[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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