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

                        OVERSIGHT OF THE SEC'S DIVISION
                            OF INVESTMENT MANAGEMENT

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

                                    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

                                   __________

                                OCTOBER 23, 2015

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-58

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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
    FRANK GUINTA, New Hampshire
    SCOTT TIPTON, Colorado
    ROGER WILLIAMS, Texas
    BRUCE POLIQUIN, Maine
    MIA LOVE, Utah
    FRENCH HILL, Arkansas
    TOM EMMER, Minnesota

                         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:
        October 23, 2015.............................................     1
    Appendix:
        October 23, 2015.............................................    39

                                   WITNESSES
                            Friday, October 23, 2015

    Grim, David W., Director, Division of Investment Management, U.S.
      Securities and Exchange Commission.............................     4

                                    APPENDIX

    Prepared statements:
        Grim, David W................................................    40

                  Additional Material Submitted for the Record

    Grim, David W.:
        Written responses to questions for the record submitted by
          Representatives Poliquin and Hultgren......................    48

                        OVERSIGHT OF THE SEC'S DIVISION
                            OF INVESTMENT MANAGEMENT

                                  ----------

                            Friday, October 23, 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 9:15 a.m., in
    room 2128, Rayburn House Office Building, Hon. Scott Garrett
    [chairman of the subcommittee] presiding.
        Members present: Representatives Garrett, Hurt, Royce,
    Neugebauer, Huizenga, Duffy, Stivers, Hultgren, Ross, Messer,
    Schweikert, Poliquin, Hill; Maloney, Sherman, Lynch,
    Perlmutter, Scott, Himes, Foster, Carney, Sewell, and Murphy.
        Also present: Representative Velazquez.
        Chairman Garrett. Good morning, everyone. The Subcommittee
    on Capital Markets and Government Sponsored Enterprises will
    now come to order. Without objection, the Chair is authorized
    to declare a recess of the subcommittee at any time.
        Today's hearing is entitled, ``Oversight of the SEC's
    Division of Investment Management.'' I welcome our witness, the
    Director of the Division, Mr. David Grim.
        Without objection, members of the Full Financial Services
    Committee who are not members of the subcommittee will be
    recognized for the purpose of questioning the witness.
        I will now recognize myself for 3 minutes for an opening
    statement.
        Today's hearing will focus on the oversight of the SEC's
    Division of Investment Management. This will actually be the
    fourth oversight hearing that this subcommittee has held in
    just this last year-and-a-half with regard to various divisions
    within the SEC.
        Mr. Grim, thank you for joining us today for this hearing.
    And also congratulations to you, and some would also say
    condolences to you as well, on your recent appointment to head
    up the Division. Thank you also, of course, for your hard work
    at the Commission for 2 decades, 20 years.
        The Division of Investment Management has broad regulatory
    responsibility over registered investment companies, ICIs,
    investment advisers, asset managers, and other entities that
    manage money basically on behalf of investors. And this year
    actually marks the 75th anniversary of the Investment Company
    Act and the Investment Advisers Act as well, two statutes that
    the SEC has administered for years as an independent--I note
    that--agency with expertise over our capital markets.
        Though many on this committee, myself included, often
    disagree with some of the actions of the SEC, I believe that
    there is broad bipartisan agreement that the Commission should
    remain the primary regulator of investment funds and our
    capital markets, and that the Commission's independence should
    never be compromised. However, recently the SEC's independence
    has come under increasing threat from unaccountable and
    secretive regulatory bodies--namely, the FSOC, the Federal
    Reserve, and the Financial Stability Board--that appear to be
    on a mission to eliminate risk from our capital markets by
    imposing bank-like regulations on asset managers and others
    that have been deemed part of the so-called shadow banking
    system.
        The FSOC, in particular, has not been shy in the past about
    using its bully pulpit, if you will, to influence or to
    threaten or cajole other regulators into carrying out its
    agenda, this despite the fact that expertise over the asset
    management industry and registered investment companies resides
    not with the prudential regulators, but with the SEC, and
    specifically with the Division of Investment Management.
        And so to that end, I am encouraged that the SEC is finally
    beginning to assert its jurisdiction in this area. Last year,
    Chair White laid out a rulemaking agenda for asset managers
    that so far includes proposals for enhanced disclosure, as well
    as rules for liquidity management by investment funds. Now, I
    would prefer that the SEC draft such new rules as opposed to
    the FSOC or the Federal Reserve. I do remain concerned that
    part of the SEC's agenda is still subject to an inappropriate
    influence by the prudential regulators.
        And so, today, as part of our oversight responsibility,
    this subcommittee will be closely monitoring the SEC's actions
    in this area to ensure that they actually reflect the SEC's
    threefold mission and are not simply an ad hoc response to
    threats from other regulatory bodies.
        Additionally, I am eager to hear today about the Division's
    work regarding Section 913 of the Dodd-Frank Act, and the
    Department of Labor's Fiduciary Rule, as well as the efforts
    that the Division is undertaking to just generally to promote
    capital formation.
        And so with that, Director Grim, thank you again for being
    with us here. And I now yield 5 minutes to the ranking member
    of the subcommittee, Mrs. Maloney.
        Mrs. Maloney. Thank you so much, Mr. Chairman, for this
    continuing oversight hearing that you have arranged. And I
    welcome Mr. Grim to our hearing today.
        The SEC's Division of Investment Management is one of the
    agency's most important divisions because it regulates the
    asset management industry including investment advisers, mutual
    funds, and exchange traded funds (ETFs).
        Mutual funds and ETFs have been growing at an incredibly
    rapid pace in recent years. Mutual funds have grown from $4.4
    trillion in assets in 2000 to a whopping $12.7 trillion in
    assets presently. And ETFs have grown from $151 billion in
    assets in 2003 to nearly $2 trillion today.
        There are nearly 12,000 registered investment advisers
    overseen by the Investment Management Division, and these
    investment advisers report over $62 trillion in assets under
    management. So it is fair to say that the Investment Management
    Division has its work cut out for it. When an industry is
    growing and innovating as rapidly as the asset management
    industry, it is critical that the regulator not get left
    behind.
        So has the growth come from new products that pose
    excessive risks or that investors don't fully understand? Has
    the industry's core infrastructure kept pace with the rapid
    growth?
        On this score, the Investment Management Division is
    beginning to catch up with the industry. For instance, the
    Division is working on three critical new rules on liquidity
    management for mutual funds, which is an area that some
    regulators have argued poses a risk to the markets. The
    Financial Stability Oversight Council, or FSOC, has expressed
    concern that without proper liquidity management there is a
    risk that funds could be forced into a fire sale of illiquid
    assets which would send prices plummeting and harm the broader
    markets.
        It is not entirely clear how big this risk is. But after
    the financial crisis of 2008, prudence is the best course. So
    the SEC has responded by embarking on a series of rulemakings,
    led by the Investment Management Division, that are designed to
    protect investors by requiring mutual funds to bolster their
    liquidity management practices. And I think the SEC should be
    praised for these rulemakings. Thank you.
        In May, the SEC proposed to enhance disclosures about
    mutual funds' liquidity which will allow investors to make more
    informed choices and potentially avoid investing in funds that
    are riskier than an investor wants. And just last month, the
    SEC proposed a new rule that would allow mutual funds to use
    something called swing pricing, which would force investors who
    are withdrawing their money from mutual funds to internalize
    the cost of their withdrawals and thus protect the remaining
    investors.
        I think that this is a sensible proposal to the extent that
    the liquidity issues in mutual funds could create a real first-
    mover advantage, in other words, an incentive for investors to
    withdraw their money first, like on a bank run. Swing pricing
    has the potential to eliminate that first-mover advantage
    entirely.
        This latest proposed rule also formalizes and enhances the
    SEC's longstanding liquidity guidelines for mutual funds, which
    will provide more consistent and robust liquidity practices
    across the entire mutual fund industry.
        So I am encouraged by the Investment Management Division's
    work in this area, and I hope that they will continue to press
    ahead with the proposals that Chair Mary Jo White outlined
    before this committee earlier. I look forward to hearing more
    from Mr. Grim about his work on these proposals. And I yield
    back.
        Thank you very much for coming.
        Chairman Garrett. The gentlelady yields back.
        I now turn to the vice chairman of the subcommittee, the
    gentleman from Virginia, Mr. Hurt, for 2 minutes.
        Mr. Hurt. Thank you, Mr. Chairman. I thank you for holding
    today's hearing.
        Welcome, Mr. Grim. Thank you for joining us today.
        I am pleased that this subcommittee is continuing to focus
    on vigorous oversight and accountability within the SEC.
    Today's hearing is an important reminder of the critical
    functions that the SEC's Division of Investment Management
    plays in our economy as the SEC's mission includes the critical
    component of facilitating capital formation.
        Capital formation is crucial to the success of our economy,
    and as I travel across Virginia's Fifth congressional district,
    my district, I am regularly reminded of how our Nation's small
    businesses and startups depend on access to private capital to
    be successful.
        I am also regularly reminded that well-intended Federal
    regulation often results in creating unnecessary costs and
    barriers to capital formation. As you may know, I have been a
    proponent of legislative initiatives that would encourage
    economic growth and job creation by increasing the flow of
    private capital to small businesses that are found on Main
    Streets all across America. Unfortunately, the Dodd-Frank Act,
    in many instances, has placed a costly and unnecessary
    regulatory burden of SEC registration, specifically SEC
    registration on advisers to private equity funds, while
    exempting advisers to other similar funds.
        A bill that Representative Jim Himes and I sponsored last
    Congress passed the House on a bipartisan basis and, if
    enacted, would have eliminated this unnecessary burden and
    would have put private equity funds on a similar playing field
    as that of other similar advisers.
        The reality is simple: private equity funds and their
    advisers did not cause the financial crisis, and I believe
    there is general consensus that they are not a source of
    systemic risk. In my district, there are literally thousands of
    jobs that exist because of the investment by private equity
    funds. I believe that the treatment in Dodd-Frank of advisers
    to private equity funds suggests that this committee review the
    overall Investment Advisers Act registration regime and look
    for ways to make sure that the laws in this area are, in fact,
    protecting investors and are, in fact, facilitating capital
    formation at a time when capital formation is desperately
    needed in places like my congressional district.
        I look forward to your testimony, Mr. Grim, and I thank you
    for your appearance.
        Mr. Chairman, I thank you. And I yield back the balance of
    my time.
        Chairman Garrett. Thank you. The gentleman yields back. And
    now, we turn to our witness. Mr. David Grim is the Director of
    the Division of Investment Management at the SEC.
        Again, thank you for being with us today. You will be
    recognized for 5 minutes. And you know, the protocol here:
    without objection, your entire written statement will be made a
    part of the record. Again, thank you. You are now recognized.

     STATEMENT OF DAVID W. GRIM, DIRECTOR, DIVISION OF INVESTMENT
          MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION

        Mr. Grim. Good morning, Chairman Garrett, Ranking Member
    Maloney, and members of the subcommittee. Thank you for
    inviting me to testify about the U.S. Securities and Exchange
    Commission, and about the Division of Investment Management's
    activities and responsibilities.
        The mission of the Commission is to protect investors,
    maintain fair, orderly, and efficient markets, and facilitate
    capital formation. The Division promotes this mission through
    regulating the asset management industry.
        A primary function of the Division is to administer the
    Investment Company Act of 1940 and the Investment Advisers Act
    of 1940, and to develop regulatory policy for both investment
    companies and investment advisers, which play a major role in
    the lives of Americans and our national economy.
        The four core activities of the Division are: one, crafting
    rulemaking recommendations to the Commission; two, revealing
    fund filings; three, providing interpretive and other advice to
    the asset management industry and the public; and four,
    monitoring risks in the assessment management industry.
        With respect to rulemaking, in 2014 the Commission adopted
    significant reforms to the rules governing money market mutual
    funds. The amendments are intended to reduce the risk of runs
    on money market funds, provide important tools to help further
    protect investors and the financial system in a crisis, and
    enhance the transparency and fairness of these products for
    America's investors.
        In September 2015, the Commission also adopted amendments
    related to the removal of credit ratings references in the
    primary rule that governs money market funds and in the money
    market fund portfolio disclosure form.
        These amendments give effect to Section 939A of the Dodd-
    Frank Act.
        In May 2015, the Commission proposed new rules and forms,
    as well as amendments to its rules and forms, to modernize the
    reporting and disclosure of information by registered
    investment companies. The proposed rules, if adopted, would
    require registered funds to provide portfolio-wide and
    position-level holdings data to the Commission on a monthly
    basis, and annually report certain streamlined and updated
    census-type information. If adopted, funds would report
    portfolio and census information in a structured data format.
        Also in May 2015, the Commission proposed amendments to
    obtain additional information regarding advisers, including
    information about their separately managed account business. On
    September 22, 2015, the Commission proposed a new rule that
    would require open-end funds to adopt and implement liquidity
    management programs. The proposed amendments also would permit
    mutual funds to use swing pricing and would enhance disclosure
    regarding fund liquidity and redemption practices.
        At the direction of the Chair, the Division also is working
    on other asset management-related potential new rules
    concerning use of derivatives by investment companies,
    transition plans for investment advisers, stress testing for
    large advisers and large investment companies, third-party
    compliance reviews for investment advisers, and a uniform
    fiduciary standard of conduct for broker-dealers and investment
    advisers when providing personalized investment advice about
    securities to retail customers.
        In addition to rulemaking, Division staff responsibilities
    include: reviewing and commenting on the numerous prospectuses,
    proxy statements, and other disclosure documents filed by funds
    each year; continuing to fulfill the Sarbanes-Oxley Act
    requirement to review investment company issuer accounting
    statements at least once every 3 years; issuing no-action
    letters, interpretive letters, and other guidance under both
    the Investment Company Act and the Investment Advisers Act;
    reviewing enforcement matters that concern investment companies
    and investment advisers; and reviewing applications from
    entities that request exemptions from provisions of the
    Investment Company Act and the Investment Advisers Act.
        Finally, pursuant to Section 965 of the Dodd-Frank Act, the
    Division also established a new Risk and Examinations Office.
    Division staff assigned to this office monitor trends in the
    asset management industry and carry out the Division's limited
    inspection and examination program.
        In conclusion, thank you again for inviting me to discuss
    the Division's activities and responsibilities. I am happy to
    answer your questions.
        [The prepared statement of Director Grim can be found on
    page 40 of the appendix.]
        Chairman Garrett. Thank you. And, again, I appreciate you
    being here.
        So the SEC, in short, would you call it a prudential
    regulator? Is that its mission?
        Mr. Grim. The SEC has a three-part mission: protect
    investors; facilitate capital formation; and maintain fair and
    orderly markets. It is not a prudential regulator.
        Chairman Garrett. Okay. So back in January, Fed Governor
    Dan Tarullo said in a speech, ``Both the short-term wholesale
    funding and asset management examples point to the broader
    objective of developing what we might call or term prudential
    market regulation.'' You know Governor Tarullo, and he is one
    of the more outspoken governors out there.
        Have you ever heard--you have been there for 20 years at
    the SEC or just shy of 20 years--the term ``prudential market
    regulation'' before?
        Mr. Grim. No.
        Chairman Garrett. No. So my next question was going to be,
    can you explain to me what prudential market regulation is? I
    guess that is a hard question to answer.
        Mr. Grim. I think that I would say that there has been--as
    you know, FSOC has been looking at the asset management
    industry for potential systemic risks in the asset management
    industry. As part of that look, there has been a focus on how
    to best approach any potential systemic risk.
        Chairman Garrett. Systemic risk. Let's bring it to a close
    on this last point. So the rules that have come out from the
    SEC, would you call them prudential market regulation?
        Mr. Grim. I would call them rules that we think advance the
    SEC's three-part mission.
        Chairman Garrett. Three-part mission, okay.
        When we invited you to come here, we sent you a whole list
    of questions or things we wanted to talk about. One of those
    things is your dealings with the FSOC. And I guess to that
    point, we asked exactly what is your involvement with the
    divisions and so on and so forth. And I think you only really
    gave one--well, maybe it was two sentences back on December
    18th, basically saying that you met with them, Division staff
    has reviewed comments received on its notice, so on and so
    forth, dealing with their public comments of potential risk to
    financial stability. You really didn't flesh that out too much
    in your written statement.
        So can you provide us briefly with a little more detail on
    how the Division is working with the FSOC on the review of
    asset management products and activities? And specifically, who
    are you meeting with over there, are they just from the
    Treasury, is there just one group or other groups, who are you
    meeting with over there, answer that as well?
        Mr. Grim. With respect to FSOC, I think the first point I
    would make is that at the SEC, it is the Chair who is the
    member of FSOC. So in terms of me and my Division's role, when
    there are asset management issues on the table, we are
    assisting her in providing our subject matter expertise.
        Chairman Garrett. So is your staff--I am not talking about
    her now--specifically meeting with them at that point?
        Mr. Grim. As part of the SEC's engagement with FSOC, yes,
    our staff meets with the staff of--
        Chairman Garrett. Okay. And when you are doing that, whom
    are you meeting with? Are you meeting just with folks from over
    in Treasury? Or are you meeting with all of the various
    agencies that are under--
        Mr. Grim. All of the various agencies and their members.
        Chairman Garrett. Okay. And lastly on this, I am trying to
    get a picture of how this actually works, is this on a regular
    basis? Is this weekly, monthly? How does that all play out?
        Mr. Grim. It is sort of as needed. I don't know that there
    is a regularity to it. But I would say it is as needed on the--
        Chairman Garrett. I said that was my last question, but I
    have one more question. Are they soliciting input from you on
    these things or is it a two-way street? How does that work?
        Mr. Grim. We are offering our subject matter expertise on
    any of these issues that are asset management.
        Chairman Garrett. But are they asking you? Because when I
    talk to some of these folks over there, some of them readily
    admit that this is not their forte, this is not their area of
    expertise. When we delve into it, that becomes very evident.
    And so we are trying to figure out where they are getting their
    information from. If it is not from you, then where is it
    coming from?
        Mr. Grim. Yes, I would say they have solicited our views on
    these matters.
        Chairman Garrett. Okay. I will just go a little bit over my
    time.
        Proxy advisers, very quickly, earlier on, the Division
    issued a Staff Legal Bulletin 20 regarding proxy advisers
    voting responsibilities which clarified that investment
    managers are not obligated to vote for every proxy issue for
    the shares that they manage and they have an ongoing fiduciary
    responsibility. We have gone through one proxy season. Can you
    briefly tell us, have you looked at the results on that? And
    how is that all playing out now?
        Mr. Grim. You are absolutely right. As you know, we had a
    Commission roundtable on proxy advisory firms that addressed a
    number of issues. One of the issues was investment adviser use
    of proxy adviser firms. Part of the response to that was the
    staff legal bulletin that you referenced.
        Chairman Garrett. Right. Is it having the intended effect
    or not really?
        Mr. Grim. We are still studying that. The first proxy
    season just ended. My colleagues in the examination unit are
    doing some exams around how it is going. But anecdotally, we
    think it has been having a positive effect.
        Chairman Garrett. Okay. My time is way over. I will yield
    to the ranking member with some leniency there.
        Mrs. Maloney. Thank you so much.
        Mr. Grim, I would like to ask you about the assessment
    management rulemakings. As you know, last December Chair White
    appeared before this committee and she outlined a three-part
    pan to update the regulatory regime for assessment managers due
    to the significant changes in the industry in recent years. And
    the SEC has now proposed two of the three rules that she
    promised: enhanced disclosures; and liquidity management rules.
    But we still haven't seen the third rule yet, which will
    require transition plans for winding down asset managers.
        Can you give us an update on this third rule? When do you
    expect the staff to be ready to present the Commission with a
    set of recommendations for this rule?
        Mr. Grim. On stress testing and transition plans, I think
    one of the things the crisis showed us was the importance of
    planning for stress, the importance of planning for
    transitions. And as a result, as you point out, that is an
    important initiative on our list of priorities.
        With respect to stress testing, it is actually a Dodd-
    Frank-mandated requirement that we develop stress testing rules
    for large nonbank entities, some of which are the registrants
    in our world.
        And we have made terrific progress on both. With respect to
    stress testing, as a matter of fact, we have stress testing
    rules already in existence on money market funds. They were
    part of the money market fund rules that I mentioned in my
    opening statement. These rules are now looking to develop the
    right kind of stress testing approach for other kinds of large
    investment companies. We are making great progress on our
    recommendation to the Commission. In terms of timing, obviously
    that is up to the Commission when they are ready to vote on it.
        Mrs. Maloney. Do you have a general sense? In a year? Six
    months? Whatever. A general--
        Mr. Grim. It is hard to know. All I can say is that we have
    made great progress on the recommendations and I am hoping it
    is going to be in the near term.
        Mrs. Maloney. Okay. I mentioned in my opening remarks the
    SEC's proposal on swing pricing in my statement, but I want to
    drill down on that a little bit. I understand that other
    countries, particularly in Europe, already use the swing
    pricing, but I understand that there might be some operational
    challenges to adopting it in the United States. Can you tell us
    what the SEC found as you were developing this proposal, and
    why did the SEC make swing pricing voluntary in its proposed
    rule? Why not make it mandatory as they do in Europe?
        Mr. Grim. With respect to swing pricing, the Commission
    unanimously proposed it as part of our liquidity rule. And I
    think what we were trying to accomplish with it is, it is
    really an intent to make fund pricing more fair for all
    investors. So it is the investors getting out, out of the fund
    through redemptions, they are paying the cost that their
    activity generates for the funds. That makes it fair for those
    investors. It also makes it fair for the remaining investors in
    the fund. It allocates the cost more fairly. That is what we
    were trying to accomplish.
        You are correct to point out that there are potentially
    some operational challenges with the swing pricing. We spent a
    lot of time in our release asking questions about those. It is
    out for public comment right now and we are very much looking
    forward to getting the public reaction to those questions, as
    well as others around swing pricing.
        Mrs. Maloney. Are there situations where swing pricing
    could harm certain investors?
        Mr. Grim. We hope not. That is obviously not what we want,
    investor protection being part of our mandate, and we hope not.
    But that is part of the public comment process. We will hear
    from all sides of the issue and develop our recommendation for
    the Commission in light of the public comment.
        Mrs. Maloney. If swing pricing had been in effect, would it
    have changed in any way the economic crisis and the response
    that took place in 2008 where there was a run on the mutual
    funds and a run on a lot of equity products?
        Mr. Grim. The focus of the most harmful runs during the
    crisis was in the money market fund space in particular. The
    money market fund rules have already been adopted by the
    Commission in response to that. It is hard to say whether
    taking it to the sort of other kinds of funds that are under
    our--how it would have changed behavior or the results of the
    crisis. But I think I would say, again, what we are trying to
    promote is a fair thing that is better for all investors within
    the fund. So we will see what the public thinks of our
    proposal.
        Mrs. Maloney. My time has expired. Thank you.
        Chairman Garrett. Thank you. The gentlelady yields back.
        The gentleman from Virginia is now recognized.
        Mr. Hurt. Thank you, Mr. Chairman.
        Mr. Grim, we know that two of the three components of the
    SEC's mission, obviously, are to protect investors and to
    facilitate capital formation. So I had a couple of questions as
    it relates to private equity funds and the registration
    requirements for their advisers.
        Do you think it is fair to say that private equity funds
    did not contribute to or cause the crisis of 2008? Do you think
    that is a fair statement?
        Mr. Grim. Sure.
        Mr. Hurt. Do you agree that there is a general consensus
    that those funds do not present systemic risk? Is that a fair
    statement?
        Mr. Grim. I think with respect to the SEC's focus on
    private equity funds, in the Dodd-Frank Act, Congress
    determined to have private equity fund managers register with
    the Commission. My Division sort of did the rules implementing
    that registration. And I think that we think that is a good
    thing. We think it is good that they are registered with us.
    The protections that come from being registered with us are
    important.
        Mr. Hurt. But would you agree that they don't present
    systemic risk? There is no evidence that the private equity
    funds present systemic risk.
        Mr. Grim. I guess the ultimate people to determine that
    would be the FSOC. As I mentioned before, I am not the FSOC. So
    they would determine whether they are. I think, with respect,
    our focus has been on investor protection.
        Mr. Hurt. But there is generally a different model that
    they follow that would not lead to cascading losses. And we are
    talking about pretty sophisticated investors. So you can't say
    whether you think that they present systemic risk or not in
    your opinion as a regulator?
        Mr. Grim. Again, I think our focus has been on the
    investor, potential investor protection issues that private
    equity funds raise. Our exam staff has done a number of exams
    recently. And while, of course, they see a range of practice,
    they have found some things in the fee area that have raised
    some investor protection concerns, and we have been
    particularly focused on those issues.
        Mr. Hurt. And understanding full well that the regulations
    that you enforce have in many instances come from Dodd-Frank,
    this particular provision did, with that said, do you, in your
    role, do you feel like you have an ability to tailor the
    enforcement and rulemaking to reflect the fact that these funds
    are different than others?
        Mr. Grim. Yes, we do, and in fact we have.
        Mr. Hurt. Can you give us some examples of that?
        Mr. Grim. Sure. One of the questions that the private
    equity industry had after these registration rules were adopted
    was about certain instruments that they invest in that raise--
    there are questions raised about how to custody those
    instruments. And our staff was able to provide some technical
    advice to them. It is sort of on how the custody rule works.
    And I think it is a good example of where us taking a fresh
    look at our rules, how they apply to a new set of--
        Mr. Hurt. Do you see opportunities to continue to do that
    in the future?
        Mr. Grim. Sure.
        Mr. Hurt. Chair White recently gave a speech in which she
    talked about the tremendous amount of information that you all
    are now receiving because of this. How is that information
    helpful?
        Mr. Grim. What it allows us to do, in addition to having
    the examination authority that I mentioned before, where we can
    go into a specific firm and look specifically at them, the
    other kind of information that we now get under the rules that
    we adopted pursuant to Dodd-Frank is broad, industry-wide, so
    we can look at trends, we can look at risks to the extent that
    they exist, and we can be better informed regulators as we--
        Mr. Hurt. Have they actually been useful? You say you can
    look broadly across the spectrum and look at risk. Are there
    examples of where that has been useful up to this point?
        Mr. Grim. Absolutely. As a matter of fact, just the other
    day--Form PF is the form that a lot of these funds file
    extensive information with us on, and we published for the
    first time some sort of global industry data about the private
    fund industry. And we think it has been good for us. We think
    it is good for the public. And so we are very happy with it.
        Mr. Hurt. I think my time has expired. Thank you, sir.
        Chairman Garrett. The gentleman yields back.
        I now recognize the gentleman from Massachusetts, Mr.
    Lynch.
        Mr. Lynch. Thank you, Mr. Chairman.
        And thank you, Mr. Grim, for your willingness to help the
    committee with its work.
        Sometimes, this committee can be like a conveyor belt where
    we have a new issue every 7 seconds and we are on to the next
    rule or the next topic. I see in your remarks, your extended
    written remarks, you talk about the money market funds rule
    that we adopted back in July of 2014, where we allowed the NAV
    to float. There was a lot of debate here of what the impact of
    that might be.
        Now, I realize with that type of rule, it is sort of like
    you are trying to test the seaworthiness of a ship and it is
    not necessarily easy to do when things are calm. But do you
    have any data for us or any experience, complaints, progress
    reports, lack of progress reports from the adoption of that
    rule on how that might be going?
        Mr. Grim. You correctly point out that one of the parts of
    the money market fund rule that the Commission adopted last
    year was the floating NAV provision which applies to a
    particular type of money market fund, institutional prime
    funds. And those rules were adopted by the Commission after--
        Mr. Lynch. Right. There were a lot of concerns raised
    from--I have some big asset managers in my district, Fidelity
    among them. They do a great job. But there were some concerns
    raised by them. And I am just interested in hearing how things
    are going.
        Mr. Grim. Subsequent to passing the rule, the Commission
    staff has put together a team, a sort of money market fund
    implementation team to monitor for just these kind of things
    that you are asking about. A number of fund complexes have
    announced changes to their lineups in response to the rules.
    Some will do the floating NAV funds. Some are not going to do
    the floating NAV funds.
        So there is a lot of work going on implementation-wise
    within the industry. I think that the compliance date isn't
    until October of 2016. So we are still a little way from
    knowing exactly how it is all going to shake out. But we are
    monitoring it. A lot of work being done to implement the rule.
        Mr. Lynch. So is it too early to tell? Is that what you are
    saying?
        Mr. Grim. I think that is fair to say.
        Mr. Lynch. Okay. That is a fair answer.
        I wanted to ask you about the explosion in the number of
    funds that are out there. It has gone from I think $94 billion
    in 1979 to something like $17 trillion now. These mutual funds
    and ETFs are a wonderful way for working people to prepare for
    their retirement and they can be a real blessing if they are
    run properly.
        While the number of funds and the amount of assets has
    exploded, the number of inspectors and folks on your side who
    monitor these funds has actually shrunk. I think it is down to
    one inspector for every, I don't know, $5 trillion dollars or
    something like that. It is a ridiculous number. And I am just
    wondering about your ability at the SEC, within your
    department, within your Division, to do the job that you are
    required to do. Can you talk about that a little bit?
        Mr. Grim. On the investment adviser exam question, the
    first thing I would say is that just about all of the examiners
    at the SEC who examine investment advisers are actually in our
    examination unit, which is not part of Investment Management.
    Investment Management does have a small exam unit which is set
    up a little bit differently which I can talk about in a minute.
        But I think--look, as the Chair has been very clear about,
    our ability to examine advisers in a frequent enough way is a
    huge--
        Mr. Lynch. Right now, if I am not mistaken, it is once
    every 10 years. That is because you only have so many people to
    conduct the exams. Is that right?
        Mr. Grim. It is 10 percent of advisers per year. There are
    different ways to measure it of course. One, it is about a
    third of the assets in the industry that we get to every year.
    But regardless of what the numbers are, the bottom line is that
    it is a challenge for us. This is an issue that has been on our
    minds for a long time.
        Mr. Lynch. So we need more people. Is that right?
        Mr. Grim. That is part of what the Chair asked for in her
    most recent budget request. But there are other things that we
    are considering. After Dodd-Frank, there was a study that was
    required of the investment adviser exam issue, the SEC staff
    study, it was reported to Congress, and it had three potential
    options: user fees paid for by investment advisers; an SRO for
    investment advisers; and FINRA having sort of exam authority
    over dual registrants, broker-dealer investment advisers.
        That study was turned in. The conversation has continued.
    Chair White more recently has talked about the concept of
    third-party compliance exams as another potential way to create
    more touches on investment advisers. She has asked--
        Mr. Lynch. My time has expired. I thank the gentleman. I
    yield back.
        Chairman Garrett. I recognize the gentleman from Texas, Mr.
    Neugebauer.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        Mr. Grim, thank you for being here this morning. Labor
    Secretary Perez testified that the Department of Labor has
    coordinated with the SEC in the development of their proposed
    fiduciary standard. What coordination have you had with the
    Department of Labor?
        Mr. Grim. SEC staff in my Division and in other places in
    the building have provided our technical expertise to our
    colleagues at the Labor Department about the potential impact
    of certain choices that they are making or may make in their
    rule proposal.
        Mr. Neugebauer. That leads me to my next question, then.
    What kind of analysis has your Division done of the impact it
    would have on investment advisers who have registered with the
    SEC?
        Mr. Grim. Chair White has directed the staff, including my
    staff, to develop a recommendation at the SEC for the SEC's
    version of the uniform fiduciary duty that would apply to
    investment advisers and broker-dealers. As part of developing
    that recommendation, our staff has done extensive analysis
    around a number of impact questions. Going all the way back to
    following Dodd-Frank, the SEC staff did a study about the
    possibility of recommending a uniform fiduciary duty for
    investment advisers and broker-dealers. We got lots of comments
    on that study that we considered.
        Subsequent to that, we did a request for information, for
    further information, and got lots of comments on that. So I
    think it is fair to say that SEC staff has been studying this
    issue extensively.
        Mr. Neugebauer. So you have done an analysis?
        Mr. Grim. We are doing it right now. The Chair has asked us
    for a recommendation as part of our recommendation to her. But
    this is on the SEC. So I think maybe your question was about
    DOL.
        Mr. Neugebauer. I want to make sure I understand. So you
    are doing the analysis and getting ready to make the
    recommendation? Or you have done the analysis and you are now
    prepared to do the recommendation?
        Mr. Grim. We are doing the analysis as part of developing a
    recommendation for the Commission.
        Mr. Neugebauer. I personally, and maybe other members of
    the committee, would like to see that analysis when it is
    complete because I think the impact it is going to have is
    going to be an important part of that. Obviously, we are going
    to want to see your recommendation as well, because this is an
    issue that has a huge impact, obviously, on investors and the
    industry as a whole.
        Are you concerned that the investment advisers are subject
    to two different fiduciary standards based on the products that
    they recommend, retirement or not? Is that confusing? And is
    that productive?
        Mr. Grim. The way the law works right now--obviously, I am
    not an expert on the Employee Retirement Security Act( ERISA)--
    as I understand it, is that certain investment advisers who
    have ERISA clients are subject to ERISA standards and SEC
    standards for those clients and they are subject to SEC
    standards for other types of clients.
        With respect to, obviously, DOL, as you have referenced,
    has a proposal out that would add--not add--DOL's--this is
    where I am getting a little bit out of my area of expertise
    obviously--DOL's thing has a proposal around how its standard
    would work for broker, for example, for broker IRA advice and
    they are developing that.
        As I mentioned at the beginning, we are providing our
    technical expertise about impacts of those choices. But,
    ultimately, it is up to DOL. That is a DOL mandate, a DOL
    statute, ERISA is a separate statute, and it is going to be up
    to them what they decide to do.
        Mr. Neugebauer. Mr. Chairman, I yield back.
        Chairman Garrett. Thank you. The gentleman yields back.
        Moving down the row, I recognize the gentleman from
    Colorado, Mr. Perlmutter.
        Mr. Perlmutter. Thanks, Mr. Chairman. I have a couple of
    questions on business development companies. And then whatever
    time I have left, I am going to yield to Ms. Velazquez for
    whatever questions she has.
        Mr. Grim, thank you for your testimony today. Are you
    familiar with business development companies under the
    Investment Company Act?
        Mr. Grim. Yes.
        Mr. Perlmutter. What are they quickly, just for the record?
        Mr. Grim. Business development companies are a specific
    type of investment company that Congress, back in 1980, set up
    a similar but a little bit different regime for, as compared to
    other funds under the Investment Company Act, in recognition of
    their focus on investing in small and emerging businesses.
        Mr. Perlmutter. Is it one of the areas that you oversee or
    your Division does?
        Mr. Grim. Yes.
        Mr. Perlmutter. Okay. So my question is, there has been a
    proposal or at least some conversation here in Congress to take
    a look at the eligible acquisitions of business development
    companies. Seventy percent are supposed to be in small public
    companies or the like. Thirty percent can be--there is more
    discretion with 30 percent. And then also the leverage that
    business development companies have, right now it is 1 to 1,
    equity to lending. The request would be to go to 2 to 1 so that
    you could have a little more leverage.
        Are you familiar with that proposal that has been floated?
        Mr. Grim. Yes, I am generally aware of some of the
    legislative efforts in this regard.
        Mr. Perlmutter. Have you thought about it? What is your
    reaction to it?
        Mr. Grim. I would say a couple of things in response to
    that. First of all, one of the reasons that we are very focused
    on BDCs is because they are predominantly held by retail
    investors. And a second point I would make is that they have
    grown quite a bit, from $5 billion to $50 billion in net assets
    just from 2004 until today.
        So looking at it through that lens, there have been bills
    that have been discussed here on the Hill. There was actually
    one a couple of years ago where Chair White wrote a letter on
    behalf of it. And I think in terms of how she and we approach
    these things, when it comes to BDCs you have issuers that sort
    of touch on two key parts of our mission: the capital formation
    part of our mission; and the investor protection part of our
    mission. And I think what she said in her letter was, while
    BDCs have the ability to take on more leverage already than
    other types of funds based on the way Congress has drawn the
    lines previously, this bill would add to that leverage and that
    could potentially raise investor protection concerns. So that
    was the gist of the letter that she wrote previously on the
    bill.
        Mr. Perlmutter. Okay. Thank you.
        I have 1\1/2\ minutes. Ms. Velazquez, would you like my
    1\1/2\ minutes? Okay. I will yield back to the Chair.
        Chairman Garrett. The gentleman yields back.
        Mr. Duffy is now recognized for questions.
        Mr. Duffy. Thank you, Mr. Chairman.
        Mr. Grim, thank you for coming in today. I believe this is
    your first time before the committee. You are doing a great
    job. Thank you.
        Obviously, you have been at the SEC for over 2 decades, so
    you are very smart, and very well-informed. You were in the
    bunker during the 2008 financial crisis. And since then, you
    have been able to see a concerted focus on systemic risk in the
    financial sector. Both the FSOC and the FSB have been focused
    in recent years on the asset management industry.
        While the SEC is the expert regulator in this segment, the
    FSOC seems to have a heightened interest in the risk that asset
    managers pose to the broader global economy. It has been
    speculated by some that FSOC has a designation of an asset
    manager as a SIFI at some point in the future.
        Now, we know that banks and asset managers operate under
    distinctly different business models. Do you feel like FSOC
    members sufficiently understand the asset management industry
    if they are going to be designating them potentially as a SIFI?
        Mr. Grim. With respect to FSOC, I think that it is
    important that as Congress set up FSOC, it has all of the
    financial regulators together. And the SEC, with Chair White
    being the member, it is critical for her to be there offering
    her subject matter expertise on all issues under sort of SEC
    market issues, but including the asset management issue that,
    obviously, I am most familiar with.
        Mr. Duffy. I know you are very familiar with it. But it
    goes back to my question, do you think the FSOC members
    sufficiently understand the asset management industry? It is
    kind of a yes-or-no question. You are doing a good job of not
    really answering the question. Kudos. Do you think they are
    well-suited?
        Mr. Grim. It is hard for me to comment on their level of
    understanding. But I think the main thing I would emphasize is
    we are--Chair White is at the table. The SEC is involved in
    these conversations about asset management sharing.
        Mr. Duffy. Do you think they have your kind of knowledge or
    the Division's knowledge? Are they as well-versed on these
    issues as you are and your team is?
        Mr. Grim. Well, no.
        Mr. Duffy. I would agree with that. Good answer.
        Now, you had indicated, I think to Mr. Garrett, that you
    offer your subject matter expertise to FSOC. Do they actually
    take your advice?
        Mr. Grim. When it comes to the asset management issues, we
    have been at the table. We have been offering our expertise.
        Mr. Duffy. Do they take the advice?
        Mr. Grim. I think it is fair to say that they--
        Mr. Duffy. Kind of yes, kind of no?
        Mr. Grim. Look, sometimes we agree, and sometimes we don't
    agree.
        Mr. Duffy. Okay. Fair enough.
        Mr. Hurt asked you this question, and I want to come back
    to it. In all of your expertise, and you agreed and I would
    agree with you that you are kind of the guy in this space, do
    you believe that the asset management industry poses a systemic
    risk to the financial sector?
        Mr. Grim. That is ultimately a determination that is up to
    FSOC.
        Mr. Duffy. Do you think that is a good idea? As an SEC guy,
    being there for over 20 years, who knows this sector better
    than anybody else, is it the SEC's position that you should
    cede this territory to FSOC and they are the ones best
    positioned to make this determination because you and the
    Division don't know? Do you think that is the best--is that
    your position at FSOC? Is that Mary Jo White's position?
        Mr. Grim. Obviously, you would have to ask Mary Jo what her
    position is. I think that what I would say is, look, the
    crisis, in my view, showed the importance of the financial
    regulators having a mechanism to sit and share views and that
    is what Dodd-Frank set up for the--
        Mr. Duffy. I know.
        Mr. Grim. But obviously, as part of that, we view ourselves
    as the technical experts on market issues generally and on
    asset management issues.
        Mr. Duffy. And I hope that the SEC would be a little
    concerned about mission creep and allowing decisions to be made
    with the technical experts, which is with you, as opposed to
    folks who do a lot of different things within FSOC but don't
    have your technical knowledge.
        I would ask you, do you think there was some concern when
    the OFR came out with their report on asset management, how bad
    it was and how many people disagreed with the assessment? Does
    that give you some pause with regard to FSOC's capabilities?
        Mr. Grim. I think that the recent approach by FSOC where
    they have sort of shifted to a focus on activities and issued a
    request for comment on that focus, I think we view that as a
    shift consistent with how--
        Mr. Duffy. Okay. Can I ask one more question, with a quick
    answer, yes or no? Do you think that Governor Tarullo fully
    understands the intricacies of the assessment management
    industry and is working to achieve the best outcome for U.S.
    companies? Yes or no or maybe?
        Mr. Grim. I think I would say that the SEC with Governor
    Tarullo and the other--any of the FSOC members, so to speak, we
    are sharing our views with him, sharing our subject matter
    expertise with him.
        Mr. Duffy. I will take that as a no.
        I yield back.
        Chairman Garrett. The gentleman is recognized with a little
    bit of wiggle room on the end of it.
        Mr. Scott. Thank you, sir.
        Mr. Grim, you are the Director of the Division of
    Investment Management for the U.S. Securities and Exchange
    Commission, correct?
        Mr. Grim. Yes.
        Mr. Scott. And are you aware on the fiduciary issue, that
    we wrote into Dodd-Frank that it was the domain of the
    Securities and Exchange Commission to come up with a uniform
    definition, if need be, of ``fiduciary?''
        Mr. Grim. Yes. That is right. That is part of Dodd-Frank.
        Mr. Scott. Are you also aware that we wrote that and it is
    clearly written in Section 913 of Dodd-Frank?
        Mr. Grim. Section 913 is the provision that gives the SEC
    the authority to adopt uniform fiduciary--
        Mr. Scott. So the issue becomes, why is the Labor
    Department getting into your bailiwick and doing what they are
    doing in such a disruptive manner when we clearly--I was here,
    I was intimately involved in that issue, very intimately
    involved in the writing of Dodd-Frank, and we expressly put
    that in.
        You regulate the financial advisers. Nobody knows more
    about investment management than the Securities and Exchange
    Commission; it is for that purpose.
        So, Mr. Grim, I put to you, why is the Labor Department
    dabbling in this issue and bringing about such great
    consternation and confusion and threatening the ability,
    particularly of low-income communities, low-income and low-
    income small businesses, from getting the kind of financial
    advice that they need? Why are they doing this?
        Mr. Grim. The question of why DOL is doing it is obviously
    better directed at DOL. It is sort of up to them what they do.
    But I would say that we, pursuant to the Section 913 authority
    that you referenced, the Chair has announced her support for
    pursuing the uniform fiduciary duty. She has directed staff at
    the agency, which includes my staff, to develop a
    recommendation, and that is what we are doing.
        Mr. Scott. Yes, but you see why the people in this country
    are getting so fed up with what is happening up here in
    Washington where you have this kind of invasion of scope of
    practice and responsibility where we clearly put into one law.
    That is your responsibility. And then you have another agency
    coming out of the blue and putting in something else that has
    tremendous unintended consequences when we are working very
    hard to get wealth building and to get people to save and to be
    able to do that in a respectful way.
        So I would hope that you would take back words of
    encouragement from me to Chair Mary Jo White that she needs to
    press hard and fight for her responsibility and not have it
    taken away from her from where we gave it to her in this
    committee when we wrote Dodd-Frank and the President of the
    United States gave it to her when he signed Dodd-Frank. And the
    Labor Department is clearly out of bounds. Would you pass that
    word of encouragement to her? Thank you.
        Now, the other question I want to ask you is, you are
    proposing a rule that is requiring investment advisers to
    create and maintain transition plans for major disruptions in
    their businesses. I was wondering if you had any idea of what
    the overall impact of this would be, particularly on the
    smaller investment companies?
        Mr. Grim. The impact on the smaller advisers is obviously
    something that we are studying very carefully as we develop a
    recommendation for the Commission in the transition area. There
    are rules on the books right now for investment advisers that
    were developed post-9/11 about certain transition issues, and
    what we are trying to do as part of this new rulemaking is
    evaluate whether there are other types of transition events
    that those rules should be expanded to cover. And clearly, in
    so doing, one of the things that we need to understand and ask
    for public comment and advise the Commission on in recommending
    whether they propose a rule is the impact on small advisers.
        Chairman Garrett. I thank the gentleman.
        Mr. Ross is now recognized for 5 minutes.
        Mr. Ross. Thank you, Mr. Chairman.
        Mr. Grim, thank you for being here. It is refreshing to
    have your testimony because rarely do we have the ones who
    actually look under the hood and try to make it run on all
    cylinders and we have a chance to talk to them.
        Specifically, and following up on my colleague from
    Georgia's questioning with regard to the Department of Labor's
    fiduciary definition, we are giving rise to a whole new cause
    of action. We are creating a situation that will eliminate the
    possibility to have the small investors to have adequate and
    appropriate advice.
        My question to you is, to what degree has the SEC contacted
    you and advised you or you advised them as to what would be the
    appropriate response to that in terms of the rulemaking that
    the SEC is going through on a fiduciary rule?
        Mr. Grim. So, the DOL--
        Mr. Ross. They have reached out to you, right? They are
    looking to you? You are the technical expert here.
        Mr. Grim. We have provided our subject matter expertise to
    them in conjunction with their development of the rule. I think
    that what we are doing as part of that is talking to them about
    our take on potential impacts on investors.
        Mr. Ross. And the impact, for example, on fair compensation
    as opposed to reasonable compensation, and if the SEC comes
    down, has a different definition for fair compensation as
    opposed to the reasonable compensation that can be charged,
    there is going to be a conflict there, how do you resolve that
    between the two rules?
        Mr. Grim. One of the issues in the fiduciary debate,
    whether it is the DOL side of it or the SEC side of it, is
    absolutely compensation and fee structure. Right now, investors
    have access to an investment adviser compensation structure,
    which is typically assets under management. On the broker side,
    it is typically Commission-based. And as we have studied
    potential impacts of--as part of the SEC rulemaking process, we
    have been very focused on making--in developing a
    recommendation for the Commission, being very conscious of
    those compensation issues.
        Mr. Ross. Reasonable compensation is important, and I think
    a lot of my friends in this industry have built a career, and
    they, of course, have a livelihood that is dependent upon their
    investors being successful. And so I would think that they are
    more incentivized to give the proper advice than would be some
    bureaucrat in Washington, D.C., telling what they can charge or
    can't charge and what advice they can and can't give.
        Let's talk briefly about FSOC's review of asset managers,
    because I think that is important. I have listened to your
    testimony today, and I can't really glean from the fact that
    you may believe that asset managers are really systemically
    important financial institutions. Am I wrong on that?
        Mr. Grim. I think the way that FSOC--
        Mr. Ross. Those are conduits. They are really conduits.
    They are managing money. They are managing assets.
        Mr. Grim. Ultimately, the determination of whether an asset
    manager is systemic is up to FSOC.
        Mr. Ross. But has FSOC reached out to you? Let's face it,
    they need to be looking to where the best expertise is, and I
    am assuming from your testimony and your background that is
    you. Have they reached out to you and said, ``Hey, what do you
    think is good criteria to determine whether an asset manager is
    a SIFI?''
        Mr. Grim. Chair White has been very involved, as I
    understand it, in--
        Mr. Ross. Let me ask you more directly: Do you have an
    opinion, based on your experience, as to what it would take,
    what criteria would need to be fulfilled in order to constitute
    an asset manager as a SIFI?
        Mr. Grim. I think that I would say it is a little too early
    to say. I think right now the focus--
        Mr. Ross. But if there is--there has to be some criteria.
    It can't just be such a subjective labeling that you simply
    say, ``Okay, this is what you are and we can't justify it, but
    good luck getting out of it,'' which is what the state of the
    law seems to be right now.
        So, again, you are the expert, would you have an opinion as
    to what it would take in order to justify the labeling of an
    asset manager as a SIFI?
        Mr. Grim. I think it is fair to say that if that
    determination is going to be made, it would be important to
    have criteria in place. But right now, of course, the focus at
    FSOC has been on this activities and products.
        Mr. Ross. Would it not also be good, if there is such
    criteria, that it be allowed to be shared with the asset
    manager so that they can make corrective action to make sure
    that they either don't become labeled as such or at least have
    an exit ramp so they can get out of that labeling over a period
    of time? In other words, transparency in the criteria
    application.
        Mr. Grim. Again, I would say, obviously that is going to be
    up to FSOC.
        Mr. Ross. Again, you are the expert, just in your opinion,
    wouldn't that not be good?
        Mr. Grim. I think in my--
        Mr. Ross. In terms of due process, would it not be good?
        Mr. Grim. In my opinion, I think that we just--right now
    the focus hasn't been on designation.
        Mr. Ross. Just say, yes, it is okay.
        Mr. Grim. It has been activities. And I think that has been
    a shift consistent with how the SEC--
        Mr. Ross. Thank you, Mr. Grim. My time is up.
        Mr. Grim. Thank you.
        Mr. Ross. I yield back.
        Chairman Garrett. The gentleman yields back.
        Mr. Carney?
        Mr. Carney. Thank you, Mr. Chairman.
        Thank you, Mr. Grim, for coming in today and for answering
    the questions that we have.
        I was part of a group of members of the committee on this
    side of the aisle, I think, obviously, I think it was also a
    bipartisan effort to encourage the Department of Labor and the
    SEC to develop the fiduciary standard, uniform fiduciary rule
    together in a consistent kind of way. That didn't happen. That
    was several years ago. And the Department of Labor has proposed
    its rule and they are taking a lot of feedback. They are
    getting a lot of input.
        And you are in the process, I understand what you have said
    and the information that I have, in developing the standard
    from the SEC's perspective. Is that right? We have had a lot of
    conversation about it over the last--
        Mr. Grim. Yes, that is right.
        Mr. Carney. --hour or so. Could you give me a timetable for
    that? You mentioned you are doing a study now. What does that
    study look like, and what is your timetable?
        Mr. Grim. I think the timetable will ultimately be up to
    the Commission to vote on the rule. I think that our direction
    from the Chair has been to develop a recommendation for the
    Commission's consideration, and that is what we are doing. We
    are studying very hard some of these impact questions that we
    have been talking about here because we want to fashion the
    recommendation in the best way possible for investors and--
        Mr. Carney. Do you have a sense as to how long that is
    going to take before you will have a recommendation ready?
        Mr. Grim. I don't.
        Mr. Carney. The reason I ask the question is because the
    Department of Labor has its proposal out, and it is getting a
    lot of feedback. Have you looked at that? I guess you have
    because you are providing some technical advice and expertise
    for them, right?
        Mr. Grim. Yes, I am aware of it.
        Mr. Carney. What do you think? What do you think of the
    best interest contract and some of the things that are in it?
    There has been some concern raised about process-wise, how it
    would all work. Have you looked at those?
        Mr. Grim. I do know that the Labor Department has gotten a
    lot of comments on that issue and a number of other issues with
    its proposal. I think our focus, the SEC staff focus on
    providing its comment or expertise on the proposal has been
    around potential impacts of choices that they are making in--
        Mr. Carney. Is your sense that what they have proposed, and
    given the feedback they have gotten and their expressions of
    willingness to make certain changes, do you think they are
    heading in the same direction of where your recommendation will
    go to the SEC?
        Mr. Grim. I honestly don't know.
        Mr. Carney. Part of the reason for our letter in the first
    instances was that you didn't have two widely differing
    approaches to this really important uniform--the whole point of
    it was to get uniformity, right, not to have a separate set of
    rules apply to different groups of people.
        Mr. Grim. I would point out that ERISA and the Investment
    Advisers Act, in terms of fiduciary, already have differing
    approaches--
        Mr. Carney. Right.
        Mr. Grim. --to what our fiduciary duty does, so that is
    something that has to be considered as part of this whole
    thing.
        Mr. Carney. One of the concerns that has been raised is
    that small balance accounts will be orphaned because of the
    changes maybe in compensation allowances would mean that small
    accounts would be orphaned. Is that something that you are
    looking--the people who have those accounts wouldn't get any
    advice, is that something that you are looking at as well in
    your analysis?
        Mr. Grim. That is something that is very important to us
    for sure as part of our effort.
        Mr. Carney. You have the, potentially, the small IRAs under
    your jurisdiction, right?
        Mr. Grim. What we did both as part of the study that the
    SEC staff provided to Congress 6 months after Dodd-Frank and in
    the request for information that we issued to the public a
    couple of years after that, we have been asking for all kinds
    of data on--well, a number of issues, but that issue in
    particular. And my staff, Division of Trading and Market staff,
    which is the broker-dealer experts, and our Division of
    Economic and Risk Analysis, our economic experts, we are all
    looking at that.
        Mr. Carney. One of the responses that we heard is that
    there will be new models will emerge in the marketplace. What
    is your view of that? And it is already happening, by the way.
        Mr. Grim. Yes, I think it is a little too early to say.
    Obviously, we are just developing our recommendation. So, it is
    going to be a little too early to say since our recommendation
    hasn't even been voted on by the Commission.
        Mr. Carney. Thank you. Good luck with it.
        I yield back.
        Chairman Garrett. The gentleman yields back.
        Mr. Huizenga?
        Mr. Huizenga. Thank you, Mr. Chairman.
        Quickly, I want to talk about proxy advisory firms, but I
    do want a quick clarification. When asked by my colleague from
    Florida about the Department of Labor and the fiduciary
    standards and about your involvement and whether the Department
    of Labor had asked for help, you said, ``We have shared the
    information.'' Did the DOL actually ask you proactively for
    that help?
        Mr. Grim. Yes, I think so.
        Mr. Huizenga. Okay. All right. Because I can share
    information with a lot of my constituents or share information
    with kind of anybody and that means I just sent the email or I
    sent it and I don't where it went. Do we know who it actually
    went to at DOL?
        Mr. Grim. I don't know the details, but I do know that
    there has been--
        Mr. Huizenga. Okay. I am going to do a follow-up written
    question on that because I would like to know who actually
    requested it and then who sent it and who received it. So thank
    you.
        The two largest proxy advisory firms together control about
    90 percent of the proxy advisory industry. In your opinion, do
    you believe the SEC's rule adopted in 2003 which permits an
    institutional adviser to rely on an ``independent third party''
    is still appropriate, given that statistic?
        Mr. Grim. The Commission and the Division have been very
    focused on proxy advisory firms. In recent years we had a
    roundtable, not too long ago, where we brought in different
    stakeholders to share their views, and got a lot of good public
    comment. And subsequent to that, staff in my Division, as well
    as staff in the Division of Corporation Finance, sort of
    jointly put together a staff bulletin on some of the issues
    around proxy advisory firms.
        The focus of that guidance has been on a couple of
    different things. One is that the proxy advisory firms that you
    mentioned, how they disclose their conflicts. And then another
    piece of it is how investment advisers who use proxy advisory
    firms oversee those proxy advisers.
        Mr. Huizenga. Could you explain how? Because I got a quote
    in here, so from that bulletin, I believe, you are talking
    about in considering whether to obtain the assistance of a
    proxy advisory firm, an investor adviser should ascertain the
    proxy advisory firm's ``capacity and competence to adequately
    analyze proxy issues,'' and ``identify and address any
    conflicts of interest?''
        Exactly what does that mean, though? What do you mean by
    that?
        Mr. Grim. I think there have been concerns expressed about
    investment advisers completely outsourcing to these proxy
    advisory firms their proxy voting responsibility. And I think
    the point of that guidance is to provide SEC staff views on
    what advisers should be thinking about should they choose to
    employ a proxy advisory firm.
        Mr. Huizenga. Do you clearly do that, though, in that
    bulletin? That seems to have brought some question to that.
        Mr. Grim. I think it is pretty clear.
        Mr. Huizenga. Clarity is in the eye of the beholder? All
    right.
        Mr. Grim. Yes, right.
        Mr. Huizenga. And do you believe that the independence of a
    proxy adviser is also important for an investment adviser to
    consider when considering whether to obtain the assistance of a
    proxy advisory firm? There has been a lot of debate about these
    firms and their inherent conflicts of interest, as you have
    kind of been pointing out, and are you concerned that it is not
    appropriate for investment advisers to use these proxy firms as
    independent third parties when developing recommendations for
    their proxy voting?
        Mr. Grim. Yes, I think it is, as that guidance that we are
    talking about pointed out, I think it is important that with
    respect to proxy advisory firms they provide good disclosure
    about material conflicts that they have.
        Mr. Huizenga. So do you believe the SEC needs to provide
    greater clarity on what it means to be an independent third
    party?
        Mr. Grim. That is something that we are studying. We just
    went through the first proxy season subsequent to the issuance
    of that guidance, so I think we are studying that and the
    impact of the guidance, and we will decide from there whether
    more needs to be done.
        Mr. Huizenga. What is sort of the timeframe then for that
    analysis? Because, again, that does get to the lack of clarity
    or clarity as to what an independent third-party proxy is and
    those definitions. So what sort of timeframe is that on?
        Mr. Grim. It is something that people are focused on right
    now. Hard to predict when that analysis will be finished.
        Mr. Huizenga. Is that weeks or months or years?
        Mr. Grim. It is hard to say. I would hope not years. But
    beyond that, it is hard to say.
        Mr. Huizenga. Okay. Mr. Chairman, my time has expired.
    Thank you.
        Chairman Garrett. Thank you.
        The gentleman from Connecticut has rejoined us and is
    recognized for 5 minutes.
        Mr. Himes. Thank you, Mr. Chairman.
        And thank you, Mr. Grim, for being with us. I have two
    categories or two questions, really.
        The first is, you note in your testimony that in December
    of 2014, the FSOC released a notice seeking public comment on
    risks to financial stability from asset managers, and you
    further note that the staff has reviewed the comments received.
    It is a topic of some interest to a lot of us about systemic
    risk that may or may not be associated with asset managers.
        I know you have sort of addressed this a little bit, but I
    wonder if I could get you to characterize these comments and
    any initial conclusions or preliminary conclusions or thoughts
    that you might have on the comments as a whole and whether
    there is a sense that there is systemic risk emergent from
    asset managers.
        Mr. Grim. I think as a general matter the comments
    focused--well, the request for comment asks for comment on sort
    of a number of different specified activities in the asset
    management industry, so leverage, liquidity, operational risk,
    those kind of things. So I think the comments, we got them from
    a wide--or I should say FSOC got them from a wide range of
    commenters. And I think that in terms of the work that is
    ongoing right now at FSOC, they are kind of assessing those
    comments and figuring out what is the appropriate next step in
    light of those comments.
        Mr. Himes. Okay. Thank you.
        My other question concerns private funds. I worked with
    Congressman Hurt on some concerns we had in Dodd-Frank about
    the registration requirement for relatively small funds, and I
    think Congressman Hurt and I were concerned about two things.
        One, those funds obviously are, by definition, held by
    institutional or other very sophisticated investors. I think we
    are also concerned about the sheer amount of data that the SEC
    would receive.
        Legislation we put forward ultimately didn't go anywhere,
    but I was saddened to see, subsequently to that, that the SEC
    really focused in on the issue of fees, and in particular
    transparency of fees in that particular community. And I
    commend the work you have done in highlighting some absence of
    transparency, to put it that way, in that community.
        So I am wondering--I am very interested in the question of
    these are obviously fairly complicated partnership agreements.
    There is an opportunity to hide fees and cash flows and to be
    less than transparent about what investors are and are not
    getting back. So I am wondering if I can get you to talk a
    little bit about whether the issues that have emerged in the
    private fund arena with respect to transparency on fees, are we
    talking about a few bad actors? Are we talking about behavior
    that is systematic in that community, is it common? How
    concerned is the staff that there is an absence of transparency
    in those investment vehicles?
        Mr. Grim. As you point out, Dodd-Frank had us, had the SEC
    develop some rules to implement the registration of a number of
    private fund advisers, including private equity advisers
    subsequent to that. So we did those rules, and now our exam
    staff--that is not me; that is the exam office--have been
    examining a number of these firms.
        And one of the reasons that they are doing so is that
    although private equity funds are generally sold to
    sophisticated investors, a number of those investors are
    pension plans that have your average retail investor worker in
    them. So there is a retail investor component to them.
        In terms of what they have found, I think it is fair to say
    they found a range of practice. They found on the sort of
    concerning side of things, they have been very focused on, as
    you point out, fees, transparency of fees, and they have been--
    my colleagues in OC have been very public about some of the
    concerns that they have seen and in certain cases have referred
    those cases to our Enforcement Division where enforcement has
    taken action.
        Mr. Himes. I don't have that much time left, but, again,
    you watch this pretty closely. How concerned should we be that
    these complicated vehicles, private funds in particular, that
    an absence of transparency is a structural problem rather than
    a problem with a number of bad actors?
        Mr. Grim. I think we at the SEC generally, and me
    specifically, see the benefits of registration under the
    Advisers Act, the transparency that comes with it, the
    examination authority that comes with it, and we think that is
    very important.
        Mr. Himes. Okay. Thank you.
        And I yield back the balance of my time.
        Chairman Garrett. The gentleman yields back.
        The gentleman from Arizona, Mr. Schweikert, is recognized.
        Mr. Schweikert. Thank you, Mr. Chairman.
        Mr. Grim, let me make sort of a circle back just because
    you have seen in a lot of the conversations here a concern
    about the harmonization of who regulates whom, but the impact
    of it. And if I continue to look at the goals or the mission
    statement of the SEC--protecting investors, maintaining
    fairness, orderly markets--so when you are actually looking at
    what many of us believe is a crisis in the retirement world,
    the number of our brothers and sisters who are heading towards
    retirement with almost no savings, no assets set aside, when
    you are promulgating rules, when you are providing information
    to the Department of Labor, is there at least the discussion
    of, hey, accessibility?
        This is going to go back to the conversation you and I had
    before the hearing of other platforms to provide information to
    get more of our public into the investor class. Do you take
    into consideration saying, here is the rule sets because we are
    trying to make everyone safe, but now we have just created
    another barrier, whether that be cost or bureaucracy, for the
    population to participate as investors?
        Mr. Grim. Investor access to investment advice is a
    cornerstone of what we are trying to accomplish with both our
    SEC work on fiduciary duty, uniform fiduciary duty, and in our
    sharing of expertise with the Labor Department, a lot of it is
    around exactly that point.
        And we have been very fortunate by publishing our study for
    Congress, pursuant to Dodd-Frank on the fiduciary duty, and
    then doing the additional request for information that we did
    on the uniform fiduciary duty, we have gotten a lot of input
    about just that point, and we are looking very carefully at it.
    It is not just the experts in Investment Management on advisers
    and Trading and Markets on broker-dealers, but our economics,
    our Division of Economic and Risk Analysis.
        Mr. Schweikert. Mr. Grim, let's sort of do a sidestep,
    because it is off in a class. Let's say I have someone who is
    out there working their heart out and they are only setting
    aside $25 a week, or $50 a week, how do they get advice? We are
    seeing a number of the investment adviser organizations out
    there try to bifurcate, saying, ``Hey, we are going to give you
    advice and you can log in using your pocket supercomputer to
    get information.''
        Are you working to harmonize that? Is there at least a
    discussion of, how do we make this information very
    egalitarian, but not also a cascade of legal events because you
    didn't put a period in the right place? I have a real concern
    that as we do more and more of this, one of the outcomes of
    Dodd-Frank is we have cut off so many people from being able to
    access advice.
        Share with me, does it at least come up in conversation?
        Mr. Grim. Absolutely. So as an example, some of the
    feedback that is relevant in the fiduciary duty, sort of
    developing a recommendation for the Commission there is, right,
    investor testing, investors--there was a study that the SEC had
    done even prior to Dodd-Frank, I think, that talked about
    investors and their preferences for the individual who provides
    them advice, or the type of account that they have, the type of
    fee structure that they want. All those things are critical to
    getting at exactly what you are you talking about, which is
    trying to do what we can to ensure that as many people as
    possible have--
        Mr. Schweikert. But to that goal, should we as policymakers
    say, hey, we need to consolidate, we need to harmonize this
    concept of, the Department of Labor is going to be doing
    something over here that may create liability in cost
    structure, the SEC is over here doing things that may change
    liability in cost structure, SIFI or others, whoever else may
    be playing, CFPB may even?
        Am I creating an environment where our layers of attempting
    to protect the world are going to lock a lot of our brothers
    and sisters away from being able to have even the most basic
    access to investment retirement information?
        Mr. Grim. I certainly hope not.
        Mr. Schweikert. But it is sort of happening, isn't it?
        Mr. Grim. I think that as we develop our recommendation for
    what we are going to try to do--
        Mr. Schweikert. As you are building--and I know we are out
    of time, Mr. Chairman--those, please consider, are we actually
    creating more barriers to entry than we are actually taking
    down?
        And with that, Mr. Chairman, I yield back.
        Chairman Garrett. The gentleman yields back.
        Mr. Hill is now recognized for 5 minutes.
        Mr. Hill. Thank you, Mr. Chairman, and Ranking Member
    Maloney, for this series of hearings.
        Mr. Grim, thank you for your public service. And having
    been a member of the Executive Branch before and testified
    before Congress before, it is a great opportunity, and I
    appreciate you doing it. But I also urge you to, while you work
    for the SEC, to also be free to express your personal view by
    prefacing it as a personal view because we do want to learn
    what you think about many of these topics.
        And on the subject of the Department of Labor, has the SEC
    written its fiduciary proposal? Do you have in your office a
    draft proposal on fiduciary based on all the work you have done
    for the past 4 years?
        Mr. Grim. We are in the process of developing a
    recommendation.
        Mr. Hill. Would you say you are in the ninth inning of that
    recommendation or the first inning? Tell me where you are in
    the process.
        Mr. Grim. I'm sorry, could you say it again?
        Mr. Hill. Are you in the ninth inning of developing the
    recommendation or the first inning? Where are you exactly? It
    reports to you, so I am sure you have a good feel for where it
    stands.
        Mr. Grim. I think, I forget exactly the words that Chair
    White used in announcing her support for and asking the staff
    for us to develop a recommendation for the Commission. I don't
    think she used a baseball analogy, which inning it was in--
        Mr. Hill. Pick one. I don't care. Tell me where you are in
    the process.
        Mr. Grim. I think front burner, is what--
        Mr. Hill. No, no, no, no, not that it is important. I am
    asking you, where are you in the development of the process?
    Are we almost through with it, through with it, waiting on your
    desk to send it to the Commission for their review? Where are
    we in the process?
        Mr. Grim. We are developing it for the Commission's
    consideration.
        Mr. Hill. When will it go to the Commission?
        Mr. Grim. As soon as it is ready.
        Mr. Hill. When did you start the process?
        Mr. Grim. This issue of uniform duty for brokers and
    advisers even predates Dodd-Frank. There was discussion about
    kind of the morphing of the broker-dealer and investment
    adviser business even before that. But clearly since Dodd-
    Frank, the staff, with its SEC staff study that it was required
    to provide to Congress within 6 months after Dodd-Frank, we did
    that, so we have been working on it certainly since then.
        Mr. Hill. But isn't this--excuse me for interrupting--
    exactly to Mr. Scott's point, that this is ridiculous that it
    takes this long? This is an important topic, but we have
    studied it for 4 years, and now the Department of Labor is
    preempting your work? Aren't they preempting your work, Mr.
    Grim, in your personal opinion, not the opinion of the
    Commission or the Chair?
        Mr. Grim. It is absolutely an important topic but it is
    complicated, right?
        Mr. Hill. Oh, I don't--I have been in this industry for 35
    years. I understand the complication. I understand the
    importance of your work. I am just simply asking you, is the
    Department of Labor preempting the important work the
    Commission has done, ordered by the statute of Dodd-Frank? In
    your view?
        Mr. Grim. DOL and the SEC have different statutes,
    different mandates. I think that it is up to DOL what to do
    with ERISA and its statutes.
        Mr. Hill. But won't that be confusing for investment
    advisers and their clients to have these two different
    competing standards that are actually in conflict with each
    other in sales practice issues?
        Mr. Grim. That confusion issue is certainly something that
    we are very focused on and continue to focus on in developing
    our recommendation.
        Mr. Hill. So you are just advocating to the Department of
    Labor, you are just going to adopt their proposal, because
    shouldn't you have the preeminent view in this, your expertise?
        Mr. Grim. Labor is--
        Mr. Hill. But it will be conflicting, won't it? How could
    you not have a conflicting standard? Because it is not in
    keeping with the 1940 Act and all the years. We talked about 70
    years of oversight of investment advisers. Won't this be in
    conflict, the DOL rule and create a lot of confusion?
        Mr. Grim. That is clearly something that we at the SEC are
    focused on as we develop our recommendation. I don't know. I
    assume that DOL would be--
        Mr. Hill. I will take that as it is confusing, because
    obviously I think you are confused by that. Let me switch
    subjects.
        Securities receive safe harbors for SEC research purposes.
    Isn't that right, generally?
        Mr. Grim. Yes.
        Mr. Hill. So is there any reason why those same safe
    harbors shouldn't be extended to exchange traded funds on
    research for exchange traded funds, in your view?
        Mr. Grim. I would say in response to that, that of course
    we are very supportive of good research about all kinds of
    securities.
        Mr. Hill. I know you are. I think that goes back to the
    1933 and 1934 Acts. But do you agree that those same safe
    harbors for research on an individual company should be
    extended to independent research on an exchange traded fund,
    yes or no?
        Mr. Grim. Because the Act 1933 and the 1934 Act are a
    little bit--
        Mr. Hill. Or the 1940 Act, pick an Act. Don't get--let's
    not talk about the Acts. Do you believe that the SEC research
    safe harbor should be afforded to exchange independent research
    on exchange traded funds?
        Mr. Grim. In looking at research about ETFs, I think we
    would look at it to encourage it to be good, subject to
    adequate investor protections. I don't know the details of how
    taking the 1933 and the 1934 Acts' safe harbors and applying it
    to our world, I just--I don't know how it would work or not.
        Mr. Hill. Thank you, Mr. Chairman, I think.
        And I yield back.
        Chairman Garrett. Thank you.
        Mr. Hultgren is recognized then for 5 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman.
        And thank you, Director Grim. I appreciate you being here,
    and I appreciate you helping us on these issues.
        As I believe all of us know, the Department of Labor
    clearly is aggressively pushing a new fiduciary standard based
    upon the Employee Retirement Income Security Act (ERISA). While
    I heard concerns early on, every day it has become more evident
    that the Department of Labor has little understanding of the
    market that it is seeking to regulate or really any perception
    of the negative implications its proposal have on retail
    investors, and my sense is they are not willing to listen.
        On July 29, 2015, I sent two separate letters to Secretary
    Perez. It has now been almost 3 months, and he has not
    responded to me and has done nothing to address the serious
    concerns of my constituents.
        Since Secretary Perez has chosen not to respond to these
    letters, I wanted to see if I could ask your opinion on these
    issues. Should the exclusive sale of proprietary products or
    services be viewed as a violation of a best interest standard?
        As you know, this has been proposed by the Department of
    Labor, but it would be inconsistent with the congressional
    directive of Section 913 of Dodd-Frank. Labor has proposed that
    options not be permissible in retirement accounts, but they
    would continue to be permissible in nonretirement accounts.
    What are your thoughts on the concept of limiting the types of
    investments that can be held in retirement accounts?
        Mr. Grim. I would say that with respect to the questions
    that you directed to Secretary Perez and DOL, I don't know the
    answers to those. I can tell you that under Section 913, which
    is directed to the SEC, you are absolutely right, one of the
    provisions in there involves the issue of sales of proprietary
    products, and that is one of the considerations that we are
    looking at very carefully.
        We got a lot of public comment around that issue in
    response to the study that we did subsequent to Dodd-Frank, as
    well as a further request for information that we did a couple
    of years later. That has been a very important issue, and that
    is part of the thing that we are trying to sort out as part of
    our recommendation.
        Mr. Hultgren. Let me follow up on that then with Section
    913 of Dodd-Frank. It provides that the SEC has the authority
    to adopt a uniform fiduciary standard for broker-dealers and
    investment advisers for advice provided to retail investors. In
    March, Chair White stated the SEC should act to implement such
    a standard. Since the statement from Chair White, what action
    has your office taken, and what is the status of your
    recommendation to the Commission?
        Mr. Grim. After Chair White directed the staff to develop
    that recommendation, that is essentially directed to at least
    three parts of the Commission. So it is Investment Management
    with our expertise about investment advisers; the Division of
    Trading and Markets, who has expertise on broker dealers; and
    then our Division of Economic and Risk Analysis, who is sort of
    integrally involved in all the rulemakings that we do at the
    Commission now, including on this one, because this one has a
    number of challenging issues in terms of impacts on investors,
    impacts on markets, and impacts on products.
        We are working very closely. The three divisions are
    working very closely on the recommendation.
        Mr. Hultgren. It is my opinion, and I think many would
    share this, certainly my constituents would share this, that
    politically biased and less informed rulemaking by the
    Department of Labor, I don't believe, should be putting in
    place flawed rules. I think it makes much more sense for the
    SEC, they could do a better job of balancing access to
    retirement advice and products with consumer protection.
        On Friday, March 6th, Secretary Perez told CNBC that, ``I
    have personally met a number of times with Chair White, and our
    staffs have been working together closely throughout.''
        I wonder, what are some specific examples of input from the
    SEC that Labor has used in its public proposals?
        Mr. Grim. I think that in terms of the SEC staff sharing of
    expertise with Labor Department folks, a lot of what we have
    been talking about with them has been on impacts, impacts of
    choices that they are making on investors, on registrants, SEC
    registrants, on access to products.
        Mr. Hultgren. Let me ask you this really quick. I just have
    a few seconds left. Do you believe the Department of Labor
    should suspend its rulemaking until the SEC finalizes its rule?
    Why or why not?
        Mr. Grim. What DOL does with their rule is up to DOL. My
    focus at the SEC has been on developing the recommendation on
    the SEC's fiduciary duty proposal for consideration by our
    Commission.
        Mr. Hultgren. Thank you for your time.
        My time has expired. I yield back.
        Chairman Garrett. I recognize the gentleman from Maine, Mr.
    Poliquin.
        Mr. Poliquin. Thank you very much, Mr. Chairman. I
    appreciate it.
        And thank you, Mr. Grim, for being here. I understand this
    is your first time doing it, and you are doing a great job, and
    I appreciate it very much.
        I don't know if you are familiar with Maine, but not only
    is it the greatest State in the country and the most beautiful
    State in the country, it is also the oldest State in the
    country. We have the oldest average age in America. And we only
    have two congressional districts. I represent one, the real
    Maine, not northern Massachusetts, the real Maine, which is
    western, central, northern, and down east Maine, and it is
    highly rural, Mr. Grim. We have folks who are off the grid, we
    have folks who go through power outages on a regular basis, and
    a lot of folks who are just not online.
        Now, at the SEC, you folks have a proposed rule 30e-3 which
    would allow investment management firms, primarily mutual
    funds, I believe, to no longer send out quarterly reports and
    annual reports to mutual fund investors, instead trying to get
    folks to log on and print that out or see it online.
        Now, here is the problem with that, sir. First of all, 71
    percent of investors around the country want to receive paper
    reports, and this is a study done by you folks, subcontracted
    by you folks in 2012. Forty-one percent of the seniors have no
    Internet. My mother is 87. She can barely use a cell phone. She
    doesn't use the Internet. Seniors also own about one-half,
    roughly, of all mutual fund assets.
        So I am very concerned about making sure the SEC does its
    job, as you said here several times, of making sure small
    investors are protected. And the best way to protect them, Mr.
    Grim, and I think we can agree, is to make sure we continue to
    allow easy access to financial information in paper form, which
    our seniors want. Can we agree to that?
        Mr. Grim. The rule that you are referencing was part of a
    unanimous proposal by the Commission, and I guess I would make
    a couple of points about it. One is that what the Commission
    and what we were trying to do with that rule proposal is allow
    investors to get their disclosure in the way that they prefer
    it.
        Mr. Poliquin. Great. And you know something, I agree with
    you, Mr. Grim. And I want to move on to another topic. And so
    all I am saying is, let's make it really easy for our seniors
    who don't want to get it through the Internet to continue to
    receive it in paper form instead of forcing them to opt in by
    filling out a form that they lose, they never receive in the
    mail, and folks have a hard time reading.
        So I know you have a lot of influence at the SEC, and I
    would really appreciate you advocating for that option to make
    sure our investors get the information they need.
        I would like to move on a little bit here. I bet I spend in
    my congressional office, Mr. Grim, 25 percent of my time
    talking to taxpayers who want money from the Federal
    Government. And I always remind them of the same thing: We are
    borrowing to pay our bills, and we are $18 trillion in debt.
    Now, on top of that, we have a Social Security system that
    deals with retirement, of course, that has promised about $15
    trillion more than the IOUs that are sitting right now in the
    trust fund.
        This morning I talked to a mom with 3 kids up in Skowhegan,
    Maine, in the middle of our district. She is working two jobs,
    her husband probably is also, and I bet, like the rest of our
    seniors in Maine and across the country, they are scared that
    Social Security might not be there for them when they need it.
    So, they are trying to put aside a little bit of money to save.
        We have about $24 trillion in retirement savings across the
    country, as you know. You are in this space. And a lot of this
    money is being managed in mutual funds and also in 401(k) plans
    and IRAs, and these asset managers are trying to help out the
    little investor.
        Now, you have probably seen the study that was done not
    long ago by a fellow by the name of Douglas Holtz-Eakin, who
    used to be at the CBO, saying that long term, if asset managers
    are designated as too-big-to-fail, if they have the SIFI
    designation, that long term, because the cost will be so
    expensive for them, these rates of return will be about 25
    percent less on these retirement savings.
        So where is the compassion for the little investor? We are
    supposed to help these folks.
        I want to hear from you, if I may, Mr. Grim, don't you
    think it is a good idea to expand upon the discussion we have
    already had here today, that asset managers who are trying to
    help small investors save for their retirement, knowing that
    Social Security is in trouble, to not penalize them, so if they
    don't have any assets on their balance sheet but they are
    managing money for other small investors, there is no systemic
    risk to the market?
        Would you agree with that? And wouldn't you also agree that
    it makes sense for asset managers not to be listed as SIFIs?
        Mr. Grim. One of the great things about my job and one of
    the--just the awesome responsibility of it is some of this
    stuff that you are talking about, right. There is over $18
    trillion in--
        Mr. Poliquin. Yes.
        Mr. Grim. --registered investment companies. We have over
    11,000 advisers with--
        Mr. Poliquin. Mr. Grim, I am just about out of time. I
    don't mean to be rude, but when Chair Yellen came here, and
    Chair White came here, and Secretary Lew came here, I asked
    them the same question that I am asking you, and they all said,
    ``We are looking at this.''
        Now, what I heard you saying earlier--I believe I heard
    this correctly--is that you think it is a good idea and it
    makes sense--
        Mr. Garrett. If the gentleman could--
        Mr. Poliquin. --for asset managers not to be list as SIFIs,
    therefore not penalizing our smaller investor with lower rates
    of return. Did I hear you correctly, sir?
        Mr. Grim. I think, being that those folks you just
    mentioned are the members of FSOC, that is kind of where--
    because they are the ones that--they were the ones that make
    that determination.
        Mr. Poliquin. I bet you have an office right next door to
    Chair White and I bet you can influence her.
        Chairman Garrett. The gentleman's time--
        Mr. Poliquin. Thank you very much, Mr. Chairman.
        And thank you, Mr. Grim.
        Chairman Garrett. Thank you.
        I recognize the gentleman from California, Mr. Sherman.
        Mr. Sherman. I would like to defer to the gentlelady from
    New York.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Let me take this opportunity to thank my colleague, Mr.
    Sherman, for yielding. And I want to take this opportunity also
    to thank the ranking member and the chairman for allowing me to
    participate in this subcommittee hearing, an important one.
        I want to raise an issue with you, Mr. Grim, that is very
    important to hard-working Americans in the U.S. territories,
    including Puerto Rico. As you may know, Puerto Rico and all
    U.S. territories are exempted from the Investment Company Act
    of 1940. And when you look at the history and the Congressional
    Record, the argument at the time was that these territories
    were far away and that it will imply more resources.
        Recently, it was reported that UBS was underwriting bonds
    for Puerto Rico's retirement system and then placing these same
    bonds into mutual funds that were sold to customers on the
    island. Would this practice be permitted in the 50 States?
        Mr. Grim. You correctly point out that the way the
    Investment Company Act works right now, there is an exclusion
    from registration for Puerto Rico and the other territories of
    the United States. And what that means is that they are exempt
    from a number of the important investor protections that are in
    the act, registration, disclosure, examination, and affiliated
    transaction provisions that apply to your standard mutual fund
    in the United States.
        On your question of the UBS situation, I think it is a
    little hard to--I don't know the facts well enough to know
    whether--how those provisions would apply--if they had applied,
    how they would apply to the UBS facts, but I guess ultimately I
    would say those affiliated transactions--
        Ms. Velazquez. If UBS in the United States would be allowed
    to incur in the reckless, abusive behavior that they have done
    in Puerto Rico?
        Mr. Grim. What is prohibited by the affiliated transaction
    provisions for investment companies in the United States is
    purchases and sales between affiliates and the funds, purchases
    of bonds from affiliated underwriters. So again, I don't know
    the specifics of the UBS case, but that is the way the
    provisions work here in the United States for those that are
    registered under the Investment Company Act.
        Ms. Velazquez. Do you believe that American citizens in
    Puerto Rico are at a disadvantage because they lack the
    investor protections of the Investment Act as afforded to those
    in the 50 States?
        Mr. Grim. My understanding is that funds in Puerto Rico are
    subject to some kind of an investment company law. I don't know
    the details of it, so therefore it is hard for me to compare
    the two laws. But I would say--
        Ms. Velazquez. But the question is simple. In Puerto Rico
    and the U.S. territories, American citizens who reside on the
    island of Puerto Rico are exempted from this law, the
    Investment Act of 1940. My question to you is, do you believe
    that this loophole should be closed? Since, as you can see, in
    the Congressional Record it shows that there was not a
    principal issue at the time, but just the fact of the distance,
    the cost, the resources.
        Do you think we should close that loophole and grant the
    same investor protections that we afford to every American
    citizen? Do you think that veterans in Puerto Rico who go and
    fight for this country should be afforded the same protections?
        Mr. Grim. I think that the investor protections of the
    Investment Company Act are critical to all kinds of investors,
    disclosure, transparency, affiliated transactions. All that
    stuff is--it is the bedrock of what I do every day, so I
    believe it in very much.
        Ms. Velazquez. And so that means you believe that we should
    close this loophole?
        Mr. Grim. I understand that there is some legislative
    discussion about just that question, whether to close that
    loophole. My understanding is that the Commission hasn't
    offered a view on that legislation. But obviously, I am happy
    to provide our technical expertise on it.
        Ms. Velazquez. I introduced legislation to close that
    loophole, and I just ask the chairman and the ranking member
    that we work together so that we can afford the same protection
    that is provided to every American citizen in the United States
    and the 50 States to the people of Puerto Rico and the U.S.
    territories.
        I yield back.
        Chairman Garrett. Thank you. The gentlelady yields back.
        Mr. Stivers is now recognized.
        Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
    holding this very important hearing.
        And, Mr. Grim, I appreciate you being here. I just wanted
    to ask you first if it is lonely down there all by yourself?
        Mr. Grim. I have some folks behind me. It makes me feel a
    little less lonely.
        Mr. Stivers. Okay. I am glad you brought a few friends.
        I want to talk about an issue I don't think anybody has
    talked about. Has anybody talked to you about the potential
    coming liquidity crisis?
        Mr. Grim. We have touched a bit on the SEC's liquidity
    proposal.
        Mr. Stivers. Great.
        Mr. Grim. Not more generally.
        Mr. Stivers. So it appears to me that there are multiple
    forces, business simplification among many of the people you
    regulate, compliance with the Volcker Rule, and also the
    fiduciary standard moving a lot of folks who have been market
    makers out of the space, which could ultimately result in much
    wider price swings on the same amount of deal flow. And I am
    curious how much discussion you have had at the SEC around this
    coming problem that is created when you are focused on the
    stability of every single company, but not truly market
    stability.
        And you can just tell me you have had a lot of discussion,
    a little discussion, not much discussion, because they are
    talking about it in the market.
        Mr. Grim. A lot of discussion.
        Mr. Stivers. Okay. Thank you.
        I hope you will take a look at it. I have written a letter
    to the Office of Financial Research (OFR), asking them to do a
    study on this, because this is the coming crisis in our capital
    markets. And whether it is the small investor that is in a
    401(k), a large investor, corporations, banks that enter their
    investments through the capital markets, you are the front door
    of regulation for a lot of people, and you need to take a look
    at this coming crisis because you have the power to solve it,
    and I hope you are taking it very seriously.
        Mr. Grim. Liquidity is a very important issue to a lot of
    people for a lot of different reasons. I think with respect to
    investment management, we have done a couple of different
    things recently that I would highlight. One, last year there
    has been--
        Mr. Stivers. I appreciate what you have done, and I have
    limited time. You haven't done enough. You have not solved the
    crisis. The crisis is getting worse, not better. I would ask
    you to take a serious look at it, get the OFR to do a study, do
    a study of your own, continue to look at this. You are having
    market makers continue to leave the space. The potential of a
    coming crisis is there. You have the ability to solve it. I
    hope you will.
        I am going to talk about the DOL fiduciary rule, and one of
    my fellow Members asked about harmonization efforts. So I
    wanted to ask you, have you had conversations with the
    Department of Labor about holding off or suspending its
    rulemaking until you complete your 913 rulemaking? Because you
    couldn't tell the gentleman from Arkansas when that would be
    done. Are you coordinating with the Department of Labor on
    release dates, yes or no? It is a yes-or-no question. That is
    all I need.
        Mr. Grim. We have provided our subject matter expertise to
    DOL on some of the things that are going on in their rule.
        Mr. Stivers. Are you coordinating release dates? Have you
    asked them to slow down until you can finish your 913
    rulemaking so you can release them together, yes or no?
        Mr. Grim. I--
        Mr. Stivers. Would you please take a look at that?
        Mr. Grim. Yes, I can look at it. I don't know the details
    of--
        Mr. Stivers. And you don't have power over the Department
    of Labor, but you can ask them. If you haven't asked them--I
    learned a long time ago, nobody does anything until you ask
    them. So maybe you should ask them, and then we might not have
    rules that conflict with each other, because they can be done
    together, harmonized, and put together. That is what people
    need and demand of their government, an efficient, effective
    government.
        So I would ask you to go back to the Department of Labor
    and see if you can coordinate. It is clear to me it has not
    happened. You don't want to say it has not happened. I
    understand that. I am not looking to place blame here. There is
    still time to fix it. Let's try to fix it.
        I am curious if what you believe about imposing a fiduciary
    standard of care, what that will mean to investors with regard
    to fewer choices and higher costs. Are you willing to
    acknowledge that investors will have less choices because of
    the due diligence required of every investment at a fiduciary
    standard level and the legal liability and all at higher cost
    because of the cost of that due diligence, yes or no?
        Mr. Grim. I think that is something that is important for
    us to study, that we have asked for a--
        Mr. Stivers. You don't believe it is true, necessarily? You
    are studying it.
        Mr. Grim. We haven't finished with our recommendation. The
    Commission hasn't adopted its--
        Mr. Stivers. It happened in the United Kingdom. Did you see
    what happened there?
        Mr. Grim. I didn't hear.
        Mr. Stivers. Have you studied what happened when the United
    Kingdom opposed this standard? Did it result in fewer choices
    and higher costs? It did. Please look at that. I hope you will
    continue to study it.
        These aren't hard questions. I am sorry you don't know the
    answers to them. But I hope you will look at it. I hope you
    will coordinate and try to harmonize these rules and do what is
    right for the American people.
        I appreciate that you have a hard job. I know you have
    competing interests. You have a lot of information that you
    have to look at. But please do what is right for small
    investors in this country and try to harmonize these rules--
        Mr. Hurt [presiding]. The gentleman's time has expired.
        Mr. Stivers. --and make them not as painful with costs and
    fewer choices. Let's not hurt mom and pop all across this
    country.
        I yield back the balance of my time, Mr. Chairman.
        Mr. Hurt. The gentleman's time has expired.
        The Chair now recognizes Mr. Sherman for a period of 5
    minutes.
        Mr. Sherman. I want to pick up on the brilliant comments of
    Mr. Stivers. You have to work to harmonize these rules. It is
    absolutely absurd to think that we would have one set of rules
    applying to me because I have my money in an IRA and no rules,
    perhaps, or another set of rules applying to my mother who
    inherited some money from my father.
        And, in fact, what you have is a circumstance where you are
    going to have greater restrictions or greater protections on
    baby boomers who have their money in IRAs, and weaker
    restrictions and more freedom for people in their eighties and
    nineties who never know from IRAs and 401(k)s.
        So it ought to be the same rule or, if anything, the
    stricter rule ought to apply to the non-IRA accounts. And it is
    the SEC that has the expertise so I hope you will talk to your
    friends in the Department of Labor.
        In your prepared testimony, you mentioned the proposed rule
    to permit asset managers to provide shareholder reports
    electronically instead of on paper. On behalf of America's
    trees, I want to commend you for that and push it forward. I
    think it will be better for the investor because, speaking as
    an investor, I am constantly losing my reports. If they are
    electronic, I will have them forever, and I can switch back at
    them. I will never do that during a hearing, but at other times
    when I have my iPad, they are right there.
        As to a SIFI designation, you also mentioned that in your
    report, do you think you have enough tools to determine whether
    an asset manager is systemically important, Mr. Grim?
        Mr. Grim. Dodd-Frank set up the tools. The tools are for
    FSOC to determine whether something is systemic as opposed to
    the SEC. But I think that is where the tools are.
        Mr. Sherman. Going to the liquidity rules, you are going to
    have six buckets. Is there going to be a requirement that the
    fund have at least 50 percent of its assets in bucket one or
    bucket two, or is this just a disclosure, or is this a
    requirement?
        Mr. Grim. On the liquidity proposal that you reference, you
    are right to note that one of the elements of the rule is it
    proposes that there would be six buckets. Those buckets would
    be disclosed and transparent, so that is an essential part of
    the rule. There is another part of the rule that codifies some
    guidance that has been in existence for a while that would cap
    the amount of illiquid assets that a fund could hold.
        Mr. Sherman. Is illiquid bucket six or bucket five and six
    or buckets two through--or are these rules just separate? Do
    the buckets have anything to do with the 15 percent
    requirement?
        Mr. Grim. It is a separate requirement.
        Mr. Sherman. A separate requirement.
        I am a bit concerned about the idea of using third parties
    because I have seen what happened in the bond rating area,
    where they basically created the greatest economic catastrophe
    of our lifetimes, because the bond rating agency is selected by
    the issuer.
        If we are going to have these outside firms come in, are
    they going to be selected by the fund or would the SEC have a
    panel and assign the way, say, bankruptcy trustees are assigned
    from a panel? And wouldn't my grades have been much better if I
    could have determined which professor graded my paper and paid
    him?
        Mr. Grim. With respect to third-party compliance reviews,
    Chair White has directed us, the staff, to come up with a
    recommendation on that point. One of the--
        Mr. Sherman. I recommend that when you do that, look at the
    Frank and Sherman amendment to Dodd-Frank as originally
    proposed. We had a good system for assigning credit rating
    agencies. The SEC board ignored it there. But it is a system
    you may want to pick up. I am not saying this will please your
    board. Since they ignored it when they were required to follow
    it, they may not want you to follow it voluntarily.
        But the idea that you are going to have an outside grader
    who is paid and selected by the people that they are grading
    didn't work out so well in 2008. And you ought to take a look
    at a system by which those doing the grading can't become more
    profitable by putting out the word that they are easy graders.
        Mr. Hurt. The gentleman's time has expired. I thank the
    gentleman.
        The Chair now recognizes the chairman of the House Foreign
    Affairs Committee, Mr. Royce, for a period of 5 minutes.
        Mr. Royce. Thank you.
        And thank you, Director Grim.
        The OFR's asset management report included a number of
    factual errors. For example, the report listed an incorrect
    name for Fidelity's highest-level asset management entity and
    misreported the amount of its assets under management. The
    report improperly described Vanguard's structure. The report
    misrepresented the amount of assets under management for PIMCO.
        Thankfully here, the SEC provided stakeholders an
    opportunity in this situation to point out these mistakes,
    along with substantive concerns that the SEC had about the
    report. Do you think some of these mistakes could have been
    avoided if the OFR worked more closely with the financial
    supervisors and regulators, those, after all, with the
    expertise in these areas, and maybe also opened up their work
    for public comment?
        Mr. Grim. With respect to the OFR report, SEC staff
    provided some comments to the OFR on it. It was the OFR report.
    They chose to take some of our comments. They chose not to take
    some other comments. I think, ultimately, it was up to OFR to
    decide how the final report looked.
        Mr. Royce. You may know that Congressman Patrick Murphy and
    I have introduced a bipartisan bill, the Office of Financial
    Research Accountability Act, to address these issues, and the
    bill requires the OFR to submit for public notice and comment
    an annual report that details the Office's work for the
    upcoming year. Additionally, this bill requires the OFR to
    coordinate with financial regulators when they conduct future
    studies.
        While the OFR opposes this extra, what I would call
    transparency, I am hopeful we will see widespread support for
    these balanced changes going forward.
        Let me ask you another question, Director Grim, and this
    follows up on the staff legal bulletin on proxy voting that
    Chairman Garrett and Mr. Huizenga raised earlier. Should proxy
    advisory firms not be held to the same sort of accountability
    on corporate reporting and transparency as the SEC requires of
    the publicly traded companies that they advise on?
        Mr. Grim. With respect to proxy advisory firms and the
    guidance that the staff did issue, I think it was focused on
    addressing two important issues as a general matter. One is,
    with respect to the proxy advisory firms themselves, doing what
    we can to encourage good disclosure of material conflicts of
    interest by those proxy advisory firms. The second focus of the
    guidance was on investment advisers and how they use proxy
    advisory firms, making sure that their oversight of the proxy
    advisers is robust and appropriate.
        Mr. Royce. I saw the bulletin. One of the things it brought
    to mind was whether or not we shouldn't instead be having the
    Commission have a formal rulemaking on this. And I say it for
    these reasons. First, when we get to this question of what are
    the standards of performance, we have a situation where you
    have two entities and they dominate here, clearly, over 90
    percent of the market. And we, on top of it, have a situation
    where there are reports I would think would be subject to
    public scrutiny after those reports are prepared. But we don't
    have that.
        So I think taking it higher than a staff legal bulletin and
    taking it to basically a question of rulemaking on this by the
    Commission, is something I would suggest and just sort of get
    your feedback on that.
        Mr. Grim. I think where we are right now is, after the
    staff issued that guidance, we have had a proxy season run. And
    we have, my colleagues in the examination unit have been doing
    or are planning to do some exams. And so we are trying to
    gather some more feedback on the status, and then we will
    decide whether further action, including potential rulemaking,
    is necessary.
        Mr. Royce. The rules of the road seem to change when
    someone has an interest. And I guarantee you, when you have a
    situation where you have two entities with 90 percent of the
    market and the kinds of questions that have been called up over
    this performance, I think at the end of the day we are going to
    need rulemaking on it.
        But thank you very much. I appreciate your testimony today.
        Mr. Hurt. The gentleman's time has expired.
        Mr. Grim, thank you very much for appearing before this
    committee today.
        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.
        The hearing is adjourned.
        [Whereupon, at 11:23 a.m., the hearing was adjourned.]

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