forward on that to enhance 
transparency. So you now have a requirement that transactions 
that are reported by a broker-dealer that sponsors an ATS 
clarifies whether it is a broker-dealer or whether it is the 
ATS. That is an important first step.
    They are also publishing transaction volume information. It 
is an important next step.
    But one of the interesting things about the over-the-
counter market is there is sort of an assumption that the 30-
something percent that makes up the over-the-counter market is 
entirely dark pools. The reality is, it is only about a third 
in dark pools.
    And so, we are going to have conversations with FINRA to 
continue to try to develop greater transparency in that space, 
just how much of the over-the-counter activity is happening 
inside of ATSs versus happening broker-broker versus happening 
internalized.
    And I think one of the next steps off of that is looking at 
whether attribution of location, hitting the tape as opposed to 
just hitting the regulatory tape, is something worth pursuing.
    Mr. Foster. Okay. And, quickly--I guess I have about 15 
seconds--do retail investors today have relatively simple tools 
to get some idea of whether their trades are being executed 
well or not? They can see their fees actually, but what about 
the other part of it?
    Mr. Luparello. The information is made available to them 
through existing Rules 605 and 606, which are Commission rules. 
Just how usable they are for retail investors is a very good 
question.
    Obviously, they also get disclosures through their 
confirms. I suspect most investors, if they are trading with 
their broker, have ready access to what is the inside market at 
the time and they can evaluate how well they are doing with the 
inside market. That clearly doesn't tell the entirety of the 
story, but it does tell some of the story.
    We would also hope that broker-dealers in their 
responsibility to their customers both look out for their 
customers, but, also, communicate well the quality of those 
executions. Their ability on a trade-by-trade basis to say, 
``Is this broker versus this broker going to give me a better 
deal?'' is a very complex analysis.
    Mr. Foster. Thank you.
    I yield back.
    Chairman Garrett. Thank you.
    And now, for the last word.
    Mr. Carney. That must be me, Mr. Chairman.
    Chairman Garrett. The gentleman is recognized.
    Mr. Carney. Thank you very much, Mr. Chairman. And thank 
you for having this hearing today. It is very interesting, if 
not a little bit complex and esoteric, for sure.
    I just have a few questions on some of the issues that I 
have been thinking about and working on over the past couple of 
years. Mr. Luparello, I appreciate you coming in today and 
having this conversation with us.
    You had some conversation a little bit about the tick-size 
pilot. I have been working with my colleague on the other side 
of the aisle, Mr. Duffy, for over a year on that, and we 
actually passed a bill out of this committee and on to the 
Floor as well. So, I was happy to see that the SEC is moving 
forward on that program.
    What do you expect to or hope to achieve out of the pilot 
and the framework that you have come up with?
    Mr. Luparello. I, too, am happy that it is out the door. 
Obviously, there are a couple of procedural--
    Mr. Carney. By the way, I thought it was very well done. 
Not that I am an expert at all, but we were really just--our 
effort was to try to encourage the SEC to do something, and we 
were pleased with what you did.
    Mr. Luparello. I appreciate that.
    And in the short term, the issues we want to study most 
carefully. So there will be a substantial amount of data that 
the SROs need to push to us to help in our analysis.
    But, fundamentally, what we want to see is whether there is 
more depth at the quotes based on the wider tick size, whether 
there is greater market-maker participation and, therefore, 
greater market-maker support.
    Obviously, at the same time, we want to see whether the 
wider tick size causes--certainly, in some cases, it may 
actually raise investor costs, especially retail investor 
costs, a little bit. That is an issue we need to pay careful 
attention to and evaluate.
    I will say, while this is an important step forward and 
something that gives us a real vision into whether there are 
solutions for a segment of the market that work really well, I 
would like to think this is not the only thing we plan to do in 
the lower capitalization area.
    Mr. Carney. So talk about some of those other things that 
you think you would like to do. I think some of them were part 
of what you were just discussing.
    But what are some of those things?
    Mr. Luparello. A little bit.
    But one of our longer--as I have talked about the Chair's 
speech and the Chair's vision on market structure, there are 
the shorter-term steps, which are our concrete actions to take, 
and there are longer-term things to think about.
    And in that longer term is just specifically the market 
structure for lower-cap, lower-volume stocks. And I think--one 
of the ideas that has been thrown around, one that has garnered 
a lot of conversation, is things like venture exchanges.
    And I think we are very open to the idea of competitive 
solutions. That is based--and we will continue to work with a 
variety of market participants.
    Mr. Carney. Sounds good. I am glad to hear that. I know my 
colleague on the other side of the aisle, Mr. Duffy, would be 
as well.
    Moving on to cross-border swaps, another kind of esoteric 
area, but an area on which I have worked with the Chair of this 
committee to try to get harmonization, we have taken a lot of 
heat from our approach. You came out with a rule just 
yesterday, I think.
    Could you talk about that? And in particular, your piece of 
the market is small, security-based swaps, I guess. What kind 
of coordination went into it with the CFTC?
    Mr. Luparello. Careful coordination with both the CFTC and 
the other regulators. The vast majority of what we did 
yesterday is very consistent with the CFTC approach.
    There are clearly a couple of areas where we come up with a 
slightly different answer. Some of that is driven by our 
understanding of the workability of our markets. Some of it is 
driven by slight differences in the statute and potentially 
different authority questions.
    But literally all we did yesterday was clarify, given that 
the swaps market is fundamentally a cross-border market, some 
very substantial percentage of trades are between a U.S. person 
and a non-U.S. person--clarifying what transactions gave--would 
give rise to registration--
    Mr. Carney. Would you agree that the objective is to get 
harmonization of regulations across market venues around the 
world?
    Mr. Luparello. Absolutely. And so, part of this is it is 
not just coordinating with the domestic regulators, but 
coordinating with the international regulators.
    Mr. Carney. What do you think is the biggest challenge 
there? What do we need to be concerned about?
    There was some reporting about--and I know the ranking 
member has expressed some concern about non-guaranteed entities 
or something.
    Could you comment on that briefly?
    Mr. Luparello. Yes. One of the big issues that we dealt 
with yesterday was the question of when you have a non-U.S. 
person that--you know, a subsidiary of a U.S. bank that is 
located in London, for example, and they do a transaction with 
another non-U.S. person. If that transaction is guaranteed by 
the U.S. bank. If there is an explicit recourse guarantee.
    It is really--the economic reality of that transaction is 
that the German hedge fund is actually doing business with the 
New York bank. So requiring that transaction to be counted for 
jurisdictional purposes made sense to us.
    When those guarantees become softer, there are some 
questions about whether we can reach what is essentially a 
transaction between one non-U.S. entity and another non-U.S. 
entity.
    And so part of this is--those are very difficult nuanced 
questions that do have the color of what our authority is over 
transactions that involve two non-U.S. persons, one of the 
difficult issues we try to navigate.
    Mr. Carney. My time is up. I would encourage you to keep 
working on that. It is, we believe, a very important issue. I 
work with the Chair on it and also encourage your cooperation 
and work with Department of Labor on fiduciary as well.
    Mr. Luparello. I appreciate it.
    Mr. Carney. Thank you.
    Chairman Garrett. I thank the gentleman.
    And I thank the Director.
    Before I let you go, Vice Chairman Hurt and I wrote a 
letter to Chair White several weeks back with regard to venture 
exchanges and the work that is being done there.
    Do you know when we will be receiving a response? Or do you 
want to just comment on that topic in general?
    Mr. Luparello. I will find out when the response is coming.
    And, as I said, I think we are open to a variety of 
potential solutions and look to flexibility at different 
segments of the market.
    Conversations I have had with market participants and 
experts before I started at the Commission around venture 
exchanges create many sort of, I think, interesting 
opportunities.
    Chairman Garrett. Opportunities. Yes.
    Mr. Luparello. As is always the case, there are 
occasionally authority questions that go along with that, which 
need to be navigated. But we continue to think that this is an 
idea worthy of further conversation.
    Chairman Garrett. Great. I appreciate your answer.
    That brings the hearing to a close.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place his responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
record.
    And with that, the hearing is adjourned. And thank you 
again.
    Mr. Luparello. Thank you, Mr. Chairman.
    [Whereupon, at 10:52 a.m., the hearing was adjourned.]
    
    
    
    
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