[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, 
[email protected], 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.]

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                              May 16, 2018


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