[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                       EXAMINING THE SEC'S AGENDA,.
                         OPERATIONS, AND BUDGET

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 4, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-45
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
                           
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 4, 2017..............................................     1
Appendix:
    October 4, 2017..............................................    64

                               WITNESSES
                       Wednesday, October 4, 2017

Clayton, Hon. Jay, Chairman, U.S. Securities and Exchange 
  Commission.....................................................     5

                                APPENDIX

Prepared statements:
    Clayton, Hon. Jay............................................    64

              Additional Material Submitted for the Record

Delaney, Hon. John:
    Letter to Hon. Jay Clayton re: EDGAR.........................    86
Clayton, Hon. Jay:
    Written responses to questions for the record submitted by 
      Representative Beatty......................................    89
    Written responses to questions for the record submitted by 
      Representative Hultgren....................................    90
    Written responses to questions for the record submitted by 
      Representative MacArthur...................................    97
    Written responses to questions for the record submitted by 
      Representative Pittenger...................................    98
    Written responses to questions for the record submitted by 
      Representative Sherman.....................................   101
    Written responses to questions for the record submitted by 
      Representative Velazquez...................................   106

 
           EXAMINING THE SEC'S AGENDA, OPERATIONS, AND BUDGET

                              ----------                              


                       Wednesday, October 4, 2017

                     U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.

    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Present: Representatives Hensarling, McHenry, Royce, Posey, 
Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross, 
Pittenger, Wagner, Barr, Rothfus, Messer, Tipton, Williams, 
Poliquin, Love, Hill, Emmer, Trott, MacArthur, Davidson, Budd, 
Kustoff, Tenney, Hollingsworth, Waters, Maloney, Velazquez, 
Sherman, Meeks, Lynch, Scott, Cleaver, Moore, Ellison, 
Perlmutter, Himes, Foster, Kildee, Delaney, Sinema, Beatty, 
Vargas, Gottheimer, Gonzalez, and Crist.
    Chairman Hensarling. The committee will come to order.
    Without objection, the chair is authorized to declare a 
recess of the committee at any time. And all members will have 
5 legislative days within which to submit extraneous materials 
to the chair for inclusion in the record.
    The hearing is entitled Examining the SEC's Agenda, 
Operations, and Budget.
    I now recognize myself for 3-1/2 minutes to give an opening 
statement.
    This morning, we--the committee will come to order, please.
    This morning, we welcome the Securities and Exchange 
Commission Chairman, Jay Clayton, for his first appearance 
before our committee. It has been almost a year since an SEC 
chair appeared before the committee. And I want to take this 
time to applaud you, Chairman Clayton, for a number of changes 
that you have made during your brief tenure.
    Under the previous administration, the SEC failed to 
develop a capital formation agenda and did very little to 
promote it beyond what Congress required in the JOBS Act. This 
committee is extremely encouraged by the SEC's renewed 
commitment under your leadership to facilitate capital 
formation to help small businesses access the capital they need 
to innovate, grow, and provide economic opportunities for all 
Americans.
    We also appreciate the public comments you have made on the 
need to reverse the trend of declining initial public 
offerings, and the SEC's announcement that confidential IPO 
filings would be open to all companies, a provision that the 
House passed as part the Financial CHOICE Act.
    The SEC should also continue to explore ways to simplify 
its disclosure regime and return to the concept of materiality. 
The securities laws are not the appropriate avenue to pursue 
ideological and political agendas that have nothing to do with 
the SEC's mission, and can only harm economic opportunity and 
growth.
    Under the previous administration, the SEC dropped the ball 
on the fiduciary rule and allowed the Department of Labor to 
insert itself into the SEC's jurisdiction. Surely, this must be 
reversed. And as I continue to watch our national debt clock 
spinning out of control, it is with deep gratitude, and at 
least I think for the first time since I have served on this 
committee and after the SEC's budget has seen an increase of 
more than 325 percent since the year 2000, the SEC did not seek 
a budget increase for Fiscal Year 2018.
    Congratulations. It is a welcome change for hardworking 
taxpayers. I do understand the SEC will request more funding in 
cybersecurity for Fiscal Year 2019 for obvious reasons, and 
this brings me to my next point.
    The committee has serious questions regarding cybersecurity 
controls at the SEC. The recent announcement that the SEC's 
Electronic Data Gathering, Analysis, and Retrieval system, 
known as EDGAR, had not only been hacked in 2016, but that 
nonpublic information may also have been used to facilitate 
illicit trading. This is very, very troubling. Even more 
troubling is that Congress and the public were not informed 
until September 2017.
    Chairman Clayton, we know that this breach did not happen 
on your watch, but you are the one who has to fix it. Given the 
recent Equifax breach and this breach, the committee has 
serious concerns with the rapidly approaching November 15 
implementation for the Consolidated Audit Trail.
    While the Consolidated Audit Trail serving as a central 
repository for order and trading activity data, I urge the SEC 
again to delay its implementation date until the Commission can 
ensure that the appropriate safeguards and internal controls 
are in place to protect this data. To echo what your colleague, 
Commissioner Piwowar, said, the SEC has only one chance to get 
this right. Please make sure you do, sir.
    I now yield 3 minutes to the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Thank you, Mr. Chairman. And welcome, 
Chairman Clayton, who is from the great city of New York.
    One of our country's greatest assets is our economic 
strength, including our strong capital markets. Investors from 
all around the world pour their money into the U.S. markets 
because they trust that our companies are accurately reporting 
and are accurately auditing their financial statements and that 
their rights as investors will be protected. And it is this 
confidence in our markets that we need to focus on maintaining. 
It is the SEC's job to oversee our markets, which makes the SEC 
one of the most important regulators in the world.
    Because of the breadth of activities that it regulates, the 
SEC must constantly evolve and adapt its regulations in order 
to respond to new innovations and trends in the market. 
Sometimes this means modernizing a regulatory regime to take 
account of new risks that are in the market. Other times it 
means modernizing the SEC's own operations to account for new 
risks that the regulator itself faces. The SEC's ability to 
adapt on both fronts has been highlighted by the recent cyber 
attacks, both at private companies like Equifax and at the SEC 
itself with the EDGAR attack.
    While I am deeply concerned about the EDGAR attack, I have 
noticed that there has been transparency in response to the 
breach. This breach did not happen on Chairman Clayton's watch, 
but he has been proactive, some say not as proactive as he 
should be, but he has been proactive in disclosing it to the 
public and ordering a full investigation into the breach.
    The EDGAR system plays a central role in our capital 
markets. It is the main system where companies keep their 
investors informed about what is going on in the company. So if 
there is a problem with EDGAR and its reliability is called 
into question, we need to know about it as soon as possible, 
and it needs to be fixed immediately.
    I look forward to hearing from Chairman Clayton as well as 
other priorities he may have in addition to EDGAR.
    Thank you.
    Chairman Hensarling. The gentlelady yields back.
    The chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, the chairman of the Capital Markets Subcommittee for 
1-1/2 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman.
    Chairman Clayton, I will try not to echo Chairman 
Hensarling too much here, but obviously we now know that to 
protect investors, maintain fair, orderly, and efficient 
markets, and to facilitate capital formation is the three-part 
mission of the Securities and Exchange Commission. And as he 
pointed out, the last administration was more focused on CEO 
pay ratios and conflict minerals and a number of other things 
that literally brought nothing to the table. This designated 
mission may be important, and as Mary Jo White had said, 
important, but not the focus of the SEC.
    Something we have discussed, one of my biggest concerns, is 
the decline in IPOs, those initial public offerings that really 
have given fewer investment opportunities for Main Street 
investors. We have the strongest, deepest most liquid markets 
here, but we are becoming less and less attractive to growing 
businesses due to one-size-fits-all kind of securities 
regulations.
    Hardworking families in west Michigan and throughout the 
country rely on capital markets to save for everything from 
college to retirement, and we must work to maintain these 
efficient capital markets so investors have the opportunity to 
receive the greatest return on their investment. We need to 
ensure that Mr. and Mrs. 401(k), as you call our Main Street 
investors, are able to invest in a better future.
    Chairman Clayton, I was encouraged by your remarks in July 
at the Economic Club of New York where you stressed that a key 
part of your agenda is facilitating capital formation. I 
applaud you for that. Well, let's work together, sir, to 
reverse the negative trend of declining IPOs and instead 
refocus the SEC on capital formation to expand opportunities 
for investors, unleash the American spirit, grow our economy, 
and increase our job creation.
    With that, I yield back. Thank you.
    Chairman Hensarling. The gentleman's time has expired.
    The chair now recognizes the gentleman from Michigan, the 
vice ranking member, Mr. Kildee, for 2 minutes.
    Mr. Kildee. Thank you, Mr. Chairman. And welcome, Chairman 
Clayton.
    First, I want to express my concern over potential insider 
trading by Equifax executives. It is critical that the SEC 
closely examine these trades to determine, both for itself and 
the public at large, whether the individuals were taking 
advantage of knowledge that would not be publicly disclosed for 
another 6 weeks. I also urge the SEC to clarify to companies 
when a cybersecurity breach is material that it must be 
disclosed. Six weeks between discovery and disclosure is simply 
too long, especially considering the scale of the Equifax 
breach. The SEC plays a critical role in ensuring the safety 
and soundness of our financial markets, and it is vital that it 
fully examine the Equifax breach in order to begin restoring 
confidence in our markets.
    Second, I am interested in your plans regarding disclosure 
of political contributions by publicly traded companies. I 
disagreed with your predecessor, Chair White, in her decision 
not to undertake rulemaking on this issue. The Supreme Court's 
2010 decision in Citizens United v. FEC opened the floodgates 
in terms of political spending. And while we now have seen 
money take an even more outsized role in our democracy, it is 
all more critical that SEC act. It can't undo the damage that 
has been done, but it could bring transparency to the glut of 
money being spent in American politics, money that we can't 
see.
    The SEC already requires corporations to disclose material 
information that the public would need to know before investing 
in a company. I believe it should require similar disclosures 
regarding political contributions, so that citizens can make 
informed decisions as they participate in the democratic 
process. It will take transparency to restore confidence in our 
election process, and I urge the SEC to do its part and 
undertake rulemaking.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    Today, we welcome the testimony of the Honorable Jay 
Clayton. This is the first time that Chairman Clayton has 
appeared before our committee. Chairman Clayton was sworn in as 
chairman of the U.S. Securities and Exchange Commission on May 
4 of this year. Chairman Clayton earned a B.S. in engineering 
from the University of Pennsylvania, a B.A. and M.A. in 
economics from the University of Cambridge, and a J.D. from the 
University of Pennsylvania Law School. Prior to joining the 
Commission, Mr. Clayton was a partner at Sullivan & Cromwell.
    Without objection, the witness's written statement will be 
made part of the record.
    Chairman Clayton, you are now recognized to give an oral 
presentation of your testimony. Thank you.

 STATEMENT OF HONORABLE JAY CLAYTON, CHAIRMAN, U.S. SECURITIES 
                    AND EXCHANGE COMMISSION

    Mr. Clayton. Chairman Hensarling, Congresswoman Maloney, 
Congressman Huizenga, Congressman Kildee, distinguished members 
of the committee, thank you for the opportunity to testify 
before you today about the work of the SEC.
    I will start with a second thank you, this one to my fellow 
commissioners and the 4,600 women and men of the SEC who have 
been incredibly welcoming to me. I have benefited from my 
interaction with these individuals.
    During my 5 months at the Commission, I have devoted a 
substantial portion of my efforts to agency operations. As 
discussed in more detail in my written testimony, I believe 
there are four areas where additional focus and resources are 
most needed: One, cybersecurity; two, retail investor 
protection; three, market integrity, including structure, risk, 
and resiliency; and, four, capital formation.
    My written testimony also discusses in detail the work of 
the Commission over the past 5 months and various policy 
initiatives moving forward.
    The remainder of my oral testimony will focus on 
cybersecurity, and I will end with one comment on our 
regulatory agenda.
    I have been concerned by and focused on cybersecurity, both 
internally and externally, since my first weeks at the 
Commission. As recent events demonstrate all too well, this is 
an area where we need to devote significant additional 
resources and attention. I will turn to the recently disclosed 
incident from 2016.
    In August 2017, I was notified of a possible intrusion into 
our EDGAR system. In response to this information, I 
immediately commenced an internal review, which led me to 
understand that the breach of our EDGAR system in 2016 provided 
access to nonpublic information and that the information 
obtained by the intruders may have been used for illicit 
trading.
    This matter involving our EDGAR system and its 
ramifications concerned me deeply. I am focused on getting to 
the bottom of the matter, and importantly, lifting our general 
cybersecurity efforts moving forward.
    I recognize that I am not the only one who is deeply 
concerned. Rightfully, the 2016 intrusion will cause this 
committee and others to increase their focus on whether the 
Commission's approach to cybersecurity appropriately addresses 
our risk profile. This is all the more reason it was 
appropriate to disclose the 2016 intrusion to Congress and the 
American people 2 weeks ago and to update that disclosure this 
past Monday. These disclosures were appropriate and important, 
even though a review and investigation are ongoing and may take 
substantial time to complete.
    On Monday, I disclosed that, pursuant to our ongoing 
investigation, the staff had determined that the EDGAR test 
filings accessed by third parties contained personal 
information of two individuals. Staff are reaching out to the 
two individuals to notify them and to offer identity theft 
protection and monitoring services. I also noted in the release 
that should the agency's review uncover additional individuals 
whose sensitive information may have been accessed, the staff 
will contact them and offer identity protection and monitoring 
as well.
    With respect to, one, getting to the bottom of what 
happened in 2016, two, assessing where we are today, and three, 
improving our approach to cybersecurity moving forward, I have 
organized the agency's efforts into five work streams: The 
independent review of the 2016 intrusion by our Office of 
Inspector General. Second, the investigation led by the 
Division of Enforcement into the potential illicit trading, 
getting to who the hackers were. A focused review and, as 
necessary or appropriate, uplift of our EDGAR system. Four, a 
more general assessment and uplift of the agency's 
cybersecurity risk profile efforts that were initiated shortly 
after my arrival, including the identification and review of 
systems, current and planned, that hold market sensitive data 
or personally identifiable information, including the 
Consolidated Audit Trail, or CAT. And finally, the agency's own 
internal review of the EDGAR intrusion.
    While there are limits on what I know and can discuss about 
the 2016 incident due to the status and nature of these reviews 
and investigations, I believe this is an appropriate framework 
to approach the key questions of what happened in the past, 
where we stand, and how we can improve moving forward.
    As a result of this incident, some have questioned whether 
we can appropriately protect sensitive information we receive 
and whether we should receive additional data to further our 
mission. I want to say that we are serious about this, but it 
is not the time for us to pull back from important market 
oversight initiatives. Our mission is too important to millions 
of Main Street investors, issuers, and market participants to 
do so. In short, we must be vigilant and we must do better.
    Turning to policy matters, my written testimony discusses 
our recent regulatory efforts and objectives in detail, 
including my philosophy on our upcoming Regulatory Flexibility 
Act agenda. I am pleased that this morning, the Commission 
announced it will hold an open meeting next Wednesday to 
consider a rule proposal by the FAST Act to modernize and 
simplify the disclosure requirements in Regulation S-K in a 
manner that reduces costs and burdens on companies with no 
reduction in the disclosure of all required material 
information. I know that a bipartisan group of members of this 
committee worked to include this provision in the FAST Act. I 
thank you for your efforts.
    In closing, I would like to thank the committee for its 
continued support of the SEC, its mission, and its people, and 
I look forward to answering any questions you may have.
    [The prepared statement of Mr. Clayton can be found on page 
64 of the appendix.]
    Chairman Hensarling. The chair now recognizes himself for 5 
minutes.
    Chairman Clayton, I am happy to hear the FAST Act 
announcement. I will have a couple of cybersecurity questions, 
time permitting. But I really want to lead off with your 
concern about the declining IPO markets.
    In your opinion, what are some of the chilling effects of 
regulation on the IPO market? What would you focus this 
committee's attention on? And why is it so important that we 
reinvigorate the IPO market?
    Mr. Clayton. Let me start with your last question, why I 
think this is so important. The choices available to our retail 
investors, the people who are saving for their retirement, I 
believe, are, in fact, diminishing because the number of public 
companies is diminishing.
    The most efficient way for retail investors to invest is in 
our public capital markets. It is costly for them to invest in 
private investments. So I want to increase, to the extent 
possible, the opportunity set for our Main Street investors to 
invest in the growth of America. That is important.
    In terms of why do we have fewer public companies today 
than we did at different periods in the past, and why is the 
trend going in a downward direction? There are a couple of 
things. One thing is that we do have a bit of a one-size-fits-
all model, and that means that the regulatory regime that 
applies to a very, very large company is essentially the same 
that applies to a medium size or smaller public company. I 
question whether that continues to be appropriate. I think that 
the JOBS Act and the scaled disclosure provisions for emerging 
growth companies demonstrate that a scaled system that is 
rooted in investor protection, audited financial statements, 
and disclosure of material information is something we should 
be looking at.
    I also recognize that there are alternative forms of 
capital available today that were not available 20, 25 years 
ago, including a fairly robust private equity and venture 
capital market. But I am looking at that landscape, and I would 
like to see a greater proportion of companies end up in the 
public market so that all investors have an opportunity to 
participate in America's growth.
    Chairman Hensarling. So switching gears, the Consolidated 
Audit Trail is due to go live in just a little bit more than a 
month. So given the EDGAR breach, how can you assure this 
committee that CAT is ready for prime time? Have all 
cybersecurity concerns been ameliorated?
    Mr. Clayton. Mr. Chairman, the CAT is being developed by 
the SROs, the self-regulatory organizations, FINRA and the 
exchanges, with a contractor. I look at us as having two roles, 
at the SEC: We have an oversight role in that we oversee those 
entities, and we are also a beneficiary of the CAT once it is 
up and running in that we get the data.
    With respect to your question about cybersecurity and the 
SEC, from the time I got to the Commission and got briefed on 
the CAT, the questions I have been asking are, what information 
are we taking in? It is sensitive. Do we need it to fulfill our 
mission, and can we protect it? And I have made it clear that I 
don't want information unless we need it for our mission.
    Chairman Hensarling. But, Mr. Chairman, have those 
questions been answered to your satisfaction?
    Mr. Clayton. To my satisfaction, from the Commission's 
perspective, the answer has not yet been answered to my 
satisfaction.
    Chairman Hensarling. And will this go live until those 
questions are answered to your satisfaction?
    Mr. Clayton. I want to be clear, but it is a little bit 
complicated. As far as us taking the information, it is not--we 
are not going to take it until those questions with respect to 
the SEC are answered to my satisfaction.
    I also have questions about the SROs and the CAT generally 
and our oversight role. There is a contractual relationship 
among those parties. I am in dialog with them, but I want to be 
satisfied that they are doing what they are supposed to do 
well.
    Chairman Hensarling. Switching gears again, the Financial 
CHOICE Act, which the House has passed, contains a number of 
capital formation provisions, including creating venture 
exchanges, modernizing the definition of accredited investor. 
What are some of the actions that the SEC is pursuing to make 
it, again, going public easier and make it more attractive to 
small businesses and entrepreneurs?
    Mr. Clayton. So to answer both questions: There is the 
private investing market, which retail investors and 
sophisticated investors do participate in. I have asked the 
Division of Corporation Finance to look across the way we 
approach crowdfunding, Reg A, Reg D, and ask, is there a 
consistency that we can bring to this? Removing complexity 
while maintaining the same investor protection has to benefit 
those small-and medium-size businesses. That is the bottom 
line.
    Chairman Hensarling. My time has expired.
    The chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee.
    Mrs. Maloney. Chairman Clayton, I think the EDGAR hack has 
demonstrated that government agencies, and the SEC in 
particular, are constantly under attack from hackers and 
criminals, so the SEC really needs to step up its cyber 
defenses in the wake of this attack. So what are you doing to 
ensure that the SEC has the most robust cyber defenses 
possible? Are you creating any new positions, any new policies, 
any new procedures, any new resources? What are you doing to 
help protect the agency from the risk of cyber attack?
    Mr. Clayton. Let me say what we are not doing. We are not 
waiting until the end of the five workstreams that I outlined 
to take action. We are focusing immediate attention on the 
EDGAR uplift.
    But with regard more generally to your question, I want to 
say that I have the support of both Commissioner Piwowar and 
Commissioner Stein. We are looking at our incident response 
plan to see if we can improve it.
    With respect to new positions, this is something that I am 
pleased to say I have the support and I am ready to move 
forward and say it today, I think the agency could use a chief 
risk officer, not just for cybersecurity, but for general risk. 
I have begun the search for a chief risk officer for the 
agency.
    Mrs. Maloney. Thank you. I want to talk to you about the 
gap between the--when companies determine that there has been a 
material change that they need to disclose to the public and 
when they actually disclose it to the public. And as you know, 
the current SEC rules give companies 4 days to disclose 
material changes, and there has been research from Professor 
Robert Jackson in New York, Columbia Law School, that shows 
that executives do actually trade profitably in this 4-day gap. 
So Senator Van Hollen and I have been working on a bill, which 
we sent a draft to your office, that would prohibit executives 
from trading in this 4-day gap.
    And do you think this makes sense? What is your response? 
Should executives be allowed to trade after they have learned 
about a material change, but before they actually disclose it 
to the public?
    Mr. Clayton. Thank you. As I mentioned to Senator Van 
Hollen and as I mentioned to you, I believe it is good 
corporate hygiene that, once a determination has been made that 
there is a material event to disclose, that the company's 
insider trading policy, which is essentially when are you and 
are you not allowed to trade, would have a control in there 
where the senior executives would not be allowed to trade. So 
as I said before and I agreed, I like this concept.
    Mrs. Maloney. Thank you. I understand that you are 
examining a pilot program on the access fees charged by 
exchanges. Many market participants have told me that this 
pilot program really needs a bucket with zero rebates in order 
to accurately test the effectiveness of different access fee 
levels. So my question is, are you going to include a zero 
rebate bucket in the access speed pilot program?
    Mr. Clayton. So we have an access speed pilot under 
consideration. And this question as to what tiers would you 
have in a pilot program has been on my mind, and I know it has 
been on the other commissioners' minds, essentially to get the 
right data so that when we do the pilot, we have the data we 
need to assess whether the make-or-take model is working 
appropriately, et cetera. That is a prelude to the answer to 
your question, which is there has been nothing definitive 
decided, but a zero rebate or zero fee bucket is something that 
is under consideration and that I have discussed with the 
staff.
    Mrs. Maloney. And last, you mentioned in your testimony 
that you are limited in what you can say about the EDGAR hack 
due to the IG investigation, but you disclosed it as soon as 
you found out about it. Now, if only you or the other SEC 
commissioners had been informed of the EDGAR attack earlier, we 
might have learned about this much sooner.
    So my question is, what is the SEC's policy on notifying 
the commissioners about cyber incidents when the Office of 
Information Technology detects any sort of unauthorized 
intrusion into the SEC systems? Are they supposed to notify 
their superiors, in this case the SEC's chief operating 
officer, or is notification only required for really serious 
hacks? What is the SEC's policy in this disclosure practice?
    Mr. Clayton. Looking at our past incident response plan, it 
is something that we will do as part of the review. But your 
question is a good one. Let me put it in a little bit of 
context.
    As I have said before, we are constantly under attack. Many 
government agencies are constantly under attack. I can't be 
notified of every attempt, but there does have to be a 
mechanism for assessing the significance, not materiality, but 
the significance of the attack and elevating it to me and the 
other commissioners.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, chairman of our Capital Markets Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman. I am going to be 
moving fast. I only have 5 minutes.
    The chairman had touched on Consolidated Audit Trail, the 
CAT. I have very serious concerns as well. That was part of a 
letter that we had sent to you last week, and I do--I am a 
little curious, based on the answers that we have, it seems 
like it might be a chicken or the egg situation here, whether 
you are waiting for the SROs to declare that the system isn't 
ready and the SROs are waiting for SEC to say, hey, wait a 
minute, we are not ready to take this because of whether it is 
a breach in EDGAR or other things. So I don't know if--I will 
give you very briefly, if you want to clarify that at all, or 
we can just leave it--
    Mr. Clayton. No. I think they have an obligation to get the 
CAT system up and running, including an obligation for 
cybersecurity. With respect to me taking the data once they 
have it, I am not going to take it until I am comfortable.
    Mr. Huizenga. So you are waiting to hear whether they can 
or can't provide you the data in a safe, secure manner? OK. 
They will be thrilled to hear that, I am sure.
    Mr. Clayton. This is not the best place to negotiate with 
them.
    Mr. Huizenga. Yes, OK. I won't try to get in the middle of 
that, but we do need to--we do need to address this.
    You are going to hear a number of others, my concern of 
Equifax, the breach of EDGAR. I do want to offer my 
philosophical support with my Ranking Member Maloney on this 4-
day executive trading gap question being addressed, and I look 
forward to seeing some language on that and working with her.
    I do want to quickly move on to MiFID, the markets and 
financial instruments directive to MiFID II, which is a 
European Union directive. It is going to require banks to 
unbundle research payments and charge for research separately 
from brokerage services. The MiFID rules will require 
investment research to be paid from either a fund manager's own 
account or from the client research payment account, which 
would limit these long recognized use of commissions from 
trading being used to help pay for research, quote/unquote, 
soft dollars.
    Well, MiFID II regime directly contradicts the U.S. regime, 
and under the 1934 Securities Act, brokers are prevented from 
receiving direct payment for research unless they are 
registered as an investment adviser, which would subject them 
to a completely entirely new regulatory regime. Clearly, I 
think we would agree that that would disrupt current models.
    September 14 of 2017, the world's largest fund manager, 
BlackRock, announced that it will pay for external research out 
of its own pocket, following similar announcements from 
Vanguard, the world's second largest fund manager, and JPMorgan 
Asset Management. Many of the asset management industry fear 
these moves in response to MiFID II are really changing the way 
the industry does business. And a number of folks up in New 
York, my friend Kenny, he knows who he is, have expressed grave 
concern about this, but I am not sure anybody knows really what 
to do with this. There have been numerous calls on the SEC to 
provide some exemptive relief or negotiate with EU to find a 
workable solution.
    Does the SEC intend to provide any formal relief or 
guidance for U.S. firms to comply with the conflicts between 
MiFID II and the U.S. regime?
    Mr. Clayton. The answer is yes, we are trying to do this. 
The European Union has decided they want to proceed in a fairly 
specific way, separating payments, research, and commissions, 
which is, as you correctly outlined, different from the way our 
markets are structured and we approached it for a while.
    In a nutshell, our aim is to allow them to do that in their 
market, but not either directly or indirectly force the 
importation of that system. If our broker-dealers and other 
market participants want to take a different approach from the 
past, they are free to do so. But we want to provide a 
structure that allows the current model to continue. We can 
then assess, as things go on, what the best way forward is.
    Mr. Huizenga. OK. As we all know, that time is flying by. 
In our remaining few seconds here, market structure, equity 
market structure, we started a series of hearings on Capital 
Markets Subcommittee, and really trying to look at the 1975 
amendments of the Securities and Exchange Act. A number of 
things, Reg NMS and others.
    Do you believe that it is important that both we and you at 
the SEC perform a holistic review of equity market structure? 
And should the focus be on regulation NMS or should it be a 
much broader review?
    Mr. Clayton. Yes, I believe it is important. I think a 
focus on Reg NMS principally makes sense. But you have to ask 
yourself the broader question: Are we driving efficiency in our 
markets? And do we have sufficient liquidity? And are the 
people who are providing that liquidity being appropriately 
compensated, undercompensated, overcompensated? Is it real 
liquidity? Those are the kind of broad questions we ought to be 
asking.
    Mr. Huizenga. All right. I appreciate that.
    My time has expired.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. And welcome, Mr. 
Clayton.
    Chairman Clayton, in the JOBS Act, we increased investor 
threshold for registering as a public reporting company from 
500 to 2,000 investors, with no more than 500 non-accredited 
investors. In implementing the rules relating to these 
increased thresholds, the SEC changed the definition of 
accredited investors as it is applied to those thresholds 
requiring firms to have a reasonable belief as to each 
investor's accredited investor status annually, rather than 
only at the time of the initial investment. Some firms have 
interpreted this as a requirement by the Commission that firms 
annually ask their investors to recertify that they remain 
accredited investors.
    Among other things, this change leaves any firm taking 
advantage of the JOBS Act threshold with great uncertainty as 
to whether that firm will remain private in the future, 
undermining the intent of the JOBS Act.
    Can you please explain how this additional requirement 
benefits the investor, if it at all benefits them?
    Mr. Clayton. Well, I think your question is a good one. 
Again, not every rule that we make is a perfect rule. This is a 
rule that we have to look at--it had a good intent, which was, 
``Hey, let's just make sure that our status is where it should 
be.'' It has had an effect of, ``You know what, we are not even 
going to go there because it is too much trouble.'' So this is 
a rule that we should look at.
    Ms. Velazquez. So my next question is can this requirement 
be change a of the Commission or do you believe this change 
requires a legislative fix?
    Mr. Clayton. Let me answer it this way: I think we should 
look at it. If we think it should be changed and we can't 
change it, we will come back to you and ask for help.
    Ms. Velazquez. All right. Thank you.
    Chairman Clayton, more of America's small businesses are 
accessing capital from financial technology or fintech 
companies. Some commentators have suggested that a current 
online marketplace for small business loans falls between the 
cracks for Federal regulators, including the SEC. What do you 
see as the SEC's role in regulating this space?
    Mr. Clayton. So I am going to give you a general answer 
about fintech and developments, and then I will try and 
specifically answer your question about loans and my 
interaction with the banking regulators.
    And I like innovation in the marketplace. I like what we 
are seeing with distributed ledger technology, I like these 
things. But as we have seen, including with an enforcement 
action we brought yesterday, sometimes new things are a new 
avenue for old frauds. And we are very mindful of that in the 
initial coin offering space.
    Now, with respect to the online platforms I am not a--I'm 
not a person who likes to jump on other people's jurisdictions, 
but I do think that we should be in dialog with the banking 
regulators on this and share with them our thoughts from the 
security space.
    Ms. Velazquez. OK. Thank you.
    Mr. Chairman, I yield back.
    Chairman Hensarling. The gentlelady yields back.
    The chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, chairman of our Financial Institutions 
Subcommittee.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. And welcome, Mr. 
Clayton. You are a breath of fresh air, trust me.
    We were discussing this morning the breach, and I would 
like for you to give me a timeline, if you wouldn't mind, just 
take a few moments here, so we all know exactly what happened, 
when it happened, what you knew, when you knew it, if you don't 
mind, just briefly.
    Mr. Clayton. I will do what I can. I will give you my 
timeline, which is, in August of this year, I was notified that 
there may be a problem with EDGAR. I asked, ``OK, what is the 
problem? What is the extent of it?'' Immediately got to the 
bottom of it. It is not easy to get to the bottom of these 
things. We are talking about something that was in 2016. You 
have to pull the servers, try and--it has been a long time 
since I have been a computer guy, but it takes a lot of work to 
compare what they looked like at one period to what they looked 
like another period.
    When it became apparent that we had a significant problem, 
I decided it needed to be disclosed. So we disclosed that. And 
I will say, our work is very much still ongoing as to the 
extent to which this intrusion took place, the information that 
was accessed, and then the next step of how was that 
information possibly used in the marketplace.
    With respect to 2016--what happened in 2016? I am going 
to--I am going to wait for more information from our internal 
investigation about when the intrusion was noticed, how it was 
patched, and as Congressman Maloney and others have said what 
was the escalation process and was it followed? Those questions 
I think I have to wait on.
    Mr. Luetkemeyer. OK. In your testimony a while ago, you 
said that the breach basically had some nonpublic information 
that was used for illicit trading or could have been.
    Mr. Clayton. Uh-huh.
    Mr. Luetkemeyer. To me, that begs the question are our 
markets safe? Are they being manipulated? Investors must be 
able to trust the system before they can or should be willing 
to participate in it. This falls right in your bailiwick of the 
trust of the public with regards to the systems that we have in 
place.
    Number 1, I guess, what kind of information was there, and 
did it affect trading? And what are you doing to look down the 
road as a result of this breach here to suggest to the 
different trading platforms how they can protect the data and 
make sure that those are not implicated or impacted or breached 
themselves?
    Mr. Clayton. First, you are absolutely right, this is 
serious because it does impact the integrity of our markets. 
This kind of information, nonpublic information that is stored 
either at the SEC or other places is a target of nefarious 
actors, because it is valuable to them because they can trade 
ahead of the rest of the market. So question one is do we need 
it? In this case, we are talking about test filings, and I 
expect, but don't know the details, the filings that were 
probably the--let me say this. Filings that were of value were 
in advance of earnings releases, in all likelihood, or another 
market event, and that they happened to include information the 
night before the release or something like that. But that is 
the type of question in the overall review that we should be 
asking ourselves, do we need that information where there is a 
latency between the time we get it and the time it becomes 
public? And if we do need it, then we have to pay particular 
attention to it.
    Mr. Luetkemeyer. During the course of the process here--I 
chair the Financial Institutions Subcommittee here and work 
data is right square in the middle of what we are doing. 
Tomorrow, we are going to have Equifax in here. In a couple of 
weeks, we are going to have another hearing in our committee 
with regards to data breaches and data security. And some of 
the things we are looking at are the protocols for notification 
and new forms of perhaps IDs that people use to be able to 
access. I saw in your testimony here, you had 50 million times 
a day the EDGAR system is accessed for individuals who do it in 
a positive way to look at data that is there. We need to let 
that disclosure information still be available, but how do you 
protect it?
    I saw that there is biometric stuff. I saw this morning 
where the administration is talking about doing away with 
Social Security number IDs. Do you have some thoughts on what 
you would like to suggest to us with regards to identification 
monikers as well as notification protocols?
    Mr. Clayton. Well, let me try and stay in my space. And I 
have asked the folks at the Commission, if we are taking things 
like personally identifiable information, Social Security 
numbers, date of birth, do we really need to be taking that? 
And if we do need to be taking it, should we be taking it in a 
different or disaggregated form from the other market 
information we are taking? Those kind of threshold questions 
are ones we should be asking.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the ranking member, the gentlelady 
from California, Ms. Waters.
    Ms. Waters. Thank you very much, Chairman Jay Clayton.
    Chairman Hensarling, thank you for holding this hearing. 
And I would like to thank Vice Ranking Member Kildee for 
managing today.
    Mr. Chairman, 2 weeks ago, you announced that, in
    August 2017, you learned that a 2016 breach of the SEC's 
electronic system for public company filings, quote, ``May have 
provided the basis for illicit gains through trading,'' end 
quote. This announcement came right on the heels of Equifax's 
announcement of a data breach that exposed sensitive personal 
information of 145 million American consumers. These incidents 
are deeply disturbing as they indicate critical vulnerabilities 
in our financial system. The dangers presented by these 
vulnerabilities are even more potent, given the recent efforts 
by foreign actors to destabilize the United States through 
cyber attacks on Wall Street, U.S.-based information technology 
companies, and even our national election processes.
    Could you tell us whether the SEC's investigation, as far 
as you know, has uncovered the involvement of any foreign 
actors in the 2016 hack? To what extent are you coordinating 
with the Department of Homeland Security to identify and guard 
against significant cyber threats from state and nonstate 
actors?
    Mr. Clayton. Thank you. I agree with you about the 
seriousness of this issue that we had, the Equifax issue, and 
issues generally. With respect to the investigation of, I will 
call it, our incident, and the hackers, perpetrators, I don't 
want to--I don't want to comment with any specificity because 
there is an ongoing investigation, and I have been advised, and 
I agree with this advice, that getting into details may hamper 
that investigation. We are looking at who the actors are, 
trying to identify how long they were there, and with the 
ultimate goal of bringing them to justice.
    Ms. Waters. So given all of this, the GAO identified 26 
deficiencies in the SEC's control over its key financial 
systems and information, including failure to properly prevent 
unauthorized access to sensitive financial data.
    What steps has the SEC taken to address the deficiencies 
identified in the GAO's report and better protect nonpublic 
market information from exploitation by cyber criminals?
    Mr. Clayton. We have had two recent GAO audits, which I 
think you reference there. My understanding of where we stand 
on those is that there were 15 recommendations, and we have 
implemented 12 in one report, and I can get you more details. 
But I think adding it up, of the 26, I think we have 
implemented over 20 at this stage. So it needs to go through 
the process with the GAO for the GAO to be satisfied that our 
implementation is what they would expect.
    Ms. Waters. Do you feel you have the resources available to 
you to make these corrections? The SEC has been underfunded, 
seriously underfunded. And many of us have fought very hard to 
try and give you, our cop on the block, the resources that you 
need to do the work that you have to do to protect our 
investors, et cetera. Do you feel you have the resources 
necessary to correct these financial systems that the GAO has 
identified need so much work?
    Mr. Clayton. So I have made an assessment now in the first 
5 months that I have been there. And for Fiscal Year 2019, we 
were flat this year. I think that was appropriate, given that I 
am new. But going forward, I am asking for a 7 percent 
increase, a substantial portion of that going to cybersecurity. 
I would say the next thing behind cybersecurity is market 
integrity, making sure--and those two are related, 
cybersecurity and market integrity. And then I would like to 
put more money into retail fraud. But the short answer to your 
question is we need more money for cybersecurity.
    Ms. Waters. All right. So you are talking about flat 
funding for 2018?
    Mr. Clayton. Yes, that was what we had for 2018.
    Ms. Waters. Well, with flat funding, how are you going to 
be able to move forward to do what needs to be done to ensure 
that you can protect all of this vital information that is 
exposed?
    Mr. Clayton. That is a really good question, a question I 
ask myself. I had what I will say is a pool of reserve, 20 
positions, new positions, and a bit of money for our 
contingencies. Well, I now know what those contingencies are. I 
authorized the hiring of six additional people for 
cybersecurity and putting some additional money into it.
    Ms. Waters. So you have a reserve that you will be using 
probably for 2018, given the flat funding?
    Mr. Clayton. I am using what--I will use a nontechnical 
term: I am using what wiggle room I had for cybersecurity.
    Ms. Waters. I am trying to get you to say what you need so 
the chairman will hear you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, chairman of our Housing and Insurance Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    Chairman Clayton, welcome to the committee. I just want to 
get some clarification on the EDGAR hack. This took place some 
point in 2016. Is that fair to say?
    Mr. Clayton. Yes, that is.
    Mr. Duffy. And Homeland Security was notified of this in 
2016. Is that right?
    Mr. Clayton. I believe that to be correct, yes.
    Mr. Duffy. And do you know if any of the commissioners or 
Chair White were notified at the same time that Homeland 
Security was notified?
    Mr. Clayton. I have no indication that they were notified.
    Mr. Duffy. So we have a hack, someone at the SEC knows that 
it has taken place, they notify Homeland Security, but don't 
notify the chair or the commissioners? Does that give you some 
pause?
    Mr. Clayton. That is a question that should be answered as 
part of our investigation.
    Mr. Duffy. Better yet, when did you become the chair of the 
SEC?
    Mr. Clayton. May of this year.
    Mr. Duffy. May of this year. And when did you find out 
about this hack?
    Mr. Clayton. In August.
    Mr. Duffy. Does that give you some pause?
    Mr. Clayton. Yes.
    Mr. Duffy. There is some conversation about a deep state. 
That the chair, the head of the organization on day one 
wouldn't have been apprised of this is concerning to me, and 
hopefully--I know you just got there--hopefully, you will take 
a look at this in the chain of command and ask the questions 
who should be making decisions at the SEC? Frankly, I would say 
it would be you and the commissioners, not the deep state. Fair 
enough?
    Mr. Clayton. Fair enough.
    Mr. Duffy. I want to quickly move to economic growth. So 
there has been a lot of conversation about the lackluster 
economic growth that we have had since the crisis or over the 
Obama years of 1.8 percent. We just hit 3.1 percent growth this 
last quarter. I hear President Trump, our former colleague and 
committee member, Mick Mulvaney, has talked about this 
frequently: What we can do to put people back to work, what we 
can do to address our deficit clock, if we can actually just 
grow our economy. And that is wrapped around a conversation of 
tax reform. We hear a lot of conversation about regulatory 
reform in government.
    What space does the SEC have in helping grow the American 
economy, address our debt, put people back to work? Do you have 
any space to play in economic growth?
    Mr. Clayton. I think we--well, let me say this: I share the 
view, your view, I think it is the view of most people in this 
room, that the difference between 3-1/2 percent growth and 2-1/
2 percent growth is huge, over any meaningful period of time. 
As a citizen, growth in jobs is what I want to see. So I 
definitely bring that perspective to the SEC in terms of growth 
and jobs. Capital formation is essential to it. As is 
confidence in our markets.
    So I am looking, and the men and women of the SEC are 
looking, how can we facilitate, how can we break down barriers 
to capital formation without in any way affecting the integrity 
of our markets? And that is, I know it is front of mind for our 
division of corporation finance, it is in front of my mind, and 
we are going to continue to look for opportunities.
    Mr. Duffy. And for my constituents in central and northern 
Wisconsin, your work on improving capital formation, that has 
an impact on jobs, doesn't it? That has an impact on economic 
growth? Is that fair to say?
    Mr. Clayton. It is fair to say.
    Mr. Duffy. OK. I want to quickly pivot to corporate 
governance. We have been spending some time looking at proxy 
advisory firms. We basically have two that own the market. 
There is a lack of transparency. There is a lack of 
competition. I am wondering if this is a space that you have 
had an opportunity to look at and whether you see whether there 
is a need for at least some reform in this space?
    Mr. Clayton. It is a space that I have had an opportunity 
to look at. It is a space that the Commission is looking at. 
These firms provide a service that has value. They amalgamate 
data so that 1,000 investment managers don't have to do it and 
provide that data.
    Mr. Duffy. Is that a service to the company that hires them 
or is this a service to the ideology of the firm that owns 
them?
    Mr. Clayton. Good question. Good question. Because they are 
the aggregator of data and the entities that people look to for 
that data, they have significant influence in the way they 
present that data. That is just the way life works. I am aware 
of that. I am looking at it, and I think it is something that 
we should all look at, because--particularly with the increase 
in indexing and passive money that--
    Mr. Duffy. If I could just--
    Mr. Clayton. --Further increases their influence.
    Mr. Duffy. My time is almost up. When we hear stories about 
a firm getting a negative recommendation, and right on the 
heels of that coming out, lo and behold, an offer comes to buy 
the consulting services of the firm that just gave you a 
negative recommendation, and they claim there is a firewall 
between the two. But I watch enough Mafia movies where people 
come in and go, yes, we were going to protect you. Pay up. This 
is a space that is ripe for the SEC to look at and this 
committee as well.
    Mr. Chairman, I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Good morning, Chairman Clayton. Last week, I sent you a 
letter regarding legislation that I am helping to lead, which 
is H.R. 3555. I hope you got the letter. It is entitled the 
Exchange Regulation--Regulatory Improvement Act, and it is by 
my colleague, Republican colleague from Georgia, Mr. 
Loudermilk, and myself.
    Now, our bill simply clarifies the definition of the word 
facility of an exchange so that companies like the New York 
Stock Exchange are not hamstrung when trying to diversify the 
lines of business that they provide to their members and to 
investors.
    I want to make it clear also that our bill in no way limits 
the Securities and Exchange Commission's regulatory powers, nor 
does it impede their ability to do their job. But our bill does 
not carve anything out from the Securities and Exchange's 
regulatory jurisdiction. The SEC has full authority today and 
tomorrow, should our bill become law, to continue to go after 
the bad actors and to oversee the filings of market data, 
collocation, lifting standards, and other business changes 
filed with the SEC today. All we are trying to do is to allow 
the necessary breathing room for the New York Stock Exchange 
and companies like that to be able to operate in a more fluid 
situation.
    Your thoughts on that. And were you able to get my letter 
and read it?
    Mr. Clayton. I am aware of--I am aware of your letter and I 
am aware of the issue, which is, in our regulatory approach to 
the New York Stock Exchange or similar facilities, are we, the 
SEC, going beyond our bread and butter and getting into 
regulating businesses that are away from, or tangential to, the 
operations of those facilities? And it is a good question. It 
is a good question. We shouldn't be stretching in a way that 
impedes innovation, so we should be asking ourselves that 
question.
    Mr. Scott. Right. Well, we look forward to working with you 
and sharing your input as we move this legislation forward. By 
Mr. Loudermilk and myself.
    Now, I want to go to another bill. Ms. Gwen Moore and 
myself are working on a bipartisan bill with Republican Keith 
Rothfus entitled or numbered House Resolution 2319, and it 
addresses a concern that we have about your rule that went into 
effect a year ago. It was the amendment to the rule governing 
money market funds.
    Now, as you know, Chairman, rule 2a-7 of the Investment 
Company Act requires certain funds available to institutional 
investors to switch from a usable, very usable net asset value, 
which we call NAV, to allow it to fluctuate or float, but 
others don't get that benefit. And I know the SEC went through 
a very rigorous rulemaking process on this rule. But sometimes, 
sometimes, very few times but sometimes, our regulators get it 
wrong, and I think this is an example of that.
    Now, your predecessor, chairman of the SEC, argued that the 
benefits of a floating NAV would exceed the costs and issuers 
of commercial paper and municipal debt. But evidence is showing 
that this isn't the case, because since the SEC has finalized 
the rule in 2015, we have seen a massive flight from prime and 
tax exempt money funds, because the costs of a floating NAV are 
so high.
    So we have this bipartisan effort, and what are your 
thoughts on that?
    Mr. Clayton. I am aware of the shift in assets from 
municipal and commercial assets to government assets in the 
institutional money market space as a result of our rule. It 
was anticipated. There are other considerations here, but I am 
looking at it.
    Mr. Scott. Good.
    Mr. Clayton. Our Division of Economic and Risk Analysis is 
looking at it. And so I think it is too early to say we were 
wrong, too early to say we were 100 percent right.
    Mr. Scott. I welcome your thoughts.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentlelady from Missouri, Mrs. 
Wagner, chairman of our Oversight and Investigations 
Subcommittee.
    Mrs. Wagner. Thank you, Mr. Chairman.
    And thank you, Chairman Clayton. Before I get into my line 
of questioning, I did want to mention the latest news 
concerning the hack on the EDGAR corporate filing system. As 
chairman of the Oversight and Investigations Committee, I would 
ask that you continue to communicate with our staff concerning 
this issue, as it is of obviously great interest to all of us. 
And I thank you for the time you have spent with them at this 
point.
    Now, as you know, I have spent the better part of the last 
4 years fighting for low- and middle-income investors who are 
losing their access to investment advice under the Department 
of Labor's misguided fiduciary rule. A recent U.S. Chamber of 
Commerce survey noted 13.4 million consumer accounts will lose 
access to products under the Department of Labor rule. America 
is in the midst of a savings crisis, and we want to make things 
easier, not harder for them.
    Just last week, I introduced the Protecting Advice for 
Small Savers Act, the PASS Act of 2017, which will create a 
standard for broker-dealers that will eliminate I hope any 
confusion. My bill, among other things, will repeal the 
Department of Labor rule, create a best interest standard for 
broker-dealers and all the services they provide, and require 
them to disclose compensation and any conflict of interest that 
exists. Most importantly, it will allow these broker-dealers to 
do what they must do, which is act in the best interest of 
their clients.
    Mr. Chairman, I believe the PASS Act of 2017 would 
certainly provide clarity for the investor. If you are sitting 
across from a broker-dealer and maybe you have two different 
accounts with them, it is important that you have the same 
standard. Unfortunately, that isn't the current practice, and 
that is causing both confusion and harm.
    Can you comment, sir, on how important it is to fix this, 
to move from this bifurcated regulatory regime created under 
the Department of Labor rule, sir?
    Mr. Clayton. Yes. So we have talked about one of the things 
that I initially focused on in getting into the job, 
cybersecurity.
    Mrs. Wagner. Right.
    Mr. Clayton. One of the other initial focuses was this: I 
want to thank Secretary Acosta for reaching out to us and 
saying, hey, this is something that we should try and work on 
together. And we have been. And a lot of the themes that you 
outlined are the themes that I have, one of which is choice. 
Investors should have a choice, what type of account they want, 
what type of relationship.
    Mrs. Wagner. And you stated that the choice is diminishing, 
in fact, in your earlier testimony.
    Mr. Clayton. And asset choice, what assets they want to 
invest in. There should be clarity. I recognize that there is 
not the kind of clarity that there should be in the marketplace 
today. We should bring clarity.
    There ought to be consistency with us and the Department of 
Labor. We can't have asymmetric standards. You can't put one 
hat on when you are talking about 50 percent of your assets and 
another hat on when you are talking about another 50 percent. 
It makes no sense.
    And then we have to cooperate. They have a mandate; we have 
a mandate. They are not the same, but we can cooperate and get 
there, I believe. I am for all of those things. Now, the 
devil's in the details and we are working on it.
    Mrs. Wagner. Do you agree this is something we need to make 
sure is completely transparent for that investor?
    Mr. Clayton. Yes.
    Mrs. Wagner. Wonderful. In July of this year the State of 
Nevada implemented its own fiduciary standard. Are you 
concerned about the potential impact a patchwork of State laws 
will have on the provision of retirement advice?
    Mr. Clayton. I am.
    Mrs. Wagner. My staff and I have been reviewing the 
comments submitted to the SEC as part of the review. There are 
a lot of very personal stories that concern me, mostly how the 
rule will result in decreased services. As you know, the Dodd-
Frank Act gave the SEC the authority to establish regulations 
in this space.
    Can you tell me, Chairman Clayton, what your next step is 
and when will the SEC be acting?
    Mr. Clayton. The next step in anything like this would be a 
rule proposal. We are working on such a proposal. We want to 
work with the Department of Labor. If this were easy, it would 
already be fixed. We have a lot to do, but I am confident that 
we are going to put forward something that addresses those four 
issues and that has a standard that protects investors and that 
they understand.
    Mrs. Wagner. We are all interested in the best interest 
standard. We want to make sure that there is access, that there 
is choice, and that it is affordable for those low-and middle-
income investors. I have maintained all along the past 5 years, 
this is about Main Street, not about Wall Street. This is about 
taking care of those that should be saving for the future in 
the middle of this savings crisis.
    So I thank you, Chairman Clayton, I look forward to working 
with you, and my time has expired.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The chair now recognizes the gentleman from New York, Mr. 
Meeks.
    Mr. Meeks. Thank you. Hello, Mr. Chairman.
    Mr. Clayton. Hi.
    Mr. Meeks. Good to see you. Good to have you here. And I 
first want to start off by thanking you for replying to a 
letter that I sent to you earlier on. And I am sure if you 
recall my letter dealing with diversity is very important to 
me.
    So let me just--and I assume that we are in the same spot 
that you do consider that board diversity, with regards to 
gender and ethnicity, et cetera, on our public companies is 
tremendously important to disclose, and so that the public 
knows who is on these boards. And it also helps I think the 
culture within some of these companies. Are we together on 
that?
    Mr. Clayton. We are together on diversity adding value in 
decisionmaking bodies and organizations. I believe in it, and I 
think it is important in our public companies. It is important 
to me at the SEC.
    Mr. Meeks. So the companies should disclose. To the degree 
I know that the board diversity rule, your predecessor was 
talking about how we needed to improve it and that was on the 
agenda. And that is why I wrote the letter to you, because I 
was concerned when I heard that you were removing that 
improvement from the agenda dealing with board diversity.
    So I am very concerned about that, because if something is 
not working I think that we should fix it, correct?
    Mr. Clayton. So we have a rule in place that says that to 
the extent companies have a policy regarding diversity, they 
are to discuss it and how they approach it.
    I have asked our Division of Corporation Finance to look at 
that, to look at the work they have done in the past and to see 
if we are getting the type of disclosure that we would expect 
companies to provide in this area. How do you think about 
putting together a mix of directors that is going to best serve 
the shareholders, keeping in mind various characteristics of 
diversity. And that is--
    Mr. Meeks. So disclosing if those boards on these public 
corporations, then shouldn't they be disclosing the diversity 
that they have on their boards, whether or not and what 
criteria, if any, that they are setting forth for women, for 
ethnic minorities, for disabled, for--that is information.
    I know, for example, it is important to a State like mine 
where my comptroller is saying that if you are going to get the 
pension funds of all of New York, which are diverse, we want to 
make sure that those companies have diverse boards. Therefore, 
they should be--and I thought the diversity rule that it has to 
be disclosed or should be disclosed, the diversity on these 
boards.
    And I will just add I just saw a report that said that 
basically big companies say they favor diversity, but they 
refuse to prove it. In other words, only 40 percent of the 
companies are talking about where the diversity is, which tells 
me that there is a lot of room for improvement. And so I would 
have to turn to the SEC to see how do we improve the rule on 
diversity disclosure, since it does not appear to be working 
currently?
    Mr. Clayton. And some people say that for improvement, we 
should have a grid that has different categories with respect 
to diversity, and that that should be disclosed in the 
company's proxy statement as opposed to the current narrative 
disclosure of how companies approach it. Is that Mr. Stringer 
who you are referring to?
    Mr. Meeks. Yes.
    Mr. Clayton. Yes. And I am aware of his shareholder 
engagement in this area, and I believe in shareholder 
engagement in areas of this type. I am not at the point where I 
think a grid is appropriate. I get concerned about that kind of 
prescribed disclosure. But I am monitoring this issue.
    Mr. Meeks. So what do you think should be done, based upon 
what we have seen from some reports thus far that does not seem 
to be working other than just monitoring or after you monitor 
and you confirm what we see in these reports, then what 
actively do you think you can do, as chair of the SEC, to make 
this rule a stronger rule or to make sure that it is complied 
with?
    Mr. Clayton. I think exactly what I said. I have the 
Division of Corporation Finance looking at this, looking at 
whether companies--when a company gets together, when the 
nominating committee of a company gets together and says, hey, 
what should we have on our board, what type of skills, what 
type of perspectives should we have on our board, I would like 
to see a discussion of that that includes--
    Mr. Meeks. I don't mean to cut you off, but I have 12 
seconds. I just want to say this: I think that when you look at 
levels of skills, everybody, whether you are a woman, you are 
going to have a level of skills; ethnic minority, you are going 
to have a level of skills.
    The question is, you can have two people that have the 
same, and if you don't consider diversity at all you can just 
have one group, period, and just say that they have the level 
of skills, and you have not considered diversity.
    Mr. Clayton. I agree with you. I agree with you.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Kentucky, Mr. 
Barr, the chairman of our Monetary Policy and Trade 
Subcommittee.
    Mr. Barr. Chairman Clayton, welcome to the committee and 
thank you for your service.
    As you know, the SEC has adopted a rule that will require 
all mutual funds that invest in stocks and bonds to file 
monthly reports detailing all the securities in their 
portfolio. The compliance date for this rule is fast 
approaching. The fund industry expressed deep concerns during 
the rulemaking that the SEC was not in a position to assure 
that the data would be kept secure, and it emphasized that the 
data in the hands of a hacker could be used to trade in a way 
that could hurt millions of fund investors. For example, 
criminals might trade ahead of funds, based on what they 
observe in the data, or replicate proprietary portfolio 
strategies.
    When the SEC adopted the rule, I am told it issued a 500-
plus-page release and only two paragraphs of which mentioned 
the industry's information security concerns. In short, the SEC 
said that it is none of your business, we have it covered. 
Obviously, that is not, in fact, the case, given recent 
revelations. Of course, I will note that the EDGAR hack did not 
occur on your watch.
    But my question, Chairman Clayton, is this: Shouldn't the 
SEC delay this monthly reporting of fund portfolio data until 
it is far more certain that the SEC will be able to keep it 
secure?
    Mr. Clayton. So that provides an example of the type of 
question that we are asking, which is, are we taking in data 
that does, indeed, have significant market sensitivity. And I 
will take what the fund industry is saying at face value there, 
which is that this data, although it may be a month old, is 
something that would provide someone who had access to it an 
advantage if somebody had a large position that they know they 
needed to get rid of. We can go into details. That is exactly 
the type of question we are asking.
    Mr. Barr. Thank you.
    Mr. Clayton. Can we protect it? We need to know. And if we 
can't, do we delay our receipt? Do we have people hold it so if 
we really need it we can get access to it? Those are all the 
kind of questions we should be asking.
    Mr. Barr. Thank you. I thank you for taking that under 
consideration.
    I also would applaud you in your written testimony and your 
verbal testimony talking about disclosure effectiveness and the 
need to reduce costs and burdens on companies. And I noted your 
concern about IPO activity, diminished IPO activity, and why 
companies are not going public.
    Let me share with you one example of why that may be the 
case and a good example of the need to modernize and simplify 
disclosure requirements. And the perfect example is section 
1503 of the Dodd-Frank Act. That is the mine safety disclosure 
requirement.
    Under 1503 of Dodd-Frank, a publicly traded mine operator 
is required to report on a quarterly or annual basis various 
violations alleged--alleged--by MSHA in citations and orders. 
When MSHA issues any of these citations or orders, it is 
important to recognize that the mine operator is required to 
disclose, regardless of whether or not it agrees with MSHA's 
allegations. In the meantime, the mine operator has the ability 
to dispute MSHA's findings with informal conferencing with MSHA 
and formally before the Federal Mine Safety and Health Review 
Commission.
    In fact, one co-operator in Kentucky told me that over 30 
percent or over a third of all of these MSHA violations are 
challenged, and many of them are successfully challenged. And 
that process takes time. It takes about 4 to 6 months from the 
date of the citation being issued before it can be assigned to 
an administrative law judge, and during that process many 
citations and orders are modified. But by the time this occurs, 
a publicly traded mine operator may have already been required 
to include the citation or order in the quarterly or annual 
filing.
    Now, here is the problem: The problem is that not only many 
times these disclosures are not material to the investor; they 
are affirmatively misleading to the investor, because of the 
timing of when they have to file. Talking to attorneys who 
practice in this MSHA area and have looked at the statute, they 
believe that the SEC has regulatory discretion to stay the 
filing requirements.
    And I would urge the SEC to take a look at this, because, 
of course, this can significantly undermine the public's 
confidence and investment in the mining industry. And I would 
just urge you as you talk about why companies are not going 
public, this is exhibit A. This should be the example of 
exhibit A.
    And I would ask for your response and whether or not the 
SEC would be willing to review that?
    Mr. Clayton. So it is not an area where I practiced, so I 
don't have the type of familiarity with it that you referenced. 
But as a more general matter, I have talked about the aggregate 
effects of incremental requirements, that each one on its own 
has a purpose, and you can see why people would ask for it. But 
overall, it creates quite a burden.
    And one of the metrics I like to ask people who run public 
companies is, how many days a quarter do you spend on 
compliance and reporting as a result of our rules and the 
market's reaction to our rules? And I will tell you what 
bothers me is that it is a significant multiple of the amount 
of time private company managers who are good spent.
    Mr. Barr. Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Illinois, Mr. 
Foster.
    Mr. Foster. Thank you, Mr. Chairman, and Chair Clayton.
    And I would like to start out by saying that I too 
represent one of the tragically underrepresented minorities in 
Congress, that is to say scientists, and how pleased I am to 
see an engineer in public service. So thank you for that.
    Now, Chair Clayton, the SEC has been looking into initial 
coin offerings, including taking recent action against two of 
them. I have been speaking with various people in the ICO space 
and I am interested in your thoughts on where this is all going 
and whether the ICOs are more likely to evolve into some sort 
of innovative tool for capital formation or simply an attempt 
to circumvent security laws while providing inadequate 
disclosures.
    Specifically, some of these ICOs involve purchasing 
something tangible, like say cloud storage, that would not 
traditionally be treated as a security, but however the 
purchaser can then sell it and there is a secondary market. And 
so there is undoubtedly room for speculators to hope to profit 
as the value of this token appreciates.
    And adding to this complexity, very often sometimes the 
token holder offers, as part of the exchange, his or her 
available computing power as part of the bargain, which would 
seem to me to mean that the token holder is not relying solely 
on the efforts of others, which is one of the traditional 
definitions of securities.
    Does the Howey test actually work in this case, and where 
do you see this going?
    Mr. Clayton. We have tests that look backward, because that 
is what we know, what happened in the past. I will be very--the 
way I look at these types of arrangements, where you take 
someone's money and instead of handing them a stock certificate 
you hand them a piece of computer code and then you take the 
money and you invest it in a venture, I don't see that much of 
a distinction between those two, whether you get a stock 
certificate or whether you get a piece of computer code.
    But what I am optimistic about is we have a settlement and 
transfer system, and I think one of the things that is very 
appealing but also can be an engine for fraud about these 
initial coin offerings is the ability to transfer, to trade is 
greatly enhanced, because you are just exchanging computer code 
across the spectrum rather than getting a stock certificate, 
signing it over, things like that.
    So that is an answer. The answer to your question is, it 
depends. I want to give people who are investing just like a 
stock certificate the same protection from those kind of 
things, but I do want to facilitate a more rapid ability to 
exchange.
    Mr. Foster. OK.
    Mr. Clayton. That is my point.
    Mr. Foster. At the point you see legislative clarity needed 
on this stuff, don't hesitate to contact us, because Congress 
does not always do well in staying abreast to technological 
developments as we should.
    Mr. Clayton. Thank you very much.
    Mr. Foster. Now, you have also expressed concern about the 
declining fraction of companies that are publicly held, and 
which is something that concerns me greatly. I was wondering 
what fraction of that might simply be due to the fact that we 
are having wealth pile up at the top in our country and that 
wealthy people tend to invest in private equity, direct 
investments in companies, whereas retail investors sort of come 
from the middle class.
    And so have you made an attempt to separate that? Because 
the narrative that we have that there is something wrong with 
the public markets might be a symptom of the larger problem 
that the wealthier just having more.
    Mr. Clayton. It is a dynamic system, and I think that there 
are elements of all of this. One thing that we have in this 
country, which I don't want to lose, is a broad participation 
in our capital markets. We are actually having--we are putting 
more responsibility on individuals to save for their 
retirement. The amount of funds in self-directed retirement 
accounts or quasi-self-directed has tripled in the last three 
and a half decades. I want to keep that.
    So there are lots of drivers. Ones you mentioned too 
probably are having an effect. But we need to have an efficient 
way--given what we have decided to do in terms of retirement 
savings, we need to have an efficient way for the average 
American to participate in the marketplace.
    Mr. Foster. All right. Thank you. Just the last question, I 
have been really concerned about these reports of sexual 
harassment in Silicon Valley. You have seen really egregious 
things being done that for sure involve misallocation of the 
investors' capital for reasons that are not economic.
    And I was wondering, aside from just the fundamental 
immorality of this, at what point is the problem of investors 
being not treated properly something the SEC might get involved 
in?
    Mr. Clayton. I actually had not thought about us getting 
involved in that. I will think about that.
    Mr. Foster. Another thing to think about. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, vice chairman of the committee.
    Mr. McHenry. Thank you so much, Mr. Chairman.
    Mr. Clayton, thank you for being here. And I actually want 
to follow up on Mr. Foster's question about initial coin 
offerings. Your investigative finding from July 25th I found 
encouraging. The SEC had a finding in order to establish a 
rationale for initial coin offerings, or ICOs.
    Can you walk me through your thinking on that finding? 
Because I know it was a major decision for you to enter into a 
new space and try to regulate and point to good actors that are 
in the ICO space.
    Mr. Clayton. Sure. There is a process and a substance 
element to it. The process element was, instead of starting 
with enforcement actions, we decided to start by level-setting 
with this report and saying, hey, here is how to behave well 
and here are some things that trouble us. So the intent of that 
was to notify people in this space there is a way to do this 
right and there are some things that--then there are some 
things that trouble us. And if you do it right, we are all for 
it; and if you do it wrong you are going to have some 
explaining to do. That is it in a nutshell how we went about 
it.
    Mr. McHenry. I have been involved in crowdfunding, and it 
looks to me that ICOs are an avenue that are basically trying 
that level set, to enable the flow of capital and enable 
different opportunities via technology. So what are you doing 
to help entrepreneurs ensure that they are pursuing ICOs 
correctly?
    Mr. Clayton. Well, that was part of the report, to first 
ask yourself if it is a security. In most cases where you are 
funding something, it is. And then go through, whether it is 
crowdfunding procedures, Reg A procedures, whatever exemption 
works for you, go through that exemption; or if an exemption 
doesn't work you are going to have to consider registration, 
which is probably not a practical avenue at this moment.
    I think it does highlight that this area of funding smaller 
businesses, through crowdfunding or other means, technology can 
really help it. It can help us do our job too.
    Mr. McHenry. So do you foresee the need for congressional 
action to ensure that secondary trading of coin, 
cryptocurrencies are enabled, or do you believe you have law on 
your side to properly do that?
    Mr. Clayton. The fair answer is, I don't know enough about 
how they are going to trade yet to know if we can do it with 
what we have or whether we need your help.
    Mr. McHenry. OK. But it is a first step. We are only 3 
months in for the SEC's findings.
    Mr. Clayton. Yes.
    Mr. McHenry. With time, I hope we can get more data on 
that.
    So let me shift to a separate issue that I know you care 
about as much as I do, which is this discussion about the rise 
of the rest. How do you help--what we do know is 80 percent of 
startup capital goes to three States. There are 47 other States 
that have great ideas, but the flow of capital is not there. It 
is not commensurate with the set of ideas and opportunities 
around there. And I know this is something you care about, as 
we have discussed.
    What can we do for medium size and small businesses in the 
rest of the country? What can we do as policymakers and what 
can you do at the SEC to make sure that is possible?
    Mr. Clayton. I think first recognizing that this is the 
landscape. I have to say I was surprised that the three States 
get the lion's share. We had some folks in the other day. We 
have been talking to people about this, small and medium size 
businesses, not intermediaries, but people who have these 
businesses.
    I learned something new, which is the Midwest is the 
world's fourth or fifth largest economy, depending on how you 
measure it, but it has very little venture capital, has lots of 
great companies, lots of well-educated people, a big economy, 
but very little venture capital. And that should tell us 
something.
    Mr. McHenry. So that initial finding, now we have to work 
through steps in order to enable this, right? So the surprising 
thing to you was the lack of capital?
    Mr. Clayton. Yes. Well, and a lack of that type of capital 
and the type of expertise in the venture market to put that 
capital to work, because there must be people who have 
businesses that are worthy of funding.
    Mr. McHenry. My time has expired, but I would love to 
follow up with you more on those ways that we can enable policy 
so that the other 47 States benefit.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty.
    Mrs. Beatty. Thank you, Mr. Chairman, and thank you, 
Ranking Member, and thank you to our witness today, Mr. 
Secretary.
    We have had a lot of questions posed to you about the 
Consolidated Audit Trail. So I have a question. Is it necessary 
for the CAT to collect social security information of the 
individuals and, if so, what value of that information is it to 
the SEC?
    Mr. Clayton. Your question is a question that I have as 
well. What value do we get from the PII? Now, I am sure there 
is some value. I will give you an example. If we have an 
insider trading investigation and we want to be able to say, 
oh, here is this person and they know that person, identifying 
who the people are and where they live and how they might work 
together is something of value to us. And we have actually made 
great strides in connecting insider trading rings that you 
would never know on the face of them through data. That said, 
it is when do we need to get it? Do we need it all the time? 
Those are very good questions around things like people's 
social security numbers.
    Mrs. Beatty. OK. We may circle back a little more on that.
    I ask the following question to every Secretary that comes 
here, your predecessor, because I think when you run an 
operation as large as your operation, it is important for some 
of us to focus on the people side of it as well as the process, 
the security side.
    So for me in section 342 of the Dodd-Frank with the OMWI 
Act, it is very important to me, as a female and as a black 
woman, small business owner, that we have diversity in our 
agencies, because I think it makes a difference. So I took the 
liberty of looking at some statistics that I want to share with 
you now that you are the chairman of the SEC and you head an 
agency that has that actual mandate under Dodd-Frank.
    So when you think about of the 500 companies that make up 
the Fortune 500, only four of them have African-American CEOs. 
That is less than 1 percent. So I am going to ask you on three 
questions, do you think that is problematic?
    The second one, of the 500 companies that make up the 
Fortune 500, there are only 32 female CEOs. That is roughly 6 
percent. Do you think that is problematic?
    Even at your old law firm, Sullivan & Cromwell, of the 174 
partners, there were 32 women and only 3 were African American.
    I guess my point of this exercise is to make sure that I 
point out it is not just a problem for you; it is a problem for 
all of the directors. That is important to the constituents 
that I represent, because I think--and you mentioned it on page 
18 of your testimony, that you had value in having a diverse 
work force.
    So I want to know how you are going to continue that, 
improve that, so maybe when you come back and your expert team 
might have some females sitting behind you or people of color.
    Mr. Clayton. I do have some behind me.
    Mrs. Beatty. Let's get them on the front row the next time.
    Mr. Clayton. We will. I want to thank you for this 
question. So we have that OMWI report that you know about. I 
read it in connection with my preparation. And then when I got 
to the Commission I met with Pam Gibbs right away, who is our 
chief OMWI officer.
    So here is the bottom line on our report: We are doing 
pretty well across the Commission except in one area, 
leadership. And so when I talk to Pam and when I look to fill 
leadership positions, this has been front of mind. And we have 
been in a regular dialog about improving that aspect of 
diversity at the Commission.
    Mrs. Beatty. In my few seconds left, let me thank you for 
that, because I appreciate your honesty, I appreciate your 
effort. And you have also met with her more than one time. So I 
want to say thank you for that, because that is not always the 
case here. And I appreciate you saying that we don't--
recognizing that it is important that we have women and 
minorities on the team, but to put them in leadership is 
important.
    I even beat up on our chairman. We didn't have a female as 
the chairwoman of any of our committees, and now we have one. 
So I am not asking you anything that I don't ask here.
    So the next time you come, I will be looking forward to 
having females and minorities in leadership.
    And I yield back.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The chair now recognizes the gentleman from California, Mr. 
Royce, chairman of the Foreign Affairs Committee.
    Mr. Royce. Thank you, Mr. Chairman.
    And thank you very much, Chairman Clayton. At the outset in 
your remarks, Mr. Chairman, let me just say I appreciate your 
comments that we need to give Mr. and Mrs. 401(k) access to the 
capital formation of growing companies. I thought you put that 
well. The current downward trend, as you explained for 
companies, has fewer and fewer going public, and that has the 
potential to benefit the few over the many. I strongly share 
your sentiment that all investors should have the opportunity 
to participate in America's growth, and I think we stand ready 
to help you achieve that goal.
    I think when we talk about the massive Equifax breach and 
the attack on the SEC itself, this is not the first nor will it 
be the last attack, but consumers, consumers as well as 
investors deserve to know when cyber attacks put their money at 
real risk. And in your recent speech that you gave before the 
Economic Club of New York, you emphasized that disclosure 
requirements extend to cybersecurity issues. Your words were: 
Public companies have a clear obligation to disclose material 
information about cyber risks and about cyber events, and that 
you expect them to take this requirement seriously.
    So I would ask are there plans for the SEC to look at 
current disclosure requirements for cybersecurity risks, or do 
you believe the materiality standard that we currently have is 
sufficient? What is your view on that?
    Mr. Clayton. Thank you for recognizing there are different 
constituencies that need to know, consumers and investors, and 
those two aren't separate but that is a good way to look at it.
    In terms of what is my view on this, for me, materiality is 
the touchstone. I have seen overly prescriptive rules not have 
the effect that they should. And in this area, though, I think 
it is pretty clear that your cyber risk profile, hey, where do 
I have sensitive material? Where would a denial of service 
attack affect my company? Where would it affect consumers? That 
is a materiality judgment that I think is fairly easy to make, 
and I expect companies to be thinking about it in the same way 
they think about other key elements of their business.
    Mr. Royce. Let me get through a couple other questions here 
to you. So I am pleased also on your reference here on efforts 
to hire a chief risk officer to oversee cybersecurity efforts 
at the SEC. Now, over at the State Department, I have led the 
effort through the bipartisan cyber diplomacy act to establish 
a high-level Ambassador there for cyberspace to help counter 
foreign threats to the internet.
    My question is fairly straightforward here. Do you need our 
help to get this done, in terms of your ambition here of 
filling that slot, or can you do this on your own? Do we need 
any legislative language? And also, as a follow-on, how will 
you define the responsibilities of this new CRO that you will 
bring on board?
    Mr. Clayton. So to try to take them in order, I think a 
CRO, as we have seen in the private marketplace, we are not a 
corporation, but in terms of just it is good organizational 
hygiene to have somebody who looks across the organization at 
the risk profile of the organization.
    We have a lot of different divisions at the Commission, and 
I can't expect somebody in one division to be constantly 
thinking about risks in another, but I should have somebody who 
is thinking about risks across those divisions. So that is the 
role. And the risk that kind of goes across the divisions, at 
least across several of them, that is most acute at the moment 
is cyber risk and our use of data. Do I need your help at this 
point? No, but if I need help I am not going to be afraid to 
ask for it.
    Mr. Royce. OK. And then I would like to follow up on Mr. 
Duffy's comment on proxy advisory firms. I understand your 
comment that the firms do provide a service that has value, but 
I would like you to look at this another way.
    Wouldn't you agree that the value of the information would 
benefit from competition in the market, because right now I 
just asked are investors being best served when only two firms 
dominate that entire market? Is there more we can do to 
increase competition?
    Mr. Clayton. It is a valid point. It is a valid point. It 
is an interesting organizational dynamic question, because 
somebody has to compile the data, but once one or two people do 
it, how do you foster competition across more of them?
    Mr. Royce. Maybe we can continue that dialog.
    Thank you, Mr. Chairman.
    Mr. Clayton. We can continue that dialog, yes.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. Welcome to the committee, Mr. Clayton. I am 
going to kind of pick up on where Chairman Royce left off. This 
issue of market concentration has been on my mind a lot. And I 
am glad that you are focused on this question of IPOs and 
startups and I think this is an important question, but I would 
like to get your take on how increasing market concentration 
has impacted a whole range of things in our economy.
    If you look up on the screen, if you look at Facebook, you 
can see they acquired 50 companies since 2005, Google 200, 
Amazon 65, Apple 80. That is just in the tech area. We could 
get charts up there in beer, in chicken, in you name it, we 
pretty much can do it, in pharmacies. And I wonder, like if I 
am a startup person, I have opened up a new business, I am 
trying to consider either taking my company public or why 
wouldn't I just sell to a big company like that, because then I 
could avoid a lot of fees and stuff like that and maybe get 
more money.
    And I am curious to know, from your standpoint, is that 
part of the explanation for why we don't have the IPOs? Then in 
addition does that explain why you see what I consider to be 
recklessness and a lack of care with companies like Wells 
Fargo, that they just don't have to be as careful because they 
just don't have the competition. Maybe even Equifax would be a 
little bit more careful. If they just didn't have two other 
competitors in the market to worry about, they might put more 
energy/resources into protecting our data. What are some of 
your thoughts on how market concentration is impacting our 
economy?
    Mr. Clayton. So first question on--and with your data here.
    Mr. Ellison. Yes.
    Mr. Clayton. I agree with you that--and as I said, the lack 
of companies going public troubles me, because I want broader 
participation. I agree with you that when--not me, but when 
someone is sitting there saying, hey, am I going to go public, 
am I going to continue to take private money, or am I going to 
sell, the path of least resistance and maximum return can be to 
sell. And that is more true in some industries than others, but 
it does lead to these companies not raising money in the 
capital markets and a concentration. And look, it is smart for 
these companies to acquire smaller companies. They acquire 
talent.
    There are a lot of market forces that affect there, but I 
think your point is a valid one as to one of the factors 
driving a reduction in the number of small-and medium-size 
startup opportunities for people to invest in.
    As far as your broader question on concentration of let's 
just call it power in the marketplace and does it have effects, 
that is outside of our bailiwick as securities regulators, but 
it is certainly a valid question.
    Mr. Ellison. And we often don't get the chance to talk to 
the agency lead who would be exactly on point but I do think 
the SEC has a role to play in terms of fostering competition. 
In keeping with what Mr. Royce just asked you, what are your 
views on how the SEC can help foster a greater amount of 
competition in the market when you look at like all these 
industries. They have three players in them, two players, four 
players. I can go on and on.
    Mr. Clayton. I will give you the cliche that I use, but I 
think it is not just a cliche. I say when we have one-size-
fits-all regulation, we end up with just one size.
    Mr. Ellison. Well, good point. I don't know if I agree with 
that point, but I will say this: We stopped doing aggressive 
antitrust enforcement in the eighties. And we used to be really 
into it, Republicans and Democrats. Now we have just said--one 
of the things I read in your bio is that you used to do mergers 
and acquisitions. Perhaps you might be the best qualified among 
a lot of other people to really say now that you are on the 
other side of the divide we might want to start taking this 
problem a lot more seriously about declining competition.
    Mr. Clayton. An area that I can step into and say that I am 
worried about declining competition is in the provision of 
financial services. I don't want to see our regulations drive 
us toward a limited number of players in financial service 
provision.
    Mr. Ellison. Well, I agree with that. And that is why I 
think that we have had a lot of debate in this committee over a 
SIFI designation. My thought, if you don't want to be a SIFI, 
get smaller.
    Anyway, I hope that we can continue this conversation. I am 
worried about even you mentioned risk. When you are so big you 
don't have to worry about risk then you do not do--anyway, I am 
out of time. Thank you.
    Mr. Clayton. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Illinois, Mr. 
Hultgren.
    Mr. Hultgren. Thank you, Chairman.
    Chair Clayton, thank you for being here. Good to have you 
here and appreciate your important work at the SEC. I am 
interested initially in discussing and getting your opinion on 
the implementation of the Consolidated Audit Trail in light of 
recent discovered breaches in the EDGAR database at the SEC.
    Two days ago, in an op-ed by Hal Scott and John Gulliver of 
Harvard Law School ran in the Wall Street Journal made a number 
of points for why the proposed data collection went far beyond 
its intention for unraveling market events, such as the flash 
crash. Specifically, they note, and I will quote from their op-
ed: ``An SEC cost-benefit analysis for the CAT did not 
meaningfully weigh the risk and potential cost of a 
cybersecurity breach against the benefit from the improved 
ability to discover the cause of a flash crash or identify a 
market manipulator,'' end quote.
    I wonder first, do you believe the operators of the CAT, 
Thesys, is taking the appropriate steps to secure the 
information that will be stored within the CAT, and what role 
does SEC have in overseeing this?
    Mr. Clayton. OK. So Professor Scott's editorial, I think it 
is fair to quote from it because no one likes criticism, but it 
was a fairly based set of questions that we should be asking 
ourselves.
    And to your specific question about oversight of security, 
the first line of oversight of security is with the SROs, who 
under our plan are charged with overseeing Thesys, the vendor 
who is producing the CAT. And I do intend to press them on 
whether the current security procedures that are in place are 
appropriate, and to do it in the kind of detail that Professor 
Scott raised in his editorial, which was, what is the data you 
are taking in, and is the security apparatus appropriate for 
that data?
    Mr. Hultgren. That is our hope that this is obviously vital 
information that is there and potentially susceptible, and so 
we are just concerned about that. I also am concerned about 
some of the timing. NMS' plan for the CAT calls for specs to be 
produced by May 2018 detailing how personal identifiable 
information should be shared and protected. However, the SROs, 
as we were talking about, are scheduled to report data 
beginning November 15th, which is just 5 weeks from now, hard 
to believe.
    How can we expect Thesys to construct a test to secure a 
database, a test that secures a database within such a short 
period of time? And then wouldn't it be more appropriate for 
the SEC and the NMS plan to consider PII before this 
information is collected and shared by the SEC and SROs?
    Mr. Clayton. Yes and yes. And in that question of do we 
have the right security in light of the data and its usefulness 
to us, we should be particularly focused on PII and what is its 
value. Does it have enough value that we should be taking it; 
and if it does, to what extent and what security are we going 
to place on it?
    Those are all questions that the SROs should be asking 
Thesys and I should be looking at from an oversight 
perspective, and then if we eventually take that data in we 
should be looking at.
    Mr. Hultgren. My sense is that your voice is very important 
in this of clarifying what really is necessary and what isn't 
necessary for the SROs to collect. And especially, I think that 
gets back to this cost-benefit analysis of absolutely, we want 
to do everything we can to identify bad actors or problems in 
the market, but at the same time we realize this information 
really is personal and important and we want to protect it. 
Again, that is the point of my question.
    Let me move on, because I have just have a minute left. I 
sent you a letter earlier this year regarding amendments to 
FINRA Rule 4210. I want to thank you for your quick response 
and for the attention your agency and FINRA have given to the 
issue for small and middle market dealers that my letter 
highlighted. I would also like to commend you on your 
initiative to assemble a fixed income advisory committee at the 
SEC.
    To my prior point, I believe it would be helpful to make 
sure that small and middle market dealers have a strong voice 
before the Commission. These dealers are often overlooked, 
unfortunately, with policymakers and as new rules come up and 
new regulations and things. And I think it is a great 
opportunity to help prevent that.
    So I wanted just to see can you give the committee a sense 
of when the advisory committee will officially begin its work, 
and what are the primary topics for which you hope they can 
lend expertise to the Commission, and, again, any thoughts you 
have on having smaller or middle market dealers have a voice in 
that.
    Mr. Clayton. So on the committee itself, as soon as 
possible. I am working through this with Commissioner Piwowar 
and Commissioner Stein. We are doing it in a very collaborative 
way.
    With respect to representation on the committee, to your 
narrow question, yes, this is not going to be all the big boys.
    Mr. Hultgren. Good.
    Mr. Clayton. It is going to have--
    Mr. Hultgren. That is important. I have a lot more 
questions. We will follow up in writing if that is OK.
    Thank you, Mr. Chairman, I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, ranking member of the Housing and Insurance 
Subcommittee.
    Mr. Cleaver. Thank you, Mr. Chairman, for being here. 
Presently security laws will allow good-acting companies, 
companies that follow the law to receive less oversight and 
more relaxed disclosure requirements. And on the other hand, 
current security laws would say that if you are found guilty of 
felonies or even misdemeanors or if your company just stepped 
on antifraud provisions that based on those laws you are 
supposed to be automatically disqualified.
    I am assuming you do understand that that is not how it 
works, because we have repeat offenders who don't suffer when 
they violate these security laws. I can call the names of some 
of the companies. I am not anxious to do that, but I will if 
you wanted me to do so.
    But do you have any--assuming that I am correct in my 
assessment, which I am, what would you do to deter that kind of 
behavior essentially forgiving the bad behavior and allowing 
companies that are repeatedly violating securities laws to 
function like they are a moral company?
    Mr. Clayton. So this is the area of bars, and whether it is 
bars from the industry altogether or bars from particular 
activities. And I will just tell you how I look at it. I break 
it down into two areas.
    One is individuals. Having given us, the Securities and 
Exchange Commission, the power to bar individuals I think is 
very important. And I actually--I expect our enforcement 
division to use that power aggressively, because if you have 
individuals--it is a privilege to work in this industry. You do 
well if you work in this industry. And if you are an individual 
bad actor, you should be out of the industry. And I think I 
have made that clear to our enforcement division.
    Mr. Cleaver. Well, are you--
    Mr. Clayton. Then there are companies.
    Mr. Cleaver. Yes.
    Mr. Clayton. Companies are more complicated, because you 
can have a relatively junior person, in terms of the hierarchy, 
who is a bad actor who you are getting rid of. And I do have a 
hard time making shareholders pay substantially for that type 
of activity.
    Now, to be clear, if you have activity at the top of the 
house that is bad activity or there is endemic activity, I do 
believe in bars. And so I am just giving you a flavor. That is 
how I look at it. And different people can look at it a 
different way, but that is how--and I also like--I want to 
empower the enforcement division with the power to pursue those 
bars, because it makes them more effective.
    Mr. Cleaver. I appreciate that. Sometimes these repeat 
offenders are not dealt with, in my estimation. In fact I think 
about this a lot. You rob a neighborhood convenience store, and 
you are going to be ostracized and criminalized. You rob 
America, and you are decriminalized and monetized. And it is 
just one of those things that in the middle of the night I get 
a headache.
    And the years that I have been on this committee, 13 years, 
we have had people come in here who have done some bad stuff, 
and they get punished with a $60 million separation amount of 
money. That is their punishment. And the world, the people out 
in the world see this and they don't understand. It makes 
people angry. It is one of the things that I think angers--I 
wish we had more time, but my time is out. You do understand I 
think where I am going.
    Mr. Clayton. I do. And I want you to know we formed a new 
unit in our enforcement division, a retail fraud unit that is 
focused on this. And one of the things they are very focused on 
is recidivists. We need the people out, we need those people 
out of the industry.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair wishes to inform all members that after calling 
on one more member the chair will call a short 10-minute 
recess.
    The chair now recognizes the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Chair.
    Chairman, thank you for being here as well. And thank you 
for not increasing your budget request this year. That is 
rather refreshing to see that more can be done with less and 
really challenge the efficiencies of the skills and resources 
that are under your tutelage there at the SEC.
    One of the things I have been concerned about for a long 
time, and you spoke about this a little bit, capital formation. 
And it is specifically the ability of smaller companies to 
access benefits from the capital markets. Compared to larger 
capitalization ranges, small cap equities face unique 
challenges in both capturing the attention of analysts and 
attracting institutional investors.
    As a result, many potentially high-growth companies often 
face a deficit in independent investment research and a lack of 
liquidity after going public. Again, you discussed the one size 
fits all.
    Some CEOs have branded this phenomenon as the valley of 
death. Unfortunately, it has become clear that this issue is 
causing many promising companies, our startups, the ones that 
you spoke about that aren't happening, to stay private longer 
or elect to sell to larger companies rather than accessing the 
capital markets to foster job creation.
    Are there any steps the SEC can take to help reduce the 
barriers faced by small cap equities after they go public?
    Mr. Clayton. I hope the answer is yes. One of the 
motivators of the tick size pilot that we have been looking at 
is if we adjust the tick size, are we going to get--how do I 
say it--better trading, increased liquidity, and perhaps 
attract more research? If you do those things, it makes it more 
attractive to become a medium-size public company to start 
with. That is one of the questions we are asking ourselves with 
the tick size pilot.
    There are other things that I am--
    Mr. Ross. And I guess where I am going with this is that 
our European friends have a different approach to this, and 
specifically with MiFID, the Markets in Financial Instruments 
Directive II, that will, of course, require that they unbundle 
their research and have to--it is going to adversely impact the 
consensus values. It is going to adversely impact earnings. It 
is going to impact a lot in the markets, in fact, devaluing 
domestically.
    Are there measures that the SEC is taking to address this?
    Mr. Clayton. Yes. There are a lot of commentators who 
believe that the unbundling is going to have an adverse impact 
at the small and medium size--
    Mr. Ross. They can't afford it. They are going to 
eventually have to register as an investment adviser and--
    Mr. Clayton. Yes.
    Mr. Ross. And it is going to trickle down to Mr. and Mrs. 
401(k).
    Mr. Clayton. This is exactly why I don't want that model to 
be imported.
    Mr. Ross. But it is going into effect in January?
    Mr. Clayton. It is going into effect in Europe in January. 
And I want our approach to their efforts to ensure that the 
U.S. markets don't have to import that model.
    Mr. Ross. And what can we do to help you in that regard?
    Mr. Clayton. There is a patchwork that we are putting 
together of exemptive relief. But we can't do this alone. We 
have to have our European colleagues recognize that we will 
recognize the way they are approaching the market, but 
recognize the way we are approaching the market should stay the 
same way, because capital flows back and forth.
    Mr. Ross. Right.
    Mr. Clayton. So we can't just draw a line down the middle 
of the Atlantic and say, you do it your way, we will do it 
ours. We have to--
    Mr. Ross. Some transition, yes.
    Asset managers, they are totally different than the bank 
entities, yet they are being identified by FSOC as potentially 
being SIFIs and yet they are under the authority of the SEC.
    It would seem to me that there are obvious differences, 
there is a difference in risk, there is a difference in 
capital. Would you not agree that the SEC is more than 
competent to regulate the asset managers, as it has been doing 
without FSOC's interference with SIFIs?
    Mr. Clayton. I agree that this is our space.
    Mr. Ross. And even being your space, I would hope also that 
if any asset managers were of such a significantly important 
financial institution that you would allow them the opportunity 
to be recognized early on to have an opportunity to correct 
that and to stay in the market without having to adversely 
impact the markets, because they were taken by surprise, not 
knowing what their classification is?
    Mr. Clayton. I think that is a reasonable perspective on 
this issue.
    Mr. Ross. I appreciate that.
    Chairman, I will I yield back.
    Chairman Hensarling. The gentleman yields back. The 
committee now stands in recess for 10 minutes.
    [Recess.]
    Chairman Hensarling. The committee will come to order.
    The chair now recognizes the gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. Thank you, Mr. Chair.
    Mr. Commissioner, thank you for being here. I just have a 
couple questions and sort of basic stuff. I first want to start 
with these ICOs, these initial coin offering things. It reminds 
me of the old days with penny stocks. It can be a different 
medium every time. And I just--you are in a position where you 
have to balance formation and ease of liquidity with the 
potential for fraud and theft and loss.
    So just kind of your basic philosophy on this stuff now 
that you are chair of the Commission.
    Mr. Clayton. So I agree with you. This is--here we have a 
new thing that has some good, but it is a new avenue for fraud. 
And that was getting the 21(a) report out saying, hey, here is 
the good way to do it, here is the bad way to do it. That is 
sort of the guidance for people in the marketplace, but then we 
have the bad actors. And I am very--well, I am cautiously 
optimistic about the Enforcement Division's approach to this. 
They know that this is a ripe area for pump and dump.
    Mr. Perlmutter. Right.
    Mr. Clayton. Right? Pump and dump--it is actually even 
easier here than it is in the penny stock area, because it is 
all electronic, it is all anonymous. It is harder to catch the 
bad guys at the end of the day. And I recognize that, and from 
a philosophical and policy point of view, if we are not doing a 
decent job on educating people that that is what can happen, 
and then when the bad guys act, getting at them, it is going to 
be a lot harder for us to get the benefits of this kind of 
technological advancement. So that is how I look at it.
    Mr. Perlmutter. OK. And I agree with you. You are going to 
just always be balancing this sort of stuff.
    So I serve on the new subcommittee that we formed on 
terrorism and illicit finance where a lot of our concerns deal 
with cryptocurrencies and electronic kinds of transactions, but 
more financing of bad guys, but potentially the SEC's going to 
have to keep their eyes on all of this.
    The second question I have is sort of going to an Equifax 
or a Sony or a Yahoo or EDGAR or whatever, a hack occurs, but 
let's put it in the private sector. And you talked about 
materiality, a reportable event. Given--you potentially have 
insider trading and you potentially have bad guy trading. So 
how quickly do you expect somebody to report this kind of hack 
upon their discovery of it?
    Mr. Clayton. I have done this for a while in terms of 
disclosure. You can't put a day, a specific day timeframe on 
this. But what we can ask people to do is to constantly assess: 
am I at the point where I know that this is something that 
investors making investment decisions should know, and what can 
I tell them? It is not an easy thing to do, but my experience 
is the sooner you can reach a conclusion on that and get it 
out, the better.
    And you can see with our own work here. You don't always 
know all the facts that you would want to know at the time you 
have to make the disclosure, but erring on the side of earlier 
rather than later is the way to go.
    Mr. Perlmutter. Right. And I would suggest to you, you are 
moving from the attorney who has had to deal with this and 
advise clients to the regulator who says you should have done 
this earlier.
    Mr. Clayton. Uh-huh, uh-huh.
    Mr. Perlmutter. Or you didn't have enough information, we 
are going to cut you some slack. But it is a different mindset 
that you have to have.
    Mr. Clayton. Absolutely. And I have been pretty clear, 
going back to July, before we disclosed the incident we have 
discussed, that I would like to see better and more prompt 
disclosure. I thought it was good to get that message out.
    Mr. Perlmutter. OK. Mr. Chair, I yield back.
    Chairman Hensarling. The gentleman yields back.
    The chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman, for hosting this 
important briefing. And thank you, Chairman Clayton, for being 
with us today and for providing your perspective on so many 
important issues relative to the SEC.
    My interest today, Chairman Clayton, is to address the 
pending sale of the Chicago Stock Exchange to a Chinese 
government-affiliated firm. And I would thank you for your 
recent thoughtful decision to freeze this transaction.
    As you are aware, for the past year and a half, I have lead 
a congressional effort to block this transaction over our 
significant national security concerns. In addition to national 
security, we are also concerned that the SEC may have trouble 
monitoring the post transaction ownership of the exchange with 
a Chinese foothold in this market, that there might be 
significant Chinese government dominance over its business 
operations and decisionmaking, enabling a company to be listed 
that would not otherwise have previously been acceptable.
    With this in mind, would you please describe the actions 
and thought process that led to the Commission placing a hold 
on this transaction?
    Mr. Clayton. I am happy to discuss the procedural aspects 
of where we stand. And where we stand is Commissioner Stein, 
Commissioner Piwowar, and I will have to decide this issue, 
because it is now before the Commission. So I am not going to--
I am not going to comment on the merits in light of that 
deliberative process. But from a process point of view, this 
was a matter that had originally been delegated to the staff. 
We delegate lots of matters to the staff.
    Mr. Pittenger. Sure.
    Mr. Clayton. The staff went through its review process and 
produced a recommendation. That recommendation is now being 
reviewed by the Commission. We have provided a time period for 
additional submissions of information. Those submissions of 
information are coming in. And I--it is a group effort with my 
other commissioners. I feel like we are working collaboratively 
very well in all areas. I expect we will work well in this 
area. But speaking for myself, I want to bring this matter to a 
resolution sooner rather than later.
    Mr. Pittenger. Yes, sir. Do you have a timeframe for 
adjudicatory decision?
    Mr. Clayton. I don't have a specific timeframe, but I don't 
expect this to be--I don't expect to be talking about this 
particular aspect of it next time I see you.
    Mr. Pittenger. Thank you, sir.
    As you know, the transaction did receive the CFIUS approval 
under the previous administration. In light of your decision to 
freeze the transaction, would you qualify this at this point as 
a national security oversight by CFIUS and the previous 
administration?
    Mr. Clayton. The question--there is a lot of ground that I 
have to cover.
    Mr. Pittenger. Sure.
    Mr. Clayton. National security is not really one that they 
have given me responsibility for.
    Mr. Pittenger. Well, there are basis for--
    Mr. Clayton. I need to take advice on national security.
    Mr. Pittenger. Yes, sir, I understand that.
    Let's move on then. Earlier this year, acting Chairman 
Piwowar stated: It is difficult to conceive of a circumstance 
with counsel in favor of enforcing the due diligence 
requirements to the conflict mineral rule.
    Do you agree with acting Chairman Piwowar's reviews, and 
what is in the status of the SEC work on modifying the conflict 
minerals disclosure rule?
    Mr. Clayton. So just taking a step back on the conflict 
minerals rule. This was the subject of substantial court 
process involving the First Amendment, a finding that parts of 
the rule did, in fact, violate the First Amendment. The 
district court has now sent all of that effectively--I am using 
layman's terms rather than lawyer's terms--has sent that back 
to the Commission to assess whether where we stand today, which 
is the rule is partially in effect, is appropriate in light of 
that decision. And one of the questions is, is our current no-
action stance on the due diligence appropriate, and we are 
looking at it.
    Mr. Pittenger. Yes, sir. Thank you for that.
    Just going back briefly to the Chicago Stock Exchange 
issue, do you consider the Chinese foothold in our markets and 
being able to list a semiconductor company, perhaps some other 
business that would no longer--otherwise, we would not have 
accepted, do you believe that that is a concern?
    Mr. Clayton. Look, I am--let me--I don't want to talk about 
specific instances because that is not appropriate. But what I 
can say is the United States has generally been in favor of 
fair and open global capital markets.
    Mr. Pittenger. Yes, sir.
    Mr. Clayton. It is fair and open. And one of the things I 
have to do in my job is assess whether we have fairness across 
jurisdictions.
    Mr. Pittenger. OK. I understand. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    And I want to thank the witness, so welcome, Mr. Clayton. I 
would like to revisit the issue of the Equifax hack and breach 
and possible insider trading. I think to talk about this, the 
timeline is important, and that is on or about July 29 of this 
year, 2017, Equifax discovered that their computer systems had 
been hacked, and that the Social Security numbers and personal 
identifiable information for about 143 Americans was stolen, 
including their Social Security numbers. Sometime later, but 
before the hack had become public information, the three top 
executives for Equifax sold about $2 million worth of stock. 
And because they were clever enough to conduct this trade 
before the information was made public, and while it was inside 
information, they avoided a 35 percent drop in the share price.
    Now, I understand that you were asked some questions about 
this over in the Senate, and you were asked if there was an 
investigation of these three individuals and the trades that 
they had made before the news of the hack and of the breach had 
been made public. And you were reluctant to answer that 
question. Could you answer that today?
    Mr. Clayton. I would provide the same answer to you that I 
did in the Senate and that I do with anything with respect to 
the matter. We at the Commission have a longstanding policy of 
not commenting on whether we have an investigation ongoing or 
any details of an investigation.
    Mr. Lynch. Let me ask you this, when--
    Mr. Clayton. And it has served us well. I am sorry.
    Mr. Lynch. When we had the EDGAR situation, you came right 
out.
    Mr. Clayton. That was us.
    Mr. Lynch. Yes, it was you.
    Mr. Clayton. Yes. And I made an exception for that because 
I thought it was important, and it is ours.
    Mr. Lynch. The only thing--look--so this is 143 Americans. 
This is everybody.
    Mr. Clayton. Uh-huh.
    Mr. Lynch. This is everybody.
    Mr. Clayton. What I can say--what I can say, and I--we are 
mindful of the significance of cybersecurity issues, we are 
mindful of the significance of insider trading, and we are very 
mindful that the American people, they want to know that--they 
want to know that we are doing what they would want us--
    Mr. Lynch. I want to know that too. I am on this committee. 
I have to tell you, and I will follow up on Mr. Cleaver's 
questions, so we have bad actor restrictions, and your 
commission regularly and customarily is giving exemptions and 
waivers to people who repeatedly violate the law. So that is 
why it makes me ask the question, are you investigating the 
three executives from Equifax? If I didn't have doubt, I 
wouldn't ask this question.
    Mr. Clayton. I am confident--let me answer your question in 
a general way that I hope gives you comfort, and that is that 
if we were to find that an executive of a U.S. public company 
committed insider trading, I am certain that we would ban them.
    Mr. Lynch. Well, they are saying they did. Equifax is 
saying that they were hacked on the 29th, and that some time 
before they announced it to the public and the stock went down 
35 percent, they are saying they sold $2 million. So the 
elements are there.
    Mr. Clayton. I want to go back to Congresswoman Maloney's 
question--
    Mr. Lynch. Yes.
    Mr. Clayton. --About having a control in place so that 
issues like this are avoided in the future, and that is if a 
company determines that it has a material event that it should 
disclose. I do believe it is good corporate hygiene for section 
16 insiders--set of executives--to not be permitted to trade by 
their insider trading policy. I do believe that.
    Mr. Lynch. Well, I will let that go for now. I will wait 
for further action. But in the meantime, I do want to just 
amplify what Mr. Cleaver was getting at. When these folks are 
repeatedly found to have violated the law, it doesn't help our 
confidence in the SEC to have you regularly and routinely give 
them waivers from the bad actor legislation that we in Congress 
have passed.
    I yield back, Mr. Chairman. Thank you.
    Mr. Huizenga [presiding]. The gentleman's time has expired.
    The chair recognizes the gentleman from Pennsylvania, Mr. 
Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Chairman, I want to talk a little bit about the issue with 
the capital markets we have and the liquidity of them and 
depth. In your testimony, you state U.S. capital markets have 
long been the deepest, most dynamic, and most liquid in the 
world. I am wondering about the connection between depth and 
liquidity, particularly when we consider the decreasing number 
of public companies and fewer IPOs that we have been seeing. It 
was interesting, Representative Ellison showed a chart looking 
at delistings of public companies going back into the 1970's, 
and how the line went up and down with respect to mergers and 
acquisitions.
    The mergers and acquisitions have been around a long time, 
and delisting has happened as a result of that. But what is new 
here is lack of new companies coming in. We have seen a similar 
dynamic going on in the community bank space with all the 
consolidations going on and very few charters coming on. I 
think the SEC has said it cost $2.5 million to go public in 
ongoing costs of $1.5 million for public companies. And you 
have talked about how fewer public companies are affecting Mr. 
and Mrs. 401(k).
    Do fewer public companies mean a shallower market?
    Mr. Clayton. Well, do they mean that the portfolio you can 
choose from is smaller?
    Mr. Rothfus. Yes. So if you have--say you used to have 
5,000 public companies, now it is 2,500. Fewer options for 
diversifying, concentration?
    Mr. Clayton. Yes. Yes. And now, people are starting to look 
at this, academics, market participants, they are starting to 
look at if you have a shrinking number of companies and you 
have continuing need for investing for your retirement--are 
we--is that somehow having an effect on the marketplace that we 
should be concerned about? Now, that is sort of--
    Mr. Rothfus. Well, it seems it might also have an effect on 
liquidity too.
    Mr. Clayton. It does. It does.
    Mr. Rothfus. Any time you shrink the number of purchasers 
or the number of sellers, I think it is going to impact 
liquidity. Would you agree with that?
    Mr. Clayton. Yes. I--one of--I outlined in my four 
priorities, one of them was market integrity, including 
structure and risk. This is one of the things that I think I 
need to better understand, we need to better understand, is how 
our market's changing and is it having an effect on liquidity.
    Mr. Rothfus. The chairman started off the question about 
the fewer IPOs. I think you responded, one of the problems has 
been one-size-fits-all regulations, and you spoke favorably of 
scaleability. You also mentioned the funding options that 
weren't there decades ago that are now there as options.
    And I wonder if it would be of benefit for the SEC to take 
a look at some of the regulations we have had over the 20 
years. In a July 12 speech, you said: The Commission should 
review its rules retrospectively. We should listen to investors 
and others about where rules are or are not functioning as 
intended. We cannot be shy about being introspective and self-
critical.
    Can you explain how you plan for the SEC to retrospectively 
review regulations it promulgates as well as regulations that 
are already on the books to ensure that they are still 
effective? Take a look at Sarbox, take a look at the capital 
formation provisions within Dodd-Frank and ask are the costs 
outweighing the benefits of what these were intending? Can you 
shed a little light on that?
    Mr. Clayton. Well, I think the FAST Act and what you will 
see from our proposal is that kind of thinking. Are there ways 
to make it much--hopefully, much less expensive or burdensome 
to provide material information, without in any way diminishing 
investor protection? Yes, we should be looking across the 
spectrum of our rules. And what I said in that speech is the 
effects our rules have--because sometimes we make a rule and we 
think it is going to cost X to implement it and, lo and behold, 
it is three X.
    Mr. Rothfus. Right.
    Mr. Clayton. And those are the particular circumstances 
where we should be looking, because we made some assumptions, 
we did it in a reasonable way, but it turns out, looking 
forward, it costs more money, and we need to think about that. 
The numbers you cited on the costs of IPOs, to be perfectly 
honest, I think they are light.
    Mr. Rothfus. OK. The FASB issued their final current 
expected credit loss, or CECL, standard rule in June 2016. This 
rule would change longstanding accounting rules by requiring 
financial institutions to reserve for the expected life of loan 
credit loss when the loan is first issued.
    Do you plan for the SEC to conduct its own review of this 
rule with you as chairman?
    Mr. Clayton. So I understand some of the concerns, 
particularly from what I will say is our regional and community 
banks around the CECL rule and the potential impact on capital. 
I know that they are talking to the banking regulators about 
that, but I am mindful of keeping an eye on where this--where 
the practical results of this accounting change--
    Mr. Rothfus. Thank you, Chair. I yield back.
    Mr. Huizenga. The gentleman's time has expired.
    The chair recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Now, Mr. Chairman, first a couple of 
accounting issues to find that those are scintillating and draw 
much more attention to the committee in this video.
    First, for over 100 years, accountants have defined and 
audited income and expense, but investors care about other 
numbers: same store sales, backlog. And I hope that you would 
lead the SEC in moving toward a situation where either your 
designee, the Financial Accounting Standards Board, or the SEC 
itself, defines the terms that are important to investors in 
various industries and requires that they be audited. Right 
now, I am investing based on same store sales, but Nordstrom 
has one definition, Target has another, and I don't trust 
either's numbers because neither one is audited.
    Research and development by private companies is what we 
expect to lead the 21st century. We in Congress spend tens of 
billions of dollars to encourage it. The FASB, using the power 
you have given them, requires the immediate writeoff of all 
research, even successful. That is a contradiction of 
accounting theory, but it is easier for accountants. They have 
done it that way for 30 years. They did it the other way for 
150 years. And I would hope that you would take a look at the 
extreme harm done to our economy, and look at all the research 
that isn't being done and the inventions that are not being 
developed because of that unwarranted departure from accounting 
theory.
    As we were talking about bond rating agencies, as long as 
the bond rating agency gets selected by the issuer, we are 
going to have a situation where they are willing to give triple 
A to alt A, which is exactly what caused the meltdown. An asset 
manager, a bond manager who fails to buy double A and triple A 
rated securities just because they are a bunch of liars, loans, 
or subprime mortgages will find that that person is replaced by 
someone who is willing to go for the high rating.
    We have talked here about cybersecurity, and Mr. Davidson 
from Ohio and I are working on a bill to direct both the SEC 
and FINRA to develop and implement risk controls to safeguard 
market data and to direct the CAT contractor to develop risk 
controls to protect CAT data, that is a consolidated audit 
control, and to prevent that operator from accepting data until 
it develops the risk controls. And I hope, for the record, that 
you would respond to those concepts.
    I now want to shift toward an interesting issue, and that 
is rule 30e-3. The folks--the only folks really in the 
financial services industry that can't provide information 
electronically are the mutual funds. And the amount of wasted 
paper is so great that the pulp and paper manufacturers are 
lobbying against the efforts. On behalf of over 2 million trees 
a year, I would hope that you would move forward. And this rule 
was first introduced in 2015. It will allow mutual fund 
companies to send annual reports to investors electronically. 
Of course, investors would still have the option of receiving 
paper statements.
    And I want to point out how much more useful the electronic 
statement is. I get these paper statements. I put them under 
something and then the magazines pile on top. I can never find 
them if, God forbid, I ever wanted to look at them. And since I 
may not be able to understand them and I want to send them to 
somebody who does understand them, but I never find them, I 
never put it in an envelope, and I never mail it anywhere. If 
you send it electronically, then all I have to do is look 
under--search my email for emails from [email protected], I can 
have it any time I want it and forward it to anybody I want. So 
electronic is better. It will save investors $2 billion over 10 
years.
    And I wonder if you could let us know when we can expect 
this 2015 project to be completed. If you could answer that 
one.
    Mr. Clayton. I got them all. Should I go with that one?
    Mr. Sherman. Go with that one.
    Mr. Clayton. We are working on the rule. You make a number 
of valid points. There are some valid points in terms of people 
who want paper, but we are not just putting this in the drawer, 
we are going to look at it.
    Mr. Sherman. 2015.
    Chairman Hensarling [presiding]. The time of the gentleman 
has expired.
    The chair now recognizes the gentleman from Texas, Mr. 
Williams.
    Mr. Williams. Thank you, Mr. Chairman.
    And thank you, Chairman, for being here today. And I am a 
small business owner, 45 years in Texas. We share some friends, 
and it is good to have you here today. And I don't have to tell 
you, and we have talked about how burdensome regulations have 
just been hampering small business creation and--to stay in 
business. And I appreciate your involvement in that.
    Let me go to Dodd-Frank. The SEC, in the past year, has 
improperly utilized its resources, attempting to create 
overbearing rulemakings which do not advance the SEC statutory 
goals, nor do they help avoid other financial crisis. So in 
light of the previous administration's improper use of SEC 
resources, what steps have you taken, since you were sworn in 
in May, to focus SEC resources on the stated goal of protecting 
investors, maintaining fair, orderly, and efficient markets, 
and facilitating capital formation?
    Mr. Clayton. So to go to specific steps taken. Let me talk 
about the things that in looking at what we do, I have said, 
there is an area where we need to either do better or focus. 
And we have spent a lot of time talking about cybersecurity. I 
have talked a little bit about it and I want to go back to it: 
retail fraud. That is an area that I am surprised and dismayed 
at how much retail, just affinity fraud there is--and that is 
an area where I think we--that is an area where we make an 
impact when we devote more resources, not only in terms of 
terms of finding it and punishing the people that are 
committing it, but thinking creatively about ways we can 
structure what we do to make it harder to commit a fraud, 
particularly ones that affect our retail investors.
    In terms of efficiency and capital formation, we looked 
across the spectrum and said, what can we do quickly that is 
not going to impact investor protection, that is going to make 
a difference? Confidential filings, eliminating the requirement 
for financial statements that are extraneous. We have done a 
number of things like that. I think they are making a 
difference.
    More generally, I am focused on scaling our approach across 
the capital markets and across capital formation to reflect the 
size and type of investment that people are making. We have 
that going on, we have it going on in a kind of patchwork way. 
And I want to bring a little more systemization to that that 
will hopefully foster capital formation. So those are some 
thoughts.
    Mr. Williams. Thank you. I noticed in your budget request 
you asked for an additional $245 million to assist in the 
procurement of a headquarters lease. What steps have you taken 
to ensure that taxpayer funds used for any relocation are 
properly used for that?
    Mr. Clayton. So we are having the GSA run this process 
effectively. That is what is happening. And their process is a 
procurement process that has bidding procedures and 
competition. And the reason for the 245 is to enable us to 
effectively set up a competitive process so--let me put it in 
business terms. We need that money so that one party doesn't 
think we are captive and that we could have a competitive 
process across a bunch of different headquarters locations. 
That is why we need it.
    Mr. Williams. What is the Commission doing to lower the 
monetary burdens? We have talked a little bit about that 
associated with going public. And how can we encourage more 
businesses to go public? And as you talked about, one size 
doesn't fit all, we know that. So how do we encourage more 
people to go public?
    Mr. Clayton. So I think we have started with our 
confidential submission FAQs. People were worried about the 
public offering process and that they would have to very early 
on make public their financials, their business, et cetera. We 
have delayed that, while still enabling investors to have a 
long time with that information. Like I have said, I do believe 
the JOBS Act and saying, ``You don't have to do 404(b) until 
you are a big enough company to warrant that.'' Those types of 
measures are helping. We are looking at additional measures of 
that type to reduce the--look, in annual spend to be public of 
$2 million versus an annual spend of $4 million, that $2 
million delta, that is real money in terms of valuation.
    Mr. Williams. Well, thank you.
    I yield my time back, Mr. Chairman. Thank you for being 
here.
    Chairman Hensarling. The gentleman yields back.
    The chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, ranking member of our Monetary Policy and Trade 
Subcommittee.
    Ms. Moore. Thank you so much, Mr. Chairman.
    And before I begin my questioning, I was wondering if I 
could put a couple of letters in the record. I ask unanimous 
consent to put a letter in the record from the Government 
Finance Officers Association.
    Chairman Hensarling. Without objection.
    Ms. Moore. OK. And also I would like to put a letter in the 
record that we sent to the Honorable Walter J. Clayton, II, the 
Ranking Member Maxine Waters and I, regarding section 1502.
    Chairman Hensarling. Without objection.
    Ms. Moore. Thank you so much.
    Thank you for appearing, sir. It is very nice to meet you, 
and I hope that we will have a very fruitful relationship.
    Let me just start out with asking you about a piece of 
legislation that Representative Rothfus and I are planning to 
reintroduce regarding the money market mutual funds where the 
SEC has moved it from a stable to a floating net asset value 
and imposed liquidity fees and redemption gates on investors of 
these funds.
    As you may know, that our municipalities in many 
governmental agencies invested in these money market funds, and 
they have to be stable to protect public funds. And changing 
the main feature of these funds to floating net assets really 
meant that cities are forced to go to more expensive 
investments. And without going on and on, because you know this 
topic, at a time when our country needs to invest in 
infrastructure, it is really difficult for cities to do this, 
make payroll, and we are hoping that this is something you will 
look at.
    Mr. Clayton. Thank you, and we are looking at the effects 
of that rulemaking.
    Ms. Moore. All right. Thank you so much. I was really happy 
to hear--I have been a here a long time, so I was able to hear 
much of your testimony and able to hear you say very 
declaratively that materiality is the touchstone for investors 
and consumers, respectively. You were talking about 
cybersecurity with Mr. Royce, I believe. But I do think that 
that has some applicability to section 1502 of the SEC with 
regard to conflict minerals.
    As you know, the acting chair of the Commission and now 
only a commissioner, Mr. Piwowar, concluded that the court's 
judgment in April held that--he concluded that they weren't 
going to enforce the provisions under 1502, although the court 
only said that the descriptor requirement was inappropriate. 
And so you say that you are looking at this, and I am hoping 
that you are going to be informed by your commitment that you 
have made here today to be very, very proactive on enforcement.
    Mr. Clayton. Yes. We are looking, and I am engaged with our 
Division of Corporation Finance and our General Counsel's 
office. It is not every day that we get a rule that--
    Ms. Moore. But I think it was a misinterpretation of that 
rule on Mr. Piwowar's part, particularly since you said 
materiality. Materiality is important to investors, whether 
they are investing in these conflict minerals, and also to 
consumers. We see our cell phones here. Nobody wants a cell 
phone that was financed by rape, murder, mutilation. Would you 
agree? That is immaterial.
    Mr. Clayton. The way you characterize it, I agree that I 
don't want that kind of cell phone as a consumer of cell 
phones. I want--look, the rules are on the books, it is a 
mandate.
    Ms. Moore. Thank you.
    Mr. Clayton. I want to make sure that--I want to make sure 
that we do it in the right way.
    Ms. Moore. OK. Thank you. You told the Senate--I have 30 
seconds left--you told the Senate, on the 26th of September, 
that Mr. Piwowar's action to prevent staff, 20 senior 
enforcement officials, to no longer be able to issue subpoenas 
in the wake of the Bernie Madoff scandal, was not affecting 
your ability to do enforcement actions. Do you still think that 
that is the case?
    Mr. Clayton. I made that statement based on a detailed 
assessment with the heads of the Division of Enforcement. The 
heads of the Division of Enforcement feel that them having the 
subpoena power--the formal authority, it is not with me, it is 
with them, it is delegated to them--they feel good about where 
it is now. And I know them. I know that if they change their 
minds, they are going to tell me.
    Ms. Moore. Thank you for your indulgence, Mr. Chairman.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The chair now recognizes the gentleman from Maine, Mr. 
Poliquin.
    Mr. Poliquin. Thank you, Mr. Chairman, very much. I 
appreciate you holding this hearing.
    Mr. Clayton, right over here. And thank you very much for 
being here, sir. I know you have an affection for the great 
State of Maine, and I appreciate that. Your kids and your wife 
will thank you forever if you vacation up there. This is a 
great time to go up there, Mr. Clayton, we need the business.
    Now, I wish Mr. Sherman were here. He is a great guy, but 
he represents Los Angeles. Now, if you have been to Los 
Angeles, you know there is a lot of cement and glass and wires 
over there. I represent rural Maine. We have two population 
centers, Mr. Clayton, one we call LA, but it is Lewiston 
Auburn, with 35,000 people. Then we have Bangor with 35,000 
people. And in between, which is about an 8-hour drive from 
point to point, not Lewiston Auburn to Bangor, but beyond that, 
we have moose and deer and all kinds of critters running around 
the roads, and we have 400 small towns. And many of those small 
towns, Mr. Clayton, don't have broadband.
    Now, the great thing about trees that Mr. Sherman is 
concerned about is cutting them down. Well, you cut them down, 
they grow back. It is one of God's great creations. We cut down 
those trees, sir, and we turn it into paper. In full 
disclosure, Mr. Clayton, in northern Maine, the northernmost 
part of our State, the northernmost part of our country is 
Madawaska, Maine. We have the Twin Rivers Paper Company, the 
best paper makers in the world. 525 jobs, and there aren't many 
other opportunities up there, at least in this industry. 525 
jobs, and they make a very thin, fine paper that mutual fund 
and other financial reports are printed on.
    Now, I disagree with Mr. Sherman. He is a good guy, but I 
disagree with him. Here is why: We have 40 million people in 
this country that live in rural America, 40 million. Forty-one 
percent of our seniors in this country, Mr. Clayton, do not 
have broadband access. So over in L.A., California, they might 
be able to print out or take a look at a mutual fund report on 
the internet; we don't have that in many parts of Maine. And we 
get power outages throughout the year, not just in the winter 
during the ice storms.
    Now, your job, with all due respect, sir, and the job of 
the SEC, is to make sure that our small investors are able to 
care for themselves. So if you are a grandparent or a parent 
and you want to take care of your kids going to college and you 
are saving for them or you are a mechanic in Lewiston, Maine, 
and you are getting ready for your golden years and you have a 
retirement nest egg, you need to know what the heck you are 
investing in. I don't worry about the big guys in L.A., 
California. I worry about the folks in rural America. By the 
way, Maine is also the oldest average State in the country. It 
is not Florida, it is not Arizona. It is Maine.
    My mom is 89, I love her to death. She can't use a cell 
phone. Having her trying to find out what her mutual fund 
holdings are--are you kidding me? So you have in front of you, 
sir, rule 30e-3. And it simply says that we think it is OK that 
these mutual fund companies send out a letter to our seniors 
saying you are no longer going to get your mutual fund reports 
and other financial reports on paper. Now, 71 percent of our 
seniors want it on paper. And this is one of the SEC's own 
commission studies.
    All we are saying is what if they are on vacation? What if 
it got lost in a snowbank? What if that notice came while they 
were moving or they were on vacation? That is not fair, sir, 
and that is not right. All I am saying is when you have all 
these millennials and these Gen X folks, and they understand 
how all this works, and over the years more and more of rural 
America is going to be connected with broadband. This problem 
is going to go away, but it is not going away now.
    You have a responsibility, with all due respect, sir, not 
only to me, but to 40 million people that live in rural 
America, many of whom are seniors, many of whom don't have 
broadband connection. Please, Mr. Clayton, please withdraw this 
rule. It is harmful to our seniors, it is harmful to our small 
investors, and over time, it is going to go away, and leave it 
the way it is now. If you don't want your financial reports on 
paper, then send in the form. That is an opt-out. Don't make it 
so complicated that you have to do something you might not be 
able to do. Just let it go. So I implore you to do that in my 
final 41 seconds, sir. By the way, can I get a commitment from 
you that you will withdraw this rule?
    Mr. Clayton. No, I can't make policies sitting right here.
    Mr. Poliquin. OK. That to me, sir, in Congress-speak, is 
you are a lean yes. OK.
    And do you have any plans over the next 6 to 9 months to do 
anything crazy with this rule?
    Mr. Clayton. I don't have any plans to do anything crazy.
    Mr. Poliquin. Well said, sir. I am going to take that as 
you will take this under great advisement. You have seen all 
the comments when it comes to this, how important this is to 
the small investors that you are responsible to protect, sir. 
And I appreciate that very much.
    Sir, SEC rule 14a-8 that deals with the shareholder 
proposal process. Are you folks looking at that?
    Mr. Clayton. Yes.
    Mr. Poliquin. You are. And do you think that it makes sense 
to change the ownership threshold or the holding period?
    Mr. Clayton. I am taking a holistic look at it.
    Mr. Poliquin. What does that mean?
    Chairman Hensarling. It means the time of the gentleman 
from Maine has expired.
    Mr. Poliquin. Thank you, Mr. Chairman. Thank you, Mr. 
Clayton, very much.
    Chairman Hensarling. The chair now recognizes the gentleman 
from Connecticut, Mr. Himes.
    Mr. Himes. Thank you, Mr. Chairman.
    And welcome, Chairman. It is great to see you again, and I 
assure you this committee is not usually this much fun. It is 
really heartwarming for me to see somebody of your caliber and 
experience in the role that you are now occupying.
    And I want to touch on just three things with you this 
morning. First, I don't want to beat a dead horse, but I do 
want to add my voice to the concern that you have heard today 
that has been raised by any number of my constituents and 
organizations in my district about the risks associated with 
the online transmission of data to the SEC. And you have heard 
that a lot today, so I don't want to beat that dead horse, but 
I do want to add my voice to that and ask that that become a 
real priority, and that issuers come to feel confidence where I 
don't think they do now.
    Second, I want to touch on just two issues that have been 
important to me for a long time. And to give you a little bit 
of context here, I have taken more than my fair share of lumps 
on this committee because I really do believe that regulation 
is not something that should be primarily discussed as though 
it were religious writ, but that there is a good balance to be 
found, and that sometimes regulation leans too heavily and 
sometimes it leans too light.
    One thing I do feel very strongly about is that there are 
areas in which I think there are systemic issues and possibly 
bad behavior. And one of those areas, it will not surprise you 
to know, is a project I have been working on for some time to 
look at the remarkable consistency of 7 percent growth spreads 
in smaller and medium-size IPOs. This grew out of my experience 
with the JOBS Act, where we worked really hard to try to save 
new issuers money, a 7 percent growth spread on a $200 million 
IPO is $14 million; that is real money.
    I don't want to spend too much time on this because I do 
have another issue, but your predecessor, when I asked about 
this and I pointed to academic literature that suggested that 
there could be collusive behavior in this particular product, I 
got back a letter that was not entirely satisfying. It said 
that academic studies have yielded mixed conclusions about the 
efficiency of the market. I am not sure that is true, and held 
up the JOBS Act as something that should be watched before we 
draw any conclusions.
    I looked up the data. There have been hundreds and hundreds 
of IPOs of the size I am talking about since the JOBS Act came 
into force. Remarkably, the mean IPO growth spread was exactly 
7 percent. The data is suggestive, and I am not ready to 
convict, but I am ready to suggest that there is probable cause 
for an investigation here.
    I will also add that as you have been, I have been in the 
room where it happened. And so I would love to see the SEC take 
this up in a serious way, because it is important for our 
issuers not only to save money, but to have confidence that 
market dynamics are applying.
    Let me give you a second to respond to that, but I do have 
one other question I want to raise to you.
    Mr. Clayton. I think it is worth looking at. And I think 
the way you framed it shows some thought, because it is 
probably a--if there is something that we should look at here, 
it is in the market segment; it is not at the top end of the 
market where there is negotiating power.
    Mr. Himes. Yes, I agree with that. Thank you. I would 
appreciate that. I will follow up on that with you.
    Look, if the facts show that that is a competitive market, 
I will let this go. But I don't know of any other product or 
service that is so consistently priced in a purportedly 
competitive market.
    The other topic, Mr. Chairman, I wanted to raise with you, 
a couple of Congresses now I have submitted or dropped 
legislation that would clearly make insider trading a crime. 
You know the background here better than I do. But I am a big 
believer that if we are going to convict and send people to 
jail for a crime, that Congress ought to establish exactly what 
the law is that is being violated.
    That, of course, is not true in the realm of insider 
trading. Of course, that has led to something else that I think 
is suboptimal, which is decisions, particularly out of the 
second circuit, which have resulted in significant numbers of 
convictions being overturned. To me, that is no way to run a 
railroad. And I have dealt with this with your predecessor. I 
get that we have a long tradition of prosecutions here based 
largely on judicially established law. I was a little 
disheartened, I guess, to see your quote that you think we do a 
pretty good job here and you are not sure that legislation is 
needed. Again, I am a big believer that if we are going to 
spend people to jail, we ought to have a law that specifies 
very clearly what they are going to jail for.
    So I am wondering if you are open to that notion and 
whether you are open to the idea that this Congress ought to, 
actually for the first time, be very clear in statute about 
what insider trading is.
    Mr. Clayton. So on where we stand and what I said NYU, I am 
comfortable that we can do a good job. As far as your question 
about engaging on it, a concern of mine is that we will run 
over kind of the same facts and circumstances question in a 
statutory approach that we do in what I call a judge-made 
approach. But I am very happy to engage on it. It is an area 
where I have spent a lot of time, and any time you would like, 
I would love to talk about it.
    Mr. Himes. Thank you. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, Mr. Chair.
    Chairman Clayton, thank you for being here today. You might 
hear this from others, but in the short time that I have been 
in Congress, I appreciate your style. This is--coming before 
this committee and being more informational as opposed to 
adversarial is incredibly refreshing.
    I loved your comments this morning when you started, 
talking about the four things that you are concentrating on. I 
loved the reference to the one-size-fits-all regulatory regime 
and how that might be having an impact on companies going 
public, because it applies the same whether you are big or you 
are small.
    In your statement that we need more companies in the public 
market so that Main Street investors, those that are saving for 
retirement, those that my colleague Bruce Poliquin was so 
concerned about a second ago, can participate, and I added, and 
realize the reward of growth in America. If that is our goal, 
that is--we need to achieve it.
    I am going to be very simplistic in terms of concentrating 
on one thing, the CHOICE Act--actually, last year, we passed 
something out of the this committee called the Main Street 
Growth Act, and part of it was contemplated within the CHOICE 
Act that just passed through this committee and out of the 
House. It contemplated the creation of venture exchanges.
    Mr. Clayton. Uh-huh.
    Mr. Emmer. To improve market quality for smaller companies 
and their investors. I am just wondering, if this is something 
that you are interested in--that your SEC will be looking into?
    Mr. Clayton. So thank you for your comments, I appreciate 
it. Thanks for the comments on a larger portfolio of public 
companies. I'm just sorry to take your time, but I want to be 
clear.
    I am not interested in people being able to invest in IPOs. 
I mean that is nice, it is good. I am interested in them having 
more companies to invest in.
    Mr. Emmer. Choice.
    Mr. Clayton. Choice.
    Mr. Emmer. It is about choice.
    Mr. Clayton. Choice, and a broader spectrum.
    To your question about venture exchanges, yes. Now, I am 
not--I haven't consulted with Commissioner Stein or 
Commissioner Piwowar about what a--so I don't want to get ahead 
of them, but from my perspective, having--and we--this is 
coming at us organically as well as from a regulatory 
perspective.
    Mr. Emmer. Right.
    Mr. Clayton. The technology people are using for initial 
coin offerings is the same kind of technology that you would 
use to set up a venture exchange. And then the question is what 
rules do you put around it so that you can have a level of 
investor protection that we are comfortable with but 
facilitates the same type of capital formation we are seeing in 
kind of that small space?
    So that is a long--sorry for the long-winded answer, but 
that is how I am looking a it, and I think it is something we 
should look at.
    Mr. Emmer. Since you have given it some thought, do you 
have any idea what the SEC could do to allow private entities 
to create a venture exchange, or is it just too premature at 
this point?
    Mr. Clayton. Going back to my comment about coming out 
organically, I am sure there are a lot of smart folks who 
operate in the marketplace who are already thinking about this 
are hearing our colloquy today. They know what I care about. 
They know that I care that this works and investors get the 
information they need. They can look across the way we do 
private offerings today and see the kind of protection that 
people get, apply that to a venture exchange, and then we have 
something to talk about.
    Mr. Emmer. Right. Actually, your comment earlier today is 
probably the--it is one that doesn't require a master's degree. 
It is more common sense, and that is that money will go to 
where it can realize its highest return in the most efficient 
manner. I guess I listened to you today in talking about this 
very narrow issue, which you could start talking about a whole 
bunch of these issues when it comes to capital formation. I 
worry the government is going to make itself less than 
relevant, because the smart people that are out there, the 
people that have the capital are going to figure out how to 
operate if government doesn't start doing what it is supposed 
to do.
    So I guess with the little time I have left, the thinking 
that you have done in this area and maybe any other that would 
be similar, is there any additional statutory authority that 
the SEC needs from this committee and from Congress?
    Mr. Clayton. You guys have been great today because you 
have asked me that in a bunch of different contexts. In terms 
of a venture exchange, if we do we will be back here. Let me 
take you up on it, but not try to be specific today.
    Can I go to just one related area on that?
    Mr. Emmer. Sure, although my time is running out.
    Mr. Clayton. We have talked a little bit about the cyber 
breach and the bad actors. Another area I am thinking about, 
and it is a DOJ issue, it is a Treasury issue, it is a national 
security issue, is do we have the tools to get at the bad guys 
or cyber breaches? So--
    Mr. Emmer. Yes. Thank you very much.
    Chairman Hensarling. The time of the gentleman has expired.
    The chair recognizes the gentleman from Maryland, Mr. 
Delaney.
    Mr. Delaney. Thank you, Mr. Chairman.
    And thank you, Chairman Clayton, for being here all this 
time. You obviously have superb credentials for the job that 
you now have, and we are grateful for that.
    You said something recently to my colleague just a couple 
minutes ago about how you really care about making sure 
investors get the information that they need. Mark Carney, the 
Governor of the Bank of England, has spoken extensively about 
his view that investors aren't getting enough information about 
climate risks, specifically valuation variability around fossil 
fuel related assets on the balance sheet of companies.
    Prior to coming to Congress, I started two companies and 
took them public. And I used to labor over the risk factors, 
because I viewed that as the place that I could get in trouble. 
And so I guess my question to you is, do you think there is 
enough disclosure in this area? Because it is not so much of 
whether what is occurring with climate change will actually 
have immediate effect on the balance sheets of these companies, 
but it seems to me the question, almost like the mortgage 
market when mortgage assets went down in value very rapidly way 
before defaults went up a lot. But what happened, there was a 
perception that defaults would go up a lot, and then the assets 
went down materially in value. And that could happen with 
fossil fuel assets, which is even before the effects actually 
hit the income statements and the balance sheets of these 
companies, people could say, we really have to get out of these 
assets, and they could fall rapidly and it could affect the 
insurance industry, financial service companies, energy 
companies obviously.
    Do you have a view as to whether we have enough disclosure 
in that area?
    Mr. Clayton. Do I have a specific view on a specific 
company about whether we have enough disclosure in the area? It 
is hard for me to judge--
    Mr. Delaney. Not specific company, but companies in 
general. Do you think there is enough information in the filing 
statements of companies for investors to allocate capital 
appropriately based on--
    Mr. Clayton. I think you framed the question in a very fair 
way. And you won't like it, but I will answer it with a 
question that I don't know the answer to, which is when the 
companies you are thinking of in your mind manage their 
business and they think about these potential impacts, which as 
good stewards of capital they should be, does their disclosure 
reflect that?
    Mr. Delaney. Reflect that. Do you think it does?
    Mr. Clayton. I don't know what is in their minds, but that 
is the right question.
    Mr. Delaney. Yes. And I would think that somewhere in your 
organization people should be figuring that out, because when 
you think about macro risks, this is clearly one of them, when 
you think of the size of the assets.
    Mr. Clayton. And I think that applies to different 
businesses in different ways.
    Mr. Delaney. It cuts across all industries, right?
    Mr. Clayton. And I agree with you.
    Mr. Delaney. Are you committed to looking at that issue?
    Mr. Clayton. Yes.
    Mr. Delaney. OK. Good.
    Mr. Clayton. That is--one of the things that everybody 
still says, how do you feel about regulation, if disclosure--
what disclosure really should do at the--
    Mr. Delaney. This is not even about new regulation. This is 
about just enforcing the standard that you just described. If 
it is material to you, it should be material to investors.
    Mr. Clayton. Exactly. One of the things I always ask myself 
in any industry is how do they manage the business?
    Mr. Delaney. Right.
    Mr. Clayton. How do they look at that? And does the 
disclosure reflect how they manage the business?
    Mr. Delaney. That is right. And you ask a lot of companies 
those questions when you are in your other seat.
    So two quick questions. A fiduciary role, I know you want 
it synchronized, right? I agree, right answer, but do you 
support the rule the way it is? Do you think it is a smart 
rule?
    Mr. Clayton. It is not really clear what the rule is yet, 
because what a rule is is how it is implemented and how you 
demonstrate compliance.
    Mr. Delaney. Right.
    Mr. Clayton. That is what this kind of rule is.
    Mr. Delaney. So are you more concerned that it is--are you 
more concerned about the rule or you generally think it will 
get implemented well?
    Mr. Clayton. I like the words.
    Mr. Delaney. Right. OK.
    Mr. Clayton. No conflicts. Disclose the conflicts. You owe 
somebody a duty, they should know what it is. The question is, 
are we going to implement it in a way that adversely restricts 
choice in terms of what type of relationship you have or 
adversely restricts what type of assets you can invest in?
    Mr. Delaney. And the tradeoff, I guess, is it could 
encourage a lot of innovation, right? Because as you know, 
people are sitting in conference rooms right now thinking of 
companies they can start to take advantage of the rule, which 
might be good.
    Mr. Clayton. It might be good.
    Mr. Delaney. Last question real quickly. We submitted a 
letter to you about the EDGAR filing. It was signed by 21 of my 
colleagues.
    I ask the chairman to submit this for the record.
    Chairman Hensarling. Without objection.
    Mr. Delaney. I assume you will be getting back to us about 
this?
    Mr. Clayton. I actually have it here.
    Mr. Delaney. Good. Wow. The mail system still works.
    Mr. Clayton. And the questions you asked are the same 
questions I am asking.
    Mr. Delaney. So what really happened here? Was it that 
between when companies file their forms and they became public, 
was there a breach in that short period of time that people 
were able to capitalize on?
    Mr. Clayton. So as far as--take this as things aren't--it 
is an ongoing investigation.
    Mr. Delaney. Yes.
    Mr. Clayton. But as an example, we have a test filing 
system in our EDGAR system, so you are going to file your 
earnings release.
    Mr. Delaney. Yes.
    Mr. Clayton. You test it the night before.
    Mr. Delaney. Yes, I remember that.
    Mr. Clayton. People happen to include.
    Mr. Delaney. And so that is where they got it, and so that 
is where they traded. Do you think it is big or small, the 
amount of money that was made on that information?
    Mr. Clayton. I don't know.
    Mr. Delaney. You don't know. Great.
    The Chairman. The time of the gentleman has expired.
    The chair now recognizes the gentlelady from Utah, Mrs. 
Love.
    Mrs. Love. Thank you so much. I know it has been a long 
day. I appreciate you being here.
    Chairman Clayton, I would like to come back to an issue 
just of access to capital. The number of companies accessing 
the capital markets for financing that are going public in 
recent years have been less than half the average annual number 
posted in 1990.
    Most alarming has been the drop-off in small companies 
going public. Less than 20 percent of initial public offerings 
in recent years have been valued at $50 million or less. By 
stark contrast, 80 percent of all IPOs in the United States 
between the years of 1991 and 1997 were valued at less than $50 
million.
    The reason for this--the reason why this is so concerning 
is that small companies account disproportionately for net new 
job--for new job creation, according to the National Venture 
Capital Association. Ninety percent of job creation by new 
companies occur after they go public.
    So my question is this: As you know, some experts have 
attributed the marked decline in small companies going public 
to the decimalization of stock prices, dropping minimum pricing 
increments by which stocks are traded, or the tick size from 
one-sixteenth of a dollar or 6.3 cents to one penny, which 
occurred in April 2001.
    So I know that there are a variety of options regarding 
this issue. Last year, the SEC launched a pilot program to 
address this issue or a program to restore wider tick size 
pricing to small capitalization stocks. I know you have been 
there since May, but how is that program going so far?
    Mr. Clayton. I have talked to our economists about this. So 
far, the results are mixed. They believe we need to let it run 
a little bit longer to be comfortable that the data they are 
getting is actually something we can put value on.
    Mrs. Love. Have you been able to draw any initial 
conclusions at all regarding the effectiveness of wider tick 
sizes to the revitalization of the small-cap IPOs?
    Mr. Clayton. Yes. Let's put it this way: The behavior in 
the marketplace takes a while to change. So if what you are 
looking to do is drive more volume in these names, people trade 
more, it is mixed. There are some places where we are seeing 
some increased volume, some increased liquidity, and other 
cases where we are not. I think we need to let it run a little 
bit more.
    Mrs. Love. OK. Given your extensive background in this 
field, does the reduction in tick sizes have anything to do, in 
your opinion, with the drop-off in IPOs under 100 million?
    Mr. Clayton. I think it could be a factor. In order for a 
company to--for it to be attractive for a company to go public, 
you have to have demand in trading. And one of the things that 
bankers will tell you, I go to a banker and I say, hey, should 
I go public? They say, you may not be of sufficient size for 
the market to be interested enough in your stock for there to 
develop a trading market where you are going to have pricing 
that you are happy with.
    Mrs. Love. So you don't think it is important for companies 
to go public earlier?
    Mr. Clayton. No, I do. That is a long-winded way of saying 
that if we can get more volume in trading in small-and medium-
size companies, it would be more attractive to go public.
    Mrs. Love. Is there anything that you would add to this 
pilot program? Do you think it is sufficient enough to give you 
the answers that you need in the long term? I mean I am just--
    Mr. Clayton. I am hoping that that program, together with 
the access fee pilot, will give us some information. And I have 
some expectation. There are people who are much more expert at 
this than I am, that the way we trade large-cap stocks is not 
the way we should trade small-cap stocks if we want to attract 
more capital. So the answer is I think it is going to have 
value, but there are a lot of factors that go into whether we 
are doing the right thing in the small and mid-cap market.
    Mrs. Love. I think you will agree with me that we want to 
have wealth-creating vehicles--
    Mr. Clayton. Yes.
    Mrs. Love. --For the public to participate in phenomenal 
growth potential of the American economy. I hope that you will 
continue studying this issue, because this is what makes the 
world go round. This is what helps hardworking Americans be 
able to get there. So I hope you will continue to work with 
that. We have to work faster.
    Mr. Clayton. I agree with you.
    Mrs. Love. Thank you.
    The Chairman. The time of the gentlelady has expired.
    The chair now recognizes the gentleman from North Carolina, 
Mr. Budd.
    Mr. Budd. Thank you, Mr. Chairman.
    Chairman Clayton, thank you again for being here. So you 
testified about some of the administrative actions the SEC has 
undertaken to improve capital formation. And I want to 
highlight specifically the SEC's decision to expand 
confidential IPO registration and the submission process to all 
issuers, large and small.
    So has the initial JOBS Act provision proven popular to 
emerging growth companies, and what have you seen since the 
July finalization of the SEC decision, in terms of large 
issuers taking advantage of the SEC decision expanding the 
confidential registration option?
    Mr. Clayton. The initial data is positive. People--not just 
people using it, but people saying thank you, we intend to use 
it, and both from an IPO perspective but also from the 
perspective of the follow-on offerings that occur in the first 
year. So I think the response is positive.
    And we are also monitoring on the investor protection side. 
If there are any adverse views, I would like to hear them. We 
haven't heard any.
    Mr. Budd. So of the positive result that you have observed 
or seen and heard, why do you think they have been successful 
or why do you think they have been positive, and have they 
achieved that success without compromising fundamental investor 
protections and transparency?
    Mr. Clayton. Yes. I think this one was pretty 
straightforward. It has made it easier, but there is no change 
in the disclosure. And I think investors still have plenty of 
time, with the disclosure, to make an investment decision. I 
haven't heard anybody say they don't have enough time.
    Mr. Budd. Sure. So do you believe that the collaborative 
process represented by confidential registrations has 
meaningfully reduced the risk associated with an IPO?
    Mr. Clayton. I think it has reduced the risk to the company 
of the process. And I like the word you used. I think when 
companies go through the registration process and transform 
from a private company to a public company, they emerge as 
better companies. I think the staff review process and the 
accounting review makes them--I think it makes them better 
companies.
    Mr. Budd. That makes sense. Chairman Clayton, I also would 
like to talk about finders. Take the example if two Main Street 
businesses come together and one would like to raise money and 
they offer the other a finder's fee and that transaction works 
out and they actually raise capital, that the SEC has held for 
about 16 years that this transaction required that a business 
needs to register as a broker-dealer. That puts them in the 
same category as Merrill Lynch or J.P. Morgan, like a 
securities trader. It is an unworkable strategy, in my view.
    So is it your view that the SEC could undertake some 
activity toward clarifying the significant regulatory 
uncertainty that exists right now with regard to finders, and 
what would that look like in your world?
    Mr. Clayton. So this is a line-drawing question. And I know 
that this committee has explored this issue in the terms of an 
NMA finder. I think the question you ask is, should we look at 
that if somebody is doing this on an ad hoc basis, not as a 
business not in connection with a broad capital raising or 
account raising, but just--
    Mr. Budd. Maybe you can answer it for both, ad hoc as well.
    Mr. Clayton. Yes. I fundamentally agree that if someone is 
not in the business of doing this type of activity and it is 
clear that they are not and you have kind of big guys involved 
or sophisticated people, they don't seem like a broker-dealer 
to me. OK? But I don't want to go too far down the slippery 
slope, because when you start going out to five or six people 
and say, hey, how about investing in this, and by the way, I am 
taking 7 percent then you sound a lot like a broker to me.
    Mr. Budd. Do you think there will be some efforts from the 
SEC to clarify that?
    Mr. Clayton. I think if somebody is worried--in the 
hypothetical you described, if somebody is worried that we are 
going to find them a broker-dealer, we probably need to address 
that.
    Mr. Budd. Certainly. I want to raise the issue of Financial 
Accounting Standards Board or the FASB current expected credit 
loss standard. Mr. Zeldin from New York and I are working on a 
letter right now that virtually every bank in my State views 
that standard as unworkable. It is onerous and it is hurtful to 
the availability of credit.
    Is there a possibility that the SEC will study this rule at 
more length before going ahead with its implementation?
    Mr. Clayton. I can't make that promise today. I understand 
these issues. I think most of it is a bank capital issue and 
whether this is going to require them to hold more capital as a 
result of an accounting change. I know many of these banks are 
in dialog with their bank regulators about this. There is a 
pro-cyclicality to it. But I will look at it.
    Mr. Budd. Thank you.
    The Chairman. The time of the gentleman has expired.
    The chair wishes to alert members that votes will be called 
on the floor soon. If remaining members would voluntarily take 
4 minutes, I think we can clear all members and not have to ask 
our witness back after votes.
    The chair now recognizes the gentleman from Indiana, Mr. 
Hollingsworth, for 4 minutes.
    Mr. Hollingsworth. I will take 4 minutes. Again, I want to 
add my welcome, especially as a UPenn alumnus as well. I 
appreciate you being here.
    I wanted to cover three topics. Hopefully, I will get to 
all three. First, you have mentioned several times the desire 
to have more tailored regulation or regulatory environment for 
smaller businesses. And one of the things that you brought up 
was 404(b).
    Certainly, one of the bills that I am looking at, dropping 
raises, the current threshold from $75 million up to a higher 
threshold, I wonder what your opinion about that is and if you 
have come to a decision about what an appropriate threshold 
might be?
    Mr. Clayton. I have not come to a decision about an 
appropriate threshold, but I do think examining that threshold 
from time to time, like we talk about--I am a believer in the 
JOBS Act.
    Mr. Hollingsworth. Right.
    Mr. Clayton. And when something is working, let's see if we 
can make it work more, being cognizant of not going too far.
    Mr. Hollingsworth. Absolutely. Well, one of the things that 
people in my district are very concerned about is ensuring that 
we have capital there for businesses at every stage in their 
lifecycle. And certainly one of the big speed bumps is going 
public, and especially for smaller companies that are in need 
of the capital. They don't want to have these onerous 
requirements on them. Like you said, it makes a huge difference 
in valuation. So please continue to look at that.
    The second thing I want to talk about was the Volcker Rule 
and just better understanding how the collaboration amongst 
different agencies that are charged with this will be carried 
out over the coming years. It took over 3 years to write the 
rule itself, and certainly as revisions come up or other 
changes may be necessary that can't be handled legislatively 
what the process looks like for both the enforcement changes to 
Volcker Rule, in terms of coordinating amongst the different 
agencies.
    Mr. Clayton. Maybe I am too much of an optimist, but I am 
optimistic that the Fed, OCC, the SEC, the FDIC, that we can 
work together on this. I said I believe in retrospective 
review. This is a rule that has a lot of impact.
    Mr. Hollingsworth. Yes, definitively.
    Mr. Clayton. So the greater the impact--
    Mr. Hollingsworth. Right.
    Mr. Clayton. --Probably the more important it is to take a 
look. I want to be clear. The policy underlying the rule that 
you shouldn't take depositors' money and speculate with 
depositors' money is a good one. The question of defining how--
what is proprietary trading and what is not is one that is 
worthy of some reexamination, particularly some components of 
that. But--
    Mr. Hollingsworth. Well, I might push back against the 
characterization that we are taking depositors' money and 
speculating wildly with it. And whether that actually 
transpired in a material way and whether that led to the crisis 
and whether the Volcker Rule really prevents that I think are 
all questions, as you said, that probably need some 
reexamination and some thoughtful research surrounding.
    I wanted to delve into one other item that is a little bit 
more esoteric, but has been perturbing me for the last couple 
of weeks. And thinking about the significant growth in ETFs 
over recent history--and, look, I am a big believer in 
financial innovation, but I think when you say Mr. and Mrs. 
401(k) and wherever they may be across this country, I think 
when they buy or sell an ETF, they perceive that they have 
great liquidity, while the proliferation of ETFs have led to 
some more exotic strategies underlying some of the ETFs 
themselves.
    And my concern is, in periods of acute stress where money 
flow is reversed--instead of money flowing in, money is now 
flowing out in a significant way--that significant redemptions, 
and especially through the broker-dealers, might lead to 
challenges in unwinding whatever those strategies are, selling 
those underlying assets, and that there is a perceived mismatch 
between apparent liquidity at the retail investor side and 
actual liquidity in the underlying assets that underlie the 
trust. Is there any concern to look into that matter?
    Mr. Clayton. Yes. I think you articulated a risk that is 
not as well understood as it should be.
    Mr. Hollingsworth. Great. Well, thank you.
    And with that, I yield back.
    The Chairman. The time of the gentleman has expired.
    The chair now recognizes the gentleman from Arkansas, Mr. 
Hill, for 4 minutes.
    Mr. Hill. I thank the chairman.
    I appreciate, Chairman Clayton, you coming to the committee 
today. And I want to echo my colleagues, we appreciate your 
tone and your discussion on these topics and your forbearance 
on all of them.
    I want to pick up where my friend Mr. Hollingsworth left 
off on exchange-traded funds. I am pleased that we have sent a 
bill to President Trump to enhance research on exchange-traded 
funds. This was something that the Commission itself thought 
about doing back in 1987, and, by God, we have rushed right 
into it now and sent down to the President's desk a directive 
on writing those rules. If you have questions about it along 
the way, I hope you will be in touch after that bill is 
enacted.
    But, like my friend said, there had been rapid growth. In 
fact, some projections show that exchange-traded funds may 
reach $6 trillion. And you yourself a few minutes ago talked 
about the impact of passive money in the markets and price-
setting.
    For me, you have index funds, you have exchange-traded 
funds that are proposed on an index that is made up. In other 
words, someone has innovated an index. And then you have 
obviously fixed income versus equity. And this is really being, 
as Trey said, a major innovation in the markets.
    The Commission has really just used exemptive relief on 
approving ETFs. Do you think the Commission should write a rule 
about exchange-traded funds and approving those under certain 
conditions instead of just using exemptive relief as a way to 
tee them up?
    Mr. Clayton. Whether that is specifically what we should do 
or we should do something else, we should recognize--and this 
is a different context, but the same label--one size doesn't 
fit all. Like you said, an ETF that follows a broadly based or 
broadly recognized index of large-cap stocks is a much 
different animal from an inversed leveraged ETF that follows a 
specific, perhaps not all that liquid, asset class. I think we 
should have a--there can be a different approach to one versus 
the other.
    Mr. Hill. Right. Well, I just would urge the Commission to 
look at this. We are now 15 years into this trend. And also 
when it comes to the pricing issue my friend raised, the impact 
out in the market reg world on circuit breakers geared to 
individual stock performance versus a macro move in an index 
and market opening times. In other words, the synchronization 
of individual stocks into participants in these indexes I think 
also merits study and something else to add to your, as Chair 
White referred to the 50 front burners over at the SEC.
    If I could, I want to switch subjects in the minute left 
and talk about the definition of credit investing. We talked 
about crowdfunding today. We talked about the JOBS Act. But I 
have put forth legislation in the past and others are 
interested on, in the committee as well is expanding the 
definition of accredited investor, which does allow people with 
the proper expertise to participate in private market issue.
    Do you think that the definition of accredited investor 
ought to be looked at and be reconsidered?
    Mr. Clayton. I do.
    Mr. Hill. Do you have thoughts as to--any more thoughts?
    Mr. Clayton. What I don't like about it is the binary 
nature of it, which is you cross the threshold and then you can 
invest whatever you want. You don't cross the threshold, you 
have no options. I am not Pollyanna enough to think that we can 
have 10 different--
    Mr. Hill. Parse that out, right.
    Mr. Clayton. But it shouldn't be that binary, because if it 
is that binary then we do need to constrict it.
    Mr. Hill. Thanks for your time today.
    Mr. Clayton. Thank you.
    Mr. Hill. I yield back.
    The Chairman. The time of the gentleman has expired.
    The chair now recognizes the gentlelady from New York, Ms. 
Tenney.
    Ms. Tenney. Thank you, Mr. Chairman.
    And thank you, Chairman Clayton for being here today. I am 
going to echo the same sentiment that my colleague Mr. Emmer 
said. And I love your one-size-fits-all regulation leads to one 
size, and I think that goes beyond even the jurisdiction of 
this committee and obviously the agency you chair. It is in all 
sectors, as I come from one of the most regulated States in the 
Nation, New York.
    But I just wanted to ask you a little bit about the DOL 
rule quickly. I know Chairwoman Wagner touched on it, but many 
of my constituents, especially the 401(k)-dependent 
constituents and the regular middle income level people, really 
rely on the relationship with brokers. And I understand there 
has been a delay for about 18 months, and I just wondered if 
you could just describe your relationship right now with the 
Department of Labor, with Chairman Acosta, and your efforts to 
revise and implement this rule so that it doesn't hurt our 
investor community and also protects seniors and others who 
rely on their 401(k). If you could just touch on your 
relationship and the delay that we are seeing right now.
    Mr. Clayton. As I said, as I have said many times, I thank 
Secretary Acosta for reaching out on this, because it is a 
reality. We have to put our heads together. We at the 
Commission have been working on where we think this ought to 
go, citing the things that I outlined quickly: Choice, clarity, 
consistency, and cooperation.
    We are at a point where we are ready to engage. And I look 
forward to engaging with the Department of Labor and Secretary 
Acosta's staff on this. They put a lot of thought into where 
they got to. We should benefit from that thought, but we need 
to drive toward a consistent approach to the marketplace.
    Ms. Tenney. So as you undergo that analysis, is that 
something that we can have in a transparent way and work with 
us on this as we go forward so we know what to expect and our 
investor world knows what is going to be happening?
    Mr. Clayton. Yes. It is easy for me to say yes, because the 
Administrative Procedures Act requires me to do that. When we 
are ready to pull it forward, you guys will have a--there will 
be a lot of people taking a fair shot at this.
    Ms. Tenney. Thank you. I greatly appreciate it, and just 
thank you for your service and doing what you are doing. We are 
grateful to have you here for this long day, but I just wanted 
to say thanks again.
    And I yield back, Mr. Chairman. Thank you so much.
    The Chairman. The gentlelady yields back.
    And since she does yield back, the gentleman from Ohio, Mr. 
Davidson, is recognized for 2 minutes.
    Mr. Davidson. Mr. Chairman, thank you.
    Chairman Clayton, thank you for being here today, and 
thanks for the work you are doing to uncover the facts and the 
truth behind what has actually been happening there at the SEC. 
You have answered a lot of questions about cybersecurity, so I 
won't belabor points that you have really already made, but I 
was encouraged to hear the thoughtfulness that you are putting 
into what do we actually need to have.
    And we are moving forward on a bill, as you know, that will 
provide additional instructions and give some intersection 
between the migration to Consolidated Audit Trail and the 
cybersecurity approach that you have been doing.
    And I guess one question is, have you given thought to 
layers of data, so that instead of all of it being in the 
Consolidated Audit Trail, all of it being in EDGAR, some of the 
data not necessarily being held but accessible as part of that 
approach?
    Mr. Clayton. I have given thought to it. The more important 
thing is that the people who know this better than I do give 
thought to it, but I have asked the same question that you 
asked and whether that is practical. There is some data that is 
mission critical for the SEC, and we need to get it, but having 
that kind of thoughtful approach is the way I am trying to do 
this.
    Mr. Davidson. Thank you. And then on the Consolidated Audit 
Trail, the net of the cybersecurity concerns, how do you feel 
the project is moving? Any concerns for the scope and the 
feasibility for Consolidated Audit Trail?
    Mr. Clayton. The Consolidated Audit Trail, the genesis was 
the flash crash and our ability to get at what was happening in 
the marketplace around the time of an event like that. And we 
learned that the data was stored in a bunch of different places 
and it was hard to bring it together to do an analysis. I still 
want to be able to do that, and I want to be able to do that 
pretty quickly.
    That is the question I am asking the SROs and the provider. 
So I think that is context to your question. I hope I got 
there.
    Mr. Davidson. It is intersecting interest. My time has 
expired. I yield back, Chairman.
    Mr. Clayton. Thank you.
    The Chairman. The time of the gentleman has expired.
    I want to thank the witness for his testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    [Whereupon, at 1:40 p.m., the committee was adjourned.]

                            A P P E N D I X


                            October 4, 2017

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