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

                             OVERSIGHT OF THE SEC'S
                            DIVISION OF ENFORCEMENT

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

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON CAPITAL MARKETS,
                           SECURITIES, AND INVESTMENT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 16, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-91

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                       ______

                         U.S. GOVERNMENT PUBLISHING OFFICE

    31-437 PDF                WASHINGTON : 2018

                     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

                         Shannon McGahn, Staff Director
          Subcommittee on Capital Markets, Securities, and Investment

                       BILL HUIZENGA, Michigan, Chairman

    RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
    LUKE MESSER, Indiana                 BILL FOSTER, Illinois
    BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
    FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
    TOM EMMER, Minnesota                 JUAN VARGAS, California
    ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
    THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    TREY HOLLINGSWORTH, Indiana

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 16, 2018.................................................     1
    Appendix:
        May 16, 2018.................................................    29

                                   WITNESSES
                            Wednesday, May 16, 2018

    Avakian, Stephanie, Co-Director, Division of Enforcement,
      Securities and Exchange Commission.............................     5
    Peikin, Steven, Co-Director, Division of Enforcement, Securities
      and Exchange Commission........................................     6

                                    APPENDIX

    Prepared statements:
        Avakian, Stephanie and Peikin, Steven........................    30

                             OVERSIGHT OF THE SEC'S
                            DIVISION OF ENFORCEMENT

                                  ----------

                            Wednesday, May 16, 2018

                         U.S. House of Representatives,
                               Subcommittee on Capital Markets,
                                    Securities, and Investment,
                               Committee on Financial Services,
                                                       Washington, D.C.
         The subcommittee met, pursuant to notice, at 10:04 a.m.,
    in room 2128, Rayburn House Office Building, Hon. Bill Huizenga
    [chairman of the subcommittee] presiding.
         Present: Representatives Huizenga, Hultgren, Stivers,
    Wagner, Poliquin, Hill, Emmer, Mooney, MacArthur, Davidson,
    Maloney, Sherman, Lynch, Scott, Foster, Sinema, and Vargas.
         Also present: Representative Hensarling.
         Chairman Huizenga. Committee will come to order. Without
    objection the Chair is authorized to declare a recess of the
    committee at any time. This hearing is entitled, ``Oversight of
    the SEC's Division of Enforcement.'' I now recognize myself for
    4 minutes to give an opening statement.
         As we all know, the Securities and Exchange Commission
    (SEC) has a three-part mission: To protect investors; maintain
    fair, orderly and efficient markets; and to facilitate capital
    formation. Today's hearing will focus on the policies and
    procedures of the SEC's Division of Enforcement.
         The Enforcement Division investigates potential violations
    of the Federal securities laws and prosecutes these cases in
    the Federal courts or in administrative proceedings before the
    SEC's own administrative law judges.
         The SEC is a civil enforcement agency--it cannot bring
    criminal charges itself, although it can refer cases for
    criminal prosecution to the Justice Department--that pursues
    civil money penalties, discouragement of illicit profits, and
    injunctions to prohibit future violations. However, the
    division has broad authority to subpoena documents and
    testimony from individuals and entities that are violating the
    Federal securities laws or who may have information relevant to
    a fraud investigation.
         In November of 2017, the SEC's Enforcement Division
    released their annual report highlighting their enforcement
    priorities, which are guided by five core principles: First,
    focus on the Main Street investor; two, focus on individual
    accountability; three, keep pace with technological change;
    four, impose sanctions that most effectively further
    enforcement goals; and five, consistently assess the allocation
    of SEC resources.
         In the Fiscal Year of 2017, the SEC brought 754
    enforcement actions and obtained almost $3.7 billion in
    disgorgement and civil penalties resulting from those actions.
    Additionally, $1.07 billion was distributed to harmed
    investors, which was a dramatic increase from the previous
    year's $140 million.
         While this increase is significant, the SEC noted that
    much of the effort that resulted in the Fiscal Year 2017
    numbers occurred in years prior. However, focusing on the
    number of enforcement actions and total amount of penalties to
    measure, quote/unquote, ``success,'' can be misleading, in my
    opinion.
         I believe in this instance that these statistics only
    provide a very limited picture of the quality, nature, and
    effectiveness of a successful enforcement program. For example,
    violations that are prevented or deterred cannot accurately be
    measured by that particular statistic.
         I am pleased to see the Enforcement Division under
    Chairman Clayton's leadership has redirected its focus away
    from the broken windows enforcement philosophy--i.e., targeting
    a high number of minor infractions in order to discourage
    larger securities violations--which was championed by former
    Chair Mary Jo White.
         In a 2013 speech, then-Chair White characterized this
    approach as, quote, ``The theory is that when a window is
    broken and someone fixes it, it's a signal that disorder will
    not be tolerated. But when a broken window is not fixed, it is
    signal that no one cares, and so breaking more windows costs
    nothing. The same theory can be applied to our securities
    markets. Minor violations that are overlooked or ignored can
    feed bigger ones and perhaps, more importantly, can foster a
    culture where laws are increasingly treated as toothless
    guidelines,'' close quote.
         In a speech last week, the SEC Commissioner Hester Peirce
    stated that by, quote, ``following the broken windows approach,
    perhaps the SEC should have changed its name to the Sanctions
    and Exchange Commission, because it acted like a branch of the
    U.S. Attorney's Office for the Southern District of New York,''
    close quote.
         I couldn't agree more with Commissioner Peirce. In my
    mind, I believe that this misguided approach to enforcement
    appears to have only been successful at boosting statistics,
    versus meaningfully improving investor protections.
         I am pleased to see that the division is shifting away
    from minor violations of securities laws, instead taking a more
    selective approach to enforcement. After all, we should not
    evaluate the true effectiveness of a regulatory agency or its
    enforcement program solely based on how many headlines it can
    generate.
         I look forward to hearing from our Co-directors of
    enforcement and on how well the rules are working and if there
    are regulatory gaps that need to be filled to allow you to do
    your jobs more closely and more carefully.
         With that, the Chair now recognizes the Ranking Member of
    the subcommittee, the gentlelady from New York, Mrs. Maloney,
    for 3 minutes for an opening statement.
         Mrs. Maloney. OK. I thank the Chairman for yielding and
    two of my minutes are going to Mr. Sherman.
         I thank you for holding this hearing. The Division of
    Enforcement's job is to investigate and punish people who
    violate the securities law, and it is the largest division in
    the SEC because its job is so very important.
         The Enforcement Division makes all of the other divisions
    at the SEC matter. After all, if you don't enforce your
    regulations and rules, then you might as well not have them.
    But if it's a job that the Enforcement Division can't do
    alone--the division's budget actually decreased slightly in
    Fiscal Year 2018, and it is still badly outspent by the
    financial industry and the white-collar defense bar.
         The SEC is responsible for overseeing over 8,000 public
    companies and more than 26,000 registered market participants,
    such as investment advisers and brokers, and there are tens of
    thousands of retail investors who rely on vigorous enforcement
    of the securities laws to get a fair shake.
         To cover all of this, the enforcement division has a staff
    of around 1,200. Less than 4 percent of the number of companies
    the SEC oversees, and easily less than 0.1 percent of the
    employees of those companies. Given this huge disparity, there
    is simply no way that the enforcement division can catch and
    punish every single violation of the securities laws.
         That's why Congress gave investors the right to sue
    companies that they invest in for violations. This private
    right of action allows investors who have been harmed to
    recover their losses without relying on the SEC Enforcement
    Division to do all the work.
         This is one of the reasons why investors have so much
    confidence in U.S. markets. They know they can hold companies
    they invest in accountable when they violate the law, even if
    the SEC's Enforcement Division doesn't have the time or the
    resources.
         So, if you care about enforcing the securities law and
    punishing bad actors who take advantage of retail investors,
    which I know our panelists do, then you should support private
    enforcement of the securities law through investor lawsuits.
         I also want to mention that the SEC has been very active
    recently in cracking down on fraud in virtual currencies and
    so-called initial coin offerings, or ICOs.
         This is important because retail investors are getting
    killed in virtual currencies, which are being treated like
    speculative investments rather than currencies. This is a
    problem that we need to address, and the SEC's Enforcement
    Division has been at the forefront of this effort.
         So I want to thank both of our panelists. I look forward
    to hearing from you. I yield back my time.
         Chairman Huizenga. Gentlelady yields back.
         I have one more minute remaining on my side, where I will
    recognize the Vice Chairman of the committee for 1 minute for
    an opening statement. Then we will be going to Mr. Sherman for
    his 2 minutes.
         Mr. Hultgren. Thank you for convening this hearing,
    Chairman Huizenga. Thank you to our witnesses. Enforcement of
    our securities laws is a critical part of achieving orderly and
    efficient markets.
         The SEC's Division of Enforcement is critical to providing
    investors the confidence to participate in our markets. This is
    especially true for retail investors who may not have a strong
    understanding of sophisticated financial products and services.
         Additionally, the market participants should be reasonably
    informed about the expectations of the Commission for following
    our securities laws. Transparency in this respect is of the
    utmost importance.
         Enforcement practices should be about ensuring the law is
    followed. Enforcement proceedings should not result from
    miscommunication or misunderstanding of the law.
         Finally, I am pleased to see that the Commission's
    enforcement approach has prioritized protecting retail
    investors. I want to ensure they maintain the confidence to
    invest, especially given the historic opportunities for
    investment and ongoing growth of our economy.
         With that, Mr. Chairman, I yield back.
         Chairman Huizenga. The gentleman yields back.
         The Chair recognizes the gentleman from California, Mr.
    Sherman, for 2 minutes for an opening statement.
         Mr. Sherman. In discussing the purpose of the SEC, often
    the focus is on the fairness to the market participants, but
    the real focus has to be funding American business. You deal
    with the people who participate in the markets, but it is those
    entrepreneurs and companies that get funded that really affect
    the economy.
         As the Ranking Member pointed out, you are beginning to do
    something on initial coin offerings. I would have hoped you
    would have done more. I hope you shut it all down.
         It will be interesting to find out what barriers you face
    in doing that, because if someone is trying to fund an
    operating business that might employ thousands of people, and
    they try to comply with the securities laws, and they screw up
    Footnote 27, you might be on them like a ton of bricks.
         But, if somebody just builds on the image of the
    securities laws as an unregistered offering of, quote,
    ``coins,'' calls it an initial coin offering to be similar to
    an initial public offering and is selling an investment with no
    investor protection, something, like in every Ponzi scheme, is
    valuable only because another sucker might be found, and,
    furthermore, isn't funding operating businesses. Now, it's
    true, somebody selling an initial coin offering might give a
    small donation to the Red Cross; every scoundrel does something
    good in their life.
         But, when somebody's trying to fund creation of jobs, they
    have to do it very carefully, or you are on them for a
    misstatement in Footnote 27. When somebody is selling
    cryptocurrencies to investors, it's taking you a while to shut
    them down.
         You are still wondering--there is still delay. I hope that
    you will be as tougher on them than those who try to comply
    with the securities laws.
         Chairman Huizenga. The gentleman's time has expired.
         Today, we welcome the testimony of Ms. Stephanie Avakian
    and Mr. Steven Peiken, who are the Co-directors of the SEC's
    Division of Enforcement.
         I am going to recognize you collectively for a generous 5
    minutes. That will save us a few minutes, actually, rather than
    each of you being recognized. Without objection, your written
    statements will be made part of the record.
         So with that, Ms. Avakian, you are recognized first.

                     STATEMENT OF STEPHANIE AVAKIAN

         Ms. Avakian. Thank you. Thank you. Good morning, Chairman
    Huizenga, Ranking Member Maloney, and members of the
    subcommittee. My name is Stephanie Avakian, and, along with my
    colleague, Steven Peiken, who will address you next, I serve as
    Co-director of the United States Securities and Exchange
    Commission's Division of Enforcement. Thank you for inviting us
    here to testify today on behalf of the Commission about the
    Enforcement Division.
         The Enforcement Division plays an essential role in
    carrying out the SEC's mission to protect investors; maintain
    fair, orderly, and efficient markets; and facilitate capital
    formation. Our vigorous enforcement of the Federal securities
    laws in order to detect, deter, and punish wrongdoing and
    compensate harmed investors enables the Commission to promote
    confidence in our markets, which is critical to encouraging
    capital formation.
         Our efforts are aided by our regular coordination with the
    Commission's other divisions and offices and our partners at
    the Department of Justice and other Federal, State, and foreign
    regulators.
         Since our appointment almost a year ago in June 2017, the
    Enforcement Division has remained focused on its core mission
    of strong and effective enforcement of the Federal securities
    laws. The cases we have investigated and recommended to the
    Commission over the past year are a product of the hard work,
    professionalism, and expertise of our career staff in
    Washington and our 11 regional offices.
         In November of last year, we issued a report in which we
    outlined five key principles that guide our decisionmaking.
    These are: Focus on the interests of Main Street investors,
    focus on individual accountability, keep pace with
    technological change, impose sanctions that most effectively
    further enforcement goals, and constantly assess the allocation
    of our resources. Today, we would like to briefly explain how
    we are applying several of these principles.
         Protecting retail investors has always been at the heart
    of the Enforcement Division's mission. We have enhanced these
    efforts by forming a Retail Strategy Task Force, which is
    focused on identifying, punishing, and deterring misconduct
    that affects everyday investors.
         This increased retail focus does not mean that we are
    allocating fewer resources to financial fraud investigations or
    to policing Wall Street. Since we were appointed Co-directors,
    the Commission has continued to pursue cases against large
    corporations, financial institutions, Wall Street firms, and
    other market participants who violate the Federal securities
    laws.
         Focusing on individual accountability has also long been a
    priority, and the Enforcement Division's recent efforts show
    that our commitment to holding individuals accountable for
    misconduct in the securities markets has not diminished.
         Since we assumed our roles, more than 80 percent of
    enforcement actions have included charges against one or more
    individuals at all levels of the corporate hierarchy, including
    CEOs, CFOs, and other high-ranking executives. Going forward,
    we will continue to hold individuals accountable, where
    warranted.
         Thank you very much for the opportunity to testify today
    before the subcommittee. I would be happy to answer any
    questions you may have. My Co-director, Steven Peiken, will
    address you next.
         [The statement of Ms. Avakian can be found on page 30 of
    the appendix.]

                       STATEMENT OF STEVEN PEIKIN

         Mr. Peiken. Good morning, Mr. Chairman, Ranking Member
    Maloney, and members of the subcommittee. My name is Steven
    Peiken and, along with my colleague, Stephanie, I serve as Co-
    director of the Division of Enforcement. I want to touch on two
    additional points: Our efforts to address technological change,
    and the issue of remedies and relief.
         In an effort to keep pace with technological change, we
    are focusing the Enforcement Division's efforts and resources
    on emerging cyber-related threats and issues, including issues
    relating to hacking, data breaches, virtual currencies, and
    initial coin offerings.
         We think these are among the greatest risks facing
    investors in the financial markets today, and we recently
    formed a cyber unit to focus on these sorts of issues.
        Cyber-related matters are an area where we have sought to
    utilize the full range of tools and remedies that are available
    in an effort to balance protecting investors and allowing for
    real innovation. In some cases, we recommend enforcement
    actions against wrongdoers. In others, we have acted on an
    emergency basis to recommend the Commission suspend trading in
    stocks.
         The commission and the Enforcement Division have also
    issued a number of public statements and alerts to focus
    investors and others on the risks relating to ICOs, including,
    for example, the risks associated with celebrity endorsements
    of these products.
         The sanctions the Enforcement Division seeks in its
    actions are critical to influencing the behavior of market
    participants, and we have a wide array of tools available to
    us; discouragement, penalties, industry suspensions and bars,
    and other relief. In every case, we consider the facts and
    circumstances, and we seek the package of available remedies
    that is most appropriate.
         The Enforcement Division is also focused on compensating
    harmed investors for losses stemming from violations of Federal
    securities laws. We place great importance on putting money
    back into the pockets of harmed investors. In the last Fiscal
    Year, the Commission returned a record $1.07 billion to harmed
    investors.
         Now, despite our successes in recovering funds, a recent
    development threatens our ability to do so for long-running
    frauds. In a case called Kokesh v. SEC, the Supreme Court held
    that claims for discouragement are subject to a 5-year statute
    of limitations. As you would expect, many fraudsters try to
    conceal their schemes. Some are successful and defraud
    investors for years before they are discovered.
         We appreciate the need for clear statutes of limitations,
    and we are redoubling our efforts to uncover, investigate, and
    bring cases as quickly as possible. But, no matter how quickly
    we work, it's likely that the Kokesh decision will impact our
    ability to obtain recovery for harmed investors in long-running
    frauds.
         So thank you for inviting us here today to discuss the
    Division of Enforcement, and Stephanie and I are happy to
    answer any questions you have.
         [The statement of Mr. Peikin can be found on page 30 of
    the appendix.]
         Chairman Huizenga. Thank you very much. We appreciate
    that. I am going to recognize myself for 5 minutes at this time
    for questioning.
         As I mentioned in my opening statement, I believe that
    lawmakers should never necessarily evaluate the efficacy of a
    regulatory agency or a rule or enforcement program solely based
    on number of headlines or press releases that it can generate.
         But there have been some recent news articles criticizing
    the drop of enforcement actions by the SEC under the new
    Administration from 868 in 2016, to 754 in 2017.
         Joint question to you both and, Ms. Avakian, you had
    talked about a focus on protecting the retail investors, which
    I think is great and needs to be done--but does the statistic--
    this drop in actual cases--beg the question of whether the SEC
    Division of Enforcement has gotten soft on Wall Street, as some
    are accusing? Are you really trying to protect that retail
    investor?
         Ms. Avakian. Thank you for the question. When we think
    about whether we are protecting and to what degree we are
    protecting the retail investor, and when we think about our
    effectiveness, we really think it's most important to look at
    the nature and the quality of our actions, the actions we are
    taking and what it is we are doing.
         So, while statistics like how many actions the Commission
    has filed over a given period of time, or, the total amount of
    financial remedies ordered over a given period of time can be
    some measure of activity, we don't think that is the way to
    really look at the effectiveness of our program.
         Instead, we take a step back and look more meaningfully at
    what are the actions we bring. Are we making a difference for
    investors? Is our program focused on the worst conduct, on the
    fraudulent conduct? Are we stopping ongoing frauds? Are we
    stopping inappropriate practices or sales of inappropriate
    products at financial institutions?
         Are we focused on those cases that are most likely to get
    money back into the pockets of harmed investors? Are we getting
    bad actors out of the securities markets? Those kinds of
    things. Are we deterring wrongdoing? That is what we think.
         Chairman Huizenga. With an enforcement program, can it be
    evaluated solely on those number of enforcements and penalties
    and those kinds of things? What we are really trying to get is,
    and what should be the evaluation of the effectiveness of your
    particular division? How should you be measured?
         Ms. Avakian. We should be measured on, are we creating
    deterrence against wrongdoing, are we getting bad actors out of
    the marketplace. Some of these things are measurable by
    statistics, but many are not. Are we stopping fraud on retail
    investors? Are we covering a broader range of retail investors
    or broader range of practices?
         So not all of these things are amenable to using
    statistics to measure them. But, if you look at, for example,
    what we have done in the ICO space in a very short period of
    time? What our program has done in that time period is a good
    way to look at it.
         In a very short period of time, the Commission has issued
    a report of investigation. We have brought a number of cases.
    The commission has issued a number of trading suspensions. We
    have made a number of statements to the marketplace. I think we
    have gotten response to that. So it's a more qualitative
    analysis.
         Chairman Huizenga. OK. I have about a minute and a half
    here, and I want to move on to another issue. But I may follow
    up with a written--looking at number of complaints and those
    kinds of things, just to get a better handle on that.
         In June 2017, the Supreme Court held in Kokesh v. The SEC
    that the 5-year statute of limitations applied to
    discouragement claims that the SEC seeks in enforcement actions
    by clarifying that the remedy of discouragement is a, quote,
    ``penalty.''
         In your testimony, you noted that the Kokesh decision has
    already had significant impact across many parts of the
    division. Can you please explain the effects of it and what you
    have seen so far? Do you believe that investors ultimately will
    have to shoulder additional losses while fraudulent actors are
    able to keep ill-gotten gains due to this decision?
         Mr. Peiken. It's a very significant decision that is
    having meaningful impact on our ability to recover funds and
    return it to investors, particularly in cases of long-running
    frauds, where they are not discovered until time has passed.
         We can't reach back beyond 5 years and pull money out of
    the pockets of the wrongdoers and return them to investors. We
    have been keeping track of our litigated and settled cases of
    how much money we have had to forgo seeking recovery of, and
    the latest numbers are over $800 million, just in the last year
    or so alone, in our litigated--
         Chairman Huizenga. That was out of the total enforcement--
    it was three-something--$4 billion?
         Mr. Peiken. It was, last year. It's a very meaningful
    percentage. I think, we don't know what the ultimate impact
    will be, but this is going to have a significant impact on the
    recovery that we achieve for investors.
         Chairman Huizenga. My time is expired and expiring, but
    what I want to know, and we will follow up in writing, is what
    we as Congress can do to ensure that bad actors aren't able to
    profit from their misbehavior and their fraudulent actions, and
    then get that remedy back to those investors.
         So I think this is going to be a very significant thing
    and look forward to continuing that conversation. With that, I
    recognize the Ranking Member for a generous 5 minutes.
         Mrs. Maloney. Thank you and I look forward to working with
    you on the point that you made.
         I would like to ask both of you about initial coin
    offerings and virtual currencies. There have been a strong
    debate about whether a token that is offered as an ICO can be a
    security when it is first issued to investors, and then later
    evolve into something that is not a security.
         Some people think that, once it is a security, it is
    always a security, and others think that the token's status as
    a security can change over time. As far as I know, this is not
    a decision that has been decided by the SEC or the courts.
         So I would like to ask both of you, do you believe it's
    possible for a token to start as a security, but then evolve to
    something that is not a security?
         Ms. Avakian. That's really a question that is primarily
    within the expertise of our Division of Corporation Finance,
    not us, as much. That said, I think it's always going to be a
    facts and circumstances test as to whether something meets the
    definition of a security. If the substance of something changes
    over time, that analysis is going to have to continue to
    happen.
         But we really do look at the substance of the transaction,
    not the name of it, not what it's called, and look at does it
    fit the test for a security? Is it an investment in an
    enterprise in order to generate a profit based upon the efforts
    of others? That is really the test that is going to be applied.
         Mrs. Maloney. Have you seen any situations where this has
    actually happened?
         Mr. Peiken. Yes, we have dozens of investigations that are
    ongoing, and one of the subjects of many of these
    investigations is evaluating whether or not a particular
    instrument is or isn't a security.
         I don't think I can speak to the outcome of those, because
    some of that work is ongoing. A lot of what we have seen,
    though, in these ICOs obviously looks and meets the definition
    of securities.
         Mrs. Maloney. Building on that statement, Chairman Clayton
    has stated, and I quote, ``I believe every ICO I have seen is a
    security.'' Do you agree with that statement?
         Mr. Peiken. I can't speak to whether he has seen the broad
    gamut of instruments that our division is investigating. So I
    certainly don't dispute that what he has seen, he believes is a
    security.
         The question, I guess, is whether some of the things that
    we are looking at do they actually meet that definition? I
    think that some more needs to be written on that.
         Mrs. Maloney. I know that you brought a number of
    enforcement actions on ICOs, and I am pleased to see that you
    are taking this issue seriously. A great number of retail
    investors are getting hurt with cryptocurrencies.
         But there have been so many ICOs over the past few years,
    and none of them have been registered with the SEC as
    securities offerings. So, when your division is looking at all
    of these ICOs, how do you decide which cases to bring
    enforcement actions on?
         Ms. Avakian. We have, as you noted, there are a number of
    ICOs, and we have a number of investigations in the pipeline. I
    think, just speaking very broadly, in terms of how we
    prioritize, things that require emergency action are going to
    come to the front of the priority list.
         So there are some cases we have brought in the last
    months, like the Centra ICO, which was a large ICO that
    involved celebrity promotion, the founders of that were
    arrested. Assets were seized. I think roughly $60 million in
    digital assets were frozen.
         There are other cases, the AriseBank case, and there have
    been others where I think those ones that really do require an
    asset freeze or emergency action are going to come to the top.
         But there are others, and like many other things, the
    investigations take time, so some of this is going to be, when
    the actions are ready, we will bring them.
         Mrs. Maloney. Do you believe that private lawsuits by
    investors can help supplement the Enforcement Division's work
    by deterring bad behavior that the SEC might not catch?
         Mr. Peiken. So our main intersection with private
    securities litigation is that we often will use private
    securities litigation as a source to start an investigation of
    our own.
         I think our assessment of whether or not to conduct an
    investigation on our own isn't impacted by whether or not there
    is a private civil litigation, because, if we think it's worth
    devoting our resources to, the remedies that we can get at the
    end of the day often are much broader than what a private
    litigant can achieve.
         So, in addition to just getting money back for investors,
    we can also bar wrongdoers from the industry. But that is our
    principal intersection with the private securities bar.
         Mrs. Maloney. I think that sounds helpful to me. I believe
    it's important that the SEC not take the unprecedented step of
    allowing public companies to use forced arbitration clauses to
    prohibit their investors from ever suing them under the
    securities laws in court, even for securities fraud.
         No matter how good a job the SEC Enforcement Division
    does, it will never be enough to catch all of the bad actors
    that are out there in our markets. I just want to say that,
    while the SEC's Enforcement Division is necessary, I don't
    think it will ever be sufficient by itself. It's so underfunded
    and understaffed compared to the challenge before you.
         That is why it's important that investors keep their
    ability to sue public companies, including those class actions
    for securities fraud, in court. So my time is long past, and I
    yield back. Thank you.
         Chairman Huizenga. The Chair was being generous, since I
    had been a little loose on my own time. So, with that, the Vice
    Chair of our committee, Mr. Hultgren from Illinois, is
    recognized.
         Mr. Hultgren. Thanks, Chairman. Thank you again, both, for
    being here.
         In your written testimony regarding the Supreme Court's
    recent ruling on Kokesh v. the SEC, I wonder if you could
    explain--and I will let you decide who's best to respond--if
    you could explain this decision--how this rescission could
    restrict the Commission's ability to enforce our securities
    laws. What does this mean for retail investors?
         Also we want to ensure our securities laws are enforced.
    We need to have enforceable rules in order to encourage
    effective markets for companies seeking access to capital,
    investors, and the brokers that facilitate these markets. So
    what steps do you believe Congress should take, if any, in
    light of the Supreme Court's recent decision?
         Mr. Peiken. So, as I said, the Kokesh decision is
    significant, and it's going to have far-reaching impact on our
    ability to recover funds that have been stolen from victimized
    investors. I think that we don't come with a specific proposal
    for a legislative fix, if one's appropriate for Kokesh.
         But we, I think, would be interested in working with this
    committee and with the members and their staff in fashioning a
    proposal, responding to anything that might come forward.
    Because this will have a significant impact on investors.
         Mr. Hultgren. Yes. Please let us know your thoughts as we
    move forward on that.
         We had floated an amendment to CHOICE Act that would
    expand the reforms proposed for the SEC's enforcement division
    to the CFTC (U.S. Commodity Futures Trading Commission), and
    wonder if you could respond to--would you support a process
    within your office for closing investigations during this
    time--say, 180 days?
         Could you make a determination to institute an
    administrative or judicial action, refer the matter to DOJ for
    potential criminal prosecution or inform the parties that
    investigations are closed?
         Ms. Avakian. I think we are not familiar with the details
    of the legislation, but, broadly speaking, the investigations
    typically take some amount of time.
         What I will say is one of the things Steve and I have
    really messaged to the staff, and I think folks have taken
    quite seriously, is the importance of, first, moving quickly in
    our investigations, but also, really, once we make a
    determination that perhaps we shouldn't proceed, there is not a
    securities law violation to close the matter; if it's more
    appropriately referred to someone else, to do that quickly.
         But we do take quite seriously prompt movement of our
    cases and decisionmaking.
         Mr. Hultgren. That's great. I think that the issue for us
    is, obviously, this is disruptive, and to get answers or
    information as quickly as possible when these investigations
    are going on or when they can be closed--that is what we want
    to see happen--obviously not shortchanging the process; making
    sure the process can work, but expediting where possible.
         Let me move on a little bit to cyber-security
    expectations. In general, I wonder if you can speak to your
    expectations for public companies to protect themselves from
    cyber-security threats?
         For example, after a breach, would you be able to reach a
    conclusion that a company was negligent in protecting itself
    and therefore, its investors from cyber-security threats? Would
    you look at something like NIST standards to inform this
    thinking?
         Mr. Peiken. So we look at the question of cyber-security
    through the lens of disclosure. The Commission has issued
    guidance to public companies about what they should be thinking
    about, in terms of disclosing cyber risks, and how they should
    be thinking about the issue of disclosing a cyber event.
         I think we are cautious in this area. We don't want to
    second-guess the good-faith disclosure decisions that companies
    that have been victimized by sophisticated actors, including
    even nation-states, have to face.
         We have said before that, while we don't want to second
    guess those kinds of judgments, there could be circumstances
    that are so egregious--failures of disclosure--that we would
    bring enforcement action. We recommended, and the Commission
    brought enforcement action against the company formerly known
    as Yahoo, just a couple of weeks ago, for what we considered to
    be a case that had crossed over that line from good faith to an
    abdication of responsibility.
         Mr. Hultgren. Thanks. In my last seconds, just at the
    beginning of your testimony, you mentioned, in Fiscal Year
    2017, the Commission brought 754 enforcement actions and
    obtained $3.8 billion in penalties and disgorgement, returned a
    record of $1.07 billion to harmed investors, and awarded nearly
    $50 million in payments to whistleblowers.
         Critics of your office may point out that the Commission
    brought fewer cases since the change in leadership at the
    Commission. However, could you please explain how you were able
    to return a record amount to harmed investors? In general, what
    does this mean for how your office is approaching enforcement?
         Ms. Avakian. We have taken the issue of both collections
    and distributions quite seriously. They are both within our
    trial unit in the division. The collections, folks have been
    incredibly aggressive about going out and collecting money.
         Our distributions area is an area where we have put
    additional resources and where we have put a serious focus on
    doing our best to quickly move to get money back into the
    pockets of harmed investors as quickly as possible.
         Mr. Hultgren. That's great. Thank you again. Thanks both
    for being here.
         Yield back.
         Chairman Huizenga. Gentleman yields back.
         With that, the Chair recognizes the gentleman from
    Massachusetts, Mr. Lynch, for 5 minutes.
         Mr. Lynch. Thank you very much, Mr. Chairman, and thank
    you for having this hearing.
         I want to go back to the Yahoo hack. Now it's called
    Altaba--I guess that is the new company. You are right, you
    just settled for $35 million with Altaba, formerly Yahoo. That
    hack effected several hundred million users.
         Yahoo sold their digital and e-mail services for about
    $4.48 billion to Verizon. I did the math on this. So the $35
    million represents about $0.08 per user that was hacked, and
    you are very correct when you say that case was, as you
    described it, an abdication of responsibility.
         I think it was worse than that. They hid that disclosure
    of that hack for 2 years. The only reason they disclosed it was
    because they were for sale. So, I think that was the worst
    possible behavior to deceive investors.
         They eventually had to discount the sale, because they had
    neglected to disclose that information to the buyer. But $0.08
    per user hacked? Do you think that is fair?
         I thought $35 million, for a company that sold for $4.48
    billion, I thought $35 million was really selling short the
    damage that was done to users. I think it was a slap on the
    wrist, to be honest with you, because it really didn't affect
    anybody other than the users having their information
    compromised.
         Mr. Peiken. I think it's a great question, and fashioning
    the appropriate recommended penalty in a case like this, where
    there had never been a case brought before against a company
    for failing to make a disclosure like this, obviously, is a
    difficult situation. You are trying to weigh the costs and
    benefits and burdens of any corporate penalty.
         The penalty itself was never going to go back to
    compensate the people whose information was hacked.
         Mr. Lynch. How about fairness? I know they weren't going
    to be compensated. But you are also telling me now that we are
    not going to do dozens of cyber hacking cases in the future. We
    are going to shift gears.
         So I just see a lot of this. We serve on another
    subcommittee that deals with cyber issues. I just think it was
    a case of first impression. I agree with that.
         But I think you fell far short, or the SEC fell far short
    of holding anybody accountable here. I think, if there had been
    a meaningful penalty here, other companies would look at that
    and say, ``Hey, we have to get our act together here.''
         Not only should we not allow this hacking to go forward
    and redouble our efforts to protect data, but, there is also
    the back end, the reputational damage to the company when that
    happens, and also the example to others in the future, because
    any company out there doing a sizable business in digital
    conduct is really going to blow this off, because $35 million
    is laughable, to be honest with you, for a company that is
    about $5 billion in value.
         These people, as I said before, intentionally concealed
    this information from investors and its customers. So, it was
    especially egregious behavior.
         I just think that example, coupled with your new policy,
    where you are not going to go after cyber hackers as you have
    in the past. So we are going from weak, to weaker. I don't know
    how much weaker you can get than $35 million for a company of
    that value. Now, you are going to do less. I just think you are
    going in the wrong direction, to be honest with you.
         I think that some--this was a Russian hack--some of these
    entities are getting even more sophisticated, so your example,
    or the lesson that you are teaching is that the fines aren't
    that bad, compared to the cost of stiffening your system,
    strengthening your system, so why spend money on it? That is
    the message I am getting from you.
         Mr. Peiken. I hope that the industry reads this case in a
    different way and that--
         Mr. Lynch. I don't know why they would, honestly. I am
    trying to be fair with you.
         Mr. Peiken. Yes, and I would say that there certainly is
    no intent or plan on our part to abandon bringing cases against
    the perpetrators of these intrusions, which continues to be a
    significant priority for us.
         We see intrusions for the purpose of stealing information
    for insider trading, and we have cases and investigations that
    were ongoing and that have been brought against the
    perpetrators of misconduct. I expect that will continue to be a
    high priority for the Enforcement Division.
         Mr. Lynch. Thank you.
         I yield back, Mr. Chairman, thank you.
         Mr. Hultgren [presiding]. The gentleman yields back.
         The gentlewoman from Missouri, Chairman Wagner is
    recognized for 5 minutes.
         Mrs. Wagner. I thank the Chairman, and I thank our
    witnesses for being here. I want to talk about a trend that
    occurred at the SEC in the last Administration that is very
    concerning to me and that I hope is being addressed with our
    new leadership.
         Under the leadership of former Chairman Mary Jo White, the
    SEC increasingly turned to its own administrative law judges,
    ALJs, rather than the Federal courts to adjudicate enforcement
    actions.
         In fact, a 2014 Wall Street Journal article found that,
    for 12 months straight, every case the SEC steered toward the
    agency's appointed ALJs was, quote, ``successful for the SEC.''
    In contrast, according the same article, the SEC fared far
    worse when they brought cases before the Federal court trials,
    winning approximately, I think, half of the time.
         At the time, former Enforcement Director Andrew Ceresney,
    I think was his name, stated, quote, ``We are using
    administrative proceedings more extensively because they offer
    a streamlined process with sophisticated fact-finders.''
         Let me start off by asking this. Are SEC administrative
    law judges the same as judges with lifetime tenure, appointed
    under Article 3 of the Constitution?
         Ms. Avakian. The judges are appointed in a different
    fashion. I am not sure of the exact mechanism, but they are
    different--
         Mrs. Wagner. So they are not appointed under Article 3 of
    the Constitution?
         Ms. Avakian. That's correct.
         Mrs. Wagner. Should SEC administrative law judges be
    interpreting and developing Federal securities laws, for
    example, insider trading laws, even though they aren't Article
    3 judges?
         Ms. Avakian. There are, I think, some sorts of cases that
    make sense for administrative law judges to consider, given
    their securities background and the fact that the appellate
    rights are to the Commission of the--and to the Circuit Courts.
         But I should step back and make it clear that, since we
    have been in this job, which has now been just about a year,
    the circumstances in which we have filed litigated actions as
    administrative proceedings have been fairly limited.
         I would say, broadly, they have been limited to
    circumstances where either the charges that we are pursuing are
    only available in the administrative forums--so think failure
    to supervise of a broker-dealer, or something like that--or
    where the principal relief we are seeking is only available in
    the administrative forum--so barring someone from being in the
    securities business--or where the person involved is a
    registered person, like a registered broker-dealer or
    investment adviser.
         So I think we have filed a far fewer number of litigated
    actions as administrative proceedings. Many of them are
    settlements.
         Mrs. Wagner. Maybe things have changed. I am going to
    reclaim my time, because I have several other questions. It's
    very clear the SEC's lately been using these administrative
    judges for complicated cases, including several involving
    insider trading. How's their performance evaluated, quickly?
         Ms. Avakian. The administrative law judges?
         Mrs. Wagner. Yes.
         Ms. Avakian. I am not sure how their performance is
    evaluated.
         Mrs. Wagner. Doesn't this create a potential for conflicts
    of interest or undue bias in favor of the Commission in
    administrative proceedings?
         Ms. Avakian. Probably worth noting that, in the last year,
    we fared much better in litigation in District Court than we
    did in our administrative forum. I think our success rate was
    less than 60 percent in the--
         Mrs. Wagner. I am very concerned about the bias. So what
    steps are being taken to prevent bias, or at least the
    appearance of bias, in all ALJ proceedings?
         Ms. Avakian. Again, the administrative law judges are
    appointed unrelated to anything we do, in an independent
    fashion. But I will say that the appellate rights are initially
    to the Commission, but, after that, to the U.S. Circuit Court
    of Appeals, which is the same appellate path that a case takes
    if it goes through the District Courts.
         So, I think, if there is concern, ultimately, there is a
    path for appeal that is very similar to that.
         Mrs. Wagner. Does the defendant have a choice about which
    path he can take?
         Ms. Avakian. No. As the plaintiffs, as the filers--
         Mrs. Wagner. Now, that is of concern to me. Does the SEC
    bring similar cases, for example, insider trading cases in both
    Federal District Court and administrative proceedings?
         Ms. Avakian. We have not filed an insider trading case as
    an administrative proceeding.
         Mrs. Wagner. Does this create the potential for different
    legal interpretations of the same or similar laws and
    potentially inconsistent enforcement actions?
         Ms. Avakian. I don't think any differently than you get by
    being in front of any number of District Court judges who
    decide the same set of facts in a different fashion. I
    understand the question, but I am not--
         Mrs. Wagner. Yes, these are complicated issues, and I have
    great concerns of this overreach of authority, especially given
    the fact that these are not Article 3 judges.
         I look forward to working with you and the agency as we go
    forward to get the most proper outcome concerning these issues.
    So I thank you. I have run out of time. I yield back, Chairman.
         Mr. Hultgren [presiding]. Gentlewoman yields back.
         Gentleman from Georgia, I think, Congressman Scott, is
    recognized for 5 minutes.
         Mr. Scott. Thank you very much, Mr. Chairman.
         Mr. Peiken and Ms. Avakian, let me ask you this: You
    listed in your testimony the recent Supreme Court decision of,
    I think it was Kokesh v. the SEC.
         You said that that, along with President Trump's
    Administration's hiring freeze, put headwinds before you and
    could very well severely affect the effectiveness of your
    enforcement duties. Would you share with us why you have come
    to that conclusion? How serious would these impediments be?
         Mr. Peiken. So, Mr. Scott, appreciate the question. I
    think, really, a couple points in response; the first is the
    Kokesh decision, if not changed, it's going to limit our
    ability to recover funds that have been stolen from investors
    as part of long-running frauds.
         Some cases, like Ponzi schemes, for example, are self-
    covering, and so they often go on for many years before they
    are discovered, and then we can't reach back and get money that
    has been stolen from investors.
         The question of hiring is one that we think about a lot.
    We have been operating under a hiring freeze. We think we are
    adequately resourced to do our jobs. We have asked, in the
    current budget request, for an additional 17 slots for
    enforcement, which we will use for our cyber efforts and our
    trial unit and other key areas.
         But we are working, we are trying to use the resources we
    have to make decisions about how to allocate scarce resources.
    Like every other law enforcement agency, we have a broad area
    to cover.
         We are doing things like using data analytics and trying
    to leverage our investigations to work smarter to try to make
    the biggest impact with the resources that we have.
         Mr. Scott. Yes. There was a case, I believe, in Dallas,
    with this company who's running a scam operation. You may
    remember that. My information is that they were trying to
    develop a false federally insured bank. Could you tell us about
    that, so we could see the ingenuity of folks doing that? It was
    AVS Bank, I believe. I know it starts with an A.
         Mr. Peiken. I think that you are talking about a case
    called AriseBank, where an initial coin offering was supposed
    to fund a banking operation. This is one of the cases that Ms.
    Avakian referred to, where we acted to obtain emergency relief.
    It turned out that it was a total scam, as we allege. The
    individuals were ultimately arrested, and we seized digital
    assets.
         So I think it's a great illustration of how these initial
    coin offerings can present real risks to investors and how we
    have been trying to work quickly to stop this fraud from going
    on.
         Mr. Scott. All right. Now, in my last minute and a half
    here, we are now in the grips of dealing with Russia and China
    and their use of their very sophisticated technology of really
    breaking into our security systems.
         What I would like to get from you is, how serious is this
    nation-states' threats? Who would be the leaders that we have
    to worry about the most? How so?
         Mr. Peiken. So I am not sure that I am in a position to
    really answer that question fully, but I will tell you that our
    cyber unit, which is focused in large part on addressing
    securities law violations that are perpetrated by cyber
    criminals, including nation-states, seize, actors in the
    Russian Federation and other places that you have mentioned
    trying to steal nonpublic information to trade, forcing trading
    by breaking into people's brokerage accounts and the like.
         The Yahoo case, which I mentioned before, is one in which
    actors, which, I think, we allege were associated with the
    Russian Federation were involved in stealing the information
    from Yahoo.
         Mr. Scott. So you have actually seized Russian operatives
    who are acting physically, correct?
         Mr. Peiken. I believe, in the Yahoo case, the allegation
    is that the people who were identified, broke in to Yahoo and
    stole user information were associated with the Russian
    Federation, so yes.
         Mr. Scott. In your enforcement capacities, what has been
    the disposition of these Russian operatives?
         Mr. Peiken. As you can imagine, for a civil investigative
    agency that polices the securities markets, we are often
    looking at people who trade on that information or benefit from
    the theft of that information. So, whether we can actually
    bring action against the perpetrators depends on the case.
         Mr. Scott. Thank you very much.
         Chairman Huizenga. Gentleman's time has expired.
         With that, the gentleman from Minnesota, Mr. Emmer, is
    recognized for 5 minutes.
         Mr. Emmer. I want to thank the Chair, again, for convening
    this hearing, and the Co-directors, for joining us today and
    for the job that you are doing.
         As I have listened today, clearly, I must have a different
    point of view when it comes to some of my colleagues on
    cryptocurrencies. I will say that you just testified that these
    initial coin offerings present real risks to investors.
         But let's not forget they also present real opportunities,
    and we are talking about a technology, blockchain technology,
    that has an amazing potential.
         I would like to go back to some of the questions earlier
    and ask them a little bit differently. I want to thank you
    before I start, because I think it was Representative Maloney
    that started the hearing this morning by suggesting that
    Secretary Clayton had said every initial coin offering is a
    security.
         That's not what I heard you say. You are reviewing these,
    and you are developing what your view is of the different types
    of cryptocurrency. Problem is a lot of people up here with
    white hair, without hair, or people that have been around for
    awhile don't even understand what they are talking about. We
    worry that too much government could kill this thing before it
    can grow into something that is very good for our economy.
         So I would like to know, since you have been getting
    involved in some of these enforcement actions and
    investigations, what has been your level of engagement with
    cryptocurrency exchanges--with the actual exchanges about their
    decision process around listings? Are you actually
    communicating with them and having a back-and-forth?
         Ms. Avakian. We, as an agency, broadly speaking, are
    engaging with the marketplace, to some degree, the exchanges,
    although we are not necessarily in the best position to answer
    that particular question.
         The reason is, as an agency, we have really worked
    together across divisions and across offices. So we have a
    distributed ledger technology working group. That's an
    interagency group. We have a fintech working group. That's an
    interagency group. Those groups, particularly the fintech
    group, have been working closely with the marketplace, with
    folks who are coming to us, with folks we are doing outreach
    to.
         I would say the Division of Corporation Finance is
    probably on the frontline of a lot of it. The Division of
    Trading and Markets is going to be on the frontline of the
    exchange issue. But we are working with industry, and we
    encourage market participants to come to us, whether it's
    through the fintech e-mail box, which we have set up,
    fintech@sec.gov, or whether it's to reach out directly to a
    particular division or office.
         Mr. Emmer. I would go the next step, then. How does the
    SEC distinguish between an ICO and the sale of a token for use
    on a blockchain platform?
         Ms. Avakian. That's always going to be a real facts-and-
    circumstances question. We are going to take a step back and
    look at exactly what the substance of that particular
    transaction or token is, not the name of it.
         Is it something that someone's investing something of
    value in? Is it an enterprise someone's investing something of
    value in order to generate a profit? I think it's based upon
    the efforts of others. That's the basic definition of what is a
    security.
         Mr. Emmer. Is that evolving? Are you--because it could be
    a security. It could be a commodity. It could be a currency.
    There have to be some delineated lines so that people
    understand where they are at and who has jurisdiction over
    them, because we want to make sure that they are continuing to
    explore the opportunity and not just going out of business.
         Ms. Avakian. Yes, I think that is right. We have spoken a
    lot publicly about it. Certainly, the Chairman has spoken a lot
    publicly about it, to the extent something is a pure currency,
    a pure medium of exchange, that is not a security.
         I think we are relying on the experts in the marketplace;
    the gatekeepers, the lawyers, others like that to really take a
    step back and take a true look at what is the underlying
    substance of a transaction. That is really going to be, I
    think, what guides someone.
         But we are open in terms of having folks come to us and
    help work through that analysis with them.
         Mr. Emmer. Let me ask you this last one. When looking at
    potential enforcement actions, what specific factors are used
    by the division to determine which token presales will be
    targeted?
         Ms. Avakian. When we think about enforcement action and
    what we are going to look at, we are working together with our
    Division of Corporation Finance, to a large degree, to analyze
    what it is we know about the substance of an underlying
    product. Is it a security? Is it potentially a security? That
    will guide how we think about it.
         Mr. Emmer. OK. I look forward to working with you as this
    evolves. I want to thank you again for the work that you are
    doing and your light-touch policies so far.
         Thank you. I yield back.
         Chairman Huizenga. Gentleman yields back.
         At this time, we are going to stay on the Republican side,
    and the Chair will recognize Mr. Davidson from Ohio for 5
    minutes.
         Mr. Davidson. Thank you, Chairman. I thank you both for
    your testimony and for the work you are doing to protect our
    markets and to make sure that America remains the world's best
    place to raise capital and see it grow.
         I will spend a fair bit of time on ICOs and
    cryptocurrencies, but I want to pick up where Mrs. Wagner left
    off on due process with administrative law judges.
         I couldn't have used 5 minutes better. For that reason, I
    introduced H.R. 2128, the Due Process Restoration Act, which
    seeks to give defendants the option of Federal court, versus a
    no-option path to an administrative law judge proceeding.
         I have some of the concerns about a near 100 percent
    batting average for the ALJs and, I think, over time, about a
    670 batting average for the courts, which says that the SEC's
    good about picking their cases, but it does raise concerns
    about the path of ALJs.
         Director Peiken? I guess, are you concerned that the SEC
    administrative proceedings have fewer due-process rights than
    in the courts?
         Mr. Peiken. So let me just make a couple of reactions to
    that. So, one, I think, as Stephanie said earlier we have been
    much more restrained in the use of administrative proceedings
    in the last year, and really using them in only the limited
    categories for litigated cases that she outlined.
         When you look broadly at the success rate of our litigated
    cases over a broad period of time in the administrative forum,
    versus Federal court, they actually are pretty close. Now,
    don't get me wrong, when we bring a case, we are looking to win
    them all. We don't. We win about 75 percent of our cases in
    Federal court and about 85 percent in administrative forum.
    They are roughly equivalent success rates.
         There are protections. There are obviously different
    processes in administrative proceedings from in Federal court.
    But the rules around administrative proceedings have been
    modernized in recent years to, for example, allow for
    depositions from each side.
         There are some protections in the administrative forum
    that aren't even available in Federal court. So we have to turn
    over our entire file immediately in an administrative forum. We
    don't have to do that in Federal court. We have to turn over
    Brady or Giglio information which is exculpatory or helpful to
    the other side. We don't have to do that in Federal court.
    There is a balance. There are obviously different rights and
    procedures in both forums.
         Mr. Davidson. There is a case pending before the Supreme
    Court. So we look forward to that outcome and we look forward
    to vote on the Due Process Restoration Act here.
         But we also look forward to regulatory certainty around
    initial coin offerings, in particular. The CFTC also has
    claimed some jurisdiction. You have a working group, as you
    referenced earlier.
         Is it clear where the CFTC's jurisdiction is? Because we
    do have court proceedings, and we have CFTC, who's staked out
    claims on cryptocurrencies since 2015. What do you make of
    these folks that are clearly a cryptocurrency today, yet, if
    they had raised capital, might be seen as a security at the
    time? How do you resolve that?
         Mr. Peiken. Yes. I think some of this, we are obviously
    encountering a new area with new products and changing
    technology. Some of these issues are being worked out in the
    courts, as we speak.
        Our financial system has operated for a long time with
    regulators with different jurisdictions, the CFTC regulating
    derivatives and commodities and SEC focused on securities.
         I think the way things have fallen out recently, where we
    have been focused on the tokens and crypto-assets that fit the
    definition of a security, and the CFTC has then focused its
    jurisdiction on currencies and mediums of exchange. I am not
    sure I am the expert to say where that exact line is drawn. I
    think some of this is going to be worked out over time.
         Mr. Davidson. Yes, OK. So our office is working on an
    initial coin offering bill that would provide certainty about
    how a security is--it's fundamentally--is the Howey Test still
    relevant? What is the role of SAFS? Is a whitepaper going to
    cut it, or are you going to use SEC forms that already exist?
    How do you advise proceeding forward with your office?
         Mr. Peiken. So, obviously, we would be interested in
    providing technical assistance and working with you and your
    staff on any proposal. Our Division of Corporation Finance is
    probably a critical participant in that, because some of this
    is beyond the expertise of the Enforcement Division.
         Mr. Davidson. All right. Thank you, my time is expired. I
    yield.
         Chairman Huizenga. Seeing no further questioners on the
    Democrat side, we will move to Mr. Poliquin from Maine for 5
    minutes.
         Mr. Poliquin. Thank you very much, Mr. Chairman. I
    appreciate it. Thank you both for being here today. I represent
    the great State of Maine. I know you folks are new at your job.
    You have been there for a year. You probably have a very
    stressful situation at the SEC.
         So I want to remind everybody that Maine is vacationland.
    If you haven't booked your vacation in Maine, you should do it.
    We don't have any air conditioning. We get a lot of moose, a
    lot of critters everywhere, a lot of blueberry pie and
    lobsters.
         So, with that, let's get right into it.
         I am concerned about small investors, because rural Maine
    is, like, the most beautiful part of the world. We are the
    hardest-working people. I don't worry as much about folks who
    have big, fat accounts. But I worry about small investors.
         In particular, when you look at small investors who are
    starting out to build their nest egg, maybe for the first time,
    through a mutual fund, and they mark-to-market every day, and
    it's public, and it's one portfolio for the asset manager. I
    don't worry as much about that.
         But what happens if one of our small investors builds up
    that nest egg to a point where they might want a separate
    account from an investment adviser? Or maybe they participate
    in a 401(k) plan or a defined benefit pension plan, and that
    account is managed by an asset manager in a separate account.
         Now, I used to be in the asset management business. What
    you are providing for your investors, for your accounts, if you
    are in that business, is trust and security. The product you
    are selling, in great extent, is your rate of return, your
    performance record over time.
         So what I worry about and what I want to ask you folks is
    how you deal with this. When you go look at an asset manager--
    it's time for their review--and you are trying to make sure
    that the rate of return that they are showing their prospective
    clients--how do you make sure there is accuracy in the
    performance data that they are submitting, because that is what
    people are buying, past performance; no guarantee of future
    performance. But that is what they are selling.
         So, for example, if you walk into an asset manager's firm
    and they have a hundred different accounts, how do you know
    they are all fully discretionary? How do you know there are no
    restrictions on tobacco or alcohol or gambling?
         How do you know about the size of the account? Are they
    diversified enough so that you are getting a true reflection of
    what the performance is, such that investors are able to make
    the decisions with confidence that the data is accurate? Tell
    us how you do that.
         Ms. Avakian. Sure. I think the first line of defense on
    the potential problems you are worried about really is our
    Office of Compliance Inspections and Examinations, OCIE.
         They are the ones that go in and do the examinations. They
    do risk-based examinations. They do other sorts of
    examinations. This is one of the things they are looking at: Is
    what an investment adviser's representing to its clientele--is
    it accurate? Is it true? Is their performance what they say it
    is?
         So that is one of the things that OCIE looks at. I would
    note that we have done some risk-based proactive work within
    the Division of Enforcement's Asset Management Unit. One thing
    we have looked at is performance reporting. Our economic folks
    in DERA, the Division of Economic Research and Analysis, have
    also spent time looking at this issue broadly.
         It's a very, potentially, real concern that you raise, and
    it's a very good question. But it is one that, I think, our
    examination folks take seriously.
         Mr. Poliquin. Mr. Peiken, have you found that these
    wonderful examination folks that work over at the SEC, that
    there is a problem?
         Or is the oversight, the enforcement, the audits that you
    perform on behalf of the investors and savers in Maine and
    beyond is enough to keep folks in line? Or have you seen there
    have been problems here?
         Mr. Peiken. So the issue of valuation is, it has been a
    problem in a number of instances, and we have brought a number
    of enforcement actions against wrongdoers for giving investors
    false information about the true value of any performance
    returns.
         We have a very close relationship with our Office of
    Compliance Inspections and Examinations, and they refer to
    enforcement results from their examination. So, if they go in
    and they find something that is sufficiently serious that they
    don't just issue a corrective letter, they will refer it over
    to enforcement, and we open investigations. Some of our most
    significant cases have been brought based on these
    examinations.
         Mr. Poliquin. What type of penalties are common with an
    asset manager who might be cooking the books?
         Mr. Peiken. So it could be the whole gamut. That could be
    disgorgement and return of money to victims, penalties, barring
    them from participating in the investment advisory business
    altogether. Anything up to and including being kicked out of
    the business.
         Mr. Poliquin. Please keep working at what you are doing.
    Make sure you vacation in Maine. But don't forget about the
    small investors, the small savers. We need to make sure they
    have confidence when they turn over their hard-earned savings
    to an investment manager.
         Thank you very much. Thank you, Mr. Chairman.
         Chairman Huizenga. The gentleman's time has expired. If it
    is fine with our Co-directors, we are going to do a quick
    second round of questioning, which, at this point, we think
    will be rather limited. We might not decide whether it's Laurel
    or Yanny, but let's at least continue the conversation.
         I am going to turn to my friend, the gentleman from
    Georgia, for 5 minutes.
         Mr. Scott. Sure. Let me get to what I think is really the
    gist of the matter here.
         I have recently read a Wall Street Journal report, and it
    says this: It says that U.S. regulators have repeatedly put
    cryptocurrency companies and their advisers on notice, in
    recent months, about what officials say are widespread
    violations of security rules designed to protect investors.
         Could you share what these widespread violations are?
         Mr. Peiken. So I think when we look at these crypto-asset-
    related issues, they really fall into two buckets. So, on the
    one hand, we have the out-and-out frauds, like the one that you
    were talking about with the Dallas bank company.
         These are people who are trying to just trade on whatever
    newsworthy event there is and make money. In the past, it's
    been in the marijuana industry or hurricane relief, and this
    just happens to be a newsworthy thing, this technology, so they
    are trying to take advantage of investors by trading on that.
         So we see those out-and-out frauds. Then we also see, in
    another bucket, the failure to register broad offerings of what
    we think meets the definition of a security.
         If you are going to make a general solicitation of a
    security offering broadly to investors, if you are not subject
    to an exemption from registration, that has to be registered
    with Securities and Exchange, and you have to comply with the
    various rules and requirements.
         If you don't meet an exception, then investors are
    presented with an investment opportunity without the
    information that the Commission has decided they are entitled
    to have.
         So those are the two real buckets that we see these issues
    falling into.
         Mr. Scott. Yes, but this whole move in our technology, the
    cryptocurrencies, all of this seems to be moving at warp speed,
    and with some worriation that what we are doing isn't enough.
         Just to carry this point further, in this same article,
    your Chairman, Jay Clayton, said this: He said, Many promoters
    of ICOs and cryptocurrencies are not complying with our current
    security laws.
         Then he also said that he has urged his staff, meaning you
    the enforcers, to be on high alert for approaches to ICOs that
    may be contrary to the spirit of these laws.
         However, with all these warnings from you and from your
    Chairman--it goes on, this article. Very good, I hope more
    people will read this Wall Street Journal article.
         It says, such warnings have failed to chill the booming
    market for digital tokens. Coin offerings have already raised
    about $1.66 billion this year and are on pace to even top last
    year's $6.5 billion tally, according to research and data from
    Token Report.
         Then he went on to say, we are just dealing with the tip
    of the iceberg. When you are just dealing with the tip of the
    iceberg, you have problems with the ship below.
         All we have to do is look at the great sinking of the
    Titanic. If we have just reached the tip, the real serious part
    of this iceberg is down below, as it was with the Titanic. If
    that happens, our nation's going to be in serious trouble.
         Is this article accurate? Are they sounding the necessary
    alarms? Do you agree with it?
         Mr. Peiken. So you raise a great point. If you look at the
    work that the staff has done, there have been enforcement
    actions that we have brought.
         There are many investigations that are ongoing, and those
    will take time, but many of them will likely lead to
    enforcement actions. I don't know how many, but many of them
    will. We have also communicated with people, and they have
    stopped a token offering because--
         Mr. Scott. Good.
         Mr. Peiken. They have been told that they were about to
    violate the Federal securities laws, so no violation occurred.
         Mr. Scott. But let me ask you--I have 10 seconds here.
         Mr. Peiken. Yes.
         Mr. Scott. Is there anything that we in this committee, we
    in Congress can do to help you with your forward progress in
    this great challenge?
         Mr. Peiken. I think we have adequate statutory tools, but,
    obviously, we would be willing and interested in working with
    your staff and the staff of any members here on any proposed
    legislation.
         Mr. Scott. All right, thank you.
         Chairman Huizenga. All right. Gentleman's time has
    expired.
         We are going to go back, for the PSA for pure Maine, with
    Mr. Poliquin from Maine for 5 minutes.
         Mr. Poliquin. Thank you very much, Mr. Chairman. I
    appreciate it.
         Folks, if one of you could take a stab at this? Ms.
    Avakian, am I pronouncing that right?
         Ms. Avakian. Avakian.
         Mr. Poliquin. Great. In February, you folks made an
    announcement about your share class selection disclosure
    initiative. I believe it deals with investment advisers and
    reporting and self-reporting and so forth, so on. Could you
    explain that program to us and how it might help investors?
         Ms. Avakian. Absolutely. Happy to explain it. We do except
    it to directly impact and help retail investors in particular.
    So one of the problems we have seen over the years, both our
    Office of Examinations and in enforcement, are problems where
    investment advisers are recommending higher-fee mutual fund
    share classes for which they are being compensated, when there
    are lower or no-fee share classes of the exact same product
    available.
         Mr. Poliquin. Now, does this only apply to, if I may, to
    fund companies
         It doesn't deal with managers who manage separate
    accounts. You are just talking about mutual fund companies, is
    that correct?
         Ms. Avakian. The share classes in mutual fund companies--
    the self-reporting initiative is targeted to investment
    advisers.
         Mr. Poliquin. Got it.
         Ms. Avakian. OCIE has identified this problem in a number
    of exams over the years. We have brought in the Enforcement
    Division, in a number of cases, for failure of investment
    advisers to identify this conflict of interest for their
    clients. The fact that there is this higher-fee share class for
    which they are being compensated, while there is a--
         Mr. Poliquin. Now, does this apply to no-loads, as well as
    load funds, where you are just talking about the H2Bs that
    are--not the H2Bs. The fees that are charged by the--
         Ms. Avakian. Typically the 12B-1 fees, yes.
         Mr. Poliquin. Yes, thank you very much.
         Ms. Avakian. The self report--and we have brought a number
    of cases against financial institutions, in each of which the
    Commission assessed penalties in connection with the resolution
    of those cases.
         The self-reporting initiative provides a defined period of
    time--4 months--for investment advisers who have this problem,
    who have identified this problem to come forward and self-
    report, and, in exchange for that, we will recommend to the
    Commission standard settlement terms.
         Those standard settlement terms require these investment
    advisers to disgorge the moneys and to repay them back to
    investors. In exchange for that, we will have standard
    settlement terms that will not include a financial penalty.
         Ultimately, what we are trying to do here is take a
    problem we identified on a broad scale, investigations that
    take a substantial amount of time to complete, and, instead,
    say, all of you who have this problem come forward, identify it
    to us, and hopefully attract and get a much larger universe
    with way fewer staff resources invested in it and money back
    into the pocket of investors.
         Mr. Poliquin. In doing your work, do you find there is a
    common thread among the asset manager community that
    participates in these practices that--there are not?
         Mr. Peiken. No.
         Mr. Poliquin. There's no common--
         Mr. Peiken. We have seen it from the smallest advisers, to
    the biggest financial services firms on Wall Street.
         Mr. Poliquin. OK, good. Thank you.
         Mr. Chairman, I yield back my time. Thank you.
         Chairman Huizenga. Gentleman yields back.
         We will give the Ranking Member an opportunity, as well.
         Mrs. Maloney. OK. I apologize. I have another hearing
    taking place. There are just many, many hearings today, with a
    lot of work to cover.
         I want to go back to the Kokesh decision. I want to
    understand how you got a 9-0 ruling. That's very rare in the
    Supreme Court. Yet there seem to be a concern on both the
    Republican and Democratic side, and from you, that this would
    limit very much the Securities Exchange Commission in your
    mission to protect investors. Can you give me some insights on
    the Kokesh case and ruling?
         Then, what do we do about it? You identified it as a
    problem as did many of my colleagues on both sides of the
    aisle. Would it take legislation to correct it? But what were
    the circumstances of this case that so overwhelmingly came out
    in a 9-0 ruling?
         I don't know of any other 9-0 ruling. It's court seizing.
    So, if you could give me some more understanding of the Kokesh
    case--and I am responding, really, to both of your testimony
    that this is a big challenge for the SEC.
         Mr. Peiken. Yes. So the Kokesh decision--a couple things.
         So, first of all, the case itself involved a pretty
    egregious fraud in which Kokesh stole, I think, like $35
    million from investors. That took place over a 10-year period.
    By the time he was prosecuted, enough time had lapsed that, in
    the end, as a result of the Supreme Court's decision, he was
    allowed to keep all but, I think, about $5 million of that $35
    million that was misappropriated from investors.
         The Supreme Court's decision was unanimous, and we
    obviously accept it and it's the law of the land. The issue is
    not with the decision, but, rather, with the effect of it,
    which is that, going forward--
         Mrs. Maloney. But, if it was a huge crime where they
    abused investors, you would think that the court would be
    sympathetic to investors being reimbursed. In other words, they
    cut off their ability to be reimbursed. There has to be a
    reason why.
         Mr. Peiken. I think they were addressing a technical,
    legal question of how did the statute of limitations apply to
    the remedy of disgorgement. So, I think, absent an extension of
    the statute of limitations that is, we are going to live with
    this, and we will have to act faster.
         But there will be cases where there is some ongoing fraud
    for years, we don't discover it until some of that money is out
    of our reach. I just would note that we respect the fact that
    statute of limitations are important. They put limits on the
    government in appropriate cases.
         But there are many statute of limitations that apply to
    financial fraud cases that are much longer than 5 years. For
    example, the Justice Department has the ability to use the
    Financial Institutions Recovery and Reform Act, which has a 10-
    year statute of limitations. So it's not without precedent for
    there to be a longer statute of limitations available.
         Mrs. Maloney. But the way Congress could react is by
    legislating, correct?
         Mr. Peiken. Absolutely.
         Mrs. Maloney. We constantly legislate after Supreme Court
    decisions that we disagree with. Most notably, the one I was
    involved in was the Lilly Ledbetter Act that allowed people to
    sue when they have been discriminated against. But, in any
    event, I just want to thank you for your testimony today. It's
    a very difficult job, and we want to help you in any way we
    can.
         I yield back.
         Chairman Huizenga. Gentlelady yields back.
         I am going to take a couple of moments here, as well, for
    a quick question on--explore, maybe, a little bit of the
    differences between corporate and individual penalties and how
    that might affect things.
         Former SEC Chair Mary Jo White emphasized the need to seek
    more admissions of wrongdoing from defendants as a condition of
    really settling the enforcement cases.
         Mr. Peiken, you have noted that, for people that resolve
    cases with the Commission without admitting wrongdoing, but
    still agreeing to all points of relief, most people don't
    particularly view that as, hey, I got away with one here.
         But can you explain how other tools, such as obtaining
    disgorgement, monetary penalties, mandatory business reforms,
    compare with the admission of guilt in settling? Is there
    something more significant that comes with that admission?
         Does settling help obtain relief more promptly, rather
    than going on and risking a trial and the time and effort and
    costs of that?
         Mr. Peiken. Thank you, Mr. Chairman.
         We continue to consider whether seeking admissions is an
    appropriate part of the resolution of any case. Obviously,
    though, we have to balance, as you note, that against the
    possibility that, by demanding admissions, rather than getting
    all the other remedies that we might seek, like disgorgement
    and the ability to return money to investors today--
         Chairman Huizenga. So the SEC still can go for these
    admissions of guilt, right?
         Mr. Peiken. Yep, and we do.
         Chairman Huizenga. You do, OK.
         Mr. Peiken. But, if there is a case where a respondent
    says, I am willing to give you everything expect those
    admissions, we have to make a cost-benefit analysis about
    whether it's worth going through what could be years of
    litigation.
         In some cases, that might well be worth it. In others,
    maybe not. We evaluate the full package of potential remedies
    and relief as part of every resolution.
         Chairman Huizenga. Do you mind addressing, briefly, maybe,
    individual versus corporate penalties and how that may affect
    people's actions?
         Mr. Peiken. Chairman Clayton has said, individual
    liability, in his view, and I agree this drives behavior more,
    even, so than organizational liability. So we put a high
    premium on bringing--
         Chairman Huizenga. I think, at one point, he said, well,
    look, it is shareholders that, then, are paying for that
    penalty, correct?
         Mr. Peiken. Yes. I think that the way we look at it is, in
    every case that we recommend to the Commission, we are seeking,
    where appropriate, to recommend action against an individual.
         In some cases, that is not possible. But, over the last
    year, it's been possible, in about 80 percent of all the cases
    that we bring, there are charges against an individual, as well
    as, potentially against an institution.
         So we are looking at both. There is a place for corporate
    liability and corporate penalties, and there are places for
    individual responsibility and individual penalties, and--
    including getting bad actors out of the markets.
         So some of the individuals that we come across in our
    investigations are recidivists or have engaged in serious
    wrongdoing, and they have no place being in our markets. We
    will recommend, as part of our proposal that we seek to suspend
    them or bar them entirely from participating in the industry.
         Chairman Huizenga. Previously, we had Bill Hinman here
    from Corporate Finance Division and talked a lot about ICOs and
    those kinds of things. It's been pretty clear that most of
    these seem to be birthed as a security, and then some migrate
    into a futures.
         How I have been describing it is, is it fish or is it
    fowl? It turns out these are platypuses. Somehow or another,
    they don't quite fit into categories.
         So I appreciate the opportunity to explore that a bit
    more. We certainly are working on that issue and needing some
    clarification--again, how that works for you all to, then,
    enforce what is being laid out.
         So, with that, I just want to say thank you. I appreciate
    the time. Thank both of you for your efforts on behalf of the
    SEC and that retail investor, as well. Without objection, I
    would like to submit the following statements for the record. I
    think we can.
        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.
         So, again, Mr. Peiken, Ms. Avakian, thank you for your
    time today here, and our hearing is adjourned.
         Ms. Avakian. Thank you.
         [Whereupon, at 11:30 a.m., the subcommittee was
    adjourned.]

                                A P P E N D I X

                                  May 16, 2018

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