[Senate Hearing 114-450]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 114-450

 
        OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                                   ON

     EXAMINING THE WORK AND AGENDA OF THE U.S. SECURITIES EXCHANGE 
                               COMMISSION

                               __________

                             JUNE 14, 2016

                               __________

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MIKE CRAPO, Idaho                    SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                    Dana Wade, Deputy Staff Director

                    Jelena McWilliams, Chief Counsel

                    Elad Roisman, Securities Counsel

                Shelby Begany, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                Graham Steele, Democratic Chief Counsel

                 Elisha Tuku, Democratic Senior Counsel

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 14, 2016

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                                WITNESS

Mary Jo White, Chair, Securities and Exchange Commission.........     4
    Prepared statement...........................................    38
    Responses to written questions of:
        Chairman Shelby..........................................    68
        Senator Brown............................................    78
        Senator Crapo............................................    83
        Senator Kirk.............................................    84
        Senator Heller...........................................    86
        Senator Scott............................................    89
        Senator Sasse............................................    91
        Senator Rounds...........................................    96
        Senator Warner...........................................    98
        Senator Merkley..........................................   103

                                 (iii)


        OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

                              ----------                              


                         TUESDAY, JUNE 14, 2016

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9 a.m., in room SD-538, Dirksen Senate 
Office Building, Hon. Richard C. Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The Committee will come to order.
    This morning we will receive testimony from Securities and 
Exchange Commission Chair Mary Jo White. Oversight of the 
Commission is an important part of this Committee's 
jurisdiction.
    The SEC is an independent agency tasked with protecting 
investors; maintaining fair, orderly, and efficient markets; 
and facilitating capital formation.
    The SEC is responsible for ensuring transparency so that 
investors have adequate information to make investment 
decisions and to mitigate conflicts of interest, fraud, and 
manipulation.
    This regulatory paradigm is one reason why our capital 
markets have long been the envy of the world and the lifeblood 
of our economy. Excessive and unnecessary regulation, however, 
may endanger America's status as the world's preferred 
financial center.
    First and foremost, I believe the SEC should focus on its 
core mission. This has become more difficult as the Commission 
has come under increased pressure to expand its mission and 
cater to special interests.
    Examples of such efforts include attempts to force the SEC 
to mandate disclosure on climate change and political 
contributions. These efforts are not new, and the SEC has 
withstood political pressure in the past. It is my expectation 
that it will continue to do so in the future.
    Chair White, as you pointed out in a 2013 speech, and I 
will quote you, `` . . . we make our decisions based on an 
impartial assessment of the law and the facts and what we 
believe will further our mission--and never in response to 
political pressure, lobbying, or even public clamor.''
    The SEC must, I believe, continue to adhere to those 
principles and uphold its fundamental mission. It should also 
periodically review the appropriateness of its existing rules.
    For example, while the Commission has undertaken work to 
review equity market structure, it has not engaged in a 
comprehensive review of its rules, even in light of the so-
called Flash Crash, which happened over 6 years ago.
    I also hope that the SEC will continue to take very 
seriously the importance of strong economic analysis when 
promulgating rules.
    As we have seen, agencies that fail to undertake such an 
analysis in their rulemakings are vulnerable to legal 
challenges, as well they should be.
    An agency with thousands of employees like the SEC should 
be able to analyze in detail the impact of its rules on the 
markets, investors, financial products, and the broader 
economy.
    This is especially true today, given the cumulative impact 
and unintended consequences of the myriad new rules stemming 
from the financial crisis.
    If the cost of a rule outweighs its benefit, then the rule 
should be eliminated. If a rule passes cost/benefit muster, it 
should then be implemented by the appropriate agency.
    The SEC has the primary expertise in capital markets and 
should be the lead agency in regulating them. Specifically, I 
am concerned that attempts by other Federal agencies to erode, 
Madam Chair, the SEC's jurisdiction could undermine the 
integrity and functioning of these markets.
    Recent examples of this include the Department of Labor's 
fiduciary duty rule, the FSOC's continued focus on asset 
managers, and the Federal Reserve's targeting of broker-dealers 
under the guise of reining in what it calls ``shadow banking.''
    The SEC has eight decades of specific expertise in these 
matters. This should outweigh the desires of other regulators 
to expand their powers at the expense of investors and the 
markets.
    Chair White, I look forward to hearing your thoughts on 
these issues and the future agenda of the SEC.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, and welcome, Madam 
Chair. Good to see you again.
    Over 3 years ago, you were confirmed as Chair of the SEC 
and assumed the task of guiding the Commission's significant 
rulemaking agenda under the Wall Street Reform Act and the JOBS 
Act. At that time the destruction of $13 trillion in household 
wealth from the financial crisis was still fresh in our minds. 
The SEC and other financial regulators had completed many of 
the Wall Street reform rulemakings and were evaluating how to 
finish the implementation of the rest.
    When you last appeared before this Committee in September 
2014, you said the staff was proceeding on the outstanding 
rules, we could expect to see additional rules shortly. 
Although several rules have been proposed and some finalized, 
many are still incomplete. In particular, the Commission has 
not finished the derivatives rules under Title VII of the Wall 
Street Reform Act, and the path to their completion seems 
unclear. These rules are important because Title VII is a key 
part of reform to the financial markets.
    By increasing transparency, by enhancing oversight, by 
moving to more resilient and stable trading platforms, Congress 
wanted to make sure that future crises could be detected sooner 
and would do less damage. This is not entirely on your 
shoulders, on the SEC's shoulders, but there are certain 
markets, such as credit default swaps, that depend on SEC. 
Until the rules are completed, the SEC and other regulators 
will not have the benefit of a framework that provides 
transparency and access to market data.
    Another Wall Street Reform Act rule that remains 
outstanding would prohibit incentive compensation that could 
lead to excessive risk taking or significant losses at 
financial firms. We know what happened during the financial 
crisis in that regard.
    The multiagency rule was proposed in 2011 and reproposed 
last month. Six years after Wall Street reform became law, this 
rules still is not finished.
    The final rule would provide the market and the public with 
some assurance that senior executives at financial institutions 
will not be rewarded for taking inappropriate risks that could 
harm the markets, could harm their employees, or could harm the 
economy. I urge you and other regulators to finish that rule as 
quickly as possible.
    During your confirmation hearing, you stated that you would 
make strengthening enforcement a high priority throughout your 
tenure. You said then, and I agree, that ``investors and market 
participants need to know that the playing field of our markets 
is level and that wrongdoers, individual and institutional, of 
whatever position or size, will be aggressively and 
successfully called to account by the SEC.'' Yet time and 
again, we see repeat offenders enter into settlement after 
settlement that seem to have no effect on stopping the problem 
in the first place.
    As the cop on the beat, the question is: At what point is 
the SEC going to stop handing out warnings and start giving 
tickets?
    This is evidence in the waiver process. SEC has routinely 
granted waivers to banks following a variety of violations that 
could have resulted in the loss of certain privileges under 
security laws. Unfortunately, granting those waivers eliminates 
the significant consequences that could promote better overall 
compliance at those institutions.
    Finally, I would like to return to an issue that has been 
discussed many times in this Committee. Democrats in the Senate 
have repeatedly asked you to begin work on a corporate 
political spending disclosure rule. This is not a plea from a 
special interest, as some on the other side of the aisle might 
say. This is good Government policy. When you were last here, 
you acknowledged the ``intense interest of investors and 
others'' on this issue, but you pointed to the low priority of 
mandatory rulemaking. I realize this year's appropriations bill 
limits the SEC's work on that rule, but it should not prevent 
you from doing anything at all.
    I sincerely hope you begin work on a corporate political 
spending disclosure rule. The interest in it has only become 
more intense. I am interested in hearing your update, Madam 
Chair.
    Thank you.
    Chairman Shelby. Madam Chair, your written testimony in its 
entirety will be made part of the hearing record. You have been 
here many times. You proceed as you wish.

  STATEMENT OF MARY JO WHITE, CHAIR, SECURITIES AND EXCHANGE 
                           COMMISSION

    Ms. White. Thank you, Mr. Chairman, Ranking Member Brown, 
and other Members of the Committee. Let me, before I start, 
just express--I am sure I speak for everyone--that my thoughts 
and prayers are with the victims of the Orlando shootings and 
their families.
    Thank you for inviting me to testify today on the current 
work and initiatives of the SEC, which are, as the Chairman 
indicated, summarized in some detail in my written testimony.
    As you know, the SEC is a critical agency that is charged 
with protecting millions of investors and safeguarding the most 
vibrant markets in the world. And the Commission has been very 
busy since I last testified before the Committee in 2014. The 
last 3 years have each been marked by a vigorous enforcement 
and examination program, empowered with new tools and methods 
to protect investors and hold wrongdoers accountable. In fiscal 
year 2015 alone, the Commission brought over 800 enforcement 
actions, an unprecedented number; secured over $4 billion in 
orders directing the payment of penalties and disgorgement, an 
all-time high; performed approximately 2,000 exams, a 4-year 
high; and, even more importantly, continued to develop cutting-
edge cases and smarter, more efficient exams.
    The strength of our enforcement program can also be seen in 
the kinds, complexity, and importance of the cases we bring 
that span the securities industry, include numerous first-of-
their-kind actions, and focus heightened attention on market 
gatekeepers like ATSs, exchanges, accountants, and lawyers.
    Significantly, approximately two-thirds of our substantive 
actions in fiscal year 2015 also involved charges against 
individuals, and we continue to obtain admissions in certain 
cases, which we have now done in over 50 instances since we 
changed our settlement protocol.
    The Commission over the last 3 years has also pursued very 
consequential rules and other initiatives to protect investors, 
strengthen markets, and open new avenues for capital raising. 
Since I last testified, we, for example, advanced major rules 
addressing key equity market structure issues--including 
controls on the technology used by key market participants, the 
transparency of alternative trading systems, and the 
consolidated audit trail--while moving forward with a broader 
assessment of other fundamental changes. We issued a series of 
proposals to address the increasingly complex portfolios and 
operations of mutual funds and exchange-traded funds. We 
adopted new rules for crowdfunding and smaller securities 
offerings under Regulation A, while also proposing additional 
avenues for small businesses to raise capital. We finalized 
major components of the regulatory regime for security-based 
swaps, and we continued to execute a comprehensive review of 
the effectiveness of our disclosure regime.
    This work marks the latest phase of extraordinary 
regulatory efforts by the agency both before and after I became 
Chair, enlisting all of our policy divisions and offices. 
Beyond our discretionary initiatives, the Commission has now 
adopted final rules for 66 of the mandatory rulemakings of the 
Dodd-Frank Act, the majority of them since I became Chair. And, 
Senator Brown, Title VII is a major priority for 2016, which I 
am sure we will get into. We have also now completed all of the 
rulemakings directed by the JOBS Act, and we have made 
significant progress on the rulemakings required of us late 
last year under the FAST Act.
    While our work in enforcement and rulemaking are perhaps 
the most prominent examples of the agency's achievements, the 
imperatives of our mission are also carried forward each day by 
the dedicated staff of our divisions and offices.
    The Division of Corporation Finance reviews the annual and 
periodic reports of thousands of issuers each year, helping to 
ensure that investors receive full and fair disclosure about 
the public companies in which they invest.
    Last year, the Division of Trading and Markets reviewed 
more than 2,100 filings from exchanges and other self-
regulatory organizations to preserve a fair and orderly 
marketplace for all investors.
    The Division of Investment Management reviewed filings last 
year covering more than 12,500 mutual funds and other 
investment companies, where many individuals, as you know, 
invest their hard-earned money to save for retirement, college, 
and other important goals.
    Our economists in the Division of Economic and Risk 
Analysis produced more than 30 incisive papers and publications 
in 2015, including two major analyses to help inform our work 
on asset management.
    This afternoon, I will actually have the privilege to 
participate in our annual awards ceremony at the Commission 
where we recognize some of the tremendous work of some of our 
staff.
    The Commission today is a stronger and more effective 
agency, and I am honored to lead the agency during this time. 
Nevertheless, significant challenges remain if we are to 
address the growing size and complexity of the securities 
markets. It is critical that the SEC has the resources required 
to discharge our responsibilities, the new ones and the many 
others we have long held, in the face of a growing and ever 
more sophisticated financial services industry.
    I deeply appreciate that we must be prudent stewards of the 
funds we are appropriated, and we strive to demonstrate how 
seriously we take that obligation by the work that we do. At 
the same time, our resources are insufficient, and the cuts and 
limitations to the SEC's budget that the House bill proposes 
would seriously imperil the progress we have made and diminish 
our ability to fulfill our mission.
    While more remains to be done and achieved, I am very proud 
of the agency's impressive accomplishments across the range of 
its responsibilities. For that I want to again thank, first and 
foremost, the exceptional staff of the SEC as well as my fellow 
Commissioners, present and past. And I want to thank the 
Chairman, the Ranking Member, and this Committee as a whole for 
your support. Your continued support will allow us to better 
protect investors and facilitate capital formation, more 
effectively oversee the markets and entities we regulate, and 
build on the significant work we are doing.
    Thank you very much. I am happy to take your questions.
    Chairman Shelby. Thank you.
    Madam Chairman, I understand that the Commission can vote 
to delegate certain of its authorities to the SEC staff, 
including enforcement proceedings. Once the Commission has 
voted to delegate, how are you and your fellow Commissioners at 
the Securities and Exchange Commission made aware of the 
staff's use of that authority? And if the Chair is recused on a 
specific matter, who is accountable for the staff's use of the 
delegated authority?
    Ms. White. The Exchange Act actually is explicit on this, 
Mr. Chairman, that the Commission as a commission has the 
authority to delegate many of its day-to-day functions. It does 
not have the power, for example, to delegate rulemaking to the 
staff or----
    Chairman Shelby. That is set out statutorily?
    Ms. White. Yes, it is statutorily done.
    Chairman Shelby. OK.
    Ms. White. There are hundreds and hundreds of day-to-day 
things that we must do at the Commission, so it is very 
important that the staff have delegated authority to act.
    As safeguards, however, on that delegated authority, the 
Commission can review any of those actions. The staff itself 
can decide to refer something to the Commission even though it 
may have delegated authority from the Commission to decide. And 
the review of the Commission can be precipitated by any one 
Commissioner's desire to do so.
    Chairman Shelby. Once the Commission votes to delegate its 
authority to the staff, it is my understanding that such 
delegation remains in place under future Commissions, and new 
Commissioners do not have a chance to approve existing 
delegations of authority. Is that correct?
    Ms. White. Yes, it is, Mr. Chairman. I think essentially 
the way it works is that if one wanted to review or change a 
delegation, it would be up to the Chairman to put that on the 
agenda, whoever the Chairman is.
    Chairman Shelby. Madam Chair, would you support an SEC 
review of existing delegations, including an analysis of their 
appropriateness? In other words, you look back--you do 
oversight, I hope, in your agency, like we do here. Is it not 
important to look back and see what----
    Ms. White. Since I have been there, it is certainly 
something that I have discussed with various of my fellow 
Commissioners, and we all have the list of delegations that 
exist. I have urged my fellow Commissioners, if they have an 
issue with any particular delegation, to bring that to my 
attention, and we will certainly look at it.
    Chairman Shelby. You have often stated, Madam Chair, that 
the Securities and Exchange Commission is an independent 
agency. That is the way we want it to be. It was set up that 
way. And while one can expect some split votes because of the 
way the Commission is set up, there have been many party-line 
3-2 and 2-1 votes under your chairmanship. By comparison, 
according to the press, former Chairman Richard Breeden never 
had a 3-2 vote, and former Chairman Levitt rarely would take a 
matter to a vote unless he knew he had a 5-0 vote.
    Are there any areas that you can work on cooperatively with 
the other two Commissioners to reach a unanimous decision? And 
if so, could you give us some examples?
    Ms. White. I think we certainly strive for consensus----
    Chairman Shelby. We know everything is not unanimous.
    Ms. White. Everything is definitely not unanimous. I think 
somebody gave me a figure the other day that about 65 to 70 
percent of our votes are actually unanimous. But, obviously, 
that is still a percentage that have not been unanimous. I 
think I have discussed with you, Mr. Chairman, and I think 
Senator Brown and probably some of the other Members of the 
Committee as well, that one thing that I have found as Chair, 
even though we strive for that consensus--unanimity, indeed--on 
all of our rulemakings, so many of our mandated rulemakings 
have been under the Dodd-Frank Act, and the controversies 
surrounding the act at the time it was adopted have continued 
into the implementation of those rules. So we have ended up 
with an extra challenge reaching consensus because of that.
    Chairman Shelby. Madam Chair, in 2013, you posed for 
comment a study on assessment management by the Office of 
Financial Research that was requested by FSOC. This allowed the 
public a meaningful opportunity to provide feedback on the 
study and highlighted significant flaws.
    Given the benefit of public comments on that study, will 
you commit to posting other FSOC-requested studies affecting 
SEC-regulated entities? And if not, why not?
    Ms. White. Well, I think certainly at the SEC, and I think 
at other agencies as well, the benefit of the notice and 
comment process and even just a comment process if you are not 
in an APA rulemaking, is enormous. So I think getting that 
feedback is important. The report that you referenced, Mr. 
Chairman, was actually the report of OFR. They publicized it. 
But we did open a comment window because we thought it was 
important to gather public input in one place. If we were in 
another situation like that and OFR or FSOC itself did not post 
its studies to make it easier for the public to comment, 
certainly we would seriously consider that again.
    Chairman Shelby. My last question is in the area of 
repeated violations. There have been concerns raised by the 
public as well as Members of this Committee about repeated 
violations by SEC-registered entities. Two years ago, a former 
SEC Commissioner stated with respect to the most egregious and 
repeated violations of our securities laws and regulations, and 
I will quote, ``We need to ask ourselves a fundamental 
question: Should the violating entity retain the privilege of 
participating in our capital markets?''
    My question to you is this: In your opinion, when is it 
appropriate for the SEC to exercise its ability to deregister 
an entity? And if you could give us an example, that would 
help.
    Ms. White. I think it is an enormously important power that 
we have and should wield in appropriate circumstances to police 
the markets----
    Chairman Shelby. It goes to the integrity of the market.
    Ms. White. Absolutely right. Absolutely right. I think you 
have to look very carefully at what the violations have been 
over what period of time, and who was involved in them. You 
want an aggressive enforcement program to bring cases when they 
are there to bring. I am certainly quite open in the interest 
of strong protection of our markets that there comes a point 
where one of our regulated entities should no longer be 
registered, and I would not hesitate to bring a proceeding to 
revoke the license.
    Chairman Shelby. Thank you.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Some of my colleagues--there seems to be a sort of 
collective amnesia on this panel in some cases and in this body 
about what happened with the financial crisis since some of my 
colleagues as a result, particularly in the House but some 
here, continue to push for the repeal of the Wall Street Reform 
Act, insisting it has created more problems in the financial 
system than it has prevented. A couple of questions to start 
with.
    Are you concerned by efforts to repeal Wall Street reform? 
Do you think it has been effective in improving our financial 
stability?
    Ms. White. I think the reforms under the Dodd-Frank Act 
have been enormously important in strengthening our financial 
system. Collectively, I think our financial system is much 
stronger and resilient now, certainly in part because of the 
actions undertaken by Dodd-Frank. So I certainly would not want 
to see those reforms repealed.
    Senator Brown. OK. Thank you. Despite the improvements to 
date that you have mentioned and that are self-evident with a 
stronger, more stable financial system, this reform, of course, 
is still a work in progress. In my opening statement, I 
mentioned the derivatives rules that are still outstanding. I 
am not just concerned that it is taking the SEC so long to 
finish its rules, but also that SEC is far behind other 
agencies implementing rules in similar issue areas. Let me give 
two examples.
    The CFTC covers a much larger portion of the derivatives 
market and has made significantly more progress than has SEC, 
even accounting for a few hiccups along the way, with far fewer 
resources than you have.
    Second, the Department of Labor was able to propose and 
repropose and finalize its fiduciary rule while the SEC only 
produced a study called for by the Wall Street Reform Act.
    In neither of those cases was the process perfect, of 
course, nor is our final rules perfect, but both agencies were 
able to adapt along the way and move forward. Why is the SEC 
slower than those agencies? What is not working?
    Ms. White. I think considering what the SEC was given 
between the Dodd-Frank Act and the JOBS Act, plus obviously all 
of our various ``discretionary responsibilities,'' which are 
vast, we have undertaken in the last few years a historic level 
of regulatory activity of great complexity. And I think I have 
said this before about Dodd-Frank and the JOBS Act in 
particular, and I have said it from the day I arrived, I am 
deeply committed to getting the congressional mandates under 
both of those statutes, and now the FAST Act, done as promptly 
as I can, but they need to be done well, and they need to last, 
and they need to be adaptable to how our markets change.
    I think with respect to the other issue you mentioned--the 
Department of Labor fiduciary duty rule--that is an authority 
that Dodd-Frank gave the Commission to decide whether to 
exercise or not. It is not a statutory mandate.
    Now, I have said myself, speaking for myself, about a year 
ago after extensive study that I think there should be a 
uniform fiduciary duty rule coming from the SEC under Section 
913 of the Dodd-Frank Act. That is speaking for myself. The 
staff has proceeded to develop outlines of recommendations, but 
it is up to the Commission as a whole to decide whether to 
advance that rule and then what its parameters should be.
    In terms of Title VII and the derivatives markets, you are 
right, our share of that market is a little less than 5 
percent, but it is an important part of those markets. Again, 
before I arrived--and this is not meant by way of criticism at 
all; I see how it made sense--what the SEC decided to do with 
its Title VII rulemakings is essentially publish a policy 
statement that set forth a sequence of when the SEC would adopt 
proposals first and then finalize those rules before they 
become effective. So we have been following that road map.
    I think there could not be a higher priority among all of 
the Commissioners, the three of us there now and the other two 
that left us last year, than completing those Title VII 
rulemakings. And I think in terms of this regulatory year, that 
is a very high priority certainly to finalize. We have 
finalized a number of those rules since I was last here, but in 
terms of the reporting and the registration and regulatory 
mechanisms for dealers, I am hoping we are done with those by 
the end of this year.
    Senator Brown. Thank you. We know from during the financial 
crisis how important it is that regulators work together. 
Industry is good at shifting its business model to find gaps, 
to find areas of weakness in the regulatory structure. Congress 
for whatever reasons chose not to combine any of the financial 
agencies 6 years ago, obviously did FSOC, but beyond that not 
really combining these agencies, and it makes your cooperation 
with other agencies all that much more important.
    Let me ask one other question. Democratic Members, Madam 
Chair, of this Committee and others have taken a close look at 
the policies and the practices and the decisions surrounding 
the waiver applications the SEC receives from financial 
institutions. I thank you and your staff for the information 
you have provided to us, to the Banking staff so far. I hope we 
can count on you and your team for additional assistance when 
needed as they make more requests.
    Ms. White. Absolutely. I think it is an enormously 
important area. As you know, Senator, it is an area that I 
focused on right at the outset of my tenure as Chair. We have 
made a number of changes to enhance the robustness of the 
process and the transparency of the process. Obviously, we 
continue to look at that for whether there are other 
enhancements that would make sense, particularly in the area of 
when we do not grant the waivers because we want to make 
certain that the public knows that there are many cases, 
including those involving financial institutions, where the 
waivers are not granted. But because of the nature of our 
process, that is not as transparent for reasons that are 
historical and good. You want to encourage people to come in 
and talk to the staff about whether they qualify or they do 
not, and often what they submit is nonpublic information. But I 
continue to look at that aspect of our process. I have 
certainly, since I became Chair, directed the staff to keep 
track of those instances that do come in and are not granted, 
assuming they are not anonymous, and, obviously, a number of 
people just will not apply for waivers because they know under 
our guidelines that they would be denied or would not be 
granted a waiver because of what the guidelines specify.
    Senator Brown. Thank you. We have particular concern about 
the lack of transparency in those waivers that are granted. The 
public sees an institution violates the law, asks for a waiver; 
the SEC issues a short notice approving the waiver. What do you 
do to--how can you assure us that the public and this Committee 
and everybody in our society will be able to understand more 
what has happened in how you bring more transparency when these 
waivers are granted?
    Ms. White. Well, again, on those that are granted, which I 
think are the ones you are addressing now, not those that are 
not granted, they are publicized on our Web site. They also are 
subject--in the case of the so-called WKSI waivers and the bad-
actor waivers and some of the other waivers as well to the 
public criteria that the staff or the Commission considers when 
reviewing those requests. And then what is published on our Web 
site really does march right through what those criteria are 
and the facts under each one.
    Again, if there is some enhancement that would make sense, 
I am certainly open to considering it.
    Senator Brown. OK. We will come to you about that. Thank 
you.
    Chairman Shelby. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    Chair White, modernizing our market structure is a 
complicated but necessary task, and I appreciate all the work 
that has been done by the SEC as well as by the market 
participants, investors, and academics on this issue.
    Senator Warner and I held a subcommittee hearing on this 
topic in March, and one of the takeaways was that while there 
has been a lot of positive input and work done in this area, 
there is concern about the pace of reform efforts and what will 
be accomplished.
    What are the top market structure objectives that you want 
to achieve this year? And how will this strengthen our markets 
and benefit investors?
    Ms. White. It is an enormously important area and, as you 
know, a very high priority for me personally, both in terms of 
some specific short-term reforms as well as a comprehensive 
review, soup-to-nuts, of the entire regulatory regime. We are 
building on, fortunately, I think the strongest, most reliable 
markets in the world, but that does not mean that they cannot 
be enhanced and optimized. So I have been pleased with the 
staff's work--but I always want things to be done sooner. That 
is my personality, among other things, and we certainly are 
concentrating a lot of resources on it. I have also been 
pleased to date with the work of the EMSAC--the Equity Market 
Structure Advisory Committee--that we formed early in 2015. 
They are tackling the core issues. As you know, Senator, the 
committee has received a recommendation from one of its 
subcommittees about the possibility of doing a maker-taker 
pilot. That is obviously one of the core issues. We are 
expecting a telephonic meeting where the subcommittee is 
expected to make a specific recommendation on July 8th, so I 
look forward to that. I think that is a very important area.
    A lot of things have actually already been done in the 
market structure arena. One is obviously in the area of 
resiliency of the markets. Shortly after I testified here in 
2014, we adopted Regulation SCI, which is the Systems 
Compliance and Integrity rulemaking that is aimed right at the 
critical market infrastructures and enhancing their resiliency 
and responses to incidents when they occur. That rule is now, 
in the last few months, subject to examination for compliance 
which is enormously important. That rulemaking is already done.
    I expect in this year rather imminently that we will also 
propose a rule to provide greater transparency of order routing 
for institutional orders as well as enhancing the existing 
disclosures that are made on the retail side. Again, that is 
very important information to our markets to ensure fairness, 
to see what your agents are doing as they execute your order. 
So those are examples.
    Senator Crapo. You referenced the telephonic meeting on 
July 8th. That is a report from EMSAC that you were referencing 
there?
    Ms. White. Yes. That will be a further discussion by the 
full committee of their subcommittee's recommendation on the 
maker-taker pilot. We are also taking up some other issues at 
that meeting.
    Senator Crapo. So following that meeting, do you expect 
that the Commission would be in a position to take the next 
action and move forward? Or when do you expect that this could 
get to a commission decision?
    Ms. White. Well, the next step is indeed for the staff of 
the Commission and the Commission to take in the recommendation 
from the committee, but it will be up to the staff and the 
Commission as to what to do and what the parameters should be. 
I do think it is important to do this in a well-designed pilot 
because it really does touch on a very important issue where we 
need the data.
    Senator Crapo. Do you have any feel for about when the 
Commission----
    Ms. White. I cannot give you a specific time, but it is a 
this-year priority to move that along as soon as we get the 
recommendation.
    Senator Crapo. All right. Thank you.
    Ms. White. And when I say ``move it along,'' I mean 
consider it at the staff and Commission level.
    Senator Crapo. Thank you. I also want to thank you for your 
past efforts to improve the transparency of the Financial 
Stability Oversight Council process by seeking public comment 
on the report by the Office of Financial Research on the asset 
management industry. There have been several hearings on the 
Financial Stability Oversight Council that focused on ways to 
improve transparency, accountability, and communications.
    In the Subcommittee hearing that Senator Warner and I held 
last year, the witnesses agreed that FSOC needed to provide 
actionable guidance to designated systemically important 
financial institutions on how they could derisk and ultimately 
shed their designation label, what has been referred to as an 
``off ramp.''
    Do you agree that it would be appropriate to take 
additional steps to increase transparency, accountability, and 
communications in the FSOC process?
    Ms. White. I think that is something that we have to be 
committed to doing as we go forward. That is not something that 
may be completed at any point in time, and I do think FSOC is 
committed to looking for ways to enhance the transparency of 
its process. The so-called off-ramp process is an existing 
process under the FSOC rules and guidance. It is an annual 
process. But I also take your point about greater transparency 
regarding what the factors are that may be involved in that.
    Senator Crapo. Thank you.
    Chairman Shelby. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chairman.
    One of the most egregious things in the lead-up to the 
meltdown were firms that put together securities and then they 
sold them, saying, ``These are the best things since sliced 
bread,'' but while they were privately taking bets so 
securities would fail because of the details that they knew 
about the securities they had packaged. Carl Levin championed 
an end to this type of egregious conflict of interest at 
Section 621. Here we are now 6 years later, and we do not even 
have a draft rule. Why not?
    Ms. White. I agree it is an enormously important rule, and 
I obviously know well the range of transactions that you are 
talking about that it was intended to address.
    As I know you know, Senator Merkley, there was a proposal 
issued in September of 2011, which is still outstanding, where 
we got tremendous comments. This was actually before the SEC 
had adopted its economic guidance. So, for some of the comments 
that we got, one was that we must really do very intense, good 
economic analysis. We also got comments that it was not tough 
enough, or it was too tough or it swept in too much or did not 
sweep in enough.
    It has proved to be much more complicated than certainly 
our experts in the agency envisioned. I think we asked in that 
proposal 100 questions, and that is a very large number--for 
example, who is covered, what is covered, and all sorts of 
various interpretation issues, including with respect to what 
the exceptions should be.
    We had a recent comment come up as late as December 2015 as 
to whether certain Fannie-Freddie guarantees would be covered 
because of the concern that those securitizations could not 
continue, at least under the parameters of the proposal. So it 
is one where the staff is working very hard to get a reproposal 
done as soon as it can, but it has proven to be very, very 
difficult to draw the right lines.
    Senator Merkley. This is one of the most direct examples of 
unacceptable Wall Street behavior where Congress took a very 
clear stand. Wall Street desperately wants this to never 
happen. The SEC has gone year after year after year failing to 
get it done under the argument it is just too complex, it is 
just too difficult. I do not think anybody in America buys that 
this type of conflict of interest is too difficult. The 
instructions have gone to the SEC. The SEC has failed the 
public on this issue and allowed this type of conflict of 
interest practice to continue, and I think it is absolutely 
unacceptable. And I would have said the same to your former 
Chair back in 2013, but here we are 3 years later, and now the 
responsibility rests with you.
    Let me turn now to the issue of political spending being 
disclosed by corporations. A million public comments have been 
received supporting disclosure because the owners of the 
company, the stockholders, feel like if the company is spending 
their money on political activity, they have a right to know. 
And under the concept of money is speech, if you do not get to 
know how your own money is being spent, it is really stolen 
speech. And that is bad enough, but it is certainly material to 
what investors understand about the future prospects for that 
company. What are they advocating for? What are they lobbying 
for? Who are they lobbying for? Who has which philosophies or 
which positions?
    And so both from the viewpoint of individuals getting to 
know how their own money is being spent on political speech and 
from the view of a material issue related to the future 
performance of the company, it is imperative that there be 
disclosure.
    There was such a plan on the agenda when you took the 
chairmanship, but in October of 2013, you took it off the 
agenda. Not even to hold the conversations, to prepare the way 
on this, this is an issue of freedom of speech. It is an issue 
of knowing how your own money is being spent. It is an issue 
material to the future of the company, and you took it off the 
agenda. Why would you do such a thing?
    Ms. White. Well, let me say first that I do deeply respect 
and understand the very deep interest in this issue on all 
sides, and I think it is also important to note that if the 
spending is material in the context of a particular company as 
we sit here today, that would need to be disclosed under the 
Federal securities laws. And we also have through our 
shareholder proposal rule, Rule 14a-8, avenues for shareholders 
to raise this issue with their particular companies, and they 
make great use of that avenue. The average approval rate for 
such proposals last year was about 26 percent. In some 
companies over the years using that avenue, there have been a 
few majority votes by those shareholders, and those companies 
have generally gone ahead and made those disclosures 
voluntarily. Certainly in large companies the number of them 
that voluntarily disclose political contributions has grown. I 
think more than half of the S&P 500 now provides that 
disclosure voluntarily, which I think is a good thing.
    In terms of the Reg Flex issue, which is what I think you 
are raising, I think there is some misunderstanding about what 
was on the SEC agenda and perhaps even, what I did in reviewing 
the Reg Flex Agenda as I found it. What has not been on the Reg 
Flex Agenda at the SEC before I arrived or after I arrived is 
to go forward with such a rule. What was on the Reg Flex 
Agenda, put on there in late 2012 and was there when I arrived, 
was an item reflecting that the Division of Corporation Finance 
would research and consider whether to recommend a rule 
proposal on this subject. My predecessor wrote to Congress in 
March 23 in response to a congressional investigation on this 
issue that neither she nor the Commission nor the staff had 
reached any conclusion about that--whether to recommend a 
proposed rule--and that no one was actually working on a rule 
proposal at that time.
    Shortly after I arrived, the first Reg Flex Agenda was due, 
and so I basically carried forward for the most part what was 
on the previous agenda, including that item. In the fall, when 
I had been there a little longer, I had a chance for the staff 
to do a deep dive of all the items on the Reg Flex Agenda, many 
that had been there, by the way, for many years and were 
aspirational. And the Reg Flex Agenda instruction requires you 
to put on that agenda the items that you reasonably believe you 
can complete in the next 12 months.
    And so as you know, I have prioritized since I arrived here 
completing the congressional mandates under the Dodd-Frank Act 
and the JOBS Act as well as, as we went forward, certain 
mission-critical initiatives like equity market----
    Senator Merkley. I am way over my time, and so in courtesy 
to my colleagues, I will just stop you there because we cannot 
get a full history. But it was listed at the proposed rule 
stage in April 2013 and was taken off in 2013. You have the 
sole power on the Commission to establish the agenda. This is 
an issue that goes to the core of who we are as a country that 
people cannot spend your money on political speech without 
telling you how the hell they are spending it or that you as an 
owner have a full right to know how your funds are being spent. 
I think for you to unilaterally remove it from the rulemaking 
agenda was an egregious affront to these core issues of our 
Republic. It came after pressure, political pressure. I think 
it is unacceptable. I think you should put it back on the 
agenda.
    Ms. White. That item and about 20 other items that were on 
the previous agenda were removed for the reasons that I said, 
and it was never on there to advance a proposed rule.
    Chairman Shelby. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    Good morning, Chair White. You have stated in the past that 
you believe there should be uniformity between the fiduciary 
rules issued by the Department of Labor and the SEC. The 
Committee on Homeland Security and Governmental Affairs 
recently released a staff report regarding the DOL's fiduciary 
rule. The report found, among other things, that there was 
extensive disagreement between staff at the SEC and the DOL 
over the fiduciary rule.
    The report found that, in addition to the DOL refusing to 
conduct a quantitative analysis of the costs and benefits of 
alternative approaches to the rule, as recommended by the SEC 
and required by the Executive order, the staff economists from 
both agencies also had disagreements over the rule. In fact, 
the report found that the disagreements reached the point of 
the Labor Department staff writing, and I quote, ``We have now 
gone far beyond the point where your input was helpful for me. 
If you have nothing new to bring up, please stop emailing me 
about this topic.''
    Chair White, how do you believe the SEC can structure a 
uniform fiduciary rule when it appears there are inherent 
disagreements between the two agencies over the fundamental 
goals of the rule?
    Ms. White. I think what I have said in the past is I 
believe that there should be a uniform fiduciary duty rule for 
broker-dealers and investment advisers when they are giving 
securities advice to at least retail investors. That is really 
under our rules. The Department of Labor and the SEC are 
separate agencies, and so our rules are not identical, 
including before the DOL rule was adopted in certain areas 
where our registrants may overlap with theirs.
    In terms of the Department of Labor/SEC staff interactions 
on their rule proposal, I think the comment you mentioned is 
from 2012, actually, on the prior proposal, so I was not here 
then. But I will say that the SEC staff did give substantial 
technical assistance to the DOL staff on the current, now final 
but then proposed, rule, including technical assistance on our 
own rules and what they provided, but also the possible, 
impacts on the availability of reasonably priced advice by 
brokers and what the impact would be on the broker model 
itself.
    The nature of those exercises--and we have done it with 
other agencies, too, on other rules where we have that 
technical assistance to provide--was not really to reach 
agreement but to make sure that we were giving our best 
technical assistance and input to the Department of Labor, 
which then obviously made the decision as to what the proposal 
should be, and put it out for notice and comment. I think the 
notice and comment was focused on some of those same issues.
    Senator Rounds. Would it be fair to say that, based upon 
the rule which is in effect right now coming out of DOL, would 
it be fair--and I do not want to put words in your mouth, but 
would it be fair to suggest that there would be concerns yet as 
to the availability of investment advice being made available 
to the smaller investors and perhaps a limiting of some of that 
advice right now based upon the traditional ways that we 
provide investment services to some of your smaller investors 
in the United States today?
    Ms. White. Again, I am very focused on that issue myself in 
connection with our work on a uniform fiduciary duty rule under 
Section 913. Certainly the Labor Department was focused on it, 
as reflected in their notice and comment period. I think 
certain changes were made in response to that concern and 
possible impact. But I think to some degree--and this would be 
true of our rules, too--you need to see what happens as the 
rules are implemented. Certainly we are available to provide 
whatever help and assistance we can to our registrants if they 
run into a conflict with our rules. Nobody has come to us yet 
for that, though.
    Senator Rounds. My concern is that sometimes as we try to 
protect individuals, we actually limit the availability to them 
of opportunities to invest. And I want to go into one other 
area here, and that is, one of the SEC's goals is to facilitate 
capital formation. One recent trend along these lines is the 
increase in the issuance of private shares which can have 
significantly less disclosure requirements relative to public 
share offerings. Private offerings can only be sold to 
qualified high-net-worth investors.
    In 2014, more than $2 trillion was raised privately. 
Private stock issuances under the SEC's Regulation D accounted 
for more than $1.3 trillion of this amount. In comparison, 
registered public offerings amounted to approximately $1.35 
trillion in 2014.
    Are you concerned by the fact that issuances of private 
stock have now outstripped public shares sold to all retail 
investors in terms of new issuance? I mean, doesn't this kind 
of point to a trend here of kind of the guys who can afford 
the--the guys who are capable of investing large amounts of 
money are basically providing a lot of the new public 
issuances, they are receiving it, and the smaller retail folks 
seem to be not in that position? Isn't there something going on 
here that maybe is not moving in the right direction?
    Ms. White. I think what we have an obligation to do--and we 
do is monitor both the private and the public markets very 
closely and continuously. As you know, we have a tripartite 
mission, which is to protect investors, assure the fair and 
efficient functioning of the markets, and to facilitate capital 
formation. I do not see those three pieces to be in conflict, 
but they certainly need to be taken into consideration in terms 
of everything we do.
    I think the point you are also making is on who should be 
within the definition of ``accredited investor,'' which 
obviously drives a lot of what happens on the private side of 
the markets. Clearly, from, our inception, that concept is 
meant to protect investors who may not be able to protect 
themselves. That obviously hits the core of our investor 
protection mission, which we feel obviously very strongly 
about.
    In terms of the public markets, one thing I do think we 
have responsibility for and we certainly, are looking at this 
constantly is whether there is something about our rules for 
the public markets that is unnecessarily driving away, public 
offerings. So we look very closely at that. Obviously, we have 
had with the JOBS Act the IPO on ramp, which makes it somewhat 
easier to do that. Again, we are still focused on investor 
protection, but I think that whole range of issues deserves and 
is getting very close attention from the SEC.
    We recently published, as you may know, the staff's 
accredited investor study with a series of recommendations on 
that, and that also touched on some of the issues you are 
mentioning.
    Senator Rounds. Madam Chair, thank you.
    Mr. Chairman, thank you for the time.
    Chairman Shelby. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Chair White, I would like to bring you to the plight of the 
3.5 million United States citizens on the island of Puerto 
Rico. This is a situation where Puerto Rico finds itself paying 
33 cents of every dollar that it has toward its debts. The 
Government has been forced to make excruciating decisions to 
shut down schools, scale back essential services. Hospitals 
with no access to power are closing the doors. The island is 
losing at least one doctor each day, and we have one of the 
most significant migrations out of the island to the mainland 
in quite some time, which underlines the critical importance of 
a congressional solution that will allow the Government to 
restructure its debts and protect the people.
    But beyond those reasonable and necessary solutions that 
should come from the Congress, the people of Puerto Rico 
deserve to know whether illegal activity by advisers to Puerto 
Rico and its municipal entities controlled and contributed to 
the current debt crisis. Dodd-Frank explicitly mandated that 
the SEC and the Municipal Securities Rulemaking Board protect 
municipal entities, and yet, despite the widely acknowledged 
problems on the island, neither the SEC nor the MSRB has held 
one hearing, Commission meeting initiative, or given any 
particular attention to Puerto Rico's debt crisis, at least not 
to my knowledge.
    So what I want to know is whether municipal advisers, 
underwriters, and broker-dealers--all of whom are subject to 
the SEC and MSRB regulations--that operated in Puerto Rico have 
done so free of conflicts of interest, whether they packaged 
and sold bonds worthy of the savings of hardworking investors, 
and, most importantly, whether they have acted in the best 
interests of the Puerto Rican Government and people. How will 
the SEC pursue this element of their crisis?
    Ms. White. I could not agree more about the state of that 
crisis and that what our Government--collectively in my view--
needs to do to address that in a positive way. But in terms of 
the SEC's jurisdiction there, we have actually very closely 
attended to investments in various funds with bonds that may be 
at risk in terms of investor protection. We put out guidance on 
some of that from our Division of Investment Management.
    We also have brought two public enforcement actions that 
have dealt with brokers who have misled investors about the 
riskiness of those bonds. And while I cannot----
    Senator Menendez. In Puerto Rico?
    Ms. White. Yes. Yes, both of them--one I think in this year 
and one in 2014. I can give your staff the details of those. 
And, again, I cannot comment on specifics of anything ongoing 
that we are looking at now, but I think I can say that we are 
very focused on the issues that you raise in some of the other 
work we are doing.
    Senator Menendez. So you know, several colleagues of this 
Committee and others have joined me in a letter to you and to 
the Commission urging you to be not just the cop on the street 
in Wall Street but also in San Juan, and to make sure that 
those who may have contributed to this crisis are fully 
prosecuted, because at the end of the day, if that can take 
place there, it can take place anywhere. And sending a strong 
message that it is not acceptable is critical. So I look 
forward to your continuing work in that regard, and I would 
like to be advised of what is happening when it is available to 
be public.
    Second, I would like to go back to the question of 
corporate political spending. I continue to believe that 
transparency and disclosure to shareholders is of the utmost 
importance, both as a matter of corporate governance and 
investor protection. And it is not just me; 1.2 million 
Americans have implored the SEC to act by virtue of their 
commentary during the rulemaking.
    So it has been nearly 6 months since I, along with 96 
Members of Congress, wrote to you asserting that the SEC 
retains the authority to take critical steps to prepare for a 
possible rule on the issue of corporate political spending. And 
as we indicated in the letter, we expected and continue to 
expect the agency to move forward with plans to prepare for a 
rulemaking.
    Now, I know that the 2016 Omnibus Act is seen by the 
Commission as preventing them from taking the type of action, 
but that action specifically talks about issuing, implementing, 
or finalizing a rule. It does not speak to preparing a rule for 
that moment, because I can assure you that that provision will 
die. That provision will die. And we need not wait for it to 
die when 1.2 million Americans have said to you, probably an 
unprecedented number, that they want to see a rule in this 
regard.
    So I hope that--and I would like to get from you a sense of 
whether or not--I mean, we have pending nominees to the SEC. I 
did not care for the way either of them answered me on this 
question. I would like to know, Are you going to at least 
prepare and respond to those 1.2 million Americans and nearly 
100 Members of Congress who believe that you should move 
forward in this regard?
    Ms. White. Senator, again--and you may have heard some of 
my answers to Senator Merkley's questions--I deeply respect the 
strong views of those that you have mentioned. There are very 
strong views on both sides of this issue, and I have also 
mentioned how the disclosure is developing, both voluntarily 
and through our shareholder proposal process. But the issue of 
the SEC doing a rulemaking to mandate political disclosures by 
all public companies is not on our Reg Flex Agenda. So with or 
without the appropriations language the priorities that we are 
pursuing, and pursuing as hard and as fast and as well as we 
can, are really the ones that I have outlined since my early 
days here, which are the mandated congressional rulemakings and 
certain of the mission-critical initiatives. I have talked 
about asset management and equity structure.
    So I think that is the status now, and I say that with a 
full appreciation of the deeply held views on this, on all 
sides, including by 2,000-plus unique comment letters that we 
have gotten on the petition that you reference.
    Senator Menendez. I will just close, Chairman: 1.2 million 
Americans, I think very rarely has the SEC seen that extent of 
commentary, tells you the incredible importance that people 
believe in the nature of limited corporate spending at a time 
in our national politics that determines decisions in every 
asset of our life. And so I think that should be a far greater 
level of consideration by the SEC than it presently is.
    Thank you, Mr. Chairman.
    Chairman Shelby. Madam Chair, before I recognize our next 
Senator, we have over 300 million people in this country, so 
1.6 million would be about a third of 1 percent and self-
generated. I hope you as Chairman of the SEC or any agency 
would not react to generated mail from Republicans or Democrats 
but would do what is best for the country and also under your 
jurisdiction. It is my understanding that this is under the 
basic jurisdiction of the Federal Election Commission, for what 
it is worth.
    Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman.
    Chair White, welcome back. You observed a few moments ago 
that one of the responsibilities of the SEC is to facilitate 
capital formation. There is legislation that I think would be 
very constructive to that end. It was introduced in the House 
by Congressman Mulvaney, and what it would do is streamline 
some of the regulations affecting business development 
companies, BDCs, and included in that is a modest increase in 
the leverage they would be permitted to use from a 1:1 ratio to 
a 1:2 ratio.
    If this were adopted, it seems to me, BDCs would be better 
able to provide loans that they do provide to small- and 
medium-sized companies, which, by the way, are finding it more 
difficult to access bank loans given the regulations of Dodd-
Frank. It would also allow better returns for investors, 
potentially, with some added risk that would be fully disclosed 
to those investors. And it has demonstrated extremely broad 
bipartisan support in the House. I think his bill passed the 
House Financial Services Committee 53-4, and it was included in 
legislation that passed the House floor overwhelmingly.
    We have not taken this up yet, but my understanding, Chair 
White, is that you have some concerns about the leverage 
component in this, and I am wondering if you could briefly, 
because I have got limited time, tell me why you are concerned 
about increasing the leverage of BDCs.
    Ms. White. Yes. First, let me just say that I think BDCs 
have been very good vehicles for growth. They were designed to 
be that for developing companies that might not otherwise be 
financed. I think the original statute was passed in 1980.
    The current reality is that retail investors hold the 
majority of those shares, so that always raises our investor 
protection antennae. We have worked over the years--the staff 
has to try to facilitate BDCs' operations because they have a 
patchwork quilt of regulations because of their exemptions from 
some of the Investment Company Act provisions.
    I have written about this. I think when I first got here in 
October of 2013, there were some changes made in the bill, 
which I think improved it. I appreciate those. I also wrote a 
letter late last year to Chairman Hensarling and Ranking Member 
Waters. I still have investor protection concerns, or I would 
not have written the letter----
    Senator Toomey. What is----
    Ms. White. One is leverage.
    Senator Toomey. What is the concern about the leverage?
    Ms. White. One is leverage.
    Senator Toomey. What about the leverage?
    Ms. White. It doubles the leverage, which means that your 
upside and downside potential are multiplied or are multiple, 
and it is a higher level of leverage than any sort of its 
counterpart kinds of funds have----
    Senator Toomey. So----
    Ms. White. Second, I think it allows more investment in 
financial institutions than was originally conceived and allows 
investments in registered investment advisers, so----
    Senator Toomey. Right, so let me--I have got very limited 
time here. So it is true that it increases the risk profile, it 
increases the exposure. But so does investing in a bank. A bank 
is a highly leveraged entity. Retail investors are allowed to 
buy securities on margin. Do you support allowing retail 
investors to continue to buy securities on margin?
    Ms. White. I am certainly not opposed to that, but I think 
there are more issues with respect to this bill and risks with 
respect to this bill than just that.
    Senator Toomey. Well, but that is what----
    Ms. White. That is one of them.
    Senator Toomey. ----leverage is about, right?
    Ms. White. That is one of them.
    Senator Toomey. OK. I thought leverage was the main 
concern. I would simply observe that there are many, many 
opportunities for an investor to take on leverage if an 
investor sees fit to do so. Buying options, for instance, can 
create the equivalent of enormous leverage, much, much more 
than this very limited increase that would be, after all, 
managed by a professionally managed company. So I would really 
urge you to consider that among the various ways a retail 
investor can achieve leverage, this would be a very modest--it 
is heavily regulated. It is run by professionals. And the 
upside benefit I think is very significant.
    Let me touch on another item here. I think the SEC has a 
proposed rule that would govern the use of derivatives by 
registered investment companies, and, of course, derivatives 
are used for a variety of reasons to achieve fund objectives. 
They are all disclosed. It is articulated. If the SEC were 
merely consolidating previous guidance letters, then I rather 
doubt we would have seen the volume of comments that have 
resulted. In fact, I think there are some things new. One that 
I am concerned about is that the exposure that is used to cap 
the amount of derivatives is based simply on the aggregate 
notional amount of those derivatives when, in fact, notional 
amounts are a terrible proxy for risk. They do not measure risk 
at all. So why are we using the notional amount to determine 
the limit on these investment companies' derivative holdings?
    Ms. White. That is one among several important issues that 
we teed up in the rule proposal, and one, as you point out, we 
have gotten a lot of comments on, which the staff is very 
thoroughly going through as they consider what their 
recommendation will be for the final rule. That is probably one 
of the most frequently commented on aspects of it--not all 
comments are critical, mind you, but a number are for the 
reasons you state.
    Senator Toomey. So is it your intention that there will be 
some modification here and that there will be a measure other 
than simply the really meaningless notional principal amount?
    Ms. White. Again, I cannot get ahead of the process, but I 
can say that we are very focused on that issue, and the nature 
of our notice and comment process is that we very seriously 
consider all of the comments and try to basically propose a 
final rule that is optimal and better than our proposals.
    Senator Toomey. OK. Thank you, Mr. Chairman. Thank you.
    Chairman Shelby. Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. Good morning. 
Thank you so much for being here.
    In 1982, the SEC adopted Rule 10b-18 to provide a safe 
harbor from market manipulation liability on certain stock 
buybacks. Buybacks could have been considered market 
manipulation back then. Recently, in my home State of Indiana, 
2,100 workers were let go by a highly profitable company in 
order to get $3-an-hour jobs to Mexico. The CEO said returning 
cash to shareholders continues to be a top priority. We are 
targeting $22 billion of total shareholder returns through 
share repurchases and dividends through 2017. Of that $22 
billion, $16 billion will come in the form of stock buybacks--
$16 billion in stock buybacks, while firing 2,100 workers in 
Indiana in order to get $3-an-hour jobs in Mexico to help fund 
the stock buyback.
    I will also note that the savings they get from this are 
less than one-half of 1 percent of the amount of the stock 
buyback.
    So my question is: You know, in 1982, this could have been 
considered market manipulation. What does the SEC think of 
actions like this now?
    Ms. White. Well, the safe harbor rule that you mention does 
not immunize companies from liability for market manipulation 
if it occurs. It is basically designed to impose some rules to 
at least try to prevent market manipulation. For example, if 
the buyback is done on the basis of material nonpublic 
information a fraud action can be brought. The safe harbor does 
not deal with that at all. I am acutely aware of the whole set 
of issues with buybacks. They have gotten a lot of attention in 
a lot of situations, and so we are focused on it.
    But the SEC does not----
    Senator Donnelly. Well, let me ask you this----
    Ms. White. ----dictate how--OK.
    Senator Donnelly. Should the SEC play a larger oversight 
role in overseeing stock buybacks as this has been funded by 
firing American workers?
    Ms. White. I take your point completely. I do not think the 
SEC has the authority to tell a company how to spend its money. 
What we do have, though, are disclosure rules with respect to 
buybacks that provide transparency to investors and the public 
of companies that buy back at least shares registered with the 
SEC under Section 12(g), and we are addressing that issue in 
our disclosure effectiveness review and our recent SK----
    Senator Donnelly. Let me ask you this----
    Ms. White. ----constantly to see whether we should----
    Senator Donnelly. ----do you think this----
    Ms. White. ----and make that disclosure more----
    Senator Donnelly. Do you think this was the conduct 
envisioned when the rule was changed back in the 1980s?
    Ms. White. I am not sure about the conduct that you are 
describing. Obviously, the way you are describing it--and I am 
not doubting it at all--it is a horrible set of events and had 
obviously very significant and unfortunate negative 
consequences. But, again, I think what we have designed with 
our rulemakings--and we are looking at it again to see if we 
cannot do more--is to avoid market manipulation, which is 
within our jurisdiction.
    Senator Donnelly. Well, in the SEC's eyes, who is the 
corporate responsibility to? Is it to just the shareholders? Or 
do they owe a duty to the entire corporate enterprise, 
including workers? You know, what is the corporation's 
responsibility in the eyes of the SEC? Who is it to?
    Ms. White. The fiduciary duty of the board, for example, 
and the officers is to their shareholders. But by my saying 
that, I do not want to imply that I think there are not duties 
and responsibilities----
    Senator Donnelly. Well, does the SEC assume that they have 
any responsibility to their workers, or can they just fire them 
willy-nilly?
    Ms. White. That is not a subject that is within the 
jurisdiction of the SEC unless it is something that has an 
impact on what is within our authority.
    Senator Donnelly. When you look at this, I think a big part 
of this is corporate short-termism, if you want to--you know, I 
do not know that that is a very technical term, but it is the 
reality of life. I met with these workers this morning. They 
were making $13 an hour. Their CEO made 11. The CEO before him 
took over $150 million out on his last day. And they are making 
13 bucks an hour on a very, very, very profitable plant, and 
they are fired so their jobs could go to $3 an hour in Mexico 
to help fund a stock buyback. Do you inherently see something 
wrong with this business model? Is the American dream that we 
all fight for? Is this what the SEC expects on conduct from the 
corporations that you regulate?
    Ms. White. What we expect from the corporations we 
regulate--and certainly as citizens expect from those we do not 
regulate--is fairness to not only their shareholders and the 
fiduciary duty they owe to shareholders, which is within our 
direct bailiwick, but also to their employees as well. There 
are studies out there on the buybacks and the benefits and the 
detriments that go both ways depending upon the context of the 
particular company when they are buying back, what they are 
doing with their funds, what they have to do with their funds 
and so forth. But I take your point.
    Senator Donnelly. Thank you, Mr. Chairman.
    Senator Cotton. Thank you. Thank you, Mr. Chair.
    I want to talk a little bit about FINRA and its structure. 
FINRA is defined as a self-regulatory organization. Is that 
correct?
    Ms. White. Yes.
    Senator Cotton. Does FINRA operate with a mandate from the 
Federal Government?
    Ms. White. FINRA is, as you point out, a self-regulatory 
organization that is a membership organization, but it is 
certainly an organization that is primarily responsible for the 
surveillance and regulation of broker-dealers.
    Senator Cotton. Does it use tools that are similar to or 
typical of those of an independent Government regulatory 
agency?
    Ms. White. Certainly on its exam and enforcement side. They 
have tools we do not have, frankly, because it is a membership 
organization. There are things they can do that we cannot do 
under our own authorities, but they certainly use surveillance 
tools, they use enforcement, and they use exams, which are 
similar.
    Senator Cotton. And they make rules that will govern the 
conduct of their members?
    Ms. White. They certainly make rules. Many of them are 
subject to SEC approval, but yes.
    Senator Cotton. Are there any other private organizations 
that are similarly structured and oriented within the 
securities law space?
    Ms. White. Not at the present time.
    Senator Cotton. What sort of input, to your knowledge, do 
FINRA members have into FINRA's regulatory policy agenda?
    Ms. White. I do not know the specifics of that. Obviously, 
they have a board structure, and they are a membership 
organization.
    Senator Cotton. What authority does the SEC have over the 
FINRA Board?
    Ms. White. We certainly oversee FINRA. We inspect FINRA, 
our exam staff does, on various issues, and some of their 
programs. We have some authority over their rules as well. Some 
of their rules.
    Senator Cotton. Do you have the power to appoint board 
members?
    Ms. White. No.
    Senator Cotton. To remove board members?
    Ms. White. No.
    Senator Cotton. So FINRA exercises investigative and 
prosecutorial functions related to SEC rules, Federal 
securities laws, and its own rules?
    Ms. White. Yes. Generally speaking, yes. There are some 
exceptions to that, but yes.
    Senator Cotton. Are those functions executive power, in 
your opinion?
    Ms. White. They are not. I know this is an issue that 
people talk about all the time, but they are not a Government 
entity. But the answers I gave are accurate, I believe, in 
terms of their powers.
    Senator Cotton. To your knowledge, does FINRA employ paid 
lobbyists?
    Ms. White. I do not know.
    Senator Cotton. OK. Thank you.
    I would like to turn to a separate topic--``shareholder 
activism,'' as it is sometimes called. On a number of 
occasions, you have commented on the role that economically 
motivated investors play in the capital markets. In a speech 
last year in New Orleans, you noted that, ``An intense debate 
is taking place in the business, legal, and academic 
communities as to whether activism by hedge funds and others is 
a positive or negative force for U.S. companies and the 
economy.'' In that speech you also said that the SEC's role in 
any given contest between shareholders and boards of public 
companies ``is not to determine whether activist campaigns are 
beneficial or detrimental but, rather, to ensure that 
shareholders are provided with the information they need and 
that all play by the rules.''
    So putting aside the question of any particular dispute, 
any particular company, any particular investor, do you believe 
that, on balance, engaged shareholders provide critical market-
drive checks and balances to provide greater corporate 
productivity and management accountability?
    Ms. White. That is a very broad question. I certainly think 
they can.
    Senator Cotton. OK. You have also spoken favorably in the 
past about the role of cost/benefit analysis at the Commission. 
Given your views on the importance of a data-driven approach to 
developing public policy, are you concerned about some appeals 
to emotion that we see from some involved in the debate about 
so-called activist investing, which is sometimes also portrayed 
as short-term investing?
    Ms. White. The SEC is an independent agency and has always 
been. I am an independent head of that agency, and so I think 
it is very important for us to keep our eye on the ball and 
make decisions based on the merits, which I think we do.
    Senator Cotton. So in this space, you are committed to 
developing rigorous econometric data on the marketplace impact 
of potential disclosure rules changes or any other limitations 
on marketplace participants where rules changes would be 
proposed and adopted?
    Ms. White. Certainly any of our rules are subject to that 
economic analysis.
    Senator Cotton. OK. Thank you for that. Thank you for your 
appearance today.
    Chairman Shelby. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. And thank you for 
being here, Mary Jo. I appreciate the work that you do.
    I want to talk a little bit--because I appreciate you 
taking the blame for a lot of stuff, but I want to talk to you 
about the Commission right now. How many members are active on 
your Commission? How many members do you have on the 
Commission?
    Ms. White. We have three.
    Senator Tester. OK. And it is my understanding--and correct 
me if I am wrong--it has been that way for about the last 8 
months, right?
    Ms. White. Do you want me to give you the hours and the 
minutes? The last 6 months.
    Senator Tester. Six months. And is it true that since you 
have only got three, any one of those three can say if they do 
not like a potential vote that might be coming up, just stay 
away, and then you do not have a quorum and you cannot work?
    Ms. White. Well, as a Commission of three, we have to have 
all three Commissioners to do a rulemaking.
    Senator Tester. Yes, so any one of them can walk away from 
the table and you are sunk, right? That is pretty good power.
    Ms. White. They could, but I think we are very focused, all 
three of us, on getting the work done, too.
    Senator Tester. Well, that is good. What about your 
staffing? How are you staffed up? Do you have adequate staff?
    Ms. White. I think the SEC is a significantly 
underresourced agency for our responsibilities.
    Senator Tester. Would that change if you became a self-
funded agency?
    Ms. White. It would.
    Senator Tester. Could you give me sort of--I mean, have you 
run any--are you 20 percent down, 30 percent down on staffing 
measures?
    Ms. White. I have certainly talked mainly in the context of 
our ability to cover on the examination side investment 
advisers, which are obviously enormously important to 
investors, particularly retail investors. I have also talked 
about how we are so outspent on the IT side by those we 
regulate that in those areas we have done some analyses. But, 
again, I respect the appropriations process, the congressional 
oversight process, and try to make the best case I can for more 
and adequate resources.
    Senator Tester. Well, I think that--and, look, I mean, 
there has been ten people speak ahead of me, and some of them 
have been very critical. Some on my side of the aisle have been 
very critical about you not doing some of the work that is 
assigned. And I can be critical, too. And, by the way, I am. 
But the fact is that you have got to play the hand that is 
dealt to you, and the hand that is dealt to you is a pretty 
weak hand right now, in my opinion. Would you agree that if you 
were fully staffed up and you had five Commissioners you would 
be much more effective and would get more work done?
    Ms. White. I think the answer to that is yes. Certainly 
being staffed up would accomplish that.
    Senator Tester. So we had a fiduciary rule that several 
have talked about, Senator Rounds and others, that got put out 
by the DOL, and I was critical because I thought this was a job 
you should have done, and I think if you had been fully up, you 
would have got it done. But, unfortunately, it did not happen. 
Are there any plans to get that fiduciary rule happening from 
the SEC's standpoint?
    Ms. White. I am certainly committed to getting it done 
because I think it is of enormous importance. But I have also 
made clear how difficult and long a road that is under Section 
913 of the Dodd-Frank Act and that I am one vote.
    Senator Tester. Yes, and so fair point. And it has been 
documented there were some differences between the SEC and the 
DOL when that rule was put out. And I do not hear you saying it 
is going to be done before this Administration is out the door.
    Ms. White. Well, I am committed to moving it as fast and as 
well as I can, but I cannot give you that commitment now.
    Senator Tester. In all practicality----
    Ms. White. It is a longer route than that.
    Senator Tester. OK. So we have got the DOL rule. So the 
question occurred to me: Do you have to enforce the DOL rule?
    Ms. White. We do not.
    Senator Tester. So who enforces it on investment advisers 
and broker-dealers?
    Ms. White. Enforcing their rules is their responsibility.
    Senator Tester. So the DOL will enforce the rules on 
investment advisers and broker-dealers.
    Ms. White. They would enforce their own rules with respect 
to whoever is subject to them.
    Senator Tester. Traditionally, wasn't that a job for the 
SEC?
    Ms. White. Not as to their rules, no.
    Senator Tester. No, but as far as investment advisers and 
broker-dealers go?
    Ms. White. And still is. Except not with respect to their 
rules, but with respect to our rules.
    Senator Tester. So tell me how this is going to work. I 
mean, practically, how is it going to work?
    Ms. White. Well, I think it is independent agencies, 
independent rules. We have had before this rule rules by DOL 
and rules by the SEC that overlap, so to speak, and we have 
managed our way through that pretty well. We clearly will watch 
this as it goes forward. And if issues arise we will certainly 
be available, and I am sure DOL will be available, to 
coordinate if a conflict should develop.
    Senator Tester. OK.
    Ms. White. And if and when--I hope we go forward with our 
own rulemaking--obviously, we will coordinate with them about 
any new issues that might arise with respect to that.
    Senator Tester. I appreciate it.
    Mr. Chairman, I will put a few more questions in the 
record, but thank you very much.
    Ms. White. Thank you.
    Chairman Shelby. Senator Moran.
    Senator Moran. Mr. Chairman, thank you. Chairwoman, thank 
you very much for your presence today. We have had a 
conversation in the appropriations process I want to continue 
to ask you about. It deals with the regulation of the National 
Marketing System. The question I have is whether the NMS plan 
governance model should be reformed to reflect evolution of our 
markets and add additional participants as voting members. My 
question is: Does the SEC currently have legal authority to 
approve the addition of additional market experts as voting 
participants in the governance of NMS plans?
    Ms. White. Subject to our overall SRO rule process, we 
could do that. One thing I should mention is we actually have 
recommendations coming from the subcommittee of the Equity 
Market Structure Advisory Committee on this very subject, but 
we are typically in the position of approving a rule filing. 
But we can also issue orders to solicit rule filings, if I 
could say it that way.
    Senator Moran. So maybe there is more to this story than me 
just asking you whether you have the authority. Is there 
something in the works? Can you bring me up to speed on this 
topic?
    Ms. White. It is certainly a topic that the Commission is 
focused on, the staff is focused on, and so is our Equity 
Market Structure Advisory Committee, and, in particular, I 
think it is called our Trading Venues Subcommittee. And that is 
one of the topics, indeed, that they discussed at their last 
meeting with the full committee, I think at the end of April, 
and is or may be the subject of recommendations.
    Senator Moran. Do you have attorney personal thoughts on 
this topic? Or are you just waiting for those recommendations?
    Ms. White. I am very well aware of the issues, and I know 
some accommodations have been made, which other advisory 
participants, have not found sufficient or satisfactory. And so 
it is an issue I am focused on. It is an issue I continue to 
consider whether and what changes, if so, should be made.
    Senator Moran. OK. I want to follow up a bit on the Senator 
from Arkansas' conversation about FINRA oversight. I noticed 
that FINRA appointed a new CEO yesterday who is a former 
employee of the SEC. I guess my question is: How do you satisfy 
the need for congressional oversight of FINRA? Is it just a 
matter of we have oversight over the SEC and the SEC has 
oversight over FINRA? Or is there a greater opportunity--we 
have no appropriations process there, no confirmation process. 
Occasionally, FINRA representation is before Congress in a 
setting like this, but beyond that, it seems to me that FINRA's 
role is growing more engaged in regulatory activities and 
Congress has little oversight in that regard.
    Ms. White. You certainly, as you indicate, have oversight 
authority over the SEC, who has oversight authority and exam 
authority over FINRA, and it is an important one, I think. And, 
clearly, FINRA is a very important component of our investor 
protection and market safeguarding.
    Since I have come to the SEC as Chair, we have enhanced our 
oversight of FINRA and continue to do so. I think I heard Rick 
Ketchum, the outgoing president and CEO, indicate that he 
understands the interest by Congress, given their activities 
and the importance of their activities, in learning about them. 
I do not know if ``oversight'' is quite the right word for the 
reasons that you indicate. And, by the way, I think Rick 
Ketchum and Robert Cook, who is his successor, are just 
tremendous public servants, and we work very well with them. 
Obviously, we oversee them, but I have found them both to be 
extraordinarily knowledgeable--I know Rick better than I know 
Robert, but I know them both--about the markets, very committed 
to investment protection. So I think that is always a 
safeguard.
    Senator Moran. I think you are telling me that my assurance 
is that you are watching over FINRA, and we need to watch--I 
know you would not say this, but we need to watch over the SEC. 
Maybe you would say that.
    [Laughter.]
    Ms. White. It will happen anyway, right? I think that that 
is correct. I guess the other part of my answer was that I am 
aware of the need, and we have moved in that direction to 
enhance our oversight of FINRA at the SEC.
    Senator Moran. You may use your position to encourage FINRA 
to be cooperative with Congress, open and available to us. That 
would be useful.
    Ms. White. Yes. I agree.
    Senator Moran. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    Thank you for being here, Chair White. As you know, the 
SEC's mission is to protect investors and our capital markets, 
and requiring companies to disclose information is a critical 
part of that mission. Publicly traded companies may not like 
disclosing potentially embarrassing or damaging information, 
but the SEC's job is to look out for investors, not for big 
companies.
    Now, there is a lot you could be doing to protect 
investors. There are still 20 mandatory Dodd-Frank rules from 
2010 that the SEC has not completed, and there are more than a 
million people, including countless investors and former SEC 
commissioners, pushing the agency to require publicly traded 
companies to disclose their political contributions. But 
instead of moving forward on issues intended to help investors, 
you have actually headed in the opposite direction.
    Since your first year in office, you have dedicated 
significant SEC time and resources to a project you invented 
and called the Disclosure Effectiveness Initiative. According 
to the 2013 speech you gave, your big idea behind this project 
is that the SEC might be requiring companies to disclose too 
much information, causing investors to suffer from something 
you call information overload.
    Now, I am all for eliminating redundant disclosures or 
improving the ways that information is presented but, honestly, 
I have never heard of the concept of information overload in 
the context of investing in stocks. I have never heard of the 
idea that investors actually want less information than they 
are getting.
    So I have a pretty simple question. The SEC is an investor 
protection agency, so when you launched your project, what 
evidence did you have that information overload was a real 
problem that investors wanted you to solve?
    Ms. White. It is an issue, Senator Warren, that the 
Commission has been looking at for, really, decades, among 
others. But the purpose of disclosure effectiveness--and by the 
way, it was not invented by me--it was basically in response to 
a congressional mandate to do a report that reviewed our entire 
Regulation S-K concept.
    Senator Warren. I am sorry; when was this report that you 
are talking about?
    Ms. White. It was, filed with Congress at the end of 2013.
    Senator Warren. So are you--now, wait. Are you talking 
about the JOBS Act report?
    Ms. White. Yes.
    Senator Warren. Because that one, I actually looked at 
that.
    Ms. White. Yes.
    Senator Warren. And what was asked of you was that the SEC 
review one subset of disclosures to see if that subset should 
be modified as they apply to one subset of companies, so-called 
emerging growth companies. Your project has gone way----
    Ms. White. Right.
    Senator Warren. ----beyond the boundaries identified in 
that law.
    Ms. White. Emerging growth companies are a very broad 
swath, as you know, of the markets.
    Senator Warren. I understand, but that is not what your 
project is.
    Ms. White. But my point is we have been, for decades at the 
SEC, undergoing disclosure effectiveness review. And I 
absolutely agree that there is nothing more----
    Senator Warren. That is not my question.
    Ms. White. ----there is nothing more important----
    Senator Warren. My question is----
    Ms. White. ----there is nothing more important than our 
disclosure powers.
    Senator Warren. ----when you launched your initiative 
called the Information Overload, this is what you identified. 
And I just want to know what evidence you have that this is a 
real problem, that investors have come to you and said: We are 
worried about getting too much information. Just what evidence 
did you----
    Ms. White. First of all, the review is not limited to 
duplicative or overloaded information. It is really----
    Senator Warren. You mean the review in the 2012 JOBS Act?
    Ms. White. No, no, our review. It is meant to make 
disclosure more meaningful to investors. And we have also 
gotten comments, recently, from all kinds of constituents, 
including our Investor Advisory Committee, about identifying, 
and really not objecting to removing, things that are 
repetitive, duplicative, or not useful. And the purpose of this 
review is to make disclosure more meaningful for investors.
    Senator Warren. I did not--I started this by saying I do 
not have a problem with getting rid of duplication. I do not 
have a problem with making it more effective. The question I 
asked you about is whether or not this so-called information 
overload is a real problem identified by investors that have 
come to you.
    Let us be honest about this. I cannot find, and you have 
not produced, a single investor who as complained to the SEC 
about receiving too much information. Investors do not want 
less information about the companies where they put their 
money. In fact, I think that is ridiculous. The SEC's own 
Investor Advisory Committee, which includes everyone from hedge 
funds to pension funds to retail investors, say recently that 
the current amount of disclosure--and here was their word--is 
appropriate.
    So who wants less information to be disclosed? It is pretty 
clear. The National Chamber of Commerce, which represents the 
giant companies that have to do the disclosing. The Chamber has 
produced a fact-free report, whining about this nonexistent 
information overload problem, in 2014, shortly after you 
launched your initiative.
    You know, information overload is a problem that was 
invented to justify a project aimed at making life easier for 
big companies and harder for investors. In fact, Keith Higgins, 
the SEC's head of the Corporation Finance Division and the lead 
on this project, kind of let the cat out of the bag in 2014 
when he said in a speech the aim of this project was ``to 
reduce the burden on companies, consistent with our mission of 
investor protection, wherever we can.''
    Now, I recognize that Congressional Republicans slipped 
language into the must-pass highway bill at the end of last 
year that asks the SEC to review disclosures with an eye toward 
eliminating ones that are unnecessary. Of course, that does not 
justify the SEC dedicating resources to this project for 2 
years before that. But nevertheless, given the views of your 
own Investor Advisory Committee that the current disclosures 
are appropriate, do you agree that the supposed information 
overload problem does not exist?
    Ms. White. Well, if you go back to even Thurgood Marshall 
years ago, in defining materiality under the Federal Securities 
laws, the concern was expressed that too much information could 
cloud and crowd out the meaningful. I think you are describing 
our disclosure effectiveness review in a way that is much 
narrower than its intent.
    Senator Warren. That is the extent of your evidence?
    Ms. White. And I think one of the most important things 
about the disclosure effectiveness review is that we are 
listening to everyone. We are also talking about adding 
information in this review that is needed to be added, for 
example on foreign taxes and other things. But it is also the 
manner in which the information is being provided to investors 
that is a huge priority of this review.
    Senator Warren. We are over our time so let me just stop 
you there. I have said now three times, I think, in just this 
brief exchange, I am fine with cutting out duplication; I am 
fine with making the information clearer, and as should be 
clear; I am fine with providing more information. What I am 
trying to identify is something that you specifically have 
targeted and talked about.
    I am frustrated that, at your direction, the SEC has 
voluntarily spent 2 years trying to address a problem that you 
have no evidence exists. Instead of making up work to help 
giant corporations, the SEC should do its job, starting with 
the 20 required rules under Dodd-Frank that still are not fixed 
6 years after the law was passed. Your job is to look out for 
investors, but you have put the interests of the Chamber of 
Commerce and their big business members at the top of your 
priority list.
    Chairman Shelby. Your time is up.
    Senator Warren. A year ago I called your leadership at the 
SEC ``extremely disappointing.'' Today I am more disappointed 
than ever.
    Thank you, Mr. Chairman.
    Ms. White. And I am disappointed in your disappointment and 
could not disagree more with your characterization of what we 
are trying to do to improve our disclosure regime for investors 
to make it better. And we----
    Senator Warren. When you bring me evidence of this so-
called information overload that you have initiated, then we 
can have more conversation about how disappointing this 
leadership has been.
    Ms. White. I would suggest you read the Regulation S-K 
concept release for the range of issues we are addressing, 
including that.
    Senator Warren. I would like to see some evidence that 
there really is a problem here.
    Chairman Shelby. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    Chair White, it is good to see you again. I want to move to 
another area of concern that I have. I have seen evidence 
recently--I am sure you probably have as well. RBC put together 
a chart of--its complexity is a little overwhelming--that there 
were 839 different fee structures-- I am getting to the maker-
taker issue--with 2,700 different iterations in terms of 
incentives and rebates within our market structure right now, 
that quite honestly give the impression that the system is 
rigged to direct trading through to those firms and entities 
that are going to give you the biggest rebate or fee structure.
    It seems to me that there is an extraordinary amount of 
conflict of interest here in the whole question of brokers and 
their clients. When we look at this--and we have got, 
obviously, the complexity of our markets and trying to make 
sure--I agree with Senator Warren that we have got to get 
information out in a clear and transparent way. But, boy, you 
talk about an area that is opaque. You know, how are we going 
to get through this?
    Now, you have talked about this back in 2014, the negative 
outcomes of some of these--this structure. You know, I strongly 
believe we need to move quickly on the maker-taker pilot. I 
would encourage you that when we take a look at this maker-
taker pilot, that we have all venues included, both those lit 
and unlit.
    When we think about--again, if you look at that RBC chart 
and then you add the dark pools behind it, enormous challenges, 
and that we do not--you know, I know that the Trade Act 
component issue added a whole series of complexity to the tick 
size project. And my hope is that we will not see those same 
kind of great to have but potentially items that dramatically 
slow down the ability for us to bring more transparency to our 
markets, and particularly in terms of this area where there 
appears to be an enormous amount of conflict of interest. So 
could you speak to that?
    Ms. White. First I will say--and I think I said it at the 
Committee meeting as well--I do think we should promptly 
proceed with a well-designed pilot. The discussion, of the----
    Senator Warner. How promptly do you think--I mean, 
considering we saw the tick size and----
    Ms. White. Right.
    Senator Warner. ----we have gone through this a number of 
times and I know it has been delayed again.
    Ms. White. For the tick size pilot, as you know, we ended 
up having to order the SRO's to submit a plan that would work. 
And I think it is enormously important. It will launch in 
October of this year, but obviously it took a while to do that.
    I do think you have got to be careful that you are getting 
the information that you need to have from these pilots. I 
think you may not, Senator Warner, have been in the room when I 
mentioned before that we are expecting a recommendation at a 
July 8th telephonic meeting from the subcommittee that is in 
charge of this subject matter at the subcommittee level to the 
full committee on July 8th. And frankly, I urged that to happen 
sooner than their next scheduled meeting so that we could move 
this along.
    It obviously is up to the Commission, and the staff to 
recommend to the Commission what those parameters should be. 
But it is one that I think is more complicated than it seems. I 
do not think the system is rigged, but I think it has developed 
in a way that we have really got to figure out how to deal 
with. And I am particularly concerned about the conflicts of 
interest inherent in it.
    Senator Warner. Once again----
    Ms. White. Yes.
    Senator Warner. ----you sort through this bespoke Byzantine 
process, and how any investor, small or large for that matter, 
really knows where their trades are being directed based upon 
the level of fees and rebates. You know, we need more market 
confidence, and I really think moving aggressively on this----
    Ms. White. I think our transparency proposals are an 
important part of that too, but----
    Senator Warner. Right.
    Let me, the last few seconds here, go back. Senator Moran 
raised some of the question around market governance. And as 
more and more of these large exchanges do these--the SIPs, the 
securities exchange processors, and are making decisions to 
make huge capital investments in technology, sometimes that 
technology which may give them that fractional second advantage 
over others. And as I have said before, you know, I do not want 
to appear as a Luddite, but I do believe at some point speed 
and the god of liquidity being the answer is not always the 
completely correct answer.
    But as we sort through this, and with all the various 
exchanges, you know, can you expand on what you said to Senator 
Moran in terms of governance? How do we make sure that, in 
terms of market governance, we have got all the right parties 
at the table sorting through these--sorting through these 
issues?
    Ms. White. I am not sure we are talking about the NMS 
governance, which we were addressing, but frankly my whole idea 
for the Equity Market Structure Advisory Committee was to try 
to bring in expertises across the range of constituents, and 
also to make sure we had a panel at every one of those meetings 
that had everybody else there that had a different point of 
view and an expertise. And I have been very pleased with it so 
far. It is also something that focuses and I think moves along 
more promptly the Commission's comprehensive review of these 
market structure issues, and it really needs to be there.
    In terms of the speed issue, certainly you can get to 
diminishing returns. I think you had that conversation with 
Steve Luparello at your subcommittee hearing. I do not think 
you roll back technology. We have had tremendous benefits, 
obviously to retail investors and institutional investors in 
our markets from the technological advances.
    Sometimes people talk about high-frequency traders as if 
they are one thing, and they are not. They are not monolithic. 
They have different strategies. And so, one of the proposals 
that the staff is working on is an antitrading disruption rule, 
which deals with, when markets are particularly vulnerable, 
liquidity being taken away by virtue of speed, to avoid that. 
So the issues, again, are complicated, but I am largely 
agreeing with you.
    Senator Warner. And my time expired.
    I just want to say, Mr. Chairman, that, you know, as we 
look at complexities in the equities market, as we have seen 
complexities in the bond market, you know, even in the 
Treasurys markets, obviously the options markets--and my fear 
sometimes that some of these bespoke products and the incentive 
systems--you know, I worry that the complexity has gotten so 
great and the effect it has on the overall market ecosystem, 
that it is bleeding from one market into another.
    And I appreciate, Chair White, your comments, but would 
love to come back and revisit with that.
    Chairman Shelby. Thank you.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman.
    Welcome back, Chairman White, my fellow New Yorker. And as 
you know, I have a great deal of respect for you, but I am 
going to go back to the issue I care so much about.
    I just want to--the money--I am now involved in a lot of 
our races, our campaigns. The money that is pouring in is 
unprecedented and it is undisclosed. And it is a few 
organizations. One is the Koch brother organization, one is the 
Karl Rove organization, one is the Chamber of Commerce itself--
pouring in, poisoning our politics, and we do not know where 
that money comes from. The shareholders do not know where that 
money comes from.
    I will have to tell you, it is more important than anything 
else to me before the SEC. All the things between shareholder 
and corporate governance pale before what is happening in 
America. And you want to know why people are so discontent? In 
part, it is because a few powerful people can send cascades of 
money into our system. The ads they put on TV have nothing to 
do with the issues they care about.
    And you, frankly, are aiding and abetting at the SEC 
because we cannot do everything. And we know that our House 
Republicans--Mitch McConnell is insisting that this stay. They 
gain from this. And it is short-term gain because, in part, 
people become so discontent with the powers that be that they 
not only go against the--all establishment, they go against the 
Republican establishment. Witness the last election, the last 
primary.
    And I just do not get it. I just do not get why 
corporations that give money should not tell their 
shareholders. These are major decisions. They have effects on 
the corporations. If Exxon--and I am just picking one. I have 
no idea what they do undisclosed, but if they put a ton of 
money of undisclosed into the Chamber of Commerce to fight 
global warming--let us just assume that--their shareholders 
have a right to know they may be making a bad decision.
    I think you are hurting America. You are hurting America. 
And I know you can stay in your narrow little box and say, 
well, the rules of the SEC are limited, and this and that. 
First, a lot of people do not agree with that--most people. 
Second, the public. I mean, I know Senator Shelby said 1.2 
million petitions is a small amount compared to the population 
of America. That is true, but how many other issues have you 
gotten 1.2 million petitioners calling you? And I wish you 
would change your mind. I am just so disappointed, so 
disappointed, because every one of our commissioners should be 
a citizen. They have to do things within the law. This is 
within the law and you have made the decision not to go 
forward.
    So let me just ask you this. This is a relevant question. 
Senator Menendez touched on this issue, but I want to come back 
to it. John Coates analyzed that the SEC, by this--we were--the 
Republican leadership insisted that this provision be put in 
the bill. It shows you--the provision that says--you know, that 
says that Congress cannot touch what you do. But it was not 
that explicit. And as I understand it, it only explicitly 
prohibited the SEC from finalizing, issuing, or implementing 
such a rule during this appropriated period.
    So do you disagree with Coates' analysis? And second, if 
you do not disagree with his interpretation, will you add this 
issue to the SEC's agenda?
    Ms. White. I have not studied his interpretation of it. Let 
me just say that I respect you enormously, and your views----
    Senator Schumer. It is a mutual respect we have.
    Ms. White. ----enormously. And I also deeply respect the 
views on all sides of this issue. I explained earlier what the 
SEC was looking at when I came in, and so forth. I will not 
repeat that or what I have prioritized for the benefit of 
investors and our markets since I have been there, although I 
certainly made a commitment to advance the mandated rulemakings 
and other mission-critical issues.
    But having said that, I have also talked about the avenues 
for shareholders to bring this issue to their companies, which 
is in our rules, the Rule 14a-8 shareholder proposal route. The 
average approval rate for those petitions last year was about 
26 percent. I also certainly applaud those companies that are 
voluntarily providing the information, which they, by the way, 
are doing in greater numbers, like----
    Senator Schumer. What else can you do to encourage 
companies to do it voluntarily? I understand the worst ones are 
not going to do it. The big violators are not going to do it.
    Ms. White. There is a report that came out in October of 
2015 basically showing that over half of the S&P 500 now makes 
disclosures of their political spending. And I think 80-plus 
percent have policies and procedures governing their spending. 
So that information is certainly voluntarily being provided. 
Obviously our rules could never reach the Koch brothers because 
it is not a public company at all.
    Senator Schumer. That is good.
    Ms. White. So it is not as if the SEC our rules--is the 
solution to campaign finance reform. I understand you are not 
suggesting they are, and I take your point. But essentially, 
the subject of doing a rulemaking has actually not been on the 
SEC's agenda before me or after me.
    Senator Schumer. No, but what I am asking you is----
    Ms. White. Yes.
    Senator Schumer. ----since you are not prohibited from 
starting the process, would you be willing to start the 
process?
    Ms. White. Well, again, the subject is not on our Reg Flex 
Agenda now.
    Senator Schumer. I know.
    Ms. White. It is not one of the priorities that we are 
advancing. So do I get to that before I get to what could we do 
or what could not we do under the appropriations language? 
Obviously the appropriations language is there with its 
prohibitions.
    Our Corporation Finance staff did look at this, actually 
before the item was put on the Reg Flex Agenda in late 2012, 
just to research and consider whether to recommend a proposed 
rule, not to advance a proposed rule. And they did a lot----
    Senator Schumer. I just----
    Ms. White. ----a lot of work on that.
    Senator Schumer. My time is expired----
    Ms. White. OK.
    Senator Schumer. ----but I am explicitly asking you a 
question, which is, are you willing to start the process? That 
is still allowed by--even with the legislation that we passed.
    Ms. White. I have not researched the legal issue, but the 
answer is that it is not a subject that is on our current Reg 
Flex Agenda----
    Senator Schumer. OK. I would----
    Ms. White. ----because of my priorities and the priorities 
of the Commission.
    Senator Schumer. I know my colleague is here. I would just 
say to you, your priorities are out of line with what corporate 
America needs and America needs. And I hope when you go to bed 
late at night you will think about that, because our country is 
basically being steered in an awful direction by a narrow few 
wealthy people. At the very least there ought to be disclosure.
    Chairman Shelby. Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman.
    And thank you, Chair White, for appearing. As you know, I 
have been working on a number of provisions within the Homeland 
Security and Governmental Affairs Committee regarding 
supervision of independent agency rulemaking, obviously still 
concerned that we have been unable to effectuate the 
implementation of a longstanding executive order in legislation 
and have met, as you know, with great resistance from all the 
independent agencies.
    That is not going to be the basis of my question, but I 
wanted just to remind you that when we met, you offered to sit 
down and actually have a conversation about this, because I 
think there is a growing amount of concern in the regulated 
community that there is not the kinds of safeguards that other 
rulemaking have. And so I want to just remind you that I have 
not forgotten about that.
    But I want to ask you about SEC rulemaking and small 
business. As you know, Senator Heller and I introduced a 
bipartisan bill that would create an Office of Small Business 
within the--a small business advocate within the SEC. I am 
wondering if you have had a chance to review that legislation 
and if you have an opinion.
    Ms. White. Well, first let me say that I think we have 
really prioritized the interests of, perspectives, if I can say 
that, and special needs of small businesses since pretty much 
the day I arrived at the Commission, and we have taken a number 
of steps.
    We were mentioning the tick size pilot before. We actually 
have, in our Division of Corporation Finance, an Office of 
Small Business Policy, which responds to a thousand-plus, 
sometimes nearly 2,000 requests for questions like how do I 
navigate the rules, how do I do this, how do I do that? They 
look at all of our rules from the perspective of how is this 
going to impact small businesses? So I think it is a very 
highly functioning unit.
    I am an advocate for small business so, conceptually, I am 
all in favor of any advocate for small business because they 
are so important to our economy. I worry about--and I know our 
staff has given some technical assistance on this--but I worry, 
if the bill is adopted, that we might fragment or dilute the 
efforts that we have within the SEC.
    Senator Heitkamp. Chair White, I would submit that a lot of 
small business feel like they are being left behind and their 
capitalization is restricted in ways that they do not 
understand. And it is so critically important that they feel 
like they are part of the economic fabric as well. And so I 
think creating an advocacy so there is somebody there, and not 
just kind of the good will of the Chair and the good will of 
the rest of the Commission, to basically be that voice that is 
heard on small business concerns. So----
    Ms. White. I certainly understand the priority on it, if I 
can say it that way. I think that is why we have the office we 
have, but I also understand the priority that you are putting 
on it in this way, as well.
    Senator Heitkamp. And I do not know if you have had a 
chance to answer questions about the Department of Labor 
fiduciary rule yet.
    Ms. White. Here and there I have, yes.
    [Laughter.]
    Senator Heitkamp. Yeah, I bet you have, so I will just kind 
of read the testimony there rather than reiterate what has been 
said.
    The SEC is credited--has been credited for developing and 
adopting a March 2012 Current Guidance on Economic Analysis, an 
SEC rulemaking which emphasizes the importance of rigorous 
economic analysis and rulemaking, including relevant cost 
benefits. It is generally recognized that accurately estimating 
the benefits of regulation is more difficult than determining 
the costs, whether or not they can be quantified or monetized.
    What lessons learned, if any, can you provide on SEC's 
efforts to justify regulations, especially when these 
limitations exist?
    Ms. White. Well, we obviously adopted and implemented our 
Economic Guidance. I think it was March of 2012. We take the 
cost-benefit economic analysis of our rules and pre-our rules 
quite seriously. And I think it is working very well. We have 
actually received compliments on the thoroughness of it and the 
pointedness of it, if I can say it that way.
    So I think it is enormously important to do. And I will not 
say much about it but you alluded to the bills that are pending 
to add more review and other factors. What I worry about there 
is the compromise of independence and adding burdens that, at 
least at the SEC, I think we are discharging what you want us 
to.
    Senator Heitkamp. Chair White, I am running out of time, 
but I just want to reiterate that, you know, we can all have 
good intentions but sometimes we need a cop on the beat who is 
going to be reviewing the work.
    And so that is really what we are asking for in that 
legislation. And we will continue to talk about what makes the 
independent agencies comfortable as we move forward, but I have 
not given up on my challenge of making sure that there is some 
oversight that assists this body in terms of oversight on 
independent agency regulations.
    So, thank you so much for appearing and thank you for your 
work. I think if you have not been thanked already, as you know 
I am greatly appreciative that you have stepped up and taken 
the chair.
    Ms. White. Thank you very much. Thank you.
    Chairman Shelby. Senator Brown.
    Senator Brown. I have one last question. Thank you, Mr. 
Chairman.
    First, one real brief comment. I join Schumer--Senator 
Schumer's plea with you to move on that. I think it is--I think 
there is a huge majority of the country, people paying 
attention, that want you to do that, and so many Members of 
this Committee too.
    Along with other members of both houses, I sent you a 
letter in March asking you to consider rulemaking pursuant to a 
petition that would provide enhanced disclosure of the 
diversity of board nominees. In your response, you indicated 
you had asked your staff to look at the nature of the 
disclosure companies are providing. Could you give this 
Committee an update on what you are doing?
    Ms. White. Yes. And this is an example of an existing rule 
that we have that investors have basically indicated is not 
providing them useful enough information on diversity. There is 
no definition of diversity, et cetera. So those concerns 
resonate with me and I have had the Division of Corporation 
Finance work on what the disclosures have been in the past, 
what they are now, and how we might enhance that rule. They 
have not completed that process, but they are well into it, and 
I expect them to make a recommendation to me fairly soon.
    Senator Brown. Please keep me appraised of those findings.
    Ms. White. Absolutely.
    Senator Brown. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. We appreciate your appearance today here, 
and we look forward to some more. Thank you.
    Ms. White. Thank you very much. Thank you.
    Chairman Shelby. The meeting is adjourned.
    [Whereupon, at 10:57 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                  PREPARED STATEMENT OF MARY JO WHITE
               Chair, Securities and Exchange Commission
                             June 14, 2016
                             
                             
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       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
                       FROM MARY JO WHITE

Q.1. With respect to delegations of authority:
    Are all delegations of authority made public? If so, please 
provide a complete list of all delegations or a Web address 
where that information can be obtained.
    How many delegations of authority are currently in place?
    Once the Commission has voted to delegate its authority to 
staff, how are you and your fellow Commissioners made aware of 
the staff's use of that authority?
    If the Chair is recused on a specific matter, who is 
accountable for the staff's use of delegated authority?
    Are there any formal or informal delegations of authority 
to staff not directly named in the delegation of authority, and 
if so, how many? Please provide a specific list of any such 
formal and informal delegation.
    Would you support an SEC review of existing delegations, 
including an analysis of their appropriateness?
    How many SEC staff have the ability by means of delegated 
authority to issue subpoenas?

A.1. In light of the breadth of the Commission's extensive 
responsibilities, section 4A(a) of the Securities Exchange Act 
of 1934 (Exchange Act) authorizes the Commission ``to delegate, 
by published order or rule, any of its functions to a division 
of the Commission, an individual Commissioner, an 
administrative law judge, or an employee or employee board, 
including functions with respect to hearing, determining, 
ordering, certifying, reporting, or otherwise acting as to any 
work, business, or matter.'' The section prohibits the 
delegation of the function of general rulemaking or the making 
of any rule pursuant to section 19(c) of the Exchange Act.
    The following table provides links to the Commission's 
delegations of authority that appear in the Code of Federal 
Regulations:
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    In addition, the Commission has delegated to an individual 
Commissioner, designated as the Commission's ``duty officer'' 
by the Chairman from time to time, all of the functions of the 
Commission, other than general rulemaking or the making of any 
rule pursuant to section 19(c) of the Exchange Act. 17 CFR 
200.43.
    To facilitate the performance of delegated functions, 
section 4B of the Exchange Act authorizes the Chair to assign 
personnel to perform functions that have been delegated by the 
Commission to Commission personnel. Specifically, section 4B 
provides that ``there are hereby transferred from the 
Commission to the Chairman of the Commission the functions of 
the Commission with respect to the assignment of Commission 
personnel . . . to perform such functions as may have been 
delegated by the Commission to the Commission personnel . . . 
pursuant to section 4A of this title.'' Under this authority, 
the Chair has assigned specified staff, under the direction of 
the person with delegated authority, to perform certain of the 
functions that have been delegated by the Commission.
    Among the delegations of authority, the Commission has 
delegated to the Director of the Division of Enforcement the 
authority to designate officers empowered to issue subpoenas in 
the course of investigations instituted by the Commission 
pursuant to section 19(c) of the Securities Act of 1933, 
section 21(b) of the Exchange Act, section 42(b) of the 
Investment Company Act of 1940, and section 209(b) of the 
Investment Advisers Act of 1940. The Commission has delegated 
similar authority to the Director of the Division of Trading 
and Markets and the General Counsel with respect to 
investigations instituted pursuant to section 21 of the 
Exchange Act. Pursuant to section 4B, the Chair has assigned 
specified persons to perform these delegated functions under 
the direction of the Director of the Division of Enforcement, 
the Director of the Division of Trading and Markets, and the 
General Counsel, as applicable.
    The staff is accountable for any exercise of delegated 
authority through the statutory power of any one Commissioner 
to request a review of an action taken by delegated authority. 
Specifically, section 4A(b) of the Exchange Act provides that 
the Commission retains a discretionary right to review any 
action taken by delegated authority, upon its own initiative or 
upon the petition of a party to or intervenor in such action, 
within such time and in such manner as the Commission by rule 
shall prescribe. Under the Commission's rules, the Commission 
may, on its own initiative, order review of any action made by 
delegated authority at any time, except that where there are 
one or more parties to the matter, such review shall not be 
ordered more than 10 days after the action. 17 CFR 201.431(c). 
The vote of one member of the Commission, conveyed to the 
Secretary, is sufficient to bring a matter before the 
Commission for review. In addition, a party to an action made 
pursuant to delegated authority or a person aggrieved by an 
action taken by delegated authority may seek Commission review 
of the action by filing a written notice of intention to 
petition for review. 17 CFR 201.430.
    Given the breadth and scope of the Commission's vast 
responsibilities, and the need for timely action and responses 
to market developments, I believe that the framework and 
subject of staff delegations have been appropriately drawn by 
the Commission. But, as I have previously advised my fellow 
Commissioners, I am receptive to reconsidering particular 
delegations of authority that may no longer be appropriate, and 
to considering whether there are new areas where additional 
delegations may be appropriate.

Q.2. As a follow up to my question at the hearing, please 
provide specific examples to the following question:

        You have often stated that the SEC is an independent 
        agency. While one can expect some split votes because 
        of the way the Commission is set up, there have been 
        many party-line 3-2 and 2-1 votes under your 
        chairmanship. By comparison, according to the press, 
        former Chairman Breeden never had a 3-2 vote, and 
        former Chairman Levitt rarely would take a matter to a 
        vote unless he knew he had a 5-0 vote. Are there any 
        areas that you can work on cooperatively with the other 
        two Commissioners to reach a unanimous decision? Please 
        provide specific examples.

A.2. While I believe that it is generally preferable for 
Commission decisions to be unanimous--and we strive for that--
each Commissioner brings his or her unique perspective to 
matters that come before the agency, and I cannot predict, nor 
should I dictate, how each member will vote on each matter that 
comes before the Commission. And, as I indicated at the 
hearing, a number of our nonunanimous votes during my tenure 
have occurred on mandated rulemakings to implement certain of 
the provisions of the Dodd-Frank Act, on which Commissioners 
continue to have very different views. Nevertheless, during my 
tenure at the SEC, the Commission has reached unanimous 
decisions on the majority of matters that have come before it, 
including on rulemakings.
    Most recently, for example, the Commission voted 
unanimously in August to approve final rules to enhance the 
information reported by investment advisers and rule amendments 
to provide authorities with access to data obtained by 
security-based swap data repositories. The month before, at the 
Commission's open meeting on July 13, 2016, the Commission 
voted unanimously to approve all four rulemakings under 
consideration, including:

    final rules and guidance under Title VII of the 
        Dodd-Frank Act related to the reporting and 
        dissemination of security-based swap transaction data;

    proposed rules that for the first time would 
        require broker-dealers to disclose specific data 
        regarding order handling information;

    proposed amendments to update certain disclosure 
        provisions by eliminating redundant, overlapping, 
        outdated, or superseded requirements due to changes in 
        rules, accounting principles, and technology; and

    amendments to the Commission's rules of practice 
        applicable to administrative proceedings.

    This year, the Commission also has voted unanimously for, 
among other things:

    proposed rules for investment adviser business 
        continuity and transition plans;

    final rules requiring security-based swap dealers 
        and major security-based swap participants to provide 
        trade acknowledgments and to verify those trade 
        acknowledgments in security-based swap transactions;

    proposed rules to revise the property disclosure 
        requirements for mining registrants;

    proposed rules to amend the definition of ``smaller 
        reporting company'' as used in our rules and 
        regulations;

    proposed amendments to address the covered broker-
        dealer provisions under Title II of the Dodd-Frank Act;

    final rules governing certain security-based swap 
        transactions connected with a non-U.S. person's dealing 
        activity in the United States;

    final rules for changes to Exchange Act 
        registration requirements to implement Title V and 
        Title VI of the JOBS Act;

    a concept release on business and financial 
        disclosures required by Regulation S-K; and

    interim final rules amending certain issuer 
        disclosure forms (Forms 10-K, S-1, and F-1) and 
        providing for a summary of Form 10-K, to implement 
        provisions of the Fixing America's Surface 
        Transportation (FAST) Act.

    I also note that this is only a partial list--since I have 
been Chair, there have been many other Commission matters, 
including the vast majority of votes on initiating or settling 
enforcement matters, on which the Commission has acted 
unanimously.

Q.3. As a follow up to my question at the hearing, please 
provide specific examples to the following question:

        There have been concerns raised by the public as well 
        as Members of this Committee about repeated violations 
        by SEC registered entities. Two years ago, a former SEC 
        Commissioner stated that, with respect to the most 
        egregious and repeated violations of our securities 
        laws and regulations, ``we need to ask ourselves a 
        fundamental question: should the violating entity 
        retain the privilege of participating in our capital 
        markets?'' In your opinion, when is it appropriate for 
        the SEC to exercise its ability to deregister an 
        entity? Please provide a specific example of what you 
        would consider to be a valid cause for deregistration.

A.3. The SEC has broad authority under the Securities Exchange 
Act of 1934 (Exchange Act) and Investment Advisers Act of 1940 
(Advisers Act) to sanction regulated entities for a variety of 
misconduct if it finds that the sanction is in the public 
interest. If a regulated entity engages in misconduct, such as 
willfully violating, or willfully aiding and abetting a 
violation of, the securities laws, or is enjoined or convicted 
of certain specified offenses, the Commission is authorized to 
pursue a variety of sanctions against that entity. These 
sanctions include suspending or revoking a regulated entity's 
registration. See Section 15(b)(4) of the Exchange Act and 
Section 203(e) of the Advisers Act. Revoking a registered 
entity's registration is the most severe sanction available to 
the Commission.
    The Commission must justify any sanction it imposes by 
finding that the sanction is necessary to protect the public 
interest. In determining whether a sanction is in the public 
interest--including revoking a registered entity's 
registration--the Commission looks to a broad range of factors. 
The factors are: (1) the egregiousness of the respondent's 
actions; (2) whether the violations were isolated or recurrent; 
(3) the degree of scienter; (4) the sincerity of the 
respondent's assurances against future violations; (5) the 
respondent's recognition of the wrongful nature of his or her 
conduct; and (6) the likelihood that the respondent's 
occupation will present opportunities for future violations. 
See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd 
on other grounds, 450 U.S. 91 (1981). The determination is a 
flexible one and no single factor is controlling. A Commission 
Order revoking an entity's registration is made in an 
administrative proceeding in which the entity may contest the 
allegations made against it and the proposed sanctions. The 
Commission's determination to revoke an entity's registration 
is appealable to the Federal appeals courts.
    The Commission has revoked the registration of registered 
entities in cases involving egregious misconduct, such as 
recurring or systematic violations of the antifraud provisions. 
For example, the Commission recently issued an opinion revoking 
an investment adviser's registration and barring its principal 
for recurring violations of the Advisers Act's antifraud 
provisions. See In the Matter of Edgar R. Page and PageOne 
Financial, Inc., Admin. Proc. File No. 3-13037, Advisers Act 
Release No. 4400 (May 27, 2016), https://www.sec.gov/
litigation/opinions/2016/ia-4400.pdf. In determining that the 
revocation of the investment adviser's registration was in the 
public interest, the Commission noted the egregiousness and 
recurring nature of the conduct and found that the firm 
presented a significant risk of future misconduct. See id. at 
15-17. \1\
---------------------------------------------------------------------------
     \1\ See also ``In the Matter of J.S. Oliver Capital Mgmt. L.P., 
and Ian O. Mausner, Admin.'' Proc. File No. 3-15446, Exchange Act 
Release No. 78098 (June 17, 2016), https://www.sec.gov/litigation/
opinions/2016/33-10100.pdf (Commission revoked investment adviser's 
registration and barred its principal where respondents repeatedly 
violated the antifraud provisions by systematically fraudulently 
allocating trades and failing to disclose material information to 
investors).

Q.4. In a speech earlier this year you stated that the SEC is 
``engaged with our fellow financial and consumer protection 
regulators, including the Department of Treasury, the Federal 
Reserve, the CFPB, OCC, FTC, and FDIC, to develop a broader 
understanding of the online marketplace lending industry, and 
regulatory initiatives that would enhance investor, consumer 
and borrower protections.'' Please explain what role the SEC 
has had in developing regulatory initiatives in the online 
marketplace lending sphere and describe the SEC's future plans 
---------------------------------------------------------------------------
in this area.

A.4. As in other subject areas, the Commission's role in the 
area of online marketplace lending is the protection of 
investors in connection with the offer and sale of securities. 
Obtaining money from investors to fund borrower loans through 
an online lending platform involves the offer and sale of 
securities. The Commission does not oversee the lending 
activities of online lenders and extensions of credit.
    Commission staff has engaged in discussions with other 
agencies and the Treasury Department to keep apprised of 
developments in the marketplace and to enhance others' 
understanding of how the Federal securities laws apply to these 
activities. I support the continuation of the interagency staff 
working group to help determine whether regulatory initiatives 
would be appropriate.

Q.5. I have previously raised concerns about the accountability 
and transparency of the Financial Stability Board (FSB). The 
FSB is not a U.S. regulator, it is not accountable to Congress 
or the American people, and yet it issues directives that U.S. 
regulators often adopt in some form. As the Chair of the SEC, 
you are a member of the FSB Plenary. Please provide a list of 
all FSB Plenary meetings and any other FSB meeting that you 
have been invited to attend or participate in, annotating which 
ones you attended and/or participated in person, telephonically 
or not at all. For the last category, please provide the names 
and titles of SEC staff that participated or attended in your 
place. If you are unable to attend an FSB meeting in person, 
have you considered sending another Commissioner, and if not, 
why not?

A.5. The FSB has a number of committees whose meetings I, 
another Commissioner, or senior SEC staff attend. With the 
exception of the first meeting after I joined the SEC held in 
April 2013, I have personally participated in all of the 
meetings of the FSB Steering Committee, which is the leadership 
group within the FSB. Prior to my tenure as Chair, Chairman 
Shapiro had Commissioner Elisse Walter attend such meetings, as 
she did the April 2013 meeting. In another change from prior 
practice, I or, at my request, another Commissioner has also 
personally attended nearly all board meetings of IOSCO. With 
respect to meetings of the other committees of the FSB, 
including the Plenary, I have continued the existing practice 
of having SEC senior staff attend.
    Members of the SEC staff attend the FSB Plenary and 
meetings of the standing committees in which the SEC 
participates, which are: (i) the Standing Committee on 
Supervisory and Regulatory Cooperation (SRC); (ii) the Standing 
Committee on Assessment of Vulnerabilities (SCAV); and (iii) 
the Standing Committee on Standards Implementation (SCSI).
    Currently, meetings of the Plenary and the SRC are attended 
by Paul Leder (Leder), Director of the Office of International 
Affairs (OIA), and meetings of the SCAV, which the SEC joined 
in 2015, are attended by Mark Flannery (Flannery), Director of 
the Division of Economic and Risk Analysis (DERA). Meetings of 
the SCSI are attended by Katherine Martin (Martin), Associate 
Director in the Office of International Affairs.
    Below is a list of the FSB Steering Committee, Plenary, and 
standing committee meetings I, another Commissioner, or an SEC 
staff member attended during my time as SEC Chair. Meetings 
where attendance was by phone are noted by an asterisk.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



Q.6. A recent news article stated that ``passive investing is 
taking over the money-management world'' and as a result, 
``mutual funds are facing extinction.'' Is the SEC studying 
this issue, and if so, when do you expect the results of that 
study? If not, what is the SEC doing to permit innovation and 
competition to thrive in this space? Do you anticipate to have 
any legislative recommendations for Congress to consider?

A.6. The Commission and its staff generally monitor trends 
within the asset management industry, including those related 
to mutual funds and exchange-traded funds (ETFs). Recent 
industry data suggests an increasing trend towards passive 
investing. While overall investor demand for mutual funds 
declined in 2015, industry data indicates that demand for both 
index-based mutual funds and index-based ETFs has increased. 
\2\ The Commission staff generally does not believe that this 
recent trend toward passive investing--which may or may not 
continue over the long term--will eliminate the role in the 
investment company marketplace for mutual funds and ETFs, 
whether passively or actively managed, as each product line 
presents its own relative set of advantages and disadvantages 
to different investor groups.
---------------------------------------------------------------------------
     \2\ See generally, Lipperus U.S. Fund Flows, http://
www.lipperusfundflows.com; Morningstar Direct U.S. Asset Flows Update: 
Data through Dec. 31, 2015, U.S. Mutual Funds and Exchange-Traded 
Products (Jan. 15, 2016), http://corporate.morningstar.com/US/
documents/AssetFlows/AssetFlowsJan2016.pdf; and Investment Company 
Institute, 2016 Investment Company Factbook 26-30 (2016), https://
www.ici.org/pdf/2016_factbook.pdf.
---------------------------------------------------------------------------
    The Commission's mission is to protect investors, maintain 
fair, orderly, and efficient markets, and facilitate capital 
formation. Consistent with its mission, the Commission 
continues to evaluate and, as appropriate, approve requests for 
exemptive relief for new and novel investment products, 
including ETFs. The Commission evaluates all exemptive 
application requests to operate such investment products under 
the standards prescribed by the Investment Company Act of 
1940--that is, such exemption must be necessary or appropriate 
in the public interest and consistent with the protection of 
investors and the purposes fairly intended by the policy and 
provisions of the Investment Company Act. The Commission has 
approved, over the years, a number of exemptive applications 
under this statutory exemptive authority, including 
applications submitted by sponsors to operate various types of 
actively managed ETFs.
    I do not anticipate the Commission making legislative 
recommendations regarding ETFs at this time.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                       FROM MARY JO WHITE

Q.1. At the June 14 hearing, you were asked about the 
legislation introduced in the House of Representatives 
regarding Business Development Companies (BDCs) and your 
investor protection concerns with respect to the changes that 
would increase the leverage used by BDCs. Specifically, you 
were asked why you are particularly concerned by the increase 
in leverage for BDCs when investors have access to other 
investments with leverage, including securities purchased on 
margin, listed options, or shares of banks that operate on a 
leveraged basis.
    For clarification, please describe any limitations on the 
purchase of those investments, as well as any limitations on 
similar instruments such as 3x leveraged exchange traded funds. 
Please include in your discussion any regulatory requirements 
or guidance, or stock exchange regulations, such as options or 
margin account approval, or limitations on margining low-priced 
or illiquid shares, that broker-dealers must comply with or 
consider for clients who wish to trade those instruments.
    In addition, you mentioned that BDC shares are 
predominately held by retail investors. Based on the most 
recent data available, please provide the portion of investors 
in BDC shares and listed options that are ``retail'' investors. 
Also, please provide data, to the extent available, of the 
percentage of retail investors that have brokerage accounts 
authorized to use margin. Finally, please discuss any investor 
protection concerns that might exist in an initial offering of 
BDC shares aimed at retail investors.

A.1. As entities regulated under the Investment Company Act of 
1940 (1940 Act), BDCs, as well as other types of funds, such as 
mutual funds, closed-end funds, and exchange-traded funds 
(ETFs), are subject to statutory provisions and regulations 
that are designed to protect investors. There are also various 
regulatory requirements with which investment advisers and 
broker-dealers must comply when making a recommendation in 
connection with a securities transaction or investment strategy 
involving securities, including those involving investments in 
BDCs or ETFs and those using options or a margin account.
    Investment Companies. The 1940 Act was enacted, in part, to 
provide ``small investors'' with ``a regulated institution for 
the investment of their savings.'' \1\ Many of the 1940 Act's 
provisions correspond to abuses that contributed to the rapid 
decline in the value of closed-end investment companies at the 
end of the 1920s. Section 18 (which is applicable to BDCs), for 
example, was intended to protect investors from abuses 
associated with complex capital structures, including excessive 
leverage. \2\
---------------------------------------------------------------------------
     \1\ See H.R. Rep. No. 76-2639, at 10 (1940). See also S. Rep. No. 
76-1775, at 12 (1940). Because the Act was enacted, in part, to provide 
``small investors'' with ``a regulated institution for the investment 
of their savings,'' the 1940 Act includes far more extensive 
substantive regulation--e.g., prohibitions on transactions between an 
investment company and its affiliates--than the other Federal 
securities laws.
     \2\ The section balances the interests of fund shareholders and 
the holders of senior securities--e.g., preferred stock or debt 
securities issued by the fund. Section 1(b) of the 1940 Act states that 
the national interest is adversely affected ``when investment companies 
by excessive borrowing and the issuance of excessive amounts of senior 
securities increase unduly the speculative character of their junior 
securities [i.e., common stock].'' 15 U.S.C. 80a-1(b). Section 1(b) 
further states that the Act is to be interpreted ``to mitigate and, so 
far as is feasible, to eliminate the conditions enumerated in this 
section which adversely affect the national public interest and the 
interest of investors.'' Id.
---------------------------------------------------------------------------
    Congress created BDCs in 1980 as a specialized type of 
closed-end investment company operated for the purpose of 
providing capital for small, growing, and financially troubled 
domestic operating companies. Congress recognized the need to 
``avoid compromising needed protections for investors in the 
name of reducing regulatory burdens.'' \3\ Under the 1940 Act, 
the regulation of BDCs is the same as the regulation of 
registered closed-end funds with modifications that generally 
allow BDCs greater operating flexibility. \4\
---------------------------------------------------------------------------
     \3\ See H.R. Rep. No. 96-1341, at 22 (1980); S. Rep. No. 96-958, 
at 5 (1980).
     \4\ A BDC, for example, may issue more debt securities as a 
percentage of total assets than other closed-end funds, may issue debt 
in multiple classes, may issue long-term options and warrants, and is 
subject to relaxed regulation of transactions with affiliates. See 
Investment Company Act 61(a)(1), 61(a)(3), and 57(d), 15 U.S.C. 
80a-60(a)(1), -60(a)(2), -(56)(d).
---------------------------------------------------------------------------
    From my perspective, increasing leverage for BDCs would 
give rise to significant investor protection concerns. Section 
18 of the 1940 Act requires open-end funds (including mutual 
funds and ETFs) and closed-end funds to comply with 300 percent 
asset coverage requirements. \5\ In comparison, BDCs must 
comply with a 200 percent asset coverage requirement for senior 
securities representing indebtedness (i.e., debt) and senior 
securities that are stock (i.e., preferred stock). \6\
---------------------------------------------------------------------------
     \5\ Open-end funds are prohibited from issuing or selling any 
``senior security'' other than borrowing from a bank and must maintain 
300 percent asset coverage after any such borrowing. Investment Company 
Act 18(f)(1), 15 U.S.C. 80a-18(f)(1). Section 5(a)(1) of the 1940 Act 
defines ``open-end company'' as ``a management company which is 
offering for sale or has outstanding any redeemable security of which 
it is the issuer.'' 15 U.S.C. 80a-5(a)(1). Closed-end funds registered 
under the 1940 Act are also required to have 300 percent asset coverage 
for debt, but their ability to issue senior securities representing 
indebtedness is not limited to bank borrowings, and they may issue 
senior securities that are stock, subject to certain limitations and a 
more liberal 200 percent asset coverage requirement, with both asset 
coverage requirements being measured at the time of issuance. Unlike 
open-end funds, BDCs and closed-end funds are required to maintain the 
asset coverage at the time of issuance of senior securities and are 
subject to limits on distributions to holders of the common stock and 
repurchases of common stock if the asset coverage requirements are not 
met. Investment Company Act 18(a)(1)(A), 15 U.S.C. 80a-18(a)(1)(A). 
Section 5(a)(2) of the Investment Company Act defines ``closed-end 
company'' as ``any management company other than an open-end company.'' 
15 U.S.C. 80a-5(a)(2).
     \6\ See Investment Company Act 61(a)(1), 15 U.S.C. 80a-60(a)(1).
---------------------------------------------------------------------------
    For example, a BDC with assets worth $100 and no 
liabilities can borrow $100 for $200 in total assets. If the 
value of those assets subsequently falls 25 percent, then the 
BDC holds assets worth $150 but still owes the lender $100. 
Thus, the BDC's shareholders' equity dropped from $100 to $50. 
Shareholders' equity declined by 50 percent although the value 
of the BDC's assets declined only 25 percent, and the asset 
coverage fell from 200 percent to 150 percent.
    Reducing the required asset coverage, for example to 150 
percent, would permit that same BDC to borrow $200, effectively 
doubling its leverage, for $300 in total assets. If the value 
of those assets subsequently falls 25 percent, then the BDC 
holds assets worth $225 but owes the lender $200. Thus, the 
BDC's shareholders' equity dropped from $100 to $25. 
Shareholders' equity declined by 75 percent although the value 
of the BDC's assets declined by 25 percent, and the asset 
coverage fell from 150 percent to 112.5 percent.
    Increasing BDC leverage increases the potential losses for 
both holders of BDC common stock and BDC debt and preferred 
stock. My concern is heightened because BDC common stock is 
predominantly held by retail investors. Retail investors 
account for nearly 70 percent of BDC common stock ownership. 
\7\ In addition, retail investors account for an unknown 
percentage of debt securities issued by BDCs. \8\
---------------------------------------------------------------------------
     \7\ This calculation is an average, weighted by total assets, of 
72 active BDCs with securities registered under the Securities Act of 
1933. Of this number, 21 are nontraded BDCs, and 51 are traded on 
securities exchanges or over the counter. Commission staff calculated 
this average internally using publicly available information on 
institutional ownership. The institutional ownership percentage for 
each BDC was subtracted from 100 percent to determine the retail 
ownership percentage. A recent report on the BDC industry states that 
the average institutional ownership of 46 exchange traded BDCs is 24.9 
percent. This percentage is a simple average of the institutional 
ownership percentage for each of the 46 BDCs and excludes ownership by 
brokers and private bank/wealth management firms, as reported in 
FactSet, a data service. See BDC Industry Investment Banking Weekly 
Newsletter (Raymond James), July 15, 2016.
     \8\ For example, since 2012, over a dozen BDCs have issued ``baby 
bonds'' (i.e., fixed income securities issued in small denominations 
and traded on a securities exchange) in $25 denominations. This 
information is based on Commission staff review of Form N-2 filings by 
BDCs with the Commission. BDCs register under the Securities Act of 
1933 public offerings of their securities on Form N-2.
---------------------------------------------------------------------------
    Use of leverage in funds continues to be a significant 
focus for the Commission and staff. In December 2015, the 
Commission proposed a new rule regarding the use of derivatives 
by mutual funds, ETFs, closed-end funds, and BDCs. \9\ SEC 
staff is also focusing resources on examinations of ETFs' 
compliance with applicable regulatory requirements, sales 
strategies, trading practices, and disclosures, including 
excessive portfolio concentration, primary and secondary market 
trading risks, adequacy of risk disclosure, and suitability, 
particularly in niche or leveraged/inverse ETFs. \10\
---------------------------------------------------------------------------
     \9\ See ``Use of Derivatives by Registered Investment Companies 
and Business Development Companies'', Investment Company Act Release 
No. 31933, 80 FR 80883 (Dec. 28, 2015), https://www.sec.gov/rules/
proposed/2015/ic-31933.pdf.
     \10\ See ``Office of Compliance Inspections and Examinations, SEC, 
Examination Priorities for 2016'' (Jan. 11, 2016), https://www.sec.gov/
about/offices/ocie/national-examination-program-priorities-2016.pdf. 
Leveraged ETFs are highly specialized investment vehicles that seek to 
replicate the performance of an underlying index each day. For example, 
a 3x ETF is designed to produce a daily return equal to three times the 
return of a specified index. Thus, a 3x ETF can magnify the amount of 
an investor's gain or loss. Leveraged ETFs are designed to achieve 
their stated objectives on a daily basis; they are not designed for buy 
and hold investors. See ``SEC Office of Investor Education and Advocacy 
and Financial Industry Regulatory Authority, Investor Alert on 
Leveraged and Inverse ETFs: Specialized Products With Extra Risks for 
Buy-and-Hold Investors'' (Aug. 18, 2009), https://www.sec.gov/investor/
pubs/leveragedetfs-alert.htm.
---------------------------------------------------------------------------
    Investment Advisers and Broker-Dealers. Investment advisers 
and broker-dealers must comply with various regulatory 
requirements when making a recommendation in connection with a 
securities transaction or investment strategy involving 
securities, including strategies utilizing derivatives and 
leverage. For example, investment advisers must make a 
reasonable determination that the investment advice provided is 
suitable for the client based on the client's financial 
situation and investment objectives. \11\ Similarly, a broker-
dealer recommending particular investments has an obligation to 
only make suitable securities recommendations to their 
customers, taking into account the particular circumstances and 
investment goals of each investor. \12\ Heightened suitability 
obligations, as well as enhanced account opening requirements, 
apply to listed options. \13\ In addition, FINRA guidance 
reminds members that leveraged ETFs typically are unsuitable 
for retail investors who plan to hold them for longer than one 
trading session, particularly in volatile markets, \14\ and 
that members have certain obligations in connection with the 
sale or recommendation of complex investment products, 
including derivatives. \15\
---------------------------------------------------------------------------
     \11\ See ``Status of Investment Advisory Programs under the 
Investment Company Act of 1940'', Investment Company Act Release No. 
22579, 62 FR 15098 (Mar. 31, 1997), https://www.sec.gov/rules/final/ic-
22579.txt (citing ``Suitability of Investment Advice Provided by 
Investment Advisers'', Investment Advisers Act Release No. 1406, 59 FR 
13464 (Mar. 22, 1994)).
     \12\ See, e.g., FINRA, ``Regulatory Notice 12-55: Suitability'' 
(Dec. 2012), http://www.finra.org/sites/default/files/NoticeDocument/
p197435.pdf (providing guidance on FINRA's suitability rule); FINRA, 
``Regulatory Notice 11-25: Know Your Customer and Suitability'' (May 
2011), http://www.finra.org/sites/default/files/NoticeDocument/
p123701.pdf (providing guidance on new FINRA Rule 2111). In addition, 
there are enhanced suitability and disclosure obligations in connection 
with penny stock transactions. See Exchange Act Section 15(h), 15 
U.S.C. 78o(h) and Exchange Act Rules 3a51-1 and 15g-1 through 15g-100, 
17 CFR 240.3a51-1, .15g-1 to 100. A small number of BDCs disclose 
that because of their stock price, they are subject to the penny stock 
rules.
     \13\ A broker-dealer is also subject to FINRA Rule 2360(b)(16) 
with respect to its suitability obligations and the opening of an 
options account. More specifically, FINRA Rule 2360(b)(16) requires its 
members to exercise due diligence to ascertain the essential facts 
relative to a customer, his or her financial situation and investment 
objectives when considering whether to open an account for that 
customer to trade options. In addition, FINRA Rule 2360(b)(19) subjects 
its members' recommendations to engage in options trading (including 
whether to open an account and the subsequent recommendations for that 
account) to heightened suitability obligations.
     \14\ See FINRA, ``Regulatory Notice 09-31: Non-Traditional ETFS'' 
(June 2009), http://www.finra.org/sites/default/files/NoticeDocument/
p118952.pdf. See also FINRA, ``Regulatory Notice 12-03: Complex 
Products'' (Jan. 2012), http://www.finra.org/sites/default/files/
NoticeDocument/p125397.pdf (providing guidance to firms about 
heightened supervision of complex products, including, among others, 
inverse or leveraged ETFs).
     \15\ See FINRA, ``Regulatory Notice 12-03: Complex Products'' 
(Jan. 2012), http://www.finra.org/sites/default/files/NoticeDocument/
p125397.pdf. See also NASD, ``Notice to Members 03-71: Non-Conventional 
Investments'' (Nov. 2003), https://www.finra.org/sites/default/files/
NoticeDocument/p003070.pdf (reminding members of their obligations when 
selling ``nonconventional investments,'' such as asset-backed 
securities, distressed debt and derivative products).
---------------------------------------------------------------------------
    Securities margin accounts are also subject to a 
comprehensive system of regulation. \16\ In general, any equity 
security that is listed on a national securities exchange is 
margin eligible. However, broker-dealers often have more 
restrictive house-margin requirements where they may not extend 
margin on certain securities such as low-priced equities. The 
Commission staff does not maintain statistics on the number of 
retail investors with margin accounts. We also understand that 
not all retail investors who open margin accounts actually 
purchase shares on margin (e.g., some investors may view such 
accounts as overdraft protection).
---------------------------------------------------------------------------
     \16\ See, e.g., Federal Reserve's Regulation T, 12 CFR 220.1 to 
220.132; Exchange Act Rule 10b-16, 17 CFR 240.10b-16; FINRA Rules 2360 
(Options); FINRA Rule 2264 (Margin Disclosure Statement); FINRA Rule 
4210 (Margin Requirements). See also FINRA, ``Regulatory Notice 11-15: 
Low-Priced Equity Securities'' (Apr. 2011), http://www.finra.org/sites/
default/files/NoticeDocument/p123431.pdf (reminding firms to consider 
risks associated with low-priced equity securities when extending 
credit in a strategy-based or portfolio margin account); FINRA, 
``Regulatory Notice 09-53: Non-Traditional ETFS'' (Aug. 2009), http://
www.finra.org/sites/default/files/NoticeDocument/p119906.pdf (outlining 
increased margin requirements for leveraged ETFs and associated 
uncovered options).

Q.2. Please clarify your understanding of the jurisdiction of 
the Department of Labor (DOL) with respect to retirement 
accounts that are covered by the Employee Retirement Income 
Security Act and its related rules and the SEC's jurisdiction 
over broker-dealers or investment advisers that service those 
accounts. To the extent it is relevant, please elaborate on the 
comment you made about how the historic overlap of SEC and DOL 
---------------------------------------------------------------------------
jurisdiction has been managed.

A.2. The DOL and the SEC are separate agencies with their own 
perspectives, jurisdiction, and statutory authority. The SEC 
oversees and enforces the Federal securities laws, including 
the Exchange Act with respect to broker-dealers and the 
Investment Advisers Act of 1940 with respect to investment 
advisers. In general, a ``broker'' is any person engaged in the 
business of effecting transactions in securities for the 
account of others, a ``dealer'' is any person engaged in the 
business of buying and selling securities for such person's own 
account, and an ``investment adviser'' is any person engaged in 
the business of advising others regarding securities for 
compensation. \17\
---------------------------------------------------------------------------
     \17\ See Exchange Act 3(a)(4)-(5), 15 U.S.C. 78c(a)(4)-(5); 
Investment Advisers Act 202(a)(11), 15 U.S.C. 80b-2(a)(11).
---------------------------------------------------------------------------
    I am not in a position to describe in detail DOL's 
jurisdiction under the Employee Retirement Income Security Act 
of 1974 (ERISA) or the Internal Revenue Code of 1986. In 
general terms, however, the statutes set minimum standards for 
employee benefit plans and provide protections to plan 
participants, including by prescribing certain requirements and 
responsibilities for fiduciaries of those plans. \18\ A 
``fiduciary'' includes a person who exercises discretionary 
authority or control with respect to the management of a plan 
or disposition of its assets, renders investment advice for a 
fee or other direct or indirect compensation, or has any 
discretionary authority or responsibility in the administration 
of a plan. \19\
---------------------------------------------------------------------------
     \18\ See, e.g., 29 U.S.C. 1104 (standard of care for 
fiduciaries).
     \19\ See 29 U.S.C. 1002(21) (definition of fiduciary).
---------------------------------------------------------------------------
    An SEC-regulated broker-dealer or investment adviser that 
works with accounts governed by these statutes must comply with 
their requirements in addition to what is demanded of the 
financial institution under the Federal securities laws. For 
example, advisory firms that provide advice as fiduciaries 
under both the ERISA and SEC regulatory regimes must ensure 
that their practices comply with the provisions for fiduciaries 
under both regimes, which may include steps to address 
differences between the two sets of requirements (e.g., 
different contract provisions for accounts subject to ERISA and 
accounts not subject to ERISA).
    The interplay between the DOL's regulations and the 
requirements under the Federal securities laws, and the 
application of different standards to the provision of 
investment advice to retail investors, are important issues. 
Consultation among the staff from the DOL and SEC has been 
important to manage any conflicts and issues that may arise 
related to the application of our separate regimes and 
mandates. For example, in 2011 staff from the Division of 
Investment Management issued a letter stating that disclosure 
to participants and beneficiaries of certain plan and 
investment-related information required by a rule under ERISA, 
including performance information, would be treated as 
satisfying the SEC's rules on mutual fund advertising, 
notwithstanding differences among the requirements. \20\ More 
recently, SEC staff consulted with DOL staff on the 
Commission's security-based swap business conduct rulemaking 
and the intersection of ERISA fiduciary status with the Dodd-
Frank Act business continuity provisions. \21\ Consultation 
will continue to be important as the DOL's new conflict of 
interest rule comes into effect.
---------------------------------------------------------------------------
     \20\ See U.S. Dept. of Labor, SEC No-Action Letter (Oct. 26, 
2011), www.sec.gov/divisions/investment/noaction/2011/dol102611-
482.htm.
     \21\ Business Conduct Standards for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, Exchange Act Release No. 
77617, 81 FR 29959, 29965-66 (May 13, 2016), https://www.sec.gov/rules/
final/2016/34-77617.pdf (clarifying that security-based swap dealers 
and major security-based swap participants would not be ERISA 
fiduciaries solely for complying with the Commission's external 
business conduct rules). See also 29 CFR 2510.3-21(c)(2) (providing 
that the provision of any advice to an employee benefit plan shall not 
cause a security-based swap dealer or major security-based swap 
participant to be deemed to be an ERISA fiduciary, where certain 
conditions are met).
---------------------------------------------------------------------------
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM MARY JO WHITE

Q.1. In a speech at Stanford you highlighted that fintech has 
``the potential to transform how our markets operate in 
virtually every respect--from streamlined market operations to 
more affordable ways to raise capital and advise clients.''
    I am interested in the approach the UK has taken to 
fintech, such as Project Innovate. Do you expect the SEC will 
explore ways to better understand fintech through roundtables 
and other outreach efforts?

A.1. The staff continues to monitor fintech developments in the 
securities industry and engage market participants to analyze 
the potential effect of new technologies on market efficiency, 
capital formation, and investor protection. This monitoring 
includes direct outreach to and discussions with industry 
participants, and staff is considering whether a roundtable or 
other more formal outreach mechanisms will foster staff's 
understanding of these issues.
    For example, established and new firms have been exploring 
the application of distributed ledger technology to potentially 
improve or replace existing processes across the infrastructure 
of the securities markets. Some of these firms appear to be 
developing applications that could be implemented in the 
clearance and settlement of securities. The staff has met with 
several of these firms to discuss their activity in this 
setting as well as consider potential regulatory implications. 
The Commission has also solicited comment on the utility of the 
new technology. For example, in response to a recent Advanced 
Notice of Proposed Rulemaking and Concept Release on transfer 
agent regulations, the Commission received industry feedback on 
the possible use of distributed ledger technology by transfer 
agents.

Q.2. In response to a question from Senator Toomey on Rule 18f-
4 and potential unintended consequences, you suggested that the 
SEC is reviewing the comment letters and working to improve the 
rule. I encourage you to consider the merits of the comment 
letters on how best to account for the actual amount of market 
risk exposure and work to tailor the rule accordingly.
    Can you commit to doing so as part of the rulemaking 
process?

A.2. To date, the Commission has received more than 180 comment 
letters on proposed Rule 18f-4, and Commissioners and members 
of the staff collectively have held more than 50 meetings with 
commenters and other interested parties to discuss the 
proposal. The staff is currently reviewing the comment letters, 
and the Commission will carefully consider all of them, 
including those urging the Commission to consider adjustments 
to the proposed rule's exposure limitations, as the Commission 
works to finalize Rule 18f-4.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                       FROM MARY JO WHITE

Q.1. Chair White, the Commission recently updated its 
interpretative release regarding automated quotations under 
regulation NMS to allow for delays in price quotations. As part 
of that release, the Commission announced that it would conduct 
a study within 2 years regarding the effects of any intentional 
access delays on market quality, including asset pricing, and 
report back to the Commission with the results of any 
recommendations. Based on that study, or earlier, the 
Commission stated that it will ``reassess whether further 
action is appropriate.''
    Which office at the Commission will be responsible for 
conducting the aforementioned study?
    What factors will the Commission be monitoring to determine 
if ``further action is appropriate'' before the aforementioned 
study is completed?
    What types of problems could arise due to the issuance of 
the updated interpretative release that could prompt the 
Commission to reassess its position?
    Given that the issue of delayed quotes raises fundamental 
concerns about the structure and efficiency of our financial 
markets, why did you decide to approve IEX's application rather 
than undertake a rulemaking?

A.1. In response to technological and market developments since 
the adoption of Regulation NMS in 2005, as well as novel 
proposals like IEX's exchange application, the Commission 
proposed and subsequently adopted an interpretation under 
Regulation NMS that ``immediate'' in the context of Regulation 
NMS does not preclude a de minimis intentional delay--i.e., a 
delay so short as to not frustrate the purposes of the trade-
through rule of Regulation NMS by impairing fair and efficient 
access to an exchange's quotations. The Commission sought 
public comment on its proposed update to its prior 
interpretation of ``immediate'' in Regulation NMS, publishing a 
draft for review and comment by investors, broker-dealers, and 
other interested parties. These comments were carefully 
reviewed and taken into account in preparing the final 
interpretation.
    The Commission's interpretation referenced a study to be 
completed by Commission staff within 2 years regarding the 
potential effects of intentional access delays on market 
quality, including price discovery. That effort will involve 
staff from the Commission's Division of Trading and Markets in 
cooperation with the Division of Economic and Risk Analysis.
    Examples of areas that staff may evaluate include potential 
impacts on the national best bid and offer for equity 
securities and volume and quotation characteristics of 
exchanges with an intentional access delay. Through these 
efforts, or earlier as it determines, the Commission will 
reassess whether further action is appropriate.
    As the Commission noted in its interpretation, however, 
markets and market participants already deal with short 
unintentional delays in the current system, generally as the 
result of geographic or technology latencies. IEX's single 
intentional access delay is within existing latencies 
experienced by market participants as they route orders between 
dispersed exchanges. At the same time, the importance of this 
issue requires careful scrutiny, and the Commission staff will 
gather data to inform the evaluation of any potential impact of 
any intentional access delays, including those established by 
IEX.

Q.2. According to some commentators, the Commission's recent 
approval of IEX's application to be a national securities 
exchange is vulnerable to court challenges.
    Did you consult with the Commission's general counsel about 
whether the Commission's order approving IEX's application was 
lawful? If so, what was the conclusion?

A.2. Included among the responsibilities of the Office of the 
General Counsel is the provision of legal counsel on regulatory 
actions such as this one, offering explanation and analysis of 
open legal questions as well as legal consequences of potential 
Commission determinations and any associated legal risks. As 
part of the standard process for considering such applications, 
the General Counsel's office was consulted and provided its 
guidance to the Division and the Commissioners' offices on a 
range of questions and on the action that the Commission 
ultimately undertook.

Q.3. Did you consider proceeding with a rulemaking to amend 
Regulation NMS rather than proceeding with a de facto amendment 
to Regulation NMS by approving the IEX's application to allow 
for intentionally delayed price quotations?

A.3. In connection with its order granting IEX's exchange 
registration application, the Commission did not amend any 
definition or rule of Regulation NMS. Rather, in response to 
technological and market developments since Regulation NMS was 
adopted in 2005, the Commission issued an updated 
interpretation of the word ``immediate'' as used in the 
definition of automated quotation in Rule 600(b)(3) of 
Regulation NMS.
    While the Commission did afford an opportunity for notice 
and comment by publishing a draft interpretation for comment, 
and did take the comments it received into consideration, it 
was not required to undertake a notice and comment rulemaking 
when updating its prior interpretation of its own regulation.

Q.4. The SEC's proposed rule to limit the use of derivatives in 
registered investment companies includes a requirement to 
calculate a fund's use of derivatives based on gross notional 
exposure. There is concern that this form of risk measurement 
may lead to the unintended consequence of overweighting to 
certain equities and moving away from commodities markets. 
Commodities markets are critical for owners of actual 
commodities who need liquid markets. Will you commit to 
addressing this concern as part of the rulemaking process?

A.4. The Commission will carefully consider all of the comment 
letters received as we work to finalize the proposed rule, 
including comment letters addressing the proposed rule's use of 
gross notional exposure. The proposed rule did not provide 
differing treatment for equity and commodity derivatives. In 
addition, as described in the proposing release, the Commission 
staff's analysis indicated that it should be possible for funds 
to pursue, in some form, almost all existing types of 
investment strategies in compliance with the proposed rule.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                       FROM MARY JO WHITE

Q.1. Shareholder voting practices have changed dramatically 
over the last decade. There is an increased use of proxy 
advisory firms to provide analysis and proxy voting 
recommendations. Today, two firms dominate the proxy advisory 
industry. In 2014, the SEC issued guidance creating oversight 
of proxy advisory firms for the first time.
    I would like to know what activities the SEC is undertaking 
to ensure this guidance is being followed?

A.1. Since the issuance of Staff Legal Bulletin 20, SEC staff 
has been monitoring the changes that have been implemented by 
proxy advisory firms and investment advisers in response to the 
staff guidance.
    The two largest proxy advisory firms now provide a 
description of their policies with regard to the disclosure of 
potential conflicts on their Web sites. In addition, while the 
Commission does not comment on specific examinations, the SEC's 
Office of Compliance Inspections and Examinations (OCIE) 
announced examination priorities for 2015, which, among other 
things, sought to examine select proxy advisory service firms, 
and how they make recommendations on proxy voting and how they 
disclose and mitigate potential conflicts of interest. OCIE's 
examination priorities for 2015 also included reviewing 
investment advisers' compliance with their fiduciary duty in 
voting proxies on behalf of investors. OCIE's efforts regarding 
this priority were incorporated into the ongoing Never-Before-
Examined Investment Company (NBE IC) Initiative launched in 
April 2015. The NBE IC Initiative was conducted as focused, 
risk-based examinations in a number of higher-risk areas, 
including compliance programs. As one of the areas to be 
reviewed within the compliance program, OCIE announced that it 
would review the funds' portfolio proxy voting policies and 
procedures.

Q.2. Do you believe proxy advisory firms use sufficient 
resources to perform proper due diligence in their research and 
vote recommendations?

A.2. The nature and amount of resources a firm uses to perform 
research and make recommendations is largely a business 
decision of the particular firm. A proxy advisory firm provides 
advice to investors about securities, not unlike numerous other 
types of analysts and advisors in the financial markets.
    As you know, some registered investment advisers may choose 
to retain proxy advisory firms to assist with the advisers' 
proxy voting duties. When considering whether to retain or 
continue retaining any particular proxy advisory firm to 
provide proxy voting recommendations, the SEC staff has stated 
that an adviser should ascertain, among other things, whether 
the proxy advisory firm has the capacity and competency to 
adequately analyze proxy issues, which could include, among 
other things, the adequacy and quality of the proxy advisory 
firm's staffing and personnel.

Q.3. How can SEC inspectors work to further ensure proxy 
advisory firms and their work receive proper examination, 
scrutiny, and is free of any conflicts of interest?

A.3. Proxy advisory firms that are registered investment 
advisers under the Investment Advisers Act of 1940 are subject 
to examination by OCIE. The SEC staff has historically 
conducted, and continues to conduct, examinations of registered 
investment advisers, evaluating many issues, including 
advisers' compliance with their fiduciary obligations and how 
they disclose and mitigate potential conflicts of interest.

Q.4. There has been several meetings conducted by the advisory 
committee the SEC has set up to look at equity market 
structures.
    Do you believe that reforms to the market structures should 
be comprehensive and significant or do you support a small and 
piecemeal reform approach?
    Are you satisfied with the advisory committee's results so 
far?
    What are the current goals of the advisory committee and 
how and when will you complete those goals?

A.4. Addressing the issues of our current market structure 
demands a continuous and comprehensive review that integrates 
targeted enhancements with an expansive consideration of 
broader changes. In February 2015, as part of our broader 
market structure work, the Commission established the Equity 
Market Structure Advisory Committee, comprised of diverse 
experts to consider specific initiatives and potential 
structural changes. The Committee was established to assist the 
Commission in its comprehensive reviews of the structure of the 
equity markets, and I have been very pleased with the progress 
of the Committee's work over the past year.
    The Committee as a whole has met six times to consider 
issues such as the operation of Regulation NMS, the impact of 
access fees and rebates widely used by stock exchanges, the 
regulatory structure of trading venues, and the impact of 
various market structure issues on customers. At the July 
meeting, the full Committee voted on recommendations from two 
of its subcommittees for an access fee pilot program and 
trading venue regulatory reforms related to NMS plan governance 
and self-regulatory organization proposals requiring technology 
changes. I expect that the staff will be considering all of 
these items and preparing its own recommendations for how the 
Commission should take account of the Committee's work in these 
areas. In particular, I expect that the staff will be working 
to develop plans for an access fee pilot program for the 
Commission's consideration.
    At the Committee's most recent meeting on August 2, the 
other two subcommittees presented their preliminary 
recommendations to the full Committee. Specifically, the Market 
Quality Subcommittee's recommendations focused on various 
market quality and safety features, such as limit up-limit down 
mechanisms and marketwide circuit breakers. The Customer Issues 
subcommittee focused on issues concerning retail investors, 
such as investor sentiment of equity market structure and 
modifications to Rules 605 and 606 of Regulation NMS.
    Maintaining and enhancing the high quality of the U.S. 
equity markets is one of the Commission's most important 
responsibilities. The Committee's work is an important part of 
that and is of great assistance in our efforts to ensure that 
the equity markets optimally meet the needs of investors and 
public companies.

Q.5. A few months ago Senator Crapo and I held a hearing 
looking at changes in the fixed-income markets and looking at 
how regulators should work to keep the fixed-income markets 
open and liquid. There are early signs that fixed-income 
markets are becoming more fragile and less liquid than they 
used to be. The U.S. Treasury Department has issued a request 
for information from industry participants to deepen their 
understanding about what is happening in the fixed-income 
markets and the Federal Reserve is also examining this issue.
    Because the mission at the SEC is to maintain fair, 
orderly, and efficient markets, I would like to know if the SEC 
recognizes the changes occurring in the fixed-income markets 
and do you believe that future rules and regulations should be 
evaluated for potential impacts on liquidity in the bond 
markets before implementation?

A.5. Commission staff actively monitors developments in the 
fixed-income markets, including changes in liquidity 
conditions, whether driven by market conditions, regulatory 
changes, or competitive forces. For example, in connection with 
implementation of the Volcker Rule, Commission staff, along 
with staffs of the Office of the Comptroller of the Currency, 
Federal Reserve Board, Federal Deposit Insurance Corporation, 
and the CFTC, monitors liquidity in the corporate bond market 
and provides quarterly reports to the House Committee on 
Financial Services.
    Before the Commission adopts or implements any rule or 
regulation, the initiative is carefully considered and 
evaluated, taking into account public input to inform our 
efforts. Among other things, this process allows for market 
participants to identify concerns they may have about the 
impact on liquidity. Any potential future rules or regulations 
impacting the fixed income markets under the Commission's 
jurisdiction would be subject to a similar process and would be 
considered and evaluated in light of the Commission's ongoing 
monitoring of evolution and developments in those markets.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                       FROM MARY JO WHITE

Q.1. Do you agree that competition among Nationally Recognized 
Statistical Rating Organizations (NRSROs) is important to 
protecting investors and that the SEC should seek to prevent 
entrenchment of the largest incumbent rating agencies in 
investor guidelines?

A.1. The Office of Credit Ratings, established pursuant to the 
Dodd-Frank Act, assists the Commission in executing its 
responsibility for protecting investors, promoting capital 
formation, and maintaining fair, orderly, and efficient 
markets. Congress stated that one of the objectives of the 
Credit Rating Agency Reform Act is to improve ratings quality 
by fostering competition in the credit rating agency industry, 
and we support Congress' objective in a number of ways. 
Pursuant to the Credit Rating Agency Reform Act, the staff 
reports on the state of competition annually as part of the 
Annual Report to Congress on NRSROs. As noted in the staff's 
December 2015 Annual Report to Congress on NRSROs, \1\ 
comparing the number of ratings outstanding for established 
NRSROs and newer (smaller) NRSROs may not provide a 
comprehensive picture of the state of competition as 
``outstanding'' ratings may not fairly reflect ``new issue'' 
rating activity. Instead, information relating to recent market 
share developments in the asset-backed securities rating 
category may provide a better gauge of how effectively newer 
entrants are competing with more established rating agencies. 
In that regard, some of the smaller NRSROs have built 
significant market shares in the asset-backed securities rating 
category, including U.S. commercial mortgage-backed securities. 
Additionally, some of the smaller NRSROs are rating newer asset 
classes, such as single-family rental securitizations and 
marketplace lending securitizations. With respect to preventing 
entrenchment of rating agencies in investor guidelines, as 
discussed below, to reduce investors' reliance on credit 
ratings, the Commission has adopted final amendments to remove 
references to credit ratings in approximately 30 rules or 
forms.
---------------------------------------------------------------------------
     \1\ ``Office Of Credit Ratings, SEC, Annual Report on Nationally 
Recognized Statistical Rating Organizations'' (Dec. 2015), https://
www.sec.gov/ocr/reportspubs/annual-reports/2015-annual-report-on-
nrsros.pdf.

Q.2. Will you commit to changing Rule 2a-7 to require a 
---------------------------------------------------------------------------
reversion in investor guidelines to the term ``any NRSRO''?

A.2. On September 16, 2015, the Commission adopted amendments 
to remove credit rating references in the principal rule that 
governs money market funds, Rule 2a-7 of the Investment Company 
Act of 1940, and in Form N-MFP, the form that money market 
funds use to report information to the Commission each month 
about their portfolio holdings. The amendments implemented 
section 939A of the Dodd-Frank Act, which requires the 
Commission to review its rules that require the use of an 
assessment of creditworthiness of a security or money market 
instrument and any references to or requirements in the rule 
regarding credit ratings, remove any reference to or 
requirement of reliance on credit ratings, and substitute in 
those rules other standards of creditworthiness that are 
determined as appropriate by the Commission. Under amended Rule 
2a-7, a money market fund may invest in a security only if the 
fund's board of directors (or its delegate, typically the 
fund's adviser) determines that the security presents minimal 
credit risks after analyzing, to the extent appropriate, 
certain prescribed factors.
    The amendments to Form N-MFP require a money market fund to 
disclose NRSRO ratings that the fund uses in its evaluations of 
portfolio securities. Specifically, a fund must disclose for 
each portfolio security any NRSRO rating that the fund's board 
of directors (or its delegate) considered in making its minimal 
credit risk determination, as well as the name of the NRSRO 
providing the rating. According to data submitted on Form N-MFP 
as of June 30, 2016, approximately 16 percent of money market 
funds report that they used NRSRO ratings in their credit risk 
evaluations of the funds' portfolio securities.

Q.3. What is your authority to regulate the investor guidelines 
of mutual funds and pension funds?

A.3. The Investment Company Act of 1940 (1940 Act) regulates 
the organization of investment companies, including mutual 
funds, which engage primarily in investing, reinvesting, and 
trading in securities, and whose securities are offered to the 
investing public. The 1940 Act was designed to protect 
investors from certain abuses and requires full and fair 
disclosure to the investing public of information about the 
fund, including about its investment objectives, financial 
condition, and its structure and operations, and prohibits an 
investment company from changing its fundamental investment 
policies without shareholder approval. The 1940 Act also limits 
funds' issuance of debt and other senior securities, and 
includes requirements related to valuation, redemptions of fund 
shares, and dealings with service providers and other 
affiliates. The Commission does not regulate pension funds.

Q.4. What other authorities does the SEC have to create a 
ratings environment that fosters access to the best research 
instead of allowing the entrenchment of incumbent NRSROs 
through outdated investor guidelines?

A.4. The Commission began removing references to credit ratings 
in Commission rules and forms in 2009 and accelerated that 
process after the enactment of section 939A of the Dodd-Frank 
Act. To date, the Commission has adopted final amendments to 
remove references to credit ratings in approximately 30 rules 
or forms. For example, as noted above, the Commission on 
September 16, 2015, adopted amendments to remove credit rating 
references in the principal rule that governs money market 
funds, Rule 2a-7 under the Investment Company Act of 1940, and 
Form N-MFP, the form that money market funds use to report 
information to the Commission each month about their portfolio 
holdings. In these amendments, the Commission eliminated 
requirements that limited money market funds to investing in 
securities that had received certain NRSRO ratings and instead 
requires that a money market fund invest only in securities 
that the fund's board of directors (or its delegate, typically 
the fund's adviser) has determined present minimal credit risks 
after analyzing, to the extent appropriate, certain prescribed 
factors.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                       FROM MARY JO WHITE

Q.1. I'd like to ask about the SEC's recent grant of exchange 
status to IEX.
    Does the SEC expect that other exchanges will respond to 
the newly approved speed bump with similar innovations?
    If so, how will this impact the securities market?
    In approving IEX's application, the SEC issued staff 
guidance stating that ``delays of less than a millisecond are 
at a de minimus level that would not impair fair and efficient 
access to a quotation . . . '' but that some intentional delays 
could be ``unfairly discriminatory, not an appropriate or 
unnecessary burden on competition, and otherwise consistent 
with the Act.'' Given this framework, how would the SEC 
evaluate an intentional delay that did not apply consistently 
and equally to all users of the exchange that implemented a 
delay?
    Do the issues raised by IEX's successful application to 
become an exchange merit a review of Regulation NMS that is 
``comprehensive and part of formal rule making,'' as former SEC 
Commissioner Paul Atkins has called for?

A.1. In light of IEX's exchange registration application and 
technological and market developments since the adoption of 
Regulation NMS, the Commission decided to revisit its 
interpretation of the term ``immediate'' under Regulation NMS. 
The interpretation is applicable to all exchanges and provides 
that, solely in the context of determining whether a trading 
center maintains an ``automated quotation'' for purposes of 
Rule 611 of Regulation NMS, the Commission does not interpret 
the term ``immediate'' by itself to prohibit a trading center 
from implementing an intentional access delay that is de 
minimis--i.e., a delay so short as to not frustrate the 
purposes of the trade-through rule of Regulation NMS by 
impairing fair and efficient access to the exchange's 
quotations. While I cannot predict how other exchanges will 
react, the Commission's interpretation is equally applicable to 
them. Whether and, if so, how multiple access delays will 
impact the securities markets is something that the 
Commission's staff will monitor and consider, if such delays 
are ultimately implemented. The Commission's interpretation 
noted that a study will be completed by Commission staff within 
two years regarding the potential effects of intentional access 
delays on market quality, including price discovery.
    As noted in the interpretation, any exchange that proposes 
to adopt an intentional access delay must do so through a rule 
filing of the exchange, which must be filed with the Commission 
and published for notice and comment by the public. 
Importantly, the interpretation does not change the existing 
requirement that, prior to being implemented, an intentional 
delay of any duration must be fully disclosed and codified in a 
written rule of the exchange that has become effective pursuant 
to section 19 of the Securities Exchange Act of 1934 (Exchange 
Act), where the exchange met its burden of articulating how the 
purpose, operation, and application of the delay is consistent 
with the Exchange Act and the rules and regulations thereunder 
applicable to the exchange. If the Commission cannot find that 
a proposed access delay is consistent with the Exchange Act, it 
would disapprove the proposal, rendering moot the issue of 
whether a quotation with such a delay is protected. Generally, 
the Commission would be concerned about access delays that were 
imposed only on certain market participants or intentional 
access delays that were relieved based upon payment of certain 
fees.
    The general issues surrounding IEX's exchange application, 
notably whether exchanges with intentional access delays can 
maintain protected quotations, has been addressed by the 
Commission's interpretation. Nevertheless, based on the results 
of the staff's study or earlier as it determines, the 
Commission will reassess whether further action is appropriate.

Q.2. I'd like to talk about the SEC's rulemaking schedule. The 
SEC's mission is to ``protect investors, maintain fair, 
orderly, and efficient markets, and facilitate capital 
formation.'' Unfortunately, as former SEC Commissioner Dan 
Gallagher has said, ``issues specific to small business capital 
formation too often remain on the proverbial back burner. This 
lack of attention doesn't just harm small business; it also 
harms investors and the public at large.'' Is there a danger 
that the SEC's focus on completing its various mandated 
rulemakings makes it difficult to fulfill its mission to 
facilitate capital formation?
    What is the SEC currently doing to focus on the ``capital 
formation'' prong of its mission, in particular for smaller 
businesses?
    Where are new areas that the SEC can explore to expand 
access to capital? For example, many have sensibly called to 
expand the definition of ``accredited investor'' to encompass 
sophisticated investors.
    While the SEC does have an annual Government-Business Forum 
on Small Business Capital Formation, the SEC rarely acts on 
these recommendations, especially without Congressional 
prodding. Can you commit that the SEC will seriously evaluate 
every recommendation from the forum next year?

A.2. The Commission is deeply committed to the priority of 
facilitating capital formation for small businesses. The SEC's 
rules provide small and emerging companies with a range of 
options for raising capital, and it is important to assess 
whether those options are meeting their needs, in light of 
their business models and capital needs, while providing strong 
investor protections that promote confidence in the markets.
    As I mentioned in my written testimony, the SEC has 
completed all of the rulemakings directed by the JOBS Act, 
which resulted in significant changes to the avenues for 
capital formation in the securities markets, especially for 
smaller issuers. In addition to statutorily mandated 
rulemakings, we also engage in discretionary rulemakings and 
other initiatives to promote capital formation. For example, 
the Commission last year issued a proposal to amend rules for 
smaller and intrastate securities offerings that would help 
facilitate State-based crowdfunding and smaller regional 
securities offerings by smaller companies.
    Another important initiative is the pilot program to widen 
the minimum quoting and trading increments--or tick sizes--for 
stocks of some smaller companies. Following a study directed by 
the JOBS Act, the Commission last year approved a proposal, 
submitted in response to a Commission order, by the national 
securities exchanges and the Financial Industry Regulatory 
Authority (FINRA) for a 2-year pilot program. The SEC plans to 
use the pilot program to assess whether wider tick sizes 
enhance the market quality of these stocks for the benefit of 
issuers and investors. The pilot is scheduled to begin on 
October 3, 2016.
    We are committed to our mission of facilitating capital 
formation for all businesses, large and small, and we 
understand it is particularly important to hear the views of 
small business owners, investors, and other stakeholders in the 
small and emerging business community. As you note, the SEC 
hosts an annual forum focusing on small business capital 
formation, called the Government-Business Forum on Small 
Business Capital Formation (Small Business Forum). This forum 
has assembled annually since 1982, as mandated by the Small 
Business Investment Incentive Act of 1980, and provides a 
platform to highlight concerns related to small business 
capital formation and to consider the ways in which these 
concerns can be addressed. Every year, the Small Business Forum 
seeks to develop recommendations for Government and private 
action to facilitate small business capital formation.
    Further, twice during my time as Chair, the SEC has renewed 
the charter for its Advisory Committee on Small and Emerging 
Companies (ACSEC). The ACSEC includes expert members from 
across the small business spectrum and provides the SEC with 
valuable recommendations and input. Pursuant to its charter, 
the ACSEC provides advice on our rules, regulations, and 
policies as they relate to:

    capital raising by emerging privately held small 
        businesses and publicly traded companies with less than 
        $250 million in public market capitalization through 
        securities offerings, including private and limited 
        offerings and initial and other public offerings;

    trading in the securities of emerging companies and 
        smaller public companies; and

    public reporting and corporate governance 
        requirements of emerging companies and smaller public 
        companies.

    Both the Small Business Forum and the ACSEC help ensure 
that the views of small businesses, investors, and other 
stakeholders in this community are clearly heard here at the 
SEC, and their recommendations are considered thoroughly. For 
example, we recently proposed amendments to the ``smaller 
reporting company'' definition that would expand the number of 
companies that qualify as smaller reporting companies, thus 
enabling them to provide certain existing scaled disclosures 
under Regulation S-K and Regulation S-X. This change was a 
recommendation of both the Small Business Forum and the ACSEC.
    You also asked about the ``accredited investor'' 
definition. In another important step for modernizing the 
private offering market, the SEC published a staff report in 
December 2015 regarding this definition. The report analyzes 
various approaches for modifying the accredited investor 
definition and provides staff recommendations for potential 
updates and modifications. The report recommends that the SEC 
consider additional measures of sophistication for individuals 
to qualify as accredited investors (other than looking solely 
at income and net worth). The report also evaluates the impact 
that potential changes to the definition would have on the size 
of the accredited investor pool.
    In July 2016, the ACSEC provided recommendations to the SEC 
regarding the accredited investor definition. I have directed 
the staff to prepare recommendations for the SEC on whether and 
how the definition should be modified, and the recommendations 
provided by the ACSEC and the SEC's Investor Advisory 
Committee, as well as all of the comments we are receiving in 
response to the report, will help inform the next steps.
    In addition to our rulemaking initiatives and our continued 
engagement with the Small Business Forum and ACSEC and their 
respective recommendations, SEC staff routinely engages with 
the public and companies on questions of small business capital 
formation. For example, staff in the Division of Corporation 
Finance's Office of Small Business Policy answers questions 
from market participants on a daily basis about disclosure and 
other issues relating to smaller public companies and about 
limited, private, and intrastate offerings of securities. This 
exchange is an important part of the work we do on behalf of 
investors and issuers involved in smaller businesses.

Q.3. I'd like to discuss the marketplace online lending 
ecosystem, which has grown significantly as of late.
    My understanding is that SEC regulations require online 
marketplace lenders such as Proper and Lending Tree to update 
their regulatory filings with the SEC every week or so. Do you 
believe this is the most effective way to regulate these 
companies?

A.3. The Federal securities laws are designed to protect 
investors in connection with the offer and sale of securities. 
Those investor protections include disclosure requirements and 
antifraud provisions that hold companies responsible for 
providing false or misleading information to investors.
    Obtaining money from investors to fund borrower loans 
through an online lending platform involves the offer and sale 
of securities. These offers and sales are subject to the same 
registration provisions of, and can take advantage of the same 
exemptive provisions from, the Securities Act of 1933 as any 
other company engaging in an offering of their securities, 
including ``brick and mortar'' lenders. The requirements for 
updating the information provided to investors is the same as 
those for other companies engaged in the offer and sale of 
securities.
    Commission staff has worked with online marketplace lenders 
to help them meet registration and disclosure requirements. For 
example, staff in the Division of Corporation Finance consulted 
with online marketplace lenders as they crafted a structure to 
fund loans and sell notes in a manner compliant with the 
Federal securities laws. As with other companies engaging in 
continuous registered offerings of securities under the Federal 
securities laws, these companies have an obligation to provide 
disclosure to investors about the securities being acquired.

Q.4. Is the SEC exploring alternative means of regulating 
online marketplace lenders that do not involve such a robust 
filing requirement? Would any of these changes require 
statutory authorization?

A.4. The Commission and the Federal securities laws provide a 
number of ways companies can raise capital, with different 
disclosure and reporting standards depending on who they sell 
to and how much they raise. To date, the need for an 
alternative system to regulate online marketplace lenders is 
not apparent based on the practices we have observed in the 
industry.
    When marketplace lenders seek to access the public capital 
markets, as with any other company, they must comply with the 
registration and disclosure requirements of the Federal 
securities laws. I believe that investors need certain 
disclosures, including about the risk of loss of all principal 
and interest upon a borrower's default, to make an informed 
investment decision.

Q.5. Would there be merit to creating a broad safe harbor for 
marketplace online lenders which scales registration 
requirements to reflect their unique business model?

A.5. I believe the Federal securities laws provide a number of 
options already, and it is not clear to me at this time that 
the business model of marketplace lenders would merit its own 
registration regime. Marketplace lenders are currently able to 
raise capital in private and public markets.

Q.6. Some have criticized the SEC's treatment of machine-
readable, open data, including for its implementation of a 
dual-filing requirement for both XBRL and old fashioned 
documents, and a slow transition toward allowing the filing of 
inline XBRL, which is both human-readable and machine-readable. 
In addition to this step, how does the SEC plan to modernize 
its treatment of Government data and transition toward open-
data?

A.6. The Commission has a longstanding commitment to using 
developments in technology and electronic data communications 
to facilitate easier access to information. Machine-readable 
financial market data enhances our rulemaking and market-
monitoring activities and makes disclosures more usable for the 
public.
    What to disclose, and how to disclose it, are vital 
questions that we ask in any rulemaking that involves the 
reporting of information to the Commission. Thus, in several 
recent rulemakings, the Commission has either proposed or 
adopted disclosures that would be made in a structured format. 
For example, in adopting Regulation Crowdfunding, the 
Commission required Form C (containing issuer disclosures) to 
be filed in eXtensible Markup Language (XML). Similarly, the 
final rule amendments to Regulation AB required asset-level 
disclosures in XML. In addition, in the recently issued 
Regulation S-K concept release, the Commission specifically 
sought comment on whether to require registrants to provide 
additional disclosures in a structured format.
    I am also committed to exploring other ways to enhance the 
availability and usability of structured data. For example, 
staff has posted on the Commission's Web site reformatted 
financial information that was reported by companies in their 
filings in XBRL format. Specifically, staff has combined and 
organized as-reported XBRL data into structured file sets to 
facilitate improved data analysis by the public.
    Finally, in addition to promoting the public availability 
and usability of structured data, the SEC has been proactively 
incorporating structured data into its own internal processes. 
Structured data enhances our rulemaking and market-monitoring 
activities; for example, it is a valuable input into several 
risk assessment tools that our Division of Economic and Risk 
Analysis, Division of Enforcement, and Office of Compliance 
Inspections and Examinations have been jointly developing and 
deploying to enhance the effectiveness of Commission staff in 
detecting wrongdoing.

Q.7. Australia has created a Standard Business Reporting regime 
(SBR) that allows a company to complete one filing to comply 
with multiple regulatory disclosure requirements. This has 
extensively reduced the amount of required data fields, saving 
the Australian economy more than $1 billion annually by one 
estimate. Could a similar regulatory regime be possible in the 
United States? Have you discussed this possibility with other 
regulators?

A.7. It is my understanding that Standard Business Reporting 
(SBR) is an Australian Government initiative that was 
introduced in 2010 to simplify the business reporting 
obligations of companies that report to the Australian 
Government. SBR uses standard terms that are built into 
software technologies to facilitate the dissemination of 
business and accounting information across participating 
Government agencies. While it may be possible to implement a 
similar regulatory regime among regulatory authorities in the 
United States, such a regime likely would involve significant 
planning and close coordination among various regulatory 
agencies with different missions and priorities and may require 
statutory changes to implement. I have not discussed this 
possibility with fellow regulators.
    The SEC's disclosure rules require companies that offer and 
sell securities to the public and that are required to file 
periodic reports with the Commission to provide information 
about their business and financial condition, among other 
things. The staff of the Division of Corporation Finance is 
engaged in a broad-based review of our disclosure rules to 
determine how we can make our requirements more effective for 
investors and companies. The Commission has issued releases 
resulting from this review on a variety of topics, including a 
concept release on business and financial disclosures required 
by Regulation S-K. Among the topics addressed in the concept 
release is the use of data tagging to facilitate disclosure and 
review of information. The staff is currently considering the 
comments received on the concept release.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
                       FROM MARY JO WHITE

Q.1. Are you concerned by the fact that issuance of private 
stock has now outstripped public shares sold to all retail 
investors, in terms of new issuance? He asked this question 
during the hearing but would like to follow up with QFRs on the 
same topic with the following two questions.
    What are the long term implications of this shift?
    What if anything is the SEC doing about this trend, to try 
to stimulate IPOs?

A.1. As you note, in recent years, the size of the private 
capital raising market in terms of the total number of 
offerings conducted and dollar amounts raised has outpaced the 
size of registered securities offerings. While the long term 
implications of the current trend are not entirely clear, it is 
the responsibility of the Commission to ensure that investors 
are protected, whether in public or private markets, and that 
issuers have a range of means to raise the capital they need to 
fuel their businesses.
    Specifically, a robust private capital raising market must 
provide all investors--irrespective of their income or net 
worth--with investment opportunities and strong investor 
protections. In implementing its JOBS Act mandates, the SEC 
created new and revitalized existing exemptions for capital 
raising options for companies and investment opportunities for 
investors, including rules that allow companies to generally 
solicit investors in certain private offerings, conduct 
securities-based crowdfunding offerings, and raise capital 
pursuant to an updated and expanded Regulation A. The fact that 
companies are increasingly relying on these and other avenues 
for capital is consistent with our goal of promoting capital 
formation by providing issuers a diverse range of capital-
raising mechanisms backed with strong investor protections.
    In addition to creating new avenues for capital formation, 
the JOBS Act included provisions that created a new category of 
companies in registered offerings, called ``emerging growth 
companies'' (EGCs). These provisions provided a number of 
accommodations for companies that qualify as EGCs.
    Since enactment of the JOBS Act, SEC staff has issued 
detailed guidance on the EGC-related provisions and procedures 
to assist companies in navigating the so-called IPO on-ramp. To 
date, the SEC has received over 1,100 confidential submissions 
of draft registration statements by EGCs seeking to conduct a 
registered initial public offering.
    Having an effective disclosure regime is critical for 
capital formation and investor protection. In late 2013, based 
in part on the results of a JOBS Act mandated report on the 
disclosure requirements for companies included in Regulation S-
K, I directed SEC staff to develop specific recommendations for 
updating our rules that dictate what a company must disclose in 
its filings. The overall goal of the disclosure effectiveness 
initiative is to comprehensively review our disclosure 
requirements and to make recommendations to update those 
requirements to make disclosure more meaningful, accessible, 
and efficient for investors. Last year, as part of this review, 
the SEC published a request for comment on what investors, 
companies, and market participants would like to see with 
respect to the form and content of financial statement 
disclosures by entities other than the registrant under 
Regulation S-X. Additionally, this year as part of the 
disclosure effectiveness initiative, as well as to facilitate 
implementation of the Fixing America's Surface Transportation 
(FAST) Act, the SEC issued a broad-based concept release 
seeking input from investors, issuers, and other affected 
market participants on our business and financial disclosure 
requirements, proposed rules to modernize the SEC's disclosure 
requirements and policies for mining properties, and, most 
recently, proposed amendments to address outdated and redundant 
disclosure requirements while continuing to require companies 
to provide investors with the information they need to make 
informed decisions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                       FROM MARY JO WHITE

Q.1. Chair White, last year, NASDAQ and NYSE filed petitions 
for rulemaking asking the SEC to promulgate rules to increase 
transparency around short selling. Other groups supported those 
petitions as well. While short selling can be important for 
liquidity and hedging, it is also important to ensure an 
equitable disclosure regime for short and long investors. As 
you know, there is currently more disclosure required for long 
positions.
    Can you please comment on the status of these petitions? 
Does the SEC plan to act on this issue?

A.1. Extensive short sale data is currently publicly available, 
free or on a fee basis, including daily short sale volume and 
transaction data, short interest data, and fails to deliver 
data. The Commission staff has worked with the self-regulatory 
organizations (SROs) to make short sale data available to the 
public, including aggregate daily short selling volume in 
individual equity securities; on a 1-month delayed basis, 
information regarding individual short sale transactions in 
exchange-listed equity securities; and semimonthly statistics 
on short interest. The Commission also publishes on its web 
site ``fail-to-deliver'' information semimonthly for all equity 
securities.
    I am committed to ensuring that short sale data strikes the 
right balance between disclosures necessary to protect 
investors while preserving the benefits of price discovery and 
liquidity that short selling can bring to the market. In 
comparing disclosure regimes for short and long investors, it 
is important to consider the different purposes that such 
requirements would seek to address. Most notably, public 
disclosure of long positions provides information regarding 
persons that may have potential influence over, or control of, 
the issuer. Similar disclosure of short positions would not 
provide such information.
    The Commission staff continues to consider, as part of 
Dodd-Frank Act section 929X and in conjunction with the June 
2014 staff study of real-time short sale disclosure required by 
the Dodd-Frank Act, whether additional transparency may be 
warranted. In that context, the Commission staff also takes 
into account feedback from all market participants, including 
the petitions from NASDAQ and NYSE.

Q.2. Over the past few years, investors and market participants 
have experienced disruptions in the timely dissemination of 
public market data via the Securities Information Processors or 
SIPs, operated by various exchanges, including at NASDAQ in 
2013. After the NASDAQ glitch, which shut down trading on 
NASDAQ listed stocks for three hours, you convened a meeting 
with exchange CEOs to discuss how to improve resiliency. These 
same entities sit on the governance committee overseeing our 
current market structure. Yet SIP outages affect the entire 
stock and options markets, and so it seems to me that entities 
who must make the decisions about whether or not to invest in 
the public data feeds and make necessary improvements to vital 
market infrastructure ought to not be the only voice in the 
room. While the current set of recommendations may be 
insufficient, the Equity Market Structure Advisory Committee 
has recommended changes to the governance structure. Would you 
agree that it is time to update the governance structure for 
NMS Plans and the operating committee?

A.2. NMS plan governance is one of the many important topics 
the Commission currently is assessing as part of its broad-
based review of equity market structure. For example, the 
Equity Market Structure Advisory Committee at its July 8, 2016, 
meeting recently made a number of recommendations to the 
Commission relating to trading venues regulation. \1\ Those 
recommendations include expanding the role of NMS plan advisory 
committees to provide them with a formal vote on any matter on 
which the operating committee votes, as well as to initiate 
their own recommendations to the operating committee, so as to 
make NMS plan advisory committees more significant, formalized, 
and uniform. \2\ I expect the Commission will give these 
recommendations full consideration as it considers governance 
structure changes in NMS plans.
---------------------------------------------------------------------------
     \1\ The recommendations can be found at the Equity Market 
Structure Advisory Committee's spotlight page. See ``Equity Market 
Structure Advisory Committee Telephone Meeting'', SEC.gov (July 8, 
2016), https://www.sec.gov/video/webcast-archive-player.shtml?
document_id=070816emsac.
     \2\ See id.
---------------------------------------------------------------------------
    As we assess possible changes to the governance structure 
for NMS plans, it is important to bear in mind that such plans 
serve important regulatory purposes, such as ensuring that 
accurate and reliable consolidated market data is widely 
available to investors, that our markets have robust mechanisms 
to protect against excessive volatility, and that SROs can 
effectively surveil the markets. At the same time, I recognize 
the importance of incorporating the views of broker-dealers and 
other stakeholders in the operation of an NMS plan at an early 
stage of the decision-making process. Early-stage engagement 
may, among other things, enhance the quality of the proposals 
developed by the NMS plans as well as facilitate more swift 
adoption and implementation. Accordingly, enhancements to the 
governance of NMS plans designed to ensure that the views of 
key stakeholders are taken into account are among the 
significant issues under consideration.

Q.3. Chair White, you previously announced as part of the 
Regulatory Flexibility agenda for the Spring of 2016 that a 
potential rulemaking to shorten the settlement time for 
securities would be complete by the end of June of this year. 
Can you please give me an update on the status of this 
rulemaking?

A.3. I and my fellow Commissioners have publicly stated our 
support for efforts to shorten the settlement cycle from the 
third business day after the trade date to no later than the 
second business day (T+2). Shortening the settlement cycle 
should yield important benefits, including reduced counterparty 
risk, decreased clearing capital requirements, reduced 
procyclical margin and liquidity demands, and increased global 
harmonization. While current SEC rules do not prevent the 
implementation of T+2, updates to those rules could help 
support the move to T+2 by all market participants, as well as 
to shorter settlement cycles potentially in the future. I 
therefore have instructed Commission staff to develop a 
proposal to amend SEC Rule 15c6-1(a) to require settlement no 
later than T+2 for Commission consideration this year. In 
developing the proposal, Commission staff has been working with 
various market participants regarding the key issues 
surrounding shortening the settlement cycle to T+2. I expect 
that the proposal will be published in the fall of this year.
    While this initiative complements the work of the 
securities industry and the SROs, it should not be seen as a 
precondition or an impediment to the ongoing industry progress 
to shorten the settlement cycle. There has been a tremendous 
amount of work done to date by a broad range of market 
participants toward achieving the transition to T+2, and this 
effort must continue expeditiously to completion.

Q.4. On July 21, 2015, Sen. Mike Crapo and I wrote to you to 
ask when the Commission would fix its duplicative requirement 
for public companies to file two versions of every financial 
statement--first as a document, then the same information again 
in the XBRL open data format. We pointed out that collecting 
two versions (1) distracted Commission staff from enforcing the 
quality of the data version; (2) delayed the broader 
modernization of the Commission's whole corporate disclosure 
system from document-focused to data-centric; and (3) imposed 
unnecessary costs on public companies, who must check the two 
versions against each other. On August 19, 2015, you responded 
that the Commission staff were ``developing recommendations to 
allow filers to submit XBRL data inline as part of their core 
filings.'' I was pleased to see that just last week, June 13, 
the Commission issued an order allowing (but not requiring) 
public companies to file a single version of their financial 
statements, using the inline XBRL format, which is both human-
readable and machine-readable. The order expires in March 2020. 
What do you expect the Commission will learn from this 
temporary period of voluntary inline XBRL filing?

A.4. I believe that inline XBRL has the potential to provide a 
number of benefits to filers and users of structured financial 
information. For example, inline XBRL could decrease filing 
preparation costs, improve the quality of structured data, and, 
by improving data quality, increase the use of XBRL data by 
investors and other market participants.
    As the Commission's exemptive order noted, permitting the 
voluntary use of inline XBRL allows the Commission to further 
assess the usefulness of inline XBRL and can facilitate further 
development of inline XBRL preparation and analysis tools, 
provide investors and companies with the opportunity to 
evaluate its usefulness, and help inform any future Commission 
rulemaking in this area.
    Additionally, a voluntary period of inline XBRL filing can 
allow the Commission to review and evaluate whether our beliefs 
regarding the potential benefits of inline XBRL are correct. It 
can also provide us with additional input to inform our 
consideration of whether to adopt a mandatory rule and, if so, 
whether the rule should include certain exemptions or phase-in 
provisions. A voluntary filing period can also provide an 
opportunity for any technological or practical issues 
associated with inline XBRL to be identified and resolved prior 
to potentially requiring the use of inline XBRL.

Q.5. Although I am pleased to see that the Commission has 
finally announced a pathway toward full open data for corporate 
financial statements, I am disappointed that the Commission did 
not publish the data structure (known as a specification) for 
inline XBRL filing in advance, to give public companies, 
disclosure management software providers, data consumers and 
other stakeholders a chance to review and comment on it. 
Instead, the Commission published the specification and issued 
the order simultaneously, leaving public companies and software 
providers scrambling to review the specification, and creating 
a delay before inline XBRL filing can begin and uncertainty 
about the impact of this change on data consumption.
    This failure to publish a data structure in advance of the 
legal order contrasts with the approach taken by the Treasury 
Department in implementing the DATA Act of 2014, which I 
introduced in the Senate and which requires the Federal 
Government to adopt a standardized open data structure for its 
own financial information. The DATA Act requires standardized 
financial reporting by Federal agencies to begin in May 2017, 
but the Treasury Department has already published several 
versions of the data structure for review and comment by 
agencies, software firms serving them, and other interested 
parties.
    For future changes to the data structures it uses to 
collect securities disclosures, will the Commission commit to 
publishing such data structures at least 60 days in advance of 
any legal order permitting or mandating their use?

A.5. The Commission seeks to provide the public with adequate 
notice regarding technical implementation issues associated 
with structured data. For example, when the Commission in 
December 2015 proposed a new rule specifying the form and 
manner with which security-based swap data repositories (SDRs) 
will be required to make security-based swap data available to 
the Commission--specifically, requiring SDRs to make data 
available using schemas published on the Commission's Web site 
and referencing international industry standards Financial 
products Markup Language (FpML) and Financial Information 
eXchange Markup Language (FIXML)--the Commission also posted 
for public comment the related technical schemas. Similarly, 
draft copies of amendments to the EDGAR Filer Manual are 
generally posted on the Commission's Web site in advance of 
Commission approval to help filers, agents, and software 
developers prepare for potential technical changes related to 
filing on EDGAR. More generally, Commission staff proactively 
engages with the software and services vendor community, 
inquiring about their capabilities and readiness with respect 
to various matters that the Commission has indicated an 
interest in potentially pursuing, such as inline XBRL, the IFRS 
taxonomy, or structuring of data outside the financial 
statements.
    With respect to the inline XBRL exemptive order, the 
Commission was permitting voluntary implementation, rather than 
requiring compliance by a date certain. One of the objectives 
of this voluntary filing program is to provide investors, 
preparers, and third party service providers a means to assess 
the technical requirements and provide feedback to staff during 
the voluntary period, in advance of any determination whether 
to require issuers to file using Inline XBRL. Delaying 
effectiveness of the exemptive order to provide advance notice 
of the technical requirements would have impeded issuers and 
preparers from voluntarily participating in the program and 
providing valuable feedback when ready. In this regard, I note 
that the first inline XBRL filing was submitted to the 
Commission on July 1, three weeks after the exemptive order was 
issued.

Q.6. Financial statements are filed as part of larger periodic 
filings under the Exchange Act of 1934. Forms 10-K and 10-Q 
include a great deal of information beyond the financial 
statements that today is expressed in plain-text document form, 
not open data. For example, Exhibit 21 to the 10-K requires a 
public company to identify its subsidiaries. This list of 
subsidiaries is plain text, not electronic data fields, which 
makes it very difficult for investors' software to 
automatically identify a company's subsidiaries and link them 
to other databases. But by adopting inline XBRL, the Commission 
is opening an easy avenue to transform more of the periodic 
filings from plain text into open data. Companies will be 
filing each Form 10-K and 10-Q as a single human-readable HTML 
document with embedded electronic tags that identify particular 
data fields. At first, only the financial statements will be 
tagged, but the Commission could add new tags to information 
such as Exhibit 21 to make such information electronically 
searchable as open data. Do you expect that the adoption of the 
inline XBRL approach for financial statements will start a 
broader modernization of the Exchange Act filings, with 
electronic tags being added for other types of information 
contained in them?

A.6. What to disclose, and how to disclose it, are vital 
questions that the Commission must ask in any rulemaking that 
involves the reporting of information to the Commission. Thus, 
in several recent rulemakings, the Commission has either 
proposed or adopted disclosures that would be made in a 
structured format. For example, in Regulation Crowdfunding, the 
Commission required Form C (containing certain issuer 
disclosures) to be filed in eXtensible Markup Language (XML). 
Similarly, the final rule amendments to Regulation AB required 
asset-level disclosures in XML. In addition, a number of 
recently proposed rules also have included structured 
information, including those on executive compensation and 
enhanced reporting by investment companies.
    In addition, the Commission has been considering whether to 
extend structuring requirements in its existing rules. In the 
recently issued Regulation S-K concept release, the Commission 
specifically sought comment on whether to require registrants 
to provide additional disclosures in a structured format, 
including whether there are categories of information in Parts 
I and II of Form 10-K or in Form 10-Q that investors would want 
to receive as structured data. We look forward to input from 
commenters to help us assess investor interest in the 
structuring of existing disclosures outside the financial 
statements.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                       FROM MARY JO WHITE

Q.1. I am very concerned that the SEC, under your leadership, 
has dropped the issue of political spending from its agenda.
    When it comes to spending on political activity, only 
roughly 2.2 percent of all public companies in the United 
States make such disclosures voluntarily. \1\ There's been a 
dramatic increase in spending by corporations that do not 
disclose their donors in recent years from less than $5.2 
million in 2006 to over $300 million in the 2012 Presidential 
election cycle.
---------------------------------------------------------------------------
     \1\ Calculation made using number of public companies that 
disclose corporate political spending divided by total number of public 
companies. Dan Strumpf, ``U.S. Public Companies Rise Again'', The Wall 
Street Journal, Markets, 5 February 2014, http://www.wsj.com/articles/
SB10001424052702304851104579363272107177430.
---------------------------------------------------------------------------
    As you mentioned in the hearing, 50 percent of the S&P 500 
companies disclose their political spending voluntarily. 
However, in a cursory glance of a handful of those companies, 
the disclosure of this type of spending varies widely. Some 
public companies disclose the topline information about a 
company's policy and political priorities while others list 
specific amounts donated for races that range from candidates 
running for President to officials at the State and local 
level.
    In 2012, included on the Regulatory Plan and Unified 
Agenda, in a Proposed Rule State, was ``the Disclosure 
Regarding the Use of Corporate Resources for Political 
Activities.''
    In the Spring 2013, consideration of the political 
disclosure rule was missing from the Update to the Unified 
Agenda. Instead, the agenda item had been relegated to the list 
of Spring 2013 Long Term Actions. This move coincided with your 
arrival at the SEC.
    In the Fall of 2013, the political disclosure rule was 
omitted altogether from both the Unified Agenda as well as the 
Long Term Actions. This omission was several months into your 
first year as SEC Chair.
    Considering the timeline, it is difficult not to draw a 
line directly from the start of your time at the SEC to the 
eventual dismissal of a political spending disclosure rule.
    While the political spending disclosure rule is no longer 
on the SEC's agenda for consideration, many Americans believe 
it should be. To date, more than 1.2 million securities 
experts, individual and institutional investors, ranging from 
former SEC Chairs Levitt and Donaldson and SEC Commissioners to 
mutual funds and State Treasurers as well as members of the 
public have pressed the SEC for a rule that would require 
public companies to disclose this very material information. In 
addition, 44 Senators wrote in support of the petition to the 
SEC to take up the political disclosure rule.
    Former SEC Commissioner Luis Aguilar in a 2012 speech said 
that shareholders of corporations are ``often in the dark as to 
whether the companies they own, or contemplate owning, are 
making political expenditures. Withholding information from 
shareholders is a fundamental deprivation that undermines the 
securities regulatory framework which requires investors 
receive adequate and appropriate information, so that they can 
make informed decisions about whether to purchase, hold, or 
sell shares--and how to exercise their voting rights.''
    The founder of the largest provider of mutual funds, 
Vanguard's John C. Bogle, said, ``It's high time that the abuse 
of corporate political spending comes to an end. Disclosure of 
corporate political contributions to the corporation's 
shareholders--its owners--is the first step toward dealing with 
the potentially corrupt relationship between corporate managers 
and legislators. Shareholders must not be left in the dark 
while their money is spent without their knowledge.''
    As Chair of the SEC, do you believe that shareholders, as 
owners of the company, have the right to know about the 
corporation's spending for political purposes?
    Do you believe this information is material to investors? 
If not, why not?

A.1. The subject of corporate political spending (and requiring 
its disclosure) is an important one on which there are strong 
and differing views. There is no specific statutory or rule-
based disclosure requirement under the Federal securities laws 
or other Federal law mandating that public companies disclose 
information relating to their political contributions. While 
there is no specific mandate under existing law, if a company's 
corporate political spending has a material impact on its 
results of operations or financial condition (or if omission of 
disclosure on this subject would make other disclosure included 
in a filing materially misleading), disclosure to shareholders 
by the company is required.
    In addition, under the Commission's Rule 14a-8, a 
shareholder may submit a proposal for inclusion in its 
company's proxy materials seeking disclosure or other action on 
political contributions. This avenue has been used by a number 
of shareholders, with such proposals in 2016 averaging support 
of 26.1 percent of votes cast. \2\
---------------------------------------------------------------------------
     \2\ See Gibson Dunn, ``Shareholder Proposal Developments During 
the 2016 Proxy Season'' (June 28, 2016), http://www.gibsondunn.com/
publications/Documents/Shareholder-Proposal-Developments-2016-Proxy-
Season.pdf.
---------------------------------------------------------------------------
    As I noted during the hearing, a number of other public 
companies have also made voluntary disclosures of their 
political spending. For example, a 2015 Center for Political 
Accountability report found that 87 percent of companies in the 
S&P 500 have adopted policies addressing political spending, 54 
percent of S&P 500 companies have a dedicated web page or 
similar space on their Web site for political spending 
disclosure, and 43 percent of S&P 500 companies have board 
oversight of their political contributions and expenditures. 
\3\ Further, the study noted that in 2015, 52 percent of S&P 
500 companies had a detailed policy on their Web sites 
governing political expenditures with corporate funds, and 60 
percent of S&P 500 companies provided information on which 
political entities they will or won't give money to. These 
avenues of engagement are important and to be encouraged, and I 
will continue to follow them closely.
---------------------------------------------------------------------------
     \3\ See Center for Political Accountability, ``The 2015 CPA-
Zicklin Index of Corporate Political Disclosure and Accountability'' 
(Oct. 8, 2015), http://files.politicalaccountability.net/index/CPA-
Zicklin_Index_Final_with_links.pdf.
---------------------------------------------------------------------------
    As you know, the Consolidated Appropriations Act of 2016 
prohibits the Commission from using any funds made available by 
the Act to finalize, issue, or implement any rule, regulation, 
or order regarding the disclosure of political contributions, 
contributions to tax exempt organizations, or dues paid to 
trade associations. I have not committed, and do not plan to 
commit, staff resources in FY16 to develop a rule regarding 
disclosure of political contributions as encompassed by the 
Appropriations Act prohibitions.