[Senate Hearing 114-181]
[From the U.S. Government Publishing Office]


 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2016

                              ----------                              


                          TUESDAY, MAY 5, 2015

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:40 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. John Boozman (chairman) presiding.
    Present: Senators Boozman, Moran, Lankford, and Coons.

                   SECURITIES AND EXCHANGE COMMISSION

STATEMENT OF HON. MARY JO WHITE, CHAIR

               OPENING STATEMENT OF SENATOR JOHN BOOZMAN

    Senator Boozman. Good morning. The subcommittee will come 
to order. I apologize that we are running just a little bit 
late.
    The only thing that we have to do around here is vote when 
we are supposed to vote, and we never really know when those 
are called. We'd be living right, though, to get that out of 
the way so it is not right in the middle of your testimony.
    So I would like to welcome our witnesses, the Securities 
and Exchange Commission (SEC) Chair Mary Jo White, and the 
Commodity Futures Trading Commission (CFTC) Chairman Tim 
Massad. Thank you so much for being with us today. We look 
forward to hearing from you about the details of your budget 
request, as well as how you are using the increases you 
received in 2015 to carry out your core missions.
    As members of this subcommittee, we have a tremendous 
responsibility to ensure funds we oversee are spent wisely. 
Both of your agencies are asking for significant increases for 
2016. The SEC is asking for $1.722 billion, a 15 percent 
increase. The CFTC is asking for $322 million, which is a 29 
percent increase more than in 2015.
    Yet just last year, both agencies received sizable 
increases. The SEC's budget increased by $150 million, or 11 
percent over 2014. The CFTC's budget grew $35 million, or 16 
percent. These increases are more generous than those provided 
to any other agency in the bill.
    Unfortunately, as we have seen too often, access to more 
funding does not necessarily ensure that an agency will 
successfully achieve its mission or spend that funding 
responsibly. Under the Budget Control Act and the House/Senate 
budget resolutions, the discretionary spending caps for fiscal 
year 2016 limit nondefense spending to just $493 billion. This 
represents an increase of just $1.1 billion over the fiscal 
year of 2015 level for all nondefense departments and agencies.
    While the SEC's funding structure is different than most 
agencies under our jurisdiction because it is funded by fees, 
we continue to take our oversight duties very seriously. Just 
because the SEC's fees come from public companies and investors 
does not in any way minimize the responsibility to ensure that 
the SEC is operating effectively and the funds are being spent 
wisely.
    All agencies have to make strategic decisions on how to 
best allocate resources. As we review your budget request, I am 
most interested to hear what decisions you have made to operate 
more efficiently in order to carry out your responsibilities 
within current funding levels. Spending on staffing levels and 
benefits, space, equipment needs, and technology must all be 
carefully considered so that they do not create unsustainable 
burdens for future years.
    We all benefit from a system that promotes fair and orderly 
markets. So I am concerned when regulations fragment the 
market, needlessly raise the cost of doing business, or push 
trading overseas. I ask you to be persistent in trying to work 
together and coordinate with your fellow regulators, including 
other Federal agencies, self-regulatory organizations, and your 
international counterparts.
    Inconsistent rules at the SEC and the Department of Labor 
governing fiduciary standards continue to cause uncertainty and 
confusion. I remain concerned that the Department of Labor's 
(DOL) proposal could limit affordable retirement options for 
low- and middle-income Americans.
    It is my hope that the SEC will conduct thorough oversight 
of the Financial Industry Regulatory Authority's (FINRA) 
rulemaking related to its Comprehensive Automated Risk Data 
System (CARDS) proposal. FINRA's original rule proposal would 
have substantially increased transaction costs while exposing 
investors to significant security risks. It is my understanding 
these rules are being reworked due to widespread concerns, and 
I look forward to working with the SEC to ensure these concerns 
have been addressed.
    Lastly, cross-border harmonization remains elusive due to 
divergent approaches your agencies have taken to implement 
derivatives market reforms contained in Title VII of Dodd-
Frank. In numerous instances, the CFTC has simply chosen to 
issue guidance in what looks like an effort to avoid cost/
benefit analysis.
    In many cases, the CFTC has moved too quickly and opted to 
act alone instead of effectively coordinating with the SEC and 
international regulators. I encourage you to work with each 
other and your fellow commissioners as you negotiate a workable 
derivatives regime with European regulators that is clear, 
consistent, and reasonable.
    You both have an important job of protecting investors who 
look to the markets to help ensure their retirements, pay for 
their homes, and send their kids to college. Your agencies have 
an obligation to protect investors and customers from the next 
Madoff, Peregrine, MF Global, or Stanford situation, and you 
must improve transparency and uncover fraud and deception 
without over-regulating our markets and hindering our economic 
recovery.
    The American people want a government that works for them, 
not against them. They want us to curb wasteful spending; make 
the Government more efficient, effective, and accountable; and 
pursue policies that create economic opportunities for 
everyone. These are the priorities of the American people that 
will be reflected in the critical oversight we conduct as we 
consider the fiscal year 2016 budget request for all of the 
agencies within our jurisdiction.
    Thank you again for being here, and we really do appreciate 
your hard work.
    I will now turn to my ranking member, Senator Coons, for 
his opening statement.

               STATEMENT OF SENATOR CHRISTOPHER A. COONS

    Senator Coons. Thank you, Chairman Boozman.
    I would also like to welcome our witnesses here today and 
thank them for their service.
    We are here to consider the budget requests for the SEC and 
the CFTC, two financial sector regulators with tremendous 
responsibilities to preserve the integrity of our markets, 
protect investors and consumers. The SEC and CFTC play a 
critical role in ensuring that we have safe, liquid, and 
vibrant capital markets. And as the financial crisis made 
clear, we need these agencies to be fully equipped to do their 
vital jobs.
    Our economy has come a long way since the depths of the 
crisis, and as we continue to heal, we must ensure we have 
appropriate measures in place to safeguard investors of all 
types, from institutional investors to families to those saving 
for retirement. In its role working overseeing securities 
markets, the SEC protects investors; maintains efficient, 
orderly, and fair securities markets; and facilitates capital 
formation.
    The SEC also oversees investment advisers, mutual funds, 
securities exchanges, broker-dealers, investment advisers, and 
many other entities. On top of that, it has the daunting and 
important task of writing all the regulations in its area for 
Dodd-Frank and promulgating relevant rules for the JOBS Act.
    The CFTC works to avoid systemic risk by fostering 
transparent, open, competitive, and sound futures markets. The 
Commission protects market users and the public from abusive 
practices and oversees markets, swap execution facilities, 
clearing operations, data repositories for swaps and swap 
dealers, and other important intermediaries. Their mission is 
so expansive that the Commission now oversees a $400 trillion 
notional value swaps market.
    When I first read that, I thought it was a typo. Four 
hundred trillion is more than five times larger than the 
combined GDP of Earth. Given the enormity of the 
responsibilities--just thought I would start off by emphasizing 
the scope of all this.
    Given the enormity of the responsibilities assigned to both 
SEC and CFTC, it is critical Congress, and in particular this 
subcommittee, provide you the resources needed to responsibly 
protect investors and oversee markets. So, to Chair White and 
to Chairman Massad, I am eager to discuss how you are currently 
using the funds Congress provided in fiscal year 2015.
    Both your agencies received increases this year, although 
significantly less than requested in the budget and more so 
than in prior years, and I look forward to learning about what 
each of your agencies have been able to accomplish with those 
investments. I am also interested in learning about what 
resource gaps still exist that, if filled, would allow you to 
become more responsive and robust regulators.
    As we look ahead to fiscal year 2016, I would like to hear 
about your most pressing funding priorities, as well as your 
honest appraisal of the potential impacts on your operations 
should your funding requests not be fully met. In short, what 
planned activities and initiatives would not be realized and 
with what practical consequences?
    I understand, broadly speaking, funding forecasts always 
seem bleak and times remain tough. So with sequestration 
looming, this subcommittee and the Appropriations Committee as 
a whole will be dealing with challenges as we face competing 
demands. Yet in my view, shortchanging your two agencies in 
particular would be irresponsible.
    So I look forward to your testimony today and to exploring 
the opportunities in front of us.
    Chairman Boozman, thank you for convening this hearing. I 
am committed to working together as we consider the resource 
needs of these two important financial regulators.
    Senator Boozman. Thank you, Senator Coons.
    Chair White, I now invite you to present your remarks on 
behalf of the SEC.

                SUMMARY STATEMENT OF HON. MARY JO WHITE

    Ms. White. Thank you very much, Chairman Boozman, Ranking 
Member Coons, Senator Moran, other members of the subcommittee.
    Thank you for inviting me to testify in support of the 
SEC's 2016 budget request and to discuss what I believe is the 
compelling basis for funding the agency at a level of $1.72 
billion and how the SEC would effectively use the requested 
funds.
    I also want to express my appreciation to the subcommittee 
for its support of the SEC, its mission and budget, as well as 
to Chairman Massad for his cooperation and leadership.
    Understanding the growth in the size and complexity of the 
SEC's responsibilities and in the markets we oversee is 
critical to assessing the agency's current funding needs and 
putting into context the SEC's budget over the past several 
years. From fiscal year 2001 to the start of this fiscal year, 
for example, assets under management of SEC-registered 
investment advisers increased approximately 254 percent from 
$17.5 trillion to approximately $62 trillion, and our trading 
volume in the equity markets more than doubled to in excess of 
$67 trillion.
    The agency now regulates more than 25,000 market 
participants and has entirely new or expanded jurisdiction over 
securities-based swaps, private fund advisers, credit rating 
agencies, municipal advisors, clearing agencies, and 
crowdfunding portals, among others.
    Improvements to technology and operations have made the 
agency more efficient and effective, but to fulfill our 
mission, we must keep pace with the size and complexity of our 
markets and the entities participating in them.
    As a point of reference, it has been reported that the 4 
largest financial institutions--4 of the over 25,000 market 
participants we regulate--each spends approximately $7 billion 
to $10 billion annually on technology alone, compared to the 
SEC's entire budget for fiscal year 2015 of $1.5 billion.
    The SEC's fiscal year 2016 budget request would help us to 
advance several key priorities, including increasing 
examination coverage of investment advisers and other entities 
who serve retail and institutional investors. A decade ago, the 
SEC had approximately 20 examiners per trillion dollars of 
assets under management, while today we have only 7 and can now 
examine only 10 percent of investment advisers each year, which 
represents approximately 25 to 30 percent of the assets under 
management.
    Our request would also allow us to further leverage 
technology and recruit experts to increase the efficiency and 
effectiveness of our programs; enhance our enforcement 
program's analytic, investigative, and litigation capabilities; 
and strengthen the SEC's economic and risk analysis functions.

               SEC ACCOMPLISHMENTS AND FUNDING CHALLENGES

    Since I testified last April, the SEC has accomplished a 
great deal. We, for example, completed critical reforms to 
money market funds, credit rating agencies, Regulation A, and 
asset-backed securities, as well as significant enhancements to 
market resiliency, including against cyber attacks.
    Most of our Dodd-Frank and JOBS Acts mandates are now 
completed, and we are prioritizing finalizing the remaining 
ones, which primarily relate to the securities-based swap 
market, executive compensation, and crowdfunding. In other core 
areas of our mission, we advanced our work on U.S. equity and 
fixed-income market structure and made significant progress in 
developing measures for enhancing risk monitoring and 
regulatory safeguards for the asset management industry and on 
our initiative to improve the effectiveness of the public 
company disclosure regime.
    Our Division of Enforcement also achieved very significant 
results, bringing 755 enforcement actions across all priority 
areas and obtaining orders for more than $4.16 billion in 
disgorgement and penalties, both at record levels.
    These and other accomplishments represent substantial 
achievements for the agency, but significant funding challenges 
remain. As I have detailed in my written testimony, the SEC's 
fiscal year 2016 budget request seeks to address those 
challenges head on by providing the resources to allow the SEC 
to hire additional staff needed in critical core areas and to 
further advance our information technology.
    As the Chairman indicated, the SEC's funding mechanism is 
deficit neutral, which means that the amount Congress 
appropriates to the SEC will not have an impact on the Nation's 
budget deficit, nor will it impact the amount of funding 
available for other agencies. Nonetheless, we take very 
seriously, as the Chairman also indicated, our very important 
responsibility to be prudent stewards of the funds the agency 
is appropriated.
    Thank you again for your support of the agency's vital 
mission to protect investors, strengthen our markets, and 
promote capital formation. I would be very pleased to answer 
your questions.
    [The statement follows:]
                Prepared Statement of Hon. Mary Jo White
Chairman Boozman, Ranking Member Coons, and members of the 
subcommittee:

    Thank you for inviting me to testify today in support of the 
President's fiscal year 2016 budget request for the Securities and 
Exchange Commission.\1\ I appreciate the opportunity to describe the 
compelling basis for funding the agency at a level of $1.722 billion to 
help it fulfill its obligation to protect investors, maintain fair, 
orderly, and efficient markets, and facilitate capital formation.\2\
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    \1\ A copy of the SEC's fiscal year 2016 Congressional Budget 
Justification can be found on our Web site at http://www.sec.gov/about/
reports/secfy16congbudgjust.shtml.
    \2\ The views expressed in this testimony are those of the Chair of 
the Securities and Exchange Commission and do not necessarily represent 
the views of the President, the full Commission, or any Commissioner. 
In accordance with past practice, the budget justification of the 
agency was submitted by the Chair and was not voted on by the full 
Commission.
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    The U.S. securities markets are complex and constantly evolving, 
and the activities within our jurisdiction are not static. 
Understanding the growth in the size and complexity of the agency's 
responsibilities and in our markets, market participants, and 
investment products is critical to assessing the agency's funding 
needs. From fiscal year 2001 to the start of this fiscal year, for 
example:
  --Assets under management of SEC-registered investment advisers 
        increased approximately 254 percent from $17.5 trillion to 
        approximately $62 trillion;
  --Assets under management of mutual funds grew by 143 percent from 
        $6.4 trillion to $15.6 trillion; and
  --Annual trading volume in the equity markets more than doubled to in 
        excess of $67 trillion.
    During this same period, the SEC's responsibilities have also 
dramatically increased, adding or expanding jurisdiction over 
securities-based swaps, private fund advisers, credit rating agencies, 
municipal advisors, and clearing agencies, among others. Improvements 
to technology and operations have made the agency more efficient and 
effective, but to continue to meet our mission, we must be able to keep 
pace with the current and growing size and complexity of our markets 
and the entities participating in them.
    The agency today currently oversees more than 25,000 market 
participants, including nearly 12,000 investment advisers, 
approximately 10,500 mutual funds and exchange-traded funds, nearly 
4,500 broker-dealers, and about 450 transfer agents. The agency also 
oversees 18 national securities exchanges, 10 credit rating agencies, 
and 8 active registered clearing agencies, as well as the Public 
Company Accounting Oversight Board (PCAOB), Financial Industry 
Regulatory Authority (FINRA), Municipal Securities Rulemaking Board 
(MSRB), the Securities Investor Protection Corporation (SIPC), and the 
Financial Accounting Standards Board (FASB). The SEC also has 
responsibility for reviewing the disclosures and financial statements 
of approximately 9,000 reporting companies and for enforcing compliance 
with the Federal securities laws.
    The SEC's fiscal year 2016 budget request seeks to address our 
current needs and the challenges we face by providing resources to 
allow the SEC to hire an additional 431 staff in critical, core areas 
and enhance our information technology. Specifically, as described in 
more detail below, the requested budget level would allow the SEC to 
advance several key and pressing priorities, including:
  --Increasing examination coverage of investment advisers and other 
        key entities who service retail and institutional investors;
  --Further leveraging cutting-edge technology to permit the SEC to 
        better keep pace with the entities and markets we regulate;
  --Protecting investors by expanding our enforcement program's 
        investigative capabilities and strengthening our ability to 
        litigate against wrongdoers;
  --Strengthening the SEC's economic and risk analysis functions; and
  --Hiring additional market experts to enhance the agency's capability 
        to fulfill its expanded and increasingly complex 
        responsibilities.
    As the subcommittee is aware, the SEC's funding mechanism is 
deficit-neutral, which means that the amount Congress appropriates to 
the agency will not have an impact on the Nation's budget deficit, nor 
will it impact the amount of funding available for other agencies.\3\ 
Our appropriation also does not count against the caps set in the bi-
partisan congressional budget framework for 2015 and 2016. Nonetheless, 
I deeply appreciate that we have a serious responsibility to be an 
effective and prudent steward of the funds we are appropriated, and I 
believe we have demonstrated how seriously we take that responsibility.
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    \3\ Section 991 of the Dodd-Frank Act requires the SEC to collect 
transaction fees from self-regulatory organizations in an amount 
designed to directly offset our appropriation.
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    Last year was one of important achievements for the SEC, but more 
remains to be done. Below is a summary of the accomplishments of the 
SEC in the past year and of the significant challenges ahead, as well 
as a more detailed description of key aspects of the fiscal year 2016 
budget request.
Significant Achievements, But More Remains
    Since I testified before this subcommittee last April, the SEC has 
accomplished a great deal in many areas important to our mission and in 
fulfilling congressional mandates. Over the last year, informed and 
supported by rigorous and robust economic analyses, the Commission has 
adopted a series of critical reforms, including rules that directly 
respond to the financial crisis and that protect the integrity of our 
markets. We have made substantial progress implementing the rulemakings 
mandated by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act) and the Jumpstart Our Business Startups Act (JOBS 
Act). The rules on which the Commission has taken action in the last 
year include:
  --Asset-Backed Securities. The Commission completed rules requiring 
        significant enhancements to registered offering disclosures for 
        asset-backed securities, a market with $4.8 trillion in 
        issuances over the past decade that includes the types of 
        securities backed by residential and commercial real estate 
        that played a central role in the financial crisis.
  --Credit Rating Agencies. The Commission finalized over a dozen rules 
        that will reduce conflicts of interest and strengthen the 
        integrity of nationally recognized statistical ratings 
        organizations and the transparency of their ratings. The 
        Commission also continued to remove references to credit 
        ratings, bringing the total of removed references to 30 and 
        leaving only four rules and one form with references to be 
        removed.
  --Money Market Funds. The Commission completed reforms designed to 
        enhance the structure and operation of the $3.7 trillion money 
        market fund market to enhance the protection of investors and 
        to support financial stability.
  --Security-Based Swaps. The Commission proceeded with the next 
        critical phase of its implementation of Title VII of the Dodd-
        Frank Act, adopting new rules for previously unregulated 
        derivatives by mandating the parameters for covered entities 
        and establishing registration and reporting requirements for 
        security-based swap data repositories. In particular, in June 
        2014 the Commission adopted the threshold series of key rules 
        and guidance on cross-border security-based swap activities for 
        market participants, and earlier this year adopted rules that 
        require security-based swap data repositories to register with 
        the SEC and prescribe reporting and public dissemination 
        requirements for security-based swap transaction data. In 
        addition, recently the Commission voted to propose rules 
        governing the application of certain requirements to security-
        based swap transactions connected with a non-U.S. person's 
        dealing activity in the United States.
  --Capital Formation. On March 25 of this year, the Commission voted 
        to adopt a potentially transformative rule under the JOBS Act 
        to significantly enhance the existing Regulation A exemption 
        from registration for small offerings of securities. The 
        Commission also advanced rules to implement JOBS Act provisions 
        concerning registration and reporting thresholds under Exchange 
        Act Section 12(g).
  --Risk Retention. As required by the Dodd-Frank Act, the Commission 
        approved a joint agency rule requiring sponsors of 
        securitization transactions to retain risk in those 
        transactions.
  --Market Stability and Oversight. The Commission adopted Regulation 
        Systems Compliance and Integrity (Regulation SCI), creating for 
        the first time mandatory technology and systems standards and 
        reporting for significant market participants intended to 
        reduce systems issues and improve the overall resiliency of our 
        markets. On March 25 of this year, the Commission also voted to 
        propose rule amendments to enhance the supervision of large 
        proprietary trading firms, including those engaged in high 
        frequency trading, which would require that broker-dealers 
        trading in off-exchange venues become members of a national 
        securities association.
  --Executive Compensation. As required by the Dodd-Frank Act, the 
        Commission proposed rules for enhancing corporate disclosure of 
        hedging policies for officers and directors, and last month 
        proposed rules to require companies to disclose the 
        relationship between executive compensation and the financial 
        performance of the companies.
    Progress has also been made in our assessment of U.S. equity market 
structure to ensure that our markets remain the deepest and fairest in 
the world and optimally serve investors and companies of all sizes 
seeking to raise capital. In addition to the adoption of Regulation SCI 
and the proposal to enhance the supervision of large proprietary 
trading firms, we have published for notice and comment a proposal by 
the self-regulatory organizations (SROs) for a pilot to assess the 
impact of different tick sizes on the quality of the equity markets for 
small capitalization issuers. In response to my request, the exchanges 
conducted and have now completed an in-depth analysis of order types 
and reported on their findings, and have filed proposed rule changes to 
improve disclosures about how they use securities information processor 
(SIP) feeds and direct feeds. The exchanges and SIPs, at my request, 
are also expected to incorporate by June a time stamp in their data 
feeds to facilitate greater transparency on the issue of data latency. 
And we have brought a number of significant enforcement actions for 
violations of market integrity rules, including against exchanges and 
dark pools.\4\
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    \4\ E.g., Press Release No. 2014-263, Wedbush Securities and Two 
Officials Agree to Settle SEC Case (Nov. 20, 2014), available at http:/
/www.sec.gov/News/PressRelease/Detail/PressRelease/1370543504806; Press 
Release No. 2014-87, SEC Charges NYSE, NYSE ARCA, and NYSE MKT for 
Repeated Failures to Operate in Accordance With Exchange Rules (May 1, 
2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/
1370541706507; and Press Release No. 2014-114, SEC Charges New York-
Based Dark Pool Operator With Failing to Safeguard Confidential Trading 
Information (June 6, 2014), available at http://www.sec.gov/News/
PressRelease/Detail/PressRelease/1370542011574.
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    In addition, we have established an equity market structure 
advisory committee to focus on the structure and operations of the U.S. 
equities markets (including Regulation NMS) and provide a formal 
mechanism through which the Commission can receive advice and 
recommendations specifically related to equity market structure issues. 
The membership of the committee reflects a diversity of backgrounds, 
expertise, and viewpoints on our current equity market structure that 
we expect will provide valuable input as SEC staff continues to pursue 
a broad market structure agenda focused on high frequency trading and 
fairness, market transparency, trading venue regulation, mitigating 
broker conflicts, and critical market infrastructure.\5\ Staff also 
continues to pursue efforts to improve the market structure for trading 
fixed income securities, including municipal and corporate bonds, and 
is developing a far-ranging package of measures for enhancing the asset 
management industry's risk monitoring and regulatory safeguards.
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    \5\ The first meeting of the equity market structure advisory 
committee is scheduled for May 13, 2015.
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    We are also advancing our initiative to improve the effectiveness 
of the public company disclosure regime for investors and companies, 
where the staff has sought input from a broad range of market 
participants and is developing recommendations for the Commission's 
consideration. In addition, consistent with the Dodd-Frank Act, staff 
is currently engaged in a comprehensive review of the ``accredited 
investor'' definition.
    The Division of Enforcement continued to achieve significant 
results, filing 755 enforcement actions and obtaining orders for more 
than $4.16 billion in disgorgement and penalties in fiscal year 2014. 
Notable actions include the first series of cases involving violations 
of the ``market access'' rule, the first action enforcing the rule 
against investment advisers participating in ``pay to play'' 
arrangements, the first action against a private equity firm relating 
to its allocation of fees and expenses, and the first anti-retaliation 
case to protect a whistleblower who reported improper trading activity. 
Structural and strategic enhancements--including increased recruitment 
of industry experts, the augmentation of our data analytics capacities, 
and bolstered new training programs--within our Office of Compliance, 
Inspections and Examinations have led to a more effective, efficient 
examination program.
    Despite this and other significant progress, there is much that the 
SEC still needs to do: from further implementing our mandated 
rulemakings, to continuing the initiatives outlined above, to further 
strengthening our economic and risk analysis functions, to hiring 
additional market and quantitative experts to further address our 
expanded responsibilities, to continuing to improve our technology and 
operations to make the agency more agile and effective. Outlined below 
is a brief overview of some of the key components of our request.
Expanding Oversight of Investment Advisers and Strengthening Compliance
    Our current level of resources is not sufficient to permit the SEC 
to adequately examine investment advisers in a way that investors 
expect and deserve. The number of registered advisers has increased 
nearly 35 percent over the last decade, and the assets managed by these 
advisers have more than doubled. At the same time, the industry has 
become more complex, as evidenced by the increasing use of new and 
sophisticated products such as derivatives and structured products; the 
increased use of technologies that facilitate high-frequency and 
algorithmic trading; and the growth of complex families of financial 
services by companies with integrated operations that include both 
broker-dealer and investment adviser affiliates.
    Even with the SEC's efficient use of limited resources to improve 
its risk assessment capabilities and focus its examination staff on 
areas posing the greatest risk to investors--efforts that helped to 
increase the number of investment adviser examinations approximately 20 
percent from fiscal year 2013--the SEC was only able to examine 10 
percent of registered investment advisers in fiscal year 2014. A rate 
of adviser examination coverage at that level presents a high risk to 
the investing public.
    Under the fiscal year 2016 request, a top priority will be to hire 
225 additional examiners, primarily to conduct additional examinations 
of investment advisers. Once fully on-board and trained, the investment 
adviser examiners would assist the agency's National Examinations 
Program (NEP) in increasing its examination coverage of advisers to an 
anticipated rate of approximately 14 percent per year.
    The NEP also would add positions to improve oversight and 
examination functions related to broker-dealers, clearing agencies, 
transfer agents, self-regulatory organizations, swap data repositories, 
municipal advisors, and, in the future, crowdfunding portals, among 
others.
Continue to Leverage Technology
    In fiscal year 2016, the SEC plans to build on the substantial 
progress made over the past few years to modernize its technology 
systems, streamline operations, and increase the effectiveness of its 
programs. The SEC's fiscal year 2016 budget request, which includes 
full use of the Reserve Fund, would support a number of key information 
technology (IT) initiatives, including:
  --Data analytics tools, to assist in the integration and analysis of 
        huge volumes of financial market data, employing algorithms and 
        quantitative models that can lead to earlier detection of fraud 
        or suspicious behavior.
  --Electronic Data Gathering, Analysis and Retrieval (EDGAR) 
        modernization, an ongoing, multi-year effort to simplify the 
        financial reporting process to promote automation and reduce 
        filer burden. With a more modern EDGAR, both the investing 
        public and SEC staff will benefit from having improved access 
        to better data.
  --Examination improvements, aimed toward improving risk assessment 
        and surveillance tools that will help the staff monitor for 
        trends and emerging fraud risks, as well as improving the 
        workflow system supporting SEC examinations.
  --Tips, Complaints, and Referral (TCR) system enhancements, to 
        bolster the flexibility, agility, and adaptability of the 
        system. TCR enhancements will provide more flexible and 
        comprehensive intake, triage, resolution tracking, searching, 
        and reporting functionalities, with full auditing capabilities.
  --Enforcement investigation and litigation tracking, to support 
        enforcement teams with handling the substantial volume of 
        materials produced during investigations and litigations. Among 
        other initiatives, the SEC hopes to build the capability to 
        permit the electronic transmittal of data for tracking and 
        loading (versus the current practice of receiving content via 
        the mail); implement a document management system for 
        Enforcement's internal case files; and revamp the tools used to 
        collect trading data from market participants.
  --Enterprise Data Warehouse (EDW), a centralized repository for the 
        SEC to organize its various sources of data and help SEC staff 
        gain easier access to more usable market data. The EDW is the 
        SEC's primary effort to bring together data from different 
        divisions and offices for easier and more efficient analysis 
        across the agency.
  --SEC.gov modernization, to make one of the most widely used Federal 
        Government Web sites more informative, easier to navigate, and 
        secure for investors, public companies, registrants and the 
        general public.
  --Information security, to further automate controls, continue the 
        transition to continuous monitoring, and build the agency's 
        risk management capabilities.
  --Business process automation and improvement, to build workflow 
        applications that will improve the efficiency and effectiveness 
        of the entire agency in serving the public.
    The fiscal year 2016 request includes 14 new positions for the 
Office of Information Technology (OIT) to better execute these and 
other technology initiatives. These staff will serve as project 
managers, business analysts, and technical resources who will improve 
technology and data management support for the SEC's business areas. In 
addition, the positions will enhance information security through 
monitoring, and drive further improvements in IT equipment management 
and reporting.
Bolster Enforcement
    It is vital to the SEC's mission to bring timely, high-quality 
enforcement actions when violations of the Federal securities laws are 
identified. The agency must adapt its enforcement function to keep pace 
with the growing size and complexity of the Nation's markets and to 
send strong messages to wrongdoers that misconduct will be swiftly and 
aggressively addressed. For fiscal year 2016, the SEC is requesting 93 
new positions for the Division of Enforcement in three areas: staff 
proficient in conducting intelligence processing and analysis; 
investigative staff to permit the agency to more swiftly and 
effectively identify and respond to the high volume of securities-
related misconduct; and litigation staff to address the growing number 
of contested enforcement matters nationwide.
    Analysis of large datasets, including SEC filings and trading data 
in equities, options, municipal bonds, and other securities, helps to 
limit investor harm by permitting earlier detection of misconduct. The 
SEC's Enforcement program expects that both an increasing number of 
high-quality TCRs and its improved data analysis capabilities will 
yield additional case leads through fiscal year 2016. The Enforcement 
program anticipates dedicating 20 of the requested positions to further 
develop its data analytic function, increase the number of staff 
responsible for reviewing and triaging incoming TCRs, and bolster the 
number of staff to whom TCRs are sent for further investigation.
    The Enforcement program also requires increased staffing to 
promptly detect complex frauds and other difficult-to-detect 
misconduct; respond to misconduct involving the changing equity 
markets, including misconduct related to algorithmic trading or dark 
pools; address large-scale insider trading or stock manipulations; 
investigate potential accounting or reporting fraud; and generally keep 
pace with a rapidly growing and evolving industry. As a result, the 
Division is seeking 50 new positions in fiscal year 2016 to reinforce 
its investigative functions. These new positions will help the Division 
continue progress on existing investigations and handle its increasing 
case load, while quickly investigating and bringing emergency actions 
in matters where investors' money may dissipate if immediate action is 
not taken.
    In addition, in recent years an increasing percentage of 
enforcement actions have been filed as contested matters, as opposed to 
being fully settled at the outset. This has led to more trials than in 
the past, a volume that is expected to continue to grow. Therefore, the 
Enforcement program needs additional resources to handle an expansive 
and sophisticated docket of litigation and trials, often against well-
funded adversaries. Enforcement requests 23 new positions in fiscal 
year 2016 to reinforce its litigation operations nationwide.
Continued Prioritization of Economic and Risk Analysis to Support 
        Rulemaking and Oversight
    The SEC remains committed to strengthening the economic and risk 
analysis functions housed in its Division of Economic and Risk Analysis 
(DERA), our fastest growing division. For fiscal year 2016, the SEC 
plans to add 6 new positions to DERA, building upon the 14 positions 
being added in fiscal year 2015. Specifically, in fiscal year 2016, 
DERA is seeking three positions to expand the agency's capability to 
provide high quality economic data in support of risk assessment and 
policy initiatives across the SEC. These employees would continue to 
expand DERA's ability to support SEC programs with data cleansing, 
normalization, and analysis; statistical programming, text analytics, 
and risk modeling; and quantitative research services. We are also 
requesting three additional positions for DERA to provide economic 
analytical capabilities to support enforcement litigation, particularly 
in the SEC's regional offices.
Meet Expanded Rulemaking and Oversight Responsibilities
    The agency also is requesting 12 additional positions in fiscal 
year 2016 for its Division of Trading and Markets (TM). As the SEC's 
oversight of regulated entities and analysis of market events become 
more data-driven, TM is expanding its use of advanced quantitative 
skills, tools, and data to assess evolving markets. The Division 
therefore is expanding its efforts to recruit professionals with 
expertise in quantitative analysis, risk management, and equity and 
fixed income market structure. The additional positions will enhance 
supervision of securities markets, securities market infrastructure, 
securities intermediaries, and other market participants. Recent 
legislation and rulemaking--including relating to over-the-counter 
derivatives, clearing agencies, and crowdfunding--also have 
substantially expanded TM's responsibilities. As registration 
requirements for these rules become effective, scores of new entities 
will require Division oversight.
    In addition, the SEC is seeking 12 new positions for its Division 
of Investment Management to operationalize new rulemaking requirements, 
offer enhanced guidance to registrants, expand the disclosure review 
program's ongoing analysis of industry trends, and provide additional 
oversight of private fund advisers. The new positions would also 
monitor money market funds' compliance with the new requirements 
adopted in fiscal year 2014 by the Commission, as well as assist in 
adopting--and ultimately operationalizing--the package of measures for 
enhancing the asset management industry's risk monitoring and 
regulatory safeguards.
Conclusion
    Thank you for your support of the agency's vital mission and the 
opportunity to present the President's fiscal year 2016 budget request. 
I would be happy to answer your questions.

    Senator Boozman. Thank you, Chair White.
    And Chairman Massad, I now invite you to present your 
testimony on behalf of the CFTC.

                  COMMODITY FUTURES TRADING COMMISSION

STATEMENT OF HON. TIM MASSAD, CHAIRMAN
    Mr. Massad. Thank you.
    Good morning, Chairman Boozman, Ranking Member Coons, 
Senator Moran, and other members of the subcommittee.
    Thank you for the opportunity to discuss the President's 
fiscal year 2016 budget request for the CFTC. I am pleased to 
be here today on behalf of the Commission.
    I first want to thank our staff for their hard work and 
dedication, as well as my fellow commissioners. I believe we 
are all working together in good faith to carry out the 
Commission's responsibilities. I also want to thank Chair White 
and the staff of the SEC for their cooperation and 
collaboration.
    Futures options and swaps markets that we oversee are 
profoundly important to our economy. They enable businesses of 
all types to manage risk, whether it is a farmer locking in a 
price for his crops, a manufacturer managing supply costs, or 
an exporter hedging foreign currency risk. These markets have 
been an engine for economic growth in our country, and they can 
continue to be so, but only if we maintain their integrity and 
transparency through sensible oversight.
    We are grateful for our fiscal year 2015 budget increase, 
and I thank the subcommittee for their support. It has helped 
us modernize our information technology capabilities and 
bolster staff in critical areas. However, even with this 
increase, the CFTC's budget has not kept pace with its 
responsibilities, and this is for two reasons.
    The first is the markets the Commission has traditionally 
overseen have grown significantly in scale, technological 
sophistication, and complexity. The number of actively traded 
futures and options contracts has doubled since 2010 and 
increased 6 times over the last 10 years. Trading is 
increasingly conducted in an automated, electronic fashion, 
even for traditional products such as agriculture and energy 
futures. Cyber attacks have become a major new threat to our 
markets.
    Secondly, the Commission now has responsibility for 
overseeing the swaps market, the size of which, as Ranking 
Member Coons noted, is over $400 trillion measured by notional 
amount. In 2008, we saw how the buildup of excessive risk in 
this market helped contribute to the worst financial crisis 
since the Great Depression. Eight million Americans lost their 
jobs.
    Now, we are implementing a regulatory framework to make the 
swaps market safer and more transparent. Simply put, we need 
more resources to do the vital job of overseeing these 
important dynamic markets. That is why the President is 
requesting a budget of $322 million for fiscal year 2016.
    One third of our budget request, about 40 percent of the 
total requested increase, will go to data and technology. This 
reflects the nature of the markets today and the challenges we 
face every day.
    Every day, we collect over 300 million data records that 
need to be processed. Our data intake and storage needs are 
increasing 35 percent a year, and these figures do not even 
include message data. That is, the billions of records 
regarding bids and orders, not just transactions, that we often 
must review to detect improper behavior.
    Chair White noted that many financial institutions are 
spending $7 billion on technology. Our technology budget this 
year was $51 million.
    Our budget request is also focused on enhancing our 
surveillance program. We must have highly skilled 
professionals, as well as high-powered data and technological 
capabilities, to monitor for the types of sophisticated 
manipulation that can occur today.
    Our request will also enhance our enforcement efforts. 
Since I took office, we have focused on enforcement, because 
there is nothing more important than deterring fraud and 
manipulation. Already, in this fiscal year, we have imposed 
fines and penalties that are over 10 times our current budget, 
all of which go to the U.S. Treasury and are not available to 
fund our budget.
    But for each case we initiate, there are many that we 
cannot pursue because of resource constraints. We must have 
adequate resources to go after abuses, whether they are price-
fixing schemes by large institutions or investment scams 
perpetrated against retirees.
    Our request will increase our ability to perform 
examinations of critical infrastructure like clearing houses. 
Clearing houses are even more important today in the global 
financial system, but we lack the resources to examine them as 
often as we should.
    And the request will enable us to step up our cybersecurity 
efforts. A cyber attack could be devastating and could come not 
only from those motivated by money, but from those seeking to 
disrupt our financial system.
    Finally, this budget will enhance our ability to respond to 
the concerns of commercial end-users. This is something I have 
made a priority since taking office last June. We have taken 
many actions to make sure our regulations do not impose undue 
burdens or unintended consequences on the commercial firms that 
need these markets to hedge routine risk, and we will continue 
to do this.
    We will also continue to fine-tune our regulations and work 
on harmonizing, internationally and domestically, so that the 
new swaps rules fulfill the goals set by Congress.
    The United States has had the best derivatives markets in 
the world for decades. This is because of the strength of our 
private sector, but it is also because we have had a regulatory 
framework that was sensible, one that promoted integrity and 
transparency as well as competition and innovation.
    If we want our markets to continue to thrive and contribute 
to economic growth, we must make the necessary investment in 
oversight. Your support of our budget request will help us do 
just that.
    Thank you again, and I look forward to your questions.
    [The statement follows:]
              Prepared Statement of Hon. Timothy G. Massad
    Good morning, Chairman Boozman, Ranking Member Coons, and members 
of the subcommittee. I am pleased to testify before you this morning on 
behalf of the Commission regarding the President's request for the 
fiscal year 2016 budget for the Commodity Futures Trading Commission 
(CFTC).
    The Commission has been very busy since two of my fellow 
commissioners and I joined about 11 months ago. We have taken several 
actions to make sure that commercial end-users can continue to use the 
derivatives markets effectively and efficiently. We have continued to 
work to bring the over the counter swaps market out of the shadows and 
implement the regulatory reforms mandated by Congress. We have focused 
on making sure clearinghouses are strong and resilient. We have worked 
to improve the swap trading framework and to enhance data collection. 
We have been collaborating with our domestic colleagues, including at 
the Securities and Exchange Commission, and I want to thank Chair 
White. There are a number of issues that impact both our agencies, and 
I appreciate our strong, cooperative working relationship. We have also 
worked closely with our international colleagues toward harmonizing new 
swaps rules as much as possible. And we are continuing to engage in the 
compliance, surveillance, and enforcement work that is necessary to 
prevent fraud and manipulation, and enhance market integrity and 
transparency. But there is much more we need to do.
    Before discussing our budget request, I know I speak for all the 
Commissioners in thanking our dedicated and talented staff for their 
hard work and dedication. The progress we have made is a credit to 
their tireless efforts. I also want to thank each of my fellow 
commissioners for their efforts and commitment. I believe we are 
working together constructively and in good faith to do the best job we 
can in carrying out the Commission's responsibilities.
    Our current fiscal year 2015 budget provides an increase of $35 
million over the previous year. This increase was essential to our 
ability to carry out our mission. We are grateful for it. We have 
outlined in our fiscal year 2015 Spending Plan how we are using these 
resources, which includes modernizing our information technology 
capabilities and bolstering our staff in critical areas.
    Even with this increase, however, the CFTC's budget is not at a 
level that is commensurate with its responsibilities. Our 
responsibilities in the last few years have increased significantly, 
and now include overseeing the swaps market, an over $400 trillion 
market in the U.S., measured by notional amount. In addition, the 
markets the Commission has traditionally overseen have grown in scale, 
technological sophistication, and complexity. The number of actively 
traded futures and options contracts has doubled since 2010 and 
increased 6 times over the last 10 years. Trading is increasingly 
conducted in an automated, electronic fashion, and cybersecurity has 
become a major new threat to the integrity and smooth functioning of 
the critical market infrastructure that the Commission regulates. While 
these developments, among others, have brought new responsibilities and 
challenges to the Commission, its capabilities have not kept pace. Our 
resources continue to be stretched far too thinly over many important 
responsibilities.
  the significance of derivatives markets and importance of sensible 
                               oversight
    The derivatives markets are profoundly important to a wide variety 
of businesses in our country. They enable businesses of all kinds to 
hedge commercial risk, whether it is a farmer locking in a price for 
his crops, a utility hedging the cost of fuel or an exporter managing 
foreign currency risk. Those businesses depend on the Commission to do 
its job efficiently and sensibly. The Commission's budget is a small, 
but vital, investment to make in order to make sure these markets 
operate with integrity and transparency.
    It is also helpful to remember how excessive risk related to swaps 
contributed to the 2008 financial crisis, and the cost of that crisis 
to American families and our economy, to recognize the value of this 
investment. That crisis resulted in 8 million jobs lost, millions of 
foreclosed homes, countless retirements and college educations 
deferred, and businesses shuttered. Indeed, the amount of taxpayer 
dollars that were spent just to prevent the collapse of AIG as a result 
of its excessive swap risk was over 700 times the size of the CFTC's 
current budget. Another perspective on the size of our budget is the 
fact that from 2009 through 2014, the Commission collected fines and 
penalties of approximately twice its cumulative budgets. This year the 
fines and penalties collected are already about 10 times our budget.
             the cftc's budget request for fiscal year 2016
    The Commission requests a budget of $322 million and 895 full-time 
equivalents (FTE) for fiscal year 2016. This will enable us to engage 
in the following critical activities, among others, in support of our 
mission:

  --Enhance our surveillance and enforcement capabilities to keep pace 
        with our expanded oversight responsibilities and the overall 
        growth and increasing complexity of the derivatives markets.
  --Enable us to perform on a timely and thorough basis the 
        examinations of critical market infrastructure, such as 
        exchanges and clearinghouses, as well as intermediaries that 
        hold billions of dollars in customer funds, to ensure that they 
        are protecting customer interests and operating in compliance 
        with Commission requirements.
  --Enable us to review and provide timely responses to requests and 
        concerns of derivatives market participants, including with 
        respect to new product approvals and other innovations.
  --Substantially expand our capabilities with respect to 
        cybersecurity, which is the single most important threat to 
        financial stability today.
  --Make key investments in technology systems and resources that are 
        vital to carry out our core mission activities.

    Before I discuss the budget request in more detail, I would like to 
review what we have been doing in several areas.
            addressing the concerns of commercial end-users
    Over the last 11 months, we have taken several actions to make sure 
that commercial end-users can continue to use the derivatives markets 
effectively and efficiently. This has involved fine-tuning rules to 
ensure that they work as Congress intended and do not impose unintended 
consequences on commercial end-users. Some of the steps we have taken 
include:

  --Local Utility Companies.--In September, the Commission amended its 
        rules so that local, publicly-owned utility companies could 
        continue to effectively hedge their risks in the energy swaps 
        market. These companies, which keep the lights on in many homes 
        across the country, must access these markets efficiently in 
        order to provide reliable, cost-effective service to their 
        customers. The Commission unanimously approved a change to the 
        swap dealer registration threshold for transactions with 
        special entities which will make that possible.
  --Customer Protection/Margin Collection.--In March, the Commission 
        unanimously approved a final rule to modify one aspect of our 
        customer-protection related rules, which had previously been 
        unanimously adopted in the wake of MF Global's insolvency and 
        were designed to prevent a similar failure from recurring and 
        to protect customers in the event of such a failure. To address 
        a concern of many in the agricultural community and many 
        smaller customers regarding the posting of collateral for their 
        trades, we removed a provision that would have automatically 
        changed the deadline for futures commission merchants to post 
        ``residual interest,'' which, in turn, can affect when 
        customers must post collateral.
  --Recordkeeping Requirements.--We have proposed to exempt end-users 
        and commodity trading advisors from certain recordkeeping 
        requirements related to text messages and phone calls. This 
        proposal is designed to make sure we do not impose undue 
        recordkeeping requirements on commercial end-users.
  --Treasury Affiliates of End-Users.--The Commission staff took action 
        to make sure that end-users can use the Congressional exemption 
        given to them regarding clearing and swap trading if they enter 
        into swaps through a treasury affiliate. It is common for a 
        large corporation with significant non-financial operations to 
        have a separate affiliate enter into swaps and financing 
        transactions on behalf of the larger corporation and its 
        subsidiaries.
  --Reporting Requirements for Contracts in Illiquid Markets.--CFTC 
        staff recently granted relief from the real-time reporting 
        requirements for certain less liquid, long-dated swap contracts 
        that are not subject to mandatory clearing and do not yet trade 
        on a regulated platform. We agreed to permit slightly delayed 
        reporting for these swaps so that the real-time reporting 
        requirements in Dodd-Frank do not lead to identifying market 
        participants, as that could result in competitive harm.
  --Volumetric Optionality.--Last week, the Commission voted to clarify 
        an interpretation of when certain agreements are forward 
        contracts, rather than swaps. Specifically, we clarified when 
        an agreement, contract, or transaction that contains embedded 
        volumetric optionality falls within the forward exclusion from 
        being considered a swap. ``Embedded volumetric optionality'' 
        refers to the contractual right of a counterparty to receive 
        more or less of a commodity at the negotiated contract price. 
        Contracts with this feature are important to, and widely used 
        by, a variety of end-users, including electric and natural gas 
        utilities. By clarifying how these agreements will be treated 
        for regulatory purposes, the interpretation is intended to make 
        sure commercial companies can continue to conduct their daily 
        operations efficiently. Once this interpretation is acted upon 
        by the Securities and Exchange Commission, as definitional 
        issues require actions by both Commissions, we will publicly 
        release the final interpretation.
  --Trade Options.--Likewise, the Commission last week voted to issue a 
        proposed rule reducing reporting and record keeping 
        requirements with respect to trade options. These products are 
        also commonly used by commercial participants.
                     finishing the remaining rules
    A second priority has been to finish the few remaining rules 
required for the new swaps regulatory framework as agreed by the G-20 
nations and enacted by Congress. This includes the rule on margin for 
uncleared swaps, which plays a key role in the new regulatory framework 
because uncleared transactions will always be an important part of the 
market. Certain products will not be suitable for central clearing 
because of their lack of sufficient liquidity or other risk 
characteristics. In these cases, margin will continue to be a 
significant tool to mitigate the risk of default from those 
transactions and, therefore, the potential risk to the financial system 
as a whole. We have made sure that our proposed rule on margin for 
uncleared swaps exempts commercial end-users from its requirements.
    We are also working closely with the domestic bank regulators, who 
are also responsible for issuing rules on margin, to harmonize the 
rules as much as possible. I am hopeful that we can finalize these 
rules by the summer.
    Another important rule we are working to complete is the position 
limits rule. The law mandates that the agency adopt limits to address 
the risk of excessive speculation. In doing so, we must also make sure 
that market participants can engage in bona fide hedging. We have 
received substantial input on this proposal and staff are considering 
these comments carefully.
                           clearing and risk
    Clearinghouse oversight continues to be another priority. In this 
post-global financial crisis world, clearinghouses play an even more 
critical role than before. In our markets, for example, the percentage 
of swaps cleared has increased from 15 percent in December 2007 to 
about 75 percent today. So we need to make sure clearinghouses have 
strength and resiliency.
    Over the last few years, the agency has done a major overhaul of 
its clearinghouse regulatory framework, including by incorporating 
international standards and taking other steps to strengthen risk 
management practices and customer protection. We are also engaged in 
extensive oversight activities that include, among other things, daily 
risk surveillance, stress testing, and in-depth compliance 
examinations. Our oversight efforts also focus on risk at the clearing 
member and large trader levels. And while our goal is to never get to a 
situation where recovery or resolution of a clearinghouse must be 
contemplated, we are working with fellow regulators, domestically and 
internationally, on the planning for such contingencies, in the event 
there is ever a problem that makes such actions necessary.
    In addition, we are addressing new risks like cybersecurity. This 
applies to key exchanges and other critical infrastructure as well as 
clearinghouses. We have incorporated cyber concerns into our 
regulations and made it a priority in our examinations. Our challenge 
is to leverage our limited resources as effectively as possible. We do 
not have, for example, the resources to do independent testing of 
cybersecurity measures. Therefore, we are looking at whether the 
private companies that run major exchanges and clearinghouses are doing 
adequate testing themselves of their cyber protections, such as control 
testing, penetration testing and vulnerability testing.
              implementing the framework for swaps trading
    We have also continued to make progress implementing the new 
framework for swaps trading. It has been a little over a year since the 
first made-available-for-trade determinations. We currently have almost 
two dozen swap execution facilities (SEFs).
    Information compiled by the International Swaps and Derivatives 
Association highlights some positive trends. Measured by trade count 
and notional value, SEF trading accounted for about half of total 
volume in 2014, and the percentage is much higher for swaps on CDS 
indices. We have also seen a significant increase in non-U.S. market 
participants participating on SEFs for credit indices.
    Our goal is to build a regulatory framework that not only meets the 
congressional mandate of bringing this market out of the shadows, but 
which also creates the foundation for the market to thrive. To do so, 
the regulatory framework must ensure transparency, integrity and 
oversight, and, at the same time, permit innovation, freedom and 
competition.
    We have taken several steps recently to improve SEF trading. This 
has included the following:

  --Package Transactions.--Last fall the staff issued no-action relief 
        to provide market participants additional time to adapt to 
        exchange-based trading. That phasing of compliance deadlines 
        has worked well.
  --Block Trades.--The staff addressed the issue of pre-trade credit 
        checks for block trades, and the so called ``occurs away'' 
        requirement, so that block transactions could continue to be 
        negotiated between parties and executed on SEF.
  --Error Trades.--CFTC staff issued no-action relief that will 
        streamline the process for correcting erroneous trades.
  --Cleared Swap Reporting.--We intend to initiate a rulemaking to 
        clarify reporting of cleared swaps as well as the role played 
        by clearinghouses in this workflow. This rulemaking will 
        propose to eliminate the requirement to report Confirmation 
        Data for intended to be cleared swaps that are accepted for 
        clearing and thereby terminated.
  --SEF Confirmations.--Staff has issued no-action relief permitting 
        the SEF legal confirmation to incorporate the ISDA Master 
        Agreement by reference. This also clarified the SEF reporting 
        responsibility regarding uncleared swaps--SEFs need only report 
        ``Primary Economic Terms''--as well as any Confirmation Data 
        they do in fact have.

    Flexibility Regarding Methods of Execution.--Our staff has been 
working with SEFs to make it clear that our rules permit flexibility in 
methods of execution as long as the regulatory standards and goals are 
met. Staff has confirmed that an auction match trading protocol is 
acceptable as long as SEFs provide adequate transparency regarding the 
process for setting the offer price.
    SEF Financial Resources.--Our staff has issued guidance that 
clarifies the calculation of projected operating expenses for the 
purpose of determining the capital that the law requires SEFs to hold. 
Specifically, the guidance clarifies that variable commissions that 
SEFs pay do not have to be included in a SEF's calculation of projected 
operating costs.
    I would note that in some areas where the staff has acted by no-
action letter to provide temporary relief at the request of industry 
participants, we are considering taking up the issue in a rulemaking in 
order to find a permanent solution.
    We are looking at a number of additional issues concerning SEFs, 
such as the made available for trade determination process and concerns 
about the lack of post-trade anonymity for certain types of trades, and 
we will continue to do all we can to improve the regulatory framework 
and enhance SEF trading.
                       cross-border harmonization
    We are also focused on addressing cross border issues related to 
the new framework. We have had productive discussions with the 
Europeans to facilitate their recognition of U.S. based clearinghouses. 
We have offered a substituted compliance framework for clearinghouse 
regulation which was their principal concern. I believe there is an 
ample basis for them to make a determination of equivalence, and I hope 
that they will do so soon.
    Another important area for cross-border harmonization is the 
proposed rule on margin for uncleared swaps. We have been working with 
our counterparts in Europe and Japan, and I am hopeful that our 
respective final rules will be similar on most issues.
    We are also focused on the cross-border implications of our trading 
mandate rules. This has been one of the greatest challenges. We were 
among the first to implement swaps trading rules and to mandate trading 
of certain products; many other jurisdictions have not yet done so. To 
avoid the potential for any regulatory arbitrage, we look forward to 
others adopting their own rules to implement swaps trading as well as 
the other G-20 commitments, and we look forward to working with them to 
harmonize rules as much as possible.
                              enforcement
    We remain committed to a robust enforcement and compliance program 
to prevent fraud and manipulation. The Commission pursues cases 
covering a wide variety of potential market abuses and bad behavior, 
ranging from more common fraud and abuse like Ponzi schemes or precious 
metal scams that target retirees, to complex manipulation schemes 
driven by sophisticated, electronic trading strategies, to price fixing 
or benchmark manipulation through collusion among large traders. In 
just the last few weeks, we have announced some significant new cases.
    Last month, the agency along with our colleagues at the Department 
of Justice, the U.K. Financial Conduct Authority and New York's 
Department of Financial Services announced settlements with Deutsche 
Bank over charges of false reporting and manipulation of the London 
Interbank Offered Rate (LIBOR), a critical, global benchmark interest 
rate, upon which trillions of dollars of contracts are indexed. The 
Commission brought the first LIBOR case in 2012, and collectively, the 
Commission has imposed over $4 billion in penalties against 13 banks 
and brokers to address LIBOR and foreign exchange benchmark abuses. In 
a separate action, the Commission and the Department of Justice brought 
civil and criminal charges against an individual who we believe engaged 
in spoofing and sought to manipulate the E-mini S&P 500 futures on 
repeated occasions, at times successfully. His activity contributed to 
the order imbalance in trading in E-mini S&P 500 futures that 
contributed to market conditions that led to the flash crash of 2010. 
We worked closely not only with the Justice Department, but also the 
FBI, the U.K. Financial Conduct Authority and Scotland Yard on this 
case.
    As these cases illustrate, we will do everything in our power, and 
within our resources, to pursue those who attempt to engage in fraud or 
manipulation in our markets. It is essential that our markets operate 
with integrity and fairness for all market participants.
       the 2016 budget request advances key commission priorities
    The 2016 budget request is focused on advancing key mission 
priorities. Of the requested $72 million increase, nearly $28 million 
is allotted for additional information technology investments that will 
help to modernize the Commission's capabilities. This would supplement 
the approximately $51 million we plan on spending on technology in 
fiscal year 2015. The remaining $44 million of the increase would 
provide for an additional 149 FTE for related mission-activity support, 
specifically targeting critical areas such as surveillance, 
enforcement, examinations, registration, and compliance, each described 
in more detail below.
                              surveillance
    The 2016 budget request seeks $62.4 million for surveillance, an 
increase of $5.9 million and 42 FTE over the fiscal year 2015 enacted 
level. The Commission must enhance its surveillance capabilities to 
keep pace with the growth and increasing technological sophistication 
of the markets. Effective surveillance is essential to detect excessive 
risk, fraud, abusive practices, and manipulation.
    The days when market surveillance could be conducted by observing 
traders in floor pits are long gone. Today, not only is almost all 
trading electronic, but in many products a majority is conducted 
through highly sophisticated automated trading programs. The Commission 
is responsible for overseeing the markets in over 40 physical 
commodities, as well as a wide range of financial futures and options 
products based on interest rates, equities, and currencies. There are 
over 4,000 actively traded futures and options contracts and thousands 
more subject to our oversight when all tenors and associated options 
are included. On a typical day, there may be 750,000 transactions in 
Treasury futures and more than 700,000 in just the E-mini S&P 500 
contract, the most active equity index future. And this does not 
include the approximately 7 million open swaps reported to SDRs. In 
just a single commodity category such as crude oil, there are typically 
hundreds of thousands of transactions every day. Transactions are only 
part of the picture, however. In today's high speed markets, 
manipulation and fraud are often conducted using complex strategies 
involving bids and offers, which far outnumber consummated 
transactions. Each day in the Treasury futures market, for example, 
there can be millions of bids and offers.
    Successful market surveillance activities require us to have the 
ability to continually receive, load, and analyze large volumes of 
data. This requires a massive information technology investment, 
sophisticated analytical tools that we develop for these unique 
environments and experienced professionals who can identify potential 
problems and engage in further inquiry.
    Moreover, the swaps market presents different challenges than the 
futures and options market with respect to surveillance. This is 
because there are multiple trading platforms so data must be analyzed 
across platforms. There is also considerable voice-driven activity and 
complexities to the execution and processing of trades that do not 
exist in the vertically integrated futures markets that require 
different surveillance perspectives. Aggregating data to understand 
participants' positions across futures and swaps markets is 
particularly challenging.
    Whether in futures, options, or swaps, market surveillance is not 
simply dependent on sophisticated technological systems. We must have 
experienced personnel who understand the markets we oversee, who can 
discern anomalies and patterns and who have the experience, judgment, 
and skills to investigate possible infractions. There is great 
variation among the various products traded in our markets, variation 
which requires specialized knowledge: The market structure, trading 
patterns, and complexities of the crude oil market are quite different 
from that of soybeans or any other agricultural product, and each 
commodity market itself has its own characteristics.
    In addition to market surveillance, the Commission must oversee the 
risk being taken on by clearinghouses, individual clearing firms, and 
large market participants. We do this by continually monitoring their 
customer and house positions and margining practices. Given the global 
nature of our markets, our surveillance personnel examine data from 
CFTC-registered clearinghouses that are located abroad, and communicate 
frequently with regulators in other jurisdictions. These teams also 
look through at large customer positions being held at or managed by 
intermediaries, and they aggregate customer data across clearinghouses. 
Today, for example, 36 firms hold more than $500 million each in 
customer funds, and 10 of these firms hold more than $10 billion each 
in customer funds. Failure or trouble at any one firm, particularly a 
larger firm, could seriously disrupt our markets. On-site examinations 
are an important component of adequate surveillance, but we are limited 
as to the frequency of these examinations given the small size of our 
staff.
    Without the requested increase in surveillance personnel and 
resources, the Commission will be severely limited in its ability to 
detect fraud and manipulation, market abuses, firms in trouble, or 
other improper behavior, thereby significantly increasing the potential 
costs and risks to our markets and our financial system generally.
                              enforcement
    The Commission requests approximately $70.0 million and 212 FTE for 
enforcement activities, an increase of $20.7 million and 48 FTE over 
the fiscal year 2015 enacted level. There is nothing more important to 
maintaining market integrity and protecting customers than a robust 
enforcement program. As I noted earlier, the markets we oversee 
continue to grow in size and sophistication, and our challenge is that 
for each case the Commission initiates, there are many that we cannot 
investigate because of resource constraints.
    Some cases can require large amounts of resources due to their 
inherent complexities, document-intensive nature, or the ability of 
resource-rich defendants to prolong litigation. A recent case that 
arose as a result of the Peregrine fraud, for example, lasted more than 
2 years and required more than 4,800 hours of staff time. The MF Global 
litigation is ongoing, more than 3 years after the firm collapsed. The 
LIBOR and foreign exchange benchmark cases--in which, as I noted above, 
the Commission obtained an aggregate of over $4 billion in penalties 
against several of the world's largest banks for manipulation of these 
benchmarks--involved intensive reconstruction of communications and 
trades requiring substantial document and email and chat room reviews, 
analysis, outside experts and reconstructing timelines.
    In particular, the Commission anticipates more time-intensive and 
inherently complex investigations due to innovative products and 
practices within the industry, including the use of automated and high 
frequency trading, and the global nature of the swaps marketplace. We 
are also experiencing an increase in international enforcement 
investigations in all of our markets. At the same time, we must do all 
we can to deter unscrupulous fraudsters who target unsuspecting 
investors through scams, tricks and schemes.
    Although the effectiveness of our enforcement efforts is best 
measured by the quality, breadth and effect of the cases pursued, 
quantitative metrics give some picture of the activity. The CFTC filed 
67 new enforcement actions during fiscal year 2014. We opened more than 
240 new investigations. In fiscal year 2014, the agency obtained $3.27 
billion in sanctions, including $1.8 billion in civil monetary 
penalties and more than $1.4 billion in restitution and disgorgement. 
Already in fiscal year 2015, the agency has obtained $2.5 billion in 
sanctions. An increase in our enforcement efforts is a good use of 
taxpayer dollars. We need to be able to prevent and punish abusive and 
fraudulent behavior, especially preventing losses to consumers whose 
customer funds are misappropriated, or to retirees whose savings are 
stolen through scams, or to our economy, when the efficiency and 
integrity of our markets is damaged by manipulation and fraudulent 
trading.
                              examinations
    The Commission requests $35.4 million and 135 FTE for examinations, 
an increase of $6.7 million and 21 FTE over the fiscal year 2015 
enacted level. Regular examinations, in concert with the Commission's 
surveillance and other activities, are a highly effective method to 
maintain market integrity so that American businesses can rely on these 
markets. This activity includes direct examinations performed by 
Commission staff and oversight of examinations performed by the self-
regulatory organizations.
    Among the most important examinations that the Commission conducts 
are those of clearinghouses, which, as noted, have become critical 
single points of risk in the global financial system. Two 
clearinghouses under the Commission's jurisdiction have been designated 
as systemically important by the Financial Stability Oversight Council, 
and the Commission is responsible for the oversight of 12 others. Five 
clearinghouses are located overseas, including some that are extremely 
important to our markets given the volume of swaps and futures cleared 
for U.S. persons. The Commission currently examines the two 
systemically important clearinghouses once a year. But the Commission 
lacks the resources to engage in annual examinations of other 
clearinghouses, and to conduct a greater number of in-depth 
examinations overall.
    A typical examination of a systemically important clearinghouse 
will involve a team of professional staff for the better part of 6 
months. For other clearinghouses, the team will be smaller but the time 
commitment will be the same. Examinations are resource-intensive, and 
they form a critical part of our supervisory program for 
clearinghouses.
    The Commission is also responsible for examining other critical 
infrastructure in our financial markets, including 15 active exchanges, 
22 swap execution facilities, and 4 swap data repositories. These 
examinations are an important investment in the safety and integrity of 
our financial and commodity markets.
    Moreover, as I noted earlier, cybersecurity is a major risk to our 
financial system today, and therefore we must devote greater resources 
to this important challenge. We must also engage in regular 
examinations of clearing firms. Current market conditions like low 
interest rates and low volatility have increased the risk profiles of 
many of these firms. And concentration in the industry means that today 
only 20 firms hold $225 billion in customer funds, or approximately 91 
percent of total customer funds for the futures and cleared swaps 
industries. The Commission must examine whether clearing firms employ 
effective risk management techniques, have appropriate compliance 
monitoring and retain adequate levels of liquidity.
    There are other entities that the Commission is responsible for 
examining, such as swap dealers. The recent volatility in the Swiss 
franc underscores the importance of examining retail foreign exchange 
dealers. We must be able to conduct not only annual or periodic 
examinations, but also other reviews triggered by unexpected incidents 
so that we can address the concerns of the businesses and individuals 
who use these markets. Without the requested level of funding, the CFTC 
will lack sufficient resources to conduct these examinations, which 
puts the markets and market participants at risk.
                      registration and compliance
    The Commission requests $17.8 million and 63 FTE for registration 
and compliance activities, an increase of $1million and 3 FTEs over the 
fiscal year 2015 level. The Commission's ability to analyze 
registrations in a timely and thorough manner is critical to market 
efficiency and confidence. The Commission's responsibilities have 
greatly expanded in this area with nearly two dozen SEFs and over 100 
swap dealer registrants. In light of the increasing globalization of 
the markets and changes made in Dodd-Frank, the Commission has 
applications for registration from 21 foreign boards of trade. The 
Commission is also considering applications for registration from five 
derivatives clearing organizations (DCOs), and must begin to review 
petitions for exemption from DCO registration from several foreign 
clearinghouses this year. We expect to see additional applications in 
the future.
    The Commission must also be able to respond to product and market 
innovation by carrying out registration reviews efficiently. A lack of 
adequate funding impairs the Commission's ability to attract and retain 
the experts who understand the markets and who are needed to review 
registrations and carry out compliance oversight in a timely and 
thoughtful manner, and can result in delay, ineffective customer 
protection, regulatory uncertainty, and higher legal and compliance 
costs for registrants--severely impacting the efficiency, integrity, 
and attractiveness of our markets.
                          data and technology
    The 2016 budget request includes $108 million for the data and 
technology activities, consisting of $79 million for information 
technology purchases (e.g., hardware, software, and contractor 
services), and approximately $29 million for staffing and other 
indirect costs. This is an increase of approximately $28 million from 
the fiscal year 2015 enacted level. Data and technology accounts for 
almost 40 percent of the agency's requested $72 million budget 
increase.
    The Commission's data and technology budget comprises several 
elements. We must expand our data operations and collections systems to 
meet our vastly expanded data collection responsibilities as well as 
the increasing technological complexity of our traditional markets. 
Data, and the ability to analyze and report data, are more important 
than ever in the derivatives markets and in CFTC's ability to oversee 
those markets; therefore, data understanding and ingestion is the 
priority for the Commission's resources. We currently receive over 300 
million records per day, and our data needs (intake, storage) are 
increasing annually by 35 percent.
    The Commission must be able to aggregate various types of data from 
multiple industry sources, such as designated contract markets (DCMs), 
swap execution facilities (SEFs), swap data repositories (SDRs), and 
derivatives clearing organizations (DCOs) across multiple markets 
(e.g., futures, exchange-traded swaps, and off-exchange swaps). The 
increasing complexity, volume, and interrelations of the data set will 
require significantly more powerful hardware such as high performance 
computing systems to support business analytics.
    Our infrastructure and services must also be expanded to support 
the growth in the agency. This includes basic computing, printing, 
voice, and data communications, and it requires expansion of storage, 
server, telecommunications, and network capacity; implementation of 
DHS-mandated cybersecurity measures; and a refresh of end-of-life 
equipment. We must also enhance our operations, platforms, and systems 
across all divisions. This includes legal, technology systems, and 
forensics support systems for enforcement as well as surveillance 
systems. It includes business process automation systems, public Web 
site operations, and management and administrative support systems.
    Without the requested level of funds, the Commission will not have 
sufficient capabilities to fulfill the critical mandates of the agency, 
directly impacting the Commission's ability to protect market 
participants from fraud, manipulation, and abusive practices, and to 
protect the public and the U.S. economy from systemic risk.
   relationship with the national futures association and other sros
    Finally, I want to note that our budget request reflects the fact 
that we are working with the self-regulatory organizations (SROs), 
including in particular the National Futures Association (NFA), so that 
they can take on further responsibilities, subject to our general 
oversight. The NFA and other SROs are a very important part of the 
overall regulatory framework. We work closely with them. In particular, 
recently, we worked very closely with the NFA when the Swiss franc was 
unpegged, to monitor potential problems at retail foreign exchange 
dealers. We are also working with them now on changes to the rules 
governing such firms to insure better protection of customers.
    Since I took office, we have been working to have the NFA and other 
SROs take on additional responsibilities, including with respect to 
review of required filings and financial information of futures 
commission merchants and swap dealers, assistance with examinations, 
review of swap valuation disputes, and other matters. This will allow 
us to focus our own resources on other priorities. Of course, it is 
vital that the Commission still oversee the work of the SROs. That 
means regular engagement and review of their activities. But by having 
them take on greater responsibility we can insure better protection of 
the public interest.
                               conclusion
    Thank you for inviting me today. The Commission is grateful to this 
subcommittee for its support of the agency's work. The 2016 budget 
request is designed to enable the Commission to continue making 
progress fulfilling its responsibilities to the American public to 
oversee our Nation's futures, options, and swaps markets, so that we 
help make sure our markets continue to thrive and contribute to 
economic growth into the future. I look forward to continuing to work 
with you on this important responsibility.
    I look forward to answering any questions you may have.

    Senator Boozman. Thank you, Chairman Massad.
    At this time, we will proceed to our questioning where each 
Senator will have 7 minutes per round. I expect that we will 
have time to accommodate at least two rounds of questioning.
    Chairman Massad, according to GAO precedent, the 
Antideficiency Act requires that agencies ensure the cost of 
collective bargaining agreements be constrained by the dollar 
limitations of their appropriations. Both agencies, in the 
course of long-recognized collective bargaining agreements, 
cannot supersede the will of the people's elected 
representatives as expressed in law.
    Congress retains ultimate authority over all Federal 
expenditures, and agencies may expend funds only in strict 
accordance with appropriations levels enacted by Congress.
    In the past, the CFTC has made long-term budgetary and 
leasing decisions based on the agency's requested budget level 
rather than on your enacted appropriation. Given your budget 
request has far exceeded the appropriated amount you have 
received in recent years, your IG has criticized the agency for 
allowing hope to trump experience in long-term decisions.
    I guess the question is, are you basing your negotiating 
position on the CFTC's current level of appropriation?
    Mr. Massad. Yes, we are, with respect to the union, most 
certainly.
    Let me just say that we have a great group of employees, 
very, very dedicated. They have chosen to be represented by a 
union. That is their right, and we are negotiating with them in 
good faith.
    But we are very conscious of our budget constraints. We do 
wish to be competitive with our other financial regulatory 
agencies because, otherwise, we are at risk of losing staff to 
them. But we are very mindful of the budget constraints, and I 
talked to our employees and I raised this in the negotiations 
also.
    Insofar as you were referring to leasing costs, I am happy 
to address that also. One of the first things I did when I took 
office was I went to visit all of our offices to look at the 
space and in particular in Kansas City, where the IG had noted 
that we had excess space.
    I promptly took action to notify the landlord that we 
wanted to give up some of that space. We consolidated our 
employees so that we could do so. We notified him formally of 
that, and we are doing all we can. Obviously, the landlord has 
to agree with that.
    With respect to our other offices, I have also directed the 
staff to look at those issues, too, to see if we could be--to 
use the space more efficiently. We are very conscious of being 
prudent stewards of the taxpayers' dollars, and we will 
continue to do so.
    Senator Boozman. Collective bargaining agreements typically 
comprise multiple years. What budget assumptions are you making 
for the CFTC's funding level in future years?
    Mr. Massad. We are basing our negotiating strategy on what 
we feel we can afford today. We are not assuming that there 
would be an increase. Having said that, as I say, I think it is 
important that we work toward making sure we are competitive 
with our sister agencies.

            SEC STAFFING INCREASES AND UNOBLIGATED BALANCES

    Senator Boozman. Good. Thank you.
    Chair White, the SEC finished fiscal year 2014 with $74 
million in unobligated balances. These unobligated balances, 
combined with the budget increase that Congress provided for 
your agency, has led the SEC to significantly increase your 
staffing.
    As a result of the number of new hires the SEC plans to 
make in 2015 and other recurring obligations, your agency will 
require $195 million above your current appropriation to 
maintain current levels of service. This represents a 13 
percent increase above last year's appropriated level, quite a 
significant increase, just to maintain existing operations.
    I guess the question, Chair White, is how is the SEC 
ensuring it is not hiring a number of staff that cannot be 
supported by its current appropriation of $1.5 billion?
    Ms. White. Essentially, as you know, we had requested 639 
positions, and I think we were able, by virtue of the 
appropriations, to hire a few over 200 employees. Some were 
hired mid-year or after. So, certainly, the way annualized 
costs work, some of those costs will obviously be greater in 
the next budget year. But each year we base our spending on 
what we are appropriated by Congress and spend it for the 
purposes that are specified in our budget request.
    In terms of balances that the SEC has, unlike some other 
Federal agencies, we have what are called no-year funds, so 
that if we haven't spent every dollar we are appropriated by 
year end, we can spend it the next year. About $20 million of 
those balances are actually due to de-obligating funds on 
completed contracts, which is very good financial management.
    By having no-year funds, we are also able to hire more 
smartly so that if we don't have that exact, right economist 
that we can hire at the end of the year, we can hire them in 
January or February. But those amounts are taken into account 
with respect to the next year's request.
    Depending on the level next year of our funding, we would 
have to make adjustments and cuts in various places in order to 
be able to carry out our mission most optimally.
    Senator Boozman. So if you had a continuing resolution, for 
instance, then you would have to make some cuts?
    Ms. White. Well, I think that would be true in any event. 
It wouldn't just be with respect to--in other words, we have 
hired the new employees we were allowed to hire under this 
year's budget request. We might well have to engage in a hiring 
freeze and cut back on IT expenses.
    Clearly, every year we spend as smartly as we can our 
appropriation and then need to deal with whatever the next 
year's level of spending is--level of appropriation is.

                  SEC'S LEVEL OF UNOBLIGATED BALANCES

    Senator Boozman. What level of unobligated balances do you 
foresee the SEC will have at the end of the year to spend in 
fiscal year 2016?
    Ms. White. We really can't determine that at this point. I 
mean, we don't really know what that will be. Obviously, it is 
not a goal to have the balances at the end of the year. But 
again, it makes for smart financial management and better 
hiring and spending because we are able to do that. But we 
certainly don't know, at this juncture, at what level they 
would be.
    Senator Boozman. Thank you.
    Senator Coons.
    Senator Coons. Thank you, Chairman Boozman.
    First, as we come close to the fifth anniversary of the 
enactment of the Dodd-Frank reforms, just tell me, if you 
would, how has the work of your agencies most concretely 
contributed to improving the oversight to the markets, 
instilling greater investor and market user confidence?
    If you put yourself in the shoes of a pensioner relying on 
securities income for their retirement or a farmer making 
financial risk management decisions before crop planting, what 
are the most significant, tangible benefits of the reforms 
enacted in the aftermath of the collapse and your actions to 
implement them? If you would, Chair White?
    Mr. Massad. Happy to go.
    Senator, you know, I spent 5 years at the U.S. Department 
of the Treasury before I came to the CFTC, overseeing the TARP 
program and being general counsel prior to that. And as you 
recall, in the fall of 2008, AIG teetered on the verge of 
bankruptcy due to its derivatives contracts. And the Government 
had to step in and provide a total of $182 billion to save one 
company because its collapse at that time probably would have 
propelled us into another Great Depression, just given all the 
other things that were going on.
    That was because we knew nothing about the swaps market. We 
didn't regulate the swaps market in any way.
    Today, we have implemented four fundamental reforms. We 
require clearing of standardized contracts so that we can 
monitor and mitigate risk. We require reporting so we know a 
lot more about the positions of institutions, particularly the 
biggest players in this market. We require oversight, and we 
require transparent trading. So we have come a huge way.
    We still have a lot to do to fine-tune all of that. But 
when you think about the risk that we faced in 2008--and again, 
$182 billion were spent, we fortunately recovered it all--but 
that is 600 or 700 times, 600 or 700 times our budget. So that 
is how I view the benefits of Dodd-Frank.
    Senator Coons. Ms. White.

                 SEC'S RESPONSE TO THE FINANCIAL CRISIS

    Ms. White. I think it is fair to say and most financial 
regulators would agree with us that we are in a lot stronger 
shape than we were because of the actions the regulators have 
taken collectively and individually. Plainly the enhancement in 
capital requirements and leverage requirements for banks are 
enormously important.
    From the SEC's perspective, I think our reforms for money 
market funds, credit rating agencies, and public securitization 
markets have strengthened the markets for investors 
tremendously. The work that we are doing not in mandated areas, 
but in terms of enhancing market resiliency for investors, is 
enormously important. I think our real focus in enforcement and 
examinations on the retail investor, as well as the 
institutional investor, is really paying dividends.
    We are also spending a lot more time and emphasis on 
investor education at the retail investor level. And clearly, 
our mutual work with respect to over-the-counter derivatives, 
you can't overstate the importance of that to the system and 
investor protection, as well as market protection.
    Senator Coons. And in both instances, your agencies are 
charged with rulemaking, with implementing the provisions of 
Dodd-Frank. You have made great progress, but there is some 
work that remains unfinished.
    Please comment, if you would, briefly on what are the 
barriers remaining towards completing the most important 
rulemaking steps, and what is coming ahead this year? What are 
the areas of focus for you in terms of finalizing some of these 
most important rules?

                             SEC PRIORITIES

    Ms. White. As I indicated in my oral testimony--our 
priority is to finalize the major remaining rulemakings under 
the Dodd-Frank Act and the JOBS Act. These include some in the 
securities-based swap area, some in the executive compensation 
disclosure area, and then crowdfunding under the JOBS Act.
    I think we have made tremendous progress. Clearly, you want 
to proceed efficiently, but also effectively and smartly to 
approve rules that are both workable and carry out the 
statutory purpose. And so, those are the major areas where we 
are prioritizing our efforts going forward this year.
    Mr. Massad. The agency has written most of the rules 
required by Dodd-Frank, but there are a couple of very 
important ones that remain. Margin for uncleared swaps, in 
particular, is one that we are very focused on right now.
    And to me, that is a central part of the risk framework 
because there will always be a large part of the derivatives 
market that is not cleared, and margin is the key thing to 
protect against risk. And we are working very hard to harmonize 
those rules from the start with the prudential regulators who 
are also charged with this responsibility, as well as with our 
foreign counterparts.
    In addition to finishing the rules that haven't been 
written, though, a major thing we are doing is looking at fine-
tuning the rules that have been written. The agency worked very 
hard to meet the congressional deadline of writing rules 
basically within a year of the passage of Dodd-Frank. Now that 
these rules are applying to the market, we are looking at are 
they working? Are they doing what they are supposed to be 
doing?
    We have made a lot of changes to the trading rules, to the 
reporting rules, and so forth, and we will continue to do that 
and also, again, to harmonize with our European counterparts. 
After I leave here, I am flying off to Brussels tonight for 
exactly that purpose.
    Senator Coons. In the closing minute and a half or 2 
minutes we have got, emphasize, if you would, how the budget 
request submitted would allow you to strengthen your regulatory 
oversight, your implementation of rules and cybersecurity, and 
give me some practical, real world consequences if you don't 
receive your budget request, if your budget is flat or reduced.

                           SEC FUNDING LEVELS

    Ms. White. I will go with that first. First I would say 
everything that we have prioritized in this budget request, and 
we really tried to be very surgical about it, would be 
compromised. So that includes enhancing our IT, increasing our 
ability to examine investment advisers, and enhancing our 
enforcement function, enhancing our Division of Economic and 
Risk Analysis even further to do better analysis. All of those 
areas would be compromised.
    The example I would give really would be in the investment 
adviser space. I have talked about that before. Current levels 
of resources allow us only to examine 10 percent of those 
investment advisers a year. Even though it is 25 to 30 percent 
of assets under management and we do it a lot smarter, a lot 
better with risk-based tools as we go forward, but 
nevertheless, that coverage rate is a real investor protection 
issue of great concern.
    If we were to be given our budget request this year, we 
could add, and we are proposing to add, 180 examiners for 
investment advisers, which would get us to 14 percent. It is 
part of a multi-year project, obviously, but enormously 
important. Everywhere we show up with these examiners, nearly 
everywhere we show up, there is value add.
    For example, in the private equity space where we have just 
shown up to do initial exams, it has resulted in tens of 
millions of dollars being returned to investors as a result of 
our just pointing out improper allocations of fees and 
expenses. And that affects retail as well as institutional 
investors because those are pension plans that represent our 
police and our teachers as well.
    Senator Coons. Chair Massad, if you could?
    Mr. Massad. The key components of the increase we have 
asked for are data and technology--that is 40 percent of the 
increase--and then surveillance and enforcement. And those 
really reflect the changes that we have seen in the 
marketplace, the fact that these markets have become so much 
more electronic and complex.
    We must make this investment if we really want to 
understand what is going on in these markets and be able to 
engage in meaningful surveillance and then follow that up with 
enforcement, where necessary, to prevent fraud and 
manipulation.
    Another piece is examinations where, again, we have made 
clearing houses far more important in the global financial 
system. We have got to make sure they now don't become the new 
sources of excessive risk. I think we have good supervisory 
framework in place, but we need to be able to examine what is 
going on in the clearing houses regularly.
    Senator Coons. Thank you both. Thank you, Mr. Chairman.
    Senator Boozman. The Senator from Kansas, Mr. Moran.
    Senator Moran. Mr. Chairman, thank you very much.
    Ms. White, thank you for your appearance today. I have had 
the opportunity to hear from you in Banking and here, and I 
have always appreciated the way that you have answered my 
questions.
    And Mr. Massad, I look forward to getting better acquainted 
with you. Welcome to your relatively new task. We have had a 
long history with the CFTC, and I welcome developing a good 
working relationship with you.
    Ms. White, let me say that I also serve on the 
Appropriations subcommittee that has responsibility for the 
Department of Labor. Your head is shaking, and you know where I 
am going. I----
    Ms. White. Anticipating.

   SEC ASSISTANCE WITH THE DEPARTMENT OF LABOR'S FIDUCIARY DUTY RULE

    Senator Moran. Yes, ma'am. I am concerned about the 
redefinition of the term ``fiduciary'' as it relates to certain 
retirement plans. And based upon what I have read you have said 
over time, my impression is that the SEC also has concerns with 
the direction that the Department of Labor is going.
    As the primary Federal overseer of investor protections, 
has the SEC been assisting the Department of Labor (DOL) in its 
efforts? If not, would it be accurate to say that the DOL could 
do harm if they don't--if they go down this path alone?
    Ms. White. Since the initial Department of Labor proposal--
which I think was in 2010 before my arrival--the staff was 
working very closely in providing technical assistance to the 
Department of Labor. We are, at the end of the day, separate 
agencies with separate statutory mandates, and obviously, what 
their rule proposal relates to is their important Employee 
Retirement Income Security Act (ERISA) mandates.
    So we including myself with Secretary Perez particularly, 
have engaged extensively in providing technical assistance. 
Their rulemaking is now proposed, and it is out for notice and 
comment.
    Two of the primary areas of expertise we have provided is, 
one, our knowledge of the broker-dealer model. The other is 
what possible impact various ways of defining a fiduciary duty 
could have on the availability of reliable, reasonably priced 
services to investors particularly at the low end.

          CHAIR WHITE'S VIEWS ON A UNIFORM FIDUCIARY DUTY RULE

    I have also recently--and I don't want to take all your 
time, but I have recently announced my own view with respect to 
the SEC, speaking for myself. I have studied it quite 
intensively since I have been here, really. My first reaction 
for those of you who would remember in my confirmation hearing, 
when I was briefed on this issue, was you have to think long 
and hard as a regulator before you regulate differently 
essentially identical conduct. And that conduct is providing 
personalized securities advice particularly in the retail 
space.
    But it is a very complicated undertaking that needs to be 
balanced correctly. So for the SEC, we are authorized under 
Section 913 of the Dodd-Frank Act, to impose a uniform 
fiduciary duty. I think the SEC should proceed with that. I am 
in discussions with my fellow Commissioners about it under 913. 
913 clearly has its own parameters that take into account the 
broker-dealer model, which I think are important to take into 
account.
    For example, it is not a per se violation of any uniform 
fiduciary duty to charge a commission. And so I am proceeding 
in those discussions. It is not an easy task by any means.
    Senator Moran. What is the significance of what you are 
telling me about the SEC potentially proceeding under 913? What 
is the relationship then between what the Department of Labor 
is proposing?
    Ms. White. Their rule is out for comment and their 
authority isn't 913. 913 imposes certain parameters on the 
SEC's rulemaking, should we go forward, that is not imposed on 
the Department of Labor's.
    Now one of the things that we will clearly continue to do, 
as we do any time with any other regulatory agency where you 
have overlapping issues and jurisdiction, is to continue to 
consult and provide technical assistance as we go forward.

           TIMEFRAME FOR THE DEPARTMENT OF LABOR'S RULEMAKING

    Senator Moran. Sometimes--I can't think of the example, but 
sometimes Congress has been critical of the delay or the 
slowness of rulemaking. And yet in this case, the Department of 
Labor has 75 days appropriate for a rulemaking--my question is, 
is 75 days appropriate for the rulemaking that the Department 
of Labor is pursuing?
    Ms. White. This has been under study for a long time by the 
Department of Labor. I think 2010 is actually when their 
original proposal was made.
    I will speak for the SEC. I mean, the notice and comment 
period is required by the APA, but it is also enormously useful 
to effective rulemaking, both in terms of achieving your 
regulatory objective, and also doing it in a very cost-
effective way.
    This is a particularly complicated area, but again, that is 
why their rule is out for notice and comment.

          SEC WORK REGARDING LIQUIDITY IN FIXED INCOME MARKETS

    Senator Moran. I think I understand what you are saying.
    Let me turn to another issue at the SEC. Would you walk me 
through what, specifically, the SEC is doing about liquidity 
concerns on fixed-income markets?
    Ms. White. That is an area clearly of interest and concern, 
I think, to all the financial regulators, particularly as we 
anticipate the rising of interest rates. So what the SEC has 
done in particular is, in January of 2014, our Division of 
Investment Management put out guidance so that funds and other 
market participants could look at how they are managing that 
risk if it occurs or when it occurs, and how to best manage 
that.
    We along with other financial regulators as well actually 
report, I think we have done three reports so far, to the House 
Financial Services Committee as to whether the Volcker Rule, or 
the anticipated compliance period to the Volcker Rule is having 
an impact on the corporate bond markets. That is just one 
example.
    I think all the regulators--it is a subject discussed in 
FSOC as well--are looking very closely at that.

                          CYBERSECURITY ISSUES

    Senator Moran. Let me ask a general question of both of 
you. What is the nature of the cybersecurity issues that your 
agencies face? How capable are you of protecting against a 
cyber attack? And how secure is your data from hackers and 
others?
    Mr. Massad. Thank you, Senator, for the question and thank 
you also for the kind words initially. I look forward to 
developing a good relationship with you also.
    The cyber challenge is a very, very serious one, 
particularly with respect to the critical infrastructure like 
clearing houses and exchanges. We don't have the budget to do 
independent testing or anything like that. So we have to really 
think about whether we leverage our resources effectively.
    One of the things we are looking at, for example, is making 
sure that the exchanges and the clearing houses themselves are 
doing adequate testing and are following best practices and are 
using independent testers, where appropriate, to do things like 
controls testing, penetration testing, vulnerability testing.
    We have incorporated cyber concerns into our examinations, 
and typically in our examinations, what we are looking for is 
whether the board of directors and top management are setting 
the right tone with respect to these issues. Are they not only 
putting policies on the books, but are they making sure those 
policies are enforced? If an incident happens--and incidents do 
happen--are they not only looking at those specifics, but 
thinking more broadly and about what else might be vulnerable 
that has been revealed by this incident?
    That is how we are thinking about it. But it is a real 
challenge given that most of the institutions we are dealing 
with are spending multiples of our entire budget on 
cybersecurity.
    With respect to our own internal controls, we have done a 
lot in that area. We are evaluated according to the Government 
standards and we have received good ratings there. But we have 
to keep up. This is an area, as you know, where you must 
constantly be making new investments in order to stay apace.

                    CYBERSECURITY EFFORTS AT THE SEC

    Ms. White. I would say that the SEC is doing everything in 
its own space and then also working with fellow regulators. 
Again, this is a nationwide problem and priority, I would say. 
And it is with us for the long term. It is one of the highest 
risk areas I think we all face, and certainly the financial 
system faces.
    In the SEC space, with respect to our registrants, we, last 
November, did a rulemaking, Regulation Systems Compliance and 
Integrity it is called, which essentially with respect to the 
critical market infrastructures--the exchanges, large ATSs, 
clearing agencies--for the first time, required enhancement of 
resiliency and integrity of their systems. And so, we think 
that is a very important rulemaking.
    We, last March, held a roundtable with Government 
participants, as well as private sector participants, to make 
sure we brought everybody into the same room to talk about the 
issues, best practices, and also sort out who has the ticket 
for what. Because one of my concerns is that everybody is into 
this, but does everybody really have it covered? And who is 
responsible for what aspects of this?
    So in our examination program, much like Chairman Massad is 
talking about from the CFTC point of view, we have prioritized 
cyber preparedness for the last 2 years in our published exam 
priorities. We recently published the results of a sweep that 
we did in that space, so that investment advisers and broker-
dealers could be informed by the practices of others so that 
they could improve and enhance their systems.
    Just last week our Investment Management Division put out 
guidance, again setting forth best practices, and our exams 
will follow suit there.
    We also in the Division of Corporation Finance, I think in 
2011, put out guidance to public companies about disclosing 
when they do have incidents that rise to a material level. But 
it is something that has and must have our highest focus and 
priority as we go forward.
    Senator Moran. Thank you both.
    Senator Boozman. Senator Lankford.
    Senator Lankford. Thank you.
    It is good to get a chance to visit with you all. I am the 
new guy on the dais, and I look forward to ongoing 
conversations in the days ahead as we work through these 
extremely complicated issues that you deal with all the time on 
this.
    Ms. White, can I ask you--and this is not a trick 
question--how many rules does the SEC have? Give me a ballpark 
number of how many rules are sitting out there.
    Ms. White. You mean in total, how many do we have?
    Senator Lankford. Yes, ma'am.
    Ms. White. Wow, it would probably depend on--I don't know 
the answer to that. I would have to give you a precise number, 
but there are obviously hundreds of rules, and if you do it by 
subdivision, it is a higher number than that.

          SEC OUTSTANDING RULEMAKINGS UNDER THE DODD-FRANK ACT

    Senator Lankford. Right. About how many do you think are 
still left for Dodd-Frank?
    Ms. White. Oh, from Dodd-Frank----
    Senator Lankford. And that is separate. I was asking big 
picture.
    Ms. White. Okay.
    Senator Lankford. Separate from that, how many are still 
left to do that are unfinished for Dodd-Frank at this point?
    Ms. White. I would say--and again, these are done by 
subdivisions. I look at them more in terms of buckets, but I 
would say that there are probably in total in the neighborhood 
of about 20 left to do. That is a guess. I will have to confirm 
it for you because there are subdivisions.
    Senator Lankford. What are the big ones that are still 
left?
    Ms. White. Essentially, in terms of the congressional 
mandates, I look at it as sort of six major or eight major 
buckets. We are essentially finished in six of those. That 
includes Volcker. That includes setting up the municipal 
advisors regime, credit rating agencies I mentioned before, and 
securitization I mentioned before.
    The ones that we still have work to do on are primarily 
finishing securities-based swap regulations and the executive 
compensation disclosure rules.
    Senator Lankford. Okay.
    Ms. White. We have some isolated other ones, but those are 
the major ones.

                      SEC'S RETROSPECTIVE REVIEWS

    Senator Lankford. Okay. I am going to come back to that in 
just a moment. The retrospective review, how often do you do 
retrospective review?
    Ms. White. First, we do it pursuant to the Reg Flex 
requirements every--really every year in terms----
    Senator Lankford. So give me a ballpark of how many rules 
you are reviewing this year, number of rules.
    Ms. White. It is on our Web site, but I would say there are 
probably 50, and we actually look at it more broadly than is 
required under the Act. The Act really applies to impact on 
small businesses, but we actually tee up our rules that go out 
for notice and comment.
    Also, and I think at least equally importantly, in the 
disclosure regime area, we are, for example, doing a very 
comprehensive review of the entire public disclosure regime 
now. In the market structure area for particularly equity 
markets, we are looking at a very comprehensive review of our 
regulations there, including NMS, which is obviously a baseline 
and very important set of rules for the National Market System. 
So that is an ongoing real-time review as well.
    Senator Lankford. Okay. And the way that you select those, 
how do you select those that are coming up for review?
    Ms. White. In terms of the Reg Flex selection, some of 
those are made for you by the requirements, and then we add to 
that, as I have indicated.
    With respect to the others, we prioritize areas. They 
should be in important areas, and they are areas which we 
believe call for review and change after that review.
    Senator Lankford. What do you mean, call for review? You 
mean outside entities are contacting you, saying this is 
antiquated, or this is a problem, or this is----
    Ms. White. That is certainly among the inputs. Our 
registrants and the folks in the public companies are not shy 
about giving us that input, and it is very useful. We also, 
from our own end, supply that input as well.

                SEC'S EXECUTIVE COMPENSATION RULEMAKING

    Senator Lankford. Okay. Let me talk about one of the rules 
that you had mentioned that is still pending to be finalized, 
it is in that final process, and it is the compensation rule, 
for executive compensation. Tell me the goal of that, where you 
think that is headed. And I understand some of the issues 
coming up from Dodd-Frank on it. As you are thinking through 
the rule itself, what is the goal? What do you think it will 
accomplish?
    Ms. White. You are talking now about the 956 rulemaking for 
the----
    Senator Lankford. Yes.
    Ms. White [continuing]. The joint rulemaking with the other 
regulators? The statutory mandate there--and I think, you 
know--and the objective there is to try not to have incentive-
based compensation create material risk to the financial 
system. I mean, that is the ultimate objective of that.
    In terms of the status, we are currently in active work 
with our fellow regulators who are jointly charged with going 
forward with that rulemaking. There was a proposal some years 
ago on that, a couple of years ago. And we are working to 
determine what the next step is, but we are quite actively 
working on it now.
    Senator Lankford. Okay. Is there a concern within SEC and 
the conversations that are happening internally that--that the 
executive compensation rule attached to stock price and stock 
performance could actually incentivize being more focused on 
shareholders than it is on employees within the business?
    Ms. White. I think that is a concern with all executive 
compensation rulemaking, and that you get that balance right 
and you consider both ends of the constituents. There have also 
been comments in that same vein that have been raised with 
respect to the rulemaking, the proposal we went forward with 
last week at the SEC, which is a disclosure rule, basically pay 
versus performance. So I think that has been raised there as 
well.
    Senator Lankford. Okay. So how legitimate do you think that 
concern is?
    Ms. White. Again, you have to be true to the statutory 
requirements. That is a judgment made by Congress. And then I 
think what you are doing is trying to make it as effective as 
you can, as well as cost effective as you can, and not have 
negative unintended consequences from it.
    Senator Lankford. Right. So the challenge that we face--and 
I understand a previous Congress put this into place. The 
challenge that we have now is it seems to me the goal of it is 
to try to shame companies into paying executives less, to 
publish it, to push it, to try to put it to stock prices so 
that at any point if stock prices begin to drop, shareholders 
would start punishing them and dropping salary.
    The problem is, is that that I think puts a tunnel focus 
for any exec to say don't focus on people, focus on stock 
price. Lay people off, do whatever it takes to keep a good 
stock price, even with a falling market, because my pay is out 
there. And so, I think the incentive is perverse, at the end of 
the day.
    Now I understand you are dealing with statutory mandates, 
but what I am trying to drive at is Congress has to reevaluate 
this in the days ahead as the rule comes out and as everyone 
looks at it, and the folks that voted for it and the folks like 
me that didn't, to look at it and say is this really what 
Congress wants to do, to incentivize execs to only look at 
stock prices in the days ahead? And even with the falling 
market, chunk as many employees as they can because they have 
to guard their salary and their appearance on it.
    That is the concern that I have in the days ahead, and I 
think this is going--it is something that we have to reevaluate 
in this Congress as soon as possible, as you all put forward 
what a previous Congress has said to do.
    Ms. White. Understood. Those rules will be put out for 
notice and comment. So I just want you to know that opportunity 
will be there, is all I am saying.
    Senator Lankford. Now, Mr. Massad, I don't want you to get 
off too easily on this. But let me just take one quick 
question, and it is small. You all have had some difficulties 
dealing with unused space that has been leased. So, what is the 
current vacancy rate for the Kansas City office? How are you 
doing with vacant space, and what is the status on that?
    Mr. Massad. On Kansas City, shortly after I took office, 
about 2 or 3 weeks after, I went out there to look at the 
space. And we promptly moved to consolidate our space on one 
floor and notify the landlord we are willing to give up the 
excess space. We are hoping that he will accept that offer.
    With that, I would need to check on exactly what our Kansas 
City occupancy rate would be, but it is very high, assuming he 
will agree to some sort of deal to take back the space. We 
would like to do that.
    Senator Lankford. Sure. CFTC is not alone, obviously, in 
having unused Federal space. We have it all over the country at 
this point, but it is one of those areas of many that we have 
to be aggressive on to say where we have empty square footage, 
we need to make sure that we are not paying for it with the 
Federal tax dollars. And so, I appreciate your aggressive 
oversight of that.
    Mr. Massad. Agreed.
    Senator Lankford. That is one of a million things I know 
you have to deal with, especially walking into this inheriting 
the issue.
    Mr. Massad. Yes, and we don't--as you know, Senator, we 
don't get the money even if--you know, we don't get the savings 
necessarily, but it still makes sense.
    Senator Lankford. Right. $480 billion in deficit this year, 
the Federal taxpayer would appreciate it very much on that 
oversight.
    With that, I yield back.
    Senator Boozman. Chairman Massad, over the past year, the 
CFTC has taken some incremental steps to reduce the burden of 
recordkeeping requirements with Rule 1.35. Can you talk a 
little bit about what steps you are trying to take to ensure 
that the American farmers and manufacturers are not 
overburdened by regulations and compliance costs, and then also 
you might talk a little bit about what has changed in the last 
few years as far as what you are regulating?
    Mr. Massad. Certainly, Senator, happy to answer that. Yes, 
we have proposed changes to Regulation 1.35, which concerns the 
recordkeeping that participants in our markets must do. And 
particularly because of the potential impact on smaller users 
in these markets, we have proposed a change. We have received a 
lot of comments on that, and we are looking at the issue and 
hope to finalize the rule soon.
    Also related to that, last week we took another step with 
respect to trade options, perhaps less important for the 
agricultural community, but very important in the energy 
community, where we are proposing to get rid of a form that is 
required and reduce the reporting burden on trade options.
    I think it is very critical that we look at our rules, 
again, to make sure that commercial firms who rely on these 
markets, whether they are in agriculture or other industries, 
can do so efficiently and effectively, and particularly the 
smaller firms. You know, the rulemaking we are doing with 
respect to the swaps market was not meant to burden them. It 
was meant to address the risk of excessive risk and to oversee 
the big players in the market.
    Senator Boozman. Good. No, I appreciate your affirming 
that. I know that that certainly was the intent, and yet 
sometimes the smaller players have gotten caught up in this 
stuff. So we really do appreciate your efforts to unwind that.

             SEC GUIDELINES FOR ADMINISTRATIVE PROCEEDINGS

    Chair White, after Dodd-Frank expanded the SEC's authority 
to try civil enforcement cases through administrative 
proceedings, the SEC has been bringing more cases to its 
administrative law judges, rather than going to Federal 
district court. I think it is important for the investment 
community to believe there is fairness and transparency in all 
judicial venues.
    Does the SEC intend to develop and make public guidelines 
for determining which cases are brought in administrative 
proceedings and which cases will be brought to Federal court? 
Will the full Commission participate in that drafting process?
    Ms. White. As you correctly point out, Dodd-Frank did 
expand the penalties that we can achieve in administrative 
proceedings. That forum has been around for many, many years. I 
think the SEC has used it since the 1940s, actually.
    Questions have been raised about the choices. Of the 
litigated cases, I think 57 percent are still in district 
court, not in administrative proceedings (APs). But questions 
have been raised about those criteria, and I do believe 
appearance of fairness is important. And so, one of the things 
that we are--I am considering is whether we should do public 
guidelines to make that clear and transparent to both 
participants and the public.
    Senator Boozman. So are you considering it along with the 
other Commissioners?
    Ms. White. I am one vote, as they say, at the end of the 
day. Obviously, there are things that can be done by the staff 
as opposed to the Commission. I mentioned staff guidance in a 
couple of other areas already today.
    I will say that I think all of the Commissioners are 
focused on this, and so we are always engaging in dialog, even 
if, what at the end of the day--assuming something comes out at 
the end of the day--is staff guidance. So there is a lot of 
discussion.
    Senator Boozman. Okay. No, I think it is important.

          FINANCIAL STABILITY BOARD ROLE IN MARKET REGULATION

    For both of you all, last month a member of the European 
Parliament argued at a swaps and derivatives conference that 
the best way to achieve international consistency of 
regulations would be to give the Financial Stability Board a 
standard-setting role, with national regulators expected to 
accept and implement its rules. Although the Financial 
Stability Board's roots are in central banking and prudential 
regulation, they are moving forward with regulating the 
insurance industry and asset management industry.
    Do you have concerns with giving bank-centric regulators a 
more detailed role in the market's regulation?
    Ms. White. The SEC is a member of the Financial Stability 
Board (FSB). I think the FSB is enormously important to 
bringing international regulators together to assess risks, 
among other things. But I also think the work of the FSB, 
including reports and suggestions for standards, are not 
binding on the national authority, and certainly not binding on 
the SEC.
    And it is clear, in the FSB setting, that predominantly 
they are central bankers who are the members. There are a few 
of us who are capital markets regulators, with very important 
expertise to bring to bear. But at the end of the day, in terms 
of, certainly, the capital markets that we oversee and have 
jurisdiction to regulate, we continue to do that. And the FSB 
reports are not binding on us.
    Senator Boozman. Chairman Massad?
    Mr. Massad. I would agree with what Chair White said and 
just add we are not even a member. I don't even get to go to 
the meeting. So I would agree with you that it is a little 
bank-centric.
    You know, having said that, it is a forum for bringing 
people together. I think the way I look at the task of trying 
to harmonize our rules is it just requires a lot of effort on 
the part of the individual regulators to get together. And that 
is what I have been focused on doing since I took the job.
    There are going to be some differences in the rules. There 
are differences in most areas of regulation between different 
countries' rules, but I think we have made a lot of progress 
with respect to over-the-counter derivatives, and we will make 
some more.
    As I said, I am flying off to Brussels tonight for this 
very purpose. We have made a lot of progress on a number of 
areas, and I think we will make more progress.

          INFLUENCE OF INTERNATIONAL REGULATORY ORGANIZATIONS

    Senator Boozman. No, and that is appreciated. I think there 
is a concern that perhaps international regulatory 
organizations are trying to exert inappropriate influence on 
the development of our regulatory policy.
    And finally, do you think we are underrepresented in that 
regard?
    Mr. Massad. Well, I have asked to be invited to the 
meeting. So, yes, I would agree with that comment.
    Senator Boozman. But you agree, you know----
    Mr. Massad. No, but I do have a good personal relationship 
with Governor Carney. I think it would help in some of these--
in the FSB in particular to have more market regulators if it 
is going to look at things like over-the-counter derivatives.
    Senator Boozman. Sure.
    Ms. White. I guess I would just add that also there are a 
number of work streams, a number of committees at the FSB that 
the SEC staff and the CFTC staff participate in, and bring that 
perspective to bear. And there is certainly in recent months, I 
believe we can call it a consensus on the part of FSB members, 
that more of that capital market expertise ought to be brought 
to bear in those working groups and committees, which, I think, 
is a good thing.
    Senator Boozman. Very good.
    Senator Coons.

                 HARMONIZATION OF RULES ACROSS BORDERS

    Senator Coons. Thank you, Chairman Boozman.
    Let me just continue the discussion along this direction. I 
was broadly encouraged by the reforms presented in Title VII, 
but I am concerned about how they are being implemented and the 
reluctance on the part of some of our European counterparts to 
accept U.S. clearing houses for trades and the reports of some 
friction between U.S. and European regulators.
    So I know you have been working with your European 
counterparts to try and find some common ground on a range of 
issues. As you fly off to Brussels, as you contemplate further 
actions, just talk to us in a little more detail about the 
efforts underway to harmonize the rules across borders to 
reduce uncertainty for market participants and what you see as 
the prospects for real progress and harmonization between your 
organizations and between our countries--our country and the 
countries of Europe?
    Mr. Massad. Sure. I think it is important to look at it 
area by area. A big issue, obviously, that has received some 
attention is clearing house recognition. And you know, we have, 
I believe, the strongest regulatory framework for clearing 
houses in the world. I think there is ample basis for the 
Europeans to declare us equivalent and recognize us.
    They have had a couple of types of issues. One was with 
what they referred to as deference more to their regulations 
with respect to the regulation of their clearing houses, 
meaning that, we do require, in fairly narrow circumstances, 
for European clearing houses that clear futures traded in this 
country or swaps to register with us.
    And they ask that to the extent that we can, we harmonize 
our regulations with theirs with respect to those clearing 
houses. We proposed a framework that is acceptable, and 
assuming we can work out our other differences, I think we will 
address that issue.
    The other issue they have raised is--pertains to margin 
methodologies. Again, we have done a lot of analysis, and I 
feel our standards are more than adequate and in some ways 
superior. We will try to work that out.
    In other areas, we are making progress. Margin for 
uncleared swaps, I referred to earlier. There has been a very 
good international dialogue on this, where, hopefully, we can 
get these rules that are being worked on currently--by us, by 
Europe, by Japan, to be fairly similar.
    There has been a lot of work in the area of swap data 
reporting. We have a number of different trade repositories for 
this data, and it is important that we collect the data in 
similar ways. It is a very big effort, but a lot of progress 
has been made there.
    So I think we are making progress. It takes time, but it is 
a task that I am very committed to.
    Ms. White. It is essential. And particularly in this space 
it is obviously a global market. I mean uniquely global. In the 
swaps area, we have about 5 percent of that market, but we are 
also talking to the Europeans about it and coordinating there.
    You are trying to both have as much consistency as you can 
for market participants, but also avoid regulatory arbitrage. 
And so, I think the discussions are quite constructive, but 
again, they are not all easy issues.

                      INSPECTIONS AND EXAMINATIONS

    Senator Coons. Talk for a minute more, if you would, about 
examinations and inspections. Both of you in the section of 
your spoken and in your written testimony emphasized that 
continued increase in your budget would allow for a continued 
increase in examination and inspection. You mentioned only 10 
percent of the underlying regulated entities are annually 
examined.
    What would be the consequences for the market, what would 
be the benefits for investors were there to be more regular, 
more predictable examinations of a broader range or more 
regular inspections?
    Ms. White. The 10 percent, by the way, applies to 
investment advisers. Coverage is about 50 percent of broker-
dealers and higher percentages for other kinds of registrants, 
just based on resource availability. More resource raises the 
entire bar of compliance. It translates directly into investor 
protection, or the lack thereof, if we don't have the resources 
to have what is referred to as ``boots on the ground.''
    I think I mentioned earlier the example of just by showing 
up, with respect to some new registrants, it has resulted in 
tens of millions of dollars going back to investors. If we are 
not present, including at the lowest levels of the retail 
markets, the smallest investment advisers, any massive fraud 
can be occurring there.
    And if the number of advisers increases--and there is some 
discussion that this is the case--as broker-dealers migrate to 
the investment adviser area because we are less present there 
because of resources, you are lowering the investor protection. 
It is quite, quite serious.
    Mr. Massad. Similarly for us, we have about 14 clearing 
houses, about the same number of exchanges. We have a number of 
clearing members, but about 20 of them hold most of the funds. 
The total funds held by clearing members is about $250 billion.
    So we simply can't get in and examine these entities on a 
regular basis. We don't even get to many of the clearing houses 
and the exchanges once a year. We get to very few of them, and 
that is a big problem.
    These clearing houses, as I said, we have made far more 
important in the global system. That is a good thing. That was 
a wise choice. But we have got to be able to see what is going 
on and to be in there and looking at the holding of customer 
money, look at the procedures they follow, look at cyber 
issues, look at other issues.
    The same is true with the clearing members. We don't, you 
know, want to be in a position where we don't know what is 
going on. We are trying to work with whoever we can who can 
assist us in this regard. We work with the National Futures 
Association. We work with the Fed, in part, on clearing house 
oversight. But there is a lot more we need to be doing.

                  INVESTMENTS IN IT AND CYBERSECURITY

    Senator Coons. In your written testimony, you referenced, 
Chairman Massad, that cybersecurity is the single most 
important threat to financial security today--and financial 
stability of the markets today. And in your spoken testimony, 
you also emphasized the increasing scale of complexity and the 
automation of a lot of the transactions, the electronic nature 
of a lot of the transactions you are charged with overseeing.
    Speak in closing, both of you, if you would, briefly to the 
resources and expertise that you need in order to keep up. You 
referenced that each of the four largest financial institutions 
dwarfs your annual budget with their annual investments in IT 
and cybersecurity alone. Just speak to how having the resources 
to continue to invest and keep up would make a difference in 
financial stability and your ability to oversee the markets.
    Mr. Massad. Certainly. It is a critical area. And you know, 
this is always going to be a joint effort. We are never going 
to be able to do all of this by ourselves. It is important that 
we work with other regulators. If there is an incident, 
obviously, we would work with, you know, the FBI and Homeland 
Security and so forth.
    But we need the resources to be able to go in regularly and 
do examinations and make sure that the critical infrastructure 
and these most important participants in the market are doing 
enough themselves in terms of testing, in terms of procedures, 
in terms of setting a tone, in terms of the attention of the 
board of directors. We simply cannot address this risk with the 
budget that we have.
    And these threats, as we now know today, don't just come 
from people motivated by profit. They come from people, you 
know, looking to disrupt the system.
    Ms. White. I would concur with everything that Chairman 
Massad said. I think in terms of resources, I mentioned before, 
I am very pleased to get the systems compliance and integrity 
rulemaking done to enhance resiliency of the critical market 
infrastructures of the exchanges and so forth, but one has to 
be able to examine and make sure the rules are being observed 
or you might as well not have those rules. Again, it comes back 
to the examination resources and challenges we have in that 
space for examinations.
    I mentioned that our national exam staff has, for a couple 
of years, prioritized cyber preparedness when they go out and 
examine investment advisers and broker-dealers. But, you know, 
that is one presence. It is not nearly enough resources to 
actually have a strong enough and broad enough presence on 
those issues. And again, no one can overstate the seriousness 
of that risk and challenge that comes from cyber.
    Senator Coons. I think this remains a particularly 
important area for us to focus on, for us to invest in. I share 
the concerns phrased by Senator Moran about fixed-income 
liquidity. I think we have discussed that before.
    And as I have mentioned to you before, I remain quite 
interested in the implementation of the conflict minerals 
rules, and I will submit some questions for the record. I hope 
you will keep us updated on how those reports and 
implementations are going.
    There was a recent report by Amnesty International and 
Global Witness that suggested while some corporations have 
really stepped up and advanced the concern in the cause of 
transparency in the minerals markets, many others have not. A 
majority have not. So I will submit a question for the record.
    Thank you very much, Mr. Chairman.

                     COLLABORATION ON CYBERSECURITY

    Senator Boozman. Thank you, Senator Coons.
    Do you have any other questions? Good.
    Let me just ask you about cybersecurity in the sense that I 
think we all agree how important it is. That really is a new 
frontier.
    Both of you, in different ways and yet in the same way, 
have to deal with that through oversight, having the IT in 
place, and the infrastructure in place so that you can monitor 
others. And then you have to deal with your own security.
    Is there any effort on collaboration? I mean, you are 
different, but you are similar, and we have so many other 
agencies that are also similar. It does make sense. We have 
limited resources, and I think all of us would agree with that, 
regardless of where we are at.
    Can you talk a little----
    Ms. White. Yes. The collaboration does occur pretty 
extensively. The Financial and Banking Information 
Infrastructure Committee (FBIIC) under Treasury's auspices 
brings together all of the financial regulators precisely to 
focus on cyber issues including at literally the principal 
level once a quarter, and our staffs are meeting more often 
than that. Again, it goes back to my concern that you do need 
to get all the relevant people in the room talking to each 
other.
    So there is certainly good efforts, good forums for that 
occurring, but we also are sharing with each other our various 
approaches to the cyber issues.
    Senator Boozman. It does seem, Chairman Massad, that, you 
know, with limited dollars and the functions that are in 
common, it does seem like we could have some sort of a team 
approach to use those dollars to build out each other's 
infrastructure.
    Mr. Massad. Absolutely, Senator. We do collaborate. FBIIC 
is one way. Chair White and I discuss a lot of issues just 
bilaterally. There are other forums for industry and Government 
to work together sharing information.
    But it comes back to something fairly simple in terms of 
examinations. If we don't even have the resources to go and 
examine a clearing house on cyber at least once a year, there 
is no way we are going to know what is going on.
    So all the collaboration among agencies in the world isn't 
sufficient. We still have to be able to have the resources, 
because we are the regulator in charge of certain clearing 
houses, certain exchanges, certain clearing members. We have to 
have the ability to go in and examine.
    Senator Boozman. No, I don't disagree with that. And yet 
the information that comes in, as you sort that out using the 
various components, both of you all have the same problem.
    And it does seem like, again, I think we are all saying the 
same thing about collaboration in that regard and building out 
that infrastructure. You have got a budget. Chair White has a 
budget. It does seem like we could do a better job. That is 
just something at which Government historically has just not 
done a very good job--not very efficient at all.
    Mr. Massad. No, I would agree, but, you know, one of the 
things we are doing, for example, I refer--I mentioned the fact 
that we are thinking about standards on testing. We are looking 
at the SEC's rules. We are talking actively with their staff as 
we think about what to do, learning from what they have done, 
the same with other agencies as well. So there is a lot of 
dialogue going on among Federal regulators on this.
    Ms. White. Part of this, if I may just add, is that, I 
think maybe it has been alluded to, but it is really getting 
the word out to the private sector, to not only working 
together with them very closely on information sharing, but 
when we are actually, by virtue of what we can do by way of 
examination, learning things about best practices in an 
appropriate way, publicizing that so that the firms can bring 
up their own bar, so to speak.
    Senator Boozman. Well, thank you all so much for being 
here, and the testimony was very helpful in helping us craft 
the fiscal year 2016 bill.
    I also want to thank your staffs for working very hard to 
prepare you and our staffs for doing the same thing and doing 
an excellent job of getting us all of this together so that we 
could have a good hearing.

                     ADDITIONAL COMMITTEE QUESTIONS

    If there are no further questions, the hearing record will 
remain open until next Tuesday, May 12th at noon for 
subcommittee members to submit any statements or questions to 
the witnesses for the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Commissions for response subsequent to 
the hearing:]
               Questions Submitted to Hon. Mary Jo White
               Question Submitted by Senator John Boozman
    Question. Chair White, unlike our other agencies, the SEC enjoys 
the benefit of the Dodd-Frank created Reserve Fund, which has been used 
to fund large, multi-year technology projects. This year, Congress did 
not receive a spend plan on Reserve Fund expenditures until more than 
halfway through the fiscal year. Next year, your agency plans to plans 
to spend $75 million from the fund.
    What process does the SEC use to determine what projects will be 
funded through the Reserve Fund rather than through appropriated funds?
    Does the SEC intend to continue using the Reserve Fund for 
technology projects in fiscal year 2016 or will the Commission use the 
fund for other expenditures?
    Will projects that are initiated through Reserve Fund expenditures 
continue to be funded solely by the Reserve Fund or will the SEC's 
appropriation be used to maintain the project in future years?
    Answer. The SEC has dedicated the Reserve Fund to large, multi-
year, mission-critical information technology projects and programs. 
The Office of Information Technology, in collaboration with the Chair's 
office and other divisions and offices, develops and proposes the suite 
of projects and programs that best use the resources of the Reserve 
Fund, in conjunction with the Office of the Chief Operating Officer and 
the Office of Financial Management. The approved projects include:

  --Improved data analytics to support the SEC's efforts to identify 
        potential securities law violations and inform policymaking;
  --EDGAR enhancements to improve the functioning of the Commission's 
        large filing repository for the public and the agency;
  --An EDGAR redesign to create a system that is easier for registrants 
        to access and use to submit required information and that 
        serves as a more robust source of data for the SEC and the 
        investing public;
  --Bolstering systems that support enforcement investigations and 
        litigation and SEC examinations;
  --Enhancing the sec.gov website to provide the public with better 
        access to information in a cost-effective manner;
  --Improving the tips, complaints, and referrals system through 
        additional functionality, such as automated triaging; and
  --Business process improvements to make the day-to-day operation of 
        the SEC more efficient.

    In fiscal year 2016, the SEC intends to continue dedicating the 
Reserve Fund to investments in such large, multi-year, mission-critical 
technology projects and programs. As in the past, the SEC intends to 
use the Reserve Fund for development, modernization, and/or enhancement 
of such systems, not their maintenance. Once a new system or system 
enhancement is deployed, the ongoing maintenance costs are covered from 
the General Fund.
                                 ______
                                 
          Questions Submitted by Senator Christopher A. Coons
    Question. What is the state of international cooperation in 
achieving the goals of the G20 commitments to reform global financial 
markets? In particular, some have posited that where there are nuanced 
differences in local regulatory implementation, there is a risk of 
market fragmentation along regional borders. Do you agree with this 
assessment? Why or why not?
    Answer. Because global markets are subject to the risk of 
fragmentation, international regulators are very focused on regulatory 
inconsistencies and possible arbitrage. Commission staff participates 
in a variety of multilateral initiatives and bilateral discussions 
aimed at helping to ensure that reforms across jurisdictions fit 
together in a sensible way. For example, this coordination is necessary 
as reforms for the over-the-counter derivatives markets, which are 
highly global, are implemented across jurisdictions where a significant 
portion of transactions could be subjected to multiple regulatory 
regimes. The staff participates in the Financial Stability Board's 
(FSB) Over-the-Counter Derivatives Working Group, which is comprised of 
staff of regulatory and supervisory authorities responsible for 
implementing reforms in the over-the-counter derivatives markets. Since 
October 2010, the Working Group has reported regularly to the FSB on 
progress in implementing over-the-counter derivatives reforms, 
including two reports in 2014. These progress reports published by the 
FSB include updates on international, national and regional progress in 
finalizing standards and implementing reforms, as well as practical 
reviews of identified implementation issues. In addition, senior 
representatives from the Commission, the Commodity Futures Trading 
Commission and foreign authorities convene regularly in the Over-the-
Counter Derivatives Regulators Group to discuss cross-border issues 
related to the implementation of reforms for the over-the-counter 
derivatives markets in their respective jurisdictions. Beyond this, the 
SEC is a member of the International Organization of Securities 
Commissions (IOSCO), a multilateral organization of securities 
regulators focused in part on cooperating in developing, implementing 
and promoting adherence to internationally recognized and consistent 
standards of regulation, oversight, and enforcement.
    I personally participate on the FSB Steering Committee and IOSCO 
Board to address these same types of concerns and priorities.
    Question. Corporations have a right to utilize their earnings in a 
variety of ways. For example, firms can repurchase stocks, issue 
dividends, increase R&D spending, invest in innovation, train workers, 
or spend money on other priorities. Some commentators have suggested 
that large amounts of corporate earnings are going toward buybacks and 
dividends, rather than some of the other investments outlined above. Is 
this a trend that you see and, if so, is it something you are concerned 
about?
    Answer. The SEC's mission is to protect investors, maintain fair, 
orderly, and efficient markets, and facilitate capital formation. 
Consistent with that mission, the SEC does not generally seek to 
regulate how a company uses its available resources. The SEC does, 
however, seek to protect investors that own or may wish to buy or sell 
the issuer's securities by ensuring that investors have the information 
they need about the company and its activities, and by requiring that 
companies that engage in buybacks or issue dividends do not engage in 
deceptive or manipulative conduct.
    With respect to disclosure, issuers must disclose in their 
quarterly and annual reports all issuer and ``affiliated purchaser'' 
purchases of shares or other units of any class of the issuer's equity 
securities that is registered under Section 12 of the Exchange Act, 
regardless of the manner of purchase (e.g., whether the purchases were 
made in open-market transactions, tender offers, in satisfaction of the 
company's obligations upon exercise of outstanding put options issued 
by the company, or other transactions). This information about the 
number and amount of purchases is disclosed in tabular format by month. 
For all plans or programs publicly announced, the issuer must provide 
additional details about the plan or program, including information 
about when the program was announced, the amount to be repurchased, and 
the expiration of the program. In addition, reporting issuers are 
required to disclose the number of shares purchased other than through 
a publicly announced plan or program and the nature of the transaction. 
Generally, issuers that publicly announce a buyback program file a 
current report on Form 8-K.
    Similarly, issuers listed on national securities exchanges are 
required to report upcoming dividends to a self-regulatory organization 
to ensure that all investors receive such information in a fair and 
timely manner. Item 201(c) of Regulation S-K requires issuers to 
disclose the frequency and amount of any cash dividends that are 
declared by the issuer in annual reports that are filed with the 
Commission.
    The Commission also vigorously pursues cases of market 
manipulation, whether executed through buybacks or otherwise. In 
particular, the Commission often brings enforcement actions alleging 
violations of Section 10(b) of the Securities Exchange Act and Rule 
10b-5 thereunder to address conduct intended to manipulate common stock 
prices. For example, the Commission actively pursues ``pump and dump'' 
cases in which the issuer either itself or indirectly through others 
touts its common stock through false and misleading statements to the 
market place.\1\
---------------------------------------------------------------------------
    \1\ See, e.g., SEC v. Pagnano, et al., Civil Action No. 14-CV-7691 
(VM) (S.D.N.Y.) (filed Sept. 23, 2014); SEC v. Benou, et al., Civil 
Action No. 14-CV-7284 (PGS) (D.N.J.) (filed Nov. 21, 2014); SEC v. 
Zenergy Int'l, Inc., et al., Civil Action No. 13-CV-5511 (JBG) (N.D. 
Ill.) (filed Aug. 1, 2013); SEC v. Spongetech Delivery Systems, Inc., 
et al., Civil Action No. 10-CV-2031 (DLI) (E.D.N.Y.) (filed May 5, 
2010). See also the lists of SEC enforcement actions, including market 
manipulations, which are published annually, including the fiscal year 
2014 list available at http://www.sec.gov/about/secstats2014.pdf.
---------------------------------------------------------------------------
    Question. Section 1502 of Dodd-Frank directed the SEC to impose 
additional disclosure requirements on issuers that use tin, tantalum, 
tungsten, and gold (so-called ``conflict minerals'') from the 
Democratic Republic of Congo (DRC) and adjoining countries. The DRC is 
an important source of minerals that are essential for electronic 
devices, such as smartphones and laptops. For over 15 years armed 
groups in eastern DRC have preyed on the mining sector to finance their 
operations with devastating impact, committing gross human rights 
abuses in the process.
    The Dodd-Frank directive aimed to establish transparency and 
accountability in mineral supply chains to ensure that companies do not 
source their minerals from the region, and thus fund the conflict. SEC 
issued final rules on August 22, 2012. Companies were required to file 
their first specialized disclosure report on May 31, 2014 (for the 2013 
calendar year) and annually on May 31 every year thereafter.
    Global Witness and Amnesty International recently published an 
analysis of how well corporations are adhering to the disclosure 
requirements based ion SEC filings The report's key findings indicated 
that:

  --79 of the 100 companies analyzed failed to meet the minimum 
        requirements of the U.S. conflict minerals law.
  --Most companies in the sample are not doing enough to map out the 
        supply chain of the minerals they purchase. Only 16 percent go 
        beyond their direct suppliers to contact, or attempt to 
        contact, the smelters or refiners that process the minerals.
  --More than half of companies sampled do not even report to senior 
        management when they identify a risk in their supply chain.
  --The fact that one in five surveyed companies did comply with the 
        law's requirements dismantles the argument that implementation 
        is too difficult and too expensive for companies failing to 
        properly investigate their supply chains.

    What efforts are currently underway or planned (and on what 
timetable) by the SEC to address deficiencies in corporate compliance 
with the required disclosures under Section 1502?
    Answer. As you know, there is ongoing litigation regarding the 
First Amendment implications of a portion of the disclosure required by 
the rule. I am mindful that the Commission and registrants are awaiting 
the court's final decision on the rulemaking, and registrants are 
preparing their Form SD filings using the interim staff guidance issued 
on April 29, 2014, subject to further action taken either by the 
Commission or a court. Until the litigation is resolved, companies have 
not been required to have an Independent Private Sector Audit of their 
conflict mineral reports, which we expect to improve compliance.
    Since the rule's adoption, the staff has issued interpretive 
guidance in response to a number of questions and will continue to 
consider the need to provide further interpretive guidance, as 
appropriate. In addition, Commission staff selected a sample of 
approximately 70 Forms SD filed in 2014 for calendar year 2013 to 
assess compliance with the disclosure requirements established by the 
form and the new rule. In that review, while registrants generally 
appeared to be complying with the form and rule requirements, the staff 
observed some items where it believed registrants could improve in 
their subsequent filings. The staff conveyed its observations for 
improvements at various conferences and speaking engagements.
                                 ______
                                 
               Questions Submitted by Senator Jerry Moran
                             fiduciary duty
    Question. Chair White, during your appearance before the 
subcommittee, you indicated that the SEC has provided technical 
assistance to the Department of Labor on their proposed rule to change 
the definition of fiduciary investment advice under ERISA. You 
indicated that the SEC's assistance primarily focused on your knowledge 
of the broker dealer model and the way in which the definition of a 
fiduciary duty could impact the availability of reasonably-priced 
services to lower-income investors. Can you please elaborate on how 
changes to the fiduciary duty could impact lower-income investors?
    Answer. Commission staff has provided DOL staff with technical 
assistance and expertise on our regulatory regime as DOL developed 
their re-proposal. As part of these discussions, Commission staff 
shared their experiences with how services are provided in this area of 
the market and the potential economic and market impacts that policy 
changes the DOL was considering could have on SEC registrants and 
retail investors.
    It is important to achieve the right balance in addressing these 
issues, while making sure investors, particularly retail investors, are 
appropriately protected and have access to the type of investment 
advice and services they need and can afford. I believe that ongoing 
analysis of potential impacts is required to achieve this balance and 
to identify possible costs. The DOL has completed the first phase of 
its comment process and will soon hold a public hearing in an effort to 
fully understand the potential practical effects of any rulemaking.
                           nms plan construct
    Question. Chair White, I am hearing concerns that the SEC has 
frequently addressed critical market structure issues by delegating its 
responsibility to regulate our markets to the exchanges, which, as you 
know, are for-profit entities that have a fiduciary obligation to 
maximize profitability. As both regulator and market participant, they 
may often find themselves competing alongside those they regulate.
    I understand that the exchanges have addressed market structure 
initiatives under a conflicted governance structure that largely 
excludes meaningful input from affected market participants such as the 
broker-dealer community. The SEC has used this delegated authority, 
otherwise known as an NMS Plan construct, in a number of key areas, 
including the Consolidated Audit Trail and the Tick Size Pilot. In 
addition, the operation of the public market data feeds, or SIPs, has 
also been delegated to the SROs and their governance structure. I 
understand that the SEC may in part be delegating these 
responsibilities to protect their resources. It seems to me that this 
provides all the more reason to improve the Operating Committee 
structure, include additional market participants in the planning, 
development, and operation of these NMS plans, and collectively benefit 
from the most efficient and resilient regulatory regimes possible. 
Kansas based BATS Exchange has suggested that the governance structure 
be amended to include voting representation by the asset management and 
broker-dealer communities.
    With that background, do you agree that the current governance 
structure appears incomplete and will you consider amending the 
existing NMS Plans to improve their governance structure while 
including the broker-dealer and asset-management industries in the 
Operating Committees, as others have suggested? Do you have the 
required legal authority to accomplish this reform with congressional 
involvement or is a statutory modification necessary?
    Answer. The SROs, which are subject to Commission oversight, 
participate in joint NMS Plans in connection with the planning, 
development, operation, and regulation of the national market system. 
The governance of the NMS Plans occurs through their Operating 
Committees, which are comprised of representatives of the member SROs.
    The Commission has rulemaking authority under Section 11A of the 
Securities Exchange Act of 1934 to facilitate the establishment of a 
national market system for securities and has relied on that authority 
to establish rules governing NMS Plans. In that regard, the Commission 
in 2005 required certain NMS Plans to establish non-voting advisory 
committees in an effort to improve NMS Plan transparency and broaden 
participation in NMS Plan governance. Advisory committees have served a 
useful role in the administration of NMS Plans. Members of an advisory 
committee have the right to submit their views to the Operating 
Committee on Plan matters, including any new or modified product, fee, 
contract, or pilot program. Members also have the right to attend all 
Operating Committee meetings and to receive any information distributed 
to the Operating Committee relating to Plan matters, except when the 
Operating Committee, by majority vote, decides to meet in executive 
session after determining that an item of Plan business requires 
confidential treatment.
    When the SROs implement Commission initiatives, such as the 
requirements for a Consolidated Audit Trail or the Tick Size Pilot, 
they are done pursuant to SRO actions subject to Commission review and 
approval. The implementation and operation of the initiatives 
themselves is closely overseen by Commission staff.
    As part of its undertaking to do a comprehensive review of equity 
market structure, the Commission recently established the Equity Market 
Structure Advisory Committee with the objective of providing the 
Commission with a diversity of views on the structure and operations of 
the equity markets. The role of SROs in today's markets covers a 
variety of issues that both the staff and the committee will be 
considering.
                                 ______
                                 
              Question Submitted to Hon. Timothy G. Massad
           Question Submitted by Senator Christopher A. Coons
    Question. What is the state of international cooperation in 
achieving the goals of the G20 commitments to reform global financial 
markets? In particular, some have posited that where there are nuanced 
differences in local regulatory implementation, there is a risk of 
market fragmentation along regional borders. Do you agree with this 
assessment? Why or why not?
    Answer. Substantial progress has been made and a variety of efforts 
are currently taking place. As Chairman, I have made several trips to 
Europe and Asia and I meet frequently with my counterparts at foreign 
regulatory agencies, as well as through formal and informal 
international organizations, to further the work of harmonizing 
derivatives regulations as much as possible. It is important to keep in 
mind the scale of the challenge and the unique circumstances in which 
the swaps market evolved. In all areas of financial regulation, there 
are significant differences between the laws of different nations. What 
is unusual about the derivatives market is that it grew to a global 
scale without any meaningful regulation. Now, in seeking to regulate 
it, there will inevitably be differences between national rules and 
requirements. While the G-20 nations agreed to basic reform principles, 
individual nations must adopt rules and requirements and these will 
vary given each jurisdiction's own legal traditions, regulatory 
philosophy, political process, and market concerns. The challenge is to 
achieve as consistent a framework as possible while recognizing that 
our responsibility as national regulators is first and foremost to 
faithfully implement and enforce our own nation's laws.
    In each of the four major areas of swaps regulation required under 
Dodd-Frank--oversight of swap dealers, central clearing, trading of 
swaps and reporting--the U.S. is leading the way both in terms of 
implementing the legislative mandates (which reflect the G-20 
commitments) as well as in the efforts to achieve international 
coordination. Other nations are not as far along. That poses challenges 
in achieving coordination.
    Oversight of Swap Dealers.--Central to our harmonization efforts is 
the Commission's substituted compliance program. Under this approach, 
market participants may comply with foreign rules in lieu of compliance 
with the Commission's rules where the foreign jurisdiction's 
requirements and oversight are comparable and comprehensive compared to 
corresponding requirements under the Commodity Exchange Act and 
Commission regulations. To date, we have issued comparability 
determinations with respect to the key swap dealer rules of six 
jurisdictions--the European Union, Japan, Australia, Hong Kong, 
Switzerland, and Canada. To our knowledge neither the European Union 
nor any other jurisdiction has taken similar action. We will continue 
to look at other jurisdictions' rules as those are finalized.
    Another aspect of oversight of swap dealers on which we are making 
good progress is with regard to proposed rules on margin for un-cleared 
swaps. The Commission, together with the U.S. bank regulators, has 
played an active role in encouraging international harmonization and 
coordination of margin rules. The Commission's proposed margin rules 
are consistent with the standards in the final international framework, 
and we are in regular communication with regulators in the EU and Japan 
as we and they finalize our respective rules.
    Clearing.--Another important area that has been a high priority 
under my tenure is central clearinghouse recognition and regulation. As 
you may know, the Europeans have not yet recognized our central 
clearinghouses as equivalent. We believe there is--and has been--ample 
basis for them to do so. However, they have raised various issues, 
which we continue to discuss, and I am hopeful that we can resolve this 
issue soon.
    We are also in dialog with European regulators to coordinate, where 
possible, clearing mandates. Europe has not yet acted but we will seek 
to work with them where possible. We have also helped to lead efforts 
to implement international principles on regulation of clearinghouses, 
known as the Principles for Financial Market Infrastructures. We 
revised our regulations to be consistent with those principles. In 
addition, we are currently co-chairing an international effort to 
develop standards for stress testing of clearinghouses and for 
clearinghouse recovery plans.
    Trading.--In the area of trading, most jurisdictions, including the 
European Union, have not implemented rules regarding mandatory trading 
of OTC swaps. This makes it a challenge to harmonize. Nevertheless, we 
are working with various jurisdictions to do all we can in this area.
    For example, we have taken action to permit U.S. persons to trade 
on foreign trading platforms even if those platforms do not register 
with us, as exemplified by a recent no action letter we issued for an 
Australian trading platform. See CFTC No-Action Letter 14-117, which 
was superseded by No-Action Letter 15-29 on May 15, 2015.
    Additionally, the CFTC has developed registration requirements and 
procedures for Foreign Boards of Trade (FBOTs) that wish to provide 
their members and other participants in the United States with direct 
access, i.e., the ability to enter trades directly into the trade 
matching system of the FBOT. The Commission has issued a series of no 
action letters in this regard and has adopted formal registration rules 
that can replace the process of issuing staff no-action letters. The 
Commission currently has 22 applications for registration pending, 15 
of which were permitted to engage in trading by direct access pursuant 
to no-action relief and can continue to do so until the Commission 
approves or disapproves their applications for registration.
    Lastly, we have also taken steps to improve our swap trading 
framework and we will continue to do so in response to feedback.
    Reporting.--CFTC staff serves as the co-chair of the CPMI-IOSCO 
Working Group for Harmonization of Key OTC Derivatives Data Elements, 
along with a representative of the European Central Bank, facilitating 
international swaps data harmonization.
    The Financial Stability Board previously requested a feasibility 
study to analyze the various options for global aggregation of over-
the-counter derivatives trade repository data. Based on the published 
recommendations of the Aggregation Feasibility Study Group, CPMI and 
IOSCO established this international working group to develop guidance 
on the harmonization of key swap data elements reported to trade 
repositories. These key swap data elements focus on the goal of 
fostering global aggregation and include, but are not limited to, a 
global Unique Transaction Identifier (UTI) and global Unique Product 
Identifier (UPI).
    In addition to this particular CPMI-IOSCO effort on swap data 
harmonization, CFTC staff participate in several other working groups 
that address reporting in cooperation with other domestic and 
international regulators.

                          SUBCOMMITTEE RECESS

    Senator Boozman. The subcommittee stands in recess until 
Tuesday, May 12 at 10:30 a.m., when we will consider the fiscal 
year 2016 budget request for the Federal Communications 
Commission.
    The subcommittee hearing is hereby adjourned.
    [Whereupon, at 11:56 a.m., Tuesday, May 5, the subcommittee 
was recessed, to reconvene at 10:30 a.m., Tuesday, May 12.]