[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]







                         OVERSIGHT OF THE SEC'S
                        DIVISION OF ENFORCEMENT

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 19, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 114-9
                            
                            
                            
                            
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
ROBERT DOLD, Illinois
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas

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

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas




















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 19, 2015...............................................     1
Appendix:
    March 19, 2015...............................................    41

                               WITNESSES
                        Thursday, March 19, 2015

Ceresney, Andrew J., Director, Division of Enforcement, U.S. 
  Securities and Exchange Commission.............................     6

                                APPENDIX

Prepared statements:
    Ceresney, Andrew J...........................................    42

              Additional Material Submitted for the Record

Ceresney, Andrew J.:
    Written responses to questions submitted by Representatives 
      Duffy and Foster...........................................    50

 
                         OVERSIGHT OF THE SEC'S
                        DIVISION OF ENFORCEMENT

                              ----------                              


                        Thursday, March 19, 2015

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:09 a.m., in 
room 2167, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Royce, 
Neugebauer, Huizenga, Duffy, Fincher, Hultgren, Wagner, Messer, 
Schweikert, Poliquin, Hill; Maloney, Sherman, Lynch, Himes, 
Ellison, and Carney.
    Ex officio present: Representative Hensarling.
    Chairman Garrett. Good morning. The Subcommittee on Capital 
Markets and Government Sponsored Enterprises is called to 
order. Today's hearing is entitled, ``Oversight of the SEC's 
Division of Enforcement.'' And I thank our witness for being 
here today.
    Before I begin today's proceedings, I will just take a 
moment of personal privilege. When you are on the Floor, and 
you come to the conclusion of a major piece of legislation, 
whether it is the budget or the defense bill or something else, 
at the very end of that whole process, what always happens is 
that the chairmen from both sides get onto the Floor, and they 
give thanks to all the people who made the culmination of that 
project possible.
    So I am going to do that before we start this hearing today 
by thanking a member of my staff, who has been with me for a 
very long time, for making not just the culmination of this 
hearing, but a culmination of the last 12 years, my entire 
tenure here in Congress possible, and as successful as it has 
been.
    It is through this gentleman's dedication, his interest, 
his keen insight into the issues, and just his general interest 
in all of the topics that we cover in capital markets and the 
financial services generally and specifically, whether they are 
issues that are fun issues, or issues that are totally boring 
to other people. This gentleman always was there to look at 
them and make them interesting, and make them understandable 
not only to me, but to the rest of my office, and I think to 
our committee as well.
    And I very much appreciate all that he has done. As I said, 
it has been 12 years now, which is, in Washington's time, a 
lifetime. Many people come in every 2 or 3 years, come and go. 
But 12 years is a lifetime.
    And during that lifetime, I have seen this gentleman go 
from an unmarried guy who spent a lot of his time down on the 
ball fields playing sports, and downtown doing other things, 
which I won't go into, to a gentleman who is now married with a 
couple of kids, and is probably going to spend more or all of 
his time--some, but all of his time, when he is not with me, 
back at home with his beautiful wife and children, taking care 
of them, but still able to, at the end of the day, make me look 
good, and make me look as if I actually know all this stuff 
that I am talking about here today.
    So I would like to take this moment again to thank Chris 
Russell for all that work, and all that dedication, and just 
being there for us, for myself, for our committee, and for my 
family as well. So thank you so very much.
    [Applause.]
    Our loss is, I guess, as I say, downtown's gain. I have a 
feeling that we will still see him up here on a regular basis, 
right? Good. Because I still have lots and lots and lots more 
questions to ask as we go along. So thank you very, very much, 
Chris. I appreciate it.
    With that said, that brings to a conclusion today's 
hearing, because he did not prepare any other opening 
statements or questions for me since he is leaving now. So I 
have nothing else to say. No, no, no.
    Mr. Hurt. We know that is not true.
    Chairman Garrett. What, that I have nothing else to say? 
Thanks.
    We will now turn back to the matter at hand. Again, we 
thank the witness for being here for today's hearing on the 
SEC's Enforcement Division. We will begin with opening 
statements, and I will yield myself such time--I don't know 
where the clocks are around here--as I may consume.
    Today's hearing, as I said, will examine the policies and 
procedures of the SEC's Division of Enforcement. Now, while the 
SEC is first and foremost a disclosure agency, I support a 
strong enforcement function of the SEC. This enforcement 
function, however, must be used in an evenhanded, non-political 
manner that preserves the due-process rights of issuers, 
regulated entities, and their employees.
    Recently, I heard an interesting distinction between blue-
collar and white-collar crime. The saying goes, ``With blue-
collar crime, you know there has been a crime committed, you 
just have to figure out who did it. With white-collar crime, 
you know who did the crime, you just have to figure out if it 
actually was a crime.''
    This saying implies that there is a degree of nuance 
required by regulators and enforcement officials when making 
decisions whether and how to bring civil actions against 
potential violators, one area where there is most need in this 
Commission's increased use of administrative proceedings. While 
bringing more cases through the administrative proceedings can 
lead to lower costs for the agency and increases in efficiency, 
it is important to realize that those benefits come with a 
cost.
    The cost is less due-process protections for defendants. 
Because the SEC administrative proceedings use the SEC's 
procedural rules, respondents are forced to operate on a 
condensed timeframe, and do not have the benefit of many of the 
fundamental due-process protections provided under the Federal 
Civil Procedures Act, and the Federal Rules of Evidence, such 
as full discovery rights, the right to a jury trial, and the 
exclusion of hearsay evidence.
    Moreover, initial appeals of administrative law judge (ALJ) 
rulings must be made to the full Commission, an ALJ's employer, 
rather than Federal district court. While the Commission's 
decision may be appealed to the D.C. Circuit Court of Appeals, 
the SEC's interpretation of the security laws generally will be 
given significant deference. Appealing an administrative 
decision is a time-consuming and expensive proposition.
    As a former SEC Division official put it, ``The entire 
process ordinarily takes years during which many SEC targets 
are bankrupt by legal costs, and their ability to find work 
with reputable companies. Only after SEC Commissioners decide 
all appeals can the accused finally seek relief from the 
Federal court. But appeals rarely succeed, because the law 
requires the court to defer to the agency's judgment, 
especially on disputed facts.''
    So this, coupled with the SEC's 100 percent success rate--
which is a pretty good success rate--100 percent success rate 
from the year 2014 illustrates a very troubling pattern of the 
SEC's attempting to stack the rules and process in a way that 
the outcome of the case is, well, predetermined. This is not 
appropriate in a country that values appropriate due process 
for its citizens. Due process is a fair process, and fair 
process is fair play.
    Other issues that I am equally concerned about, and I hope 
to address today, are the inappropriate delegation of authority 
to SEC staff to issue subpoenas and to compel testimony and 
documents, the comments in SEC press releases by Enforcement 
officials that presume guilt instead of innocence of recently-
charged market participants, the lack of cases against specific 
individuals compared to cases against the corporation, the lack 
of any structure or legal guidance around determining the 
sought-after penalties in settlements and cases, and finally, 
the backdoor changes to Commission policies included in the 
very enforcement actions at the end of the game.
    So, let me reiterate. I strongly support the proper and 
stringent enforcing of our Nation's security laws. However, the 
enforcement of those laws, like any other, should be done in an 
evenhanded manner, removed from politics, with appropriate due-
process protections for the defendants.
    The current SEC enforcement policies come into question as 
to whether they meet the standards and need to be improved. The 
SEC should be less concerned about the press releases it sends 
out, and the headlines it receives, and really more concerned 
about having a clear and consistent approach to enforcing the 
laws.
    With that, I yield back, and I recognize Mr. Lynch for such 
time as he may consume.
    Mr. Lynch. Thank you, Mr. Chairman. I, too, want to 
congratulate Chris Russell on his 12 years. That is a long time 
to be serving here. You have certainly helped the committee out 
greatly, and we appreciate your service as well. And we wish 
you very good luck in your next endeavor.
    I do want to just comment briefly on subpoena power, and 
about the SEC extending subpoena power to its employees. I just 
want to remind my friends--and you are my friends on the other 
side of the aisle--that this Congress, the Republican House, 
has expanded subpoena power among--the woman who runs the 
elevator has subpoena power in this Congress.
    We have expanded the subpoena power for many, many chairmen 
who never had it before. So I am much more comfortable with the 
SEC having subpoena power, and doing so in a deliberate and 
responsible manner, than I am having it so widely dispersed 
here in the Congress.
    Director Ceresney, I want to just mention one area where I 
think we can do much better at the SEC with the limited 
resources that you have. And that is the revolving door 
situation with SEC employees.
    We have had situations where--I am completely comfortable 
with folks at the SEC. They work, they learn the system. They 
understand, they have value in the knowledge that they gain 
because of their service at the SEC.
    And then at some point, they make a lateral move. They go 
to the industry that can pay them much more money. And they 
have earned it. The same thing with our staff here. They toil 
here for a while, they do their sentence, and then hopefully 
they gain enough acumen and ability that someone seeks to hire 
them.
    This is a different situation that I am addressing here. 
That is when SEC employees are involved in an enforcement 
action against a bank or financial services company, or any 
entity. And then while that enforcement action is ongoing, they 
leave, and they go to work for the other side, for that company 
that has an enforcement, or has a waiver pending. That cannot 
happen.
    You can't have somebody working at the SEC, prosecuting an 
enforcement case, and then all of a sudden, the next week, they 
go out and they are working for the company that they were just 
prosecuting last week. That cannot happen.
    But it does happen. And so, I recently introduced the SEC 
Revolving Door Restriction Act of 2015. This legislation will 
reduce the conflicts of interest beyond the current ethics 
rules; specifically, this bill amends the Securities Exchange 
Act of 1934 to prevent former employees of the SEC from seeking 
employment with companies against which they have participated 
in enforcement actions in the preceding 18 months. It just 
gives them a little cooling-off period.
    You can't go to work for somebody you just prosecuted or 
waived an enforcement action against within 18 months. That 
would hurt the credibility of the SEC and hurt the integrity of 
the process.
    If that employee wants to go to work for that person, they 
can--we leave an option here if they are low-level, not very 
much involved, they can go and get an ethics opinion that says 
that going to work for that company does not present the 
appearance of impropriety, or compromise the standing of the 
SEC, or put any party in that enforcement action at a 
disadvantage, or give them an advantage.
    I believe that these added measures will improve confidence 
in the agency's ability to investigate suspected wrongdoing, 
and continue the SEC's recent efforts to strengthen the 
agency's enforcement actions. The SEC Revolving Door 
Restriction Act of 2015 is supported by the Project on 
Government Oversight, POGO, a non-partisan, independent 
watchdog.
    And POGO has detailed the dangers of the revolving door 
blurring the lines between the SEC and the interest that it 
regulates in a 2013 report, ``Dangerous Liaisons: Revolving 
Door at the SEC Creates a Risk of Regulatory Capture.''
    They lay out the cases, the individual cases where this has 
happened. It is very powerful. And I want to give credit to 
POGO, the Project on Government Oversight, for the work that 
they have done on this. They really were the catalyst for my 
legislation.
    The report highlights that some SEC alumni routinely help 
corporations try to influence the SEC rulemaking. They also 
help them counter the agency's investigations of suspected 
wrongdoing, and they often try to soften the blow that the SEC 
might otherwise deliver in enforcement actions.
    They also block shareholder proposals, and they also, at 
times, win exemption from Federal law. So as I said, if we are 
going to maintain the SEC's integrity, and the integrity of 
this process, that cannot happen. I thank you, Mr. Chairman. 
And I yield back the balance of my time.
    Chairman Garrett. Thanks. And the gentleman yields back. 
The gentlelady from New York is recognized for such time as she 
may--
    Mrs. Maloney. Thank you. And my apologies. The meetings get 
earlier and earlier. I have already been in a meeting this 
morning. Thank you, Mr. Chairman, for holding this hearing, and 
we welcome you, Director Ceresney.
    The SEC's Division of Enforcement has a very important job. 
It is the sharp end of the spear, so to speak, for the SEC. It 
investigates and prosecutes individuals and companies for 
violations of securities laws.
    And it is fair to say that the Enforcement Division makes 
all of the other divisions at the SEC matter. After all, there 
is no point in writing rules if they are not enforced.
    So the Enforcement Division is facing significant 
challenges. For example, despite a modest increase in your 
budget, the Enforcement Division is still vastly outspent by 
the white-collar defense bar. And the Second Circuit's recent 
Newman decision poses a real threat to the Enforcement 
Division's ability to police the markets for insider trading.
    Nevertheless, the Enforcement Division has made significant 
progress under the leadership of Chair White and Mr. Sorinsky. 
And the SEC has adopted a broken-windows approach to 
enforcement, in which there is no violation too small to 
pursue. The goal is to make market participants feel like the 
SEC is everywhere.
    While it is still too early to judge the success of this 
enforcement strategy, I believe we should start thinking about 
how we should measure the success of an enforcement strategy 
whose main goal is deterrence. I look forward to the hearing 
today. Thank you for being here.
    Chairman Garrett. Thanks for that. And so now we turn to 
Mr. Ceresney, the Director of the Division of Enforcement over 
at the SEC. Thank you very much again for being with us, You 
are recognized for 5 minutes.

    STATEMENT OF ANDREW J. CERESNEY, DIRECTOR, DIVISION OF 
      ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION

    Mr. Ceresney. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. Good morning, and 
thank you for the opportunity to be here today.
    A strong enforcement program is at the heart of the 
Commission's efforts to ensure investor trust and confidence in 
the Nation's securities markets. And the Commission and the 
Division of Enforcement are committed to the swift, vigorous, 
and fair pursuit of those who have broken securities laws.
    The Division investigates potential violations of the 
Federal securities laws, recommends enforcement actions to the 
Commission, and litigates the enforcement actions to 
completion. Enforcement staff include investigators, 
accountants, industry experts, trial attorneys, and other 
employees in Washington, D.C., and the regional offices.
    The Division works closely with the other divisions and 
offices of the SEC, and regularly coordinates investigations 
with other regulators and law enforcement agencies, including 
the criminal authorities. In Fiscal Year 2014, the Commission 
brought the highest number of enforcement actions to date, 755, 
and obtained monetary remedies at our highest level, totalling 
over $4.16 billion.
    More importantly, though, these enforcement actions 
addressed significant issues, spanned the entire spectrum of 
the securities industry, and included numerous first-of-their-
kind actions. We punished securities-law violators, returned 
funds to injured investors, and sent important messages of 
deterrence.
    The Division is focused on a number of important areas that 
are central to protecting investors in the markets. 
Comprehensive and accurate financial reporting is critical to 
ensuring that investors have access to reliable information and 
can make informed investment decisions.
    Because false or misleading financial information erodes 
the integrity of the markets, we have intensified our focus on 
this area and recently have seen a significant increase in 
financial reporting and auditing investigations and filed 
actions.
    Investment advisors and the funds they manage also remain a 
focus of the Division. And we regularly investigate and bring 
actions against investment advisors for conflict of interest, 
misrepresentations regarding performance or investment 
strategies, breaches of their duties to their clients, and 
other fraudulent conduct.
    The proliferation of sophisticated trading technology, such 
as algorithmic automated trading, has transformed the 
securities markets. These changes in the markets present 
significant potential risks to investors. The Division has 
recently filed a number of actions against market participants 
that pose a risk to the markets by failing to operate within 
the rules and has ongoing investigations into other potential 
violations of law related to equity market structure.
    In the area of municipal securities, which are an important 
investment vehicle for retail investors, enforcement is focused 
on investigating misrepresentations in connection with bond 
offerings, failures by underwriters to meet their obligations, 
undisclosed conflicts of interest, and pay-to-play violations.
    Policing insider trading has long been central to the 
Commission's mission of ensuring confidence in the markets. And 
the Division has sent a strong deterrent message to would-be 
violators by charging more than 590 defendants in civil insider 
trading cases over the last 5 years.
    Pursuing violations of the Foreign Corrupt Practices Act 
(FCPA) remains a critical part of our enforcement efforts. In 
the last fiscal year, the Commission obtained orders for over 
$380 million in disgorgement and penalties in FCPA cases.
    A common thread throughout these priority areas is the 
emphasis on the importance of gatekeepers to our financial 
system: attorneys; accountants; fund directors; board members; 
transfer agents; broker dealers; and other industry 
professionals who play a vital role in the functioning of the 
securities industry.
    When gatekeepers fail to live up to their responsibilities, 
the Commission will hold them accountable. The Commission's 
ability to successfully litigate cases is critical to the 
mission of protecting investors. When the Division goes to 
trial, we have had a strong record of success, despite the 
difficulty and complexity of our cases.
    The Division strives to be proactive and efficient as it 
investigates violations of the securities laws. And we 
continually work to assess and refine our approach. Some recent 
efforts include requiring admissions of misconduct in certain 
cases where heightened accountability and acceptance of 
responsibility by a defendant are appropriate and in the public 
interest, leveraging the knowledge of various experts hired to 
give insights into the market and industry practices in its 
investigations and litigation, and using large-scale data 
analysis to assist in the identification of misconduct, and 
conduct more sophisticated investigations.
    Going forward, we will continue to take the steps necessary 
to permit the Division to more effectively and efficiently 
protect investors and the markets. Thank you again for inviting 
me to discuss the Division of Enforcement. I am happy to answer 
any questions.
    [The prepared statement of Director Ceresney can be found 
on page 42 of the appendix.]
    Chairman Garrett. Great. Thank you very much. So I will 
begin with questioning, and recognize myself for 5 minutes.
    Two or three major areas: one is the administrative 
proceedings, which I touched on in my statements. Last year you 
were quoted as saying, ``There have been a number of cases in 
recent months where the SEC has threatened administrative 
proceedings. It was something that we told the other side we 
were going to do, and then they settled.''
    Based upon your statement, do you believe it is appropriate 
to use statements like that, I will say it, the threat, if you 
will, that you are going to use administrative proceedings 
against the defendant in the matter basically as a threat, 
knowing what the outcome is going to be if you go through an 
administrative proceeding (AP) hearing?
    Mr. Ceresney. Administrative proceedings is a procedure 
that is available to us. And we try to use it when it is 
appropriate to protect investors. And we look at a whole bunch 
of factors to determine whether an administrative proceeding is 
appropriate.
    We have used it for years against regulated entities and 
individuals. And the only change, frankly, in the recent past 
that expanded the use of APs was the Dodd-Frank Act, which gave 
us the authority to obtain penalties against non-registered--
    Chairman Garrett. Why don't you just stress that point 
again. What is that change in Dodd-Frank?
    Mr. Ceresney. Dodd-Frank gave us the authority to obtain 
penalties against non-registered individuals and entities in 
administrative proceedings; whereas before, we could only 
obtain those penalties in district court actions. So that is 
the only expansion of the use of--
    Chairman Garrett. But that is a significant expansion, 
wouldn't you say?
    Mr. Ceresney. It is significant. But it allows us now to--
    Chairman Garrett. Has there been a significant uptick then 
in the number of ALJ cases versus trial cases?
    Mr. Ceresney. There has been, but most of those--
    Chairman Garrett. Can you give a percentage or increase or 
anything like that?
    Mr. Ceresney. I should just say that most of those cases 
are settled cases. So most of those cases are cases in which 
the other side is agreeing to a settlement with us. And so the 
uptick, I think, if you look at it, is probably more pronounced 
because we are settling more cases.
    Chairman Garrett. I threw out a number in my opening 
statement. What is the correct number of your success rate, if 
you will, when you go through ALJ? I said 100 percent, but what 
is the--
    Mr. Ceresney. That was for last year. It actually--
yesterday, we actually lost an administrative proceeding 
against an individual; an ALJ ruled against us in connection 
with the Penson matter. And so--and that has been true in prior 
years.
    Last year, we did have a unanimous record. I should say 
that doesn't necessarily reflect that we won every claim, 
doesn't necessarily reflect we got the remedies we were 
seeking. And in many cases, the ALJs are pretty--
    Chairman Garrett. The intention--the way I was toning my 
comments was that you have a fairly high success rate, 100 
percent or akin to that, or in that area. So what are the 
rules, what are the--not the procedures, what are the 
guidelines that you use in order to make that determination 
that you are going to go that way and make that--I will use the 
word ``threat'' against the defendant in the case?
    Mr. Ceresney. We use a number of facts and circumstances. 
First, there are certain proceedings we can only bring as 
administrative proceedings. So that includes failures to 
supervise and causing violations.
    Second, in cases where we need quick relief, where we want 
to get a bar very quickly, or we want to get investors relief 
quickly, administrative proceedings can be much quicker than 
district court actions. District court actions will often take 
years to get a resolution in. APs, we can get a decision within 
300 days of the institution of the action. So that is 
important.
    And another important point is where we have technical 
rules, where we have complicated rules, some of our rules are 
very complicated, we have sophisticated fact-finders who are 
the ALJs; whereas with a jury, it would be much more difficult 
for them to grasp those very, very complicated issues.
    So those are some of the issues. But we also--there are 
many reasons to use district court, including where we can get 
summary judgment. We can't usually get summary judgment in an 
AP, including where we need discovery about privilege issues, 
including where we need expedited relief and emergency relief.
    Chairman Garrett. So you just laid them out here. Is that 
all in written format for your staff to follow?
    Mr. Ceresney. We do have some guidance internally for our 
staff.
    Chairman Garrett. Can you supply that to us so we can see 
what those guidelines are and understand them in better detail 
than I can get in 4 minutes here?
    Mr. Ceresney. Let me consult, but I will come back to your 
staff on that issue, yes.
    Chairman Garrett. And, this is not just me raising this 
case, this issue. Recently, District Judge Rakoff stated that 
bringing more cases before ALJs ``hinders the balanced 
development of the securities laws. The results would be that 
law in such cases would be effectively made, not by neutral 
Federal courts, but by SEC administrative judges.''
    So even independent bodies, judges, are making the--or 
calling into question what is occurring right now at the SEC. 
So do you agree with what he is saying?
    Mr. Ceresney. I have great respect for Judge Rakoff. I 
disagree on this fact, which is I think that what you get when 
you have an AP is, you get the Commission weighing in on the 
securities laws, the Commission with the expertise they have. 
And then you have review by the Court of Appeals.
    Chairman Garrett. But aren't they developing law then by 
doing that, administrative law judges, when they make some of 
these decisions, making new Federal law? And they are not 
Article III judges, right?
    Mr. Ceresney. The Commission reviews those decisions. And 
the Commission, I think, is obviously appointed by the 
President, and confirmed by the Senate. And they have expertise 
in the securities laws. And then after that expertise is 
exercised, the Court of Appeals has the ability to review that.
    So I do not think that you are taking away from the courts 
the ability to shape the law.
    Chairman Garrett. You laid out somewhat the procedures that 
you use in order to do this. Is it possible that you will bring 
these cases, both similar-situated cases, both in one day, is 
an ALJ case one day, the next day in an Article III judge case?
    Mr. Ceresney. The last year, if you look at our statistics 
last year, we brought 57 percent of the cases that were 
litigated in district court, and 43 percent as an AP
    Chairman Garrett. So does that mean that you get different 
results because of that interpretation of the law? And then I 
will yield back.
    Mr. Ceresney. Obviously, you can never tell whether a 
result would be different in one forum or the other. But our 
overriding goal here is investor protection, which is our 
mission. And we use the forum that we think is appropriate for 
the goals of investor protection.
    Chairman Garrett. I will yield back at this point. But 
since we don't have that many people, maybe we will get a 
second round of this. The ranking member of the subcommittee, 
Mrs. Maloney, is now recognized for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman. And following up on 
your line of questioning, any of us who has been in court knows 
it is incredibly time-consuming, and incredibly expensive. And 
as Mr. Ceresney noted, you can be in court for years without 
any solution. That doesn't help investors, and it certainly 
doesn't help business having a decision.
    So I supported the expansion that was in Dodd-Frank that 
expanded the SEC's authority to try cases in an administrative 
forum where they could be made by administrative law judges in 
order to speed up the system. And some critics have said that 
the SEC's administrative proceedings amount to what would be 
called a ``home-court advantage.''
    And some have even claimed that it deprives defendants of 
their due process. So I would like to ask you to speak to those 
issues. Do you think the SEC gets an unfair ``home-court 
advantage'' when they try cases in front of an administrative 
law judge?
    Mr. Ceresney. I do not. Administrative proceedings have 
additional protections that actually defendants don't 
necessarily have in district court, including our obligation to 
produce Brady material, exculpatory material to the defense, 
Jencks Act material, which is prior witness statements. We turn 
over the investigative files, usually within 7 days of filing 
our cases, which we do not do in district court proceedings.
    There also are exhibit lists and witness lists provided 
typically in administrative proceedings, extensive such. And so 
there are lots of protections. I think the one major 
difference, defendants also get subpoenas if they show good 
cause, and they can subpoena documents.
    The one major difference is obviously the lack of 
depositions. And I think the fact is if you look at our 
criminal cases, criminal authorities don't give deposition 
authority. That clearly is not a due-process violation. So I 
think it can't be a due-process violation to deprive defendants 
of depositions in this context.
    Mrs. Maloney. That is the second criticism that I have 
heard, that defendants are still not receiving their full due 
process. And can they appeal the administrative law judges' 
decisions?
    Mr. Ceresney. Yes, they can appeal to the full Commission. 
The Commission hears the appeal in the first instance and then 
they can also appeal after that the Commission's decision to 
the Court of Appeals.
    Mrs. Maloney. Could you just outline briefly what are the 
due process protections? You were talking in general, but can 
you just hit them like bullet points? What are the due process 
protections?
    Mr. Ceresney. We have obligations to turn over Brady 
materials, which is exculpatory evidence; and Jencks Act 
materials, which are prior witness statements. We turn over our 
entire investigative file including any prior testimony by any 
witness, within 7 days--typically within 7 days of our 
institution of the proceeding, we provide exhibit lists and 
witness lists that lay out in great detail what our case is 
going to look like. And, as I said, defendants also have the 
ability to obtain subpoenas of documents for good cause. And so 
I think the defendants have an extensive record which allows 
them to see exactly what we are charging.
    Mrs. Maloney. That sounds like a good process to me. Are 
you getting criticism from investors or institutions about the 
administrative law judge procedures?
    Mr. Ceresney. I have not heard criticisms from investors 
about the administrative law judge's procedures. Obviously, 
there has been some public dialogue about it.
    Mrs. Maloney. Okay. I would also like to ask you about the 
fact that when people talk about the Enforcement Division and 
whether or not it has been successful, they cite statistics on 
how many cases the SEC has brought and how much money they have 
collected in fines, and the bigger the numbers, the ``more 
successful'' the Enforcement Division is supposed to have been.
    This has always seemed extremely strange to me. If the SEC 
is bringing a huge number of security fraud cases, for example, 
doesn't that suggest that there is more securities fraud in the 
markets? How is that a good thing? And, for me, this just 
highlights how foolish it is to judge the Enforcement Division 
based solely on statistics about the numbers of statistics and 
the numbers of fines and the number of cases.
    For example, how do you quantify the number of violations 
that did not occur because they were successfully deterred by 
the Enforcement Division? So my question is, should we be 
looking beyond simple statistics and instead looking at a 
broader range of factors to judge the Enforcement Division, 
even if those factors can't be easily quantified. Could you 
comment on that? My time is up.
    Mr. Ceresney. I agree that numbers are easy to come up with 
and, therefore, those are often cited, but I agree with you 
that is not a major touchstone of success of our Enforcement 
Division. As I always say, the numbers are not the most 
important aspect of judging how well we are doing. From my 
perspective, it is about the quality of our cases--are we 
covering the entire security spectrum, are we bringing cases 
that have an impact on investors, and also deterring and 
punishing this conduct more broadly.
    So we have tried--it is not easy as you suggest--to look at 
cases more qualitatively and to assign sort of measures 
qualitatively to the cases. And so we are trying to emphasize 
that we have talked about first-of-their-kind actions, where we 
are bringing cases in areas where we haven't before. I think 
that is important, as well. So there is no question that 
numbers are not the be-all and end-all in terms of measuring 
our success.
    Mrs. Maloney. Thank you very much.
    Chairman Garrett. Mr. Hurt is now recognized.
    Mr. Hurt. Thank you, Mr. Chairman. I know the gentlelady 
from Missouri, Mrs. Wagner, has some things she has to do so I 
am going to yield my time to her.
    Mrs. Wagner. I thank the gentleman very much for his 
courtesy. And welcome, Director Ceresney. Thank you for joining 
us today to discuss some of these enforcement issues with the 
SEC.
    Earlier this year, a White House memo dated January 13th 
from Council of Economic Advisors Jason Furman and Betsey 
Stevenson was leaked that outlined the rationale for a new 
rulemaking from the Department of Labor to deal with conflicts 
of interest in the retirement advice market. Are you familiar 
with this memo?
    Mr. Ceresney. I am not. The Enforcement Division obviously 
enforces the rules. We are not really involved in policy 
decisions about what--
    Mrs. Wagner. Are you aware of the memos then?
    Mr. Ceresney. I am not.
    Mrs. Wagner. Commissioner Dan Gallagher recently referred 
to it as a ``thinly veiled propaganda designed to generate 
support for a wildly unpopular rulemaking.'' Director, I am 
worried about the effects that such a rule would have on low- 
and middle-income Americans seeking financial advice for their 
retirement. And I would like to get your perspective on some of 
the claims regarding this area.
    Mr. Ceresney. In the Enforcement Division, we are in charge 
of enforcing the rules and the laws as they exist right now. 
And I think what you are referring to is a policy question as 
to what the law should be in the future. Should there be a 
different fiduciary standard, should that fiduciary standard 
apply to broker-dealers and the like. And that is a policy 
question that really is handled by other divisions at the SEC, 
not the one in which I am involved.
    Mrs. Wagner. Let me proceed here and say the memo stated 
that, ``Consumer protections for investment advice in the 
retail and small plan markets are inadequate and that the 
current regulatory environment creates perverse incentives.'' 
Unfortunately, the memo does not analyze regulatory oversight 
or the protections investors currently receive from the SEC or 
FINRA. In fact, the memo doesn't even mention the SEC at all.
    Isn't it true that there are rules that require clear 
disclosure to investors about payments and fees, including, 
sir, incentive fees and rules which prohibit the use of 
manipulation, deceptive or fraudulent practices?
    Mr. Ceresney. There certainly are statutes and rules on the 
books that preclude fraudulent activity and then we certainly 
vigorously enforce those.
    Mrs. Wagner. You vigorously enforce those. Could you please 
help us fill in the blanks left on how the SEC currently 
regulates and enforces conflicts of interest and issues of 
``perverse incentives in the investment advice market?''
    Mr. Ceresney. The law now does have a different standard 
for investment advisors than it does for broker-dealers. The 
broker-dealers are obviously governed by the anti-fraud 
provisions, and investment advisors have a fiduciary duty to 
their clients. So there is a difference in some of the 
standards that apply--
    Mrs. Wagner. There is a difference in the standards. Does 
the SEC ever bring cases against investment advisors for 
violations regarding their fiduciary duty?
    Mr. Ceresney. Yes, we do.
    Mrs. Wagner. So there are still issues of investor 
protection even with a fiduciary duty at times?
    Mr. Ceresney. Yes, but there are different standards that 
govern investment advisors and fiduciary standard does have a 
different nature to it than the protections that apply to--
    Mrs. Wagner. There were also claims, sir, that the current 
regulatory environment incentivizes advisors to recommend 
excessive churning of retirement assets. Doesn't the SEC have 
rules that expressly prohibit brokers from churning client 
accounts?
    Mr. Ceresney. The anti-fraud laws do prohibit churning, and 
that is governed by a test that looks at things like turn-over 
ratios--
    Mrs. Wagner. Right.
    Mr. Ceresney. --and the like.
    Mrs. Wagner. From an enforcement perspective, how do you 
handle these cases?
    Mr. Ceresney. We look for churning and we try--if we see 
indications of churning, we look to try to prove it by looking 
at things like the turnover ratio and the like.
    Mrs. Wagner. What further ways can the SEC mitigate 
potential risks associated with conflicts as a deterrent 
through enforcement, sir?
    Mr. Ceresney. As I said, we in Enforcement enforce the 
statutes and rules that are on the books now. And we do that 
vigorously. Whether there should be a different standard or not 
is, again, not something that is within our purview.
    Mrs. Wagner. If the Department of Labor potentially steps 
into this space where you have decades of experience in 
regulating, could that make your job through Enforcement 
perhaps more difficult, sir?
    Mr. Ceresney. I don't know. I would have to know more about 
what it is that the Department of Labor is going to do. I will 
say that we enforce the law as we see it. Whenever we see a 
violation, we will bring an action.
    Mrs. Wagner. Thank you, and I appreciate it. I yield back 
my time, and I thank the gentleman for his courtesy.
    Chairman Garrett. And I thank you both.
    Mr. Lynch, you are recognized.
    Mr. Lynch. Thank you, Mr. Chairman. Director, I wanted to 
talk to you about WKSI waivers. As you know, Congress and the 
SEC has the ability to withdraw well-known seasoned issuer 
(WKSI) status to a company if they are found to have, in 
particular, violated securities law and anti-fraud provisions.
    So I have sort of made a hobby out of tracking how many 
folks actually have their well-known seasoned issuer status 
withdrawn as a result of prosecution. And it is far more common 
for waivers to occur than it is to actually see prosecution. We 
don't have a lot of success, I think, in--especially looking at 
the financial crisis, not a lot of people were prosecuted, at 
least high-level folks. Very little was done to hold people 
accountable. But this is a case where I think just last year 
the SEC granted 80 specific waivers when they could have 
penalized these companies for wrongdoing.
    One particular case that I have found troubling was against 
Credit Suisse and they actually pled guilty to a criminal 
violation and yet, when the SEC was asked whether they would 
withdraw their well-known seasoned issuer status--this is 
someone whose employees were guilty of criminal activity--we 
still didn't withdraw their status.
    So I am just curious as to where is that line? How do we 
review this, because it looks like it is much more likely that 
you will get a waiver from a penalty established by Congress 
than you might ever be prosecuted or be subject to this 
withdrawal of benefits? And of course, I should add that the 
well-known seasoned issuer status allows them to use shelf 
registrations. So that is a real benefit to these companies and 
it seems to be a good leverage point that we could use to 
require them to refrain from violating the anti-fraud 
provisions or other securities laws that we have established. 
And I am just curious, why don't we use that tool?
    Mr. Ceresney. Enforcement is generally not involved in 
waiver recommendations or decisions. Those are typically 
handled by other divisions at the SEC. For example, the WKSI 
waivers are handled by the Division of Corporation Finance. My 
understanding is that waiver requests are carefully evaluated 
by the Commission staff and by the Commission based on the 
facts and circumstances of the case under applicable legal 
standards.
    It is important to recognize that WKSI disqualifications 
are not enforced from remedies. We have remedies that are 
available to us to punish misconduct and deter misconduct. For 
example, we have disgorgement, we have penalties, we have bars, 
we have undertakings. We have lots of different remedies 
available to us.
    But the disqualification and waiver question is a separate 
question, as Chair White indicated in her speech a couple of 
weeks ago, that is a separate question about whether it is 
appropriate for that particular issuer to function in this 
particular business activity going forward. And whether the 
conduct that is involved in the enforcement action suggests 
that they cannot do that responsibly. That is a different--
    Mr. Lynch. So Credit Suisse, you were involved in that 
prosecution? The criminal prosecution?
    Mr. Ceresney. I was not involved--we were not. We brought a 
separate case against Credit Suisse that was separate from the 
criminal case--
    Mr. Lynch. Okay.
    Mr. Ceresney. --regarding unregistered broker-dealer 
conduct.
    Mr. Lynch. I wonder if the prosecuting authority actually 
recommended that WKSI status be withdrawn or would that be 
overreaching on their part?
    Mr. Ceresney. I am not--again, without talking about any 
particular case, which I don't know if that would be 
appropriate for me to do, I am not aware of criminal 
authorities kind of expressing a view on a WKSI waiver 
decision.
    Mr. Lynch. I am just curious, what is--so you have 80 
waivers. I am just wondering, do you know if we are using the 
threat of withdrawing that classification, WKSI classification, 
as a bargaining chip, sort of, in negotiations?
    Mr. Ceresney. That is exactly why the Enforcement Division 
is generally not involved in the question--
    Mr. Lynch. I see.
    Mr. Ceresney. --about whether--because we do not want it to 
be a bargaining chip in our enforcement actions.
    Mr. Lynch. Okay. Thank you. I yield back. Thank you, sir.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Huizenga?
    Mr. Huizenga. I am up. All right.
    Chairman Garrett. Yes.
    Mr. Huizenga. All right. Well, thank you. Sorry, I have to 
get back, gather my notes. I was being distracted by my 
Wisconsinite. He was bragging about how Wisconsin was going to 
win the tournament so I don't know--I have to--
    Mr. Duffy. Bill agrees Wisconsin is going to win, you guys.
    Mr. Huizenga. You are--reclaiming my time. I am not going 
to offer my predictions. Yes. All right, all right. I am 
getting to the penalties phase and all that. Let's get back to 
business here. When former SEC Chair Schapiro announced her 
intention to return power to staff to determine penalties, it 
is my understanding she received a standing ovation; at least, 
that is what was reported.
    And I would like to hear your thoughts on, should power to 
decide penalties really reside with staff or should it reside 
with the five Commissioners appointed by the President and 
confirmed by the Senate? And, you have to understand, I am a 
former staffer myself. I understand the importance and the 
power of staff but, at the end of the day, doesn't that seem 
like it should be political appointees and confirmed 
Presidential appointees who determine that?
    Mr. Ceresney. Every recommendation that we make, including 
about penalties, gets approved by the Commission. So, at the 
end of the day, every penalty decision is approved by the 
Commission. We recommend to the Commission what the penalty 
should be, but it is up to the Commission to approve that.
    Mr. Huizenga. But the staff determines the level and then 
how often is that overturned by the Commission?
    Mr. Ceresney. I would say in the vast majority of cases, 
the Commission accepts our recommendation. That is true of 
penalties and other things. In the vast majority of cases, our 
recommendation is accepted. Occasionally there is an issue, but 
every penalty recommendation gets approved by the Commission 
ultimately.
    Mr. Huizenga. All right. Tell me a little bit about company 
versus individual penalties on that. I have a quote here from 
you from 2013: ``Monetary penalties speak very loudly and in 
any language a potential defendant understands. Enforcement 
needs to be aggressive in our use of penalties.'' And I am 
curious, do you believe that penalties against corporations 
actually deter actions and conduct that violates the rules? Or 
why are they easier to levy these against companies versus 
individuals, and is there some sort of level where the SEC 
isn't going to go after an individual or an employee at a 
certain level where public securities are--have been--there has 
been fraud within these public companies?
    Mr. Ceresney. There is no question that cases against 
individuals are the greatest deterrent. I think individuals who 
feel like they are at risk will be deterred in their conduct. I 
think that is the case. And actually, 70% of our cases last 
year were brought against individuals--involved individuals 
being charged.
    Having said that, I do think that there is an important 
place for monetary remedies against corporations. I think those 
kind of penalties have great impact. I think they encourage the 
increase in compliance, they encourage increased focus on 
compliance, they encourage shareholders and directors to pay 
attention and to ensure that executives are focused on making 
sure that there is compliance. So, for all of those reasons, I 
think corporate penalties are important but individual cases 
are critical.
    Mr. Huizenga. Is there a written policy as to what 
determines that for the recommendations?
    Mr. Ceresney. A written policy for corporate penalties?
    Mr. Huizenga. No, is there a written policy that staff 
follows as they are trying to determine corporate versus 
individual?
    Mr. Ceresney. There are internal guidelines about generally 
how to look at penalties but I don't--
    Mr. Huizenga. There are always internal guidelines.
    Mr. Ceresney. Right.
    Mr. Huizenga. We have internal guidelines in my family but 
that doesn't mean they are necessarily written down. How are 
they written, are they policy when someone comes in and is new 
to this, is there something for them to review?
    Mr. Ceresney. I believe we have internal guidelines but 
they generally set forth factors to consider in each case. So, 
in other words--
    Mr. Huizenga. So do you or don't you know whether they are 
written down?
    Mr. Ceresney. Well, there--for example, there is a 2006 
release that the Commission put out on corporate penalties that 
contains 9 factors that are relevant to corporate penalties. 
And in every case, we consider how those factors impact the 
case, and in a particular case, we may look at couple or two or 
three of those as being more important than the others. But, 
yes, that is one example.
    Mr. Huizenga. Okay. Would you be willing to provide this 
committee with those written policies?
    Mr. Ceresney. Sure. I am happy to provide the 2006 
statement to the committee.
    Mr. Huizenga. Okay. And that is the extent of any of the 
guidelines that you deal with and staff would deal with?
    Mr. Ceresney. I believe we do have some internal factors to 
be considered. I would have to go back and look at our internal 
guidelines. But the public around this--also I should note 
cases out there--case law that articulates particular factors 
that should be considered in looking at penalties and we 
obviously follow those, as well.
    Mr. Huizenga. My time is expiring but I think what I would 
like to do is follow up in written form with you--
    Mr. Ceresney. Sure.
    Mr. Huizenga. --and see what we can pull together. Okay. 
Thank you, Mr. Chairman. And I yield back.
    Mr. Hurt [presiding]. Thank you.
    The Chair now recognizes the gentleman from Delaware, Mr. 
Carney, for a period of 5 minutes.
    Mr. Carney. Thank you very much, Mr. Chairman. And thank 
you for coming in today, Director Ceresney. Just a couple of 
quick questions. One, and it has been referred to a little bit 
before, is that we as Members hear from our constituents all 
the time about the fact that so few people were prosecuted or 
went to jail. That is what I hear specifically from 
constituents, as a result of the big financial crisis. How 
would you respond to that?
    Mr. Ceresney. I would say--obviously, I can't speak to the 
criminal authorities, because we don't have criminal authority 
at the SEC, and I can't speak for the Department of Justice, 
which does. I will say that I think our record in the financial 
crisis was very strong. We brought cases against 175 entities 
and individuals including 70 CEOs, CFOs, and senior executives. 
We got tremendous amounts of relief and disgorgement and 
penalties as a result of the financial crisis cases.
    And so I think when you look at our efforts during the 
financial crisis, they were extremely strong. One example, just 
to point to, is the Bank Atlantic case which we tried in Miami 
a couple of months ago and we got a verdict against the CEO and 
the firm for misrepresentations relating to loans arising out 
of the financial crisis. That is just an example of a case we 
brought that was very strong and important.
    Mr. Carney. Could you characterize some of the other cases. 
What generally were you--or is it just a broad range of things?
    Mr. Ceresney. It was a broad range of things. I think it 
included cases like the case against Citi's CFO relating to the 
disclosure of the subprime exposure. A case against Countrywide 
Financial relating to issues relating to their mortgages. Cases 
against Thornburg Mortgage relating to representations they 
made to investors. A case against BankAtlantic involved 
misrepresentations by a CEO regarding the performance of loans 
on the books of the bank. Those are just some examples.
    Mr. Carney. Shifting gears, considerably actually, I am 
interested in your reflections here. A number of us have heard 
presentations about the possibility of a venture-type exchange. 
And I have talked to folks in the business and there--some of 
the concerns they raise are around fraud and that kind of 
thing, and the example in Canada, there actually has been some 
fraud. What concerns would you have with respect to a venture 
exchange, if you will, from an enforcement--from a fraud 
perspective and if you are familiar with that at all? I would 
be interested in your viewpoint on that.
    Mr. Ceresney. Obviously, the question about venture 
exchanges is one for the Division of Corporation Finance or for 
the Division of Trading and Market--
    Mr. Carney. But my question is more of what should we be 
concerned about and--
    Mr. Ceresney. Sure. I think it is--I wouldn't characterize 
it as anything different than we are often concerned about, 
which is investor protection and whether investors are being 
misled. You obviously want to make sure that any 
representations the company that lists on a venture exchange 
are accurate. And so we would obviously monitor that just like 
we are monitoring all kinds of other things. Like, for example, 
Rule 506 Jobs Act, and other types of initiatives that relate 
to raising money from investors. We do look for fraud and all. 
So I don't know whether venture exchanges would present a 
larger--
    Mr. Carney. Yes, I think that is really the question.
    Mr. Ceresney. I don't know--
    Mr. Carney. You don't have a view on that?
    Mr. Ceresney. --to have a view on that, yes.
    Mr. Carney. Well, thanks very much. Thanks for being here. 
I yield back.
    Mr. Hurt. The gentleman yields back. The Chair now 
recognizes the gentleman from Texas, Mr. Neugebauer, for a 
period of 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman, and thank you, Mr. 
Ceresney, for coming today.
    Under Sarbanes-Oxley, the Commission is authorized to take 
pools of cash collected from defendants in the SEC enforcement 
actions and distribute the money to injured investors. I think 
they call those Fair Funds. The penalties are deposited into 
the Fair Fund which functions like a private class action 
settlement.
    In an op-ed in November of 2014 in The Wall Street Journal, 
SEC Commissioners Gallagher and Piwowar expressed concerns 
about the use of those funds and said they believed that class 
action lawyers have an incentive to round up potential victims 
in the SEC insider trading cases and arrange a substantial 
contingency fee, then lead Fair Fund campaign under the guise 
of grassroots movement by harmed investors.
    I think the particular case that Commissioners Gallagher 
and Piwowar were referring to was the SEC v. CR Intrinsic 
Investors. I think in that case there were thoughts that it was 
difficult to really tell who the injured parties were in that 
case, and that a substantial amount of money was involved in 
that transaction. And so I guess the question is, were you 
aware that before the vote, the Commissioner's office received 
dozens of suspiciously similar letters from purported victims 
urging the Commission to petition for a Fair Fund?
    Mr. Ceresney. The CR Intrinsic case did involve proceeds 
from a settlement that involved insider trading. Our 
assessment, based on the WAU and Congress' prior activity in 
this area, is that contemporaneous traders--that is, traders 
who traded at the same time as the insider trading occurred--
were victims under the law as it has been defined by both the 
case law and by Congress in the past.
    And so our recommendation to the court was that a Fair Fund 
be established both from the disgorgement and from the penalty 
amounts in that case and distributed appropriately, and we also 
reminded the court that the statute does not allow for the use 
of attorneys' fees--the use of the funds to pay attorneys' fees 
as part of that distribution.
    And so our perspective was that a fund should be created 
and an administrator should be appointed to determine who the 
victims were, and then distribute the money, but that it 
shouldn't go to attorneys' fees.
    Mr. Neugebauer. You may not directly pay attorneys' fees, 
but if a bunch of trial lawyers get together and go out and 
solicit people who could have--say they could have been injured 
in that trading or that specific case, they get a contingency 
fee, while the funds from the pool don't directly go to pay 
those attorneys, indirectly they would go to the attorneys. I 
guess they would be netted from the settlement with the 
individual who claimed their damages. Wouldn't that be correct?
    Mr. Ceresney. I don't know what arrangements there are 
between investors and their attorneys and, obviously, we don't 
look into--we award a settlement--if money is awarded out of 
the Fair Fund to a particular investor what they then do with 
that money is not something that we can have visibility into. 
And so I think the only question that we were faced with was 
whether those contemporaneous traders were victims, and a 
majority of the Commission obviously approved the 
recommendation that we recommend to the court the creation of 
the Fair Fund.
    Mr. Neugebauer. What is the current policy of when you 
establish a Fair Fund and when you don't establish a Fair Fund?
    Mr. Ceresney. Whenever we have investors that have been 
harmed that we can identify, and wherever the money is 
sufficient such that it makes it justifiable to create a fund, 
we will recommend a Fair Fund. It obviously is a facts-and-
circumstances determination based on the amount of money, who 
the victims were, what the conduct was, et cetera.
    Mr. Neugebauer. What is the current status of the Intrinsic 
case?
    Mr. Ceresney. I am not 100%--I think an administrator has 
or will be appointed, I am not 100% sure of exactly where--I am 
happy to get back to you with the current status if I can go 
back and check. I believe it was in the planning stages still 
where we had--I think there had been an administrator appointed 
and now they have to come up with a plan.
    Mr. Neugebauer. And how many Fair Funds have you set up 
since the authorization in Sarbanes-Oxley, do you know?
    Mr. Ceresney. I don't have a number of Fair Funds. I can 
tell you the amount of money we distributed through--since 
Sarbanes-Oxley. It is almost $10 billion.
    Mr. Neugebauer. But you don't how many funds?
    Mr. Ceresney. I can't tell you. It is hundreds, but I don't 
know the exact number. I can get back to you with that if you 
would like.
    Mr. Neugebauer. And when you say you distributed $10 
million, that was the amount of money that went into the fund?
    Mr. Ceresney. $10 billion.
    Mr. Neugebauer. $10 billion.
    Mr. Ceresney. Yes. I think that is the amount distributed. 
There are occasions I think where money goes into a fund but 
there is excess and it comes back, so I am not sure whether 
that--I think that $10 billion is actually disbursements.
    Mr. Neugebauer. I would be interested to know the current 
status of the Intrinsic case.
    Mr. Ceresney. Okay. We can get back to you on that.
    Mr. Neugebauer. Thank you.
    Mr. Hurt. The gentleman yields back. The Chair now 
recognizes Mr. Sherman for a period of 5 minutes.
    Mr. Sherman. Thank you. I want to focus a little bit on 
some of the less sophisticated, more clearly illegal, but 
sometimes not detected, fraud that goes on out there. The best 
example is Madoff. I want to make sure that we have learned all 
the lessons that can be learned there.
    One of the things with Madoff is he submitted audited 
financial statements, audited by a firm so small that they 
could not have done an audit of his operation. You might also 
have a circumstance where the firm is just barely enough to 
have done the work, but if they did it, that would have to be 
like half their fees for the year and they would have lost 
independence. You may have a circumstance where the audit firm 
doesn't exist. And you may have a firm that does exist but the 
issuer just steals a piece of stationery. What systems have you 
done--gone through to make sure that the auditor sends you a 
copy of the audit opinion, or emails it in to you, so you know 
that the issuer is not submitting a forged audit opinion?
    Mr. Ceresney. Obviously, the PCAOB was created by part--
Sarbanes-Oxley to oversee the audit--public audit of public 
companies, and I think that they have--
    Mr. Sherman. This is more, how do you--
    Mr. Ceresney. Is your question in connection with--
    Mr. Sherman. Yes. When a registration statement is 
submitted--
    Mr. Ceresney. Right.
    Mr. Sherman. --it is submitted by the issuer. How do you--
when a reg D document is submitted, et cetera. At all levels 
from public to A plus to A minus to A triple plus, whatever, 
reg A, reg D. How do you make sure that, in fact, the CPA firm 
did in fact sign that opinion? It is not a forgery?
    Mr. Ceresney. Well, the Division--
    Mr. Sherman. Do you bother to contact the firm?
    Mr. Ceresney. The Division of Corporation Finance reviews 
filings by companies.
    Mr. Sherman. Do they have a system, or you don't know if 
they have a system?
    Mr. Ceresney. Sitting here today, I can't tell you what 
their system is. I know if they were to find a red flag that 
suggested there was an issue they would refer it to us.
    Mr. Sherman. The answer, I believe, last I checked is that 
they have no system. Madoff happened because 10 or 12 of the 
barn doors were open. They have closed one or two, and they 
have gone on to other things. There will be more fraud, and 
then there will be more work for you folks to do and more big 
fines to collect, which will get the agency more big and good 
headlines.
    What does your Enforcement Division do with regard to the 
Ponzi schemes that are out there being sold to people who 
wouldn't know a registration statement if it hit them in the 
face? Are you trolling the internet and finding the Ponzi 
schemes or are you going to tell me that, well, you are not a 
law enforcement agency so you won't do that?
    Mr. Ceresney. We do do that, amongst many other things. We 
obtain over 15,000 TCRs, tips, complaints and referrals a year.
    Mr. Sherman. I am not talking about--I am talking about, 
are you trolling or are you just waiting for people to tell 
you?
    Mr. Ceresney. We do have proactive efforts in a number of 
areas, including pyramid schemes, microcap fraud, and that kind 
of--
    Mr. Sherman. You actually have at least one employee who is 
trolling the internet, finding the bogus offers that are out 
there to investors?
    Mr. Ceresney. We do in a number of areas, including 
microcap fraud, pyramid schemes and the like. We do do 
affirmative proactive surveillance.
    Mr. Sherman. Got you. Now, you are asking for a 7 percent 
increase in the budget. How would that be spent? Why is it 
necessary?
    Mr. Ceresney. Yes, the portion of that budget that is 
related to the Enforcement Division relates to 93 positions 
that we have asked for. I think the way we break it down is 
really three categories of additional needs. One is data 
analytics. We anticipate 20 people would be into analytics. We 
have a huge amount of data now available to us. Using that to 
detect misconduct is a great opportunity and something that we 
really need to be doing.
    The second is for investigators, about 50 additional people 
there. And there, I think the point is we have just tremendous 
resources that are necessary to investigate complex schemes. 
And the third area is trial attorneys--about 20 or so trial 
attorneys. And we have seen an increase in trials--
    Mr. Sherman. And these 93 positions, that would be roughly 
a 7 percent increase of your Division or is it somewhat 
different than that?
    Mr. Ceresney. Our Division now is about 1,300 or so 
employees--
    Mr. Sherman. It is pretty close to 7 percent.
    Mr. Ceresney. I guess it is close to 7 percent.
    Mr. Sherman. Close enough for government work.
    I yield back.
    Mr. Hurt. The gentleman yields back. It is my understanding 
that votes have been called. So what I would like to do is to 
have questions for--what I would propose doing, without 
objection, is that we have questions from Mr. Royce and then 
Mr. Himes and we would then recess.
    So with that, I recognize Mr. Royce for a period of 5 
minutes.
    Mr. Royce. I thank the chairman.
    Director, as you point out in your testimony, policing 
insider trading is central to the mission of ensuring 
confidence in the markets. And I assume that you often get 
anonymous tips on insider trading cases or have things referred 
to you from the Division of Corporation Finance.
    I am wondering what other avenues you look to for 
information. For example, if a Federal judge raises serious 
questions about insider trading in a ruling, is this something 
that could trigger the commencement of an investigation into 
securities laws violations? Or is an investigation--let's say 
there is an ongoing investigation, are issues raised in a court 
proceeding potential evidence for the Division of Enforcement?
    Mr. Ceresney. We have a number of sources of information 
relating to insider trading cases. A prominent source is SRO 
referrals, FINRA and ORSA refer cases to us often. We also now 
have developed internally a mechanism for finding insider 
trading through data that we have--blue sheet data that we 
have. Obviously, if a court decision were to come out which 
suggested there was insider trading, it clearly is also 
something we would look at.
    Mr. Royce. The judge raised those serious questions, I see. 
As for what makes up the insider trading, do you look to the 
law for guidance? Do you discuss potential investigations with 
your colleagues in Corporation Finance? I assume it is not 
always as easy as Justice Potter's storage rule that you know 
it when you see it.
    Mr. Ceresney. We do. Obviously, we have dialogue 
internally, including with the Division of Corporation Finance 
about violations of the insider trading laws.
    Mr. Royce. And it is clear to me that sometimes you have to 
answer complicated questions in order to bring an insider 
trading case to the Commission. Under the Securities and 
Exchange Act, and specially Rule 14e-3, there are many hurdles 
that have to be overcome. And I was hoping you could help me 
understand some of those today.
    The first is this question of what constitutes a 
substantial step or steps toward a tender offer? Do you look 
for tactics commonly associated with a hostile bid? Say, for 
instance, Company A is making an offer to buy Company B. If 
Company A begins a PR campaign and hires financial and legal 
advisers and sends multiple threatening letters to Company B's 
Board of Directors, directly communicates with Company B, its 
customers and employees, would this not meet the threshold of 
commencing a hostile tender offer?
    Mr. Ceresney. I think it is a facts and circumstances 
inquiry. You know, what a substantial step towards a tender 
offer is really a--can be a complicated question, in certain 
cases, obviously. So I think it really depends on the facts and 
circumstances.
    Mr. Royce. And here is a follow-up on this: What if Company 
A's board meeting materials clearly reflect a recognition by 
the board that a move to acquire Company B would most likely 
require a hostile takeover? Or what if Company A simply makes a 
self-serving statement that it is not taking a substantial step 
towards a tender offer. Is this enough to establish that as 
fact?
    Mr. Ceresney. Again, I think it is a facts and 
circumstances inquiry. I need to really sort of examine the set 
of facts and circumstances on that.
    Mr. Royce. And another question that has only recently been 
raised is what is the SEC's definition of who would be 
considered a co-bidder or a so-called co-offering person and 
therefore exempted from the scope of the rule?
    Mr. Ceresney. Again, it depends on the facts and 
circumstances and what kind of conduct the individual or the 
entity takes.
    Mr. Royce. Would a person or persons brought on as a 
strategist or financier by Company A qualify as a co-offering 
person under the rule? What would have to be established for 
this person to qualify for the exemption from the disclosed or 
abstain rule that applies to those with material non-public 
insider information.
    I am hopeful that the SEC will provide some clear guidance 
on these issues in the future. And so, that is why I asked the 
question for the record. If I could have a response on those?
    Mr. Ceresney. Again, it is a facts and circumstances 
inquiry. I would really need to examine the facts more closely.
    Mr. Royce. Thank you, Director.
    Mr. Ceresney. Thank you.
    Mr. Hurt. The gentleman's time has expired.
    The Chair now recognizes Mr. Himes for a period of 5 
minutes.
    Mr. Himes. Thank you, Mr. Chairman. Thanks for being with 
us, Director Ceresney. I have two questions pertaining to 
insider trading. Like my colleague, Mr. Lynch, I am working on 
a bill that takes a slightly different approach.
    And my two questions are this. First, there is some 
ambiguity in the press reporting about the SEC's beliefs around 
the implications of the Second Circuit's Newman decision. Law 
360--I think they quoted you as saying you have the ability to 
adapt, late January Southern District prosecutors say they are 
going to drop some prosecutions. And of course, we are hearing 
lots of talk about the possibility of convictions being 
overturned.
    So my first question is, regardless of the future of the 
Newman decision, do you think we would be well-served, big 
picture, by clear statutory liability, in other words, a law 
prohibiting insider trading?
    Second--I will let you divide up the remaining time in 
terms of how you want to answer these--and this would be 
helpful in thinking through the legislation that I am working 
on, how does the SEC think about the threshold between civil 
and criminal liability? I guess the right way to ask that is 
when do you and how do you take the decision to refer a case 
like this to the DOJ for criminal prosecution?
    Mr. Ceresney. First, let me just comment on the impact of 
Newman. I think it is fair to say it is a very significant 
decision and it will impact certain of our cases. Whatever has 
been reported about our views, it is very significant. It also, 
though, as I have said before, does not mean that we don't have 
insiding trader cases. We brought cases against 16 defendants 
since Newman and we will continue to do that. We will work 
within the confines of Newman.
    We have a lower standard of proof on the civil side, where 
we have to show negligence by knowledge of a tippee, and so 
that helps. We have other circuits we can go to. So, there are 
ways we can deal with Newman. And I think courts may well 
distinguish the facts on Newman, as they did in the last couple 
of weeks in the Southern District. So, that is just our views 
on Newman.
    And we filed an amicus brief. The rehearing is still 
pending. And so, obviously, whatever happens with that will 
impact our views.
    As for the views on legislation, I think that obviously is 
a decision for the Commission to make about what their position 
is on legislation. And they have not taken a position yet. What 
we have said and we will continue to do is, we are happy to 
supply technical expertise, as you and others work on bills.
    And I think Chair White said last week--and I think this 
remains our overriding view--strong insider trading laws are 
critical to the markets. And we think that is important. And we 
think that is critical. So, that remains our overriding goal, 
making sure that insider trading laws are strong, and that 
people have confidence in the markets.
    Now, as to the question about civil and criminal--
    Mr. Himes. Can I stop you there? Because, of course, some 
might argue that there are no insider trading laws, that you 
rely on anti-fraud provisions. So, can I interpret what you 
just said as encouragement that perhaps we should do away with 
some of the ambiguity emerging from the way these cases have 
been prosecuted?
    Mr. Ceresney. No, I think I am saying it is really up to 
the Commission, and they haven't expressed a view on this. And 
I don't want to be interpreted one way or the other on this. I 
think Section 10b-5 does prohibit insider trading, as the case 
law has shown. It is deceptive conduct, and it is illegal under 
Section 10b-5. So, that is really what I was saying.
    And just on the civil/criminal question that you asked, 
obviously, violations of the securities laws--the only--the 
thing that makes it criminal is intentional conduct, where we 
can show intentional conduct beyond a reasonable doubt. That is 
what makes it criminal. Obviously, every violation to 
securities law could be criminal if it is done intentionally 
and we can prove it beyond a reasonable doubt.
    And so, in insider trading cases, what we do is we often 
work with criminal authorities, as well. They have tools that 
aren't available to us, including undercover operations and the 
threat of jail and those kinds of things. And the question 
about whether something goes criminal versus civil is often a 
question of the evidence.
    Typically, you will have a cooperator in a criminal case, 
or you will have a recording. Or you will have some sort of 
definitive evidence that can prove it beyond a reasonable 
doubt.
    In our civil cases, we often have circumstantial evidence. 
You see somebody trading right before an announcement. You see 
them getting a call from an insider right before they trade. 
You see evidence of suspicious trading, where they are trading 
two thirds of their net worth right before an announcement. 
They have a relationship with somebody who is an insider.
    So, there is lot of circumstantial evidence that shows it, 
and we think that can prove it by a preponderance of the 
evidence. But that is not always sufficient to show beyond a 
reasonable doubt.
    Mr. Himes. Last question. Newman hinged on the knowledge of 
the tippee, of the tipper's personal gain and the existence of 
that personal gain. Do you think that the tippee's knowledge of 
the possibility of personal gain on the part of the tipper--do 
you think that is sort of an essential feature to liability of 
the tippee?
    Mr. Ceresney. Well, that is what Newman says. And we had 
previously--our view was that it wasn't. But the Southern 
District didn't appeal that portion of the Newman case--didn't 
seek rehearing on that portion of the Newman case. And so, I 
think it will stand. So Newman, at least in the 2nd Circuit, 
governs there.
    As I mentioned, the way we deal with that is we have a 
lower standard of proof on that. We just have to show that the 
tippee should have known that the tipper had a personal 
benefit. And that gives us an ability to show, for example, 
that the nature of the information was such that the tippee 
should have realized that it came from somebody who had 
personal benefit.
    Mr. Hurt. Thank you, Mr. Ceresney.
    The gentleman's time has expired.
    The list that I have now is Mr. Schweikert, Mr. Poliquin, 
Mr. Hill, and Mr. Duffy are the ones that we will expect to 
hear from, or have questions when we get back.
    And, without objection, we will recess until 10:45.
    [recess]
    Mr. Hurt. The subcommittee will come back to order. Thank 
you, Director, for your patience.
    And what I have like to do is go ahead and recognize the 
gentleman from Wisconsin, Mr. Duffy, for a period of 5 minutes, 
starting now.
    Mr. Duffy. Thank you, Mr. Chairman.
    Mr. Ceresney, you are a lawyer, correct?
    Mr. Ceresney. I am.
    Mr. Duffy. And you used to be a Federal prosecutor, 
correct?
    Mr. Ceresney. I was.
    Mr. Duffy. And now you have moved over to the SEC? Yes?
    Mr. Ceresney. Yes.
    Mr. Duffy. Yes. Very easy questions.
    And you care about due process, I would imagine?
    Mr. Ceresney. Yes, I do.
    Mr. Duffy. Who hires the ALJs who work at the SEC?
    Mr. Ceresney. I am not sure of the exact process and I am 
not involved in the process--
    Mr. Duffy. But the SEC hires the ALJs, right?
    Mr. Ceresney. I believe, actually--
    Mr. Duffy. You should know the answer to that. It is not 
some outside group, right?
    Mr. Ceresney. I don't--I think that the chief judge, Judge 
Murray, may be well involved in it. I assume ultimately, it is 
approved by either the Chair or the Commission. I am not sure.
    Mr. Duffy. At the SEC? So the ALJs are hired by the SEC? 
They are paid by the SEC, correct? Yes.
    Mr. Ceresney. They are paid by the government. I don't know 
exactly where the money--
    Mr. Duffy. In the administrative law proceedings, who makes 
the rules in regard to those proceedings?
    Mr. Ceresney. The Commission.
    Mr. Duffy. The SEC does, right?
    Mr. Ceresney. That is correct.
    Mr. Duffy. Right. So, not some third party. You actually 
make the rules by which you get to litigate cases or prosecute 
cases, correct?
    Mr. Ceresney. I think they are subject to notice and 
comment, but yes, it ultimately is--
    Mr. Duffy. But you make the final rule. You can say, ``I 
will listen to you, I will hear you, but I am going to make the 
final decision.''
    Mr. Ceresney. Like other rules, that is correct.
    Mr. Duffy. So with regard to discovery in the ALJ 
proceedings, do you have the same discovery requirements going 
the ALJ route as you do in Federal court?
    Mr. Ceresney. Actually, you have more extensive discovery.
    Mr. Duffy. More extensive?
    Mr. Ceresney. Yes. We turn over our whole file, typically 
within 7 days of--
    Mr. Duffy. Are you required per your rules to turn over 
those documents?
    Mr. Ceresney. Yes, we are.
    Mr. Duffy. So you are--your testimony is, the discovery 
requirements at the SEC going the administrative route is more 
extensive than the Federal courts?
    Mr. Ceresney. Our obligation to produce documents and items 
that are in our file is more extensive.
    Mr. Duffy. So do you have a duty to disclose exculpatory 
evidence to the defendant?
    Mr. Ceresney. In an administrative proceeding, we do, not 
in a district court action.
    Mr. Duffy. So you are required to--per your guidelines, to 
disclose exculpatory evidence?
    Mr. Ceresney. Per the rules of practice, yes.
    Mr. Duffy. Okay. And what happens if you violate that rule?
    Mr. Ceresney. I assume there are implications for the 
proceeding, but I am not familiar with instances where that has 
occurred. But I imagine there would be implications in the 
proceeding.
    Mr. Duffy. In regard to the admissibility of hearsay, is 
that admissible in Federal court?
    Mr. Ceresney. Hearsay is, unless it is subject to an 
exception--there are obviously a number of exceptions to 
hearsay--
    Mr. Duffy. It is not admissible, right?
    Mr. Ceresney. Hearsay that is not subject to an exception 
is not admissible.
    Mr. Duffy. Is it admissible in your proceedings?
    Mr. Ceresney. The rules of evidence are relaxed in an 
administrative proceeding, but the administrative law judge has 
discretion.
    Mr. Duffy. So the point is, you don't have the same rules 
on hearsay at the SEC as you do in Federal court.
    Mr. Ceresney. They could, although one thing to say is the 
administrative law judge decides on the weight of the evidence.
    Obviously, if evidence is hearsay--
    Mr. Duffy. The administrative law judge that is employed by 
the SEC, that one?
    Mr. Ceresney. The administrative law judge--
    Mr. Duffy. --what was the--I thought I heard that 
incorrectly--what was the win rate last year in the cases you 
brought, in those administrative cases?
    Mr. Ceresney. Last year--
    Mr. Duffy. Did I hear it was 100 percent?
    Mr. Ceresney. Last year, but--
    Mr. Duffy. But 100 percent?
    Mr. Ceresney. Not in prior years, though.
    Mr. Duffy. But last year was 100 percent? You won every 
case?
    How about with regard to the cases that you brought in 
Federal court? Was it 100 percent there?
    Mr. Ceresney. No--
    Mr. Duffy. No? You won 11 out of 18?
    Mr. Ceresney. That is correct--11 out of--
    Mr. Duffy. Do you think there could be any correlation when 
you actually hire the judges and you set the rules that you win 
all the cases? Do you see a correlation there?
    And you might say, you know what? I want to bring more 
cases in front of the judges that I hire and abide by the rules 
that I set as opposed to letting these cases go into Federal 
court. And low and behold, wow, I win them all. And I believe 
in due process.
    This is a great way to administer justice when you work at 
the SEC.
    Mr. Ceresney. I will just say this: We are not afraid to 
try cases in Federal court. In fact, we have won 11 of our last 
13 jury trials in Federal court. We just won one yesterday.
    And we still bring a majority of our cases in district 
court, so we are not shying away from using district court.
    Mr. Duffy. With regard to press releases, I read a few of 
your press releases. I don't know if you would agree, but when 
I read your press releases, I read them and say, ``This 
defendant, man, the SEC says they are guilty. They lay out the 
case, they lay out the facts, and they conclude guilt.''
    As a former Federal prosecutor, from the U.S. Attorney's 
Manual, there is a requirement that says, ``A news release 
should contain a statement explaining that the charge is merely 
an accusation, that the defendant is presumed innocent until 
and unless proven guilty.''
    And I was a former prosecutor, only a lowly State 
prosecutor, and we would abide by that rule as well.
    I read this, and I am amazed at the stuff you put in your 
press releases with regard to defendants.
    Thoughts on that?
    Mr. Ceresney. I think our press releases always make clear 
that the allegations are being alleged, and they make it clear 
that they have not been proved and they are subject to being--
    Mr. Duffy. What do you think a Federal judge would do if 
you, as a Federal prosecutor, put out a press release about a 
defendant, like you do, about a defendant at the SEC? Do you 
think he would say, ``Oh, wow, that is right in line with 
Federal procedure?''
    Mr. Ceresney. I think it is in line.
    Mr. Duffy. You think it is?
    Mr. Ceresney. Yes, I do.
    Mr. Duffy. I would disagree in the most strong way.
    I see my time--
    Mr. Hurt. Thank you, Mr. Duffy.
    Mr. Duffy. --is up. I yield back.
    Mr. Hurt. Thank you, Mr. Duffy. And the gentleman's time 
has expired.
    The Chair now recognizes Mr. Poliquin for a period of 5 
minutes.
    Mr. Poliquin. Thank you very much, Mr. Ceresney, for being 
here this morning. I appreciate it.
    And I want to thank you also for the good work of you and 
your staff in pursuing the bad guys in the financial services 
space. I know that you are doing the best you can to make sure 
you protect our consumers.
    Now, if you don't mind me beginning by reminding both of us 
that the reason we have such a strong economy, in great part, 
here in America is because we have such a diverse and creative 
and liquid capital market and also financial services sector. 
Not only do they provide the capital that we need as an economy 
to grow and create better lives and more jobs for our citizens 
but it also provides the tax revenues we need to defend 
ourselves and take care of those who are truly in need.
    Now, we both know that this country is a country of laws, 
and it is very, very important that whomever comes before you--
and I am sure you would agree with this, Mr. Director--has a 
fair hearing. This is embedded in our Constitution, the 4th and 
5th Amendments.
    And I am sure you want to make sure that anybody who is 
brought before you folks has an opportunity to defend 
themselves in a fair and predictable way, whether you are in 
front of a traffic court in Bangor, Maine, or someone here in 
Washington who is in the financial services sector before you 
folks.
    Now, one of the concerns that I have, to be very candid 
about with you, as we discussed a little bit this morning, Mr. 
Ceresney, is that during the past few years, you seem to have 
relied much more on an in-house administrative process to chase 
down those you think are--or have been accused of violating our 
securities laws.
    Now, if I am not mistaken, internal in-house procedures are 
located and they take place at your offices. Is that correct? 
In-house?
    Mr. Ceresney. In D.C., we have a hearing room in the SEC--
    Mr. Poliquin. Okay, so it is that essentially at your 
building?
    Mr. Ceresney. In the regions, actually, often, the hearings 
are not held in our offices; often, they are held in Federal 
courts or other places.
    Mr. Poliquin. Okay, but I am just talking about your 
administrative process. And if I am also not mistaken, Mr. 
Ceresney, you folks actually select the administrative law 
judges who oversee these proceedings. Is that correct?
    Mr. Ceresney. As I mentioned, I am not 100 percent sure of 
the process by which the ALJs get hired. I know that the--
    Mr. Poliquin. Okay, but you folks pay them.
    Mr. Ceresney. They are paid by the government.
    Mr. Poliquin. Okay, they are paid by the government. Paid 
by the SEC in this case, part of your budget.
    Mr. Ceresney. I assume that is right. But I don't know 
where the money comes from.
    Mr. Poliquin. Okay. I would make the case, if I may, sir, 
that if you are not in Federal court to pursue these alleged 
violations of the securities law and they are held, effectively 
on government property, your government property or 
thereabouts, and you folks are involved in some way, are hiring 
and paying for these judges, I would make the argument with you 
or make the point that they might not be completely impartial.
    And I want to just bring that to your attention.
    Also, it is my understanding that there is no jury 
involved, correct?
    Mr. Ceresney. There is no jury--
    Mr. Poliquin. Okay. And also, hearsay is admissible as 
evidence in these proceedings, is that correct?
    Mr. Ceresney. As I said before, hearsay evidence can be 
admissible. It is at the discretion of the ALJ and the amount 
of weight--
    Mr. Poliquin. Okay. And these folks are the people that you 
hire for these proceedings.
    And if someone comes before you and they--or they come out 
on the other side of the fence, and they want to appeal it, 
they appeal it before your people, right?
    Mr. Ceresney. They appeal it to the Commission.
    Mr. Poliquin. Okay. So they--
    Mr. Ceresney. Presidential appointees.
    Mr. Poliquin. Okay, so they appeal it to your organization, 
not an independent outside entity, correct?
    Mr. Ceresney. They ultimately can appeal to a court of 
appeals.
    Mr. Poliquin. Okay, but the first appeal is to you folks, 
right?
    Mr. Ceresney. The first appeal is to the Commission.
    Mr. Poliquin. Okay. Here is where I am going with that, Mr. 
Ceresney. Everybody wants to make sure that our investors and 
our consumers are protected, but we also want to make sure that 
the folks that you bring before you also have a fair and honest 
process. That is part of our Constitution.
    Now, I would also, if I may, remind you that the financial 
services industry employs about 6 million people in this 
country in various functions. And they are good-paying jobs. 
And they provide opportunities for their families.
    And what I am concerned about is that if you have a process 
that is perceived to be unfair or unpredictable, where it is 
stacked against the person that you bring before you or the 
company you bring before you, that this will have a negative 
impact on this part of our economy, which provides so much 
vibrancy and so much depth to our economy and so much 
employment, that this could actually hurt the folks whom you 
are trying to help.
    Let me give you an example. If you are talking about a 
paper maker in Rumford, Maine, that I represent, or a teacher 
from Bangor, Maine, or a nurse from Lewiston, Maine, and they 
are preparing and saving for their retirement or to put their 
kids through college with savings, and they are dependent upon 
a mutual fund company or an investment management firm that 
helps them grow that retirement nest egg or that nest egg to 
put their kids through college, and all of a sudden the firms 
in this space are dragged before the SEC and there is not a 
fair opportunity to be heard, then that will have a negative 
impact and raise the cost, raise the fees, and reduce the 
performance of that nest egg that those retirees are trying to 
accumulate.
    So I know there is all kinds of room to make improvement. 
And I would just encourage you, Mr. Ceresney, as you go through 
this process, to make sure you are looking out for these 
middle-class families who are trying to prepare for their 
retirement by being fair to the people who are brought before 
you.
    I bet there are ways you can make adjustments to make that 
happen.
    Mr. Hurt. Thank you, Mr. Poliquin.
    The gentleman's time has expired.
    The Chair now recognizes Mr. Messer for a period of 5 
minutes.
    Mr. Messer. Thank you, Mr. Chairman.
    And thanks to the Director for being here today. I 
appreciate your willingness to withstand testimony.
    We all support the vigorous enforcement of Federal 
securities laws and believe that it is important that you go 
after bad actors. When, though, those bad actors are penalized, 
at times the payment for that falls upon innocent shareholders, 
who, of course, weren't a direct part of the bad activities 
that may have been prosecuted.
    Could you talk a little bit about what, if anything, the 
SEC does to ensure or try to mitigate the impact on innocent 
shareholders of enforcement efforts?
    Mr. Ceresney. We have a number of factors that we consider 
when we think about corporate penalties. And I think you are 
focused on issuers that are not regulated. I think that is the 
area folks have focused on when it comes to shareholders and 
the like.
    And there are a bunch of factors that we consider. We 
consider the conduct. We consider whether or not there was 
intent. We consider cooperation, remediation. We also consider 
whether there was a corporate benefit, that is, whether the 
shareholders got some benefit from the conduct. That is 
obviously an important factor. And then, also, what is the 
impact on the shareholders. We consider all of those things.
    And in every case, we decide on the appropriate penalty 
that would be important and useful for punishment and 
deterrence, and that is really our goal, making sure that we 
are punishing and deterring. So in every case we weigh those 
factors and reach that conclusion.
    Mr. Messer. You have agency guidelines, as I understand it, 
that say that you can consider the impact on shareholders?
    Mr. Ceresney. There was a 2006 release that outlined a 
number of factors that should be considered. One of those 
factors was impact on shareholders. So it is one of the factors 
that is looked at in connection with a corporate penalty. But 
it is only one of the nine factors.
    Mr. Messer. And make sure when you say release, those 
releases are a set of guidelines of how you will analyze 
things, they are not requirements.
    Mr. Ceresney. They are not requirements. They were never 
binding on the Commission.
    Mr. Messer. Okay. So there is no assurance that each and 
every time the impact on innocent shareholders is required to 
be analyzed as part of the penalty?
    Mr. Ceresney. I will tell you that when it comes to making 
recommendations, we in the action memo will typically discuss 
all nine factors and how they impact a particular case. So one 
of the factors we will discuss is impact on shareholders and 
inform the Commission of that. But there may be other factors 
that we will consider more compelling or important in a 
particular case that compel a penalty.
    Mr. Messer. I just would make the case that certainly it is 
important that we have strong enforcement. The bad actors ought 
to be penalized. But often innocent shareholders get caught up 
in the midst of this, at no fault of their own.
    And we certainly, as a committee, are looking at a 
requirement that the SEC must consider the impact on innocent 
shareholders as part of your analysis. Do you have any thoughts 
on implementing that requirement?
    Mr. Ceresney. As I say, in almost every case, we consider 
it. It is one of the factors we look at. And then we weigh that 
against the other factors.
    Mr. Messer. Okay. Thank you very much.
    Mr. Ceresney. Thank you.
    Mr. Hurt. The gentleman yields back.
    What I would like to do, without objection, maybe, is to 
start a second round of questions. And I know there are a 
couple of Members who are on their way back, so hopefully that 
will give them time to get back here. And I think the ranking 
member also had some questions.
    But I would like to recognize myself for 5 minutes.
    First, I think a common theme that we have heard here today 
certainly focuses on our system of justice and the rule of law 
and making sure that there is fairness in these processes.
    One of the things I think that has been said is that the 
administrative procedure is not as time-consuming as the 
Federal court system, and I understand that. And perhaps there 
are efficiencies going through the administrative process. But 
I think that we should never, ever, ever take a shortcut for 
times' sake in pursuit of something that is not square with 
justice and fairness.
    And I know you agree with that. But there are some 
questions that have been raised that I think are worth 
exploring.
    One of my first questions is, what was the reason, if you 
know, that the nonregistered registrants were excluded from the 
administrative process from the beginning? Because, obviously, 
Dodd-Frank included nonregistrants. There must have been a 
reason for that. And I was wondering if you could speak to 
that?
    Mr. Ceresney. I am not familiar with the history. I just 
know that for a very long time, administrative proceedings have 
been available. Penalty authority was only given to us about 20 
or 25 years ago. And so, when penalty authority was provided, 
we could obtain penalties against registered entities in 
administrative proceedings.
    I don't know the history and that--
    Mr. Hurt. But it probably had something to do with the fact 
that registrants are submitting themselves voluntarily to the 
SEC and its processes, and nonregistrants are not, they are 
just regular citizens, whether they are bad actors or not.
    Mr. Ceresney. I think that was probably part of it, yes. I 
imagine that there could have been other issues, but, yes, I 
imagine that was part of it.
    Mr. Hurt. Now, with respect to the due process issues that 
have been raised, hearsay can be allowed in the administrative 
process. There is no jury trial.
    Those are two fundamental constitutional rights that are 
afforded defendants in criminal trials, correct?
    Mr. Ceresney. That is right, although I should note that 
the Supreme Court had ruled in Atlas Roofing, which is a case 
from some years ago, that there is no Seventh Amendment right 
to a jury trial in connection with administrative--
    Mr. Hurt. But we are concerned with fairness and due 
process regardless of whether it is strictly required by the 
Constitution or not, correct?
    Mr. Ceresney. Oh, undoubtedly. I am concerned with 
fairness, and my view is that administrative proceedings do 
provide that fairness.
    Mr. Hurt. Okay. And so when you look at the appeals 
process, the way it would work is if a ruling is made within 
the administrative process, and then it gets appealed to the 
SEC, to the Commission, itself.
    And then it bypasses any district proceedings and goes to 
the court of appeals. So that is not a trial court and they are 
not reviewing anything de novo, they are reviewing it is not de 
novo, is it?
    Mr. Ceresney. The Commission review is de novo. The court 
of appeals review is not de novo.
    Mr. Hurt. And so, what are the standards of review as it 
relates to this Commission's action? Do they give deference to 
the SEC in interpreting its own enforcement actions?
    Mr. Ceresney. There is some deference given to the SEC with 
regard to findings of fact. I think when it comes to legal 
matters, obviously the court of appeals reviews that, and legal 
matters are not--are subject to the court of appeals views. But 
there could be deference there, as well, based upon Chevron 
deference.
    So there is a fair amount of deference that does exist for 
the Commission's rulings.
    Mr. Hurt. Now, as a part of the penalties that are 
assessed, there is something called ``undertakings'' that are 
sometimes part of the order of the--in the administration 
process.
    Mr. Ceresney. Sometimes the--
    Mr. Hurt. Administrative process.
    Mr. Ceresney. Sometimes in settlements, we will agree to 
certain undertakings that the defendant has to undertake, yes.
    Mr. Hurt. Is there any concern, because there has been a 
concern expressed, do you have concern that those undertakings 
amount to rulemaking outside of the Administrative Process Act?
    Mr. Ceresney. I do not.
    Mr. Hurt. And why is that?
    Mr. Ceresney. Because I think in every case, the 
undertakings are tied to the actual conduct that is involved in 
the case and designed, typically, to ensure the conduct does 
not recur.
    Mr. Hurt. But, do you think that there is a danger that 
other participants in the marketplace look at these 
undertakings and then that creates uncertainty? And also of 
course, avoids the Administrative Process Act, which allows for 
public comment and public notice?
    Mr. Ceresney. I don't think so. We are pretty sensitive to 
not doing rulemaking by enforcement. And those undertakings are 
only obligations of the particular party to the enforcement 
action--
    Mr. Hurt. Sure, but--
    Mr. Ceresney. --and they are typically closely, closely 
tied to the conduct.
    Mr. Hurt. Okay. My time has expired. Thank you Director, 
and I now recognize the ranking member, the gentlelady from New 
York, for a period of 5 minutes.
    Mrs. Maloney. Thank you.
    You noted in your testimony that the SEC's Fiscal Year 
budget for 2016 requests money for 93 additional Enforcement 
staff positions. Can you describe the impact of having these 
additional people? And what would you do with 93 additional 
people in enforcement?
    Mr. Ceresney. There are three areas in which we would 
deploy people. First, data analytics, I think about 20 people 
for identifying misconduct. There is tremendous amounts of data 
now available to us, and developing tools that allow us to use 
that data to detect misconduct is critical. So, that is one 
area. The second area is investigative activities, I think 
approximately 50 employees would go in this area.
    And here, I think I would point to the increase in 
resources that we need to devote to investigate complicated, 
large scale issues like financial reporting, like market 
structure, like asset management issues and the like.
    These schemes have become much more sophisticated. There is 
tremendous amounts of email data and other data that is 
required to be reviewed, and so having additional people as 
well as experts in the area would be important.
    And the third area is trial attorneys, approximately 20 
people for trials. We have seen an uptick in the number of 
trials that we have. There could be many reasons for that. But 
we think that will continue, probably not as many as last year. 
I think last year was probably more than we will have this 
year, but we will still see an increase from historical levels. 
And the trials do take lots of resources, particularly district 
court actions.
    Mrs. Maloney. Are you active in cybersecurity in any way? 
This is something that I would say everyone in Congress is 
deeply concerned about. The private sector is deeply concerned 
about it, and it is a threat, really, to our national security 
and our economic security.
    What are you doing in cybersecurity?
    Mr. Ceresney. We are very active in the cyber area. The 
number of ways in which that impacts SEC enforcement, 
obviously, there are lots of aspects of cyber that we don't 
have involvement in, but there are many that we do, including 
whether companies are disclosing cyber attacks promptly and 
appropriately, whether information is being stolen through 
hacking and used for insider trading or other misconduct. Also, 
where the registrants are developing policies and procedures 
that are necessary to guard against the misuse of information.
    So, we have regulations like Reg S-P that is out there, 
where dealers have to develop policies and procedures to 
safeguard customer information. We brought five cases under 
that regulation, so we are very active. There were other 
regulations that also could apply, like Reg SCI, when it comes, 
is now online. But when it becomes effective and when companies 
have to comply, when investment advisors have to, when broker-
dealers have to comply with it, as well as the market access 
rule and some other rules that do provide requirements for 
policies and procedures. So, we are very focused on this area. 
It is something that we obviously are devoting resources to.
    Mrs. Maloney. I believe that there would be bipartisan 
support for increased personnel in cybersecurity. And I think 
that would be an area that we really need to focus on. We know 
it, and we need to work in that area.
    I want to thank you for your testimony today. Thank you so 
much.
    Mr. Hurt. The gentlelady yields back.
    The Chair now recognizes Mr. Hultgren for a period of 5 
minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Thank you so much Director, we appreciate you being here.
    I would like to bring up the issue of well-known seasoned 
issuer waivers, which I believe should not be in consideration 
for an additional penalty outside of the SEC's formal 
enforcement process. My understanding is that there was already 
a thorough review process in place to determine whether a 
waiver is appropriate and that this process was recently 
reviewed and tightened in April of this year, I wonder if you 
could walk us through the WKSI waiver review process, and the 
steps the SEC has recently taken to make this process even more 
thorough?
    Mr. Ceresney. Sure. The Enforcement Division generally 
doesn't make waiver recommendations or decisions. And so we are 
not--we don't make those kinds of recommendation decisions. 
That typically is handled by the other divisions, including in 
the case of WKSI, the Division of Corporation Finance.
    Having said that, my understanding is that the Division of 
Corporation Finance follows the guidance that they have issued, 
and as you mentioned, they did update that guidance in April of 
this past year.
    In determining whether a WKSI waiver should be provided, I 
understand it is a facts and circumstances determination based 
on the applicable legal standards, which include whether there 
is good cause to issue such a waiver.
    Ultimately, I think it is important to recognize that the 
waivers--the disqualifications are not enforcement remedies. We 
have significant remedies for enforcement violations, including 
disgorgement penalties, bars, et cetera.
    But the WKSI determination is really a determination about 
whether, going forward, the entity can be trusted to comply 
with these obligations under WKSI.
    Mr. Hultgren. Let me get into that a little bit more. 
Registration requirements for a new stock offering I know can 
be burdensome for a public company. The added red tape leads to 
a delayed offering oftentimes, which can run up against 
changing market conditions, which certainly can adversely 
impact the issuer. WKSI is able to file an automatic shelf 
registration statement on Form S-3 when preparing a stock 
offering.
    What does the accelerated process mean for those companies 
looking to raise capital?
    Mr. Ceresney. I would have to defer to the Division of 
Corporation Finance on the impact of that.
    That is really a policy question, which is not really one 
in which I am involved.
    Mr. Hultgren. Okay. Let me move on then.
    SEC maintains the authority to deem a WKSI an ineligible 
issuer and revoke its WKSI status for 3 years if the Commission 
views the company as having disclosure practices that would be 
less reliable than the disclosure of other issues, and thus 
unsuitable for short-form registration or ineligible for 
disclosure-related relief.
    This authority, paired with the annual and quarterly 
filings, to me seems sufficient to address any issuers that may 
potentially abuse their WKSI status.
    Do you agree with that?
    Mr. Ceresney. Again, I think that would be a question 
really for the Division of Corporation Finance, which is the 
policy division involved in determining WKSI waivers.
    Mr. Hultgren. Yes, I have one more question to see if you 
are able to answer this. On the issue of well-known seasoned 
issuer waivers, or WKSI waivers, my understanding is that there 
was already a thorough review process in place to determine 
whether a waiver is appropriate, and that--let me--any further 
thing? Let me just understand a little bit more about your role 
with WKSI, any suggestions you have there. I know it came up 
earlier in the hearing. I wasn't here, but I wonder if you 
could maybe just talk a little bit, again, about your role and 
suggestions we have, concerns certainly that we are hearing of 
maybe overstepping or additional problems that are being handed 
out?
    Is there any other further involvement that you have or 
your Division has?
    Mr. Ceresney. We investigate the misconduct, so we know 
better than anyone, I think, at the Commission, what the nature 
of the misconduct was, who was involved, what was the duration, 
et cetera.
    So, we provide all that information to the Division of 
Corporation Finance or the Division of Investment Management 
and provide our views on that.
    They then go and apply the applicable legal standards to 
determine whether a waiver is appropriate.
    And my understanding is that it is a rigorous process where 
they review the facts and circumstances closely to determine 
whether the applicable legal standards are met.
    Mr. Hultgren. Well, I would agree with you. My 
understanding is it is a rigorous process, the thorough review 
process is already in place, and with it being recently 
reviewed, I have some concerns of additional action being taken 
there.
    I appreciate it. We will follow up with other authorities 
as well, just to get some more clarity for ourselves and to see 
if there is anything else we need to do.
    With that, Mr. Chairman, I yield back.
    Mr. Hurt. The gentleman yields back.
    And the Chair now recognizes the gentleman from Arizona, 
Mr. Schweikert, for a period of 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman. And Chairman Hurt, 
that seat sort of--you look good there.
    Mr. Hurt. Thank you.
    Mr. Schweikert. We will explain the joke later.
    Forgive me, but a lot of the obvious questions have already 
been asked, so could you help walk me through just a couple of 
things, you know, for the education of David?
    One of my great frustrations is that 3-plus years ago, this 
body, and this committee did things like the JOBS Act. There is 
Reg A and crowdfunding, and apparently in the rulemaking side 
of the ledger, those things are backed up.
    Will they ever reach out to you and your Division and say, 
``We are doing a rule set. Tell us how to keep the consumers 
safe?'' Do you ever have input and dialogue in the crafting 
design of those rule sets?
    Mr. Ceresney. Obviously, rulemakings are handled primarily 
by the Policy Division, and we are not directly--they obviously 
handle--but in cases in which there is an enforcement angle 
that--on which we can be helpful, we obviously do provide--they 
do consult with us, they do ask us our views, and we provide 
input as requested to the Rulemaking Policy Division.
    Mr. Schweikert. That doesn't bother me.
    Mr. Ceresney. Yes.
    Mr. Schweikert. In some ways, that seems absolutely 
appropriate, whether it be in writing or watercooler 
conversation.
    For some of the new technologies, whether it be 
crowdfunding or some of the new uses where we see people using 
506 and sort of regional bases of those, from your sort of 
enforcement side and observations, has access to information 
very open disclosures and sometimes a readable fashion, is that 
an interest? Have you seen it done? Have you seen benefits from 
that?
    Mr. Ceresney. Again, I don't know that I am in a position 
to really judge the impact that has on capital formation, on 
the raising of capital, because I think that is a question for 
others. I am really focused more on the issue of, is there 
fraud, is there misconduct in connection with the offerings?
    And when there is, obviously, we are very involved.
    Mr. Schweikert. When you design, because you will be part 
of designing a consent decree or an agreement.
    Mr. Ceresney. A settlement agreement, yes.
    Mr. Schweikert. Forgive me. All right, a settlement 
agreement.
    Mr. Ceresney. Yes, an order.
    Mr. Schweikert. In that settlement agreement, have you ever 
done part of the mechanics for fixing the bad acts or the 
agreed-upon bad acts, the way the bad actors tell their story, 
or disclose risk, or put out information so for the investor or 
the consumer, the product, they are doing better decision-
making?
    Mr. Ceresney. What we sometimes will do, if we see if there 
is a case involving failure of disclosures, for example, an 
investment advisor that has failed in their disclosures and 
misled investors, we sometimes will, as part of the 
undertakings, require them to craft policies and procedures 
aimed at ensuring that their representations to investors are 
accurate.
    So yes, if--what we often do is we will design undertakings 
designed to try to get at the misconduct. And if the misconduct 
involves material misrepresentations and marketing materials, 
we very well may include a requirement that they have a 
consultant come in and provide advice on policies and 
procedures going forward.
    Mr. Schweikert. Is some of your staff behind you?
    Mr. Ceresney. Yes, some of them.
    Mr. Schweikert. I can almost tell generationally, because I 
don't see any gray hair. I have realized Washington is run by a 
bunch--
    Mr. Ceresney. I have gotten more gray hair since I have 
been here.
    Mr. Schweikert. --of 30-year-old brilliant servants. For 
many of the young folks we work with who are entering into the 
investment world, they want to see it online. They want to see 
a blog discussion about the investment. They want to see sort 
of open dialogue where people are on each side of the trends--
the good idea, bad idea.
    You may actually have a very unique window, as part of your 
settlement operations to sort of reach out into that world and 
say, maybe it is time to enter this century of disclosure, 
instead of giving me another half-inch-thick binder with micro 
type that, with my aging eyes, I have trouble reading. So just 
one sort of suggestion, as we start to move into this 
generation, this century of regulation.
    One last thing and this is a little bit more of a narrative 
than a question. How many enforcement actions were there in the 
last calendar year?
    Mr. Ceresney. In the last fiscal year, there were 755. We 
don't track it by calendar year.
    Mr. Schweikert. Any sense of what the average settlement 
cost was?
    Mr. Ceresney. Well, it was--$4.16 billion was ordered. In 
some cases--
    Mr. Schweikert. You have more of a mean.
    Mr. Ceresney. Yes, in some cases--
    Mr. Schweikert. You probably have some very large ones.
    Mr. Ceresney. It is very hard to say, because some cases, 
obviously, have large large monetary remedies. Others have 
none. So it really varies.
    Mr. Schweikert. For almost every Member, right and left, we 
have had that person who comes into our office and say, ``I am 
subject to an action. I don't think I broke the rule. My 
lawyers are telling me it is cheaper just to agree and write a 
check.''
    I may send you sort of a little narrative question in 
writing. And I know that may be hard to quantify, but I am sort 
of curious how many of the settlements are actually--I admit I 
screwed up or I admit it is cheaper to write you a check and 
admit than it is to defend myself.
    Mr. Ceresney. I can't comment on what the reasoning of 
somebody in settling with us is. I can only say that when we 
charge someone with misconduct, we believe that there is a 
violation of law and believe that, based upon our understanding 
of the law and the facts.
    Mr. Schweikert. Thank you.
    And thank you, Mr. Chairman.
    Mr. Hurt. Thank you. The gentleman's time has expired. The 
Chair now, on the second round of questioning, recognizes Mr. 
Poliquin for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman.
    And thank you, Mr. Ceresney. Again, I appreciate you being 
here. I would like to pursue a little bit more of what we were 
discussing a little bit ago. And again, I want to make sure 
that I salute you for your goal and your hard work and that of 
your staff for pursuing the bad apples in this particular 
industry. But I do want to continue to ask a few more questions 
about your in-house administrative procedure.
    I think it was said just a moment ago that last year, you 
had a very high success rate, with respect to your in-house 
administrative procedures, as far as finding I am not sure--I 
am not an attorney, a conviction rate is concerned, about 100 
percent.
    Mr. Ceresney. Liability. And yes, although as I said, 
yesterday we just lost one.
    Mr. Poliquin. You poor thing. Yes, I am talking about last 
year. So you were completely successful.
    Mr. Ceresney. Yes, yes. And that was unusual.
    Mr. Poliquin. Yes, okay. If I am not mistaken, last year 
also, when you went to Federal court to pursue some of these 
bad apples, that turned out not to be bad apples, you had about 
a 60 percent success rate. Is that right, roughly?
    Mr. Ceresney. Can I just--
    Mr. Poliquin. Quickly, because my time is expiring.
    Mr. Ceresney. It was a little over 60 percent.
    Mr. Poliquin. Okay. But there is a big difference.
    Mr. Ceresney. I would say most of the losses were in 
insider trading.
    Mr. Poliquin. Okay. But when you have an in-house 
procedure, if I may--so I will ask you, Mr. Ceresney, where you 
select the administrative law judges, you pay them. They are 
held on-property and the home-court. And you can admit most 
heresy evidence and so forth and so on. But I would argue with 
you that you have to be really, really careful to make sure 
this is a fair process.
    Now it seems to me that this process might be a little bit 
more art than science. And let me go down there, just a little 
bit, if I may. Do you have a written in-house set of benchmarks 
or procedures whereby you determine if you are going to pursue 
this case internally or you are going to let it play itself out 
in Federal courts? Do you have a written set of procedures on 
that?
    Mr. Ceresney. We have factors that people should consider, 
but we don't have a written set of procedures.
    Mr. Poliquin. Okay. So, you don't. I might recommend that 
you think about doing that. I don't want to tell you how to do 
your job, but that would make me feel much more comfortable. 
Along that same line, sir, do you have a written set of 
procedures that allows you to determine which administrative 
law judges you are going to select for this particular case?
    Mr. Ceresney. We don't select the administrative law judge.
    Mr. Poliquin. Okay. And do you have written procedures on 
how to determine what fines or penalties would be imposed on 
those you found to be in violation of the law?
    Mr. Ceresney. As I said, there are factors.
    Mr. Poliquin. Okay. So it is really more of an art than a 
science?
    Mr. Ceresney. It is, yes.
    Mr. Poliquin. Okay. You know what would be really helpful 
to me is if you could get those guidelines, if you will, to my 
office or our office or--my LD right back here will be in touch 
with your office. Because I would like to see your written 
documentation on what the SEC follows to make sure we have a 
set of fairness when it comes to how you go through to 
determine who is going to meet internally in front of your 
people and who the judges are going to be and what fines will 
be imposed. That will be really helpful. And if you don't have 
those, and I think you just said that you do not, then we may 
come back to you with a few suggestions. But that would be very 
helpful.
    Sir, may I ask you also, Mr. Ceresney, have you ever worked 
in the investment management industry?
    Mr. Ceresney. I have not.
    Mr. Poliquin. You have not. Have any of your senior people 
who are involved with enforcement of the financial services 
industry who are around you, have they ever worked in the 
investment management business?
    Mr. Ceresney. Yes. We have industry experts who have 
worked--
    Mr. Poliquin. Good. Industry experts. I don't mean 
academics, I mean folks who have actually worked in the 
industry.
    Mr. Ceresney. Yes, we do.
    Mr. Poliquin. Okay, good. But you have not?
    Mr. Ceresney. I have not.
    Mr. Poliquin. Okay.
    Mr. Ceresney. No. I have represented people from the 
industry, but I am--
    Mr. Poliquin. Great, great. Well, we just had a new 
investment company move to our district with 200 new jobs in 
Lewiston, Maine. And we are thrilled to death to have these 
folks there. There are new jobs, they are good-paying jobs with 
benefits. And I would submit to you, as you consider these 
enforcement actions at the SEC, that you consider that the most 
important thing a mutual fund company or a pension investment 
firm has is their reputation and their good word, their good 
name. It is so important to make sure that investors and folks 
saving for their retirement or saving for their college 
education have trust in that firm. And part of that is making 
sure that if there is an allegation that they violated the law, 
there is a fair process. And that is why I was asking just a 
moment ago--and I know your office will get back to us with 
some paperwork on this--to make sure there is confidence in 
what you are doing.
    And I will tell you the reason why I am concerned. Because 
if you look at the EPA or you look at the Internal Revenue 
Service, there has been a pattern during the last few years of 
overreach by these government agencies that causes American 
families to lose confidence in our government, that they are 
being treated fairly.
    I know you don't want to go there and I am not saying that 
you are there. But what I am saying is that it would be 
terrific if you would think about people's reputation, their 
firm's reputation, and the confidence that people need to 
invest, to save for their retirement and their kids' college 
education. And that comes with, I think, due process or as 
close to due process as you can, given the guidelines that you 
have. The Fourth and fifth Amendments, all the things we have 
talked about, I would really appreciate it if you would 
consider that as you go forward and also make sure you get that 
paperwork to us in our office. I would be very grateful.
    Thank you, sir.
    Mr. Hurt. Thank you, Mr. Poliquin. The gentleman's time has 
expired. I want to thank you, Director, for being with us today 
and being generous with your time.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place his responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
record.
    Without objection, this hearing is now adjourned.
    [Whereupon, at 11:28 a.m., the hearing was adjourned.]
    
    
    
    
    
    
    
    
    
    
    
    
                            A P P E N D I X



                             March 19, 2015
                             
                             
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