[Senate Hearing 113-630]
[From the U.S. Government Publishing Office]


 
  		FINANCIAL SERVICES AND GENERAL GOV-
  		  ERNMENT APPROPRIATIONS FOR FISCAL 
                    YEAR 2015

                              ----------                              


                        WEDNESDAY, MAY 14, 2014

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Tom Udall (chairman) presiding.
    Present: Senators Udall, Coons, Johanns, and Moran.

                   SECURITIES AND EXCHANGE COMMISSION

STATEMENT OF HON. MARY JO WHITE, CHAIR

                 OPENING STATEMENT OF SENATOR TOM UDALL

    Senator Udall. Good afternoon. The subcommittee will come 
to order.
    I am pleased to convene this hearing of the Financial 
Services and General Government Subcommittee to consider the 
fiscal year 2015 funding requests of two key Federal regulatory 
agencies, the Securities and Exchange Commission (SEC) and the 
Commodity Futures Trading Commission (CFTC).
    I welcome my distinguished ranking member, Senator Mike 
Johanns, and some of our other colleagues I think will join us 
here throughout the day.
    Joining us today are also the Honorable Mary Jo White, 
Chair of the Securities and Exchange Commission, and the 
Honorable Mark Wetjen, Acting Chairman of the Commodity Futures 
Trading Commission. They will discuss the critical work of 
their agencies, their use of resources provided over the past 
couple of years, and their budget needs for fiscal year 2015.
    The workload for these agencies has grown dramatically in 
recent years. The SEC and the CFTC all play critical roles in 
stimulating and sustaining economic growth and prosperity in 
our country, in protecting the marketplace from fraud and 
manipulation, and in carrying out Dodd-Frank reforms. My 
constituents have made clear they support these reforms to 
prevent the reckless and abusive practices that led to the 
financial crisis.
    Fortunately, some sectors of our country are recovering. 
But sadly, many families have not recovered, and they continue 
to struggle. I believe it is my responsibility to the hard-
working and honest people of New Mexico and to all Americans 
who suffered as a result of this crisis to ensure that we work 
to fully implement Dodd-Frank.
    We need a financial system that is safe and sound because 
what happens on Wall Street touches every American family. 
Whether they are saving to buy their first home, helping to put 
their children through college, or planning for retirement, 
they put their faith in the financial markets being sound. We 
cannot let them down.
    And they are not alone. Market users, financial investors, 
and the U.S. economy all depend on vigilant oversight by these 
two agencies, especially in today's rapid-paced, evolving, and 
often volatile global marketplace.
    In the past few years, both Chair White and Acting Chairman 
Wetjen and their fellow commissioners and their respective 
staffs I think have worked very hard to create a more reliable 
regulatory structure to ensure the stability and integrity of 
the futures and securities markets. But there is still, I think 
everyone will admit, a lot of work to be done.
    We depend on your leadership to implement the reforms 
designed to strengthen our regulatory framework, to do so 
promptly, prudently, and transparently, and help guard against 
another financial meltdown.
    As the investors' advocate, the SEC has an important role 
in maintaining fair, orderly, and efficient stock in securities 
markets. The SEC conducts day-to-day oversight of the major 
market participants, monitors corporate disclosure of 
information to the investing public, and investigates and 
pursues enforcement action against securities laws violations.
    Dodd-Frank dramatically expanded the SEC's 
responsibilities. The SEC was thrust into the driver's seat for 
issuing nearly 100 new rules, creating five new offices, 
issuing more than 20 studies and reports, overseeing the over-
the-counter derivatives market and hedge fund advisers, 
registering municipal advisers and security-based swap market 
participants, and setting up a new whistleblower program.
    The Jumpstart Our Business Startups Act of 2012 (JOBS Act) 
added more to SEC's plate for further rules and studies on 
capital formation, disclosure, and registration requirements.
    Turning to the CFTC now, the CFTC carries out market 
surveillance, compliance, and enforcement programs in the 
futures and swaps arena. It detects, deters, and punishes 
abusive trading activity and manipulation of commodity prices, 
helping to prevent negative impacts both on consumers and on 
the economy.
    Four years ago, the CFTC's mission was substantially 
expanded to include new oversight of the swaps marketplace, the 
vast once-in-the-shadows world of over-the-counter derivatives. 
It is a significantly transformed and highly diversified 
marketplace, one that is globalized, electronic, and around the 
clock.
    The enactment of Wall Street reform in 2010 also added to 
the job of the CFTC. CFTC now has oversight of the once 
unregulated $400 trillion over-the-counter U.S. derivatives 
market to protect and benefit end-users and the broader 
American public. This complex swaps market has a notional value 
of nearly eight times the size of that of the futures market.
    Now, the forecast for 2015, looking ahead for fiscal year 
2015 for the SEC, the President seeks funding of $1.7 billion, 
an increase of $350 million, 26 percent above the fiscal year 
2014 base enacted level of $1.35 billion. It is $236 million 
above the SEC's $1.464 billion current operating level. The 
$1.7 billion requested for fiscal year 2015 will support 5,143 
permanent positions, an increase of 639 positions over the 
current 4,504 permanent positions, for a 14 percent growth in 
staff.
    And for the CFTC, the President's budget requests $280 
million, an increase of $65 million above the fiscal year 2014 
enacted level of $215 million. This is a 30 percent increase in 
funding above the current level. The proposed fiscal year 2015 
level will support 920 staff or 253 more when compared to the 
current staffing level of 667, a 37 percent increase.
    Congress probably exercises its most effective oversight of 
agencies and programs through the appropriations process, 
permitting an annual checkup and review of operations, of 
activities, and spending. Today's hearing provides a valuable 
opportunity to ask some important questions.
    Are the SEC and the CFTC keeping pace with the developments 
in the markets, particularly with more complex financial 
products which are emerging?
    Do these agencies have the right mix of talent and 
specialized expertise to be vigilant watchdogs?
    Do they have the state-of-the-art information technology to 
augment and support their human capital?
    What are the top priorities for use of the resources 
proposed for 2015?
    And what are the likely consequences of continued budget 
shortfalls and reduced resources?
    I know Senator Johanns and I welcome the opportunity to 
conduct critical oversight of these two agencies. And I now 
turn to my distinguished ranking member, Senator Mike Johanns, 
for his opening remarks.

                   STATEMENT OF SENATOR MIKE JOHANNS

    Senator Johanns. Mr. Chairman, let me just start out and 
say thank you to the witnesses for being here with us today. I 
thank you, Mr. Chairman, for holding yet another important 
hearing as we work our way through the various budget requests 
under our subcommittee's jurisdiction.
    I do look forward to hearing from the witnesses today 
regarding the details of your requests as well as your plans to 
carry out core missions and implement Dodd-Frank in a 
responsible manner. There are three areas that I would like to 
highlight, looking forward to your testimony and my questions.
    First, the SEC's implementation of the JOBS Act. Where is 
that on schedule? I am concerned that it is not on schedule, 
and I want to learn more about that. I do encourage the SEC and 
your team to move with all appropriate speed in finalizing 
Regulation A and the crowdfunding rules.
    Second, I would like to get both of your thoughts on 
technological advancement in the marketplace, and what your 
agencies are doing on the technology front to adapt.
    And finally, I ask you to be persistent in trying to work 
together and coordinate with your fellow regulators. Any 
conflicts between SEC and CFTC on cross-border swaps and lack 
of coordination between the SEC and Department of Labor over 
fiduciary standards continues to cause uncertainty and 
confusion.
    Derivatives markets and effective oversight of those 
markets matter a lot to farmers, to homeowners, and to small 
businesses. We all benefit from a system that promotes fair and 
orderly markets. So I am concerned when certain agency rules 
seem to fragment the market and push businesses overseas.
    In some instances, the CFTC has moved too quickly. Others, 
the Commission has simply chosen to issue guidance in what 
looks like an effort to avoid cost-benefit analysis. In many 
cases, the Commission has opted to act alone instead of 
properly coordinating with the SEC as well as other domestic 
and international regulators.
    In order to be an effective regulator, transparency is 
critical. This need for transparency and coordination is 
evident in the CFTC's approach to cross-border implementation 
swaps regulation. CFTC's guidance, the delays, the lack of 
coordination with other regulators have led to confusion and 
concern for market participants, foreign government finance 
ministers, and investors here and abroad.
    No doubt that both the CFTC and SEC have an important job 
of protecting investors who look to the markets to help secure 
their retirements, pay for their homes, send kids to college. 
Your agencies have an obligation to protect consumers, 
hopefully, from the next Madoff, MF Global, or Stanford.
    As we look at both of your budget requests, two things come 
to mind. First, technological solutions are important to keep 
up with next-generation trading platforms that operate at 
lightning speeds. Two, staffing levels have to be carefully 
considered. We also have to make sure that they are 
sustainable.
    All agencies have to make strategic decisions on how best 
to allocate resources. As we all know, simple increasing 
funding doesn't necessarily ensure that the agency will 
successfully achieve its mission.
    So, to the chairs, you both have difficult tasks before 
you. We ask a lot. We ask that you improve transparency in our 
securities markets, uncover fraud and deception, without over-
regulating our markets and hindering economic growth.
    Chairman Udall, again, I look forward to working with you 
as we consider the fiscal year 2015 budget requests of the CFTC 
and the SEC, and I look forward to the testimony and the 
opportunity to ask questions.
    Thank you, Mr. Chairman.
    Senator Udall. Thank you very much, Senator Johanns.
    And at this time, I would invite Chair White to present 
testimony on behalf of the SEC, followed by Acting Chairman 
Wetjen on behalf of the CFTC. You each will have 5 minutes. I 
know you have very thorough statements, which will be put in 
the record, and you can use your 5 minutes as you choose.
    Please proceed, Chair White.

                SUMMARY STATEMENT OF HON. MARY JO WHITE

    Ms. White. Thank you, Chairman Udall, Ranking Member 
Johanns. Thank you for inviting me to testify in support of the 
President's fiscal year 2015 budget for the Securities and 
Exchange Commission.
    Now more than ever, investors and our markets need a 
strong, vigilant, and adequately resourced SEC. To put the 
SEC's extensive responsibilities and its 2015 budget request 
into context--from fiscal year 2001 to fiscal year 2014, 
trading volume in the equity markets more than doubled to a 
projected $71 trillion. The complexities of financial products 
and the speed with which they are traded increased 
exponentially.
    Assets under management of mutual funds grew by 131 percent 
to $14.8 trillion, and assets under management of investment 
advisers jumped almost 200 percent to $55 trillion. There are 
today over 25,000 SEC registrants, including broker-dealers, 
clearing agents, transfer agents, credit rating agencies, 
exchanges, and others.
    During this time of unprecedented growth and change in our 
markets, the SEC also has been given significant new 
responsibilities for over-the-counter derivatives, private fund 
advisers, municipal advisors, crowdfunding portals, and more.
    The President's $1.7 billion budget request would enable 
the SEC to address critical core priorities including enhancing 
examination coverage for investment advisers and other key 
entities who deal with retail and institutional investors; 
protecting investors by expanding our enforcement program's 
investigative capabilities, and strengthening our ability to 
litigate against wrongdoers; deploying and leveraging cutting-
edge technology to better keep pace with those we regulate, 
make our operations more efficient, and improve our ability to 
identify a variety of market risks, including emerging frauds.
    The SEC's funding, as you know, is deficit neutral, which 
means that the amount Congress appropriates is offset by 
transaction fees and thus does not impact the deficit, the 
funding available for other agencies, or count against the caps 
in the congressional budget framework.
    Nonetheless, I fully recognize my duty to be an effective 
and prudent steward of the funds we are appropriated. I believe 
our accomplishments in the past year should give Congress and 
the public confidence that we will fulfill this responsibility.

                       RECENT SEC ACCOMPLISHMENTS

    While certainly much more remains to be done, since my 
arrival in April 2013, the Commission has adopted or proposed 
more than 20 significant rulemakings, including many mandated 
by the Dodd-Frank and JOBS Acts, across the regulatory spectrum 
of our jurisdiction. My written testimony details these.
    We are also now more aggressively enforcing the securities 
laws, requiring for the first time admissions to hold certain 
wrongdoers more publicly accountable. And in fiscal year 2013, 
we obtained orders for penalties and disgorgements of $3.4 
billion, the highest in the agency's history.
    We have intensified our data-driven disciplined approach to 
analyzing and appropriately addressing complex market structure 
issues, such as high-frequency trading and dark pools, 
implementing a powerful new analytical tool called MIDAS. We 
have begun a comprehensive review of the SEC's public company 
disclosure rules to make disclosures more meaningful to 
investors while at the same time making them more cost 
effective for companies.
    And I want to make clear that this significant progress I 
am talking about was due to the incredible commitment, talent, 
and expertise of the SEC staff. The fiscal year 2015 budget 
request would permit the SEC to increase its examination 
coverage of investment advisers who everyday investors are 
increasingly turning to for investment assistance for 
retirement and family needs.

                           SEC FUNDING NEEDS

    While the SEC has made the most of its limited resources, 
we nevertheless were only able to examine 9 percent of 
registered investment advisers in fiscal year 2013. In 2004, 10 
years ago, the SEC had 19 examiners per trillion dollars in 
investment adviser assets under management. Today, in 2014, we 
have only eight. More coverage is plainly needed, and the 
industry itself has acknowledged that.
    Very importantly, this budget request would also allow us 
to better leverage technology across the agency to support a 
number of key initiatives.
    This budget request also allows us to continue augmenting 
our Division of Economic and Risk Analysis by adding financial 
economists and other experts to assist with economic analysis 
in rulemaking, risk-based selection for investigations and 
examinations, and structured data initiatives.

                           PREPARED STATEMENT

    I firmly believe that the funding we seek is fully 
justified by our important and growing responsibilities to 
investors, companies, and the markets. Your continued support 
will allow us to better fulfill our mission and to build on the 
significant progress the agency has achieved, which I am 
committed to continuing and enhancing.
    I would be pleased to answer any of your questions.
    [The statement follows:]
                Prepared Statement of Hon. Mary Jo White
    Chairman Udall, Ranking Member Johanns, and members of the 
subcommittee:
    Thank you for inviting me to testify today in support of the 
President's fiscal year 2015 budget request for the Securities and 
Exchange Commission.\1\ I appreciate the opportunity to describe why 
and how the SEC needs the $1.7 billion requested for the coming fiscal 
year in order to fulfill the obligations given to the agency by 
Congress to protect investors, maintain fair, orderly, and efficient 
markets, and facilitate capital formation.\2\
---------------------------------------------------------------------------
    \1\ A copy of the SEC's fiscal year 2015 Budget Congressional 
Justification can be found on our website at http://www.sec.gov/about/
reports/secfy15congbudgjust.shtml.
    \2\ The views expressed in this testimony are those of the Chair of 
the Securities and Exchange Commission and do not necessarily represent 
the views of the President, the full Commission, or any Commissioner. 
In accordance with past practice, the budget justification of the 
agency was submitted by the Chair and was not voted on by the full 
Commission.
---------------------------------------------------------------------------
    I am pleased by the SEC's accomplishments this past year. We 
adopted or proposed a substantial volume of mandated and other key 
rules. We aggressively enforced the securities laws, changing a key 
policy that can hold wrongdoers more publicly accountable and obtaining 
orders for penalties and disgorgement of $3.4 billion in fiscal year 
2013, the highest in the agency's history. We launched MIDAS and 
intensified our review of market structure issues, including high-
frequency and off-exchange trading practices. And we have continued to 
improve our efficiency by enhancing our technology, bringing in more 
experts, and deploying more risk-based analytics to allow us to do more 
with our limited resources, and to do so more quickly.
    And with last week being Public Service Recognition Week, I want to 
take this occasion to make clear that none of this would have been 
possible without the incredible commitment, talent, and expertise of 
the staff of the SEC.
    As described in more detail below, the requested budget level would 
allow the SEC to build upon its strong efforts and accomplish several 
key and pressing priorities, including:
  --Bolstering examination coverage for investment advisers and other 
        key areas within the agency's jurisdiction;
  --Strengthening our enforcement program's efforts to detect, 
        investigate, and prosecute wrongdoing;
  --Continuing the agency's investments in the technologies needed to 
        keep pace with today's high-tech, high-speed markets; and
  --Enhancing the agency's oversight of the rapidly changing markets 
        and ability to carry out its increased regulatory 
        responsibilities.
                  significant gains, but work remains
    The SEC's funding mechanism is deficit-neutral, which means that 
the amount Congress appropriates to the agency will not have an impact 
on the nation's budget deficit, nor will it impact the amount of 
funding available for other agencies.\3\ Our appropriation also does 
not count against the caps set in the bi-partisan Congressional budget 
framework for 2014 and 2015.
---------------------------------------------------------------------------
    \3\ Section 991 of the Dodd-Frank Act requires the SEC to collect 
transaction fees from self-regulatory organizations in an amount 
designed to directly offset our appropriation. The current fee rate is 
about $0.02 per every $1,000 transacted.
---------------------------------------------------------------------------
    Nonetheless, I deeply appreciate that I have a serious 
responsibility to be an effective and prudent steward of the funds we 
are appropriated. Since my arrival just over a year ago, we have made 
every effort to effectively deploy our funds to accomplish our mission 
and the goals that Congress has set for us. And, within the last year, 
we have advanced a significant number of rules and other initiatives 
across the wide range of our responsibilities with respect to the 
regulatory objectives mandated for the SEC by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (``Dodd-Frank Act'') and the 
Jumpstart Our Business Startups Act (``JOBS Act''), proposing or 
adopting rules concerning, among other things:
  --The registration and regulation of nearly a thousand municipal 
        advisors;
  --The cross-border application of our security-based swap rules in 
        the global swaps market;
  --Lifting the ban on general solicitation in certain private 
        offerings and proposing rules to provide important data and 
        investor protections for this new market;
  --Proprietary trading and investments in private funds by banks and 
        their affiliates, under what is commonly called the ``Volcker 
        Rule'';
  --Increasing access to capital for smaller companies by permitting 
        securities-based crowdfunding;
  --Programs required of broker-dealers, investment companies, and 
        other regulated entities to address risks of identity theft;
  --Further safeguarding the custody of customer funds and securities 
        by broker-dealers;
  --Updating and expanding the Regulation A exemption for raising 
        capital;
  --The retention of a certain amount of credit risk by securitizers of 
        asset-backed securities;
  --The removal of references to nationally recognized statistical 
        rating organization ratings in our broker-dealer and investment 
        company regulations; and
  --Enhancing risk management and other standards for the clearing 
        agencies responsible for the safe and efficient transfer of 
        trillions of dollars of securities each year.
    In addition, we put forward rule proposals to strengthen and reform 
the structure of money market funds and require that certain key market 
infrastructure participants have comprehensive policies and procedures 
to better insulate market infrastructure technological systems from 
vulnerabilities.
    We also have taken steps to enhance the SEC's already strong 
enforcement program, including by modifying the longstanding ``no 
admit/no deny'' settlement protocol to require admissions in certain 
cases. While no admit/no deny settlements still make a great deal of 
sense in many situations, because admissions achieve a greater measure 
of public accountability, they can bolster the public's confidence in 
the strength and credibility of law enforcement and in the integrity of 
our markets. Already the Commission has resolved a number of cases with 
admissions, and my expectation is that there will be more such cases in 
2014 as the new protocol continues to evolve and be applied. The 
Commission also has brought a number of significant enforcement cases 
across our regulatory spectrum, including actions against exchanges to 
ensure they operate fairly and in compliance with applicable rules, 
actions against auditors and others who serve as gatekeepers in our 
financial system, landmark insider trading cases, and additional cases 
against individuals and entities whose actions contributed to the 
financial crisis.
    In the past year, the Commission also has made great strides to 
improve its technology, including through the development of tools that 
permit us to better understand and protect the integrity of our markets 
and inform our exam program. In October 2013, the agency brought on-
line a transformative tool called MIDAS that enables us to analyze 
enormous amounts of trading data across markets almost instantaneously. 
The SEC's Quantitative Analytics Unit in our National Exam Program has 
developed groundbreaking new technology that allows our examiners to 
access and systematically analyze massive amounts of trading data from 
firms in a fraction of the time it has taken in years past. We are 
laying the technological foundation for unified access to SEC 
information, applications, and data across the agency, and are making a 
variety of other technological investments to enable us to meet our 
mission more efficiently and effectively.
    Despite this significant progress, there is much that the SEC still 
needs to accomplish. Completing the rulemakings and studies mandated by 
Congress in the Dodd-Frank and JOBS Acts remains among my top 
priorities. We must continue to seek to address structural concerns 
about our complex, dispersed marketplace in a responsible and 
empirically-based manner, and also continue our current review of the 
SEC's public issuer disclosure rules. We also need to continue to 
increase our capacity to examine and oversee the entities under the 
SEC's jurisdiction, as well as hold accountable those that harm 
investors through securities law violations. We are at a critical point 
in the deployment of more sophisticated technology tools and platforms, 
and it is vital that we have the resources necessary to continue 
modernizing our IT systems and infrastructure.
    The SEC needs significant additional resources to keep pace with 
the growing size and complexity of the securities markets and the 
agency's broad responsibilities. The agency currently oversees more 
than 25,000 market participants, including over 11,000 investment 
advisers, approximately 10,000 mutual funds and exchange-traded funds, 
4,450 broker-dealers, 450 transfer agents, 18 securities exchanges, as 
well as the Public Company Accounting Oversight Board (PCAOB), 
Financial Industry Regulatory Authority (FINRA), Municipal Securities 
Rulemaking Board (MSRB), Securities Investor Protection Corporation 
(SIPC), and Financial Accounting Standards Board (FASB). The SEC also 
has responsibility for reviewing the disclosures and financial 
statements of approximately 9,000 reporting companies, and has new and 
expanded responsibilities over the derivatives markets, an additional 
2,500 reporting advisers to hedge fund and other private funds, close 
to 1,000 municipal advisors, ten registered credit rating agencies, and 
seven registered clearing agencies. And, as you know, between the Dodd-
Frank and the JOBS Acts, the SEC was given nearly 100 new rulemaking 
responsibilities.
    The SEC's responsibilities are extensive and complex and its 
mission is critically important. The funding we are seeking is fully 
justified by our growing responsibilities to investors, companies, and 
the markets. With what I believe is a thoughtful and targeted approach 
to our resource challenges, the fiscal year 2015 budget request of $1.7 
billion would allow the SEC to hire an additional 639 staff in 
critical, core areas and enhance our information technology.
    Outlined below is a brief overview of some of the key components of 
our request.
expanding oversight of investment advisers and strengthening compliance
    There is an immediate and pressing need for significant additional 
resources to permit the SEC to increase its examination coverage of 
registered investment advisers so as to better protect investors and 
our markets. During fiscal year 2013, due to significant resource 
constraints, the SEC examined only about 9 percent of these advisers, 
comprising approximately 25 percent of the assets under management.
    The number of SEC-registered advisers has increased by more than 40 
percent over the last decade, while the assets under management by 
these advisers have increased more than two-fold, to almost $55 
trillion. At the same time, the industry has been increasing its use of 
new and complex products, including derivatives and certain structured 
products, employing technologies that facilitate high-frequency and 
algorithmic trading, and developing complex ``families'' of financial 
services companies with integrated operations that include both broker-
dealer and investment adviser affiliates. While the SEC has efficiently 
used its limited resources by improving its risk assessment IT 
capabilities and focusing its examination staff and resources on those 
areas posing the greatest risk to investors, in 2004, the SEC had 19 
examiners per trillion dollars in investment adviser assets under 
management. Today, we have only 8. More coverage is clearly needed as 
the status quo does not begin to provide sufficient protection for 
investors who increasingly turn to investment advisers for assistance 
navigating the securities markets and investing for retirement and 
family needs.
    A top SEC priority under the fiscal year 2015 request is to add 316 
additional staff to the examination program in its Office of Compliance 
Inspections and Examinations (OCIE). This would allow the agency to 
examine more registered firms, particularly in the investment 
management industry; build out the examination program to implement 
newly expanded responsibilities with respect to municipal advisors, 
swap market participants, private fund advisers, crowdfunding portals 
and other new registrants; and more effectively risk-target and monitor 
other market participants. Additionally, OCIE would also be able to 
continue ongoing efforts to enhance its risk assessment and 
surveillance through the development of new technologies in areas such 
as text analytics, visualization, search and predictive analytics.
                         bolstering enforcement
    Strong and effective enforcement of our Federal securities laws is 
central to the SEC's mission. In addition to modifying our settlement 
policy to require public admissions in certain cases, the Commission in 
the last year brought groundbreaking cases across the full range of the 
securities laws, including, among many others, a $615 million 
settlement of an insider trading case; a failure to supervise case 
against a prominent hedge fund adviser; actions against exchanges and 
municipal issuers; Foreign Corrupt Practices Act cases against large 
multinational corporations; and additional matters against individuals 
and entities whose actions contributed to the financial crisis.
    Notwithstanding these results, the SEC's Division of Enforcement 
faces a number of key challenges to preserve and enhance its ability to 
vigorously pursue the entire spectrum of wrongdoing within our 
jurisdiction. Our Enforcement work includes the detection, 
investigation, and litigation of violations of the Federal securities 
laws. In each of these areas, we face significant challenges:
  --Detection. We receive over 15,000 tips, complaints, and referrals 
        annually, including the more than 3,000 tips that flow into the 
        Division's Whistleblower Office, which generate a fresh stream 
        of case leads in need of investigation. The review and analysis 
        of these tips require significant human and technological 
        resources. We also have focused intensively on potential 
        misconduct in the equity markets and in connection with new 
        rules, including those implemented under the Dodd-Frank and 
        JOBS Acts. But detecting misconduct in constantly evolving 
        securities markets, including as a result of the growth of 
        algorithmic, automated trading and ``dark pools,'' requires 
        substantial resources.
  --Investigations. Technological advances across the industry allow 
        for more sophisticated schemes, which require improved 
        technology and significant resources to unravel. We also are 
        expanding our focus on financial reporting and auditing 
        misconduct cases, which are highly technical and labor 
        intensive.
  --Litigation. We have seen an increase in litigation and trials as we 
        focus more extensively on individual wrongdoing. And, the 
        recent change to our long-standing settlement policy that now 
        requires admissions in certain cases may lead to more 
        litigation. Success at trial is critical to our ability to 
        carry out our mission, and litigation, often against well-
        funded opposition.
    In order to meet the challenges of our rapidly changing and 
expanding markets, with increasingly complex products and more 
sophisticated wrongdoers, Enforcement seeks to hire 126 new staff, 
including additional legal, accounting, and industry specialized 
experts, primarily for investigations and litigation. These critical 
resources will enable us to improve our information processing and 
analysis, expand our investigative capabilities, strengthen our 
litigation capacity, and better use technology. In addition, the 
Division will continue to: (1) invest in technology that enables the 
staff to work more efficiently and effectively, and (2) collaborate 
with external stakeholders who assist in the Division's identification, 
investigation, and litigation of securities law violations, including 
wrongdoing that crosses borders.
                         leveraging technology
    The SEC is strongly committed to leveraging technology to 
streamline operations and increase the effectiveness of its programs. 
We are developing new analytic tools designed to process data more 
efficiently and make timelier and better-informed decisions. For 
example, we apply cutting-edge analytics, such as visual data analysis, 
to increase the speed with which the exam and enforcement program 
evaluate data and develop evidence. To support these tools, we are 
investing in our information technology infrastructure to store and 
process increased volumes of data. We generated over $18 million in 
cost avoidance in fiscal year 2013 through a more efficient data center 
structure, renegotiated contracts, server virtualization, and other 
process improvements. Our recently initiated Quantitative Research and 
Analytic Data Support program is structuring vast quantities of 
financial market data and making it more accessible across the agency. 
This program will enhance the quality and speed of data-driven analyses 
and, importantly, link disparate sources of data to allow staff to 
establish connections not previously possible.
    While the agency has made significant progress over the past few 
years in modernizing its technological systems, progress was set back 
by our level of funding in fiscal year 2014. Increased funding for 
these efforts and new technology investments are essential. The SEC's 
fiscal year 2015 budget request, which includes full use of the SEC 
Reserve Fund, would support a number of key information technology 
initiatives, including:
  --EDGAR modernization, a multi-year effort to simplify the financial 
        reporting process to promote automation and reduce filer 
        burden. EDGAR provides the most critical window into the 
        capital markets for investors and businesses. With a more 
        modern EDGAR, both the investing public and SEC staff will 
        benefit from having access to better data.
  --Enterprise Data Warehouse, a centralized repository for the 
        Commission to organize different sources of data, which can 
        help the public gain easier access to more usable market data, 
        which will facilitate easier and more effective analysis.
  --Data analytics tools, to assist in the integration and analysis of 
        large amounts of data, allowing for computations, algorithms 
        and quantitative models that can lead to earlier detection of 
        fraud or suspicious behavior. We have begun deploying these 
        tools on a limited basis within our enforcement and exam 
        programs, but due to current budget constraints have not yet 
        rolled them out more broadly. Under this request, more front-
        line staff, including those performing examinations and 
        investigations, would be able to leverage these tools to 
        efficiently identify links, anomalies, or indicators of 
        possible securities violations.
  --Examination improvements, to improve risk assessment and 
        surveillance tools and datasets that will help the staff 
        monitor for trends and emerging fraud risks, as well as 
        improving the workflow system supporting SEC examinations.
  --Enforcement investigation and litigation tracking, to support 
        Enforcement teams with the receipt and loading of the high 
        volume of materials produced during investigations and 
        litigation, to build the capability to permit the electronic 
        transmittal of data, and to implement a document management 
        system for Enforcement's internal case files.
  --SEC.gov modernization, to make one of the most widely used Federal 
        government websites more flexible, informative, easier to 
        navigate and secure for investors, registrants, public 
        companies, and the general public. SEC.gov receives more than 
        35 million hits per day, and there is high public demand for 
        quick and ready access to the tremendous amount of data 
        available there, including 21 million filings in the EDGAR 
        system and 170,000 documents on SEC.gov. When fully 
        implemented, the website will offer dramatically improved 
        search and filtering capabilities that will enhance the 
        transparency and availability of this data.
  --Tips, Complaints, and Referral (TCR) system enhancements, to 
        bolster flexibility, configurability, and adaptability. The TCR 
        system is the SEC's central repository of tips, complaints, and 
        referrals that maximizes our ability to search, track, and 
        route workflow for the high volume that the agency receives 
        each year (e.g., over 15,000 in fiscal year 2013). System 
        enhancements will provide automated triage of the items the 
        agency receives, as well as improved intake, resolution 
        tracking, searching, and reporting functionalities.
  --Information security, to upgrade security tools and processes, and 
        to develop and train staff to monitor, respond to, and 
        remediate ever-increasing risks and security threats and to 
        permit continuous risk monitoring.
  --Business process automation and improvement, to improve the 
        efficiency and effectiveness of the agency's processes, thereby 
        enabling us to better serve the public.
  strengthening oversight of the securities markets and infrastructure
    To effectively assess constantly evolving market activity across a 
wide range of complex trading venues, the SEC's Division of Trading and 
Markets must:
  --Enhance its effort to address market structure and technology 
        developments, including through MIDAS and other tools that 
        facilitate the analysis of trade and order data that reflects, 
        for example, high-frequency trading and trading on off-exchange 
        venues where pre-trade prices are not typically available to 
        the public;
  --Continue its work with self-regulatory organizations (SROs) to 
        enhance critical market infrastructures that are essential for 
        the operation of the securities markets; and
  --Expand its oversight of clearing agencies, large broker-dealers, 
        exchanges, and other major securities market participants.
    Further, in fiscal year 2015 we expect a significant number of new 
registrants under the Dodd-Frank and JOBS Acts as registration 
requirements under those laws go into effect, including dealers and 
other participants in the security-based swap market and crowdfunding 
portals. Additional resources are needed to undertake these new market-
related responsibilities, including staff focused on market 
supervision, analytics and research, and derivatives policy and trading 
practices. Accordingly, for these core and new responsibilities, in the 
fiscal year 2015 budget request the SEC proposes to add 25 positions in 
its Division of Trading and Markets.
enhancing corporate disclosure reviews and supporting implementation of 
                              the jobs act
    For fiscal year 2015, the SEC requests 25 new positions for its 
Division of Corporation Finance. These resources are needed for 
Corporation Finance to continue its multi-year effort to enhance its 
disclosure review program for large or financially significant 
companies, meet the increased workload resulting from expected improved 
market conditions and additional emerging growth companies 
confidentially submitting registration statements for non-public 
review, provide increased interpretive guidance, and evaluate trends in 
the increasingly complex offerings of asset-backed securities and other 
structured financial products. During fiscal year 2015, Corporation 
Finance also will continue to implement the rulemakings required by the 
Dodd-Frank and JOBS Acts and move forward on a comprehensive initiative 
to update the disclosure requirements for reporting companies.
   focusing on economic and risk analysis to support rulemaking and 
               structured data and risk-based initiatives
    The SEC's Division of Economic and Risk Analysis (DERA) works to 
integrate analysis of economic, financial, and legal disciplines with 
data analytics and quantitative methodologies in support of the SEC's 
mission. DERA is our most rapidly growing division, having more than 
doubled since its creation in late 2009. In fiscal year 2014, we are 
planning to hire 45 additional staff for DERA, primarily for additional 
financial economists and other experts to perform and support economic 
analyses and research and further enhance our risk assessment 
activities. In fiscal year 2015, we seek to add 14 positions in DERA, 
primarily financial economists and other experts who significantly 
assist with:
  --The rulemaking process by providing the Commission and staff with 
        economic analysis and technical advice;
  --Data analysis for risk-based selection of firms and issues for 
        inquiries, investigations and examinations; and
  --Improving structured data initiatives in order to enable the 
        Commission, investors, and other market participants to more 
        systematically and efficiently analyze and draw conclusions 
        from large quantities of financial information.
    DERA also seeks to hire additional technologists with mathematical 
and statistical programming experience to support the activities of the 
Division, including by assisting with the development of risk 
assessment models and risk metrics, data analytics, and economic 
analysis in the agency's rulemakings.
       enhancing monitoring of the investment management industry
    In the past 10 years, the number of portfolios of mutual funds, 
exchange-traded funds, and closed-end funds has increased by 17 
percent, and assets under management held by those funds has increased 
by 123 percent to $16 trillion. And significantly, during that period, 
complexity in the investment management industry has increased 
dramatically, reflecting growing sophistication in product design and 
portfolio strategies.
    For fiscal year 2015, the SEC requests 25 new positions for its 
Division of Investment Management. With additional resources, 
Investment Management plans to:
  --Improve the reporting of information about fund operations and 
        portfolio holdings by mutual funds, closed-end funds, and 
        exchange traded funds;
  --Continue to build capacity to manage and analyze data filed by 
        hedge funds and other private funds;
  --Bolster the technical expertise of Investment Management's 
        disclosure review program to, among other things, identify 
        trends and monitor the risks related to the growth and 
        increased product sophistication in the asset management 
        industry; and
  --Enhance the ability of Investment Management's Risk and 
        Examinations Office to manage, monitor, and analyze industry 
        data, and provide ongoing financial analysis of the asset 
        management industry.
            enhancing training and development of sec staff
    Nothing is more critical to the agency's success than the expertise 
of the SEC's staff. And providing in-depth and up-to-date training is 
essential for the staff to maintain and enhance its expertise over our 
constantly changing markets. Historically, the SEC's training budget 
has not matched that of its Federal financial regulatory agency peers. 
The agency is requesting to increase its staff training budget in 
fiscal year 2015 principally to support training and development for 
employees directly involved in examinations, investigations, fraud 
detection, litigation, and other core mission responsibilities of the 
SEC. This will consist of specialized training about new trends in the 
securities industry and changing market conditions, as well as 
analytics and forensics. The investment in training also will allow the 
SEC to provide continuing education courses that staff are required to 
take to maintain necessary legal and financial credentials.
                               conclusion
    Thank you for your support of the agency's vital mission and the 
opportunity to present the President's fiscal year 2015 budget request. 
I would be happy to answer your questions.

    Senator Udall. Thank you very much.
    And Acting Chairman Wetjen, please proceed.

                  COMMODITY FUTURES TRADING COMMISSION

STATEMENT OF HON. MARK P. WETJEN, ACTING CHAIRMAN
    Mr. Wetjen. Good afternoon, Chairman Udall, Ranking Member 
Johanns, and members of the subcommittee.
    Thank you for inviting me today to the hearing on the 
President's fiscal year 2015 funding request for the 
Commission.
    In my written remarks, I respond to the subcommittee's 
request to detail on how the Commission has used its resources 
in the previous 2 fiscal years. My goal this afternoon is to 
provide this subcommittee with context to the important role 
the Commission plays in the financial system and the economy as 
a whole, as well as the important role this committee plays in 
helping our agency achieve its mission.
    As you know, the Commission was directed by Congress to 
police the derivatives markets, which includes futures, 
options, and swaps. The CFTC also has continued its effort to 
implement the new regulatory framework for the swaps market 
required under Dodd-Frank.
    The operation and integrity of the derivatives markets are 
critical to the efficient functioning of the global financial 
system and the economies it supports. Without them, a farmer 
cannot lock in a price for his crop; a small business cannot 
lock in an interest rate that would otherwise fluctuate, 
perhaps raising its costs; a global manufacturer cannot lock in 
a currency value, making it harder to plan and grow its global 
business; and a lender cannot manage its assets and balance 
sheet to ensure it can continue lending. The derivatives 
markets better enable these enterprises to do what they do 
best--create jobs and grow the economy.
    When not overseen properly, failures of firms or other 
irregularities in the markets can severely and negatively 
impact the economy and cause dramatic losses for individual 
participants. This is why appropriately funding the Commission 
is so important.

                         CFTC RESPONSIBILITIES

    Measured in percentage terms, the Commission's funding 
level today is substantially larger than it was through much of 
the last decade. Previous funding increases were necessary and 
appreciated. Nonetheless, the growth of the Commission's 
responsibilities, including under Dodd-Frank, have 
significantly outpaced the growth in the agency's budget. 
Consequently, today the Commission is underfunded.
    The markets the Commission oversees and the agency's 
related responsibilities have grown by a variety of different 
measures. For instance, the notional value of derivatives 
centrally cleared by clearinghouses was estimated to be $124 
trillion in 2010 and is now approximately $223 trillion. That 
is nearly a 100 percent increase.
    Now more than ever, a clearinghouse's failure to follow the 
Commission's regulations--designed to ensure proper risk 
management--could have significant consequences to the economy. 
The amount of customer funds managed by clearinghouses and 
futures commission merchants was $177 billion in 2010 and is 
now over $218 billion, a nearly 40 percent increase.
    The Commission's rules are designed to ensure customer 
funds are safely kept by these firms, and a failure to provide 
appropriate oversight increases the chance of risky practices, 
placing customer funds at risk.
    By one measure, the total number of registrants and 
registered entities overseen directly by the Commission has 
increased by at least 40 percent in the last 4 years. This 
includes 102 swap dealers, two major swap participants, and 
more than three dozen registered entities, which include 
clearinghouses and trading venues.
    The CFTC also oversees more than 4,000 advisers and 
operators of managed funds, some of which have significant 
outward exposures across financial markets. Additionally, the 
Commission directly or indirectly supervises approximately 
another 64,000 registrants, yet the agency's current onboard 
staff is just 648 employees.
    The registered entities the Commission oversees are, by and 
large, well-run firms that perform important services for their 
customers. Nevertheless, those relying upon them, as well as 
the American public, deserve assurance that the risks the firms 
pose are being mitigated by an agency capable of meaningful 
oversight.

                  FISCAL YEAR 2015 REQUEST PRIORITIES

    This year's budget request is a significant step towards a 
longer-term funding level that is necessary to fully and 
responsibly fulfill the agency's mission. It recognizes the 
immediate need for an appropriation of $280 million and 
approximately 920 full-time equivalents, which is heavily 
weighted toward examinations, surveillance, and technology 
functions. The request balances the need for more technological 
tools to monitor the markets, detect fraud and abuse, and 
identify risk and compliance issues with the need for expert 
staff to analyze and make use of the data.

                           PREPARED STATEMENT

    Without additional funding, the consequences are plain: the 
Commission will be forced to perform fewer and less thorough 
examinations of registered entities, including those deemed 
systemically important or that steward customer funds; it will 
be less able to develop analytical systems to effectively 
perform surveillance of markets becoming increasingly 
automated; it will be deterred in its mandate to collect and 
analyze swaps data in an effort to enhance market transparency; 
and it will be less able to timely investigate and prosecute 
enforcement cases to address customer harm or threats to market 
integrity.
    Thank you for inviting me today, and I will be happy to 
answer any questions.
    [The statement follows:]
               Prepared Statement of Hon. Mark P. Wetjen
    Good afternoon, Chairman Udall, Ranking Member Johanns and members 
of the subcommittee. Thank you for inviting me to today's hearing on 
the President's fiscal year 2015 funding request and budget 
justification for the Commodity Futures Trading Commission 
(``Commission'' or ``CFTC'').
    During the last 2 years, despite significant budgetary constraints, 
the CFTC has made important progress in fulfilling its mission. As you 
know, under the Commodity Exchange Act, the Commission has oversight 
responsibilities for the derivatives markets, which include futures, 
options, cash, and swaps. Each of these markets is significant. 
Collectively, they have taken on particular importance to the U.S. 
economy in recent decades and, as a consequence, have grown 
substantially in size, measuring hundreds of trillions of dollars in 
notional value. Their operation and integrity are critical to the 
effective functioning of the U.S. and global economies.
    At their core, the derivatives markets exist to help farmers, 
producers, small businesses, manufacturers and lenders focus on what 
they do best: providing goods and services and allocating capital to 
reduce risk and meet Main Street demand. Well-regulated derivatives 
markets facilitate job creation and the growth of the economy by 
providing a means for managing and assuming prices risks and broadly 
disseminating, and discovering, pricing information.
    Stated more simply, through the derivatives marketplace, a farmer 
can lock in a price for his crop; a small business can lock in an 
interest rate that would otherwise fluctuate, perhaps raising its 
costs; a global manufacturer can lock in a currency value, allowing it 
to better plan and grow its global business; and a lender can manage 
its assets and balance sheet to ensure it can continue lending, fueling 
the economy in the process.
    Essentially, these complex markets facilitate the assumption and 
distribution of risk throughout the financial system. Well-working 
derivatives markets are key to supporting a strong, growing economy by 
enabling the efficient transfer of risk, and therefore the efficient 
production of goods and services. Accordingly, it is critical that 
these markets are subject to appropriate governmental oversight.
    Mr. Chairman, Ranking Member, and subommittee members, I do not 
intend the testimony that follows to sound alarmist, or to overstate 
the case for additional resources, but I do want to be sure that 
Congress, and this subcommittee in particular, have a clear picture of 
the potential risks posed by the continued state of funding for the 
agency. When not overseen properly, the derivatives markets may 
experience irregularities or failures of firms intermediating in them--
events that can severely and negatively impact the economy as a whole 
and cause dramatic losses for individual participants. The stakes, 
therefore, are high.
  the cftc's responsibilities have grown substantially in recent years
    The unfortunate reality is that, at current funding levels, the 
Commission is unable to adequately fulfill the mission given to it by 
Congress: to prevent disruptions to market integrity, protect customer 
assets, monitor and reduce the build-up of systemic risk, and ensure to 
the greatest extent possible that the derivatives markets are free of 
fraud and manipulation.
    Recent increases in the agency's funding have been essential and 
appreciated. They have not, however, kept pace with the growth of the 
Commission's responsibilities, including those given to it under Dodd-
Frank.
    Various statistics have been used to measure this increase in 
responsibilities. One often-cited measure is the increase in the gross 
notional size of the marketplace now under the Commission's oversight. 
Other measures, though, are equally and perhaps more illustrative.
                      trading volume has increased
    For instance, the trading volume of CFTC-regulated futures and 
options contracts was 3,060 million contracts in 2010 and rose to 3,477 
million in 2013. Similarly, the volume of interest rate swap trading 
activity by the 15 largest dealers averaged 249,564 swap events each in 
2010, and by 2012, averaged 332,484 each (according to the 
International Swaps and Derivatives Association (``ISDA'') data). Those 
transactions, moreover, can be executed in significantly more trading 
venues, and types of trading venues, both here and abroad. In addition, 
the complexity of the markets--its products and sophistication of the 
market tools, such as automated-trading techniques--has increased 
greatly over the years.
                    clearing houses manage more risk
    The notional value of derivatives centrally cleared by clearing 
houses was $124 trillion in 2010 (according to ISDA data), and is now 
approximately $223 trillion (according to CFTC data from swap data 
repositories (``SDRs'')). That is nearly a 100 percent increase. The 
expanded use of clearinghouses is significant in this context because, 
among other things, it means that the Commission must ensure through 
appropriate oversight that these entities continue to properly manage 
the various types of risks that are incident to a market structure 
dependent on central clearing. A clearinghouse's failure to adhere to 
rigorous risk management practices established by the Commission's 
regulations, now more than ever, could have significant economic 
consequences. The Commission directly oversees 15 registered 
clearinghouses and two of them, Chicago Mercantile Exchange, Inc., and 
ICE Clear Credit LLC, have been designated as systemically important by 
the Financial Stability Oversight Council.
     clearing houses and intermediaries manage more customer funds
    The amount of customer funds held by clearinghouses and futures 
commission merchants (``FCMs'') was $177 billion in 2010 and is now 
over $218 billion, another substantial increase. These are customer 
funds in the form of cash and securities deposited at firms to be used 
for margin payments made by the end-users of the markets, like farmers, 
to support their trading activities. Again, Commission rules are 
designed to ensure customer funds are safely kept by these market 
intermediaries, and a failure to provide the proper level of oversight 
increases the risk of certain practices by firms, including operational 
risks or fraud. In fact, recent events in the FCM community led to the 
temporary or permanent loss of more than a billion dollars of customer 
funds.
   substantially larger number of firms now registered with the cftc
    The total number of registrants and registered entities overseen 
directly or indirectly by the Commission, depending on the measure, has 
increased by at least 40 percent in the last 4 years. This includes 102 
swap dealers and two major swap participants (``MSPs'').
    In addition, the CFTC oversees more than 4,000 advisers and 
operators of managed funds, some of which have significant outward 
exposures in and across multiple markets. It is conceivable that the 
failure of some of these funds could have spill-over effects on the 
financial system. In all cases, investors in these funds are entitled 
to know their money is being appropriately held and invested.
    Additionally, the Commission directly or indirectly supervises 
another approximately 64,000 registrants, mostly associated persons 
that solicit or accept customer orders or participate in certain 
managed funds, or that invest customer funds through discretionary 
accounts. Although it leverages the resources of the self-regulatory 
organizations (``SROs''), the Commission itself must oversee these 
registrants in certain areas and provide guidance and interpretations 
to the SROs. The Commission does so with a total staff of only 648 
employees currently onboard--about 1 percent of the number of 
registrants under its purview. Separately, the Commission must oversee 
more than three dozen registered entities, including clearinghouses and 
trading venues, each of which is subject to a complex set of regulatory 
requirements newly established or modified by the Dodd-Frank Act and 
designed to mitigate systemic risk.
    By almost any measure, in fact, the portfolio of entities that the 
Commission is charged with overseeing has expanded dramatically in size 
and risk over the last half decade. The intermediaries in the 
derivatives markets are by and large well-run firms that perform 
important services in the markets and for their customers. 
Nevertheless, collectively, these firms can potentially pose risks--in 
some cases significant risks--to the financial system and the broader 
economy. Accordingly, those relying upon these firms and the public 
deserve assurance that such firms are supervised by an agency capable 
of meaningful oversight.
    the cftc has made important progress but has been significantly 
                              constrained
    For much of fiscal year 2013, the CFTC operated under continuing 
resolutions, which extended the fiscal year 2012 appropriation of $205 
million. These appropriations, however, were subject to sequestration. 
Effectively, our operating budget for fiscal year 2013 was $195 
million. Thus, the fiscal year 2014 appropriation of $215 million was a 
modest budgetary increase for the Commission, lifting the agency's 
appropriations above the sequestration level of $195 million that has 
posed significant challenges for the agency's orderly operation. As 
directed by Congress, the agency has submitted a fiscal year 2014 Spend 
Plan outlining its allocation of current resources, which reflects an 
increased emphasis on examinations and technology-related staff.
    Even with these significant budget constraints, the dedicated staff 
of the Commission were able to complete the majority of new rulemakings 
required by the Dodd-Frank Act--about 50 rulemakings in all. This was 
in addition to the Commission's ongoing work overseeing the futures 
exchange and options markets. These regulatory efforts resulted in 
greater transparency, which is critical to reducing systemic risk and 
lowering costs to end-users, while improving efficiency and supporting 
competition.
    With regard to technology, we made progress in a variety of areas. 
We improved the quality of data reported to swap data repositories and 
have laid groundwork to receive, analyze and promulgate new datasets 
from SROs related to new authorities. We upgraded data analytics 
platforms to keep up with market growth. Financial risk surveillance 
tools were enhanced to support monitoring and stress testing related to 
new authorities. The Commission has prototyped a high-performance 
computing platform that dramatically reduces data analytics computation 
times and an on-line portal for regulatory business transactions to 
improve staff and industry productivity. The Commission has implemented 
enhanced position limit monitoring and is ready to implement pre-trade 
and heightened account ownership and control surveillance. Finally, the 
Commission has ensured that foundational server, storage, networking, 
and workstation technology are refreshed on a cost-effective cycle and 
that technology investments have cybersecurity and business continuity 
built-in.
    In its role as a law enforcement agency, the Commission's 
enforcement arm protects market participants and other members of the 
public from fraud, manipulation and other abusive practices in the 
futures, options, cash, and swaps markets, and prosecutes those who 
engage in such conduct. As of May 1, 2014, the Commission filed 31 
enforcement actions in fiscal year 2014 and also obtained orders 
imposing more than $2.2 billion in sanctions. By way of comparison, in 
fiscal year 2013, the Commission filed 82 enforcement actions, and 
obtained orders imposing more than $1.7 billion in sanctions.
    With the bulk of rulemaking behind us, the necessary focus must be 
examinations, market supervision and enforcement. Simply stated, this 
requires appropriate staffing and technological resources sufficiently 
robust to oversee what are highly advanced, complex global markets, and 
be able to take effective and timely enforcement action.
  the fiscal year 2015 request prioritizes examinations, technology, 
                   market integrity, and enforcement
    The President's fiscal year 2015 budget request reflects these 
priorities and highlights both the importance of the Commission's 
mission and the potential effects of continuing to operate under 
difficult budgetary constraints.
    The request is a significant step towards the longer-term funding 
level that is necessary to fully and responsibly fulfill the agency's 
core mission: protecting the safety and integrity of the derivatives 
markets. It recognizes the immediate need for an appropriation of $280 
million and approximately 920 staff years full-time equivalents 
(``FTEs'') for the agency, an increase of $65 million and 253 FTEs over 
the fiscal year 2014 levels, heavily weighted towards examinations, 
surveillance, and technology functions.
    In this regard, the request balances the need for more 
technological tools to monitor the markets, detect fraud and 
manipulation, and identify risk and compliance issues, with the need 
for staff with the requisite expertise to analyze the data collected 
through technology and determine how to use the results of that 
analysis to fulfill the Commission's mission as the regulator of the 
derivatives markets. Both are essential to carrying out the agency's 
mandate. Technology, after all, is an important means for the agency to 
effectively carry out critical oversight work; it is not an end in 
itself.
    In light of technological developments in the markets today, the 
agency has committed to an increased focus on technology. The fiscal 
year 2015 budget request includes a $15 million increase in technology 
funding above the fiscal year 2014 appropriation, or about a 42 percent 
increase, solely for IT investments.
    In my remaining testimony, I will review three of the primary 
mission priorities for fiscal year 2015.
                              examinations
    The President's request would provide $38 million and 158 FTEs for 
examinations, which also covers the compliance activities of the 
Commission. As compared to fiscal year 2014, this request is an 
increase of $15 million and 63 FTEs.
    I noted earlier that the Commission has seen substantial growth in, 
among other things, trading volumes, customer funds held by 
intermediaries in the derivatives markets, and margin and risk held by 
clearinghouses. Examinations and regulatory compliance oversight are 
perhaps the best deterrents to fraud and improper or insufficient risk 
management and, as such, remain essential to compliance with the 
Commission's customer protection and risk management rules.
    The Commission has a direct examinations program for clearinghouses 
and designated contract markets, and it will soon directly examine swap 
execution facilities and SDRs. However, the agency does not at this 
time have the resources to place full-time staff on site at these 
registered entities, even systemically-important clearing 
organizations, unlike a number of other financial regulators that have 
on-the-ground staff at the significant firms they oversee. The 
Divisions of Market Oversight and Clearing and Risk collectively have a 
total of 47 examinations positions in fiscal year 2014 to monitor, 
review, and report on some of the most complex financial market 
operations in the world.
    The Commission today performs only high-level, limited-scope 
reviews of the nearly 100 FCMs holding over $218 billion in customer 
funds and 102 swap dealers. In fact, the Commission currently has a 
staff of only 38 to examine these firms, and to review and analyze, 
among other things, over 1,200 financial filings and over 2,400 
regulatory notices each year. This staff level is less than the number 
the Commission had in 2010, yet the number of firms requiring its 
attention has almost doubled, and there has been a noted increase in 
the complexity and risk profile of the firms. Additionally, although it 
has begun legal compliance oversight of swap dealers and MSPs, the 
Commission has been able to allocate only 13 FTEs for this purpose. 
This number is insufficient to perform the necessary level of oversight 
of the newly registered swap dealer entities.
    In fiscal year 2014, the Commission overall will have a mere 95 
staff positions dedicated to examinations of the thousands of different 
registrants that should be subject to thorough oversight and 
examinations. The reality is that the agency has fallen far short of 
performance goals for its examinations activities, and it will continue 
to do so in the absence of additional funding from Congress. For 
example, as detailed in the Annual Performance Review for fiscal year 
2013, the Commission failed to meet performance targets for system 
safeguard examinations and for conducting direct examinations of FCM 
and non-FCM intermediaries. The President's budget request 
appropriately calls on Congress to bolster the examinations function at 
the agency, and it would protect the public, and money deposited by 
customers, by enhancing the examinations program staff by more than 66 
percent in fiscal year 2015.
    Moreover, if Congress fully funds the President's request, the 
Commission can move toward annual reviews of all significant 
clearinghouses and trading platforms and perform more effective 
monitoring of market participants and intermediaries. Partially funding 
the request will mean accepting potentially avoidable risk in the 
derivatives markets as the Commission is forced to forego more in-depth 
financial, operational and risk reviews of the firms within its 
jurisdiction. Thus, the Commission would be reactive, rather than 
proactive in regard to firm or industry risk issues.
                    technology and market integrity
    The fiscal year 2015 request also supports a substantial increase 
in technology investments relative to fiscal year 2014, roughly a 42 
percent increase. The $50 million investment in technology will provide 
millions of dollars for new and sophisticated analytical systems that 
will, in part, assist the Commission in its efforts to ensure market 
integrity. As global markets have moved almost entirely to electronic 
systems, the Commission must invest in technology required to collect 
and analyze market data, and to handle the unprecedented volumes of 
transaction-level data provided by financial markets.
    The President's fiscal year 2015 budget request supports, in 
addition, 103 data-analytics and surveillance-related positions in the 
Division of Market Oversight alone, an increase of more than 98 percent 
over the fiscal year 2014 staffing levels. Market surveillance is a 
core Commission mission, and it is an area that depends heavily on 
technology. As trading across the world has moved almost entirely to 
electronic systems, the Commission must make the technology investments 
required to collect and make sense of market data and handle the 
unprecedented volumes of transaction-level data provided by financial 
markets.
    Effective market surveillance, though, equally depends on the 
Commission's ability to hire and retain experienced market 
professionals who can analyze extremely complex and voluminous data 
from multiple trading markets and develop sophisticated analytics and 
models to respond to and identify trading activity that warrants 
investigation. The fiscal year 2015 investment in high-performance 
hardware and software therefore must be paired with investments in 
personnel that can employ technology investments effectively.
    Accordingly, to make use of existing and new IT investments, the 
fiscal year 2015 request would provide funding for 193 FTEs, an 
increase of 74 FTEs over fiscal year 2014. These new staff positions 
are necessary for the Commission to receive, analyze, and effectively 
surveil the markets it oversees. These new positions, together with the 
technology investments included in the fiscal year 2015 request, will 
enable the Commission to make market surveillance a core component of 
our mission.
    The CFTC has invested appropriated funds in fiscal year 2013 and 
fiscal year 2014 in technology to make important progress. We have the 
groundwork in place to receive and effectively analyze swaps 
transaction data submitted to repositories and SROs related to new 
authorities. The fiscal year 2015 request would provide funding to 
continue and increase the pace of progress in the areas noted above and 
also support the additional examination, enforcement, and economic and 
legal staff. Effective use of technology is essential to our mission to 
ensure market integrity, promote transparency, and effectively surveil 
market participants.
                              enforcement
    The President's fiscal year 2015 request would provide $62 million 
and 200 FTEs for enforcement, an increase of $16 million and 51 FTEs 
over fiscal year 2014. The simple fact is that, without a robust, 
effective enforcement program, the Commission cannot fulfill its 
mandate to ensure a fair playing field. From fiscal year 2011 to date, 
the Commission has filed 314 enforcement actions and also obtained 
orders imposing more than $5.4 billion in sanctions.
    The cases the agency pursues range from sophisticated manipulative 
and disruptive trading schemes in markets the Commission regulates, 
including financial instruments, oil, gas, precious metals and 
agricultural products, to quick strike actions against Ponzi schemes 
that victimize investors. The agency also is engaged in complex 
litigations related to issues of financial market integrity and 
customer protection. By way of example, in fiscal year 2013, the CFTC 
filed and settled charges against three financial institutions for 
engaging in manipulation, attempted manipulation and false reporting of 
London Interbank Offered Rate (LIBOR) and other benchmark interest 
rates.
    Such investigations continue to be a significant and important part 
of the Division of Enforcement's docket. Preventing manipulation is 
critical to the Commission's mission to help protect taxpayers and the 
markets, but manipulation investigations, in particular, strain 
resources and time. And once a case is filed, the priority must shift 
to the litigation. In addition to requiring significant time and 
resources at the Commission, litigation requires additional resources, 
such as the retention of costly expert witnesses.
    In 2002, when the Commission was responsible for the futures and 
options markets alone, the Division of Enforcement had approximately 
154 people. Today, the agency's responsibilities have substantially 
increased. The CFTC now also has anti-fraud and anti-manipulation 
authority over the vast swaps market and the host of new market 
participants the agency now oversees. In addition, the agency is now 
responsible for pursuing cases under our enhanced Dodd-Frank authority 
that prohibits the reckless use of manipulative or deceptive schemes. 
Notwithstanding these additional responsibilities, however, total 
enforcement staff has shrunk--there are currently only 147 members of 
the enforcement staff. The President's budget request would bring this 
number to 200. More cops on the beat means the public is better assured 
that the rules of the road are being followed.
    In addition to the need for additional enforcement staff and 
resources, the CFTC also believes technology investments will make our 
enforcement staff more efficient. For instance, the fiscal year 2015 
request would support developing and enhancing forensic analysis and 
case management capabilities to assist in the development of analytical 
evidence for enforcement cases. In fiscal year 2013 and fiscal year 
2014, appropriated funds invested in information technology have 
enabled the Commission to continue enhancing enforcement and litigation 
automation services, including a major upgrade to the document and 
digital evidence review platform that will enable staff to keep pace 
with the exploding volume of data required to successfully conduct 
enforcement actions.
    A full increase for enforcement means that the agency can pursue 
more investigations and better protect the public and the markets. A 
less than full increase means that the CFTC will continue to face 
difficult choices about how to use its limited enforcement resources. 
At this point, it is not clear that the agency could maintain the 
current volume and types of cases, as well as ensure timely responses 
to market events.
other fiscal year 2015 priorities: international policy coordination & 
                      economic and legal analysis
    The global nature of the derivatives markets makes it imperative 
that the United States consult and coordinate with international 
authorities. For example, the Commission recently announced significant 
progress towards harmonizing a regulatory framework for CFTC-regulated 
Swap Execution Facilitys (SEFs) and EU-regulated multilateral trading 
facilities (``MTFs''). The Commission is working internationally to 
promote robust and consistent standards, to avoid or minimize 
potentially conflicting or duplicative requirements, and to engage in 
cooperative supervision, wherever possible.
    Over the past 2 years, the CFTC, SEC, European Commission, European 
Securities and Markets Authority, and other market regulators from 
around the globe have been meeting regularly to discuss and resolve 
issues with the goal of harmonizing financial reform. The Commission 
also participates in numerous international working groups regarding 
derivatives. The Commission's international efforts directly support 
global consistency in the oversight of the derivatives markets. In 
addition, the Commission anticipates a significant need for ongoing 
international policy coordination related to both market participants 
and infrastructure in the swaps markets. The Commission also 
anticipates a need for ongoing international work and coordination in 
the development of data and reporting standards under Dodd-Frank rules. 
Dodd-Frank further provided a framework for foreign trading platforms 
to seek registration as foreign boards of trade, and 24 applications 
have been submitted so far.
    Full funding for international policy means the Commission will be 
able to maintain our coordination efforts with financial regulators and 
market participants from around the globe. If available funding is 
decreased, we will be less able to engage in cooperative work with our 
international counterparts, respond to requests, and provide staffing 
for various standard-setting projects. The President's fiscal year 2015 
request would enable the Commission to sustain its efforts, providing 
$4.2 million and 15 FTEs that would be dedicated to international 
policy.
    In addition, for fiscal year 2015, the President's budget would 
support $24 million and 92 FTEs to invest in robust economic analysis 
teams and Commission-wide legal analysis. Compared to the fiscal year 
2014 Spending Plan, this request is an increase of $4 million and 18 
FTEs. Both of these teams support all of the Commission's divisions.
    The CFTC's economists analyze innovations in trading technology, 
developments in trading instruments and market structure, and 
interactions among various market participants in the futures and swaps 
markets. Economics staff with particular expertise and experience 
provides leverage to dedicated staff in other divisions to anticipate 
and address significant regulatory, surveillance, clearing, and 
enforcement challenges. Economic analysis plays an integral role in the 
development, implementation, and review of financial regulations to 
ensure that the regulations are economically sound and subjected to a 
careful consideration of potential costs and benefits. Economic 
analysis also is critical to the public transparency initiatives of the 
Commission, such as the Weekly Swaps Report. Moving into fiscal year 
2015, the CFTC's economists will be working to integrate large 
quantities of swaps market data with data from designated contract 
markets and swap execution facilities, and large swaps and futures 
position data to provide a more comprehensive view of the derivatives 
markets.
    The legal analysis team provides interpretations of Commission 
statutory and regulatory authority and, where appropriate, provides 
exemptive, interpretive, and no-action letters to CFTC registrants and 
market participants. In fiscal year 2013, the Commission experienced a 
significant increase in the number and complexity of requests from 
market participants for written interpretations and no-action letters, 
and this trend is expected to increase into fiscal year 2015.
    A full increase for the economics and legal analysis mission means 
the Commission will be able to support each of the CFTC's divisions 
with economic and legal analysis. Funding short of this full increase 
or flat funding means an increasingly strained ability to integrate and 
analyze vast amounts of data the Commission is receiving on the 
derivatives markets, thus impacting our ability to study and detect 
problems that could be detrimental to the economy. Flat funding also 
means the Commission's legal analysis team will continue to be 
constrained in supporting front-line examinations, adding to the delays 
in responding to market participants and processing applications, and 
hampering the team's ability to support enforcement efforts.
                               conclusion
    Effective oversight of the futures and swaps markets requires 
additional resources for the Commission. This means investing in both 
personnel and information technology. We need staff to analyze the vast 
amounts of data we are receiving on the swaps and futures markets. We 
need staff to regularly examine firms, clearinghouses, trade 
repositories, and trading platforms. We need staff to bring enforcement 
actions against perpetrators of fraud and manipulation. The agency's 
ability to appropriately oversee the marketplace hinges on securing 
additional resources.
    Thank you again for inviting me today, and I look forward to your 
questions.

    Senator Udall. Thank you both for your testimony.
    And we will now proceed on 7-minute rounds of questions.

                        CFTC MISSION ACTIVITIES

    Chairman Wetjen, the CFTC's budget justification submitted 
to the committee suggests that the fiscal year 2015 request, 
and I quote from that budget justification, ``A significant 
step towards the longer-term funding level that is necessary to 
fully and responsibly fulfill the agency's core mission.''
    What do you consider to be the optimum funding level 
necessary for the CFTC to fully and responsibly perform its 
work? What functions would the CFTC not be able to adequately 
address if the funding level enacted for 2015 is less than the 
full $280 million requested?
    Mr. Wetjen. Thank you, Chairman, for the question.
    This request is especially focused on three key areas for 
the agency and with regard to the agency's mission. The key 
mission activities are enforcement, surveillance, and 
examinations. And as I just said in my opening statement, we 
are not going to be able to do as much as we should, I believe, 
in each of those three key areas.
    So we are not going to be able to do as many examinations 
of some of these critical entities and intermediaries in our 
marketplace. I mentioned clearinghouses. There is a tremendous 
and enormous amount of risk that is now being housed at 
clearinghouses. That has increased quite substantially in 
recent years. We have 15 clearinghouses under our jurisdiction, 
and we are able to annually examine 2 of them which have been 
deemed systemically important.
    We have, with current staffing, been able to get around to 
some of the other clearinghouses as well, but we are not in a 
position with the current staffing to examine all 15 of those 
on a regular basis. So the staff has been forced to make 
judgments about which clearinghouse might be a little more 
risky than others and focus attention in that way. And I think 
ideally--again, just focusing on the category of 
clearinghouses--you would have examinations of all of them on 
an annual basis.
    Senator Udall. How about the optimum level? Do you have a 
thought on that?
    Mr. Wetjen. Well, the $280 million request I think gets us 
very, very close to optimal, based on my judgment. The request 
this year is slightly below what was asked for last year.
    Primarily that was because we wanted to be respectful of 
the direction the Congress gave us in passing the budget 
resolution, which called for a very modest increase in overall 
discretionary spending. So in light of that, it seemed 
appropriate to adjust the request this year accordingly.
    Senator Udall. Thank you.
    Chair White, the SEC is seeking $1.7 billion for fiscal 
year 2015. This would be a 26 percent increase in resources 
compared to the level enacted for the current year.

                       KEY PRIORITIES FOR THE SEC

    What are the top priorities to which these additional 
resources will be devoted? What consequences can be expected if 
the funding level approved for the SEC is less than the amount 
requested by the President?
    Ms. White. The priorities are to fund our exam program, our 
enforcement program, our--really, our core areas, including our 
Division of Economic and Risk Analysis.

                  IMPORTANCE OF SUFFICIENT SEC FUNDING

    I don't think we can overstate the importance of sufficient 
funding, what we request in this budget request, for 
technology. We are at a critical juncture at the SEC with a 
number of our systems enhancements, a number of our risk-based 
tools that allow us to be smarter and more efficient in 
detecting problems in the marketplace, including emerging 
frauds.
    Just as an illustration, I alluded to this in my oral 
testimony as well--there are 11,000 registered investment 
advisers now under the SEC's jurisdiction. And under current 
levels, we were only able to cover 9 percent of those last 
year. And that is using very smart, targeted, risk-based tools 
to go to the areas where we think the highest risk is.
    But there are 40 percent of those investment advisers who 
have not been examined. So that is a very, very high priority 
for us, as it was in the 2014 request, but we did not actually 
receive funding for that.
    Strong enforcement of our Federal securities laws is always 
at the top of our highest priority list, along with others. And 
this budget request does seek 126 additional enforcement staff, 
including market experts, which I think is enormously important 
to do our job better and more efficiently.
    So if we were not to receive funding at that level, clearly 
all of our functions really across the board would suffer. I 
have tried to illustrate the areas of greatest need, and 
certainly our request is intended to be quite targeted and 
surgical to those core needs.
    We obviously have the new responsibilities that you alluded 
to in your opening remarks to implement the reforms in the 
over-the-counter securities-based swap markets. We have new 
advisers we are responsible for. All of that needs to be 
implemented as well as, obviously, the rules put in place.

                          WALL STREET REFORMS

    Senator Udall. Thank you.
    In a couple of months, we will mark the fourth anniversary 
of the enactment of comprehensive Wall Street reforms aimed at 
strengthening the oversight in the wake of the financial crisis 
of 2008. And recent analysis by outside monitoring entities 
reflect that of the 398 total rulemakings required under Dodd-
Frank, 95--24 percent--are under the jurisdiction of the SEC, 
and 60--15 percent--are under the jurisdiction of the CFTC.
    A report by Davis Polk analysts issued last month indicates 
that of the 95 rules under the SEC, 42--that is 44 percent--had 
been finalized, and 10--11 percent--have not yet been proposed. 
Of the 60 CFTC rules, 50--83 percent--have been finalized, and 
3--5 percent--have not yet been proposed.
    Both of you, I am interested in hearing how the independent 
progress reports square with your agency's own internal 
tracking of your implementation timetable. I think the best 
thing for me to do is come back to that question, let Senator 
Johanns question, because I have a couple of additional 
questions on that. And if you can keep that in mind, I may end 
up repeating some of that.
    Senator Johanns, I am going to go to you for questioning at 
this point.

                        BUDGET INCREASE REQUEST

    Senator Johanns. Thank you, Mr. Chairman.
    Chairman Wetjen, let me get started with you. If you look 
at the Budget Control Act and then the Ryan-Murray agreement 
that was reached last fall after, as you know, some very, very 
difficult negotiations, total discretionary spending is due to 
increase this year by about $1.4 billion--or in the next budget 
year, I should say. That is less than 1 percent increase over 
last year.
    So I think the bipartisan message sent to everybody is that 
this is going to be very tight, very challenging, very 
difficult. However, in the budget request we get from CFTC, you 
are asking for a 30 percent increase.
    Now, I think by anybody's definition that is significant. 
But it is especially high when you recognize what everybody 
else is faced with across the Federal Government.
    So I would ask you a couple questions. One is how do you 
justify it, recognizing that colleagues across the Federal 
Government with very important missions like yours are also 
going to be held to this agreement?
    And then, second, what if it doesn't happen? Do you have 
contingency plans as to how you will deal with that and how you 
will get your budget in line with what the Ryan-Murray 
agreement calls for?
    Mr. Wetjen. Thank you, Senator, for the question.
    The request was based on a number of different factors. But 
first and foremost, what are we responsible for doing under the 
law? And again, I will go back to the three key areas of our 
agency's mission--enforcement, surveillance, and examinations.
    Those are the key mission activities. But meanwhile, the 
number of entities we oversee has increased by a variety of 
different measures that I just recently went through in 
percentage terms that are even higher than the percentage 
increase we sought with our budget request this year.
    And so, I think our first responsibility--or my first 
responsibility in my capacity at the moment is trying to make 
my best judgment and best case for the kind of funding we need 
to make sure we are complying with the law. And so, that formed 
the basis of this.
    And as I said before, we recognize the passage of the 
budget agreement last year, and so we tried to be more modest 
this year in the request. But we have to make sure that we are 
executing on these key mission activities. Otherwise, I worry 
that we are not fulfilling our responsibilities to the American 
public.
    There is quite a bit at stake. As I tried to lay out in my 
testimony, there are enormous amounts of risk being managed by 
the firms that we oversee. That is why we have fulsome rule 
sets that they are required to comply with. It is primarily for 
that purpose, to make sure they are managing risk in an 
appropriate way.
    And unfortunately, we have seen over the past number of 
years the sorts of outcomes that can happen when they fail to 
do that or when they fail to follow our rules. So that is the 
basis for the request.
    Your second--remind me again, Senator, the second part of 
your question.
    Senator Johanns. The second part of the question is what if 
you don't get there? How are you going to----
    Mr. Wetjen. Right.
    Senator Johanns [continuing]. Describe for us how you are 
going to deal with that if your argument isn't adopted and your 
request isn't granted?
    Mr. Wetjen. Well, I think we will have to continue doing--
we would be forced to continue doing what we have been doing. 
And that is using our best judgment about which entities to 
examine, which ones we are going to have to take a pass on in a 
particular year, make judgments about which matters to pursue 
by way of investigations once some incident comes to light, 
whether by referral from another division within the agency or 
through some other way outside of the agency. Judgments will be 
have to made there--be made there.
    And as far as those cases that are already under 
development, enforcement cases under development, again, 
judgments will have to be made about how to allocate resources. 
Do we devote more to some cases based on, you know, certain 
risks of success or risk of not succeeding, and so it might 
involve an assessment of litigation risk in that way.
    So these are the sort of judgments you prefer not to have 
to make, given the responsibilities we have been given under 
the law.

                          TECHNOLOGY SPENDING

    Senator Johanns. In this general vein, let me ask a 
question about the technology piece of your budget.
    CFTC technology spending has grown less than 7 percent 
since fiscal year 2011. The overall budget is up by 12 percent 
during that same period of time. My concern is that the CFTC is 
operating with Selectric typewriters while the industry is 
operating with the latest technology, and I just worry that you 
are getting behind.
    It seems to me that what we are trying to achieve with your 
agency is a faster, more technological advanced agency than we 
have today that can keep up with what is going on in the 
marketplace. Not necessarily a bigger agency. Bigger doesn't 
necessarily solve the problems that you are dealing with out 
there.
    So tell us why the Commission has, it seems to me, 
downplayed technology investment while spending in other areas 
of the budget. It would seem to me technology would be critical 
for you to keep up.
    Mr. Wetjen. Sir, you are absolutely right. It is critical. 
And by no means should this year's request be viewed as 
downplaying the importance of technology. It is critically 
important.
    But what we have had to do, again, is given the fact that 
there are finite resources and trying to be responsible in our 
request and in light of other responsibilities of the agency, 
we just had to make a judgment about how much is appropriate to 
allocate to technology spending right now and how much is 
appropriate to spend on these other important mission 
activities.
    And as important as technology is, we still need human 
capital to use it and deploy it. And as important as technology 
is, we need to be doing our level best on these key functions 
such as examinations.
    And I hate to beat this drum continually, but these 
entities that we oversee are critically important, and the 
amount of risk that they house is very, very significant. And 
some of these intermediaries also manage billions and billions 
of dollars of customer money, and we have seen instances of 
FCMs, they are called, fail in the last number of years.
    And in the case of MF Global, we had more than $1.5 billion 
tied up in a bankruptcy proceeding. Now there is a variety of 
different reasons why MF Global failed, but the point is 
oversight is important, and the rules we have are designed to 
prevent that sort of incident from taking place.
    So $50 million is a slight increase, as you said, above 
where we have been spending currently. I would like to spend 
much more than that. But in the context of an overall budget 
request that has limitations, that was my best judgment about 
where we should be in the short term.
    Senator Johanns. Mr. Chairman, I will yield back to you. 
And I anticipate another round?
    Senator Udall. Yes, yes. Of course. Thank you, Senator 
Johanns.

                     STATUS OF MANDATORY RULEMAKING

    I outlined a little bit on that Davis Polk analysis and the 
numbers there. And going back to that question, how the 
independent progress report squares with your agency's own 
internal tracking of your implementation timetable. Yes? For 
both of you.
    Ms. White. Essentially, yes, whether the particulars match 
up precisely, essentially, they do. I mean, the SEC, as you 
mentioned in your opening remarks, was given nearly 100 
rulemakings by Dodd-Frank, and then some additional ones under 
mandated rulemakings and then additional ones under the JOBS 
Act.
    And I did from the beginning of my tenure and continue to 
prioritize the completion of those rulemakings under both Dodd-
Frank and the JOBS Act. And I am pleased with the progress. We 
have proposed or adopted about over 80 percent, but we clearly 
have a ways to go.
    Among those that we have adopted and proposed since I have 
been at the agency for about a year now, I think there are 20-
quite significant ones. Among those adopted, the Volcker rule 
is obviously one of them. The bad actor rule, which is very 
important to investors, specifies that certain offerings should 
not be exempt if they are associated with bad actors.
    We have proposed all of the title VII rulemakings under our 
jurisdiction and adopted some. It is a very high priority for 
2014 for us to complete those. We have adopted the municipal 
advisors rule. A number of others have been adopted. And again, 
we have completed nearly all the mandated studies that were 
assigned to us under Dodd-Frank.
    It is very important that these rulemakings are done, 
obviously, promptly--and that is certainly one of my 
commitments and one of the commitments I made at my 
confirmation--but also to be done well and to be done after 
careful and appropriate economic analysis. And so, you know, we 
are all very closely focused as one of our highest priorities 
on completing those mandated rulemakings under the Dodd-Frank 
Act and under the JOBS Act.

                           STAFFING EXPERTISE

    Senator Udall. Do you feel you have the necessary expertise 
on staff to adequately issue and enforce the rules required by 
Dodd-Frank?
    Ms. White. I think we have the necessary expertise on 
staff. Obviously, some of our rulemakings are also done jointly 
or in consultation with our fellow regulators, both 
domestically and internationally.
    But you make an excellent point, which is what we are 
talking about is not just adopting those robust, strong rules, 
but also then implementing them following their adoption. And 
that is one of my significant resource concerns, that we 
actually do have the resources to adequately and robustly 
implement and enforce those rules once they are adopted.
    Senator Udall. And do you have staffing plans adapted to 
bring on more expertise in areas that contributed to the 
financial crisis?
    Ms. White. Again, a very high priority of mine since I 
began was to bring on more experts, including economists. So 
you will see that prioritized in our budget again this year as 
it was last year with expertise certainly in areas that were 
involved in the financial crisis and also in modern-day issues 
with respect to our equity market structure.
    And we have done that in the enforcement space as well. So 
there is full understanding of the rules we are enforcing with 
the requisite expertise. And that is one of the very important 
things that we are seeking the funding for in this budget 
request.

                               RULEMAKING

    Senator Udall. Chair Wetjen, how are you coming on the 
rules that you are promulgating, the ones that are in the 
pipeline? Does it square pretty much with the independent 
analysts, or do you take issue with their numbers?
    Mr. Wetjen. No, I believe it does. The primary rulemakings 
that come to mind when I think about those that we were 
required to do under Dodd-Frank but have not yet finalized, it 
is the rulemaking for margin requirements for uncleared swaps, 
capital requirements for those firms entering into uncleared 
swaps, and then the third one would be a final rule on position 
limits, another rulemaking required under Dodd-Frank.
    So I believe that Davis Polk study had the same count--they 
might have mentioned one more, I believe you said. But those 
are the three that I think of in terms of unfinished business.
    On position limits, we proposed a rule there last fall. So 
staff is working on the common file, creating a response to 
that proposal.
    On the other two, staff is working on a re-proposal. Those 
were rulemakings that were actually proposed a couple of years 
ago. But in light of significant international work done 
through the auspices of a number of different key international 
organizations, the decision was made to actually re-propose the 
rule, those two rules. And so, we hope to have something in 
circulation for the Commission very, very soon on those two.
    Senator Udall. Now how would you characterize the efforts 
to harmonize rules among multiple regulators? Why don't you 
take a stab at that.
    Mr. Wetjen. Thank you sir.
    It is difficult. It is--everyone has their own 
responsibilities and obligations to their own country and to 
their own legislative bodies. But there has been considerable 
effort through some of these same international organizations I 
mentioned. The International Organization of Securities 
Commissions (IOSCO) is a key one that comes to mind.
    There is another group that was formed specifically related 
to derivatives reforms, the OTC Derivatives Regulators Group 
(ODRG) it is called. And so, those groups meet on a regular 
basis all in an effort to try and get countries to adopt 
reforms that are sufficiently comparable and comprehensive in 
nature.
    Senator Udall. Chair White.

                       COORDINATION IN RULEMAKING

    Ms. White. Yes. I think, again, a high priority we have 
both domestically and internationally is to try to--even on 
rulemakings that are not required to be joint, ensure that 
there is very close consultation and coordination to try to 
make them as robust, but as consistent or at least compatible 
as possible really around the globe.
    When you talk about the title VII rulemakings and the over-
the-counter derivatives market, that is obviously a uniquely 
global market. And so, we need to get that right. And I think 
we are all working very hard to try to do that.
    I think the fact that the agencies charged with 
implementing the Volcker rule actually worked together and came 
out with a joint rule, including the CFTC and the SEC, was 
enormously important, both to the strength of the rule and the 
consistency and certainty for the marketplace.
    Senator Udall. Thank you.
    Senator Moran, would you like to----
    Senator Moran. Mr. Chairman, thank you very much.
    Senator Johanns was--this may be based upon the 
relationship I have had with other CFTC chairmen--telling me 
that the presumption exists that if you are a Creighton grad, 
you can do no wrong.
    Chairman Wetjen, thank you very much for joining us today. 
I appreciated the conversation that we had in my office 
yesterday. You have indicated to me, and I have seen evidence 
of it, the desire to work hard to develop good, solid 
relationships with Congress, and I am very grateful for that. I 
look forward to accomplishing that as well with you. Let me 
just ask a question that in part we discussed yesterday.
    Implications of rulemakings mandated by Dodd-Frank. What 
are you able to do to mitigate what is always described as 
unintended consequences? You and I have been in touch in regard 
to a real-time reporting rule, which may unintentionally 
identify swap participants in transactions, and you indicated 
this is something you are looking into.
    Would you bring me up to date? And maybe can put on the 
record the conversation--the nature of the conversation we had 
yesterday and where you are headed.

                            REPORTING TRADES

    Mr. Wetjen. Thank you, sir.
    We did pass a rulemaking that puts in place a real-time 
reporting obligation of swaps activity. And depending on the 
entity or the counterparty in the trade, there is a timeline by 
which the party has to report their trade to the public.
    And the matter you and I discussed, as you know, relates to 
certain instruments that are not terribly liquid, meaning there 
is not a lot of trading activity in some of these products. And 
because of that fact, it becomes easier to identify the 
identity of one of the counterparties.
    And so this is a problem and a challenge for the agency 
because the statute does say one of the considerations that has 
to be made is that in this reporting obligation, the identity 
of the party not be revealed. On the other hand, there is 
tremendous public benefit in having information about a trade 
available as quickly as possible. That is very useful in terms 
of price discovery, which is one of the key functions of our 
marketplace.
    So that is where the tension is. And so, I have directed 
the staff at the CFTC to examine this problem, to look into it, 
and to see whether or not we can confirm that this is, in fact, 
a problem.
    The other analysis here is, again, I think we need to 
review what the statute says and look carefully at that and 
determine what was meant when we were cautioned not to have a 
reporting obligation that could reveal someone's identity. It 
is not like anyone said, ``Hey, it is so and so.'' But just 
that, again, so few people are trading in a particular 
instrument that the marketplace tends to figure out relatively 
easily who those parties are.
    So staff is looking at this. I actually had a conversation 
after you and I spoke yesterday, a follow-up conversation with 
the staff. They are doing a new type of analysis that I wasn't 
aware of when you and I spoke. So they are looking at another 
way to see if they can confirm some of what has been reported 
by the parties in these particularly illiquid swaps. So we will 
keep looking at it and keep you up to date.

           FINANCIAL STABILITY OVERSIGHT COUNCIL DESIGNATIONS

    Senator Moran. Thank you very much.
    Let me turn to the SEC. Chair White, thank you very much 
for your presence today. I am pleased to see you here, as I 
sometimes do in the Banking Committee as well.
    Two asset managers were recently graduated to Stage 2 of 
the Financial Stability Oversight Council (FSOC's) review 
process for systemically important financial institutions. And 
I am concerned that asset managers who simply administer 
customer accounts may be proceeding down a path of additional 
regulation that, in my view, may be inappropriate for that 
industry.
    Can you give me a better sense of how this designation 
process for asset managers is progressing at the FSOC, and 
given the understanding that the assets in question are not 
owned by the companies in question? And then I have a couple of 
follow-ups, I think, based upon what you say.
    Ms. White. I think although there have been media reports 
to the effect of your question, I don't think there has been a 
public announcement of the precise status, if any, with respect 
to specific asset managers, which is the protocol of the FSOC 
with respect to any company that might be considered.
    Senator Moran. That is encouraging. Because what I would 
ask you is--because I understand there is a roundtable 
discussion to occur in the next couple of weeks. And so, part 
of my concern is why are we making designations now when there 
is more work yet to be done?
    Ms. White. Well, again, I think that FSOC officials--the 
Secretary of Treasury, obviously, the chair of the FSOC--are 
engaged in a process of learning about and gathering data on 
the asset manager industry. Again, I can't go beyond what I can 
say publicly about the process otherwise.
    I think it is a good development that there is the asset 
manager conference on Monday, and it is a public forum, so that 
the representatives of the FSOC, staff of the member agencies 
will hear from the industry and other interested parties and 
knowledgeable parties.
    I do think it is important--and again, the FSOC is given 
the responsibility to decide whether there are systemically 
important institutions that aren't banks, are insurance 
companies, et cetera. And if so, if they pose systemic risk to 
the financial system, one of the powers Congress gave to FSOC 
was to designate.
    Now that doesn't say what that process should be, what the 
data should be before one does that. I think those are very 
important questions. And I think it is also very important--and 
actually, the OFR study, which came out in September about the 
asset management industry, not specific parties, pointed out 
the very fact that you mentioned, which is the asset manager 
business is an agency business.
    And so, when you are considering what, if any, systemic 
risk it may or may not pose, you are not talking about a 
balance sheet of positions. You are talking about an agency 
model. And I think it is very important that that be understood 
by all who are considering this and that the right expertise be 
brought to bear on that analysis.

        SIGNIFICANCE OF AGENCY RELATIONSHIP IN FSOC DESIGNATIONS

    Senator Moran. In your analysis, what is the significance 
of that agency relationship? How do you personally, or how do 
you at the SEC as chair, see this issue within your role at 
FSOC?
    Ms. White. Well, again, as the Chair, I am a member of 
FSOC, as you know. I think it is an extremely important factor.
    Essentially, if you are looking to what kinds of entities 
and why they may create systemic risks, if these assets are not 
yours and not on your balance sheet, that is a very different 
situation before you to assess in terms of whether such an 
entity, if it were to fail, fails in any sense similarly to a 
bank, which does carry positions on the balance sheet, 
obviously.
    So I think it is a critical fact. Not the only fact to look 
at, but a critical distinction between asset managers and some 
of the other entities that have been considered.
    Senator Moran. Thank you both. My time has expired.
    Senator Udall. Senator Johanns.

                        CHANGES MADE AT THE SEC

    Senator Johanns. Chair White, if I could turn to you. If 
you look at the history of the SEC budget, even predating the 
Obama administration going back to the year 2000, the budget 
has grown from $377 million to $1.35 billion in 2014, very, 
very significant growth by any definition.
    But despite this tremendous growth in resources, the SEC--
and I acknowledge this was prior to your time. But it failed to 
detect Ponzi schemes like Madoff, Stanford; didn't sound the 
warning on the collapse of the U.S. financial system--or near 
collapse. That describes for me a very serious problem within 
the SEC. You may disagree with that. You may agree with that.
    But I would like you to spend some time, since this is a 
great opportunity for oversight, to talk to us on the committee 
about your view of what needs to be done to avoid a future 
Madoff, a future Ponzi scheme.
    What are you doing at the SEC that changes the culture of 
that dynamic of how people look at their role and 
responsibility in terms of dealing with characters like that 
and in terms of dealing with the financial system of the United 
States?

                   SEC ENHANCEMENTS AND IMPROVEMENTS

    Ms. White. I think several points there. One is--and the 
agency has obviously acknowledged this--that there were 
weaknesses and issues where before my arrival the agency had 
made significant progress on addressing, and very important 
that that did happen, I think.
    For example, in terms of a Ponzi scheme, today one of the 
items in our budget request that we are seeking to enhance even 
further is the tips, complaints, and referral system whereby we 
get about 15,000 complaints at the SEC every year. Three 
thousand plus of those come into our whistleblower office, but 
15,000 in toto, so to speak. And so, those are now all 
centralized, automated, assessed electronically, quickly, and 
sent out to where they need to be sent out.
    One of the enhancements that we actually weren't able to do 
last year because of the funding was to automate the triaging 
of those complaints. But there is no question that that 
feature, which did figure in those incidents you are 
mentioning, is now quite, quite different at the SEC.
    A number of other changes were made, both in the exam 
program--enhancement, improvements--and in the enforcement 
division as well. I mean, one of the things that I think is 
enormously strengthening the enforcement program, for example, 
is the specialty units, where you now have expertise residing 
in different market strata that the SEC is responsible for. And 
again, I think nothing is more important at the SEC than to 
have a very strong compliance function, very strong enforcement 
function.
    On the examination side, also enhancements, improvements 
have been made, really very significant ones. We have been 
helped by our technology there. We have been helped by our 
economists as part of that effort, which is basically that we 
now have technological tools that allow us to analyze, assess, 
and access massive amounts of data much more quickly.
    For example, one of our newer tools in the examination 
program is called NEAT, which is National Exam Analytics Tool. 
Basically, it allows our examiners when they go in to an 
investor adviser to examine, to look at all of their trading.
    And so, we have one instance recently where I think 17 
million transactions were accessed and analyzed in 36 hours. 
The SEC of yesterday couldn't have come close to that.
    And what do we do when we get that data analyzed? We look 
for patterns of insider trading. We look for Ponzi schemes. We 
look for front running. We look for other kinds of patterns 
that may suggest wrongdoing.
    So it is a much stronger SEC in those respects, I think. No 
one could responsibly sit here and say that any law enforcement 
agency will never miss a scheme going forward. But it is an 
extraordinarily strong enforcement and exam function today.

                      PREVENTION OF ANOTHER MADOFF

    Senator Johanns. Would you be confident in testifying to 
the subcommittee today that under the current atmosphere, the 
current approaches, that Madoff could not repeat what he did 
some years ago?
    Ms. White. From what I know of what occurred--and again, I 
wasn't here, but I have studied what occurred. I think the 
systems we were just talking about, among others, certainly at 
the SEC, I believe that activity would have been detected and 
proceeded upon.
    Again, you can never guarantee that you will catch every 
Ponzi scheme, every fraudster, every criminal in any agency. 
But I do think it has been built to prevent that from happening 
again.

        SEC'S ABILITY TO USE FUNDS IN AN ABBREVIATED TIME PERIOD

    Senator Johanns. The budget request you are making this 
year admittedly is sizeable. I appreciate you are a little bit 
different circumstance. But having said that, it is our job to 
provide oversight wherever the dollar comes from.
    Given recent past experience, history would probably tell 
us that we might be facing a continuing resolution and that you 
would not receive your full request for some period of time 
into the budget year. We haven't done a lot of budgets around 
here, unfortunately. Consequently, what would then happen is 
your budget request may be met in January, February, March of 
next year.
    Under those circumstances, would you in that limited period 
of time, between when you received that and the end of the 
fiscal year--the end of September 2015, would you be able to 
responsibly deal with that? Hire up the people you want to hire 
up, do the things you want to do, within an abbreviated period 
of time?

                            PRUDENT SPENDING

    Ms. White. I think there is no question, and we have done 
this in prior years as well. We take into account the 
likelihood of a continuing resolution, and how long it may 
last. And that clearly leads to prudent deferred spending. We 
do have no year funds, however, so that we are able to more 
flexibly deal with getting our money somewhat later in the 
year.
    But there is no question. One place where it is a 
particular challenge is in our long-term mission-critical 
information technology (IT) projects. I mean, for those of 
necessity, you need to know you have the money. And then there 
is a relatively lengthy procurement process. So they do present 
challenges.
    But I think our financial management folks, and I have 
talked at length to them about these issues as well, are geared 
up to be able to use if we would get the funding, as much of it 
as is possible. And then they can carry over and be able to use 
the funding in the following year, but having projected the 
uses for it in this year.
    Senator Johanns. I yield, Mr. Chairman.
    Senator Udall. Thank you very much, Senator Johanns.
    And thank you for those answers.

                              VOLCKER RULE

    I wanted to shift over to the Volcker rule, which you all 
know is a very, very important one. Chair White and Chairman 
Wetjen, on September 10, 2013, five Federal financial 
regulatory agencies issued uniform final regulations 
implementing the Volcker rule.
    The first question. How is the Volcker rule being enforced, 
and what is the relevant role of each of your agencies in 
overseeing compliance?
    Ms. White. I think the rule itself actually became 
effective April 1 of this year. But the compliance period is 
still out into 2015 and beyond that. It is a scaled compliance 
approach, both in terms of extent and also in terms of timing.
    And again, I think I alluded to this a few minutes ago, it 
is critical that the agencies did enact a joint rule. I think 
it is a better rule, a stronger rule, and it plainly for the 
marketplace was necessary to do that.
    And one of the commitments, and I actually said this in my 
opening statement when the SEC adopted the rule, is that we 
need to be focused from this day forward on continuing that 
coordination as we get into the compliance and enforcement 
period.
    And so, there is an interagency working group that all five 
agencies have very active senior members on who are focused on 
questions of interpretation, questions of compliance, questions 
of enforcement. And we will try to stay as consistent and in 
sync as we can. We are obviously independent agencies at the 
end of the day.
    With respect to entities who are covered by the rule--for 
example, broker-dealers--the SEC is the primary regulator 
there. And so, we will have the voice as to whether there is 
compliance or not and proceed with enforcement, but we will 
still coordinate with each other on questions of interpretation 
that affect compliance and enforcement.

                          AGENCY COORDINATION

    Senator Udall. Chair Wetjen, do you have thoughts on that?
    Mr. Wetjen. I would like to echo what Chair White said. I 
think there is a continued commitment to coordinating among the 
agencies.
    Another good example, in addition to what Chair White 
shared, is we actually issued an interim final rule, I believe 
that was late January, and it related to a special investment 
vehicle issue that materialized and had come to the attention 
of the agencies and to the Congress. And so, all five agencies 
adopted this interim final rule very, very rapidly.
    And again, I just think that is another example that there 
is a continued commitment to solve these problems jointly, 
again, in an effort to avoid any kind of uncertainty that not 
doing so could create for the marketplace. So I expect that to 
continue.

                       MONEY MARKET MUTUAL FUNDS

    Senator Udall. Shifting now to money market mutual funds. 
Chair White, as you know, Senator Johanns and I and several 
other Senators wrote to you at the SEC in 2012, highlighting 
the concerns raised by our local governments on changes to 
money market mutual funds. And I keep hearing from folks back 
home about this issue.
    In fact, a little over 2 weeks ago, I had a conference call 
with constituents representing local governments and businesses 
in New Mexico, and they continue to express concern about 
possible changes. As you know, local governments rely on these 
money market mutual funds as a cash management tool and as an 
important source of low-cost, short-term financing.
    Can you give us an update on where the SEC is on the rule? 
And how do you plan to address these concerns of local 
governments and others?
    Ms. White. Yes. The SEC commissioners and staff are 
actively involved, quite actively involved in finalizing those 
rules and those reforms of money market funds. They are a 
priority for 2014. I expect in the relative near term to 
proceed to finalizing those rules.
    As you know, when we proposed the rules, we proposed two 
alternatives. One is a floating net asset value (NAV) for prime 
institutional funds and the other a fees and gates approach. 
Government funds were actually exempted from the floating NAV, 
but municipalities weren't. I think that is the issue that is 
being raised.
    We have gotten a lot of comments on precisely that point. 
The staff has met with a number of representatives of 
municipalities expressing that concern. Should we go in that 
direction of a floating NAV, there is an exemption for retail 
funds, which would cover some of the municipal funds, but I 
think not all. We are very carefully focusing on all of the 
comments, but quite focused on the concern that has been 
expressed by the municipalities.
    Senator Udall. Right. Thank you very much.
    Senator Coons. Welcome. Good to have you here.

                               IT FUNDING

    Thank you. I appreciate the opportunity to join you and 
thank you both for your service and for the opportunity to 
discuss with you your proposals.
    If I might first ask CFTC Chair Wetjen, the core to your 
funding request is about investments in technology and staff. 
And your fiscal year 2015 request calls for a $15 million 
increase in IT funding.
    Could you just comment on the risks posed to your 
organization, on the markets if your IT infrastructure isn't 
upgraded or modernized, and what role it plays in your taking 
on an expanded role?
    Mr. Wetjen. Thank you, Senator Coons.
    We have a plan developed by our Office of Data and 
Technology on how to use the $50 million. It would include some 
enhancements to current systems we have in place which are 
necessary for surveillance purposes.
    And the one system I would point out is one that tries--
well, tracks positions taken on by market participants. And so, 
it is a critical tool that we have now, but it still needs to 
be enhanced if it is going to be as effective as possible.
    Going forward, I think what the agency should consider 
doing is investing in new initiatives, technological 
initiatives so that we can get a better understanding of not 
only consummated trading activity, but order messaging, which 
is something that happens a lot in automated markets.
    You have firms or entities sending in orders that don't 
always match with another counterparty. So it is important 
because some firms inappropriately might use a number of 
different order messages sent into a marketplace as a way to 
engage in some kind of a manipulative scheme. And so, going 
forward, you know, if we are able to get additional funding for 
IT, I think that is the next key initiative we might want to 
invest in.

                        CFTC ENFORCEMENT ACTIONS

    Senator Coons. You had a budget of roughly $200 million 
last year and collected north of $1.7 billion in fines. That is 
about an eightfold return on taxpayer investment. So I just 
wondered if you wanted to take a moment and explain, as an 
entity that literally pays for itself, what enforcement actions 
you pursued last year and how a more fully funded CFTC would 
benefit taxpayers, as well as benefit the marketplace.
    Mr. Wetjen. Yes, thank you, Senator, for that question.
    I think we initiated and completed around 150, 160 
enforcement actions last year, in fiscal year 2013, which, as 
you mentioned, resulted in over $1.5 billion in fine 
collections. So it was in that sense a good return on the 
investment, when you consider the level of funding for the 
agency.
    Right now, we are on pace to probably have fewer 
enforcement actions consummated and completed based on numbers 
midway through the year--midway through the fiscal year. There 
is a variety of reasons for that, but one of which is that we 
have lost some staff in the Division of Enforcement. So that 
does give you some indication about what the impact of reduced 
staffing can have.
    Again, there could be other reasons for that as well. It 
could just be the nature of incidents that have been brought to 
the attention of the agency this year are different than in 
years past, but it is one thing you might want to take a look 
at.
    So I have some concerns about that. That is one of the 
reasons why we have asked for additional attorneys for the 
Division of Enforcement at the agency. Our request would bring 
us roughly 50 additional FTEs. And again, I think we would 
continue to demonstrate with that enhanced team an ability to 
bring a good return for the taxpayer.
    Senator Coons. Thank you.
    Thank you for what you do, Chair White, at the SEC. I have 
a sense that you are charged with overseeing more than 25,000 
market participants roughly who engage in trillions of dollars 
worth of economic activity, and I think what the SEC does is, 
like the CFTC, critically important to a well-functioning 
capital market that is secure and transparent.

                        SEC ENFORCEMENT EFFORTS

    And as we continue to heal from the financial crisis, I 
think it is critical we take steps to ensure that doesn't 
happen again. Given the very broad range and significant 
expansion in your responsibilities and given that, as is the 
case I just referred to, you don't cost anything to the 
taxpayers, net-net, I support funding the President's request 
at $1.7 billion. But I would be interested in your comments on 
the trends of security frauds that you are seeing in current 
enforcement efforts and what sort of risks retail investors are 
exposed to. I would also be interested in how you see progress 
in rulemaking to implement the JOBS Act.
    Ms. White. In terms of the enforcement efforts, I think 
there is nothing more important than a strong, a very strong 
enforcement presence by the SEC to protect investors--retail, 
as well as institutional--to protect the integrity of our 
markets, to protect the markets so that capital formation will 
be facilitated.
    The SEC had, and much of this before I arrived, but in 
terms of the financial crisis cases, I think an extraordinarily 
strong record. The agency charged over 165, I think it was 169, 
entities and individuals. Seventy-plus of those were actually 
senior executives--chief executive officers (CEOs) and chief 
financial officers (CFOs). Enforcement actually got orders to 
return over $3 billion in fines and disgorgement. So there is 
obviously value--not only value added there, but it is actually 
returning under our Fair Funds provision money to investors.
    So we are just about through. We have some additional 
financial crisis cases that obviously we are focused on 
completing. One of the things that we have done--really, two of 
the things that we have done since I have been there to 
strengthen the enforcement function is to form two new task 
forces. One is a financial reporting and auditing task force, 
which I think is the core of investor protection. And that is 
something that is already yielding results for the benefit of 
investors and the markets.
    We have also formed a microcap fraud task force, which 
particularly targets that brand of securities fraud on retail 
investors.
    Another very disturbing pattern--and I have seen this when 
I was a prosecutor, too. And it is some of the most egregious 
frauds you see are what I call the affinity frauds, when 
somebody commits a Ponzi scheme or other kind of investment 
scam really against their own communities. And we are certainly 
seeing really a growth in those, and so we are very focused on 
dealing with those. We have brought a number of different 
cases.
    We have also intensified our enforcement efforts vis-aa-vis 
the obligations of exchanges to make sure they are following 
the various what I call the market structure rules of our 
equity markets, which I think is important to everyone.

                    INVESTMENT ADVISOR EXAMINATIONS

    And then one final point I would make is just talking 
earlier about our need for resources to increase the number of 
examinations we do of investment advisers. And of course, they 
are the ones that are really day-to-day dealing with your 
everyday investor, and we are only able to cover a very small 
percentage of those under current funding.
    And when we go to those places--and frankly, when we go to 
the broker-dealers we examine as well--we find a lot of issues. 
So it is these issues that make us at least understand the 
critical importance of sufficient funding to be able to carry 
out those responsibilities for investors.
    And actually, by just showing up on an exam--I think since 
fiscal year 2012, just showing up and pointing out, ``By the 
way, those fees should not have been charged to those investors 
or those funds. They should have been for your account.'' We 
have returned, I think, $28.8 million just by showing up. So it 
shows you across the span I think the benefits to investors.

                  SEC TRAINING FOR NON-U.S. REGULATORS

    Senator Coons. One last question, if I might, Mr. Chairman.
    One other area that I was surprised to see in your report 
is that I didn't realize you were engaged in training non-U.S. 
regulators.
    Ms. White. Yes.
    Senator Coons. It was roughly 1,700 in fiscal year 2013, I 
think it is 1,400 this fiscal year and next. What are the 
benefits of that program? How does it benefit us to provide 
training to non-U.S. regulators whose markets may not be as 
robust or scalable or secure?
    Ms. White. I think there has been significant benefit and 
has for decades, frankly, but even more so now. The securities 
markets, and certainly the securities frauds markets, are quite 
global. I mean, they don't respect borders.
    And so, I think the training that we provide is invaluable 
to the American investor who may well be defrauded from any 
country you could name abroad. If they have a strong 
enforcement function, we are protecting the American investors 
there.
    And we have seen an awful lot of progress. There is much 
more to go, but I think it is an invaluable service to the 
American investors. It is also I think an invaluable service 
really to the global markets and the integrity of them.
    Senator Coons. Thank you.
    Thank you, Mr. Chairman.
    Senator Udall. Senator Coons, thank you very much.
    Senator Johanns, please proceed.
    Senator Johanns. Mr. Chairman Wetjen, let me ask you a 
question. But let me also, if I might, lay some groundwork for 
this question so you know where I am coming from.

                          EFFECTS ON END-USERS

    I think all of us agree that the CFTC must have smart, 
forward-leaning regulation. The market changes so dramatically. 
And yet, we still have to be sensitive to the potential to 
over-regulate. We don't want to regulate everything that moves. 
So trying to be--to strike that balance I think is key.
    One example of regulatory overreach that I have been 
working on since Dodd-Frank passed is margin requirements on 
end-users when trading derivatives. I can state unequivocally 
Congress never intended for nonfinancial end-users to be 
subject to costly margin requirements, and yet here we are, 
almost 5 years later, still battling with this.
    So I have introduced legislation that exempts end-users 
from margin requirement. This is not a Republican versus 
Democrat issue. The measure has gained strong bipartisan 
support. A companion bill has already passed the House with 
over 400 votes.
    This is one of those things that should be done. I don't 
know of a Senator that opposes it. Maybe there is one out there 
that I haven't come across yet. But again, I think Congress is 
nearly unanimous on this.
    I asked Gary Gensler about it one time, and I always felt 
that he had a pretty aggressive view of regulating things. I 
think that is what he saw his job as, and he was going to 
regulate stuff. But he even agreed that nonfinancial end-users 
don't pose a risk to the system and, therefore, should not be 
burdened with what I would call a job-killing margin 
requirement.
    I would like you--I know this is an issue now in the Fed's 
hands, but I would like your thoughts personally, as the acting 
chair of the CFTC, on what I am trying to get done here.
    Mr. Wetjen. Senator, I agree with you that Dodd-Frank tried 
to, if I can use these words, hold harmless as much as possible 
the end-user community as it related to title VII in 
particular.
    Senator Johanns. Right.
    Mr. Wetjen. And we have a number of rules that provided 
exemptions from clearing requirements for end-users, and we 
have taken a number of different other actions as well to build 
out that general principle. And one specific area has to do 
with interaffiliate trades between companies that are not swap 
dealers. And so, we have done a considerable amount of work 
there.
    So I agree with you in principle that that was a message 
and intent behind Dodd-Frank. At least as it relates to title 
VII, end-users are supposed to largely be left out of the grip, 
so to speak, of the new rulemakings implementing title VII.
    I am not familiar with the details of the Fed's proposal, 
and I don't recall exactly where they are in the process. But I 
agree in principle with what you are saying as it relates to 
end-users in title VII.
    Senator Johanns. Mm-hmm. See, Mr. Chairman, the Creighton 
education kicks in, and good, practical, common sense stuff 
come out.
    Thank you. I will yield.
    Senator Udall. Senator Coons, did you have additional 
questions? Okay.
    Chair White, one of the key components of Dodd-Frank was a 
mandate that the SEC adopt a number of new rules relating to 
credit rating agencies. And all of us remember what a key role 
credit rating agencies played in the kind of meltdown that we 
were in back in that time period.
    And of these new rules, we included annual reports on 
internal controls, conflict of interest with respect to sales 
and marketing practices, various disclosure requirements, and 
consistent application of rating symbols and definitions.
    What is the status of the SEC's efforts to comply with the 
mandates under Dodd-Frank relating to credit rating agencies, 
and what further developments can we expect from the SEC on 
this?

                         CREDIT RATING AGENCIES

    Ms. White. A very important area, a very high priority for 
the agency.
    The agency did in January 2011 adopt, actually, a new rule 
requiring Nationally Recognized Statistical Rating 
Organizations (NRSROs) to disclose representations and 
warranties and how investors might enforce breaches of those. 
In May 2011, the agency proposed the rules you are alluding to. 
I think they proposed that 11 be amended to accomplish the 
objectives that you listed and 5 new ones. We are moving those 
forward quite actively, and they are a priority to complete 
this year.
    Senator Udall. Do you believe there are additional 
reporting requirements or controls necessary to prevent another 
crisis?
    Ms. White. There is no question in my mind that the credit 
rating agency issues played a significant role in the financial 
crisis. And I think the issues you have identified are ones 
that do need further reforms, and that is the objective of 
these rulemakings.
    Senator Udall. Okay. And I know that some of the critics 
have kind of come at this and said we should start over again. 
I assume that isn't the position of the SEC at this point.
    Ms. White. Well, we are certainly listening to all 
comments. Obviously, the formal comment period is closed, but 
we are listening very carefully to those who think that certain 
aspects perhaps should be re-proposed or done differently and 
perhaps not require a re-proposal.
    So we are trying to come out with very robust rules, and we 
are continuing to listen to all critics and all supporters and 
really all ideas on it.
    Senator Udall. Right. Thank you very much.
    Senator Johanns, do you have--and it looks like Senator 
Coons has completed his questioning here.
    Let me thank both of you. We really appreciate having you 
here today. We appreciate this frank discussion and exchange of 
ideas.
    We want to thank everyone who participated in preparing for 
this hearing. You have excellent staff. We do also, and we very 
much appreciate their help.
    Today's discussion I think has provided helpful insights 
into these--your operations and I think shows us what the 
challenges are that are ahead of us. This information will be 
instructive as we further consider the budget proposals and 
develop our fiscal year 2015 bill during the coming weeks.

                     ADDITIONAL COMMITTEE QUESTIONS

    The hearing record will remain open until next Wednesday, 
May 21 at 12 noon for subcommittee members to submit statements 
and/or questions to be submitted to the witnesses for the 
record.
               Questions Submitted to Hon. Mary Jo White
                Questions Submitted by Senator Tom Udall
        strengthening exams and oversight--frequency of reviews
    Question. The SEC's Office of Compliance, Inspections and 
Examinations (OCIE) is responsible for conducting examinations of the 
Nation's registered entities. These include broker-dealers, transfer 
agents, investment advisers, the securities exchanges, clearing 
agencies, as well as self-regulatory organizations.
    Chair White, your budget materials state that during fiscal 2013, 
the SEC was able to examine only about 9 percent of registered 
investment advisers. That means only 1 of every 12 of investment 
advisers is inspected. What do you believe would be a more suitable 
frequency?
    Answer. As you point out, during fiscal year 2013, the SEC examined 
about 9 percent of registered investment advisers, comprising 
approximately 25 percent of the assets under management. As I stated in 
my testimony, clearly more coverage is needed, as the status quo does 
not provide sufficient protection for investors who increasingly turn 
to investment advisers for assistance navigating the securities markets 
and investing for retirement and family needs.
    Examination staff uses a risk-based approach designed to focus its 
limited resources on those firms and practices that pose the greatest 
potential risk of securities law violations that can harm investors and 
the markets. These high-risk firms frequently are large and complex 
entities, and examinations of them often take significant time to 
complete.
    While we believe our risk-based approach has helped us to more 
efficiently use our resources to better protect investors, an increase 
of exam frequency to between 30 and 50 percent of investment adviser 
firms annually would further enhance our effectiveness and bring us 
closer to the current broker-dealer coverage level that, combined with 
examinations conducted by the Financial Industry Regulatory Authority, 
is approximately 50 percent.
    Going forward, we will continue to use technology and risk-based 
data analytics to be as efficient as possible with our limited 
resources.
    Question. What are the drawbacks of sporadic inspections?
    Answer. OCIE staff's direct engagement with registrants allows the 
staff to provide first-hand information to the Commission and other SEC 
staff regarding the activities of our regulated entities, helping us 
prevent fraud, identify compliance deficiencies, promote compliance, 
inform policy, and monitor risk. Less frequent examinations therefore 
limits the information available to the Commission in discharging its 
mission to protect investors, including by reducing the instances in 
which we may identify potential fraud and other wrongdoing and also 
reducing incentives for registrants to put in place rigorous internal 
controls and compliance programs.
    Sporadic or less frequent examinations also factor into business 
decisions that may not always be in the best interests of clients or 
customers. For example, OCIE staff has identified an increase in firms 
choosing to de-register as broker-dealers, or to conduct a greater 
percentage of their business as investment advisers. The staff believes 
that in some cases this shift could be due in part to the perception of 
less rigorous oversight of investment advisers.
    Question. Your request for fiscal 2015 seeks $373 million, a $72 
million increase for the exams function above current spending. This 
will support 316 additional staff positions above the 967 current 
level. What impact will those enhanced funds have on accelerating the 
frequency of exams?
    Answer. The number and percentage of investment advisers examined 
each year depends on a number of factors, including the type and scope 
of the examinations conducted, the program priorities, the complexity 
of the advisory business, and staffing levels. Of the 316 positions for 
OCIE, we anticipate using 240 for investment adviser exams.
    Our best estimate, as reflected in the budget request, is an 
investment adviser coverage level of 9 percent in fiscal year 2014 and 
12 percent in fiscal year 2015. The time it would take in fiscal year 
2015 to hire and train new employees likely means we would not realize 
the full effect from this staffing increase until future years. OCIE 
estimates that with the requested fiscal year 2015 staffing increase, 
the exam program would be able to cover at least 14-15 percent of the 
population in fiscal year 2016. This outcome could vary depending on a 
number of factors, including new program priorities or higher than 
expected staff attrition/turnover rates. To achieve an annual 
examination level of 30 percent to 50 percent would require incremental 
increases in subsequent budgets to permit the agency to hire and 
sufficiently train the necessary complement of examiners.
            market transformation and high-frequency trading
    Question. Chair White, as the leader of one of our key financial 
regulators, you are acutely aware of the growing challenges facing your 
agency in monitoring the markets. We now have significantly 
transformed, globalized, round-the-clock, and highly diversified 
marketplace. Stock exchanges can now execute trades in less than a half 
a millionth of a second.
    What is the current status of the SEC's oversight of high-frequency 
trading and automated trading environments?
    Does the SEC presently have the necessary talent and technology in 
place to monitor and analyze high-frequency trading, to inform your 
regulatory and enforcement work, and guard the integrity and safety of 
the markets? What are the deficiencies?
    Answer. Generally, the SEC's ability--in enforcement, examination, 
and regulation--to monitor and analyze high-frequency trading (HFT) 
activity in the U.S. markets has increased as more tools have become 
available to SEC staff, including software that can handle larger data 
sets and more advanced and powerful computers.
Data and Analysis of HFT Activity
    The SEC has developed improved data sources and capabilities that 
can be used to analyze HFT activity.
    Most prominently, we have launched an equity market structure 
website \1\ that builds on an analytical tool called MIDAS (Market 
Information Data Analytics System), which enables us to quickly analyze 
enormous amounts of trading data across markets.\2\ Though MIDAS does 
not identify individual firms, MIDAS data is now used in conjunction 
with existing investigations of specific firms. In particular, OCIE 
examiners and Enforcement staff use MIDAS to compare the individual 
trades and quotes of a particular firm (acquired from the firm itself) 
in the context of all other contemporaneous market trades and quotes. 
These types of analyses can help inform investigations on a variety of 
issues, such as those relating to insider trading and market 
manipulation.
---------------------------------------------------------------------------
    \1\ The web site is located at http://www.sec.gov/marketstructure/
and is broadly intended to promote a market-wide dialogue and fuller 
empirical understanding of the equity markets. It serves as a central 
location for SEC staff to publicly share evolving data, research, and 
analysis about HFT and other market structure issues.
    \2\ MIDAS is an SEC system that collects equity quote and trade 
data from the consolidated public tapes as well as the individual data 
feeds that are commercially available from each equity exchange. That 
system supports a variety of powerful applications across the SEC's 
enforcement, examination, and regulatory functions, including research 
to better understand a market structure with a significant amount of 
HFT trading. This research in turn helps better inform policy decisions 
related to market structure issues, including HFT.
---------------------------------------------------------------------------
    SEC staff also is now analyzing information that recently has 
become available to it though the Large Trader Reporting Rule \3\--
which provides SEC staff access to information about the trading 
activity of the largest market participants, including many HFT firms, 
upon request--into its policy-making, examination, and enforcement 
efforts.
---------------------------------------------------------------------------
    \3\ See Exchange Act Release No. 64976 (July 27, 2011), 76 FR 46959 
(August 3, 2011).
---------------------------------------------------------------------------
    Barriers to the development of comprehensive and reliable analyses 
of HFT remain, however, and include: (1) the limitations of available 
data; \4\ (2) the absence of a clear, commonly agreed definition of 
HFT; and (3) inherent complexities in the econometric techniques 
available for assessing the effect of HFT on market quality. To help 
surmount these barriers, the SEC is in the midst of an initiative to 
expand the data available to regulators. Specifically, in July 2012, 
the SEC adopted Rule 613, which requires the self-regulatory 
organizations to submit a national market system (NMS) plan to 
establish a consolidated audit trail (CAT) for NMS securities, across 
all U.S. markets, from the time of order inception through routing, 
cancellation, modification, or execution.\5\ When the consolidated 
audit trail is fully implemented, regulators will be able to readily 
tie all order and trade activity in NMS securities throughout the U.S. 
markets back to particular accounts and to properly sequence that 
activity in time. Fully implementing CAT is a high priority for the 
Commission.
---------------------------------------------------------------------------
    \4\ There currently is no comprehensive data source that enables 
regulators to tie all order and trade activity in the U.S. equity 
markets back to particular accounts. Accordingly, an exhaustive 
analysis of HFT activity is not possible at this time.
    \5\ See Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 
(August 1, 2012).
---------------------------------------------------------------------------
    A significant impediment to the SEC's ability to monitor and 
analyze HFT trading is the absence of comprehensive data that links 
orders and trades to individual market participants. Although current 
data resources allow the SEC to monitor and analyze overall market 
quality, questions regarding outcomes for end-users and intermediaries 
are often difficult to answer without account-level data. Data from CAT 
will facilitate many types of studies that are difficult to conduct 
with current data.\6\ CAT will also significantly improve regulators' 
ability to monitor the trading activity of individual firms, the 
overall level of HFT activity in the market, and the outcomes realized 
by end-users of the market.
---------------------------------------------------------------------------
    \6\ Examples of such studies include: how different types of market 
participants provide liquidity, and how liquidity provision from 
different market participants impact market quality at times of market 
stress; whether aggressive HFT strategies increase investor trading 
costs or serve to provide short-term liquidity at a premium; whether 
certain HFT strategies crowd out passive liquidity suppliers, and if 
so, how the costs of end-users are affected; and whether improvements 
in price efficiency allow liquidity providers to provide more liquidity 
to institutional orders.
---------------------------------------------------------------------------
Oversight of Operational Risks in Automated Trading
    To address the risk of instability and disruption that can arise in 
an automated trading environment, the SEC and the securities industry 
have undertaken a series of responsive initiatives. ``Limit up-limit 
down,'' for example, is now fully implemented and moderating price 
volatility in individual securities.\7\ Market-wide circuit breakers 
are in place to address volatility across the equities, options, and 
futures markets.\8\
---------------------------------------------------------------------------
    \7\ SEC Press Release No. 2012-107, ``SEC Approves Proposals to 
Address Extraordinary Volatility in Individual Stocks and Broader Stock 
Market'' (June 1, 2012).
    \8\ Id.
---------------------------------------------------------------------------
    The SEC has taken additional steps to require market participants 
to address their technology risks. We adopted--and are vigorously 
enforcing--the Market Access Rule, which requires brokers to have risk 
controls in place before providing their customers with access to the 
market.\9\ Last March, the Commission proposed Regulation Systems 
Compliance and Integrity (SCI) to put in place stricter requirements 
relating to the technology used by exchanges, large alternative trading 
systems, certain exempt clearing agencies, and securities information 
processors--the SIPs.\10\ The staff is now completing a recommendation 
for final rules.
---------------------------------------------------------------------------
    \9\ SEC Press Release No. 2010-210, ``SEC Adopts New Rule 
Preventing Unfiltered Market Access'' (November 3, 2010). One market 
access risk is the potential for erroneously submitting a single large 
order or a flood of small orders that disrupt trading. See SEC Press 
Release 2013-222, ``SEC Charges Knight Capital With Violations of 
Market Access Rule'' (October 16, 2013).
    \10\ SEC Press Release No. 2013-35, ``SEC Proposes Rules to Improve 
Systems Compliance and Integrity'' (March 7, 2013).
---------------------------------------------------------------------------
    The SEC has closely focused on certain market infrastructure 
systems that are ``single points of failure'' that can halt or severely 
disrupt trading when a problem occurs. The exchanges have responded 
with technology audits of the SIPs and a series of specific 
enhancements to improve SIP robustness and resilience. In addition, the 
exchanges have developed more robust SIP backup capabilities, and at 
the end of June 2014 implemented a new ``hot-warm'' backup, with a 10-
minute recovery standard.
Further Enhancements to HFT Oversight
    In addition, I recently publicly outlined a series of initiatives 
that will, among other things, enhance the SEC's oversight of HFT firms 
and automated trading tools.
  --The SEC staff is now developing a recommendation to the Commission 
        for an anti-disruptive trading rule that would address the use 
        of aggressive, destabilizing trading strategies in vulnerable 
        market conditions. Such a rule will need to be carefully 
        tailored to apply to active proprietary traders in short time 
        periods when liquidity is most vulnerable and the risk of price 
        disruption caused by aggressive short-term trading strategies 
        is highest.
  --The SEC staff is also preparing two recommendations for the 
        Commission that are focused on using our core regulatory tools 
        of registration and firm oversight: (1) a rule to clarify the 
        status of unregistered active proprietary traders to subject 
        them to our rules as dealers; and (2) a rule eliminating an 
        exception from Financial Industry Regulatory Authority (FINRA) 
        membership requirements for dealers that trade in off-exchange 
        venues. Dealer registration and FINRA membership should 
        significantly strengthen regulatory oversight over active 
        proprietary trading firms and the strategies they use.
  --Finally, the SEC staff is preparing recommendations for the 
        Commission to improve firms' risk management of trading 
        algorithms and to enhance regulatory oversight over their use.
    I also have asked the exchanges and FINRA to consider including a 
time stamp in the consolidated data feeds that indicates when a trading 
venue, for example, processed the display of an order or execution of a 
trade. With this information, users of the consolidated feeds would be 
able to better monitor the latency of those feeds and assess whether 
such feeds meet their trading and other requirements.
  enhancing corporate disclosure of material risk: climate change and 
                         environmental impacts
    Question. Generally, publicly traded companies disclose business 
risks to investors through regular financial reports (called ``10-K 
filings'') submitted to the SEC.
    Recently, there have efforts to ensure that environmental costs and 
risks are also reported to investors because they impact a company's 
bottom line. In July 2010, the SEC issued guidance requiring companies 
to address how climate change (and climate change regulation) could 
potentially impact their businesses. Like all SEC disclosures, this is 
aimed at informing market price and protecting investors. Yet, concerns 
have been raised that despite existing disclosure guidance, reporting 
by companies is not as robust as it should be. In response to this 
subcommittee's fiscal 2014 report, the SEC submitted an updated staff 
report focused on the quality, specificity, and thoroughness of 
disclosure related to climate change.
    I would be interested in hearing more about how the SEC is 
reviewing climate disclosures and the extent to which public companies 
are conforming to the guidance and making full disclosures.
    Answer. The Commission's 2010 Guidance Regarding Disclosure Related 
to Climate Change provides interpretive guidance about how companies 
should evaluate climate change related issues when considering what 
information to disclose to investors under existing disclosure 
requirements, such as risk factors or management's discussion and 
analysis. Companies that are subject to SEC disclosure rules must 
provide climate change related disclosure if the information is 
material. The U.S. Supreme Court has held that information is material 
if there is a substantial likelihood that a reasonable investor would 
consider it important in deciding how to vote or make an investment 
decision. Companies must consider their own particular facts and 
circumstances in evaluating whether information would be considered to 
be material.
    As you noted, the SEC submitted a report on public company 
disclosures about climate change related matters to the Subcommittee 
earlier this year. The staff of the Division of Corporation Finance 
prepared the report based on its survey of climate change related 
disclosures by a number of companies in selected industries. Of those 
companies surveyed, most included risk factor disclosure about climate 
change related matters. The companies surveyed also disclosed climate 
change related matters in the business, management's discussion and 
analysis, executive compensation discussion, and legal proceedings 
sections of their filings.
    The Division of Corporation Finance staff routinely reviews new 
issuer filings and periodic reports of public companies for compliance 
with applicable disclosure requirements and inclusion of material 
information. The goal of the staff's reviews is to monitor and enhance 
compliance with applicable disclosure requirements. In conducting its 
filing reviews, the staff will continue to consider whether a company 
has complied with applicable disclosure requirements, including with 
respect to climate change, in their filings. Where the staff has 
concerns about the adequacy of the disclosure in a filing, the staff 
will issue a comment letter asking the company for further explanation 
or additional disclosure.
             ecological disclosure--pollution externalities
    Question. There is also growing concern that while the SEC requires 
public companies to disclose certain financial information, its 
disclosures do not take into account the possible costs imposed on 
public by corporate activities that have an adverse impact or pose 
material risk to public health and the environmental such as pollution 
damages.
    What actions are underway at the SEC to evaluate public company 
disclosure of environmental and ecological risks?
    Answer. A number of Commission rules and regulations may trigger 
disclosure of the possible costs and environmental and ecological risks 
stemming from corporate activities, depending on a company's particular 
facts and circumstances. The following provisions of Regulation S-K may 
require disclosure of environmental and ecological risks and associated 
costs, based on a company's particular facts and circumstances.
  --Item 101 requires companies to disclose the material effects that 
        compliance with environmental laws may have upon the company, 
        as well as any material estimated capital expenditures for 
        environmental control facilities.
  --Item 103 requires disclosure of certain proceedings arising under 
        environmental laws, including proceedings that involve a claim 
        for damages, potential monetary sanctions, capital 
        expenditures, deferred charges or charges to income if the 
        amount involved exceeds 10 percent of the company's 
        consolidated assets.
  --Item 503(c) requires a discussion of significant risk factors, 
        which could include environmental and ecological risks.
  --Item 303 requires companies to identify and disclose known trends, 
        events, demands, commitments and uncertainties that are 
        reasonably likely to have a material effect on financial 
        condition or operating performance.
    The Division of Corporation Finance staff routinely reviews public 
company disclosures to monitor and enhance compliance with applicable 
disclosure requirements. Where the staff has concerns about the 
adequacy of the disclosure in a filing, including with respect to 
environmental and ecological risks and associated costs, the staff will 
issue a comment letter asking the company for further explanation or 
additional disclosure.
                        ustr special 301 report
    Question. The United States Trade Representative (USTR) ``Special 
301'' Report is an annual review of the state of intellectual property 
rights (IPR) protection and enforcement among our trading partners 
around world.
    Does the SEC or the major U.S. exchanges take into account a 
foreign company's inclusion in the USTR Special 301 Report when 
considering whether to permit the company to be publicly listed?
    Should the SEC or major U.S. exchanges take into account a foreign 
company's inclusion in USTR's Special 301 Report or its Special 301 
Out-of-Cycle Review of Notorious Markets before allowing the company to 
be publicly listed?
    What role do the SEC and major U.S. exchanges have in ensuring that 
US capital markets do not enrich companies that profit from 
intellectual property rights (IPR) infringement?
    Answer. The U.S. Federal securities regulatory system as applied to 
listed companies is based on the principle of full and fair disclosure 
of information to investors, and the Commission does not consider the 
merits of the transaction or company during the registration process. A 
company is, however, required to provide disclosure of material risks 
and litigation to which the company is subject, including any material 
risks associated with a company's intellectual property or the 
enforcement of rights related to intellectual property.
    As to the U.S. exchanges, section 6(b)(5) of the Exchange Act 
requires that, among other things, the rules of a registered securities 
exchange be designed to ``prevent fraudulent and manipulative acts and 
practices,'' ``promote just and equitable principles of trade,'' 
``remove impediments to and perfect the mechanism of a free and open 
market and a national market system,'' and ``protect investors and the 
public interest.'' The exchanges have adopted rules relating to the 
qualification, listing and delisting of foreign issuers on their 
markets, which have been determined by the Commission to be consistent 
with the Exchange Act. These rules, among other things, set forth 
financial, corporate governance, and disclosure requirements that 
issuers must comply with in order to be eligible for listing. 
Furthermore, the exchanges generally retain broad discretion in their 
rules to deny the listing of a company (or suspend dealings in, or 
delist, a company's securities once listed) even if the company meets 
the listing or continued listing standards, if the exchange determines 
there are circumstances that make the initial or continued listing of 
the company inadvisable or unwarranted. Thus, pursuant to this broad 
authority, an exchange could take into account a company's country's 
inclusion in the USTR Special 301 Report or the Special 301 Out-of-
Cycle Review of Notorious Markets when considering whether to permit 
the company to be publicly listed.
    We understand that the exchanges are considering adopting 
procedures to ensure companies on the Special 301 Out-of-Cycle Review 
of Notorious Markets list are identified in the listing application 
process and would generally not warrant listing. The USTR Special 301 
Report does not actually list foreign companies, but rather lists 
countries that have a particular problem with respect to intellectual 
property rights protection, enforcement, or market access for persons 
relying on such rights. To the extent a company from one of these 
foreign countries has applied to list on an exchange and has disclosed 
that there is a material risk or litigation about an issue related to 
intellectual property rights, the listing exchange would inquire about 
the issue and take it into consideration when considering the listing 
application of the company.
                         executive compensation
    Question. The Dodd-Frank Wall Street Reform and Consumer Protect 
Act required a number of regulations on executive compensations to 
allow for greater transparency and to discourage the excessive risk 
taking that contributed to the economic crisis, including those 
outlined in section 956. There was also significant outcry after it was 
reported that banks who relieved taxpayer bailouts awarded their top 
executives nearly $1.6 billion in salaries, bonuses and other benefits 
the following year.
    On March 2, 2011, the SEC issued a proposed rule made jointly with 
other regulators that would require certain financial institutions to 
disclose the structure of their incentive-based compensation and 
prohibit compensation that encourages inappropriate risks.
    What is the expected timeline for the rule to be finalized?
    How does the SEC plan to address the criticisms of the proposed 
rule?
    Does the SEC believe that the proposed rule would have discouraged 
the troubling practices that contributed to the economic crisis? Will 
it help prevent future excessive risk-taking?
    Is the SEC considering additional measures or actions on this 
issue?
    Answer. In the spring of 2011, the SEC, acting jointly with the 
Federal Reserve Board, the Office of the Comptroller of the Currency, 
the Federal Deposit Insurance Corporation, the Federal Housing Finance 
Agency, the National Credit Union Administration, and the Office of 
Thrift Supervision proposed a rule pursuant to section 956. As required 
by the statute, the proposed rule would apply to bank holding 
companies, banks, the Federal National Mortgage Association, the 
Federal Home Loan Mortgage Corporation, broker-dealers, credit unions, 
and investment advisers.
    In general, the jointly proposed rules drew upon the Guidance on 
Sound Incentive Compensation Policies finalized by the Federal banking 
agencies in the summer of 2010. The banking agency guidance is designed 
to address compensation structures that could cause imprudent risk 
taking.
    The proposed joint rule is comprised of three parts:
  --Disclosures: A covered firm would be required to file an annual 
        report describing the firm's incentive-based compensation 
        arrangements.
  --Prohibition on Encouraging Inappropriate Risk: All covered firms 
        would be prohibited from establishing or maintaining an 
        incentive-based compensation arrangement that encourages 
        inappropriate risks. This portion of the rule draws upon the 
        banking agency guidance.
  --Deferral for Large Firms: For covered firms with $50 billion or 
        more in total consolidated assets, executive officers would 
        have at least 50 percent of their incentive-based compensation 
        deferred for at least 3 years. The deferred compensation could 
        not be paid faster than on a pro-rata basis, and would have to 
        be adjusted to reflect actual losses. The firm's board also 
        would approve incentive compensation for individuals determined 
        to have the ability to expose the firm to substantial losses.
    The comment period for the proposed rule closed on May 31, 2011. 
The SEC and its fellow regulators received approximately 10,000 comment 
letters. Common themes in the comment letters included:
  --Concern in applying a single mandatory deferral requirement to a 
        broad array of firms with dramatically different businesses;
  --How the proposed rule would apply to affiliates regulated by 
        multiple agencies;
  --How the proposed rule would apply to certain types of investment 
        advisers; and
  --Tax and accounting consequences.
    The SEC staff is working closely with the staff of the banking 
regulators to consider these comments and how the jointly proposed 
rules could be revised to address commenters' concerns with those 
rules.
    The SEC is also moving forward with enhanced disclosures related to 
executive compensation required by the Dodd-Frank Act. In the fall of 
2013, the Commission proposed a new rule that would require public 
companies to disclose the ratio of the compensation of its chief 
executive officer to the median compensation of its employees. 
Advancing the other executive compensation rules required under the 
Dodd-Frank Act is also a near-term priority.
                                 ______
                                 
            Questions Submitted by Senator Richard C. Shelby
    Question. In recent years, the SEC has responded to events like the 
2010 flash crash or the concerns raised by Michael Lewis with narrowly 
focused studies of the problem at hand. While examining the latest 
problems and reassuring market participants is important, ad hoc 
reviews and immediate responses to crises often crowd out the 
opportunity to engage in deeper assessments of complex reform issues 
such as market infrastructure, off-exchange trading, and Regulation 
National Market System (NMS).
    Given the growing complexity and fragmentation of our equity 
markets, are you supportive of calls for the SEC to undertake a 
comprehensive review of market structure?
    Answer. Yes. As reflected in a recent public speech, I set forth 
three core principles that are grounding the SEC's review of equity 
market structure and guiding further actions: (1) all issues must be 
evaluated through the prism of the best interest of investors and the 
facilitation of capital formation for public companies; (2) we must 
account for the varying nature of companies and products, with a 
particular sensitivity to the needs of smaller companies; and (3) our 
review of market structure must be comprehensive, including testing 
assumptions about long-standing rules and market practices.\11\
---------------------------------------------------------------------------
    \11\ Enhancing Our Equity Market Structure, Speech by SEC Chair 
Mary Jo White, at Sandler O'Neill & Partners, L.P. Global Exchange and 
Brokerage Conference New York, N.Y. (June 5, 2014), available at http:/
/www.sec.gov/News/Speech/Detail/Speech/1370542004312.
---------------------------------------------------------------------------
    Addressing the issues of our current market structure demands a 
continuous and comprehensive review that integrates targeted 
enhancements with an expansive consideration of broader changes.\12\ 
Accordingly, as we evaluate the merits of broader changes, we will also 
continue to assess and address specific elements of today's market 
structure that work against the interests of investors and public 
companies. In these remarks, I outlined the initiatives we are 
advancing across five broad sets of issues: market instability, high 
frequency trading, fragmentation, broker conflicts, and the quality of 
markets for smaller companies.\13\ These initiatives are designed to 
address discrete issues that will, among other things, enhance 
transparency and the Commission's ability to oversee HFT firms.
---------------------------------------------------------------------------
    \12\ Id.
    \13\ Id.
---------------------------------------------------------------------------
    While our review in each of these five areas has already resulted 
in discrete actions targeting specific issues, the more fundamental 
policy questions demand--and are receiving--close attention at the SEC. 
To facilitate engagement with market participants and the public, SEC 
staff will populate our market structure website with summaries of key 
issues that provide a framework for further analysis, identifying areas 
that the staff is focused on and where public perspectives are 
essential. To help in our review of equity market structure, I have 
also recommended to the Commission the creation of a new Market 
Structure Advisory Committee comprised of experts with a diversity of 
backgrounds and viewpoints. The new committee will serve as an 
additional forum and resource for reviewing specific, clearly 
articulated initiatives or rule proposals.
    Question. In early July, the Commission's rules providing for the 
regulation and registration of municipal advisors will become 
effective. The Commission routinely publishes updated and final 
``Frequently Asked Questions'' (FAQs) which provide practical 
information to firms seeking to comply with the rule. The Office of 
Municipal Securities provided general interpretive guidance on certain 
aspects of the final rules on May 19, 2014. However, FAQ's detailing 
the manner in which the rule treats wholly owned bank subsidiaries 
making tax exempt loans have not been finalized and published. It is my 
hope that these would be published well before the effective date so 
that covered entities have the time and opportunity to understand and 
comply with the rule.
    When will you publish Commission FAQs relating to wholly owned bank 
subsidiaries?
    Answer. The Commission's final rules for municipal advisor 
registration became effective on July 1, 2014. To address specific 
questions arising from market participants and to facilitate a smooth 
implementation of these major new rules, the staff in the Office of 
Municipal Securities provided interpretive guidance, in the form of 
frequently asked questions (FAQs), in January and May of this year.
    In the May FAQs, the staff specifically addressed several questions 
raised by banks regarding implementation of the final rules, including: 
(1) the treatment of so-called ``dual employees'' of banks (i.e., 
individuals who are employed by a bank and also are associated with the 
bank's broker-dealer affiliate); (2) the applicability of the bank 
exemption to banks that provide advice to a municipal entity regarding 
the structure, timing, and terms under which the bank would purchase 
municipal securities for its own account; (3) the treatment of proceeds 
of pension obligation bonds; and (4) transitional guidance for 
identifying existing proceeds of municipal securities held in existing 
accounts or existing investments.
    Although the staff did not provide specific guidance regarding the 
treatment of transactions in which wholly-owned bank operating 
subsidiaries make tax-exempt loans under the final rules, the staff 
issued an FAQ regarding the purchase of municipal securities by an 
institutional buyer in a principal capacity that may be relevant for 
these transactions. Specifically, in this FAQ, the staff stated that an 
institutional buyer would not be engaged in municipal advisory activity 
under the final rules if the institutional buyer only provides 
information regarding the terms under which the institutional buyer 
would purchase municipal securities for its own account and does not 
provide advice to the municipal entity regarding an issuance of 
municipal securities that would be offered to other investors. The 
staff believes that this guidance could be relevant to and useful for 
advice on transactions involving those wholly-owned bank operating 
subsidiaries that meet the general parameters specified in the FAQ.
                                 ______
                                 
            Question Submitted by Senator Richard J. Durbin
    Question. Chair White, you have received several letters, one 
signed by the Illinois Secretary of State (and 7 others) and the other 
by the Illinois Securities Commissioner (and 17 other Commissioners), 
expressing concerns about the SEC's proposal to preempt the States from 
reviewing Regulation A offerings. Under the JOBS Act, issuers are 
exempt from State review for shares traded on a national exchange or 
sold to a ``qualified purchaser.'' The SEC's proposed rules define a 
qualified purchaser as ``all offerees of securities in a Regulation A 
offering and all purchasers in a Tier 2 offering,'' applying to anyone 
and eliminating State review.
    Many have suggested that with smaller offerings and newer issuers 
also comes greater risk and likelihood of fraudulent activity. Although 
your points on investor protection and costs associated with complying 
with State law are well-taken, states currently offer review on these 
smaller offerings that can further protect investors. States also have 
taken steps to harmonize review processes, streamlining requirements 
among states in response to concerns about the time and costs 
associated with complying with State review.
    How will the SEC work with State regulators' to address concerns 
that preempting State authority beyond what Congress intended under the 
JOBS Act would limit the additional investor protections states can 
offer, especially in light of commitments to streamline State review 
processes to address issuer concerns?
    Answer. As part of our ongoing dialogue with State securities 
regulators, Commission staff and I periodically meet with 
representatives of the states and the North American Securities 
Administrators Association (NASAA) to discuss developments in the 
securities markets and, where applicable, to address areas of specific 
concern.
    With respect to the Commission's proposed rules for implementing 
Title IV of the JOBS Act, the Commission has received more than 100 
comment letters on its rule proposal, many of which addressed the 
proposed approach to State securities law compliance. The staff is 
carefully reviewing the comments as it works to develop recommendations 
for final rules for the Commission's consideration. In addition, the 
staff is closely monitoring the development and implementation of 
NASAA's multi-State coordinated review program for Regulation A 
offerings. It should also be noted that the proposed rules would not 
limit in any way the states' authorities to pursue fraudulent offerings 
and would permit that all offers under proposed Regulation A be filed 
with a State with such a requirement.
    I look forward to continuing our ongoing dialogue with State 
securities regulators and NASAA, including with respect to the 
Commission's proposal to adopt rules to implement title IV of the JOBS 
Act. Our objective for this rulemaking is to ensure that the framework 
and requirements for Regulation A offering are both workable and 
protective of investors.
                                 ______
                                 
          Questions Submitted by Senator Christopher A. Coons
    Question. Since becoming Chairman, have you found the SEC to have 
the right resources necessary to go after those that commit fraud, 
regardless of where the security is bought?
    Answer. Since my arrival, we have made every effort to 
effectively--and efficiently--deploy our funds in order to identify, 
investigate and prosecute those within our jurisdiction that commit 
fraud. These efforts have resulted in a number of significant 
enforcement cases across our regulatory spectrum, including actions 
against exchanges to ensure they operate fairly and in compliance with 
applicable rules, actions against investment advisers and broker-
dealers for taking undisclosed fees and for disrupting the markets 
through failures in their automated trading systems, important 
financial reporting cases against issuers, actions against auditors and 
others who serve as gatekeepers to our financial system, Foreign 
Corrupt Practices Act (FCPA) cases against large multinational 
corporations, actions against municipal issuers, landmark insider 
trading cases, and additional cases against individuals and entities 
whose actions contributed to the financial crisis.
    That said, the SEC needs significant additional resources to keep 
pace with the growing size and complexity of the securities markets and 
the agency's broad responsibilities. Specific to our Enforcement 
program, we face a number of key challenges to preserve and enhance our 
ability to vigorously pursue the entire spectrum of wrongdoing within 
our jurisdiction. Our Enforcement work includes the detection, 
investigation, and litigation of violations of the Federal securities 
laws. In each of these areas, we face significant challenges:
  --Detection. We receive over 15,000 tips, complaints, and referrals 
        annually, including the more than 3,000 tips that flow into the 
        Division's Whistleblower Office, which generate a fresh stream 
        of case leads in need of investigation. The review and analysis 
        of these tips require significant human and technological 
        resources. We also have focused intensively on potential 
        misconduct in the equity markets and in connection with new 
        rules, including those implemented under the Dodd-Frank and 
        JOBS Acts. But detecting misconduct in constantly evolving 
        securities markets, including as a result of the growth of 
        algorithmic, automated trading and ``dark pools,'' requires 
        substantial resources.
  --Investigations. Technological advances across the industry allow 
        for more sophisticated schemes, which require improved 
        technology and significant resources to unravel. We also are 
        expanding our focus on financial reporting and auditing 
        misconduct cases, which are highly technical and labor 
        intensive.
  --Litigation. We have seen an increase in litigation and trials as we 
        focus more extensively on individual wrongdoing. And, the 
        recent change to our long-standing settlement policy that now 
        requires admissions in certain cases may lead to more 
        litigation. Success at trial is critical to our ability to 
        carry out our mission, and litigation, often against well-
        funded opposition.
    In order to meet the challenges of our rapidly changing and 
expanding markets, with increasingly complex products and more 
sophisticated wrongdoers, Enforcement seeks to hire 126 new staff, 
including additional legal, accounting, and industry specialized 
experts, primarily for investigations and litigation. These critical 
resources will enable us to improve our information processing and 
analysis, expand our investigative capabilities, strengthen our 
litigation capacity, and better use technology. In addition, the 
Enforcement Division will continue to: (1) invest in technology that 
enables the staff to work more efficiently and effectively, and (2) 
collaborate with external stakeholders who assist in the Division's 
identification, investigation, and litigation of securities law 
violations, including wrongdoing that crosses borders.
    Question. I believe private enforcement and investors' right to 
recover losses is very important, and serves as a deterrent to 
securities fraud. Would you agree and can you discuss how the SEC can 
work with victims of securities fraud to recover losses?
    Answer. The SEC is fully committed to its mission of protecting 
investors and continuously strives to maximize the return of funds to 
victims of securities fraud whenever possible. This may consist of ill-
gotten gains required to be disgorged and/or penalties imposed by a 
court in the Commission's enforcement actions. The Sarbanes-Oxley Act 
of 2002 enhanced the Commission's ability to more fully compensate 
harmed investors by giving us authority, in appropriate cases, to 
create Fair Funds through which we can distribute civil penalties 
(along with disgorgement) to victims. Prior to the Act, the Commission 
was required to transmit all penalties obtained to the U.S. Treasury. 
This Fair Fund authority is an important part of our effort to help 
harmed investors recover losses. Additionally, meritorious private 
actions can help supplement regulatory enforcement of the securities 
laws.
    The SEC's Office of Distributions (OD) within the Division of 
Enforcement is responsible for overseeing the Commission's 
distributions program. The OD handles all distributions to victims in 
enforcement actions where a disgorgement fund exists or where the 
Commission or a court has created a Fair Fund that includes monetary 
penalties. The office was reorganized in 2011 to centralize the 
handling of distributions, develop expertise, and improve speed and 
efficiency in the distribution process. Its mission is to return money 
to harmed investors whenever practicable in a fair, reasonable, cost-
effective, and efficient manner. It also seeks to promote awareness 
among injured investors about the distributions process through 
proactive outreach and targeted mailings.
    The OD handles an average of 200 distribution funds at any given 
time. Since the passage of the Sarbanes Oxley Act, the SEC has returned 
more than $9.9 billion to harmed investors through its distributions. 
In fiscal year 2013, the SEC returned over $250 million to harmed 
investors through 22 different distribution funds. We are committed to 
continuing to work to maximize the return of funds to harmed investors 
whenever possible.
    Question. There are reports that the SEC is considering allowing 
U.S. companies to utilize accounting standards from the International 
Standards Board to report their financial results in the United States. 
Could you comment on the validity of these reports, as well as the 
strengths and weaknesses of such an approach?
    Answer. The Commission has long promoted the objective of a single 
set of high-quality globally accepted accounting standards. The 
Financial Accounting Standards Board (FASB) and the International 
Accounting Standards Board (IASB) have been working together to more 
closely converge U.S. Generally Accepted Accounting Principles (U.S. 
GAAP) and International Financial Reporting Standards (IFRS) since 
2002. The FASB's ongoing work with the IASB on convergence projects has 
resulted in the elimination of many significant differences between 
U.S. GAAP and IFRS. The Commission continues to monitor the progress of 
the remaining convergence projects.
    Under the Commission's rules, foreign private issuers are permitted 
to file financial statements in accordance with IFRS as issued by the 
IASB without reconciliation to U.S. GAAP. Today, over 500 companies, 
representing trillions of dollars of market capitalization, avail 
themselves of this method of reporting by submitting reports to the 
Commission as foreign private issuers using IFRS. Therefore, high-
quality IFRS standards are critically important to the U.S. markets.
    The Commission has not yet made any determinations as to whether 
there would be any further incorporation of IFRS into the U.S. 
financial reporting system. I believe it is important for the 
Commission to continue to consider the potential benefits and 
challenges of further incorporating IFRS into the U.S. financial 
reporting system. As we do, it is imperative to fully consider the 
interests of U.S. investors, the FASB's role as the standard setter of 
accounting standards for U.S. companies, and the role the United States 
plays in the development of global accounting standards.
                                 ______
                                 
               Questions Submitted by Senator Jerry Moran
             sec registration threshold under section 12(g)
    Question. In implementing Section 401 of the JOBS ACT, the SEC 
proposed Regulation A+, which is intended relieve the reporting burden 
for small businesses by exempting securities offerings of less than $50 
million annually from the registration requirements of the Securities 
Act. Additionally, the JOBS Act increased one of the registration 
thresholds under section 12(g) of the Exchange Act, by allowing up to 
2000 accredited investors for companies with over $10 million in 
assets. Recently, Kansas businesses have expressed concerns about 
increasing asset threshold under 12(g) in order to match the exemption 
provided for public offerings in Regulation A+.
    Has the SEC examined the effects of increasing the 12(g) asset 
threshold?
    What is the policy rationale for such an increase? Do you believe 
that rationale is consistent with Congressional intent?
    What is the SEC doing to make certain the reporting requirements 
for companies with assets of $10 million and 2000+ accredited investors 
are not more burdensome than requirements for companies with potential 
assets of up to $50 million?
    Answer. As described in the Commission's rule proposal to implement 
new section 3(b)(2), often referred to as Regulation A+ exemption, a 
company raising capital under that exemption would have to comply with 
the requirements of Exchange Act Section 12(g) just as any other 
company would. That is, no matter how much a company raised in a 
Regulation A+ offering, if, at the end of the year it had more than $10 
million of assets and 2,000 holders of record, it would be required to 
register under the Exchange Act.
    Under the rule proposal, certain Regulation A+ issuers would be 
required to file annual and semiannual ongoing reports and current 
event updates that are similar to the requirements for public company 
reporting, but scaled for these issuers. In the proposing release, the 
Commission noted that such disclosures would benefit investors by 
providing a regular flow of information and would further the 
development of a market for the securities. The reporting obligations 
would be required even if the issuer has fewer than 2,000 holders of 
record and therefore does not meet the thresholds under section 12(g). 
The staff is carefully reviewing the public comment received on this 
rule proposal as it works to develop recommendations for final rules 
for the Commission's consideration.
    With regard to Exchange Act Section 12(g), Congress established a 
$1 million total assets threshold in 1964. The Commission subsequently 
used its authority under Exchange Act Section 12(h) to raise the asset 
threshold several times, and raised it to $10 million in 1996. The 
changes made by the JOBS Act, which were effective immediately upon 
enactment, codified the $10 million threshold in the Exchange Act, but 
did not raise it.
    The Commission staff is preparing rule recommendations to revise 
its rules to implement the changes made by the JOBS Act to section 
12(g). When undertaking these rulemakings, as is the case with all 
rulemakings, the Commission and its staff are mindful of the economic 
effects associated with the requirements proposed or adopted, including 
the costs and benefits of regulation and potential effects on 
efficiency, competition and capital formation.
                          accredited investors
    Question. Section 413 of the Wall Street Reforms and Consumer 
Protection Act of 2010 requires the SEC to examine its definition of an 
accredited investor to determine whether it should be modified ``for 
the protection of investors, in the public interest, and in light of 
the economy.'' To qualify as an accredited investor, SEC requires an 
investor to earn an annual income over $200,000 or a net worth over $1 
million, excluding a primary residence. There is concern among the 
angel investing community and new businesses across the country that a 
dramatic increase in the threshold for qualification as an accredited 
investor could limit the number of individuals who are able to provide 
capital to early stage businesses at their most critical juncture. GAO 
analysis of Federal data on household net worth showed that adjusting 
the $1 million minimum threshold to approximately $2.3 million, to 
account for inflation, would decrease the number of households 
qualifying as accredited from approximately 8.5 million to 3.7 million, 
or approximately a 56 percent drop in eligible accredited investors.
    What criteria will the SEC use to determine whether or not to 
increase the threshold for qualification as an accredited investor?
    Is there strong evidence that the current thresholds pose any risk 
for investors? What data suggests current accredited investors do not 
understand risk when making investments?
    Answer. The Commission staff, including staff from the Division of 
Corporation Finance and the Division of Economic and Risk Analysis, 
currently is engaged in a comprehensive review of the accredited 
investor definition. The review and the feedback received through that 
process will inform the Commission's consideration of whether to change 
the definition of accredited investor, including whether net worth and 
annual income should be used as tests for determining whether a natural 
person is an accredited investor. As part of this review, Commission 
staff is also independently evaluating alternative criteria for the 
accredited investor definition suggested by the public and other 
interested parties. Careful consideration is being given to both the 
need to facilitate capital formation and the need to protect investors. 
Any possible changes to the definition would subsequently occur through 
the rulemaking process, which includes opportunities for public comment 
on any such changes and a thorough economic analysis of their potential 
effects.
                    accounting rules under jobs act
    Question. The section 4(a)(6) exemption of the JOBS Act was 
intended to provide investors with protection in the form of disclosure 
while allowing companies an easy pay to accessing investment capital. 
Balancing these goals is why Congress included mandatory financial 
disclosures for companies seeking investment. However, Congress did not 
stipulate the basis of accounting required and deferred to the SEC to 
make that determination. In response, the Commission has proposed U.S. 
generally accepted accounting principles (U.S. GAAP), a standard basis 
of accounting designed for use by larger and public corporations. Many 
companies and crowdfunding platforms believe this requirement is 
unnecessary, unduly burdensome, and inconsistent with Congress's intent 
to create an exemption that was compatible with the reality of small 
business. As the National Federation of Independent Business (NFIB) has 
shown, most small businesses do not use U.S. GAAP accounting. In fact, 
only a small minority uses any sort of pure accrual-based accounting 
(of which U.S. GAAP is a subset) with the vast majority using either 
cash-based accounting or a hybrid method. Small businesses choose the 
method of accounting that makes the most sense for their needs, both in 
terms of how it reflects the reality of their business and the costs of 
preparation and compliance.
    Why did the SEC decide to require U.S. GAAP as the preferred 
accounting practice?
    Answer. As you know, the Commission has proposed rules to implement 
the crowdfunding provisions of the JOBS Act.\14\ Under the proposal, 
companies would be required to provide financial statements prepared in 
accordance with U.S. generally accepted accounting principles (``U.S. 
GAAP''). The Commission considered a variety of factors when issuing 
the proposal, including that (i) financial statements prepared in 
accordance with U.S. GAAP are currently required for offerings under 
Regulation A, which is another exemption available to smaller issuers 
to raise capital; (ii) financial statements prepared in accordance with 
U.S. GAAP are generally self-scaling to the size of the issuer, which 
should reduce the burden of preparing financial statements for many 
early stage issuers; and (iii) some commenters suggested that the 
Commission require financial statements prepared in accordance with 
U.S. GAAP.
    The Commission requested comment on the proposal and alternatives, 
such as whether financial statements should be prepared differently 
than under U.S. GAAP and, if so, which changes from U.S. GAAP would be 
appropriate The Commission also requested comment on whether the 
Commission should allow issuers to prepare financial statements using a 
comprehensive basis of accounting other than U.S. GAAP.
    The Commission has received approximately 320 comment letters, 
including 30 form letters, on the crowdfunding proposal. Comments 
received on this aspect of the proposal were mixed, and contained a 
variety of suggested approaches. The Commission staff is reviewing 
these letters and will consider them carefully as they develop 
recommendations for final rules for the Commission's consideration.
                            audit threshold
    Question. In the JOBS act Congress established a tiered system of 
required financial disclosures that companies would have to meet in 
order to participate in an offering under Regulation Crowdfunding. 
Under the law, issuers offering more than $500,000 within a 12-month 
period, or such other amount as the Commission may establish, by rule, 
are required to provide audited financial statements. The Commission 
has proposed keeping the threshold for requiring an audit at $500,000. 
The $500,000 audit threshold as proposed has received criticism in both 
the media and comments to the Commission because of the prohibitive 
cost of audits for small companies, especially since the audit will 
need to be undertaken prior to the company being certain that it will 
secure funding. The Commission proposes to keep the threshold at 
$500,000 because ``Congress specifically selected'' it. However this is 
not true; Congress specifically gave the SEC authority to select a 
different threshold amount to avoid the very scenario that appears to 
be developing--that the audit requirement is too onerous for companies 
to comply with, excluding them from being able to take advantage of 
crowdfunding.
    Is the SEC aware of concerns raised by small businesses interested 
in using crowdfunding?
    Will the SEC monitor and potential modify these thresholds over 
time?
    Answer. Title III of the JOBS Act, which establishes a new 
crowdfunding exemption, contains a number of requirements mandated by 
Congress, including those to ensure investor protection. As you note, 
the Commission proposed rules designed to implement the crowdfunding 
exemption and received approximately 320 comment letters, including 30 
form letters, on the proposal. While some commenters were supportive of 
the Commission's proposal, other commenters expressed concerns about 
costs that may arise under the proposal, including costs associated 
with preparing audited financial statements. Commission staff is 
reviewing these comment letters and has been meeting with individuals 
and groups interested in sharing their views about the rule proposal. 
The staff is considering all of the feedback provided as it works to 
develop recommendations for final rules for the Commission's 
consideration. The Commission and staff appreciate the need to develop 
rules to implement the crowdfunding exemption in a way that both 
promotes capital formation while at the same time providing key 
protections for investors.
    In issuing the proposal, the Commission noted its understanding 
that the proposed rules, if adopted, could significantly affect the 
viability of crowdfunding as a capital-raising method for startups and 
small businesses. Rules that are unduly burdensome could discourage 
participation in crowdfunding. Rules that are too permissive, however, 
may increase the risks for individual investors, thereby undermining 
the facilitation of capital raising for startups and small businesses.
    The Commission also directed the staff to develop a comprehensive 
work plan to review and monitor the use of the crowdfunding exemption 
under section 4(a)(6) and the rules the Commission adopts to implement 
crowdfunding. Upon adoption of the final rules, the Commission staff 
will monitor the market for crowdfunding offerings, focusing in 
particular on the types of issuers using the exemption, the level of 
compliance by issuers and intermediaries, and whether the exemption is 
achieving its objectives. This monitoring program will assist the 
Commission's efforts in evaluating the development of market practices 
in offerings made in reliance on the crowdfunding exemption and related 
rules. These efforts also will facilitate future Commission 
consideration of any potential amendments to the rules implementing 
crowdfunding.
                       ongoing audit requirement
    Question. The Commission has proposed a requirement that companies 
subject to an initial audit must undergo audits on a yearly basis until 
the securities are retired, the company becomes a reporting company, or 
the company liquidates or dissolves. This proposal is in no way 
mandated by the JOBS Act. The Commission justifies this requirement on 
the grounds of providing investors and potential secondary purchasers 
with up-to-date information. While this is an important objective, and 
was the reason for Congress requiring certain limited ongoing 
disclosures in the JOBS act, requiring ongoing audits is excessively 
expensive, burdensome, and ultimately contrary to the needs of small 
businesses and potential investors. The ongoing audit requirement will 
also render the cost-of-capital of crowdfunding higher than other 
sources of funding, possibly creating an adverse selection problem 
where the best companies avoid crowdfunding in favor of other types of 
offerings with less onerous requirements such as offerings made in 
reliance on Rule 506(c), leaving only companies for whom crowdfunding 
is the last resort in the marketplace.
    Is the Commission aware of the concern about this requirement?
    Why would the Commission treat crowdfunding investments differently 
than securities sold under Regulation A, which do not require a yearly 
audit?
    Answer. While some commenters were supportive of the Commission's 
proposal, other commenters expressed concerns about costs that may 
arise under the proposal, including costs associated with preparing 
ongoing annual reports with audited financial statements. As indicated 
above in response to Question 3, Commission staff is reviewing these 
comment letters and has been meeting with individuals and groups 
interested in sharing their views about the rule proposal.
    The crowdfunding provisions of the JOBS Act require ongoing 
disclosure, which differs from current Regulation A. Under the proposal 
to implement the crowdfunding provisions, a company's ongoing 
disclosure about its financial condition would have to meet the 
financial statement requirements that were applicable to its initial 
offering of securities. As a result, only companies whose offering 
statement included audited financial statements would be required to 
provide audited financial statements on a yearly basis until one of 
three terminating events occurs. The Commission requested comment on 
the proposed ongoing annual reporting requirement and will consider 
carefully the comments submitted on this requirement when adopting 
final rules.
                                 ______
                                 
               Questions Submitted to Hon. Mark P. Wetjen
                Questions Submitted by Senator Tom Udall
                 importance of conducting annual exams
    Question. Chairman Wetjen, the Commodity Futures Trading Commission 
(CFTC) regulates the activities of over 68,000 registrants who handle 
customer funds, solicit or accept orders, or give trained advice. These 
include commodity pool operators, futures commission merchants, floor 
brokers, floor traders, and salespersons. I understand that due to 
resource constraints, the CFTC is unable to conduct reviews more 
frequently than once every 3 years. Because of the triennial cycle, the 
ability to check compliance is diluted. Your fiscal 2015 budget request 
seeks $38.1 million dollars which will support 158 staff. That is 63 
more staff than the 95 supported by the current spending level of $23.6 
million dollars.
    Would the requested funding permit more frequent reviews?
    Answer. Yes. Currently, the Commission's review cycles of 
registered entities varies depending on many factors, including the 
Commission's available resources and whether an entity is considered 
systemically important. By fully funding the President's budget 
request, the Commission can move toward annual reviews of all 
significant clearinghouses and trading platforms and perform more 
proactive monitoring of higher risk market participants and 
intermediaries. Partially funding the request will mean accepting 
potentially avoidable risk in the derivatives markets as the Commission 
is forced to reduce the frequency of reviews and forego more in-depth 
financial, operational and risk reviews of the firms within its 
jurisdiction.
    Question. What are some of the benefits CFTC could realize from the 
proposed increase in resources for the Exams functions?
    Answer. The CFTC would be in a better position to monitor risk in 
the markets and entities we oversee, verify that registered entities 
are complying with our rules, and proactively monitor the activities of 
our registrants. This would also help the CFTC to ensure that the 
financial, risk, compliance and operational reports that we receive are 
materially correct. Likewise, the CFTC would be better able identify 
industry trends and assess new and emerging risks in the industry. 
Lastly, the CFTC would be in an improved position to proactively 
monitor and detect problems at firms sooner. The benefit to customers 
would be just as important as closer monitoring would help ensure the 
firms are following our customer protection rules.
    Question. Would more frequent reviews require adding staff with 
enhanced expertise?
    Answer. While our staff has, on average, 23.6 years of experience, 
the industry is constantly changing and becoming more complex. In 
enhancing its examinations program, the CFTC would expect to hire 
individuals with more specialized skills, and possibly train current 
employees to provide those specialized skills. The skills necessary for 
an effective examinations program include risk management, technology 
(including data security and data management), swaps expertise, 
liquidity analysis, market risk analysis, and operational risk 
analysis.
    Question. Is the CFTC encountering any problems in acquiring the 
skills and experience needed to support the growth you project to need?
    Answer. The key challenges the CFTC faces in this regard are having 
adequate resources to train existing staff and hire qualified new 
staff. An additional challenge the Commission faces when hiring new 
staff is that it competes for qualified staff directly with private 
sector employers who have significant financial resources at their 
disposal and are often able to provide greater compensation than public 
sector employers. Regarding our existing staff, the Commission faces 
challenges in retaining some of its most experienced and knowledgeable 
staff. In recent years, the Commission has had to reduce investments in 
training opportunities for existing staff. Such training is vital to 
retaining employees and updating their skills and knowledge about the 
markets we regulate and our agency's increased regulatory 
responsibilities under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank).
            market transformation and high-frequency trading
    Question. Chairman Wetjen, as the leader of one of our key 
financial regulators, you are acutely aware of the growing challenges 
facing your agency in monitoring the markets. We now have significantly 
transformed, globalized, round-the-clock, and highly diversified 
marketplace. Rapid, electronic, algorithmic trading platforms are 
replacing the traditional open-outcry trading floors.
    What is the current status of the CFTC's oversight of high-
frequency trading and automated trading environments?
    Answer. The Commodity Exchange Act (Act) and Commission regulations 
are designed to protect market participants and the public from fraud, 
manipulation, abusive practices, and systemic risk related to futures 
and swaps. The Commission oversees designated contract markets (DCMs), 
swap execution facilities (SEFs), clearinghouses, futures commission 
merchants (FCMs), swap dealers (SDs) and other entities and 
intermediaries to monitor their compliance, and in the case of DCMs and 
SEFs, reviews their self-regulatory programs. DCMs are subject to 23 
core principles under the Act and SEFs are subject to 15. As the front-
line self-regulatory organizations, DCMs and SEFs have primary 
responsibility for identifying misconduct by all market participants, 
including those engaged in automated trading and high-frequency trading 
(HFT). The CFTC's Division of Market Oversight conducts rule 
enforcement reviews of DCMs' self-regulatory programs and evaluates 
their compliance with the Act and Commission regulations.
    The Act and Commission regulations do not distinguish between HFT 
and non-HFT. ``High-frequency trader'' is not a distinct category of 
market participant within the Commission's regulations, nor is it a 
defined term or separate registration status. Applicable regulations 
and resources developed by the Commission to detect trading abuses are 
equally relevant regardless of the trading strategy used to effectuate 
the abuse. Many Commission rulemakings implementing Dodd-Frank apply to 
automated trading and HFT because the rules address trading on DCMs and 
SEFs, or apply to registrants who may engage in automated trading of 
HFT activity.
    In April 2012, the Commission adopted Regulations 1.73 and 23.609 
requiring FCMs, SDs and major swap participants (``MSPs'') that are 
clearing members to establish risk-based limits based on ``position 
size, order size, margin requirements, or similar factors'' for all 
proprietary accounts and customer accounts. The rules also require 
FCMs, SDs and MSPs to ``use automated means to screen orders for 
compliance with the [risk] limits'' when such orders are subject to 
automated execution. The Commission also adopted rules in April 2012 
requiring SDs and MSPs to ensure that their ``use of trading programs 
is subject to policies and procedures governing the use, supervision, 
maintenance, testing, and inspection of the program.''
    In June 2012, the Commission adopted rules to implement the 23 core 
principles for DCMs. Regulation 38.255 requires DCMs to ``establish and 
maintain risk control mechanisms to prevent and reduce the potential 
risk of price distortions and market disruptions, including, but not 
limited to, market restrictions that pause or halt trading in market 
conditions prescribed by the designated contract market.'' Regulation 
37.405 imposes similar requirements on SEFs.
    The DCM rules also set forth risk control requirements for 
exchanges that provide direct market access (``DMA'') to clients. 
Regulation 38.607 requires DCMs that permit DMA to have effective 
systems and controls reasonably designed to facilitate an FCM's 
management of financial risk. These systems and controls include 
automated pre-trade controls through which member FCMs can implement 
financial risk limits. Regulation 38.607 also requires DCMs to 
implement and enforce rules requiring member FCMs to use these systems 
and controls. The DCM rules also implement new requirements in the Act 
related to exchanges' cyber security and system safeguard programs. The 
Act and Commission regulations also address cyber security and system 
safeguards within SEFs.
    Finally, the Division also conducts direct surveillance of its 
regulated markets, and continues to improve the regulatory data 
available for this purpose. For example, in November 2013 the 
Commission published final rules to improve its identification of 
participants in futures and swaps markets (OCR Final Rules). While 
enhancing the Commission's already robust position-based reporting 
regime, the OCR Final Rules also create new volume-based reporting 
requirements that significantly expand the Commission's view into its 
regulated markets, including with respect to HFT.
    In addition to its current rules, on September 12, 2013, the 
Commission published a Concept Release on Risk Controls and System 
Safeguards for Automated Trading Environments. The Concept Release 
proposes consideration of a series of 23 additional pre-trade risk 
controls; post-trade reports; design, testing, and supervision 
standards for automated trading systems (ATS) that generate orders for 
entry into automated markets; market structure initiatives; and other 
measures designed to reduce risk or improve the functioning of 
automated markets. The Concept Release is intended to foster a public 
dialogue and inform the Commission as it considers what additional 
measures, if any, might be necessary to address automated and high-
frequency trading.
    The initial 90-day comment period closed on December 11, 2013, but 
was reopened from January 21 through February 14, 2014, in conjunction 
with a meeting of the CFTC's Technology Advisory Committee (TAC). The 
Commission received over 40 public comments on the Concept Release, 
including comments from DCMs; an array of trading firms; trade 
associations; public interest groups; members of academia; a U.S. 
Federal reserve bank; and consulting, technology and information 
service providers in the financial industry. CFTC Staff is currently 
studying all publicly submitted comments received and upon completing 
the review will make initial recommendations if necessary.
    Question. Does the CFTC presently have the necessary talent and 
technology in place to monitor and analyze high-frequency trading, to 
inform your regulatory and enforcement work, and guard the integrity 
and safety of the markets? What are the deficiencies?
    Answer. As noted above, the Commission's rules do not distinguish 
between HFT and non-HFT trading. The Commission does face challenges in 
making sure its technology and personnel are adequate to oversee 
trading in the markets, including HFT trading. The most significant 
impediment to enhanced Commission surveillance of HFT is insufficient 
staff and resources. In particular, the Commission does not have the 
resources in place to receive and analyze complete messaging (e.g., 
order book) data from DCMs or SEFs. Access to messaging data is 
critical to overseeing electronic trading because it permits analysts 
to reconstruct what actually happened during a particular trading 
period. With appropriate staff and technology, staff can use this data 
to detect disruptive trading practices such spoofing. Achieving 
comprehensive surveillance of electronic trading will require 
additional financial, staff and other resources not currently available 
to the Commission.

                          SUBCOMMITTEE RECESS

    Senator Udall. The subcommittee hearing is hereby 
adjourned.
    [Whereupon, at 3:25 p.m., Wednesday, May 14, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]