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


 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2017

                              ----------                              


                        TUESDAY, APRIL 12, 2016

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.

    The subcommittee met at 10:32 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. John Boozman (chairman) presiding.
    Present: Senators Boozman, Moran, Lankford, Coons, and 
Durbin.

                   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 would like to welcome our witnesses, Security and 
Exchange Commission (SEC) Chair Mary Jo White and Commodity 
Futures Trading Commission (CFTC) Chairman Tim Massad. Thank 
you both for being here today. We look forward to hearing from 
you both about the details of your budget requests and your 
plans to carry out your agencies' missions.
    As members of this subcommittee, we have a responsibility 
to ensure that funds we oversee are spent wisely. Both of your 
agencies are seeking significant increases for fiscal year 
2017. While you do have important responsibilities, you have 
also received significant increases in recent years, 
particularly in comparison to other agencies in our 
jurisdiction.
    The SEC is requesting $1.781 billion, which is $176 
million, or 11 percent, higher than fiscal year 2016. Since 
fiscal year 2000, the SEC budget has grown from $377 million to 
now $1.6 billion.
    While the SEC is a fee-funded agency, congressional 
oversight over the Commission's budget is critical. Although 
those fees come from public companies and exchanges, they are 
borne by investors. And Congress has a responsibility to ensure 
those funds are being spent in a manner that protects 
investors, helps markets operate efficiently, and spurs 
economic growth for all Americans.
    The CFTC is requesting $330 million, a 32 percent increase 
from fiscal year 2016. The CFTC has also received significant 
increases. For comparison, the CFTC was funded at $62.7 million 
in fiscal year 2000, and the budget has now reached $250 
million.
    However, access to more funding does not necessarily ensure 
that an agency will successfully achieve its mission or spend 
that funding responsibly.
    In the case of the CFTC, some leasing costs and practices 
have raised concerns about effective management of Federal 
funding.
    All agencies have to make strategic decisions on how to 
best allocate their resources. As we review the budget 
requests, I am most interested to hear what decisions you have 
made to operate more efficiently in order to carry out your 
responsibilities within the current funding levels.
    We all benefit from a system that promotes a fair and 
orderly market, 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 other Federal regulators, 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's) proposal could limit affordable retirement options for 
low- and middle-income Americans.
    We're also interested in hearing more about efforts to 
defend against cyber threats to investors and financial market 
infrastructure, protecting families from higher electricity 
bills by treating regional transmission organizations fairly, 
and ease regulatory burdens for end-users.
    Your jobs have become even more challenging with the rise 
in automated trading, constant technological innovations, and 
your charge to operate in what has been referred to as ``the 
Internet-fueled age of finance.''
    I look forward to your testimony and hearing from you about 
these and other challenges you face.
    But first I will turn to our ranking member, Senator Coons, 
for his opening statement.
    Thank you.

               STATEMENT OF SENATOR CHRISTOPHER A. COONS

    Senator Coons. Thank you, Chairman Boozman, for convening 
this hearing.
    And I, too, want to welcome our witnesses, SEC Chair Mary 
Jo White and Chairman of the CFTC, Tim Massad. The SEC and CFTC 
have played critical roles in our economy, working to stimulate 
and sustain economic growth and prosperity while protecting the 
securities and futures markets from fraud and manipulation.
    Market users, financial investors, and the U.S. economy all 
rely on vigilant oversight by your two agencies in today's 
fast-paced, evolving, and often volatile, global marketplace.
    And as someone from the State of Delaware, which is at 
least the incorporation home to a majority of the largest 
corporations in our country and a fairly sophisticated 
financial services sector, I'm particularly interested in 
making sure your agencies are using your resources effectively 
and efficiently.
    Our economy has made notable progress in emerging from the 
financial crisis, but just because we're recovering doesn't 
mean we've let down our guard by allowing a return to the same 
practices that led to the crisis in the first place. Indeed, we 
must make sure we have the necessary safeguards in place to 
keep our markets secure and stable.
    Protecting investors of all types, from large institutional 
investors to retirees and families to Americans at all stages 
in their lives, from reckless and irresponsible practices is of 
paramount importance.
    As the investors' advocate, the SEC is responsible for 
maintaining fair, orderly, and efficient securities markets. 
The SEC conducts day-to-day oversight of major market 
participants, such as broker-dealers, self-regulatory 
organizations, and transfer agents. It monitors corporate 
disclosure of information to the investing public. The SEC also 
investigates and pursues both civil and criminal enforcement 
actions against securities law violators.
    The CFTC carries out market surveillance, compliance, and 
enforcement programs in the futures arena, and detects, deters, 
and punishes abusive trading activity, manipulation of 
commodity prices, especially those that could negatively impact 
consumers and the economy.
    To be frank, the forecast for providing the requested 
resources for fiscal year 2017 does not currently look 
promising. We, again, face complicated and challenging funding 
decisions requiring that we, on this subcommittee and the whole 
Appropriations Committee, juggle a multitude of competing 
requests vying for limited resources.
    For the SEC, the President has requested $1.78 billion, an 
increase of 11 percent, or $176 million above the fiscal year 
2016 enacted.
    And for the CFTC, the President seeks $330 million, an 
increase of 32 percent, or $80 million above the fiscal year 
2016 enacted, which was frozen at the fiscal 2015 level.
    This subcommittee's challenge, as always, is to evaluate 
these requests under a challenging set of budgetary 
constraints. That's why I welcome the opportunity today for you 
to inform us about exactly how you will invest these additional 
resources and for us to conduct critical oversight of your 
agencies through a candid discussion of where they are today, 
where they need to be, and how we could work together to 
provide the resources you need to fulfill your vital missions.
    Congress exercises some of its most effective oversight of 
agencies through the appropriations process, and today's 
hearing provides a valuable public forum in which to ask you, 
as the leaders of the SEC and the CFTC, some key questions as 
to whether your agencies are keeping pace with developments in 
the marketplace, particularly including the emergence of new 
and complex financial products, whether your agencies have the 
right mix of talent and expertise to be effective and vigilant 
watchdogs, whether you have nimble state-of-the-art information 
technology to augment and support human capital, whether you're 
adequately protected from cyber-attack, and what are the 
practical consequences of a budget belt-tightening and possibly 
reduced resources.
    Given the enormous responsibilities assigned to both the 
SEC and CFTC, it's critical that Congress and, in particular, 
this subcommittee, I believe, provide you the resources needed 
to protect investors and promote and preserve confidence in the 
markets, all while responsibly managing taxpayer dollars.
    So to Chair White and Chairman Massad, I'm eager to discuss 
how you're currently using the funds that we've provided in 
fiscal 2016. And as we look ahead to fiscal 2017, I'd like to 
learn more about your most pressing funding priorities, as well 
as your honest appraisal of the potential impacts should your 
funding requests not be fully met.
    While the subcommittee faces challenges to address many 
competing demands, short-changing your two agencies, in my 
view, would be exceedingly irresponsible.
    Chairman Boozman, I'm committed to working with you as we 
consider the resource needs of these two important financial 
regulators, as well as all the other agencies that come under 
our purview, and I thank you for convening today's hearing.
    Senator Boozman. Thank you very much, Senator Coons.
    We now ask Chair White to deliver her testimony.

                SUMMARY STATEMENT OF HON. MARY JO WHITE

    Ms. White. Thank you very much, Mr. Chairman, Ranking 
Member Coons, Senator Moran, and other members of the 
subcommittee. Thank you for inviting me to testify in support 
of the President's fiscal year 2017 budget request for the 
Securities and Exchange Commission and to discuss why funding 
at a level of $1.781 billion is critically needed to enable the 
agency to fulfill its important responsibilities to investors, 
our markets, and companies seeking to raise capital to fuel 
innovation and economic growth.
    I also appreciate testifying alongside Chairman Massad, 
whom I commend for his leadership of the CFTC and his 
cooperation with the SEC on a range of important issues.

                          SEC ACCOMPLISHMENTS

    The SEC has made great strides in recent years to 
strengthen its operations and programs, adopting strong 
measures and bringing important enforcement actions to protect 
investors in our markets. Two thousand fifteen was a year of 
particularly impressive accomplishments for the agency, which 
we are striving to continue in fiscal year 2016.
    On the rulemaking and policy fronts, we finished our JOBS 
Act mandates with the adoption of both Regulation A-Plus and 
Regulation Crowdfunding, and are nearing completion of all of 
our Dodd-Frank Act mandates.
    In 2015, we also advanced other key nonmandated rules and 
comprehensive initiatives in mission-critical areas. We, for 
example, continued our comprehensive review of equity and 
fixed-income market structure issues; forwarded our disclosure 
effectiveness review to improve the public company disclosure 
regime for investors and companies; implemented Regulation 
Systems Compliance and Integrity, SCI, to enhance the 
cybersecurity of certain important regulated entities; and 
advanced the modernization and enhancement of our regulatory 
regime for asset managers--all core areas directly impacting 
investors, small and large, and the integrity, robustness, and 
reliability of our markets as well.
    The Commission also continued in 2015 to hold securities 
law violators accountable in record numbers in all market 
strata and in a number of cutting-edge, first-of-their-kind 
enforcement cases, obtaining record recovery orders of $4.2 
billion, which is more than twice our budget.
    Systemic enhancements in the SEC's National Exam Program, 
including increased recruitment of more industry experts, 
greater use of data analytics, and enhanced training, have led 
to a more effective, efficient program.
    We are also, throughout the agency, with assistance and 
leadership from our economists in the Division of Economic and 
Risk Analysis, increasingly harnessing technology to better 
identify risks, uncover frauds, sift through large volumes of 
data, inform policymaking, and streamline operations.

                     SIGNIFICANT CHALLENGES REMAIN

    While these achievements clearly evidence a stronger and 
more effective agency, significant work and challenges remain. 
Currently, the SEC is charged with overseeing approximately 
28,000 market participants, as well as 19 national securities 
exchanges, the Public Company Accounting Oversight Board 
(PCAOB), Financial Industry Regulatory Authority (FINRA), the 
Municipal Securities Rulemaking Board (MSRB), Securities 
Investor Protection Corporation (SIPC) and the Financial 
Accounting Standards Board (FASB). In addition, the SEC is 
responsible for selectively reviewing the disclosures and 
financial statements of over 9,100 reporting companies.
    Beyond these extensive responsibilities, the SEC has also 
been given new duties or expanded jurisdiction over securities-
based derivatives, hedge and other private fund advisers, 
credit rating agencies, municipal advisors, and clearing 
agencies, in addition to the responsibility to implement and 
oversee an entirely new crowdfunding regime for start-up and 
small businesses.
    The SEC greatly appreciates the confidence that Congress 
and this subcommittee have placed in us in recent 
appropriations cycles, and we are seeking that support this 
year. As detailed in my written testimony, the requested level 
for fiscal year 2017 has been carefully thought through and 
targeted to permit the agency to continue to improve our 
information technology across the agency and hire an additional 
250 staff in critical core areas, including for examinations, 
enforcement, market oversight, and our economic and risk 
analysis functions.
    The markets and registrants we oversee have grown 
exponentially in size and complexity, with the trading volume 
in the equity markets nearly tripling to $70 trillion since 
2001, and assets under management of registered advisers more 
than tripling from approximately $21.5 trillion to 
approximately $67 trillion.
    Without the funds we have requested, we will be unable to 
keep pace with our dynamic markets and expanding 
responsibilities.
    I think two key points of reference starkly illustrate our 
current and continuing funding needs. First, in 2006, we had 
about 17 examiners per trillion dollars in assets under 
management. Today, we have only about eight. Second, the annual 
IT budgets for some of our largest registrants are reported to 
be up to $10 billion, more than five times the SEC's entire 
budget.
    If our funding does not match our responsibilities in 
today's markets, every facet of our mission suffers. Investors 
are not adequately protected. Our capital markets cannot be 
sufficiently overseen and improved. And companies will be 
hindered in raising the capital that they need.
    As I know the subcommittee is aware, and as the chairman 
alluded to, the SEC's funding is deficit-neutral, so that any 
amount appropriated to the agency will be offset by modest 
transaction fees and, therefore, will not impact the deficit or 
the funding available for other agencies. Our appropriation 
also does not count against the budget caps.
    I hope and believe that we have shown ourselves to be good 
stewards, and very sensitive and responsive to congressional 
oversight of the funds that we have been appropriated. And we 
will continue to be so.
    Thank you again for your support of the agency. I'd be 
pleased to answer any 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 2017 budget request for the Securities and 
Exchange Commission.\1\ At the outset, I want to thank the Chairman, 
the ranking member, and all of the subcommittee for your support of the 
SEC's important mission in previous budget cycles. And today, I very 
much appreciate the opportunity to discuss with you why funding the SEC 
at a level of $1.781 billion for fiscal year 2017 is necessary for the 
agency to continue to fulfill its critical responsibilities to protect 
investors, maintain fair, orderly, and efficient markets, and 
facilitate capital formation.\2\
---------------------------------------------------------------------------
    \1\ A copy of the SEC's fiscal year 2017 Congressional Budget 
Justification can be found on our Web site at http://www.sec.gov/about/
reports/secfy17congbudgjust.pdf.
    \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.
---------------------------------------------------------------------------
    The SEC has made great strides in recent years to strengthen its 
operations and programs, adopting strong measures that protect 
investors and our markets, and aggressively enforcing the securities 
laws to punish wrongdoers.
    With respect to rulemaking, the agency has proposed or adopted 
nearly all of the mandatory rulemakings required by the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act) and the 
Jumpstart Our Business Startups Act (JOBS Act), in addition to 
advancing other key rules in mission critical areas. Actions 
implementing the Congressional mandates have included final rules 
governing credit rating agencies and the public securitization markets; 
rules to address over-the-counter derivatives; new means for small 
businesses to access capital (including rules to expand the Regulation 
A exemption and permit securities-based crowdfunding offerings); 
executive compensation disclosures; and the removal of references to 
credit ratings from SEC rules. In addition to the congressional 
mandates, the SEC has also advanced other important policy objectives, 
including rules to enhance oversight of high-frequency traders; the 
agency's supervision of investment advisers and mutual funds; and the 
structure and resiliency of money market funds. The agency has also 
adopted requirements for comprehensive new controls at critical market 
participants to strengthen key technological systems.
    Beyond the specific rulemakings, the SEC has intensified its review 
of equity and fixed income market structure issues; undertaken a 
comprehensive disclosure effectiveness initiative seeking ways to 
improve the public company disclosure regime for investors and 
companies; and undertaken the modernization and enhancement of our 
regulatory regime for the asset management industry. We also have 
continued to hold securities law violators accountable by bringing 
cutting-edge cases in record numbers and in all market strata. Systemic 
enhancements in the SEC's National Examination Program (NEP)--including 
increased recruitment of industry experts, the augmentation of data 
analytics capacities, and enhanced training programs--have produced a 
more effective, efficient program. We are also throughout the agency 
increasingly harnessing technology to better identify risks, uncover 
frauds, sift through large volumes of data, inform policymaking, and 
streamline operations, while at the same time improving internal 
collaboration and recruiting more staff with specialized expertise and 
experience.
    While these accomplishments and enhancements clearly evidence a 
stronger and more effective agency, challenges remain if we are to be 
successful in addressing the growing size and complexities of the 
securities markets and fulfill the SEC's broad mandates and 
responsibilities. Currently, the SEC is charged with overseeing 
approximately 27,000 market participants, including nearly 12,000 
investment advisers, almost 11,000 mutual funds and exchange-traded 
funds, over 4,000 broker-dealers, and over 400 transfer agents. The 
agency also oversees 18 national securities exchanges, 10 credit rating 
agencies, and six active registered clearing agencies, as well as the 
Public Company Accounting Oversight Board (PCAOB), Financial Industry 
Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board 
(MSRB), the Securities Investor Protection Corporation (SIPC), and the 
Financial Accounting Standards Board (FASB). In addition, the SEC is 
responsible for selectively reviewing the disclosures and financial 
statements of over 9,100 reporting companies. In recent years, the 
SEC's responsibilities have also dramatically increased, adding new 
duties or expanded jurisdiction over securities-based derivatives, 
hedge fund and other private fund advisers, credit rating agencies, 
municipal advisors, and clearing agencies, as well as a responsibility 
to implement a new regime for crowdfunding offerings.
    The size and complexity of the entities the SEC regulates has also 
expanded exponentially. From 2001 to 2015, assets under management of 
SEC-registered advisers more than tripled from approximately $21.5 
trillion to approximately $66.8 trillion, and assets under management 
of mutual funds more than doubled from $7 trillion to over $15 
trillion. Trading volume in the equity markets from 2001 through 2015 
nearly tripled to over $70 trillion.
    While the SEC greatly appreciates the confidence that Congress has 
placed in it in recent appropriation cycles, additional funding is 
imperative if we are to continue the agency's progress in fulfilling 
its responsibilities over our increasingly fast, complex, and growing 
markets. Funding at the requested level will permit the agency to hire 
an additional 250 staff in critical, core areas and continue to improve 
our information technology so that we can better oversee today's 
markets with the sophisticated tools necessary to safeguard investors. 
Specifically, as described in more detail below and consistent with the 
planning reflected in our recent requests, the budget for fiscal year 
2017 seeks to:

  --Increase examination coverage of investment advisers and other key 
        entities who interact with retail and institutional investors;
  --Further leverage cutting-edge technology to permit the SEC to 
        better keep pace with the entities, markets, and products we 
        regulate;
  --Protect investors by enhancing our enforcement program's 
        investigative capabilities and strengthen our ability to 
        litigate against wrongdoers;
  --Further bolster the SEC's economic and risk analysis functions; and
  --Hire market and other experts to enable the SEC to more expertly 
        and efficiently discharge its current rulemaking and oversight 
        responsibilities.

    As the subcommittee is aware, the SEC's funding is deficit-neutral, 
which means that any amount appropriated to the agency will be offset 
by modest transaction fees (approximately $.02 per $1,000) and 
therefore will not impact the deficit or the funding available for 
other agencies.\3\ Our appropriation also does not count against the 
fiscal year 2016 or fiscal year 2017 caps set in the Bipartisan Budget 
Act of 2015.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    Last year was one of important achievements for the SEC, but 
significant work remains. Below is a summary of some of the 
accomplishments of the SEC in fiscal year 2015 and of the principal 
challenges ahead, as well as a more detailed description of key aspects 
of the fiscal year 2017 budget request.
           many accomplishments, but significant work remains
    Fiscal year 2015 was one of great accomplishment for the agency. 
The SEC brought an unprecedented number of enforcement cases (807 in 
total), secured an all-time high for orders directing the payment of 
penalties and disgorgement (over $4.2 billion), performed exams at a 
level not seen for the past 5 years (over 2,200), and, even more 
importantly, continued to develop cutting-edge cases and smarter, more 
efficient exams. Aided by enhanced technology to identify and analyze 
suspicious activity and strengthened by initiatives like self-
reporting, SEC staff was able to identify and target the most 
significant risks for investors across the market. Areas of focus 
included cybersecurity, market structure requirements, dark pools, 
microcap fraud, financial reporting failures, insider trading, 
disclosure deficiencies in municipal securities offerings, and 
protection of retail investors and retiree savings.
    The imperative of investor protection and market fairness was 
carried forward by all of our divisions and offices. While numbers of 
course only tell part of the story, the Division of Corporation Finance 
reviewed the annual and periodic reports of thousands of issuers last 
year, helping to ensure that investors receive full and fair disclosure 
about the public companies in which they invest. The Division of 
Trading and Markets reviewed more than 2,100 filings from exchanges and 
other self-regulatory organizations (SROs), standing guard for 
investors over major changes to the markets in which they entrust their 
savings. The Division of Investment Management reviewed filings 
covering more than 12,500 mutual funds and other investment companies, 
where the great majority of individual investors send their hard-earned 
money. And our economists in the Division of Economic and Risk Analysis 
produced more than 30 incisive papers and publications, including two 
major analyses to inform our work on asset management rules.
    The agency's accomplishments on the rulemaking front in fiscal year 
2015 were particularly noteworthy. The SEC has now executed a vast 
majority of the voluminous congressional mandates for a wide range of 
complex rulemakings. In 2015, with the adoption of Regulation A+ and 
Regulation Crowdfunding, the agency completed all of the major 
rulemakings directed by the JOBS Act. The SEC also moved into the final 
phase of implementing the Dodd-Frank Act, focusing on the two major 
remaining areas of mandates: security-based swaps and executive 
compensation. We marked two key milestones in the first area: first, 
with the adoption of rules for reporting and disseminating security-
based swap information; and second, with final rules for registering 
security-based swap dealers. We proposed a process for dealing with bad 
actors in the security-based swap market and adopted rules to help 
ensure that non-U.S. dealers participating in the U.S. market play by 
our rules. These reforms will give us powerful tools to oversee an $11 
trillion market and provide investors with unprecedented transparency 
into trading that had long been dangerously opaque.
    During the past year, we also issued proposals for the remaining 
executive compensation rulemakings required by the Dodd-Frank Act, 
including disclosure of whether a company allows executives to hedge 
the company's stock, disclosure of pay versus performance measures of 
executive compensation, and new disclosures and rules for clawing back 
incentive compensation erroneously awarded. And following the analysis 
of some 285,500 total comment letters, 1,500 of them unique, the final 
pay ratio rule was adopted in August 2015.
    Significant, high-priority work for the SEC will continue in fiscal 
year 2017: from completing the implementation of our mandated 
rulemakings,\4\ to continuing the core initiatives described above,\5\ 
to further strengthening our economic and risk analysis functions, to 
continuing to improve our technology and operations to make the agency 
more agile and effective, to ensuring that both our examination and 
enforcement function are strong and effective to match and address 
current markets. Outlined below is a brief overview of some of the key 
components of our budget request that would provide the funding for 
that work.
---------------------------------------------------------------------------
    \4\ The SEC will continue in 2016 to complete its remaining 
mandates. Of particular focus and priority will be to finalize the 
remaining security-based swap rules required of the SEC by Title VII of 
the Dodd-Frank Act. In February, the agency passed another key Title 
VII milestone with the adoption of the last set of rules for cross-
border dealer activity. Adoption of the substantive requirements for 
security-based swap dealers--specifically, the rules governing their 
business conduct and the requirements for their capital, margin, and 
asset segregation--are expected to be adopted soon.
    \5\ The SEC has actively advanced discretionary rulemaking in a 
number of areas essential to our mission. Three of the most prominent 
of these initiatives center on the asset management industry, the 
structure of the equity markets, and the SEC's disclosure regime. The 
Commission took action on all three in 2015, and I expect additional 
actions this year. Going forward, additional rulemaking initiatives to 
be considered will likely also include: shortening the securities 
transaction settlement cycle to support industry efforts and reduce 
potential systemic risk; further enhancing filings through the expanded 
use of structured data; and finalizing rules to update the intrastate 
offering exemption and recommendations for a universal proxy. In 
addition, I expect to continue to develop support from my fellow 
Commissioners for a uniform fiduciary duty for investment advisers and 
broker-dealers, and to bring forward a workable program for third party 
assessments to enhance the compliance of registered investment 
advisers.
---------------------------------------------------------------------------
expanding oversight of investment advisers and strengthening compliance
    The need for significant additional resources to permit the agency 
to increase its examination coverage of registered investment advisers 
and investment companies cannot be overstated. Increasing this 
examination coverage is vital to the SEC's ability to protect investors 
and the Nation's securities markets.
    The largest increase in entities registered with the SEC has 
occurred among investment advisers: a decade ago, there were 
approximately 9,000 investment advisers managing $28 trillion in 
assets, while the current projection is that these figures will grow to 
12,500 investment advisers managing more than $70 trillion in assets by 
fiscal year 2017. Beyond an increase in the number of advisers and 
amount of assets under management, additional challenges to examination 
staff are posed by the increased use of new and complex products by 
both investment advisers and broker-dealers, an increasing use of 
technology in registrants' operations that facilitate activities such 
as high-frequency and algorithmic trading, and the growth of complex 
``families'' of financial services companies with integrated operations 
that include both broker-dealer and investment adviser affiliates. As a 
point of reference, a decade ago we had approximately 17 OCIE staff per 
trillion dollars in investment adviser assets under management, but 
today have only approximately 8 OCIE staff per trillion dollars.
    In fiscal year 2015, SEC staff, through risk-targeted exams, 
examined approximately 10 percent of registered investment advisers 
managing more than 30 percent of the assets under management of 
currently registered advisers. The program also continued its emphasis 
on the roughly 40 percent of all registered investment advisers that 
have never been examined through the continuation of the NEP's never 
before examined adviser initiative started in 2014. Significant 
additional resources are critical to improve the examination coverage 
of this important industry. Under the fiscal year 2017 request, a top 
priority will be to hire 127 additional examiners, primarily to conduct 
additional examinations of investment advisers, but also to improve 
oversight and examination functions related to broker-dealers; clearing 
agencies; transfer agents; SROs, including FINRA and the PCAOB; swap 
data repositories; municipal advisors; and crowdfunding portals; among 
others.
                    continue to leverage technology
    The SEC has made substantial progress in modernizing its technology 
systems, streamlining operations, increasing our use of data analytics, 
and increasing the effectiveness of its programs. The SEC's fiscal year 
2017 budget request, which includes full use of the Reserve Fund, seeks 
to build on this progress by supporting a number of key information 
technology (IT) initiatives, including:

  --Expanding data analytic tools that 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 and ultimately 
        enabling the agency to allocate its resources more effectively. 
        For example, SEC staff has used data analytic (including 
        pattern recognition) tools to, among other things, detect 
        potential fraudulent or manipulative trading, identify 
        financial statement outliers or unusual trends indicative of 
        possible accounting fraud, discover possible money laundering, 
        sift through massive volumes of trading data to detect 
        suspicious trading patterns, and flag higher risk registrants 
        for examination prioritization.
  --Increasing investments in Information Security to address, as a top 
        priority, the ability to monitor and avoid advanced persistent 
        threats. The SEC's IT security program plans to focus its 
        efforts on improved risk management and monitoring and 
        continuing to invest in modernizing and securing the SEC's 
        infrastructure to enhance workflow and document management, the 
        SEC's electronic discovery program, operational resiliency, and 
        internal communications to staff.
  --Redesigning the Electronic Data Gathering, Analysis and Retrieval 
        (EDGAR) system, an ongoing, multi-year effort to simplify and 
        optimize 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. We are also making incremental 
        enhancements to the existing system to improve the user 
        experience, accommodate new submission requirements, and other 
        improvements that are needed prior to the full redesign.
  --Improving examinations through risk assessment and surveillance 
        tools that will help staff monitor for trends and emerging 
        fraud risks, as well as improving the efficiency of the 
        examination program so it can cover higher risk areas with its 
        resources.
  --Enhancing the Tips, Complaints, and Referral system (TCR) to 
        bolster its flexibility, configurability, and adaptability. TCR 
        investments will provide more flexible and comprehensive 
        intake, triage, resolution tracking, searching, and reporting 
        functionalities, with full auditing capabilities.
  --Improving enforcement investigation and litigation tracking to 
        better handle the substantial volume of materials produced 
        during investigations and litigation. Among other initiatives, 
        the SEC needs to build capacity to electronically transmit 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.
  --Further modernize SEC.gov to make one of the most widely used 
        Federal Government Web sites more flexible, informative, easier 
        to navigate, and secure for investors, public companies, 
        registrants, and the general public.
  --Invest in further business process automation and improvements to 
        build workflow applications that will improve the efficiency 
        and effectiveness of the agency in serving the public.

    To better execute these and other technology initiatives, the 
fiscal year 2017 request includes eight new positions for the Office of 
Information Technology (OIT). These staff would 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 resources to address wrongdoing in today's markets
    It is vital to the SEC's mission to bring timely, high-quality 
enforcement actions when violations of the Federal securities laws are 
identified. In fiscal year 2015, the SEC brought a record number of 
enforcement actions against those who defrauded investors and violated 
the law--including many first of their kind actions--and obtained 
orders for monetary remedies exceeding $4 billion. Building on these 
very strong efforts, the agency must continue to enhance its 
enforcement function to keep pace with the growing size and complexity 
of the Nation's markets and to swiftly and aggressively address 
misconduct.
    For fiscal year 2017, the SEC is requesting 52 additional positions 
for the Enforcement Division. The Division will use the additional 
requested positions to support its three core functions: intelligence 
analysis, investigation, and litigation. Specifically, these additional 
resources will support the Enforcement program's current and future 
initiatives by, among other things:

  --increasing the experienced forensic accountants, attorneys, 
        industry experts, and information technology and support staff 
        needed to promptly detect, prioritize, and investigate areas 
        appropriate for enhanced enforcement efforts (30 positions);
  --adding experienced trial attorneys to prosecute the growing number 
        of highly-complex enforcement actions (12 positions);
  --enhancing Enforcement's data analytics expertise to assist in the 
        implementation of data intensive projects, state-of-the-art 
        investigative tools (such as eDiscovery and knowledge 
        management), and improved forensic capabilities (5 positions); 
        and
  --bolstering staffing for intelligence functions, including the 
        collection, analysis, triage, referral, monitoring, and follow-
        through on the thousands of TCRs received each year (5 
        positions).

    With respect to the latter two priorities, analysis of large 
datasets, including SEC filings and trading data in equities, options, 
municipal bonds, and other securities, helps to limit investor harm by 
increasing the chances of detecting misconduct and detecting it 
earlier. The SEC's Enforcement program expects the improved data 
analysis capabilities derived from the agency's investments in IT will 
yield additional important case leads in fiscal year 2017. As a result, 
the Enforcement program would dedicate 10 of the requested positions to 
further develop its data analytic function, increasing the number of 
staff responsible for reviewing and triaging incoming TCRs and 
bolstering the number of staff to whom TCRs are sent for further 
investigation.
    The Enforcement program also requires additional staffing to 
promptly detect complex frauds and other difficult-to-detect 
misconduct, whether it occurs at hedge funds, broker-dealers, or 
``boiler rooms''; respond to misconduct in the changing equity markets 
relating to algorithmic trading and dark pools; address large-scale 
insider trading and stock manipulation; and keep pace with a rapidly 
evolving industry. As a result, 30 of the positions the SEC is seeking 
in fiscal year 2017 would be 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 as necessary in 
matters where investors' money may dissipate if immediate action is not 
taken.
    Finally, 12 of the new positions the SEC is requesting in fiscal 
year 2017 would reinforce its litigation operations nationwide. This 
increased allocation will enable the SEC to handle the higher 
proportion of enforcement actions that are being filed as contested 
matters as well as to follow through on its commitment to litigate any 
case where it believes admissions of wrongdoing are necessary to 
achieve greater public accountability.
focus on economic and risk analysis to support rulemaking and oversight
    The SEC remains committed to strengthening the economic and risk 
analysis functions of its Division of Economic and Risk Analysis (DERA) 
and for fiscal year 2017 plans to add six new positions to DERA. DERA 
is our fastest growing division, and this additional growth would 
continue to deepen the Division's expertise in support of rulemaking 
initiatives affecting the capital markets as well as initiatives to 
detect violations of the securities laws.
    The DERA positions requested would focus on areas including 
exchange-traded funds, microcap stocks, the derivatives markets, and 
asset-backed securities. These staff would work with colleagues across 
the SEC to proactively monitor these markets from a systemic 
perspective, as well as to develop analytical tools to assist the 
Division of Enforcement in analyzing and identifying potential illicit 
activity in these areas.
        meet expanded rulemaking and oversight responsibilities
    The agency is also requesting seven additional positions in fiscal 
year 2017 for its Division of Trading and Markets. In fiscal year 2017, 
the Division plans to use the additional positions requested to 
undertake new market-related responsibilities resulting from ongoing or 
recently completed rulemakings, as well as continuing to improve the 
agency's market supervision. Three of these positions would help the 
Division implement its new or enhanced responsibilities to oversee 
clearing agencies and swap data repositories. The other four would help 
improve the SEC's analytics and reporting on broker-dealers' finances, 
internal controls, and risk management practices; process rule 
proposals from a growing number of SROs; and provide interpretive 
guidance related to the derivatives markets.
    The SEC is also requesting seven new positions for the Division of 
Investment Management to implement key policy objectives. These 
personnel would conduct ongoing data analysis, including new data that 
would be submitted to the SEC as part of the investment company 
reporting modernization initiative. In addition, they would monitor 
issues related to asset management risks (including those related to 
liquidity, derivatives, stress testing and transition planning 
rulemaking initiatives), provide interpretive advice, and respond to 
exemptive applications.
                               conclusion
    Thank you again for the opportunity to present the President's 
fiscal year 2017 budget request. The SEC has made great progress with 
the recent funding increases approved by Congress, and I deeply 
appreciate the President's and Congress' continued support of the 
agency. I look forward to working with the subcommittee to provide the 
SEC with the resources it needs to fulfill its important 
responsibilities to investors and our capital markets. I would be happy 
to answer any questions.

    Senator Boozman. Thank you very much, Chair White.
    Chairman Massad, we invite you to deliver your testimony.
                                ------                                


                  COMMODITY FUTURES TRADING COMMISSION

STATEMENT OF HON. TIM MASSAD, CHAIRMAN
    Mr. Massad. Thank you, Chairman Boozman, Ranking Member 
Coons, and members of the subcommittee. I am pleased to have 
this opportunity to discuss the President's fiscal year 2017 
budget request for the CFTC and its importance.
    And I am also pleased to be here with Chair White. Let me 
underscore and agree with her comment on the fact that our 
agencies are working closely together on many fronts, and I 
also appreciate her leadership.
    Let me also thank the members of this subcommittee for 
supporting the work that we do.
    As you know, the CFTC oversees the futures, options, and 
swaps markets. These markets are critically important to 
American businesses, families, and the American economy. They 
allow farmers to lock in a price for their crops, utilities to 
manage the cost of fuel, and businesses of all types and sizes 
to hedge commercial risk. And as a result, they shape the 
prices we all pay for food, energy, and many other goods and 
services.
    Our job is to ensure these markets are working properly by 
helping to deter and prevent fraud and manipulation, and by 
creating a regulatory framework that promotes transparency, 
competition, and innovation.
    Since the last time I was here, we have made further 
progress, considerable progress, in achieving these goals.
    First, we have taken a number of actions to ensure that 
commercial businesses can effectively hedge business risk 
without undue burden.
    Second, we have taken steps to mitigate the potential 
excessive risks that these markets can create. For example, we 
recently finalized our rule setting margin requirements for 
uncleared swaps, and in doing so, we harmonized our rule with 
international standards. We've also continued to address the 
potential risks global clearinghouses may pose to financial 
stability.
    Third, we have substantially increased international 
cooperation and harmonization. For example, the European 
Commission and CFTC recently reached agreement regarding 
clearinghouse regulation after years of negotiations. This 
accord will ensure that European and U.S. clearinghouses can 
continue to provide clearing services to firms in each other's 
jurisdiction.
    We are also looking ahead to the new challenges and 
opportunities in our markets through proposals that focus on 
cybersecurity, as well as the risks of automated trading, and 
we have continued our robust enforcement efforts which are 
vital to protecting the integrity of our markets.
    This progress is due to the hard work of our dedicated 
staff and to the constructive and collaborative engagement of 
my fellow commissioners, Sharon Bowen and Chris Giancarlo. 
Working together, we are bringing important, sensible 
regulation to the derivatives markets.
    But sensible regulation requires adequate resources, and 
that's why the President has requested $330 million, an 
increase of $80 million over the 2016 enacted level. The 
increase we are requesting is significant because the agency's 
budget today is simply not adequate.
    As you know, our responsibilities were vastly increased in 
the wake of the global financial crisis, which devastated 
American families, businesses, and the broader economy. And the 
traditional markets we have always overseen are much larger and 
far more complex than even a few years ago. And as a result, 
the CFTC's budget is not commensurate with our 
responsibilities.
    Today's budget request would change that. Today's budget 
would give us the resources we need to oversee these markets in 
the way that the public deserves. Of the requested increase, 
approximately 36 percent would be dedicated to information 
technology investments critical to the Commission's activities.
    This will enable us to improve our IT infrastructure, our 
surveillance capabilities, our data collection and analysis 
capabilities, and help us catch up with an industry that is 
changing and innovating at the speed of light.
    The increase would also support additional staff and 
related expenses, with a particular focus on essential areas 
such as surveillance, enforcement, and examination of critical 
market infrastructure such as clearinghouses and exchanges. And 
it will increase our ability to be responsive to the concerns 
of commercial end-users.
    Finally, I would like to point out that our budget request 
is a fraction of the amount this agency has added to the U.S. 
Treasury in recent years as a result of our enforcement 
activities. Last year, for example, we collected over $2.8 
billion through enforcement efforts, an amount equal to 
approximately 12 times our budget for that year.
    Mr. Chairman, let me close by thanking this committee for 
the increases the CFTC has received in the past. They have been 
put to good use. But not fulfilling this request will undermine 
our ability to make sure our derivatives markets continue to be 
world leaders and continue to serve the many businesses that 
rely on them.
    This is a good investment for the American people and the 
American economy.
    Thank you for the opportunity to testify today, and I look 
forward to your questions.
    [The statement follows:]
              Prepared Statement of Hon. Timothy G. Massad
    Thank you Chairman Boozman, Ranking Member Coons, and members of 
the subcommittee. I am pleased to testify in support of the President's 
fiscal year 2017 budget request for the Commodity Futures Trading 
Commission (CFTC).
    First, let me thank all the members of this subcommittee for 
supporting the work we do at the CFTC, and for the budget increases you 
have provided the agency in years past. I am also pleased to be here 
with Chair White. Our agencies are closely working together on many 
fronts.
    The CFTC oversees the futures, options, and swaps markets. While 
most Americans do not participate in these markets directly, they are 
vital to our economy, affecting the prices we all pay for food, energy, 
and other goods and services. They do this by providing farmers, 
ranchers and businesses of all types with the ability to manage costs 
and hedge commercial risk.
    For these markets to work well, sensible regulation is essential. 
As you know, in 2008, the absence of sensible oversight in the swaps 
market contributed to the intensity of the worst global financial 
crisis since the Great Depression. That crisis cost our economy more 
than 8 million jobs, wiped out the savings of millions of Americans and 
cost millions more their homes.
    Today, the dedicated staff and Commissioners at the CFTC are 
working hard to provide that oversight. I want to thank in particular 
our staff for their tireless efforts and commitment, as well as 
Commissioners Bowen and Giancarlo for the judgment and constructive 
approach they bring to the agency.
    Our collective effort has led to significant progress. We have 
implemented almost all of the rules to regulate derivatives required by 
the Dodd-Frank Act. Clearing is now required for most interest rate and 
credit default swaps. Today, approximately 75 percent of swap 
transactions in our markets are being cleared, as compared to only 
about 15 percent in 2007. Trading on regulated platforms is a reality, 
and is bringing increased transparency and integrity to the process. We 
have implemented a program for the oversight of major market 
participants. And transaction data is being reported and is publicly 
available. In addition, we have taken many actions to make sure these 
new rules do not create undue burdens on commercial end-users, so that 
they can continue to use the derivatives markets effectively and 
efficiently.
    But sensible regulation requires resources. While our progress has 
been significant, the agency does not have the resources necessary to 
adequately oversee these markets in the way that the public deserves. 
Our budget is simply not proportionate to the responsibilities we face. 
The President's budget request would change that. This budget will give 
us the resources to keep pace with an industry that is changing and 
innovating at the speed of light, and that is much larger and more 
complex than even just a few years ago. It will enable us to address 
the technological transformations that are shaping our markets but also 
are creating new risks to financial stability-- such as automated 
trading and cyberattacks, for example. It will ensure we can be even 
more responsive to the concerns of commercial end-users, who did not 
cause the global financial crisis yet rely on these markets to hedge 
commercial risk. It will allow us to meet our dramatically expanded 
responsibilities and continue bringing the once-opaque swaps market out 
of the shadows. And it will enable us to continue holding bad actors 
accountable, so that we protect customers and the integrity of our 
markets.
                         recent accomplishments
    Before I turn to the President's fiscal year 2017 budget request, I 
would like to briefly review some of the CFTC's major accomplishments 
since I last appeared before this subcommittee.
    Margin for Uncleared Swaps.--One of the Commission's most important 
recent accomplishments is the adoption of a rule setting margin 
requirements for ``uncleared'' swaps. The margin rule is one of the 
most significant elements of swaps market regulation set forth in the 
Dodd-Frank Act. A significant percentage of swaps will always be 
uncleared, and exercising care in what is required to be cleared will 
make our clearinghouses stronger. The rule focuses on where the 
greatest risk exists--transactions between large financial 
institutions, where significant interconnectedness means that one 
entity's default could trigger defaults by others. And we worked hard 
to ensure our rules are as similar as possible to those concurrently 
issued by U.S. banking regulators, as well as with international 
standards.
    Equivalence Agreement with Europe.--In addition to harmonizing our 
margin rule with international standards, a major accomplishment toward 
harmonizing our rules internationally took place in February, when 
European Commissioner Jonathan Hill and I reached an agreement 
regarding clearinghouse regulation. This is a milestone agreement for 
many reasons, particularly given the elevated importance of 
clearinghouses in today's global financial system. Our accord resolves 
the issue of ``equivalence,'' and will ensure that European and U.S. 
clearinghouses can continue to provide clearing services to firms in 
each other's jurisdiction. Once implemented, European market 
participants can carry on clearing derivatives trades on U.S. 
clearinghouses without incurring higher capital charges. That allows 
U.S. clearinghouses to remain competitive, and ensures that the global 
derivatives market can continue to efficiently serve the many 
businesses that use it. Our agreement also makes sure clearinghouses on 
both sides of the Atlantic are held to high standards, which will 
enhance global financial stability.
    A key aspect of the agreement is for the CFTC to consider a 
``substituted compliance'' determination that would permit European 
CCPs to comply with many of our rules by adhering to the comparable 
corresponding European Market Infrastructure Regulation (EMIR) 
requirements. Recently the Commission fulfilled this step by 
unanimously approving a comparability determination. This will also 
streamline the registration process.
    Recognition of Foreign Clearinghouses.--The Commission has further 
promoted international harmonization by specifically recognizing a 
number of foreign clearinghouses and allowing them to do businesses in 
the U.S. For example, we recently approved the registration of Eurex 
Clearing, one of the largest clearinghouses in Europe, as a U.S. 
derivatives clearing organization. We have also granted exemptions or 
relief from registration to several non-U.S. clearinghouses that wish 
to clear swaps for their U.S. clearing members only, and not for U.S. 
customers. In the last 12 months we have issued these exemptive orders 
for clearinghouses located in Australia, Japan, South Korea and Hong 
Kong. In these cases, the clearinghouse need not comply with many CFTC 
regulations as long as it is subject to comparable and comprehensive 
supervision and regulations in its home jurisdiction, and is complying 
with the international standards set forth in the Principles for 
Financial Market Infrastructures.
    Clearinghouse Resiliency.--In addition to our equivalence agreement 
and our recognition of foreign clearinghouses, the CFTC is taking 
additional steps to address potential risks that global clearinghouses 
could pose to financial stability. Clearinghouses play a critical role 
in the global financial system--one that has only become more prominent 
since the enactment of Dodd-Frank. Their strength and resiliency is 
critical. We are co-chairing a major effort involving regulators from 
around the world to look at clearinghouse resilience and recovery 
planning. This includes examining issues such as stress-testing 
standards, margin methodologies, capital, liquidity and adequacy of 
resources in a default, governance and the development of recovery 
plans. We are also working with domestic regulators on clearinghouse 
examinations, as well as recovery and resolution planning.
    Improving Swaps Trading.--We continued to focus on improving swaps 
trading. In January of this year, the Commission announced permanent 
registration status for 18 swap execution facilities (SEFs). We have 
also fine-tuned many of our rules. Our objective is not just to 
implement the trading mandate in the law and achieve the basic goals of 
transparency, fairness and integrity in trading--but also to create 
conditions in which participants want to trade on SEFs.
    Improving Data Reporting.--In addition, we have taken steps to 
ensure that the swap data we receive is accurate, consistent and 
useful. Swap data reporting was a key goal of Dodd-Frank and the G-20 
leaders. And we have some a long way since 2008. Today, the reforms we 
have implemented have given better information to regulators and 
greater transparency to market participants. But while we have made 
progress, there is more work to do.
    So for example, last summer, we proposed rule changes to clarify 
reporting obligations with respect to cleared swaps. These changes, if 
adopted, would ensure that as swaps are cleared, there is a simple, 
consistent process for reporting them. The changes would also help 
ensure that there are not multiple records of a swap that can lead to 
erroneous double counting, and that accurate valuations of swaps are 
provided on an ongoing basis. It will eliminate unnecessary reporting 
requirements, reduce reporting costs and improve data quality. And it 
will enhance the Commission's ability to trace swaps from execution 
through clearing. I hope that we can finalize this rule in the near 
future.
    And in December, CFTC staff requested public comment on technical 
specifications for the reporting of 120 priority data elements. We did 
so to address the considerable variation in how different participants 
report the same fields to swap data repositories (SDRs), and in how the 
SDRs themselves transmit information to the CFTC. The comment period on 
this proposal recently closed, and we are in the process of reviewing 
these comments. We will continue working to identify priority areas 
where standardization or clarification is needed.
    We are also leading international efforts on data harmonization. 
And we will continue to take enforcement actions to ensure that 
participants honor their reporting obligations.
    De Minimis Study.--One tangible example of the value of the swap 
data that is being reported was shown late last year, when Commission 
staff released an important preliminary report on what is known as the 
``de minimis threshold'' for swap dealing. An entity engaged in swap 
dealing at a level exceeding that threshold--which is currently set at 
$8 billion in notional amount of swaps over a year--must register as a 
swap dealer. This triggers oversight by the CFTC as well as capital, 
margin, disclosure, recordkeeping and documentation requirements. The 
rule provides that in about 2 years, that level will fall to $3 
billion, unless the Commission takes action.
    Our staff report was written with the benefit of significant new 
data, thanks to the reporting efforts I described earlier. It did not 
make a recommendation as to what the level should be. It instead 
explored the issues, and sought public comment on the data, the 
methodology and the issues discussed. We are currently reviewing the 
feedback we have received and will produce a final report. The 
Commission can then decide whether to take any action.
    Reducing Burdens for Commercial End-Users.--We have also continued 
to take actions to make sure commercial end-users can use the 
derivatives markets effectively. Since taking office, this has been a 
priority of mine, and I am pleased to have the strong support of both 
my fellow Commissioners in this regard. Together, we have fine-tuned 
many of our rules to reduce burdens on these businesses.
    In mid-December, the Commission adopted significant changes that 
will reduce recordkeeping obligations for commercial end-users. Mr. 
Chairman, I know this issue has been a concern of yours and of other 
members of the subcommittee, and I am pleased that we have addressed 
it. Now, these entities do not have to keep records of pre-trade 
communications or text messages, nor do they have to record oral 
communications related to their transactions. Further, we have 
simplified the requirements for keeping records of final transactions.
    In addition, just a few weeks ago, the Commission unanimously 
approved a final rule on Trade Options, which are a type of commodity 
option. This rule recognizes that trade options are different from the 
swaps that were the focus of Dodd-Frank reforms. It eliminates certain 
reporting and recordkeeping obligations for these commercial users, 
including Form TO, and thereby reduces the burdens on such businesses 
in using these instruments.
    Just last week, the Commission joined with the SEC to issue 
proposed guidance regarding the treatment of peaking supply and 
capacity contracts. These are different than swaps. These contracts 
pertaining to electric power and natural gas are often designed to meet 
regulatory requirements. They are entered into to assure availability 
of a commodity, neither to hedge against risks arising from a future 
change in price of that commodity, nor to speculate or invest. Our 
guidance is intended to make it easier for regulated entities to use 
these contracts to maintain reliable energy supplies. We encourage, and 
look forward to, public comment on this important issue.
    These efforts complement an action we took last year to clarify 
when certain agreements that include volumetric optionality provisions 
are forward contracts, rather than swaps. These types of contracts are 
widely used by a variety of end-users, including electric and natural 
gas utilities. Our interpretation is intended to make sure commercial 
companies can continue to conduct their daily operations efficiently.
    Promoting Customer Protection and a Robust FCM Industry.--The 
Commission also is continuing to promote customer protection and a 
robust clearing member industry. To this end, in March the CFTC held a 
staff roundtable discussing the implementation of the Commission's 
``residual interest rule,'' which addresses when a futures commission 
merchant must cover a customer's account if it becomes undermargined. 
Last year before this subcommittee, I discussed the action we took to 
remove an acceleration in that deadline which many feared would impose 
a significant burden, particularly on smaller customers.
    The views of participants at the roundtable were virtually 
unanimous: the rule and the other customer protection measures we have 
taken are working. We will continue to engage with market participants 
on these and related issues, to make sure our regulatory framework 
strikes the proper balance.
    Addressing New and Emerging Threats to the Financial System.--It is 
important to note that we are not just looking back to address the 
causes of the crisis. We are also looking ahead to the risks and 
opportunities that may come with technological and other forms of 
innovation in our markets. For example, recently the Commission 
unanimously approved proposals to enhance cybersecurity protections. 
This is critical, as the risk of cyberattacks is perhaps the greatest 
single threat to the orderly functioning of our markets. Our proposal 
seeks to make sure that the critical market infrastructure that we 
oversee--the exchanges, swap execution facilities, clearinghouses and 
swap data repositories--engage in adequate testing of their own 
protections against cyberattacks and similar technological risks. Our 
comment period on this item has closed, and while commenters have 
requested some clarifications and offered some suggestions, the 
proposed rules have elicited generally positive responses. Many 
commended the Commission for taking action and for the principles-based 
approach that avoids an overly prescriptive regime.
    Second, we unanimously approved proposed rules to address the 
increased use of automated trading in our markets. Our proposal seeks 
to minimize the risk that automated trading will result in disruptions 
in the markets by requiring adequate risk controls, testing and 
monitoring of algorithms, and other measures. Like our cybersecurity 
proposal, this is principles-based, and builds upon industry best 
practices. Related to this issue, there has been some concern about the 
issue of confidentiality of source code. Let me just reiterate that I 
am committed to a final rule that respects and protects 
confidentiality, while at the same time ensures that source code is 
preserved and is available to us when we need to reconstruct market 
events. We hope to finalize these critical rules later this year.
    These are just some of the actions the Commission has taken 
recently. As you know, a significant amount of our work is focused on 
enforcement, surveillance, examination and compliance. All are critical 
to our mission of ensuring our global derivatives markets are stable. I 
will discuss all of these areas in greater detail as I talk about our 
budget request for fiscal year 2017.
    Now, let me turn to the President's budget request.
             the cftc's budget request for fiscal year 2017
    To properly carry out its mission, the Commission requests $330 
million and 897 full-time equivalents (FTE) for fiscal year 2017. This 
is an increase of $80 million and 183 FTE over the fiscal year 2016 
enacted level. It is an investment that is much needed; as it will 
enable the CFTC to engage in a number of important activities that will 
help ensure that U.S. derivatives markets continue to be stable, 
transparent, competitive and free of fraud and manipulation.
    These additional resources will allow the Commission to improve 
surveillance capabilities to keep up with the technological 
sophistication of our markets, and the extreme pace at which it is 
developing. This oversight will help us to detect excessive risk and 
prevent fraud, abusive practices and manipulation. The President's 
budget request will bolster the CFTC's enforcement efforts, which are 
so important to reining in illegal behavior. It will allow the 
Commission to substantially increase and improve its examinations of 
the critical infrastructure in our markets, such as clearinghouses, and 
better equip the agency to deal with the very real risk of 
cyberattacks.
    Additional resources also are essential to maintain and improve the 
basic information technology infrastructure and capabilities of the 
Commission. This includes the ability to receive, store and analyze 
vast new quantities of data in light of our new responsibilities and 
the increased use of automated trading.
    The CFTC has been and will continue to be prudent stewards of 
taxpayer dollars. We are focusing our limited resources on a number of 
activities that will strengthen and enhance the markets we oversee.
           the 2017 budget advances key commission priorities
    The 2017 budget request is focused on advancing key priorities 
related to our mission. Of the requested $80 million increase, 
approximately 36 percent would be dedicated to information technology 
investments that will enhance all of the Commission's activities, such 
as market, financial and risk surveillance, data collection and 
analysis, and enforcement. The remaining 64 percent supports an 
increase in staffing and related support, with a particular focus on 
highly critical areas such as surveillance, enforcement and 
examinations.
    Below is a breakdown of our request.
                          data and technology
    The Commission requests $61.1 million and 60 FTE for enterprise-
wide data and technology support activities, an increase of $17.1 
million and 11 FTE above the fiscal year 2016 enacted level. As you 
will hear throughout my testimony, data, and the ability to analyze and 
report data, are more important than ever to the CFTC's ability to 
oversee the markets we regulate. As a result, it is essential that the 
Commission expand its information technology systems.
    This includes increasing our ability to receive, store, and analyze 
message data resulting from the growth in electronic and automated 
trading, as well as the vast new quantities emanating from the swaps 
market. The Commission currently stores more than 800 terabytes of 
data, as compared to only 60 terabytes in 2008. We are planning to 
increase our storage capacity by 50 percent this year, addressing 
requirements for growth in our high performance analytics program and 
other mission activities.
    The CFTC also must be able to aggregate various types of data from 
multiple industry sources that have grown dramatically more complex. It 
is important that we bolster our core infrastructure to provide 
flexible, reliable, scalable, and high-performance services. This 
includes hardware, software and other equipment, which must be expanded 
to support the agency's growth. And it requires enhancing 
communication, processing, storage, and platform infrastructure.
    In addition, the Commission must safeguard the data of a wide 
variety of registrants and registered entities, to ensure it is 
maintained in a safe, secure environment, and is properly available to 
support the Commission's oversight and enforcement activities.
    We are also working to build an efficient system to collect and 
analyze data from the swaps market. As mentioned earlier, this is a 
momentous undertaking. Recently, we proposed technical specifications 
to standardize reporting fields, and have proposed clarifying reporting 
obligations, including eliminating certain unnecessary obligations, 
with respect to cleared swaps. We are leading international efforts on 
data harmonization. And we take enforcement actions to ensure reporting 
obligations are honored. But a lack of resources could dramatically 
undermine these efforts.
                              surveillance
    The Commission requests $62.8 million and 160 FTE for surveillance, 
an increase of $25.7 million and 56 FTE over the fiscal year 2016 
enacted level. These funds will help provide an investment in 
technology and personnel, and further develop the Commission's 
automated surveillance and data visualization tools.
    I have previously spoken of the need for more resources to improve 
our surveillance capabilities to address the growing complexity, volume 
and sophistication in our markets. Today, the situation poses an even 
greater challenge.
    The days when the CFTC could conduct market surveillance by 
observing traders in floor pits are long gone. We are in an age of 
electronic, and mostly automated, trading, which requires an entirely 
new level of sophistication. In today's high-speed markets, 
manipulation and fraud are often conducted using complex strategies 
involving large numbers of bids and offers that far outnumber 
consummated transactions.
    Moreover, the number and range of products in which we should 
engage in surveillance has significantly increased. Today, the CFTC 
oversees 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. The volume and number of contracts 
have grown. For example, the number of actively traded contracts on 
U.S. exchanges has more than tripled in the last 10 years, with a 
substantial increase in 2014.
    To be successful in our market surveillance efforts, the Commission 
must have the ability to continually receive, load, and analyze large 
volumes of data on these transactions. This requires a massive 
information technology investment, sophisticated analytical tools that 
the Commission develops for these unique environments, and experienced 
professionals who can identify potential problems and engage in further 
inquiry.
    Our expanded oversight of the swaps market presents unique 
challenges with respect to surveillance. For example, the types of data 
required by the Commission, the number of sources providing data, the 
complexity of the data, and the volume of the data have all expanded 
significantly. We must analyze this data across the multiple trading 
platforms that exist. There is also considerable voice-driven activity 
and complexity related to the execution and processing of trades, which 
require different surveillance perspectives. Aggregating data to 
understand participants' positions across futures and swaps markets, 
both cleared and uncleared, is particularly challenging.
    The Commission also engages in surveillance to monitor risk--risk 
at the individual clearinghouse, clearing member and large trader 
levels. We must look at credit, concentration, liquidity and market 
risk. We monitor customer and house positions and margining practices. 
Commission staff must also review large customer positions being held 
at or managed by intermediaries. Today, there are ten clearing firms 
that each hold more than $10 billion in customer funds.
    To give just one illustration of our challenges today, as I 
mentioned earlier, we have worked with banking and international 
regulators to come up with a sensible and harmonized framework for 
requiring margin for uncleared swaps. Now, we need to significantly 
enhance our surveillance of these uncleared swaps, and integrate that 
with existing surveillance efforts. Our goal is to obtain a much better 
picture of the risks posed by large market participants to one another, 
and to the financial system, whether swaps are cleared or uncleared. 
Now that we have a sensible rule framework, lacking the resources to 
measure whether it is working would be a missed opportunity. It will be 
challenging to create and maintain this surveillance function without 
additional resources.
    Surveillance in all of these markets does not occur with technology 
alone. The Commission needs experienced staff; staff who understand the 
markets we oversee, who can distinguish anomalies and patterns, and who 
have the judgment and skills to investigate possible misbehavior. Every 
market we oversee is different, and we must have staff with specialized 
knowledge of the market structure, trading patterns, and complexities 
of each unique market and product.
    Falling short of the requested increase in surveillance would 
severely limit the Commission's ability to detect fraud and 
manipulation, market abuses, firms in trouble, or other improper 
behavior. The result will be increased costs and increased risks to our 
markets and our financial system.
                              enforcement
    The Commission requests $68.7 million and 212 FTE for enforcement 
activities, an increase of $15.5 million and 51 FTE over the fiscal 
year 2016 enacted level. There is perhaps no more critical role of the 
CFTC than to maintain market integrity and protect consumers. To do so, 
a strong enforcement function is vital.
    The CFTC's enforcement responsibilities are more important than 
ever, due to its expanded mission, market complexity, and the advent of 
new, complicated forms of illegal behavior, such as spoofing. The CFTC 
must have the necessary resources to investigate and punish abusive 
practices. For example, analyzing automated trading patterns requires 
sophisticated information technology capabilities and unique expertise. 
The Commission not only has insufficient resources currently, but it 
anticipates more time-intensive and inherently complex investigations 
in the future.
    We have accomplished a great deal with the resources we have. The 
Commission is investigating more cases involving manipulation, false 
reporting of market information and disruptive trading practices. 
However, as behavior becomes more advanced, cases become more 
expensive. Often, these cases involve conduct spanning many years, 
multiple markets and products, and require forensic economic analysis 
of trading data. In recent years, the Commission prosecuted wrongdoers 
for a wide range of fraudulent schemes, including Ponzi schemes that 
preyed upon the retail public, precious metals frauds and deceptive 
practices related to commodity pools.
    For example, a recent case involving alleged spoofing in connection 
with the May 2010 ``Flash Crash'' took years of intensive data analysis 
and other investigation. Further, the Commission often faces defendants 
that will spare no expense in their defense. A recent case that arose 
from 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 4 years after the firm collapsed. The London 
Interbank Offered Rate (LIBOR) and foreign exchange benchmark cases 
were global in nature and required intensive reconstruction of 
communications and trades, substantial document, email and chat room 
reviews, analysis of trading data and books, and outside expert 
analysis. The LIBOR investigation took us 4 years to bring the first 
case. Specialized experts are needed not only in benchmark cases, but 
also to investigate and litigate many other types of complex trading 
cases.
    Our ability to bring or continue to pursue a meritorious case can 
be undermined by our limited resources. Today we face an increasing 
number of well-financed defendants with high-powered defense teams. 
This can require more staff time as well as out-of-pocket expenses--for 
example, for our own expert witnesses, or for the often very high costs 
of deposing a defendants' expert witnesses. These costs can divert 
resources from other important investigations, and impact our ability 
to move all investigations forward.
    In addition to increases in complexity, the Commission also 
predicts a continued increase in resource-intensive, multi-
jurisdictional and multi-national investigations. This is due to the 
global nature of the swaps marketplace where money and risk have no 
geographic boundaries, as well as the challenges associated with 
permitting compliance with foreign law in some circumstances.
    While our effectiveness is best illustrated by the quality, breadth 
and complexity of the cases pursued, data can provide a snapshot of our 
accomplishments. In fiscal year 2015, the CFTC filed 69 new enforcement 
actions and opened more than 220 new investigations. It also obtained 
$3.2 billion in sanctions, collecting over 90 percent of the sanctions 
imposed.
    This means that over the past 5 years, the Commission collected 
fines and penalties of approximately four times its cumulative budgets. 
And in fiscal year 2015 alone, the amount collected was over 12 times 
the enacted budget. This amount would support the Commission's fiscal 
year 2017 budget request for the next 9 years.
    Enforcement is not just about dollars and cents. It's about helping 
investors, retirees, and others who have been victimized by wrongdoers. 
For example, just this past December, the Commission obtained more than 
$9 million in monetary judgments against an institution for its 
operation of a fraudulent foreign exchange rate scheme. The scheme 
claimed roughly 114 victims, including several elderly victims who had 
invested significant portions of their life savings.
    And in another case, the CFTC settled charges against a number of 
entities for operating a fraudulent hedge fund and commodity pool, 
which victimized elderly persons who were deceived into participating 
in the scheme through their IRA accounts. To date, the CFTC has 
returned nearly $4 million to those victims--and the recovery efforts 
continue. The Commission also joined with the SEC and U.S. Attorney's 
Office for the Eastern District of Texas, which brought related civil 
and criminal actions.
    And we are rewarding those who come forward and assist us in our 
enforcement efforts. For example, just last week we announced an award 
of more than $10 million to a whistleblower who provided key 
information that led to a successful CFTC enforcement action.
                              examinations
    To substantially bolster its examinations of the critical 
infrastructure and intermediaries in our markets, the Commission 
requests $34.2 million and 128 FTE for examinations, an increase of 
$3.4 million and 13 FTE over the fiscal year 2016 enacted level. Taken 
in concert with other activities, regular examinations maintain market 
integrity so that American businesses--as well as participants from 
around the world--can continue to have confidence in our markets. The 
Commission engages in direct examinations, as well as oversight of 
examinations performed by self-regulatory organizations.
    Among the most important examinations that the Commission conducts 
are those of clearinghouses, which have become critical single points 
of risk in the global financial system. We lack the resources to engage 
in annual examinations of all clearinghouses, and to conduct a 
sufficient number of in-depth examinations. And yet, the number of 
clearinghouses, the scope and complexity of the examination issues and 
the importance of these examinations to overall financial stability are 
all increasing. Moreover, the risk of cyber-attacks is of particular 
concern with clearinghouses and warrants examinations specifically 
dedicated to that subject.
    In addition to clearinghouses, we need to examine other critical 
infrastructure such as exchanges, swap execution facilities, and swap 
data repositories, as well as intermediaries such as the clearing firms 
that take customer money. The 10 clearing firms that each hold more 
than $10 billion in customer funds that I noted earlier are just one 
example of registrants that the Commission oversees. The Commission 
also oversees over 100 registered swap dealers, as well as nearly 4,100 
commodity trading advisors and commodity pool operators. The Commission 
has asked the National Futures Association (NFA) to take on greater 
responsibility for certain examinations, including in particular the 
examinations of swap dealers. However, the Commission must still 
oversee the NFA's activity.
    For all these reasons, the Commission needs to increase its 
capability to conduct examinations and provide oversight. A failure to 
provide the requested level of funding will mean the CFTC will not have 
sufficient resources to do so, putting the markets and market 
participants at risk.
                      registration and compliance
    The Commission requests $18.0 million and 62 FTE for registration 
and compliance activities, an increase of $3.5 million and 10 FTE over 
the fiscal year 2016 enacted level. The CFTC's ability to analyze 
registrations in a timely and thorough manner is critical to the 
stability and integrity of the markets. The new swap regulatory 
framework has resulted in the permanent registrations of 18 swap 
execution facilities (SEFs) and five temporary registrations. There are 
over 100 swap dealers, plus four provisionally registered swap data 
repositories. However, the Commission still has a significant backlog. 
The Commission is dealing with applications for pending registration 
from 19 foreign boards of trade, as well as new derivatives clearing 
organizations and other applicants. We expect additional applications 
in fiscal year 2017 and beyond.
    And following an entity's initial registration, the CFTC keeps 
monitoring the entity's activities for compliance, and may provide 
policy direction and legal interpretative guidance when necessary.
    We have again worked to delegate more responsibility to the NFA. 
But between the policy guidance and review work that we must do 
directly, as well as the oversight of our self-regulatory 
organizations, our resources simply are not sufficient. A lack of 
adequate funding impairs the Commission's ability to attract and retain 
the experts who understand the markets and who have the ability to 
review registrations and carry out compliance oversight in a timely and 
thoughtful manner. This results in delays, insufficient customer 
protection, regulatory uncertainty, and higher legal and compliance 
costs for registrants. All of these factors severely impact the 
efficiency, integrity, and attractiveness of the Nation's markets.
                  actions to address end-user concerns
    An increase in funding is also essential to responding to the 
concerns of market participants promptly and properly, in particular 
commercial end-users. These markets exist to enable businesses to hedge 
risk, and so it is vital that we are in a position to evaluate and 
respond to their suggestions and concerns. Since Commissioners Bowen, 
Giancarlo and I assumed office, we have taken many important actions to 
ensure commercial end-users can use these markets efficiently and 
effectively, but there is more we should consider.
    I mentioned earlier some of the actions we've recently taken to 
reduce record keeping obligations and to address commercial end-users' 
concerns regarding trade options, peaking supply contracts, and 
contracts with volumetric optionality. We have done even more recently. 
For example, the Commission excluded end-users from our rule setting 
margin requirements for uncleared swaps. Consistent with congressional 
intent, our final rule does not require the collection of margin from 
end-users.
    CFTC staff has also addressed the concerns of our community 
development financial institutions and small banks with under $10 
billion in assets, by making clear that these entities may choose not 
to clear a swap subject to the CFTC's clearing requirement, provided 
they comply with certain other conditions.
    We are also implementing congressional changes related to 
``centralized treasury units'' or CTUs. As you know, the law ensures 
that an end-user company that uses a CTU to streamline and manage all 
its derivatives activity would continue to be exempt from margin and 
clearing requirements that are designed for financial institutions.
    These are just some of the actions we have taken to address end-
user concerns. In the coming months, we will continue this work. And 
with the appropriate resources, we can do so more efficiently and 
thoroughly.
    For example, we will make it a priority to finalize the rules 
related to position limits this year. I know these rules are of great 
interest to commercial end-users and other market participants, as well 
as members of the subcommittee. There are many complex aspects to these 
rules, such as standards for bona fide hedging, the standards and 
process for hedging exemptions, and deliverable supply estimates. We 
have been considering stakeholder input carefully and making good 
progress toward finalizing these rules.
                               conclusion
    Finally, let me conclude by noting again my appreciation for the 
increase of $35 million we received in our fiscal year 2015 budget. 
This was essential to improving our ability to carry out our mission, 
and we used these resources wisely. In particular, we took some long 
overdue actions to modernize our information technology capabilities 
and to bolster our staff in critical areas, such as enforcement. This 
was effective, as evidenced by our continued progress in building a 
system to collect, aggregate and analyze data, as well as in our 
continued success in returning billions of dollars from bad actors back 
to U.S. taxpayers. But unfortunately, our funding level in fiscal year 
2016 remained flat, making it difficult to maintain the additional 
staff the Commission added and risking some of the good progress we 
have made.
    An increase in our budget is a wise and necessary investment for 
our economy. Our derivatives markets are the most robust, dynamic and 
innovative in the world. And that is why they have been global leaders, 
and have attracted global participation. But maintaining that 
leadership requires not only the continued ingenuity and resources of 
the private sector; it requires a regulatory effort that makes people 
from around the world want to continue to invest here. It requires a 
regulatory effort that is equally sophisticated and technologically 
competent; one that has the resources to tackle new emerging risks, and 
revisit existing regulations when they are outpaced by technological 
advancement. And it requires a regulatory effort that is capable of 
responding to the concerns of honest and hardworking market 
participants, while punishing the bad actors who might otherwise 
succeed in taking advantage of those very individuals.
    Thank you again, Mr. Chairman and Ranking Member Coons. The CFTC's 
fiscal year 2017 budget request is designed to enable the Commission to 
keep making progress toward fulfilling its responsibilities to the 
American public, so that we help make sure our markets continue to 
thrive and contribute to economic growth. I look forward to answering 
any questions you may have.

    Senator Boozman. Thank you, Chairman Massad, very much for 
your testimony.
    At this time, we will proceed to our questioning, where 
each Senator will have 7 minutes per round. I expect we will 
have time to accommodate two rounds.

                              CFTC LEASING

    Chairman Massad, the CFTC has a concerning track record on 
leasing decisions. Your inspector general has issued several 
reports on underutilized office space that has cost taxpayers 
millions of dollars. Two months ago, the Government 
Accountability Office (GAO) ruled that the CFTC has been 
improperly recording its lease obligations. GAO has also found 
that the CFTC has not made cost-effective decisions for lease 
procurement and internal controls.
    Chairman Massad, you all deal with some incredibly complex 
situations in your oversight capacity. The Federal Government 
has an agency dedicated to providing real estate services and 
negotiating leases so agencies can instead focus on their core 
missions. Given the CFTC's track record, are you open to 
working through the General Services Administration (GSA) to 
have them negotiate future leases and renewals?
    Mr. Massad. Thank you for the question, Mr. Chairman.
    I absolutely am, and, in fact, shortly after I took office, 
I met with the head of the GSA to discuss how we might work 
together. I also, within a couple of weeks of taking office, 
visited our Kansas City office to look at our space there, and 
then took steps to consolidate our office on a smaller 
footprint and try to give back the extra space to the landlord. 
We've done the same thing in New York.
    Let me say on the lease accounting issue, that pertains to 
decisions that were made beginning in 1994. Congress gave the 
agency the ability to enter into multiyear leases. It directed 
the agency to do so. And the agency did in order to get a 
better deal for the taxpayer, because obviously, with an agency 
of our size, you can get a much better deal if you enter into a 
multiyear lease rather than a 1-year lease with, say, an option 
to renew.
    But the agency did not properly account under Federal law 
for recording the obligation. This was not a matter of 
accounting in terms of how much we were spending and keeping 
track of that. It was that Federal law provides that what we 
should have done was record the entire amount of the rent due 
for all years under the lease. Even if the lease went 10 or 20 
years, we should have recorded that entire amount in the first 
year.
    Our outside accountants did not recognize this for 9 years. 
They gave us clean opinions. They did not recognize this. It 
was only when the GAO asked us some questions about 6 months 
ago that everyone focused on this.
    But again, it pertains to decisions that were made a long 
time ago, and we are taking steps now to fix it.
    The fact is the cost of our leases was always known. It was 
reflected in our financial statements. Our financial statements 
reflected the future costs. They just put it in a footnote 
instead of on the face of the balance sheet.
    So we are working to address that. And we are working, as I 
say, to make good decisions going forward.
    We've been talking to the GAO about steps we can take in 
the future. Our leases don't expire until about 5 years from 
now, but we certainly want to start planning now to make cost-
effective decisions in the future.
    Senator Boozman. We appreciate your willingness to work 
with GSA. I guess the problem is commissioners come and go, 
Senators come and go. Would you be willing to support actually 
codifying that, to some degree?
    Mr. Massad. I would certainly be happy to discuss that with 
you, Senator, yes.
    Senator Boozman. Thank you very much.

     SEC ACTIVITIES REGARDING DISCLOSURE OF POLITICAL CONTRIBUTIONS

    Chair White, as you know, the 2016 omnibus included 
provisions that prohibit the SEC from using funds to finalize, 
issue, or implement any rule, regulation, or order regarding 
the disclosure of political contributions. Has the agency taken 
any actions with regard to political contributions since the 
enactment of the omnibus? And if so, what?
    Ms. White. The issue of mandating the disclosure of 
political contributions is not on our current Reg Flex Agenda, 
so the answer to your question is no. And I'm obviously mindful 
of the appropriations language as well.
    Senator Boozman. So you're not planning on doing anything 
in the coming year?
    Ms. White. It's not on our agenda. That's correct.
    Senator Boozman. Thank you. Thank you very much.

                        ECONOMISTS WORK AT CFTC

    Chairman Massad, in January, the CFTC Inspector General 
released a report that the Office of the Chief Economist (OCE) 
is censoring economist research that might conflict with the 
official positions of the agency. According to the report, and 
I quote, ``Several OCE economists identified position limits as 
an example of a topic on which economic research is no longer 
permitted. As one OCE economist put it, `You can't write a 
report on something that destroys 3 years of CFTC work,' '' end 
quote.
    What is going on within that office to lead many of the 
agency economists to believe they are not permitted to conduct 
research in areas if it conflicts with the official position of 
the agency?
    Mr. Massad. Thank you for the question, Mr. Chairman.
    I actually think our Office of the Chief Economist has 
many, many excellent economists. And I think the morale there 
is very good, and the work that they produce is very good, and 
they often produce things that might conflict with views that I 
have or views that other commissioners have.
    We don't have any kind of political screen on what we do. 
We do have, however, priority-setting. It's a small division. I 
would like to increase it by 50 percent, because I think we 
need more economists. But we must set priorities.
    So we can't always have a staff person just do the research 
that they'd like to do, as opposed to research that we really 
need to focus on. That's the only way in which we focus their 
work.
    Certainly, in terms of the views that are expressed, I 
think I've set a tone, and I think this runs throughout the 
agency, that I want to hear all views, regardless of whether 
they might conflict with what people might think I believe or 
the direction I want to go.
    Senator Boozman. Thank you, Mr. Chairman.
    Senator Coons.
    Senator Coons. Thank you, Chairman Boozman.

                  ADVANCING CYBERSECURITY PROTECTIONS

    If I might, first, Chair White and Chairman Massad, both 
the SEC and CFTC have undertaken efforts in recent years to 
strengthen your cyber defenses and the cyber defenses of market 
participants, and to improve your agency's ability to detect 
and contain, respond to and recover from cyber-attacks, and the 
abilities of those that you regulate. This has been a subject 
of persistent concern for the subcommittee across many Federal 
agencies.
    What is currently underway in each of your agencies to 
further advance cybersecurity protections and guard against 
emerging threats as they impact the financial sector? How does 
your 2017 budget request specifically contemplate further 
investments? And what would be the risk of failing to make 
these investments? What would be the consequences, if we were 
not to grant the funding requests that would specifically 
relate to IT?
    Chair White.

                         SEC CYBER UNDERTAKINGS

    Ms. White. Let me say, I certainly share your concerns. I 
don't think there's any higher priority or serious long-term 
risk than that from cybersecurity, and we've certainly 
emphasized that in all of the areas of our jurisdiction, so to 
speak, on the cyber issues, and maybe a little beyond. We've 
tried to be a real leader there, because of how serious it is.
    Our current budget, to go to that first, requests $14.7 
million for issues related to securing our data. That's our own 
data as well as the confidential data that companies provide us 
with. And we consider that critical for all the obvious reasons 
plus, as we're regulating entities and asking them to submit to 
us, as they must for us to be an effective regulator, 
confidential information, we have to be able to protect it. So 
we give that the highest priority one can imagine, frankly.
    In terms of other areas, such as our registrants, one of 
the major undertakings that we've done is the System Compliance 
and Integrity (SCI) regulation I mentioned before, which 
applies to exchanges, large Alternative Trading Systems (ATSs), 
and clearing agencies, and really requires for the first time 
that those critical market infrastructure participants, under a 
mandatory rulemaking, enhance the resiliency of their systems. 
They're reporting to us, so we can oversee it better, and also 
assess how they respond when they do actually have an incident.
    That particular rule just became effective. And so, our 
budget request, which does prioritize funds for examiners, 
where we're so woefully deficient, frankly, and which is quite, 
quite worrisome, that would be impacted there, too. So we 
obviously want to have enough examiners to examine for cyber.
    We have been very active in doing so, out of our National 
Exam Program. We've done sweeps of broker-dealers and 
investment advisers to see what their cyber preparedness is. It 
has been an exam priority for the last--this will be the third 
year in a row.
    We also try to share the results of those exams in an 
appropriate way, with our registrants, so that they can take 
advantage of best practices.
    And I mentioned the review of the public disclosures of 
public companies, financial disclosures of public companies. In 
2011, the Corporation Finance staff put out guidance about 
disclosing cyber risk, cyber incidents, if they rise to the 
level of being material to a company's business.
    Also our Enforcement Division is active in the area. We 
have regulations. One is called S-P (Privacy of Consumer 
Financial Information). One is called S-ID (Identity Theft Red 
Flags Rules). But basically, they apply to our registrants 
safeguarding customer data.
    We brought a case recently where there just weren't 
policies and procedures in place and put in jeopardy a 100,000 
customers' personal information. So we're trying to be 
aggressive in the area to underscore the importance of it.
    In our Investment Management Division, the same thing. We 
put out guidance in that area.
    So we could not overstate its importance or the funding for 
it.
    Senator Coons. Thank you.

                         CFTC CYBER INITIATIVES

    Chairman Massad.
    Mr. Massad. Thank you. Well, it's a similar situation for 
us also. Our budget, that is in terms of amounts to be spent 
directly on cybersecurity, is a little less than $4 million. 
That's about three times what it was in fiscal year 2014. So 
we're very focused on this.
    And I would say that our recent Federal Information 
Security Management Act (FISMA) rating, which is the Federal 
Government evaluation, was over 90. There were only a handful 
of agencies that were over 90. But we all know this is a 
constant arms race, and you have to constantly maintain your 
systems.
    In terms of what we're doing with our registrants, it's a 
top priority. I don't think there's anything more important. 
The risk is really probably the greatest risk we face to the 
potential stability of our markets.
    We're focused on it in terms of exams, particularly 
examinations of clearinghouses and exchanges.
    But our challenge is we don't have enough examiners to do 
exams frequently enough or as thoroughly as we should. This is 
a real constraint. And with clearinghouses, in particular, 
these global clearinghouses are incredibly important now to 
financial stability. We need to be in there more often.
    And I take this issue personally. I meet with the boards, 
risk committees, CEOs in some cases, of some of our registrants 
to discuss these issue.
    We're also focused on it in terms of our rules. We've made 
proposals to require enhanced cybersecurity testing by our 
registrants.
    We can't do the testing. We don't have the budget. But they 
should be doing it. So we are proposing more extensive 
requirements, principles-based requirements. We're not telling 
them exactly how to do it, but we want to make sure they're 
doing frequent penetration testing, controls testing, 
vulnerability testing, and enterprise risk management.

                         HIGH-FREQUENCY TRADING

    Senator Coons. I have just a minute left, so let me, if I 
could, pose a broad question to which I'd like you to give a 
brief answer, if you can.
    There has been a lot of attention paid to high-frequency 
trading. You engaged in some regulatory action. Do you have the 
resources you need to be able to adequately regulate, oversee, 
and understand the significant developments in high-frequency 
trading? And what are your current and planned initiatives in 
this area?
    Ms. White. I think our overall budget request, if we 
received it, would give us adequate resources. We're clearly 
doing a lot of work in that space through our market structure 
initiatives.
    High-frequency traders are not of one piece. They have 
different strategies. But if they engage in improper illegal 
activity, we obviously pursue them through our Enforcement 
Division.
    But what we are also looking very closely at, as part of 
our look at equity market structure, is one rule. For example, 
the antidisruptive trading rule would basically regulate 
harmful trading during periods of particular market 
vulnerability.
    So the answer is we're very focused on that area. We do 
need the funding for it, as we've laid out in our request.
    Senator Coons. Thank you, Chair White.
    Chairman Massad.
    Mr. Massad. The answer to your question is no. We don't 
have the resources to keep up. And this really illustrates the 
problem.
    I mean, 10 years ago, you could engage in surveillance in 
our markets by watching floor traders in trading pits. That 
isn't the case anymore. Almost all the trading in our markets 
is electronic, and 70 percent of it is automated.
    That means we have to take in huge quantities of data. And 
we have to be able to store that data. We have to be able to 
analyze it. We have to write our own programs and software to 
analyze it the way we need to. Plus, we have to have 
sophisticated professionals who understand these markets.
    So our surveillance capacity simply isn't where it needs to 
be, given the sophistication in these markets. And that is both 
an IT issue as well as a personnel issue.
    On the rules side, we're also looking at our rule set. 
We've proposed further requirements that trading firms have 
adequate risk controls, so that they don't cause disruptions in 
our market.
    Senator Coons. I'd like to thank you both. These two 
questions reveal, I think, a broader theme. You're asking for 
increases, but you are not just deficit-neutral, you actually 
return money to the Federal budget. And there are some 
significant risks in terms of cyber and high-frequency trading 
that, with your budget request met, you would have the 
resources. In the absence of it, there will be significant 
risks.
    Thank you, Chairman Boozman.
    Senator Boozman. Senator Moran.
    Senator Moran. Mr. Chairman, thank you.
    Thank you both for being here. The conversations, the 
responses to our questions, I find useful, which has not always 
been the case in settings such as this.

                 CFTC DE MINIMUS LEVEL FOR SWAP DEALERS

    I want to start with you, Chairman Massad, and ask a 
question about the definition of de minimis level for swap 
dealers.
    The Consolidated Appropriations Act of 2016 included report 
language. That language directs the CFTC to issue a rule 
setting the swap dealers' de minimis level at $8 billion or 
higher.
    Mr. Chairman, does the CFTC intend to comply with those 
instructions and issue an interim ruling establishing that $8 
billion or higher level?
    Mr. Massad. Well, we certainly take all direction and 
advice that we receive from Congress seriously, so let me tell 
you where we are in this process.
    It has been my plan to do a study of this issue. It's very 
important that we use the data that we are collecting on this 
market to really look at what would be the implications.
    As you know, the way the rule was written, when the CFTC 
and the SEC did the joint rule, was that the threshold was set 
at $8 billion, and then it is automatically supposed to fall to 
$3 billion, in our case, at the end of 2017.
    So we did a preliminary study of what the effects of that 
would be. We then put that out for comment. We've gotten a lot 
of very good comments about that, and we're working on a final 
report.
    And that will put the Commission in a position to then make 
a decision. I want to make sure we have that information with 
plenty of time, so that we can make a decision on what to do.
    Senator Moran. Well, the reason I ask this question is in 
an attempt to require you to provide the market participants 
some level of certainty that they won't be subjected to an 
arbitrary and destructive drop, if it would drop that de 
minimis level.
    Mr. Massad. I certainly don't want it to be arbitrary or 
disruptive. That's why we're working on it now.
    As you know, there are a lot of views on this issue, 
including within Congress. But we do take the report very 
seriously that was attached to the omnibus.
    And as I say, we are working on it, and I'd be happy to 
come visit with you further and tell you our thinking on it.
    Senator Moran. What period of time will the participants 
remain with this uncertainty? In other words, how soon are you 
going to establish that level?
    Mr. Massad. Well, again my plan is to finish the report 
within the next few months, so that puts the Commission in a 
position to take action, should it choose to do so. I need to 
then visit with my fellow commissioners and see what their own 
views are on it.
    Senator Moran. If you would fail to accomplish this by year 
end, is that a possibility?
    Mr. Massad. Well, I guess I would say that the way the rule 
works is the level doesn't fall until December 2017, so I think 
we've got plenty of time. There is a counting requirement that 
does look back, and that's why I am focused on addressing this 
soon.
    Senator Moran. That was the direction I was taking this 
follow-up question, which is, would the Commission consider 
clarifying that one need not be below the $3 billion threshold 
until after December 2017? That's to say that the de minimis 
level would not be retroactively applied to transactions that 
occurred beginning January 2016.
    Mr. Massad. Well, I think my attitude on all the issues we 
face is I don't want to create cliffs. I don't want to create 
surprises. I want to give people time to come into compliance. 
That is how I think we should be acting. We're not playing 
gotcha games.
    So I think with this rule and all rules, we want to make 
sure that there is adequate time where people know what the 
rules are, they have certainty about that, and there's time to 
come into compliance.
    Senator Moran. I may desire to follow up with you, Mr. 
Chairman.
    Mr. Massad. Absolutely, Senator.
    Senator Moran. Thank you very much.

                           LIQUIDITY CONCERNS

    Let me ask both of you about the volatility and the impact 
of regulations on liquidity.
    It seems to me in recent months that market events, new 
research studies, current and former regulators, have raised 
concerns about the deterioration of liquidity and that the 
cumulative impact of various new prudential and market 
regulations might be contributing to that occurrence.
    My concern is that lack of liquidity leads to increased 
volatility, which may ultimately negatively impact consumer 
prices. And we've been through this a bit in agriculture 
commodities and others.
    So my question is this, do you share those views, these 
concerns that the accumulative impact of new and prudential and 
market regulations are contributing to a reduction in market 
liquidity? And would this have a price impact?
    Chairman White. Thank you.
    Ms. White. Certainly, the issue of sufficient liquidity is 
of concern. And if there isn't sufficient liquidity, that can 
have harmful impacts, as you're outlining.
    With respect to the question of what causes that, if it's 
there, we do continue to look at that, and not just the SEC, 
but also other regulators.
    As I think you may know, several of us, including the CFTC 
and our fellow banking regulators, report quarterly on the 
level of primary market liquidity in the corporate bond market 
and secondary liquidity to the House Financial Services 
Committee, with respect really to the question: Is the Volcker 
rule having that kind of impact?
    We certainly have not concluded that it has. I think it is 
a complicated question.
    Our economists, who I think are terrific, were given an 
assignment basically in the last, as you know, budget cycle to 
look at the cumulative effect of rulemaking on liquidity.
    I will say that the academic community is just beginning 
to, in a serious way, study that as well. And there's actually 
a recent study, I think out of British Columbia, Vancouver, 
that suggests that although liquidity deteriorated certainly 
right after the financial crisis, that they don't find 
evidence, actually, that it has deteriorated further, based on 
the passage of Dodd-Frank or specifically the passage of 
Volcker. But obviously, there are many more studies coming on 
that. And it's very, very important to continue to study it.
    Senator Moran. The regulatory book has certainly increased 
in the last 6 years. Would there be any benefit in pausing the 
process to assess the cumulative impact of these regulations on 
the economy?
    Ms. White. I think you have to look at what you're 
regulating for. I mean, obviously, liquidity is one concern 
that's an impact, really. It can also be the subject of 
regulation. But you're also trying to achieve other benefits 
and trying to prevent that next financial crisis.
    So I wouldn't advocate pausing regulation. I would 
advocate, and we do it at the SEC, very carefully studying the 
impacts of all the regulations we do from a liquidity point of 
view and other impacts point of view.
    Senator Moran. Thank you very much. I'll try to follow up 
in my next round of questions.
    Senator Boozman. Senator Durbin.
    Senator Durbin. Thanks, Mr. Chairman.

             STATUS OF SEC'S COVERED CLEARING AGENCY RULES

    Chair White, I understand that as part of the post-crisis 
regulatory changes adopted in Europe, clearinghouses for which 
the SEC is the supervisory agency have been obligated to apply 
to be recognized in Europe in order to continue providing 
services to European participants.
    To receive recognition status, the European Commission must 
first find that the SEC has an equivalent regulatory regime for 
clearinghouses. But in order to make this determination, the 
SEC needs to finalize its covered clearing agency rules.
    The rules were agreed to 4 years ago by the United States, 
the international banking and securities regulators, including 
the CFTC and the Federal Reserve. And they were proposed nearly 
2 years ago.
    So market participants in clearinghouses are concerned that 
if this process is not resolved and resolved quickly, the U.S. 
markets could be at a competitive disadvantage.
    A recent article by Philip Stafford starts with the 
following: ``European banks may be forced to hold another $5 
billion of regulatory capital to trade equity options in the 
U.S., unless transatlantic regulators can strike a deal to 
close a gap in the market rules.''
    Unlike Chairman Massad, you've had a pretty good run of 
funding and, in your testimony, talk about reaching new levels 
of activity at your agency, because, unlike Chairman Massad, 
you have a dedicated source for your funding.
    So what is the reason? Why is this taking years when there 
is so much at stake?
    Ms. White. The particular proposal that you reference, and 
it is an outstanding proposal, as you mentioned, from 2014, 
it's something that is also on our current Reg Flex Agenda. 
We've been studying the comments very closely.
    We've also, I should add, been, throughout this period, in 
discussions with the European Commission (EC) and other 
European authorities about not having the markets disrupted in 
the ways that the clearing agencies are concerned about.
    I've met with a number of the clearing agency heads on this 
to share with them the priority that we put on finishing this 
particular rule. It's not a mandated Dodd-Frank rule, but it 
certainly is very much in the mix of the equivalency 
discussions. It's not all that's in the mix of those 
discussions. Those discussions have been going well.
    But it is on our current Reg Flex Agenda to get done.
    I can't guarantee it, obviously, but I don't anticipate 
that our schedule on that rulemaking is going to provide a 
hindrance, but I understand the concern.
    Senator Durbin. It's a matter of months now.
    Ms. White. Yes, understood.
    Senator Durbin. There is going to be some serious results, 
if we fail to produce this rule.
    Ms. White. We're very cognizant of that, and it's 
prioritized on our agenda for this year.
    Senator Durbin. Okay, thanks.

                              CFTC FUNDING

    Chairman Massad, I've tried to understand what's happening 
to the CFTC here. For better or worse, you are sitting at this 
table because when I chaired this subcommittee, I decided to 
move the CFTC from the oversight of the Agriculture 
Appropriations Subcommittee to this subcommittee. I thought it 
was a better fit.
    There was a time when CFTC was primarily agriculture-
oriented. That time has passed. Not that agriculture isn't 
important. I am from Illinois. Let me tell you point blank, 
it's very important.
    But I also thought that it was a good idea to bring you to 
the same table as SEC, because many things you do in a 
regulatory fashion at least parallel one another.
    I find it so hard to understand the difference in treatment 
between the SEC and CFTC by the subcommittee. You are a net-
plus to the Federal Treasury, as you said in your testimony. 
Some years up to 12 times your annual appropriation is 
generated by fines that are collected by your agency, so it 
isn't like you're a beggar here. I mean, you do your part in a 
regulatory fashion.
    And yet, while we're dealing in billions of dollars, many 
times, you are begging for millions to deal with an ever-
growing responsibility when it comes to regulation.
    I think it's extremely shortsighted of us in Congress to 
continue to treat the CFTC in this manner. I think the strength 
of America and its financial markets really comes down to the 
fact that we have a rule of law that is enforced, and people 
want to do business here because they believe we are on the 
square.
    If we start pulling cops off the beat at CFTC, and can't 
keep up with the things you've described this morning, it 
diminishes our international reputation, and I think that is a 
mistake.
    So can you tell me, I mean, I think your request is $80 
million over this year's appropriation? $80 million? How much 
did you generate last year and bring back to the Treasury?
    Mr. Massad. $2.8 billion was collected last year, 12 times 
our budget from last year.
    Senator Durbin. So I'm struggling to figure out why in the 
world you have to come here hat in hand and beg?
    Mr. Massad. I appreciate that, Senator. And obviously, I 
appreciate your strong support for the agency.
    And another way to look at it--obviously, one way is what 
we bring in. The other way to look at is what is the cost of 
failing to regulate these markets. And one only needs to think 
back to what happened in the crisis, where AIG almost went 
bankrupt, largely because of swaps activity that was not 
regulated. And our Government had to commit $182 billion of 
taxpayer money to prevent that and to prevent what likely would 
have resulted then in a Great Depression.
    $182 billion, Senator, is about 600 times our budget 
request. That would fund us for the next 600 years.
    So our request is small, but as you say, to maintain the 
fact that the United States has had the best derivatives 
markets in the world, and they are world class, and they 
attract participation from all over the world, which helps our 
businesses and helps our farmers and others, we have to invest 
in good regulation.
    Senator Durbin. We will rue the day in Congress when we 
were penny-wise and pound-foolish, if we face another crisis, 
and we end up, as taxpayers, holding a bag of $180 billion in 
payouts to make up for short funding your agency when your 
requests, by Federal standards, are certainly modest.
    I hope that, even in this tough year with budgets, we can 
find the resources to give you what you need.
    Thank you.
    Mr. Massad. Thank you.
    Senator Boozman. Thank you, Senator Durbin.
    Chairman--Senator Lankford.
    Senator Lankford. You're the chairman, so I'll let you keep 
that there.

                      COORDINATION REGARDING SWAPS

    Good morning all. Thanks for being here.
    Let me ask about a little bit of coordination, as you all 
are trying to work through the regulatory rulemaking on Dodd-
Frank as it rolls out.
    The new oversight for the swaps and security-based swaps 
market, there's been some feedback, as I'm sure you're aware. 
The GAO has released its report saying there's some confusion 
in the market on who's regulating, what the regulations will 
be, and not only what they are now, where they are headed 
toward in the future.
    So what I'm interested in is your conversation about this 
issue between security-based swaps and swaps, and how the 
regulations are going to roll out based on timing, consistency 
of the regulations, and how you're working together for that.
    So either one of you can go first.
    Ms. White. Go ahead, Tim.
    Mr. Massad. Thank you, Senator Lankford, for the question.
    As you know, Congress did divide responsibility for the 
swaps market. We were given most of it, but there were was one 
piece, the security-based swaps market, given its similarity to 
other things that the SEC regulates, that the SEC has.
    I think we're working together very well. Just over the 
last couple of weeks, for example, our staff cooperated on some 
guidance that we jointly put out concerning the treatment of 
what we call peaking supply contracts, because that's related 
to the swap definition.
    We're working together on capital rules and making sure we 
harmonize those as much as possible. We've been working 
together on swap data reporting, which is a very complex field, 
but trying to align what we're doing there. And we've been 
working together on clearinghouse regulations and other things.
    So we each have different things on our plates overall, in 
terms of our agendas, and sometimes that may mean that we move 
faster than the other. I mean, obviously, for the CFTC, the 
swaps regulations were a huge part of our overall 
responsibility, so the agency moved very quickly to try to 
draft those.
    But I think we're working together very well these days.
    Ms. White. I would echo that as well, I think both at the 
principal level and the staff level. As Chairman Massad 
indicates, the SEC is responsible for about 5 percent of that 
market, the securities-based swap market, an important market.
    We have over 100 congressional mandates between the JOBS 
Act and Dodd-Frank, including very important ones under Title 
VII, which is a high priority for the Commission to finalize 
most of those rules this year.
    The decision was made at the SEC before I got here, 
frankly, to layout the sequence in which we would adopt our 
rules before they actually became effective and operative, 
really to minimize market disruption. And so what that 
permitted us to do, the good part of that at least, and it is a 
good part, is to take cognizance of what the CFTC has done as 
well as our foreign counterparts in a number of these areas.
    For example, one of the recent proposals that we put out 
several months ago, basically the cross-border proposal, asks 
the question: Look, the SEC thinks we ought to do this, but the 
CFTC has done something slightly different. What's the priority 
on consistency for market participants that we go the same way?
    So every time we're doing our rulemakings--we're scheduled 
to consider very important ones tomorrow on business conduct--
we look very closely at what the CFTC has done. Our rules won't 
be identical, because our markets aren't identical, but we 
certainly try to make them at least compatible and often quite 
consistent.

                   RETROSPECTIVE REVIEW OF SEC RULES

    Senator Lankford. Deadlines when they're released, how they 
come out, frequency of those release, all of those are 
important to business as well, to make sure that they're not 
having to worry about the rules changing every 30 days based on 
who is promulgating what at what point.
    Let me ask you, Ms. White, as well about the retrospective 
review, which we've talked about before as well. In 2011, SEC 
solicited comments on the retrospective review. I just want to 
the know the status on that, where things are in the 
retrospective review on different rules.
    Ms. White. That specific proposal hasn't been carried 
forward. But what the SEC does with respect to retrospective 
review, we clearly every year follow the Reg Flex requirements, 
and we actually broaden them out in terms of the scope of the 
rules we put up for review. Essentially, every 10 years, we ask 
what's the significant impact on small businesses?
    We actually put up for review all of our notice and comment 
rulemakings, which is considerably broader than that, and then 
we follow the criteria for those reviews. Our economists are 
very much involved in leading that, along with the policy 
divisions.
    In addition, I would name two things. One is, since I've 
been here, we've undertaken a very comprehensive review, for 
example, of Regulation National Market System (NMS), and all of 
its impact through our market structure initiatives. We're 
doing the same with our entire disclosure effectiveness review.
    And the other thing that I've tried to do with the new JOBS 
Act rulemaking particularly is to begin to review them 
essentially simultaneously when they become effective, which I 
think it is the optimal way to be looking at regulatory impact, 
regulatory burden, as well as investor protection issues.

           POLITICAL PRESSURE ON SEC DISCLOSURE REQUIREMENTS

    Senator Lankford. Right. Do you have any concern at all, 
for you, that SEC is headed toward and being directed by 
Congress, by the way, or by an outside entity, toward a more 
political position, rather than being a fair-minded arbitrator 
in some things to be able to take in some additional disclosure 
requirements?
    Let me give you a ``for instance.'' The push that has 
happened recently toward you need to disclose more about 
climate change and the risk based on climate change for your 
company, or for guns and Second Amendment issues, and some of 
those disclosures.
    What are you sensing right now as far as the political 
pressures as something to transition the SEC into something 
very, very different than what it has been?
    Ms. White. Well, the SEC is an independent agency with a 
very proud tradition of that independence, and it's critical to 
maintain that independence, and I think we do.
    I mean, pressures, interests of various sorts, are part of 
that territory. And I think it's our job--I think we do it very 
well--in getting maximum input from interested parties, but 
then proceeding to make our own decisions, particularly with 
respect to our very important mandatory disclosure powers, as 
to what should be disclosed.
    Senator Lankford. So where do you think this is going on 
things like the two that I just mentioned, mandatory disclosure 
powers on things like climate change, or Second Amendment 
vulnerabilities, or gun purchaser liabilities, or sugar and 
you're very exposed to diabetes liability, or whatever it may 
be?
    Where are you headed on some of the conversations on 
mandatory disclosures?
    Ms. White. One of things that we're doing in our disclosure 
effectiveness review, because we want that to be comprehensive, 
is hearing from all constituents about what those various 
constituencies think should be disclosed. But the hallmark of 
the SEC's disclosure powers is materiality to investment 
decisions and voting decisions, and that has been our lodestar 
throughout the history of the agency.
    You mentioned climate change. We have guidance out on 
climate change. It illustrates our materiality focus, which 
essentially helps companies assess whether climate change-
related issues may be material to them, in which case, under 
the Federal securities laws, they must be disclosed.
    That's different than broader climate change disclosure or 
any other kind of disclosure that may well not be material. So 
we always approach these issues from that materiality 
perspective.

                      COSTS RELATED TO DISCLOSURES

    Senator Lankford. Right.
    Mr. Chairman, can I have 30 seconds? I just want to be able 
to make a final statement.
    When the pay ratio piece came out and the conflict minerals 
piece came out, the amount of money that companies now spend, 
the estimates just to be able to keep up with those--and those 
are statutory issues, I understand full well--but the numbers 
are correct here. The compliance for the pay ratio is $315 
million. For the conflict mineral piece, it could be around $3 
billion in total compliance cost. Now the GDP of the Congo is 
only $33 billion, and we've got a compliance cost, just 
complying with that, and it may have all sorts of arbitrary 
issues both in the Democratic Republic of the Congo and for us.
    So the challenge is, every time a new mandatory disclosure 
comes out, it's a new mandatory list of costs, which costs 
consumers more in products and has its own unique dynamic in 
pushing back.
    So we're trying to figure out how to be able to keep that 
balance. It's good for investors to have the balance and the 
information. It's bad if we continue to drive up costs and 
complexity, and drive out businesses from a market.
    Ms. White. My only comment on that would be, and I've said 
this before, in all of the congressional mandates that relate 
to disclosure, obviously, we're not so independent that we 
don't follow the law. We do our duty, and we carry out those 
rules, again, not making any substantive comment on the rules.
    When we do that, we do our best, but being true to the 
statutory mandate given to us, to make it as effective, as 
cost-effective, as we can, but we do need to comply with 
statutory requirements.
    Senator Lankford. Thank you, Mr. Chairman.
    Senator Boozman. Thank you, Senator Lankford.

                       CFTC POSITION LIMITS RULE

    Chairman Massad, we've talked about this before, in regard 
to the position limits rule. Can you tell us what the agency is 
doing to work with farmers, manufacturers, energy producers to 
make sure that the rule is workable?
    Mr. Massad. Yes, absolutely, Mr. Chairman.
    The position limits rule, as you know, is that Congress has 
mandated us to enact position limits to prevent excessive 
speculation. But at the same time, we have to make sure that 
commercial participants can engage in bona fide hedging.
    So I, along with my fellow commissioners, none of us were 
at the agency when the proposed rules were issued in December 
2013. So we have wanted to make sure that we are fully 
educated, that we understand what market participants' views 
are. So we have been taking time to do that and to make sure we 
get this rule right, because it's extremely important.
    So we've been focused on the issues of bona fide hedging. 
We've also been focused on the process by which you might grant 
exemptions that aren't otherwise specified. In other words, 
there can be a situation where a market participant is engaged 
in something that isn't specifically enumerated in the law, but 
it's deserving of an exemption under the principles.
    So we've been looking at whether we should draw on the 
experience of the exchanges in our market and work more closely 
with them.
    There are other aspects of the rule that we've been very 
focused on. The deliverable supply estimates, it's very 
important that we have the most up-to-date information, and 
we've been working to get that.
    My goal is to try to get these rules done this year. But 
again, I want to make sure we get them done in the right way 
that achieves the goals that Congress has directed us to 
achieve and make sure that bona fide hedging still works.

                    SEC OVERSIGHT OF FINRA'S BUDGET

    Senator Boozman. Okay. Thank you very much.
    Chair White, as you remember, I raised concerns about the 
Financial Industry Regulatory Authority's (FINRA's) rulemaking 
related to its Comprehensive Automated Risk Data System (CARDS) 
proposal at the hearing last year. Earlier this year, the SEC 
announced it would begin leaning more on FINRA for oversight of 
broker-dealers.
    I've discussed with you and your staff the coordination 
that takes place between the SEC and FINRA on examinations and 
rulemaking. Can you tell us about the oversight the SEC does 
regarding FINRA's budget?
    Ms. White. Yes, we do examine FINRA on various issues. We 
don't review and don't have authority to review their budget, 
per se. But when we do our exams, and some recent exams 
included, we do look at budget, source of funding issues. At 
least one of our primary concerns there is obviously that FINRA 
is able to carry out its core mission, which we do rely upon 
them to carry out in many cases.
    I think you alluded to, on the broker-dealer side, for 
example, they actually carried out about 80 percent of the 
exams of broker-dealers. When I'm up here talking about the big 
gap in coverage, I'm talking about the investment adviser side, 
which doesn't have nearly enough resources to achieve that 50 
percent of the brokers examined every year.
    And so what we've decided to do in part, and it will just 
be in part, is to actually transition some of the SEC 
resources, because we do examine brokers as well, to the 
investment adviser side. That is something we recently 
announced.
    As part of that, we are also enhancing even further our 
oversight of FINRA because, again, they will be called upon to 
do more of those exams than they have in the past. And so our 
market surveillance and oversight folks will be sufficiently 
resourced to be able to carry that out. I think it's a very 
important part of our regulatory responsibility.
    Senator Boozman. Should you or shouldn't you play a role 
perhaps in helping with their budget?
    Ms. White. I mean, it's a decision for Congress to make. As 
I say, our primary concern is, given the nature of FINRA, that 
they are able to carry out the responsibilities that they do 
have. And obviously, budget issues and funding sources are 
relevant to that.
    But I think it's really a congressional decision on whether 
we need to oversee the budget to do that. We certainly look at 
those issues, but don't actually review their budget, per se, 
given the nature of the organization.

                  STATUS OF SEC'S FIDUCIARY RULEMAKING

    Senator Boozman. Many are concerned about the Department of 
Labor's fiduciary rule and its potential impact on low- and 
moderate-income investors. This is certainly a very complicated 
issue, and the SEC has more knowledge and technical expertise 
in this arena, yet DOL has inflexibly pushed forward first.
    Where is the SEC in its process of considering fiduciary 
changes?
    Ms. White. Again, I would say we are independent agencies, 
and they have authority over the Employee Retirement Income 
Security Act of 1974 (ERISA) space, obviously, and have pursued 
the rulemaking because of that responsibility.
    In terms of the SEC, I have said publicly some months ago 
that my own personal view is--I'm one vote of five--that we 
should advance a uniform fiduciary duty rule for broker-dealers 
and investment advisers under Section 913 of the Dodd-Frank 
act, which, as you know, provides certain parameters if we do 
so that takes into account the broker-dealer model, frankly, 
something not applicable to the Department of Labor.
    I directed the staff to do a recommendation. They're 
working very hard on that. They have provided an outline of 
their thinking and recommendations to my fellow Commissioners, 
and that's in dialogue.
    Again, I have to emphasize, though, the SEC has looked at 
this issue for many, many, many years. It's complicated. It's 
not quick. And so we're still proceeding, but----
    Senator Boozman. Are you considering doing anything to 
specifically make sure that the low to moderate investor gets a 
fair shake and has the ability----
    Ms. White. Well, I mean, clearly--and I have said this 
before, too--if we, at the end of the day, were to have the 
impact of our rule be that we deprive the lower end, 
particularly retail investors, of reasonably priced, reliable 
advice, we would have failed in our objective, and so we're 
very focused on that.

                     STATUS OF TITLE VII RULEMAKING

    Senator Boozman. Good. One last thing, Chair White.
    The SEC has yet to promulgate most of its rules to 
implement the derivatives reforms for security-based swaps 
under Title VII of Dodd-Frank. Will you update us on the status 
of the rules? And when do you expect to finalize them?
    Ms. White. Yes, I think we've done over half of those, in 
terms of finalized. They're all proposed. I think I mentioned 
before the way we've been proceeding is pursuant to an 
established road map and sequencing before we go live.
    All of the Commissioners, current Commissioners as well as 
my former colleagues and myself, are prioritizing completing 
those Title VII rulemakings. We are very focused on them, to 
make certain that our dealer regime and our reporting regime, 
hopefully, are live by the end of this year.
    Senator Boozman. I bring that up again. That really is 
important.
    Senator Coons.

                      ENFORCEMENT ACCOMPLISHMENTS

    Senator Coons. Thank you, Chairman Boozman.
    Let me ask you first, if I could, about enforcement 
accomplishments, because as I was reviewing your prepared 
testimony and some of the background, it really is striking, 
the impact of your enforcement work.
    During fiscal 2015, the SEC brought an unprecedented 807 
enforcement cases and secured an all-time high for orders 
directing penalties or disgorgement. I think it was $4.2 
billion.
    The CFTC's most recent performance report, same period, 
fiscal 2015, filing of 69 enforcement actions--these were 
focused on manipulation, spoofing, and fraud--and a record 
$3.14 billion in civil monetary penalties ordered against 
wrongdoers.
    If you would both just speak to the broader question here. 
Is your enforcement caseload volume a signal that there is more 
illicit activity going on, or just that your agencies are 
getting better at identifying it and rooting it out? And how 
well are you able to measure the deterrent effect of your 
enforcement actions? What is the message that your enforcement 
actions send to fraudsters? How rapidly are you able to collect 
on either restitution or disgorgement? And is there something 
we should be doing that would affect that? And are there any 
statutory or administrative impediments that prevent you from 
doing more to combat illegal activity in the securities area 
and in futures and swaps?

                            SEC ACHIEVEMENTS

    Ms. White. Well, I'd say first, I'm very proud of what the 
Enforcement Division has accomplished. I appreciate your 
comments on that.
    We've had actually two successive not just record years in 
terms of numbers, but they have been that, too, but we have 
really focused on I think the most serious risks to the 
markets, the most egregious frauds.
    We don't have the criminal powers, actually. I'd be 
delighted to have them, but I'm not sure others would be 
delighted for me to have them.
    But we are very aggressive in pursuing wrongdoers across 
the market strata. And that's very important, because I think 
one of our remedies that doesn't get as much attention as the 
money tends to or just the charges do is our power to actually 
bar people from the industry, so that they don't harm again. So 
we have a lot of emphasis on proceeding against individuals. I 
think two-thirds of our cases last year included individuals as 
well as firms.
    Deterrent value is hard to measure. That's one of the 
hardest things in law enforcement, I think, to measure. I do 
think we're getting significant deterrent effects. I would 
point to the Municipalities Continuing Disclosure Cooperation 
(MCDC) Initiative, and what we've done with the expenses and 
fees in the private fund adviser area. We've seen a change in 
behavior, in a very short period of time. Better disclosures on 
the municipal securities markets is hugely important. And tens 
of millions of dollars has been actually returned to investors 
in private funds just by virtue of our showing up with our 
examiners, frankly. And we've brought some enforcement cases, 
too.
    In terms of collecting the penalties and securing the 
disgorgement, I think we are the only Federal agency that 
actually has a standalone collections function, because we feel 
so strongly about pursuing promptly those penalties. Obviously, 
if you're settling with a major financial institution, you tend 
to get your money right then.
    But again, a very important part of what the SEC does is 
really across the swath of market participants large and small, 
and so there are significant impediments to collecting some of 
those awards.
    Of the $4.2 billion, I think so far we've collected about 
$2 billion of that, and we're quite active in collecting 
others. But we have, for example, a number of cases against 
international foreign issuers, where we may not see that money. 
It's very hard to get it when it's residing elsewhere, in at 
least some countries.
    But we think it's very important for deterrent value that 
we nevertheless achieve that award.
    The same may be true of an individual who can't currently 
pay, and so, therefore, you're not going to collect. But 5 
years down the road, they write a book that's a bestseller, and 
so we want to be able to collect it later. We've seized jets. 
We're pretty persistent. And it's an important part of the 
deterrence, obviously.

                           CFTC ACHIEVEMENTS

    Mr. Massad. A similar situation for us. In terms of both 
the deterrent effect and the level of activity that we've been 
engaged in. I would point to two areas that I think are quite 
significant.
    One is benchmarks, where we've brought a number of cases 
against the world's largest financial institutions for 
manipulation or attempted manipulation of the London Interbank 
Offered Rate (LIBOR), of foreign exchange rates, and what's 
called ISDAFIX or swap rates. These have been very significant 
cases, and I think they have led to dramatic changes in the 
administration of benchmarks and hopefully will help prevent 
manipulation of this sort in the future.
    A second very important area of activity, which again comes 
back to the need for the budget we're asking for, is 
manipulation and, in particular, new forms of manipulation, 
like spoofing, where a trader enters a lot of orders that they 
do not intend to consummate. We brought a case that led to the 
first successful criminal prosecution of someone engaged in 
spoofing. We also brought a case concerning someone whose 
spoofing activity had taken place over many, many years, 
including in the lead up to the flash crash.
    But again, to be able to bring those cases, we have to 
enhance our IT systems. I mean, these, we were able to bring. 
But there are lots of cases like that that we can't bring or 
that we can't pursue just because the amount of data you have 
to process is huge.
    And even in terms of traditional fraud, a very good example 
of our budget constraints would be cases like MF Global, where 
we're still involved in litigation because we face defendants 
who have very deep pockets and can prolong discovery, run up 
sizable costs, and that makes it very hard.
    In terms, you asked, of the statutory assistance, one thing 
that would help significantly is looking at and revising the 
statutory provisions concerning the fines we can collect. The 
provisions right now say $140,000 for a lot of violations. 
That's far too low.
    So we've worked with a number of Senate offices and their 
staff to suggest language on this and would be happy to visit 
with you further on it.

                 IMPORTANCE OF WHISTLEBLOWER PROVISIONS

    Senator Coons. Both your agencies were granted under Dodd-
Frank whistleblower capabilities. And you've had some 
significant success here that's led to some critical 
information. And you've paid out a significant amount in 
awards, and that's led to some really substantial recoveries.
    Could you just briefly speak to the importance and value of 
the whistleblower provisions that are relatively new for your 
agencies?
    Ms. White. I will say, in a very short period of time, it 
has been enormously successful. I think I would even call it a 
game-changer in many ways.
    I think that is reflected through the awards, as you 
mentioned, the number of cases, and the kinds of cases in which 
whistleblowers are providing tips to us.
    One of the things that we've also taken very seriously, as 
an enforcement priority, is that we were also given authority 
in Dodd-Frank to protect against retaliation of whistleblowers, 
and so we brought cases there as well.
    I think it's something that has really enhanced the 
enforcement program tremendously.
    Mr. Massad. The same is true for us. This is an entirely 
new program for us that we've really just been ramping up in 
the last few years, but we've made some significant awards, 
including one just a few weeks ago on a case where it was of 
major importance, an over $10 million award.
    But again, the challenge is being able to follow up on the 
tips. A whistleblower program is great, but you have to have 
the resources to follow up on the tips. And a lot of times, 
again, this takes a lot of time. It takes a lot of data-
processing. And that's why we need the budget that we've 
requested.

                   CONSEQUENCES OF A LACK OF FUNDING

    Senator Coons. Well, I'd appreciate it if each of you would 
just speak to, if you're not provided with the budget request 
submitted, what are the consequences? What happens to your 
ability to conduct robust enforcement? What's the consequences 
for market stability, security, transparency?
    And in particular, if you could, Chairman Massad, you said 
in your prepared statement that the full budget, $330 million, 
would help ensure that the CFTC can be even more responsive to 
the concerns of commercial end-users who rely on markets to 
hedge risk. If you'd speak to what it is with the full budget 
request, the $80 million, you might be able to do to address 
that particular concern.
    If you would start, Chair White, and then Chairman Massad?

                             EFFECTS ON SEC

    Ms. White. The effects would be enormous, negative effects 
would be enormous.
    I mean, clearly, all of the areas that we have prioritized 
and tried to target for additional resources in our budget 
request, each of them would be harmed. One, in particular, is 
that coverage of investment adviser exams. Those are the folks 
that deal with investors, including the smallest retail 
investors and institutional investors as well.
    I worry about Regulation System Compliance and Integrity 
(SCI) enforcement, which is in the cyber area as well, if we 
don't have our funding.
    And to echo something that you said, I think, Senator, as 
well as Chairman Massad, if you look at our request for IT, 
which would be compromised, the data analytics piece of our 
budget request is the largest number going forward. Those data 
analytics have been real game-changers in our ability to detect 
fraud, detect it earlier, and, frankly, to oversee our markets.
    So if we were to be flat-funded, essentially, we would be 
facing a wall right when we should be ramping up--and I haven't 
even gotten to that we need to oversee that crowdfunding regime 
we just set up, and obviously the over-the-counter derivatives 
market and securities-based swaps as well.
    Just when we should be ramping up, we would be going in the 
other direction. We would impose a hiring freeze, which would 
be, obviously, detrimental. I think IT would be hit 
particularly hard, and that is something that's very hard to 
make up once it is delayed even.
    And I think enforcement and exams would be hit particularly 
hard, as well as market oversight. I'm grateful for the 
increase that we got last year, less than we'd requested.
    There was $25 million, $30 million of very important IT 
projects, for example, that we just couldn't do or had to 
delay.

                            EFFECTS ON CFTC

    Mr. Massad. Again, it's a similar story for us.
    If our budget is flat, we cannot even maintain what we're 
doing today. We wouldn't be able to have as many staff, simply 
because costs do go up. And that means key activities, whether 
it's examinations of clearinghouses or surveillance to prevent 
fraud, are cut back.
    Surveillance is an excellent example here. We have about 50 
people in market surveillance. We're responsible for overseeing 
the markets in 40 different physical commodities, as well as 
all of the financial futures.
    What that means is, today, we have one analyst on crude 
oil. Now crude oil has been subject to incredible volatility. 
But that's because we simply can't afford to have more people 
working on that issue.
    For a lot of the ag products, we don't even have one person 
dedicated to that particular product.
    So for our budget increase, where we're looking for about a 
35 percent increase in surveillance staff for market 
surveillance, that means instead of seven people for energy 
products--meaning crude, natural gas, heating oil, gasoline--
we'd have 10. It's still not very many.
    The crude oil market is very different from even the nat-
gas market, which, obviously, they're both very different from 
the soybean market and the aluminum market, not to mention, 
then, all the financial futures, whether it's on interest 
rates, equities, foreign exchange. And all of those futures 
products are very different from swaps.
    Senator Coons. So just to be clear, Chairman Massad, cops 
on the beat, surveillance staff, IT, looking at the crude oil 
market, and futures and swaps, one.
    Mr. Massad. For surveillance?
    Senator Coons. Surveillance.
    Mr. Massad. Enforcement is different, but one for crude 
oil.
    The cyber risk is paramount, as we've talked about. So, 
again, maintaining our own systems so that we, again, can avoid 
any possible problem, as well as doing examinations of global 
clearinghouses, which today could pose some risks to stability, 
if we don't make sure they're resilient, as well as exchanges, 
is very important.
    You asked about commercial end-users. We have done a number 
of things to address their concerns, where they felt that some 
of our regulations might be posing undue burdens, or where 
simply the markets had changed and we needed to update our 
regulations.
    But it takes time to respond to those requests. It takes 
time to have staff look into it, to prepare a rulemaking.
    Some of the things we've done recently, for example, on 
recordkeeping, we made some changes to a rule called 1.35 that 
relieves some of the burdens on commercial end-users.
    There's more we should do in that area, probably. We should 
look at our books and records rules generally, because they 
were written in an age where you refer to signatures, and 
writing things down, and so forth. We need to bring those up-
to-date.
    So that would be an example.
    Senator Coons. Thank you.

                  SHORT-TERMISM AND ACTIVIST INVESTORS

    Thank you both for your thorough, detailed answers.
    Chair White, I might ask one last question, if the 
chairman's patience continues to extend.
    My hometown recently was centrally affected by a fight over 
control over an iconic 200-year-old chemicals and materials 
business. And in the conversation afterward in my community, 
there has been a great deal of concern and expressed concern 
about activist investors and how longstanding corporations that 
invest in research and development that have a long-term view 
of their future can be compelled to take sudden and dramatic 
changes in action in order to gin up short-term benefits, but 
at the expense long-term investment.
    Some concern was expressed by those who were trying to 
advocate to shareholders the value of their long-term agenda 
that the activist investors were able to communicate almost 
without restraint and yet the management that was trying to 
fight for a long-term investment perspective was significantly 
constrained.
    In your view, is that accurate at all? And is the SEC doing 
everything it can to address concerns about short-termism 
versus, at times, a more appropriate longer term focus on 
return of investment?
    Ms. White. We're certainly doing everything we can do with 
respect to all parties following the rules as they exist, the 
laws as they exist, which do pertain.
    We don't, as the SEC, though, basically take sides in that. 
I don't think we should take sides in that.
    But we're very vigilant on making sure that the rules are 
followed. And we're also looking at our rules, our various 
proxy rules and various communication rules, to see whether, in 
order to avoid abuse or imbalance, they should be changed.
    I've said this before publicly. Just as you don't paint 
with the broad brush all high-frequency traders because they 
have very different strategies, I think activists also run the 
spectrum.
    I've also spoken out a number of times, and I think very 
firmly, in favor of more direct engagement between companies 
and all of their shareholders across-the-board. You do see that 
happening, too, which I think is a positive development.
    We really have our eye on it very closely. But again, I 
don't think the SEC takes sides in that, other than to make 
sure that the rules are as they should be.
    Senator Coons. I appreciate your answer.
    I wouldn't expect you to take sides. I would expect you to 
enforce the rules.
    Going forward, I may be doing more considering what those 
rules are, and whether they appropriately encourage and 
incentivize investment in high-return, long-term activity, 
rather than simply short-term.
    Mr. Chairman, thank you so much for your patience with my 
lengthy additional question.
    And I'd like to thank both of our witnesses for their full 
answers today.
    Senator Boozman. Thank you for your questioning.
    I think Senator Coons and I will echo the comment of 
Senator Moran, in the sense that I think that we've had a 
really good discussion today that's helped both of us, which is 
not always the case. So we appreciate your forthrightness, and 
that's very helpful.
    We also appreciate your staff for all their hard work. I 
know they've worked hard to get you guys ready.
    We appreciate Senator Coons' staff and my staff also for 
their efforts today to make it so that we could have the 
hearing.

                     ADDITIONAL COMMITTEE QUESTIONS

    If there are no further questions, the hearing record will 
remain open until next Tuesday, April 19, 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
          Questions Submitted by Senator Christopher A. Coons
                   impact of vacancies on agency work
    Question. I note that the SEC is not presently at full strength as 
a five-member Commission, having two vacancies awaiting confirmation of 
nominees to fill the posts.
    What particular issues does the SEC encounter when the agency lacks 
a full complement of Commissioners?
    What are the most acute ramifications on conducting business that 
are the result of the agency currently being two Commissioners short?
    Answer. Although we currently are a Commission of three members, as 
has occurred in the past, we can carry forward all of the business of 
the Commission. While all three members are required for a quorum to do 
rulemakings, the current Commission has acted to complete all of its 
JOBS Act mandates and continues to work to complete the mandated 
rulemakings under the Dodd-Frank Act, as well as advancing important 
discretionary rulemaking. Of particular focus and priority is to 
finalize the remaining security-based swap rules required of the SEC by 
Title VII. Toward that end, in February the Commission adopted the last 
set of rules for cross-border dealer activity. Likewise, in April we 
finalized rules implementing a comprehensive set of business conduct 
standards and chief compliance officer requirements for security-based 
swap dealers and major security-based swap participants, as well as 
issuing the plan for CAT, the Consolidated Audit Trail. We also, in 
May, joined with fellow financial regulators to re-propose the 
incentive compensation rules for financial institutions as mandated by 
Section 956 of the Dodd-Frank Act. Beyond the specific rulemakings, the 
SEC has intensified its review of equity and fixed income market 
structure issues; advanced our comprehensive disclosure effectiveness 
initiative seeking ways to improve the public company disclosure regime 
for investors and companies; and is proceeding with the modernization 
and enhancement of our regulatory regime for the asset management 
industry. We also have continued to hold securities law violators 
accountable by bringing cutting-edge cases in record numbers and in all 
market strata. While I look forward to the time when Congress has 
confirmed the full complement of Commissioners, Commissioners Stein, 
Piwowar and I are fully engaged in doing the Commission's work.
                                 ______
                                 
            Questions Submitted by Senator Richard J. Durbin
    Question. Chair White, since the Supreme Court's Citizens United 
decision in 2010, I have joined with several of my colleagues in 
sending letters to you and your predecessor asking the Securities and 
Exchange Commission (SEC) to initiate a rulemaking requiring public 
companies to disclose their political spending to shareholders. Such a 
rulemaking would bring much-needed transparency to the U.S. political 
process. A report issued last year by the Brennan Center found that 
outside spending has more than doubled since Citizens United. 
Shareholders deserve to know when that money comes from the coffers of 
a company that they have invested in.
    Last year, a problematic rider was included at the last minute in 
the fiscal year 2016 omnibus appropriations bill. That rider limits the 
SEC's ability to finalize, issue, or implement a corporate political 
spending disclosure rule. Shortly after the omnibus appropriations bill 
was signed into law, I joined a bicameral group of more than 90 Members 
of Congress in sending another letter to you, which explained that the 
rider did not bar the SEC from at least planning, investigating, or 
developing proposals for a disclosure rule.
    Chair White, as we expressed in our December letter, more than 1.2 
million securities experts, institutional and individual investors, and 
members of the public have asked the SEC for a disclosure rule. Though 
the rider in current appropriations laws limits the SEC's ability to 
issue such a rule, there are initial steps that the SEC can take to 
prepare for an eventual rulemaking, such as holding a public 
roundtable.
    Can you commit to working with your colleagues to examine and 
investigate the issue of corporate political spending disclosure?
    Answer. I recognize and respect the deep public interest in 
campaign finance reform and in the topic of mandated corporate 
political spending disclosure. Very strong (and differing) views have 
been expressed on the subject by many commenters, including Members of 
Congress.
    While there is no current rule generally mandating the disclosure 
of political spending by public companies, I note that under existing 
law, if political spending is material in the context of a particular 
company, it must be disclosed under our rules. In addition, our April 
Regulation S-K Concept Release sought comment on disclosure of public 
policy issues of importance to investors, and the public debate 
indicates political contributions is one such issue.
    I also note that a number of companies, including the majority of 
the companies in the S&P 500, voluntarily disclose political 
contributions to the public. Shareholders also can, and do, submit 
shareholder proposals on the topic for inclusion in companies' proxy 
materials, and a number of these proposals have been voted on by 
shareholders. In the current proxy season (through April 30, 2016), 
these proposals received favorable votes on average of approximately 23 
percent. In the past, several companies where shareholder proposals 
have received a majority of the votes, the companies have proceeded to 
adopt policies requiring disclosure of political spending. These are 
important developments which I continue to monitor closely.
    In light of the numerous rulemakings and other initiatives in the 
Regulatory Flexibility Act agenda, the Commission and its staff have 
focused on implementing those rules and have not devoted resources to a 
consideration of a corporate political spending disclosure rule. I 
expect that completion of those rulemakings and initiatives will 
continue to be the primary focus of the Commission's agenda for the 
upcoming year.
    In addition, the appropriations act to which you refer precludes 
the Commission and its staff from using funds ``to finalize, issue, or 
implement any rule, regulation, or order regarding the disclosure of 
political contributions.'' This broadly worded provision limits the 
ability of the Commission to examine and investigate the issue of 
mandated corporate political spending disclosure.
    Question. In February, I, along with nearly a dozen of my 
colleagues, wrote to you expressing support for the Commission's 
proposed rule to implement Section 1504 of the Dodd-Frank Act. The goal 
of Section 1504 is to increase transparency around payments made by 
oil, gas, and mining companies to foreign governments in order to 
reduce corruption. Congressional intent, when drafting this law, was to 
protect and to support investors, including by ensuring that there are 
no exemptions to publically disclosed project-level payments.
    I understand that the Commission has received a substantial amount 
of evidence showing that investors overwhelmingly support such 
disclosures and that there are no legal prohibitions to such 
disclosures in many countries of concerns. Will your justification on 
the final rule reflect this evidence when considering the potential 
costs of disclosure?
    Answer. I appreciate the importance of Section 1504's mandate that 
the Commission adopt a rule requiring the disclosure of payments to 
foreign governments and the Federal Government in connection with 
resource extraction activities. As you know, after the rule we 
finalized under Section 1504 was overturned by the courts, in November 
2015 the Commission re-proposed new rules for public comment. Among 
other things, the accompanying proposing release acknowledged that 
investors could find the information provided under Section 1504 to be 
useful and it specifically discussed various ways that investors have 
said that they might use the information in their decisionmaking. In 
response to our proposal, we have received a number of thoughtful 
public comments expressing various views on this issue, including 
several from investors and investment managers. We also received a 
number of comments addressing the legal and practical consequences of 
making resource extraction payment disclosure in various jurisdictions. 
Commission staff is carefully considering these comments in developing 
recommendations for the Commission's consideration of a final rule, 
which I expect to occur in the very near future.
                                 ______
                                 
             Questions Submitted to Hon. Timothy G. Massad
          Questions Submitted by Senator Christopher A. Coons
                   impact of vacancies on agency work
    Question. I note that the CFTC is not presently at full strength as 
a five-member Commission, having two vacancies awaiting confirmation of 
nominees to fill the posts.
    What particular issues does the CFTC encounter when the agency 
lacks a full complement of Commissioners?
    Answer. Under Section 2(a)(3) of the Commodity Exchange Act (CEA) 
(7 U.S.C. 2(a)(3)), vacancies in the Commission do not impair the 
ability of the remaining Commissioners to exercise any of the 
Commission's powers under the CEA. In the past, the Commission has 
operated with fewer than five Commissioners on a number of occasions. 
The Commission has operated with three Commissioners for nearly a year 
and has been able to continue to carry out its responsibilities. 
However, the fact that there are only three Commissioners does pose 
certain challenges, including that it is harder for the Commissioners 
to discuss Commission business and harder to carry out the work of all 
the Commission's advisory committees.
    Question. What are the most acute ramifications on conducting 
business that are the result of the agency currently being two 
Commissioners short?
    Answer. A practical issue that arises when the Commission has three 
or fewer Commissioners is that the Government in the Sunshine Act, 5 
U.S.C. 552b, restricts communications between the Commissioners. The 
Commissioners cannot conduct or dispose of agency business other than 
in accordance with rules that generally require public meetings, 
subject to limited exceptions. Two Commissioners constitute a quorum 
when the Commission consists of three Commissioners. As a result, the 
ability of two Commissioners to discuss Commission business outside of 
a public meeting is constrained by the possibility that such 
discussions could be deemed to be the conduct or disposition of 
official business in violation of Commission rules and the Sunshine 
Act.

                         CONCLUSION OF HEARINGS

    Senator Boozman. At this point, the subcommittee hearing is 
adjourned.
    [Whereupon, at 11:54 a.m., Tuesday, April 12, the hearings 
were concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]