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

                        OVERSIGHT OF THE U.S. SECURITIES

                            AND EXCHANGE COMMISSION

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 21, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-103

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 _________

                     U.S. GOVERNMENT PUBLISHING OFFICE

    31-492 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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        June 21, 2018................................................     1
    Appendix:
        June 21, 2018................................................    49

                                   WITNESSES
                            Thursday, June 21, 2018

    Clayton, Hon. Jay, Chairman, U.S. Securities and Exchange
      Commission.....................................................     4

                                    APPENDIX

    Prepared statements:
        Clayton, Hon. Jay............................................    50

                  Additional Material Submitted for the Record

    Ellison, Hon. Keith:
        Report entitled, ``Rewarding or Hoarding? An Examination of
          Pay Ratios Revealed by Dodd-Frank''........................    75
    Clayton, Hon. Jay:
        Responses to questions for the record from Representatives
          Beatty, Budd, Emmer, Luetkemeyer, Sherman, Tipton, and
          Wagner.....................................................   101

                        OVERSIGHT OF THE U.S. SECURITIES

                            AND EXCHANGE COMMISSION

                                  ----------

                            Thursday, June 21, 2018

                         U.S. House of Representatives,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
    [chairman of the committee] presiding.
        Present: Representatives Hensarling, Royce, Lucas, Posey,
    Luetkemeyer, Huizenga, Stivers, Hultgren, Pittenger, Wagner,
    Barr, Rothfus, Tipton, Williams, Poliquin, Love, Hill, Emmer,
    Zeldin, Trott, Loudermilk, Mooney, MacArthur, Davidson, Budd,
    Kustoff, Tenney, Hollingsworth, Waters, Maloney, Velazquez,
    Sherman, Meeks, Scott, Green, Cleaver, Ellison, Perlmutter,
    Himes, Foster, Delaney, Sinema, Beatty, Vargas, Gottheimer,
    Crist, and Kihuen.
        Chairman Hensarling. The committee will come to order.
    Members are asked to take their seats. Without objection, the
    Chair is authorized to declare a recess of the committee at any
    time. All members will have 5 legislative days within which to
    submit extraneous materials to the Chair for inclusion in the
    record.
        The hearing is entitled, ``Oversight of the U.S. Securities
    and Exchange Commission.'' I now recognize myself for 3-1/2
    minutes to give an opening statement.
        I think we all know that the SEC (U.S. Securities and
    Exchange Commission) has a well-established three-part mission
    to include investor protection, the maintenance of fair,
    orderly, and efficient markets, and the promotion of capital
    formation. Unfortunately, in the recent past, this latter
    aspect of the mission has received short shrift. That is why I
    am very grateful to Chairman Clayton for his leadership in
    devoting more time and attention to the capital formation
    mission.
        Although our economy is clearly red hot today, there are
    some worrisome signs that we must confront. Number one, as
    recently as 2016, entrepreneurship, the provision of startups,
    reached a 40-year low. We know that IPOs (initial public
    offering) have been on a slide downward. Although we have seen
    a gradual uptick, they are half of what they were 20 years ago.
        Although we passed a bipartisan banking bill, it is largely
    a community bank, credit union, and regional banking bill, when
    80 percent of our business debt comes from investors in our
    capital markets, not from lending officers in our banks.
        Small business represents 99 percent of all business
    enterprises and half of our U.S. jobs. Surely they are the job
    engine of America. When companies do go public, unfortunately,
    many are withering on the vine.
        We have a number of challenges. If these businesses cannot
    find adequate capital, it begs the question, where will the
    Amazons, the Googles, and the Apples of tomorrow come from? How
    can we sustain long-term 3 percent GDP (Gross Domestic Product)
    growth without ensuring that we have plenty of these startups
    in the pipeline?
        It also begs the question, how will we successfully compete
    with China, particularly ``Made in China 2025,'' unless we
    infuse more reforms into our capital markets because we know
    China is committed to dominating several different fields in
    high tech, including high tech, biotech, and artificial
    intelligence. We know they have a very healthy IPO market and
    currently produce about roughly a third of the world's IPOs,
    IPOs that I think we would much prefer to have in America.
        Another question that we have to ask ourselves and ask the
    SEC, how can Main Street investors have more opportunities to
    invest in their future? How can they invest in great companies,
    when we look at our IPO market and see that so many of our
    public companies are now older, they are bigger, they are
    fewer?
        When they go to the public markets, this is often at a
    billion dollar valuation when so much of the explosive growth
    took place as a private company that they were not allowed to
    invest in. Why was it only the wealthy that managed to invest
    on these companies on the way up and not our teachers, our
    barbers, our farmers, and our first responders? We too must
    act.
        We have an opportunity, since we know the Senate will be
    voting on a package of capital formation bills. Historically,
    this is something that has been done on a bipartisan basis in
    this committee. I note again when President Obama signed the
    first Jobs 1.0 Act into law, he said it was an important step
    on the journey to remove barriers of capital formation for
    entrepreneurs. That job must continue, both at the SEC and
    Congress. I look forward to hearing from our witness on the
    capital formation agenda of the SEC.
        I now turn to the Ranking Member for an opening statement
    for 3 minutes.
        Ms. Waters. Thank you very much, Mr. Chairman. Welcome
    back, Chairman Clayton.
        Mr. Chairman, given recent developments regarding the
    Volcker rule, I would like to offer a reminder that Congress
    put the Volcker rule into effect in order to stop banks from
    essentially gambling with taxpayer dollars. But earlier this
    year, the Office of the Comptroller of Currency, the Federal
    Reserve Board, the Federal Deposit Insurance Corporation, and
    the Commodity Futures Trading Commission (CFTC), and the
    Securities and Exchange Commission issued a proposal that
    appears to give banks a pass and allow them to continue what
    Congress clearly wanted to stop.
        Now the SEC's analysis of the proposed rules said, and I
    quote, ``We recognize that the proposed amendment would
    increase moral hazard risk related to proprietary trading by
    allowing dealers to take positions that are economically
    equivalent to positions they could have taken in the absence of
    the 2013 final rule,'' end quote.
        I am wondering why the SEC would be supporting changes to
    the Volcker rule that will increase moral hazard risk. I am
    also concerned about the SEC's regulation-based interest. In
    Dodd-Frank, Congress specifically gave the SEC the authority to
    impose a harmonized fiduciary standard for both brokers and
    investment advisers. But the SEC's proposal does not do that. I
    am going to urge Chairman Clayton to ensure that the SEC's
    final rules protect investors and retirement savers from
    unscrupulous actors.
        Mr. Chairman, it has been reported that you have a plan to
    advance a package of capital markets bills to the House floor.
    You and I have not talked about this, I have not been consulted
    on what might be included in such a package. But based on some
    of the bills the committee has marked up to date, I remain
    concerned that this package may contain bills that could weaken
    investor protections, given that any such legislation can make
    the SEC's job that much harder.
        I am looking forward to Chairman Clayton's ability to
    express his concerns to this committee about any measures that
    he views as potentially harmful to investors, and I look
    forward to hearing from him throughout this process. I thank
    you, and I yield back the balance of my time.
        Chairman Hensarling. The gentlelady yields back. The Chair
    now recognizes the gentleman from Michigan, Mr. Huizenga, the
    Chairman of our Capital Markets Subcommittee.
        Mr. Huizenga. Thank you, Mr. Chairman. While, Chairman
    Clayton, finally our economy is starting to fire on all
    cylinders, and while tax reform is strengthening our economy,
    increasing paychecks, it is also starting to deliver real
    results for hard-working middle-income families, not only in
    west Michigan, but across the country.
        I had an opportunity to meet with a number of NFIB members
    from Michigan yesterday, and they echoed that sentiment. But
    moving forward, it is my goal to build on the success of tax
    reform by continuing to promote policies that empower
    taxpayers, strengthen our economy, and provide more opportunity
    for American taxpayers to succeed.
        Signed into law the Economic Growth Regulatory Relief and
    Consumer Protection Act has begun to provide much needed relief
    to consumers and small businesses on Main Street, but that is
    just the beginning of unleashing American innovation, jobs, and
    capital, while supporting economic growth. We can all
    acknowledge that the United States has the strongest, deepest,
    most liquid markets in the world, but it is becoming more
    apparent that our capital markets are becoming less and less
    attractive, as well, to growing businesses due to the one-size-
    fits-all securities regulations currently in place.
        For public companies, some of which are just a couple
    hundred million dollars, up to a number of massive companies
    knocking on the door of $1 trillion in value. Our capital
    markets are the envy of the world, but we have to keep it that
    way. We must jumpstart our capital markets to truly unleash
    American innovation and economic growth and provide greater
    investment opportunities for Mr. and Mrs. 401(k).
        Chairman Clayton, as we can work together, we can further
    our economy by building on the successes of the Bipartisan Jobs
    Act. Let's work together to reverse the negative decline in
    public companies by modernizing our Nation's securities
    regulatory structure to ensure the free flow of capital, job
    creation, and economic growth. I appreciate that.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs.
    Maloney, Ranking Member of our Capital Markets Subcommittee.
        Mrs. Maloney. Thank you so much, Mr. Chairman. Welcome,
    Chairman Clayton.
        The SEC has been very active since you were here last
    October. In April, the Commission proposed a best interest rule
    for brokers who were giving recommendations to retail
    investors. We have known for a long time that retail investors
    do not distinguish between advice they get from investment
    advisors, who are already subject to the fiduciary rule, and
    sales recommendations they get from brokers. A best interest
    rule for brokers is long overdue.
        I have to say, I was somewhat disappointed that the SEC did
    not propose a uniform best interest standard for both
    investment advisors and brokers who were providing
    recommendations to retail investors. A uniform standard is
    exactly what the SEC staff recommended after conducting a
    lengthy study of this issue in 2011. I am concerned that the
    SEC's proposed best rule is not as strong as it should have
    been and is not as strong as the Department of Labor's
    fiduciary duty rule, so I look forward to hearing from Chairman
    Clayton on this.
        The SEC has also been quite active on cryptocurrencies and
    limited initial coin offerings. I think the SEC is right to be
    active in this space because there is a great number of retail
    investors who are getting hurt in cryptocurrencies. As Chairman
    Clayton has acknowledged, a lot of the digital tokens that have
    been issued in ICOs are in reality unregistered securities.
        I also look forward to hearing what the SEC is seeking to
    clarify the loan rule. My time is up. I look forward to your
    testimony. I yield back. Thank you.
        Chairman Hensarling. The gentlelady yields back.
        Today we welcome back to the Committee, for his second
    appearance before us, the Honorable Jay Clayton, Chairman of
    the U.S. Securities and Exchange Commission. He received a more
    thorough introduction in his first appearance, so in the
    interest of time, we won't say it again.
        Chairman Clayton, you are recognized for 5 minutes to give
    an oral presentation of your testimony. Again, welcome.

                    STATEMENT OF THE HON. JAY CLAYTON

        Mr. Clayton. Chairman Hensarling, Ranking Member Waters,
    members of the Committee, thank you for the opportunity to
    testify before you today about the work of the SEC. I will
    attempt to be brief in my opening remarks and refer you to my
    written testimony, which details our work over the past year.
        On behalf of my fellow Commissioners and the 4,500 women
    and men at the SEC, I would like to thank this Committee for
    its support. Congress's recent Fiscal Year 2018 funding for the
    agency is enabling the SEC to make significant investments in
    furtherance of our efforts to modernize our information
    technology infrastructure, including improving our
    cybersecurity risk profile.
        Further, Congressional funding, including our current
    pending Fiscal Year 2019 requests, will allow us to hire
    experienced staff to improve our expertise relating to our
    markets, cybersecurity, capital formation, and protecting Main
    Street investors. We recognize the vote of confidence that
    Congress has shown in the SEC, and I am committed to ensuring
    that the agency is a prudent steward of our appropriations, and
    I know the SEC staff is committed to our mission.
        With regard to agency operations, I believe that the agency
    is running effectively. This is in large part due to the
    efforts of our senior leadership in our divisions and offices,
    including our 11 regional offices and their respective teams.
        We have many good teams at the SEC. My written testimony
    outlines many of our accomplishments over the past year,
    particularly as they relate to the long-term interests of our
    Main Street investors, including improving our standards of
    conduct for investment professionals, the integrity of our
    markets, and overall investor protection.
        Additionally, I am pleased that the Commission will meet
    next Thursday to adopt final amendments to the smaller
    reporting company definition, which will expand the number of
    public issuers eligible to provide scaled disclosure.
        I also want to bring to your attention the discussion of
    cybersecurity in my written testimony, including a discussion
    of our 2016 EDGAR intrusion. The testimony discusses the
    ongoing internal review of this matter that is being conducted
    by our Office of the General Counsel (OGC), including the
    remedial steps we are taking.
        Finally, I want to leave you with this. The women and men
    of the SEC are working hard each and every day, motivated by
    the fact that tens of millions of Americans are invested in our
    securities markets for the long term. The accomplishments
    detailed in my written testimony are because of the individual
    and collective efforts of these members of our SEC team.
        In closing, I would like to again thank the Committee for
    its continued support of the SEC, its mission, and its people.
    I look forward to answering any questions you may have.
        [The prepared statement of Mr. Clayton can be found on page
    50 of the appendix.]
        Chairman Hensarling. The Chair now yields to himself for
    questioning.
        Chairman Clayton, you heard my opening statement. Again, as
    you well know, there has been a 20-year decline in IPOs. We
    have roughly half the companies going public than we did 20
    years ago. How big of a problem is this? What investment
    opportunities are Main Street investors losing out on?
        Mr. Clayton. I think you broke that into two perspectives,
    both of which are important. The first is, from a capital
    formation perspective, are we impeding capital formation by not
    having as attractive a market for companies? I think the answer
    to that is yes. Are there alternatives in the private markets?
    Yes. But our public capital markets have been an incredible
    engine for capital formation in America, incredible competitive
    advantage. We want to keep that.
        The second part of your question, does it trouble me that
    the suite of opportunities that is available to ordinary
    investors is shrinking on a relative basis because our public
    capital markets are shrinking on a relative basis? Yes, it
    troubles me. I do believe that the quality of opportunities
    that you see in the public capital market space are not as good
    as the quality opportunities that are available to people with
    a great deal of capital in the private market space.
        Chairman Hensarling. In your opening statement, you mention
    that you have noticed an open meeting for Thursday, June 28th
    to include a number of items on smaller company reporting. Will
    there be any discussion of 404(b) of Sarbanes-Oxley at that
    time?
        Mr. Clayton. Yes, there will be. I expect there will be.
    The smaller reporting company thresholds are something we are
    going to be examining, providing more public companies with the
    opportunity to used scaled disclosure. There are thresholds for
    when 404(b) is applicable, when companies have to comply with
    it.
        I believe those thresholds should be examined, and I expect
    a discussion of that at our meeting.
        Chairman Hensarling. I must admit when I meet with a lot of
    entrepreneurs, venture capital startups, what I typically--and
    I ask the question. I just recently came back from a trip from
    Silicon Valley and one of the things I heard when I asked have
    you considered going public and one pithy answer was it costs
    too much and it is too big of a hassle.
        Of all the cost factors from particularly early growth
    stage companies is 404(b) of Sarbanes-Oxley. Looking at that
    on-ramp is something I would commend that you do.
        Speaking of commendations, the Treasury Department has 15
    different policy recommendations in the capital formation space
    that the Commission has yet to act on. Again, I applaud you for
    what you are doing. I wish it might be at a little quicker
    pace.
        I know this Committee has voted on a number of provisions,
    as has the full House, some of which the SEC could do on its
    own authority, including providing greater clarity for angel
    investors in updating the definition of accredited investor.
        How important is it that we do that? What is the Commission
    contemplating at the moment?
        Mr. Clayton. In the registered space, in the public capital
    market space, I believe in the process that the Jobs Act--I
    think, as you referred to it, JOBS Act 1.0--started, which is
    one-size-fits-all, doesn't make sense for our public companies.
    We have some at the top of the spectrum, which are incredibly
    sized companies--200 times, 300 times the size of some of our
    small- and medium-sized public companies. We are looking at
    that path provided by the JOBS Act in order to provide scaled
    disclosure, scaled requirements.
        Let me go back to your conversation with Silicon Valley. At
    what point is a company big enough where going public makes
    sense? Right now, I think that point is too high on average.
        Chairman Hensarling. Increasingly, it is a billion dollars,
    isn't it?
        Mr. Clayton. If you have to get to a billion dollars for it
    to make sense to access our public capital markets, that is
    probably too high. In the private space, and particularly what
    you are focused on is the private offering space that would be
    available to accredited investors, is looking at the accredited
    investor definition. I believe it needs to be modernized.
        Chairman Hensarling. My time has expired. I now recognize
    the Ranking Member for 5 minutes.
        Ms. Waters. Thank you very much, Mr. Chairman. I have a
    question that I would like to propose. But before I do that,
    since you mentioned Silicon Valley, I too, was there recently.
    I was appalled at the lack of diversity.
        I know that there are a number of organizations, civil
    rights organizations that have been working very hard to
    increase participation of minorities and women in the Silicon
    Valley businesses. They have not done very well, and of course
    I would be anxious to be of assistance to them in making sure
    that we could reduce the costs and reduce the hassle of
    becoming IPOs.
        But we certainly must take into consideration whether or
    not these companies are developing, understanding that some of
    us are going to be focused on diversity in those companies.
        Having said that, let me go to my question on fiduciary. As
    we have discussed before, I am concerned that the SEC's
    proposed Regulation Best Interest does not apply a fiduciary
    standard to brokers that effectively function as investment
    advisers by providing retail investors with personalized
    investment recommendations.
        The best way to protect investors and reduce confusion is
    to treat all advisers, regardless of their titles, the same
    under a fiduciary standard that requires them to put their
    clients' interests first. Yet the proposal would only prohibit
    brokers from calling themselves adviser and fails to address
    the numerous other titles that may be used, like financial
    planner or wealth manager.
        Don't you agree that it would be far simpler and clearer
    for investors to subject any broker that holds himself out as
    providing investment advice or who engages in advisory services
    to the Advisers Act fiduciary duty and require them to put
    their clients' interests first?
        Mr. Clayton. Thank you for raising the question of our
    proposal to bring clarity to the broker-dealer space and the
    investment adviser space.
        If you will indulge me, I will explain what we are doing.
    There are two relationship models for retail investor advice in
    America. There is an investment adviser model and a broker-
    dealer model. The investment adviser model is a portfolio-
    based, holistic model where you come to me--I am your
    investment adviser--and I say tell me what your goals are:
    Education, retirement, what your risk tolerance is. I am going
    to help you go over your whole portfolio, monitor it, plan it,
    and I am going to charge you a fee for doing that. The fees
    vary, the types of fees vary, but I am going to charge you a
    fee. It may be a--we can go into that in more detail.
        A broker-dealer model is, you come to me for a
    recommendation in a specific area on an episodic basis. You
    say, ``Jay, I would like to get some exposure to telecom stocks
    and maybe some international stocks.'' I make you a
    recommendation. That is the relationship there.
        What we are doing in each case, I can't put my interests
    ahead of yours. We are bringing to the broker-dealer space that
    requirement. We are also bringing to the broker-dealer space
    care obligations, that in getting to the stocks that I will
    recommend to you, I have to go through a series of steps that
    ensure that those are right for you in your circumstances.
        That is what we are doing in the broker space. But more
    importantly, the conversation that I just had with you through
    our Form CRS, our client relationship summary, the customer
    needs to understand what I am doing in wearing either hat, how
    I am getting paid, and what my other incentives are. Most
    importantly, we are going to bring clarity to that space.
        You raised a very good point. Does the customer know how I
    am getting paid and what my motivations are and how I am
    mitigating the conflicts that creates? There is no conflict-
    free relationship. There are conflicts in an investment adviser
    relationship and there are conflicts in a broker-dealer
    relationship. Disclosing them, mitigating them, making sure
    that everybody understands what the motivations are, that is
    what we are going to do in this space. Or I should say that is
    what I want to do in this space.
        Ms. Waters. I appreciate that. I would like to continue my
    conversation, my discussions with you on best interest, the
    client, the customer's best interest always being put first. I
    think we need to continue that conversation.
        Mr. Clayton. I am very happy to. But I want the American
    people to understand that, in the investment adviser space, the
    investment adviser fiduciary duty, the way that is applied is
    you, as the adviser, can't put your interests ahead of the
    customer.
        That is what we are going to do in the broker-dealer space.
    You as the broker-dealer can't put your interests ahead of the
    customer.
        So, and I look forward--we have a long comment period. I
    want to keep talking.
        Ms. Waters. All right. Thank you.
        Chairman Hensarling. The time of the gentlelady has
    expired. The Chair now recognizes the gentleman from Michigan,
    Mr. Huizenga, Chairman of our Capital Markets Subcommittee.
        Mr. Huizenga. Thank you, Mr. Chairman, and welcome again,
    Chairman Clayton. We were starting to talk about this--or at
    least I was in my opening statement about how the SEC needs to
    take a path to make complex, obscure, outdated rules more
    relevant for today's investors and for our capital markets.
        I can't emphasize enough how strongly we need to do this.
    Many would argue we have a digital, fast-paced capital markets
    but we are dealing with analog and paper-based regulations, and
    we need to catch up.
        One of those--and I do want to say thank you for--to take a
    quick moment--is your recent proposed rule on what is commonly
    referred to as the loan rule, which was issued May 2nd. This is
    the type of thing I think will be helpful for us to do that. It
    will help clarify what for a long time has been a source of
    ambiguity and uncertainty in capital markets. Thank you for
    that.
        I do want to touch on Kokesh and disgorgement. Last month,
    SEC's Division of Enforcement co-directors testified in front
    of the Capital Markets Subcommittee that the SEC has been
    unable to recover $800 million in disgorgement since the
    Supreme Court's Kokesh decision.
        In your testimony, you stated, quote, ``allowing clever
    fraudsters to keep their ill-gotten gains at the expense of our
    Main Street investments, particularly those with fewer savings
    and more to lose, is inconsistent with basic fairness and
    undermines the confidence that our capital markets are fair,
    efficient, and provide Americans with opportunities for a
    better future,'' close quote.
        Since the Kokesh decision, many have called for extending
    the statute of limitations assigned to disgorgement, while
    others have said that giving the SEC the authority to pursue
    restitution would be counter to the SEC's core mission. I would
    like to hear from you what you believe Congress should be
    considering as we are looking at addressing the Kokesh issue.
        Mr. Clayton. Thank you. I think you described it very well.
    The Supreme Court in Kokesh determined that disgorgement was a
    penalty. Therefore, the 5-year statute of limitations that
    applies to penalties applies to disgorgement remedies.
        I believe in statutes of limitations. I think they serve a
    very important role. What does bother me about that decision
    from a practical point of view is the most well-concealed
    frauds may fall outside of that limitations period. I think the
    SEC should be in the business of getting money back for
    investors who are subject to fraud, a Ponzi scheme, whatnot. A
    possible way to do that is to give us restitution authority in
    those circumstances.
        Let me be very direct: I think we should have the authority
    to get people back their money in those cases. I do think we
    should bring cases quickly. Statute of limitations drive you to
    bring cases quickly. But in these very well-concealed
    situations, we should be able to get people their money back.
        Mr. Huizenga. I look forward to working with you on that
    because I know I want to ensure that the SEC has the necessary
    tools to protect those shareholders and investors.
        Let's talk briefly about capital markets modernization. As
    I mentioned in my opening statement, we do have the strongest,
    deepest, most liquid markets and the envy of the world, but
    that has been slipping. We know that.
        Today's equity markets have been shaped by the 1975
    amendments to the Securities and Exchange Act, which goes back
    to the 1930's. But obviously markets have dramatically changed
    over the last 40 years. Do you believe that the one-size-fits-
    all approach to securities regulation is a competitive
    disadvantage to the United States as compared to our global
    competitors?
        Mr. Clayton. We have benefited greatly from our capital
    markets. We have 4.4 percent of the world's population. We have
    over 50 percent of the world's largest public companies. It is
    pretty amazing. That is largely because of our ability to
    create capital formation in our public capital markets.
        When I meet my regulatory brethren from around the world,
    they would like to replicate what we have. That is their goal.
    Now, capital formation around the world is good for all of us,
    but in the U.S we want to keep this going.
        Mr. Huizenga. Yes. We know that there are some things that
    are working well. What areas do you think we can improve?
        Mr. Clayton. I do think we can improve the requirements,
    the public company requirements, particularly of our smaller
    and medium-sized companies, to have access to capital. The
    rules that we have today are the product of history, just as
    you said.
        They are not the--if we sat down this afternoon, all of us,
    and tried to write rules, they would be different from the
    rules on the books because life has changed a great deal. Our
    Division of Corporation Finance has that perspective, and they
    are looking at recommending changes. We will have a release
    coming that cleans up a lot, but we need to continually do
    this.
        Mr. Huizenga. I look forward to working with you. Thanks,
    Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs.
    Maloney, Ranking Member of our Capital Markets Subcommittee.
        Mrs. Maloney. Thank you.
        Chairman Clayton, the last time you were here, I asked you
    whether the SEC's pilot program on access fees charged by
    exchanges was going to include a zero rebate bucket. You did
    mention that you were going to include a zero bucket, and thank
    you very much for that.
        My question is, when do you expect to finalize the access
    fee program, this year, this summer, this fall, this winter?
    When?
        Mr. Clayton. We are going through the Administrative
    Procedures Act process. We have proposed the rule. It is out
    for comment. I believe that comment period is coming to an end
    rather quickly. It is on my near-term agenda. If I had to sit
    here today, I would say sometime this fall.
        Mrs. Maloney. Thank you.
        Last month, Bloomberg reported on a very troubling meeting
    that one of your colleagues, Commissioner Piwowar had with
    Citigroup. In the wake of the Parkland shootings, Citi had just
    announced a new policy on guns in which Citi stated that it
    will require all the retailers that it does business with to
    adopt best practices on gun sales, such as limiting gun sales
    to people who are over 21 and have passed a background check
    and not selling so-called bump stocks.
        I think that Citi's new policy is very responsible, a very
    responsible decision. They weren't the only bank to do so. Bank
    of America also announced that it would restrict its business
    with gun manufacturers that make military-style guns for
    civilian use.
        But Commissioner Piwowar was apparently upset with Citi's
    new policy on guns when he met with a group of their executives
    in April. According to a press report in Bloomberg, Commission
    Piwowar, quote, ``castigated the Citi executives for,'' quote,
    ``straying into social policy,'' end quote.
        The report also stated that he issued a thinly veiled
    threat to Citi, saying that their new gun policy would cause
    them to lose votes on SEC rules that Citi supported, even
    though the SEC has absolutely no role in setting firearms
    policy in the United States.
        My question is, do you think it was appropriate for
    Commissioner Piwowar to use his position at the SEC to try to
    influence a private company's policies on firearms or any
    private policy that doesn't affect the SEC?
        Mr. Clayton. I am not going to comment on the subject
    matter of those press reports. In a separate hearing over on
    the Senate side, this was raised, and the question of whether
    there should be an inspector general's inquiry was raised, and
    I am going to leave it at that.
        Mrs. Maloney. OK. Then let me ask you, since we are not
    talking about Piwowar now. But would you base your vote on the
    SEC rulemaking on whether the companies that support the rule
    do business with gun manufacturers?
        Mr. Clayton. I will tell you my perspective--
        Mrs. Maloney. That is not part of an IG report.
        Mr. Clayton. No, no, no and I will tell you what
    perspective I bring to this job, which is we have our mission.
    I pursue all of our rulemaking. We are all human beings. I hope
    I pursue all of our rulemaking and I pursue all of our
    enforcement cases with the idea of what is in the long-term
    interests of the people who put money in our market and leave
    it there. That is the perspective I bring.
        Mrs. Maloney. Social policy would not influence you? It is
    the markets and your job?
        Mr. Clayton. Yes.
        Mrs. Maloney. Thank you. The question also I would like
    clarification on your proposed best interest rule for broker-
    dealers. The SEC proposed a rule that says, ``a broker can't
    put his own financial interests ahead of the interest of the
    retail customer,'' end quote. The proposed rule then goes on to
    imply that a broker will satisfy this obligation as long as the
    broker's interests aren't, quote, ``the predominant motivating
    factor behind the recommendations,'' end quote.
        Is this your intent? Do you really mean to equate these two
    things? In other words, under the proposed rule, as long as a
    broker's own interest wasn't the predominant motivating factor
    behind a recommendation, does that mean the broker
    automatically did not put his own interest ahead of his
    customers?
        Mr. Clayton. I think you are taking that language--let me
    be clear on what we are proposing. The broker cannot put their
    interests ahead of the customer's. I believe that language is a
    recognition of the fact that there is no conflict-free advice
    model. But we are absolutely clear that the broker can't put
    their financial or other interests ahead of the client's.
        Mrs. Maloney. Thank you.
        Chairman Hensarling. The time of the gentlelady has
    expired. The Chair now recognizes the gentleman from Missouri,
    Mr. Luetkemeyer, Chairman of our Financial Institutions
    Subcommittee.
        Mr. Luetkemeyer. Thank you, Mr. Chairman.
        Chairman Clayton, thanks for being here today. Last week, I
    sent a letter to you and other financial regulators outlining
    my concerns on guidance being treated by examiners as rules
    creating binding obligation on financial firms. This practice
    is fairly prolific in the banking space, but I am not sure your
    agency is immune from the trend. Essentially, examiners are
    treating guidance as rule without subjecting anything to the
    process outlined in the Congressional review process.
        Are you willing to communicate to your staff, and in the
    words of the Federal Reserve Chairman Jay Powell and Vice
    Chairman Randy Quarles, ``that rules are rules and guidance are
    guidance?''
        Mr. Clayton. I think that articulates my view of rules and
    guidance pretty well.
        Mr. Luetkemeyer. I know that in my discussion with Vice
    Chairman Quarles about this, about the letter he was
    receiving--I assume you received yours--he wants to be the
    individual who tries to bring all regulatory agencies together
    to have a common way of going about issuing guidance, even to
    the point of having a disclaimer in the guidance that says this
    is guidance, this is not a rule, and therefore punitive action
    will not be taken if you do not adhere to this guidance,
    because it is a suggestion, it is not a rule.
        As we have seen with the past Administration, especially
    with the CFPB, whenever they produce guidance, they suddenly
    believe that they have the authority to enforce that as a rule.
    It is very concerning to me. I don't know that your agency does
    a lot of it, but I am sure there is some. That is my reason for
    my concern this morning, and I hope that you will be willing to
    join us in this effort to try and clear up for your examiners
    to be able to know what are rules and what are guidance and
    appropriately adhere to those.
        Mr. Clayton. I very much agree with clarity in that area,
    and I very much agree with our system, which is to get to
    rules, you have to go through a process, and guidance is
    guidance.
        Mr. Luetkemeyer. Thank you for that.
        Also, I have spent a lot of time working on issues
    surrounding data security in the last several months here and
    breach notification. Along those lines, I am concerned about
    the Government's hypocrisy in setting standards for
    cybersecurity readiness and disclosure.
        The SEC intrusion that occurred in 2016, which you
    described in your written testimony, wasn't publicly disclosed
    until the fall of 2017, shortly after you got there. The SEC
    itself holds self-regulatory organizations, SROs, to an
    immediate standard for disclosure of cybersecurity incidents
    under regulation SCI. Public companies are held to a
    materiality standard for disclosure.
        My question is, should the SEC and other Federal agencies
    be held to the same standard which they hold with respect to
    supervised entities and SROs?
        Mr. Clayton. The short answer to that question is, based on
    my experience at the agency and with other agencies, I don't
    think it should be the same standard. There are governmental
    considerations that would go into whether to make a disclosure
    or not.
        Do the same principles apply when we decided to disclose
    our cyber incident? Was it on my mind that the American people
    should know and that they should know what we are doing about
    it? Absolutely. But I could see other circumstances, maybe not
    at the SEC, but at other agencies, where national security and
    other considerations weigh against immediate disclosure.
        I don't want to say, certainly for other agencies or make a
    blanket statement that the exact same standard should apply.
    But should we be thinking about what I consider our
    shareholders, the American people, as we disclose what happens?
    Absolutely. That is the approach that we took when we disclosed
    the cyber incident.
        Mr. Luetkemeyer. I know that the OGC is doing an internal
    review of the incident, and they are not done yet, according to
    your testimony this morning. We don't have some answers there.
    But, I am very concerned. We have discussed this before. It
    took a year for this disclosure to happen.
        I understand national security interest. I understand that
    law enforcement may want to try and find a way to track down
    the guys or gals or entities, whoever they are, who are trying
    to break in and do nefarious things here.
        But at the same time, as you just disclosed, you are the
    keeper of the private data of our citizens. The last time we
    talked about this, my question to you was, did you feel that
    the markets were manipulated by this event of people getting
    into your data? Your response was, we are not sure, I don't
    think so.
        Quite frankly Chairman, that answer is not good enough. We
    have to improve on that. I am hopeful that the report will give
    you the guidance it takes to make sure this doesn't happen
    again and, if it does, that there could be a more timely
    disclosure of this incident so that the people can take their
    own actions to protect themselves or that businesses can take
    their own actions to protect themselves, if the data is
    disclosed.
        I yield back. Thank you.
        Mr. Clayton. I agree.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms.
    Velazquez.
        Ms. Velazquez. Thank you, Mr. Chairman. Mr. Clayton,
    welcome.
        Mr. Clayton. Thank you.
        Ms. Velazquez. Puerto Rico has been hit by two hurricanes,
    a financial crisis that entailed many actors, including
    government mismanagement, bondholders, hedge funds, vultures,
    and then Hurricane Maria. I offered legislation that was
    included in S. 2155, and that legislation is known as the U.S.
    Territories Investor Protection Act closes a huge loophole that
    allow UBS and other financial firms operating in Puerto Rico
    and in any other U.S. territory to rip off millions from
    ordinary investors.
        My question to you is, when can we expect the SEC to begin
    implementing this badly needed provision?
        Mr. Clayton. Thank you. This is the provision that removes
    the exemption from the 1940 Act for funds organized?
        Ms. Velazquez. Correct, yes.
        Mr. Clayton. I thank you for that legislation. We are going
    to move forward with that. I think you characterized it
    correctly. It does close what could be characterized as a
    loophole, and it should be done.
        Ms. Velazquez. OK. I am very excited to hear that. Mr.
    Clayton, I am also concerned that a position of advocate for
    small business capital formation has not been filled. Do you
    see any value in that position?
        Mr. Clayton. I am disappointed that we have not yet filled
    that position. We have employed a search firm to try and help
    us find the right person for that. More importantly to your
    question, why am I disappointed? I think that voice should be a
    permanent voice in the work we do at the SEC.
        Ms. Velazquez. When do you expect to fill that position?
        Mr. Clayton. I would like to fill it tomorrow. We have some
    candidates that we are vetting. This is a Commission decision,
    so I can't speak for my fellow Commissioners, but I would like
    to do it as quickly as possible.
        Ms. Velazquez. OK. Let me explain to you why I am so
    concerned about the fact that that position has not been filled
    since it was created in 2016. Earlier this year, language of my
    bill, 4792, the Small Business Access to Capital After a
    Natural Disaster Act, was enacted into law. The bill requires
    the SEC advocate for small business capital formation to issue
    a report to Congress on ways small businesses can access
    private capital following a hurricane or other natural
    disaster.
        This report cannot be issued until an advocate is hired. I
    hear that you are committed and that you will not come here 6
    months later and I will ask the same question to hear that it
    has not been filled.
        Mr. Clayton. I sure hope not.
        Ms. Velazquez. Will you be interviewing candidates with
    experience on capital formation issues after a natural
    disaster?
        Mr. Clayton. We are interviewing candidates. In the context
    of interviewing candidates, the interviews that I have had, I
    have not asked that question, but I will now.
        Ms. Velazquez. In terms of the specific language that was
    included into the bill, it requires someone to be able to issue
    a report related to capital formation, access to capital
    formation after a natural disaster.
        Earlier this week, the SEC imposed Bank of America's
    subsidiary Merrill Lynch with a $42 million civil penalty for
    misleading customers about how it handled their orders. While
    Merrill Lynch entered the scheme known as masking, in May 2013,
    the SEC order indicates that Merrill Lynch did not inform
    customers about its past practices, but rather took steps to
    hide the misconduct.
        This follows an SEC announcement earlier this month that
    Merrill Lynch will pay more than $15 million to settle charges.
    Can you tell us how the SEC determined the level of fines and
    payments against Merrill Lynch in each of these two instances?
        Mr. Clayton. I don't think it is appropriate for me to
    comment on the specific circumstances of a case. I can tell you
    that the way we operate is, our Division of Enforcement and the
    people tasked with bringing these cases, formulate a
    recommendation to the Commission, and the fine and the other
    sanctions are part of that recommendation, and that is what we
    vote on.
        Chairman Hensarling. The time of the gentlelady has
    expired. The Chair now recognizes the gentlelady from Missouri,
    Mrs. Wagner, Chair of our Oversight and Investigations
    Subcommittee.
        Mrs. Wagner. Thank you, Chairman Hensarling. Welcome,
    Chairman Clayton. Breaking news: The Supreme Court just ruled
    that the SEC did not follow proper procedures prior to your
    moving into this space and into this job when appointing
    administrative law judges. In fact, it says that these
    administrative law judges appointed by the SEC and other
    Federal agencies are inferior officers, and many of these
    inferior officers have adversely affected a number of my
    constituents in Missouri's Second Congressional District, and
    that they are subject to the appointments clause of the
    Constitution.
        I think this is going to have broad ramifications now for
    an array of Federal agencies that employ in-house judges,
    including the SEC. I know this is breaking news, but I look
    forward to hearing how this will influence your practices at
    the SEC vis-a-vis the administrative law judges going forward.
    I just thought I would toss that out there.
        I want to start this morning by thanking you and your staff
    for their work on the proposed best interest standard rule. As
    many of my colleagues know, I have been an outspoken critic of
    the Department of Labor's misguided fiduciary rule, and I am
    happy to see that the SEC is finally taking the lead as Dodd-
    Frank, frankly, asked them to do some 8 years ago.
        In testimony before the Committee last year, you identified
    key principles that you felt needed to guide the SEC's approach
    when seeking a new rule that is, in fact, a best interest
    standard for broker-dealers in these areas for clarity,
    consistency, and coordination.
        Let me start by asking you this: Do you believe the SEC has
    achieved this goal in their proposed rule?
        Mr. Clayton. I do. I want to say, we took those concepts
    and then we added an additional lens. This was a truly
    collaborative effort around the--
        Mrs. Wagner. With the Department of Labor, I hope, too.
        Mr. Clayton. With the Department of Labor. I am in contact
    with Secretary Acosta. Our staffs are in contact with each
    other. In fact, our inspection staff recently connected with
    the Department of Labor to show how we would inspect for
    compliance with this rule. We want to bring a common approach
    to this space.
        The other thing that came out of this drafting process and
    interactions was, let's align what investors expect from their
    professional with the law. Because if we are aligning
    expectations, it is a lot easier to get clarity.
        Mrs. Wagner. Agreed. I have several more questions. You
    talked about having investor testing. Has that process started?
    If not, are you still going to follow through with that part of
    the proposed rule?
        Mr. Clayton. Our Office of the Investor Advocate is doing
    investor testing, but that is not the only investor testing we
    are doing. We have scheduled six town halls around the country
    to go out and interact with investors, explain the rule to
    them, ask them what they think about it. I have participated in
    the first two; I plan to participate in two of the remaining
    four.
        Mrs. Wagner. Great.
        Mr. Clayton. That is actually really valuable.
        Mrs. Wagner. Are you willing to make this feedback that you
    get from the investor testing public, sir?
        Mr. Clayton. Investor testing feedback?
        Mrs. Wagner. Yes, are you willing to make this public, your
    findings through these investor testings? I know you are saying
    about a public town hall, so I assume that would be public.
        Mr. Clayton. That is all public. Comments are all public. I
    don't want to make a blanket statement, but I expect that the
    results of the investor testing will be publicly available in
    some form.
        Mrs. Wagner. In testimony before the Senate Appropriations
    Committee, you said, quote, ``I am not going to take forever,''
    referring to completing the rule. I know the comment period
    ends the first week of August. Are you still on track, Chairman
    Clayton, to complete the comment period? Or do you think you
    are going to need to extend it?
        Mr. Clayton. I think I will see in August. But right now I
    think a good comment, good lengthy comment period of 90 days.
    This issue has been around for at least 10 years.
        Mrs. Wagner. Don't I know.
        Mr. Clayton. It is time for--people have been heard--
        Mrs. Wagner. Has the response from the industry been
    positive? Because it is the industry that actually represents
    the low- and middle-income investors and retail savers that we
    are trying to protect. Has it been positive, the feedback?
        Mr. Clayton. I think overall, I am very pleased with the
    feedback.
        Mrs. Wagner. So am I. I have preemption questions, Mr.
    Chairman, that I want to talk about, but I think I will submit
    those for the record, and I yield back the balance of my time,
    and I thank you for your tremendous work in this arena.
        Chairman Hensarling. The time of the gentlelady has
    expired. The Chair now recognizes the gentleman from
    California, Mr. Sherman.
        Mr. Sherman. Mr. Luetkemeyer and I and others have worked
    to try to have more information sent electronically with paper
    only being sent when requested. When you were here in October,
    I asked you about Rule 30e-3 and I want to thank you for moving
    forward with that rule, which will modernize the default
    delivery method for mutual fund disclosures from paper to
    electronic, while protecting a permanent right to paper for
    those who prefer it. You are going to save investors $2
    billion. You are going to save 2 million trees. Good work.
        Mr. Clayton. Thanks.
        Mr. Sherman. My question is, what more can the SEC do in
    terms of electronic delivery that can benefit investors and
    trees?
        Mr. Clayton. So that--30e-3 was a big step. I appreciate
    all the comments from this Committee and others. I think we
    landed in a good spot. But it is just a start. As has been
    discussed in many of the questions today, modernizing our
    rules, including our communications methods, is front of mind
    in our Division of Investment Management, our Division of
    Corporation Finance, and throughout the SEC. Next Thursday, I
    expect we will vote on XBRL and the inclusion of XBRL tagging,
    which, again, is aimed at modernizing our delivery of data to
    the investment community.
        Mr. Sherman. Let me move on. The SEC has pretty much left
    it to the FASB (Financial Accounting Standards Board), but
    accounting is what determines what happens to stock prices.
    Financial statements are based on a 100-year-old view as to
    what every company would disclose in terms of numerical
    information.
        But investors care. For example, if you are investing in
    retail stores, you want to know same store sales. I hope that
    the SEC would look toward either you or getting FASB to define
    the terms that are important to numerical information to
    investors in particular industries and to make sure that those
    numbers are audited, because right now Target has one
    definition of same store sales, Nordstrom has another, and both
    of them issue unaudited information. But I will ask you to
    respond to that for the record.
        I want to associate myself with the comments about
    cryptocurrencies--they are securities, as you pointed out to
    the Senate--and pick up on your current about accredited
    investor rules. When these rules came out, the definition was a
    million dollars in assets, $200,000 in income, and those were
    staggeringly high numbers in the 1980's.
        Now, in effect, those numbers represent one-third of the
    purchasing power, 10 times as many families fit into the
    category, which means 10 times as many families don't get the
    protection. One of my colleagues asked, why can't the average
    barber or teacher get all those great investments that seem to
    be reserved for--why can't anybody charge into the minefield?
    Why do we limit that just to explosive ordnance disposal
    experts?
        Will you revisit the accredited investor definition and
    index up those numbers? Because either they were wrong when the
    SEC issued them or they are wrong now.
        Mr. Clayton. There is a lot to--let me agree with you on
    the concept of an accredited investor definition, which is, no,
    we shouldn't just let people charge into the minefield, as you
    characterize it, without ascertaining to some extent whether
    they are capable of handling the private investment arena.
    Completely agree with that. We have chosen the accredited
    investor definition as that gatekeeping function to the private
    investor arena--
        Mr. Sherman. This doesn't mean that they can't make the
    investment. It just means that they need to get advice, and all
    those rich people who make these investments are getting advice
    and putting in effort.
        Mr. Clayton. Anyway, we can have a longer discussion about
    this.
        Mr. Sherman. Yes, because I--
        Mr. Clayton. It is a very complicated issue.
        Mr. Sherman. I want to sneak in one more question.
        Mr. Clayton. OK.
        Mr. Sherman. We had the meltdown in 2008 because the bond
    rating agencies gave AAA to Alt A. They gave buy ratings to bad
    bonds. We put into Dodd-Frank a provision, the Franken-Sherman
    Amendment, that would eliminate the system where the issuer
    selects the bond rating agency. We don't let the home team
    select the umpire, especially if the umpire makes a million
    dollars a game.
        I would hope--the SEC found a loophole in that requirement,
    issued a report and decided not to do it. That was your
    predecessor's mistake. I hope you will take a look at this and
    use the power you have to end the issuer selects rater system.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. Barr,
    Chairman of our Monetary Policy and Trade Subcommittee.
        Mr. Barr. Thank you, Mr. Chairman.
        Chairman Clayton, good to see you again. Thanks for being
    with us. Some publicly traded firms, especially early stage bio
    firms, and some equity exchanges have expressed concern about
    the absence of a disclosure requirement for those who bet
    against a company by taking a large short position in that
    company's stock.
        They point out that there is a regulatory gap between long
    and short sellers since there are extensive disclosure
    obligations for investors who bet on a company by buying its
    stock or investing long. They have argued in favor of a short
    position disclosure regime, noting that long positions over 5
    percent of outstanding shares require public disclosure while
    equally large short positions have no comparable requirement.
        On the other side of this argument, there are those who
    will point out the critical liquidity provided by short
    selling. They make the point that short positions are by
    definition not related to corporate ownership and instead are a
    strategic trading tool. They don't share the view that stealth
    short positions are as big of an issue.
        Again, they make the point that short positions provide
    critical liquidity to public markets and that short sellers are
    responsible for a substantial portion of equity trading volume,
    and that short sellers, because they provide that heterogeneity
    of views in equity markets about future share prices, provide
    efficiency to the markets.
        The concern that they express with a disclosure regime
    would be that the reporting requirements would discourage
    institutional investors from taking short positions. Those
    reporting costs would then reduce overall short positions and,
    therefore, reduce market liquidity. I am just setting up the
    debate there.
        I would be interested--now, of course, there is a provision
    in Dodd-Frank that counsels the SEC in favor of a disclosure
    regime for short positions, large short positions. I am
    wondering if you or the Commission have a view on this issue
    and how would you approach that issue if asked to do so?
        Mr. Clayton. I don't have a definitive view on a particular
    rule as we sit here today or not a rule, but I think you framed
    it very well. If you don't mind, to try and give you my
    perspective, I will frame it as I look at it, which is, there
    are valid points in those arguments. The people who say that
    being able to go short and doing so as a fundamental view on
    the company adds liquidity, adds discipline, adds price
    transparency to the market. Great. I agree.
        There are people who say that there are people who use
    short selling not because of a fundamentally different view of
    the price of the company, not for liquidity, but to take
    advantage of trading opportunities that cause the company's
    quoted value to depart from what it otherwise might be. To the
    extent we can get at that type of behavior, if it exists, I
    don't know to the extent to which it exists, but if it exists,
    the extent to which it exists without affecting liquidity and
    the discipline, that is how you should look at that problem in
    my view.
        Mr. Barr. Yes, it is a balancing act for sure, and I
    appreciate your thoughts on that. In your last appearance
    before us, Mr. Chairman, you talked about the importance of
    reducing the reporting requirements for public companies to
    reduce some of the burdens that are maybe limiting IPOs. You
    did respond with respect to a question I had about disclosures
    for mining companies.
        I am just wondering--and the response that you sent to us
    on March 23rd indicated that you planned to finalize rules to
    modernize and clarify certain disclosure requirements for
    companies engaged in mining operations. Do you have any update
    on that?
        Mr. Clayton. We are working on a proposed rule. It is on
    our short-term agenda. I will just reiterate this. Our short-
    term agenda that we publish and are required to publish is what
    we are trying to finish in this fiscal year.
        Mr. Barr. Finally, we recognize that getting the fiduciary
    rulemaking right is more important than rushing the process and
    getting it wrong, but as you know, many broker-dealers in
    anticipation of the DOL rule have invested a considerable
    amount of time and energy and resources in getting ready for
    that. Just curious about a timetable, because the uncertainty
    is creating some level of consternation.
        Mr. Clayton. The comment period ends in August. We will
    collect the comments, go through the process. I am not going to
    set a specific date, but we should not take forever.
        Mr. Barr. Thank you. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. Scott.
        Mr. Scott. Thank you, Mr. Chairman. I appreciate it.
    Welcome, Mr. Clayton. It is always good to have you.
        I have been at the front of the spear on this fiduciary
    rule since its very conception. You recall that when we put
    Dodd-Frank together, we required the SEC to come up with a rule
    that would raise the broker-dealer standard and would harmonize
    that standard with the obligations that investment advisers
    have to follow today.
        Now, here is the point. When we did that, we put that in
    Dodd-Frank, but we exclusively said that was the SEC's
    responsibility, not the Department of Labor. Now, the
    Department of Labor does have a piece in this, of course, with
    the retirement accounts, but you see where this is if we don't
    have the SEC at the leadership, being aggressive, to be able to
    set these standards the way they are.
        As I said, I have been dealing with this. I was the only
    Democrat to cross over and vote for this bill with Mrs. Wagner.
    We were able to increase that great bipartisanship when we got
    it to the floor with two more Democrats. We are growing this
    bipartisanship, but there is great concern on both sides of the
    aisle, but certainly on mine, as to confusion within this.
        For example, in terms of establishing the best interests
    that you have going forward, you have said that to do this we
    must meet several obligations. First, there is the disclosure
    obligation. Then we have the care obligation. Then we have the
    conflict of interest obligation.
        My concern and the concern of both the investment community
    as well as the investor is that these concerns, this complexity
    makes it difficult for the investment industry to discern what
    we need, which is a clear path to compliance. You have done a
    remarkable job in explaining this.
        But I want to ask you, do you believe that the Securities
    and Exchange Commission is the best suited place to come up
    with a standard that indeed can be harmonized across all
    investment categories and all types of investment adviser?
        Mr. Clayton. I firmly believe that.
        Mr. Scott. All right. Let me ask you this, also, because
    here is another major concern, and this is where I understand
    the Labor Department's retirement situation. We are faced with
    a horrendous retirement boom right now, because we have this
    baby boomer generation that really produced itself right after
    World War II that is coming.
        I wanted to know if you will commit to this committee today
    that your intention is to see this proposal through to the
    final rulemaking. Now, that question has been asked to you in a
    couple of different ways, but you haven't been clear. Are you
    going to be the man that is going to see this through to the
    end?
        Mr. Clayton. No one person can do this, but this is--
        Mr. Scott. Will you be the captain of the ship?
        Mr. Clayton. Yes.
        Mr. Scott. You said you will?
        Mr. Clayton. Yes.
        Mr. Scott. All right. Thank you.
        Mr. Clayton. Thank you.
        Mr. Scott. Glad you will be the captain of the ship.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Oklahoma, Mr.
    Lucas, former Chairman of the House Agricultural Committee.
        Mr. Lucas. Thank you, Mr. Chairman. I can't speak to the
    issue of who is captain of the ship, but in my time on this
    committee, I have always tried to be very pragmatic and very
    practical in my perspectives, my questions, and the focus.
        If you don't mind, Chairman Clayton, let's visit for a
    moment about some issues that impact a very large and
    substantially important job creator in my district. While
    everyone thinks about me as the ag guy, we have a major oil and
    gas industry in Oklahoma. As many of my colleagues know, the
    United States has experienced a rather remarkable growth in
    energy independence, and that has occurred primarily due to the
    increase in shale production in places like the Bakken and in
    the Marcellus formations.
        But I would like to focus on how the SEC treats proven, but
    undeveloped reserves, because it concerns me a bit. Currently
    domestic producers can report on their annual filings only
    those reserves they plan to recover within a 5-year window.
    This has been the policy since 2008.
        At that time, shale accounted for a much smaller percentage
    of oil and gas production than it does now, and I would suggest
    to you that this 5-year rule might not reflect the realities of
    the new American energy landscape. These shale formations are
    so vast and finite that a proper development plan will often
    exceed 5 years.
        Chairman Clayton, given this change in domestic energy
    production, have you and your staff given any thoughts to
    changing the 5-year rule for these reserves?
        Mr. Clayton. The short answer is yes, we have given
    thought--and let me make sure that, if you indulge me, make
    sure we are on the same page. It is in particular, yes, because
    I am concerned in this space that the way our rules require
    disclosure is inconsistent with the way investors value these
    companies. They are looking for additional disclosures, and we
    should make sure that our rules line up with what investors
    think is the material information.
        Mr. Lucas. Exactly. Because from my perspective, the 5-year
    rule may prevent a business from being able to disclose the
    full extent of its assets to investors.
        Mr. Clayton. I will actually just add to that, that when
    that is the case, you have information asymmetries, and that is
    not what we want.
        Mr. Lucas. I will leave on this particular question with
    one last thought, and that is 51 percent of all domestic crude
    oil and 63 percent, almost 64 percent of all domestic natural
    gas come from shale formations, and I think that is just an
    amazing statement about the advances in technology and
    utilization and all those things.
        Second, I noticed in your testimony that you expressed a
    commitment to working on the Commission's Title VII regulations
    surrounding security based swaps. I very much appreciate this,
    given my desire to see derivatives markets work for all
    participants and, quite frankly, the long delay in getting
    these regulations out the door.
        I also very much appreciate your testimony mentioned active
    engagement with the CFTC. Can you elaborate at all on some of
    that engagement with your colleagues at the other entity?
        Mr. Clayton. Yes. We have set up a bilateral process to get
    through the rules that we need to get through with the hope of
    ensuring that they are either harmonized or, if we can't
    harmonize them because of our different mandates and the
    different types, that they are at least not inconsistent or
    creating problems for each other. But we are working closely
    with the CFTC, and I want to say, I really appreciate the
    leadership of Chairman Giancarlo in that area.
        Mr. Lucas. I think he is a great leader, and you have
    touched on exactly the point that I was trying to make, whether
    it was Treasury reports last year calling for more
    harmonization or just the nature of the markets. I think it is
    critically important that everyone be able to utilize these
    tools in their businesses in the most cost-effective fashion
    possible.
        Therefore, Mr. Chairman, in that spirit of brevity and
    focus, I thank you for my time, and lo and behold, Mr.
    Chairman, I yield back.
        Chairman Hensarling. The gentleman from Oklahoma yields
    back. The Chair now recognizes the gentleman from New York, Mr.
    Meeks.
        Mr. Meeks. Thank you, Mr. Chairman. Welcome, Commissioner
    Clayton. Now that I know that you are, in fact, the captain of
    the ship.
        Mr. Clayton. I knew that was going to get me in trouble.
    Thanks, Mr. Scott.
        Mr. Meeks. I want to follow up on some questions that I
    posed to one of your lieutenants, the director of the SEC's
    Division of Corporation and Finance in April. I asked him about
    the SEC's intention to either adopt or reject recommendations
    from the agency's Investor Advisory Committee.
        The committee recommended better disclosure rules around
    dual-class stock structures. The advisory committee also
    recommended creating a pilot program to monitor shareholder
    disputes arising out of such structures. These structures are
    common among Silicon Valley's tech giants, like Facebook.
        In fact, you may have seen where there was--I read in an
    article--an investors revolt against Mark Zuckerberg at the
    annual shareholders' meeting, because they can create a system
    where the average investors, including teachers and
    firefighters and the like, have less power to hold CEOs and
    board directors accountable. We see when we can't, things can
    happen.
        My question to you is, A, what is your personal opinion on
    the potential investor harm posed by dual-class stock
    structures? And, B, what is the status of the investor
    advisory's recommendations at the SEC?
        Mr. Clayton. OK. Let me, if you don't mind, I will take
    those in reverse order. The Investor Advisory Committee
    recommendation regarding making sure that the disclosure around
    governance and what dual-class structures mean to governance,
    in particular to your point, what it means to investors in
    terms of their ability to participate in governance, I 100
    percent agree that that disclosure needs to be clear and
    accessible.
        To the extent it is murky, it should not be. Your rights as
    a shareholder, whether they are one share, one vote or whether
    there is a super vote stock that dilutes your voting ownership,
    you should be able to know that clearly from the disclosure. I
    believe that.
        Now, my personal views on corporate governance, I am not a
    one-size-fits-all corporate governance person. My experience
    across our markets and across the globe is that trying to
    dictate a one-size-fits-all governance model for public
    companies does not make sense. I do recognize that there are
    models that are so extreme that they cause problems.
        Mr. Meeks. These dual-class stock structures you are saying
    in some places they may fit and in some places they may not? Is
    that what you are saying?
        Mr. Clayton. I think, yes, to the extent you take a dual-
    class structure to an extreme--let me give you an example.
    Somebody has complete voting ownership over a company, but has
    no economic stake in the game. As a person who looks at
    investments, that kind of outcome troubles me. Does it trouble
    me to say that a founding group of people who want to take
    their company public but don't want to be subject to the
    vagaries of short-termism should have some control over it?
    That absolutely resonates with me, as well.
        Mr. Meeks. Thank you. That is clear.
        Let me also ask you, Commissioner Clayton, and I have asked
    you this before, about the SEC's intentions to go beyond merely
    monitoring its board diversity rule and to actually improving
    the board diversity rule. Investors and the SEC's advisory
    committee on small and emerging companies have found the
    current board diversity rule to be unhelpful in determining the
    race, gender, and ethnicity of board directors.
        In April, your director of corporate finance mentioned to
    me that the board diversity rule is back on the SEC's
    rulemaking agenda. Is this the case? After monitoring
    compliance with the board diversity rule for some months, have
    you come to a conclusion on whether or not the rule should be
    enhanced so that investors could have more complete information
    on the composition of their boards?
        Mr. Clayton. Yes, it is the case. The dialog that Director
    Hinman and his colleagues have had with companies around this,
    two of the issues that you raised has, I would say, raised some
    additional considerations about what companies think is
    appropriate and what the individual directors think is the
    appropriate type of disclosure. But I expect that we are going
    to move forward in some form. I don't want to--I never want to
    overpromise--but some form with this rule. It is on our
    rulemaking agenda, and we are going to do something.
        Mr. Meeks. Thank you.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, Mr.
    Pittenger.
        Mr. Pittenger. Thank you, Mr. Chairman. Chairman Clayton,
    thanks for being with us today. I sure appreciate your hard
    work at the SEC over this year, I really commend you, as well,
    for your regulation in the best interest for broker-dealers,
    and thanks for seeing that through. I think it will be clearly
    important to protect investors and preserve their choices in
    the future.
        Chairman Clayton, tell me your impressions of FIMSAC, the
    Fixed Income Market Structure Advisory Committee, and after 6
    months and its first meeting, are you satisfied with where they
    are headed and what is the focus of their agenda moving
    forward?
        Mr. Clayton. Look, it is early days. But if you ask me to
    give them a grade, I give them an A. This is a group of people
    who are giving up their time--it is a very diverse group of
    people in terms of perspectives, participation in the market.
    We have people who are in the public sector.
        I won't go into all of that, but they are looking at how
    the fixed-income market is evolving, and the fixed-income
    market is evolving toward electronification. Products are
    changing, and they are trying to come up with recommendations
    that make sense to make the market better, including around
    trading and transparency. We are going to benefit from their
    work.
        Mr. Pittenger. At the end of the day, what will be the best
    outcome? What do you think can be achieved as a result of their
    input?
        Mr. Clayton. Adding liquidity to the market. People
    understanding where there may not be the liquidity that they
    think there is. Making sure that trading is efficient.
        Mr. Pittenger. As it relates to corporate bond
    transactions, the block trades, do you intend to move forward
    with FIMSAC's advisory board recommendations?
        Mr. Clayton. That is a recommendation that has to go to
    FINRA in the first place, but I am encouraging FINRA to take
    that recommendation very seriously.
        Mr. Pittenger. On another point, what legislative action do
    you think would be most helpful to support capital raising by
    new and small businesses?
        Mr. Clayton. Most helpful for small businesses?
        Mr. Pittenger. New and small, sure.
        Mr. Clayton. Here is the conundrum for new and small
    businesses in terms of raising capital. Raising capital from a
    single source or several sources is not that costly,
    relatively. When you try to raise capital as a small business
    from multiple sources, the transactions costs are high. What we
    are looking at is ways to bring those transactions costs down
    without hurting investor protection. That is what we are trying
    to do.
        Mr. Pittenger. Yes, sir. We certainly see the impediments
    have been there in the past, and any efforts that can be made
    there to allow greater capital investment would be--
        Mr. Clayton. I think modernizing the definition of
    accredited investor is one of those steps, to be clear.
        Mr. Pittenger. Thank you. Would you also speak to what the
    SEC is doing to ensure that small businesses remain the
    backbone of our economy? But what do you foresee in terms of
    your role to ensure that small businesses have the central role
    in the backbone?
        Mr. Clayton. Small businesses are so important to our
    economy. We talked about capital raising for small businesses
    and access to capital, and the SEC has a role in that, just as
    our banking regulators and other regulators do, because they
    get capital in other ways.
        I am hopeful that the way we are approaching the covered
    funds issue in Volcker will free up some capital for small
    businesses, particularly in areas of the country where there is
    not a large venture capital community. That is one of the
    things I am hopeful for.
        Another thing for small businesses is to continue that path
    from being a small business--some small businesses just stay
    small businesses and that is a very important part of our
    economy. But keeping that path from small businesses to become
    a bit larger, a bit larger, and having access to capital
    throughout the lifecycle, that is an important part of our job.
        Mr. Pittenger. You have seen in the past decade there has
    been a real limit and restriction in terms of the emergence of
    small business. Of course that in itself to me has been the
    biggest concern that I have had on the ongoing growth of our
    economy, because without the infusion of the needed capital,
    the access to credit, and the ability for small businesses to
    emerge, our economy floundered. That was my gravest concern, is
    what would happen in the future long-term if this wasn't
    addressed.
        Mr. Clayton. Can I add to that?
        Mr. Pittenger. Yes, sir.
        Mr. Clayton. Just as a citizen, the connection between
    growing businesses and small businesses should not be lost.
    Lots of businesses that move from small, medium size to large
    drive the creation of small businesses.
        Mr. Pittenger. Yes, sir.
        Mr. Clayton. We need to continue both of those things.
        Mr. Pittenger. Thank you. My time has expired.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Colorado, Mr.
    Perlmutter.
        Mr. Perlmutter. Mr. Chairman, thanks for being here. We
    look forward to your visit to Colorado in a couple weeks.
        I have three areas I want to talk to you about, marijuana,
    cybersecurity, and cryptocurrencies. I will start with
    marijuana. We have the Controlled Substances Act, which is at
    odds with now 47 States and the District of Columbia that have
    some level of marijuana use, whether it is cannabis oil for
    seizures, medical marijuana, or fully legalized commercial
    sale.
        Canada, a couple days ago just legalized marijuana, and we
    were talking earlier about IPOs and where have all the IPOs
    gone. Many of them have gone, for a variety of reasons, to the
    Canadian exchanges. We know American marijuana businesses have
    gone public by holding IPOs on the Canadian securities
    exchange, the Toronto exchange, and the TSX exchange.
        I am curious, sir, whether you have seen any effort on our
    exchanges, either for marijuana businesses, direct marijuana
    businesses, or the ancillary businesses to marijuana, whether
    you have had any issues from an enforcement point of view or
    from a regulatory point of view in dealing with businesses here
    in the United States that publicly trade and are related to the
    marijuana business?
        Mr. Clayton. Nothing specific that comes to mind. I think
    what you said, are we seeing impediments?
        Mr. Perlmutter. Yes. Have you had any cases where you as a
    regulator or an enforcer of the law have had to say you can't
    take this company public, it violates the Controlled Substances
    Act? That would be one question. Another question is, if it is
    a company that the primary part of their business is to supply
    electric lighting or nursery things to marijuana grow
    operations, is that something you would require as part of a
    disclosure?
        Mr. Clayton. Let's go back to the touchstone, which is
    materiality. If there is something material to investors in
    making the investment decision in connection with, for example,
    an IPO--and to use the industry you are talking about--is
    regulatory uncertainty or regulatory--likelihood of additional
    regulatory developments, something that should be disclosed to
    investors. My position--I have to be careful about any specific
    type of thing--but, yes, that is the type of disclosure you
    would expect to see in an industry subject to regulation and
    particularly an industry that is in flux.
        Mr. Perlmutter. Has it come to your attention whether there
    has been an impediment, to use your word, or some limitation to
    companies that may want to go public related to a marijuana
    business or in supplying the marijuana businesses?
        Mr. Clayton. No, I think--would an investor take into
    account the regulatory situation and whether they are going to
    invest or not? Would they pay less if there is regulatory
    uncertainty? That is possible.
        Mr. Perlmutter. I am asking a speculative question. I guess
    I will just ask it more directly. Have you personally run into
    any issues concerning the public offering of a marijuana
    business?
        Mr. Clayton. Not that I recall, no.
        Mr. Perlmutter. All right. Let's just broaden it now.
    Forget about marijuana. Is there any competition between the
    Canadian exchanges and the U.S. exchanges? Has that been where
    some of these IPOs have gone that the Chairman was concerned
    about?
        Mr. Clayton. There is--to be clear--there is competition
    now around the world for listings. Where are you going to raise
    capital and where are you going to list your securities is a
    competitive business now. I don't know, but I would expect
    there would be competitive pressures in that industry.
        Mr. Perlmutter. In your position, do you take a look at the
    limitations that say Canada may place on its public offerings
    versus what the U.S. does versus an Australian exchange?
        Mr. Clayton. I do look at those, and it is a competitive
    question. But there is also--I am going to go in a direction
    that is slightly different. The investor protection regimes in
    other countries can be substantially different from what they
    are here, and I think a lot of times our investors look at if
    it is traded on XYZ Exchange and they think the investor
    protection is the same as if it is traded on one of our
    exchanges, and often it is not.
        Mr. Perlmutter. Thank you. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr.
    Hultgren.
        Mr. Hultgren. Thank you, Chairman. Chairman Clayton, thank
    you so much for being here. I really do appreciate your work.
        I want to begin by briefly thanking you for proposing a
    rule for independence with respect to certain loans or debtor-
    creditor relationships. As participation in the capital markets
    has expanded and as technology has changed business models, the
    opportunity to update regulations to reflect these changes is
    essential. I want to thank you for your movement on the loan
    rule and your willingness to provide clarification. Thank you
    so much for that. We look forward to working with you on that,
    as well.
        CFTC Chairman Giancarlo has testified before the House that
    we have, and I quote, he said, ``We have some anecdotal
    information that shows that during the recent market volatility
    the supplemental leverage ratio impacted larger market makers'
    ability to take on certain positions, thus exacerbating market
    volatility. The SLR is not specifically mandated in Title VII
    of Dodd-Frank and it has had the opposite effect intended,
    pushing trades away from central clearing,'' end quote.
        The Treasury Department's October 2017 report on capital
    markets also acknowledged the issue. I wonder, do you share
    similar concerns for the equities options market? Have you
    shared these concerns about options market liquidity with
    banking regulators, given that they have rulemaking authority
    for the risk and leverage-based capital rules?
        Mr. Clayton. The issue that you bring up is an important
    one. Our cash markets, the stock market, as is familiar to
    American investors, is actually connected to the options
    market. People who provide liquidity in our cash market use the
    options markets as part of their business. To the extent that
    liquidity drives up in the options market, it can cause a
    knock-on effect into the cash market.
        This issue has been raised. I know that my fellow Federal
    financial regulators are aware of it, and I think we should
    continue to look at it.
        Mr. Hultgren. Great. Thanks. I am sure you heard, but the
    Committee unanimously reported legislation just last week that
    would direct our banking regulators to address the issue.
    Again, it was bipartisan, worked through and got unanimous
    support. Again, thank you, and just would encourage the SEC to
    continue to work with bank regulators, as well, on that.
        I sent a letter last week to you raising concerns with
    FINRA rule 4210. In short, I am concerned that the margin
    requirements will push small to medium-sized dealers out of
    trading covered securities because of the competitive
    advantages to commercial banks and similar intermediaries that
    are not FINRA members. This is something we corresponded about
    last year, as well. I appreciate you providing a delay in the
    compliance date to spring of 2019.
        However, I am continuing to hear serious concerns about the
    unlevel playing field that this would create. I wanted to ask,
    in general, do you believe FINRA has the authority to regulate
    credit markets? It seems to be what is happening with the new
    margin requirements on certain mortgage transactions covered
    under 4210. Then also, will the Commission consider changes to
    the rule or working more closely with the Fed to address
    unlevel playing fields between FINRA members and non-FINRA
    members?
        Mr. Clayton. The last part of your question is the part I
    can give a direct answer to, which is, yes, I think we should.
    If there is an asymmetry in the costs of providing a service to
    clients, depending on whether you are in a bank or you are a
    standalone broker-dealer, we need to look at that.
        Your other question, I do think FINRA has the authority to
    regulate broker-dealer conduct. To the extent margin
    requirements go into that, knock-on effects, et cetera, are a
    larger debate, but I will leave it at that.
        Mr. Hultgren. OK, thank you. In general, as my time is
    running down, I am interested in your views about the
    independence of the Financial Accounting Standards Board. It
    seems that the standard-setting body has drifted beyond the
    focus of the Commission and its staff in recent years.
        I wonder, do you believe the SEC is exercising sufficient
    oversight over the FASB to ensure that accounting standards
    meet the needs of investors in the financial market? Is FASB
    conducting a rigorous and transparent view of new or modified
    accounting standards to make sure that there would be no
    detrimental impact on financial markets? For example, is a
    quantitative cost-benefit analysis of the standards conducted?
        Mr. Clayton. I believe that high-quality financial
    statements--it is a combination of accounting standards and
    auditing standards that we have in this country--have been
    fundamental to the great capital markets that we have.
        It is extremely important to me, it is extremely important
    to Wes Bricker, the head of the Office of the Chief Accountant,
    our Chief Accountant at the SEC. This is a focus not only
    inside the United States, but as U.S. investors have greater
    and greater exposure to non-U.S. companies, ensuring that those
    financial statements and those audits are on a level with ours.
    We are participating both nationally and internationally in
    that debate.
        Mr. Hultgren. Thanks, Chairman. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr.
    Foster.
        Mr. Foster. Thank you, Chairman Clayton for being here.
    When we were discussing, prior to the start of your testimony,
    we discussed our shared enthusiasm for getting the consolidated
    audit trail implemented quickly and effectively.
        I have a searing memory of, roughly 8 years ago in this
    room. Four days after the flash crash, we had testimony from
    the CFTC, which described that the evening after the flash
    crash they had 30 people in a room looking over all the trade
    records and knowing exactly who did what when.
        On the other hand, 4 days after the flash crash, the SEC
    was still in the process of collecting the data, which to my
    mind made something like the consolidated audit trail an
    emergency. Here we are 8 years later, the consolidated audit
    trail, as you note in your testimony, was supposed to be at
    least initially operating in November 2017, and obviously that
    deadline was blown.
        I was just wondering if you could describe where you think
    this is going and what you think Congress can expect as
    intermediate-term milestones in getting this thing operating as
    I think we both believe it should?
        Mr. Clayton. Your question has embedded in it exactly what
    we have been trying to do since it became readily apparent that
    this was not going to be delivered on time or on spec, which is
    to require a work plan with milestones and goals. We now have a
    draft work plan from the SROs in front of us. It is long
    overdue. But we are now making progress with milestones.
        Mr. Foster. Will you be able to share that work plan with
    Congress? Or at least a high-level summary of it in a memo?
        Mr. Clayton. Yes, I think we can.
        Mr. Foster. Milestones at least.
        Mr. Clayton. I think we can find a way--look, I never like
    to answer a legal question without consulting. That is a bad
    habit I have--or a good habit--but I can find a way to give you
    a sense of the milestones.
        Mr. Foster. Yes, milestones that Congress can track, so
    that we know whether we are just going to have another 8 years
    of little action.
        Mr. Clayton. I have no problem with that kind of oversight.
        Mr. Foster. OK. One of the trickiest parts of this is the
    beneficial owner behind each trade in the consolidated audit
    trail. From your testimony, you have had a lot of internal
    discussions about exactly what that should consist of and how
    it gets implemented. Can you describe your thinking on that?
    Particularly in view of the fact that a lot of the issues here
    are now international that you have correlated markets across
    the world and a lot of manipulation that you are worried about
    can happen internationally.
        Mr. Clayton. Yes. We are talking about the two different
    functions of an audit trail. Going to the trading and the flash
    crash, having order types and the types of information that is
    contemplated by the consolidated audit trail is exactly what
    you would want from a market integrity, surveillance,
    functioning point of view.
        When you turn to bad behavior and the ability to get at bad
    behavior, whether it is insider trading or manipulation and
    what you bring up is, are there things going on in some market
    outside of our purview that, when you connect them with things
    here, they revealed behavior that is bad when it would
    otherwise look fine? I think that is what you are--
        Mr. Foster. That is one of the often cited dangers of the
    international markets we have.
        Mr. Clayton. Yes, and the way we conduct this today is we
    see something that we don't like and then we inquire to get
    further information on who is behind those trades. The
    consolidated audit trail would make that process easier.
        Mr. Foster. What is the status of international
    discussions, getting comparable information--well, are there
    comparable efforts fully internationally here? Are there big
    holes in that international cooperation that you would like to
    see patched? How do you see the international aspects of this
    going?
        Mr. Clayton. International cooperation--here is my sense,
    no study, but my sense, a little over a year into the job, is
    international cooperation around what we will call manipulative
    or insider trading has increased significantly.
        I will tell you that the legislation in Europe and here, it
    is--I have no problem with it--around information protection,
    individual information protection, GDPR in the E.U. and what we
    do here, getting through that in terms of cooperation around
    enforcement and surveillance is a task before us.
        Mr. Foster. All right. Thank you, and my time is up.
        Chairman Hensarling. The gentleman yields back. The Chair
    wishes to inform members there are two votes pending on the
    floor. I will yield to one more member, and then we will recess
    and reconvene at the conclusion of floor votes.
        The Chair now recognizes the gentleman from California, Mr.
    Royce, Chairman of the House Foreign Affairs Committee.
        Mr. Royce. Thank you, Mr. Chairman. When we are looking at
    the proxy advisory industry, we have a stranglehold there, from
    my standpoint, we have two firms holding 97 percent of the
    market. What do you think the main causes of this lack of
    competition are? Is it good for the voting process? Is there
    anything the SEC can do in order to help jumpstart some
    competition in this industry?
        Mr. Clayton. Let me say this, why only two firms? Just my
    knowledge of economics, economies of scale. The core function
    of those firms is aggregating data, crunching and producing
    data reports. You can see economies of scale coming to that.
        Mr. Royce. I can see that it could lead to that outcome,
    but I do not know that it is in investors' interests not to
    have wider competition in the system. I do wonder if there are
    things we could do that might make it more likely that it would
    be a more competitive environment.
        Mr. Clayton. The role that proxy advisory firms play is
    something we are looking at.
        Mr. Royce. Yes. That is what I would suggest. I will ask
    you some other questions, as well, but just to have that on the
    table for your purview is important.
        Mr. Clayton. They have a very important role in our
    regulatory ecosystem, and, therefore, we have to look at them.
        Mr. Royce. Very good. Here is another question, Chairman,
    that I would raise to you. Earlier this year, this committee
    here passed legislation that would reverse a previous SEC rule
    requiring that certain money market funds float the NAV. Now, I
    certainly remember when the reserve fund in the industry broke
    the buck back in 2008. I remember the massive backstop that the
    U.S. taxpayers provided to restart the process for the entire
    market. This is not the only thing that caused that meltdown,
    but it was a factor after the overleverage of the GSEs and the
    overleverage in the investment banks.
        The fact is that the value of the underlying assets of
    these products fluctuate. They go up and down. As I said in
    opposition to the bill at the time, if we learned anything from
    the financial crisis, it should be that price should reflect
    risk.
        Six months have passed, yet the bill still seems to have
    some life. Do you stand by your comments from last year? Let me
    just ask you, has anything changed in your estimation from the
    comments that you made on this subject?
        Mr. Clayton. No.
        Mr. Royce. OK. That is good news, as far as I am concerned.
    Chairman, let me ask you, also--I Chair the Foreign Affairs
    Committee here--I have witnessed firsthand that we have state-
    sponsored agents now, actors that are looking to do our
    companies and our country harm through cyberattacks. The
    Commission clearly recognizes the problem with the updated
    interpretive guidance you have provided. We thank you for that.
        Undoubtedly, companies have a duty to disclose when a
    material cyber security event has occurred. But what more
    should they be telling shareholders about cybersecurity risks?
    I think that is something that has to go into the equation.
    Have you noticed an uptick in the number of companies
    disclosing these risks or disclosing the attacks?
        Mr. Clayton. I have, in my time focusing on this, I have
    noticed what I would consider to be--I will just say the word
    ``improvement'' in disclosure about the risk profile of
    companies and the types of risks they face from cyber
    intrusions. I think we are starting to see what I would say is
    more measured, and incident disclosure is more thoughtful. I
    hope our guidance is helping companies with that. I want to
    continue to work with companies and the investing public on how
    we should be approaching this issue.
        Mr. Royce. My time has expired. Thank you, Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
    Pending conclusion of two votes on the floor, this committee
    stands in recess.
        [Recess.]
        Chairman Hensarling. The committee will come to order. The
    Chair now recognizes the gentleman from Pennsylvania, Mr.
    Rothfus.
        Mr. Rothfus. Thank you, Mr. Chairman. Welcome, Chairman
    Clayton. Thank you for taking the pause and the recess. Before
    I begin, I want to take a moment to address some of the
    comments that Congressman Royce made prior to the recess.
        From my perspective, the problems caused by the SEC's rule
    changes respecting money markets remain an issue, because the
    problems they caused are still apparent. This rule
    discriminated against municipal and corporate debt and, in
    doing so, prompted the dislocation of a trillion dollars. This
    led to increased borrowing costs and caused an outcry in the
    municipal finance world.
        That is why my bipartisan legislation attracted broad
    support from over 70 co-sponsors, many of whom sit on this
    committee, and the endorsement of over 300 National, State, and
    local organizations and public leaders. Nothing in my bill
    would undo the helpful 2010 SEC reforms that improved
    liquidity, increased credit quality, and shortened maturities.
    What it would do is restore the level playing field between
    prime, tax-exempt, and government funds.
        This issue remains relevant and will continue to be
    relevant until the problem is fixed. I understand the Senate is
    actually going to be taking another look at this, this week.
        But with that, I wanted to talk for a moment about your
    testimony. As you discussed in your testimony, there are still
    significant barriers that prevent companies from going public
    and staying public. The JOBS Act and successor legislation
    helped address some of these issues, but clearly there is more
    work that needs to be done.
        I have a bill that we will mark up later day that would
    extend certain disclosure exemptions for emerging growth
    companies, or EGCs, that would remain EGC, but for the current
    5-year limit. As you know, EGCs accounted for more than 90
    percent of all IPOs over the last 2 years. Can you discuss some
    of the ways that we can help companies go public and stay
    public?
        Mr. Clayton. Yes. Let me give you a general response to
    that question, which is, I do think the JOBS Act and the
    creation of the EGC concept for scaled disclosure and an on-
    ramp to being a public company was and remains a very good
    idea. I would love to see that on-ramp be modernized to reflect
    the markets we have today.
        Specifically, are the thresholds where you have the benefit
    of being an EGC set in the appropriate place or should they
    reflect the markets of today and our experience with the JOBS
    Act? I think we should look at those thresholds. Happy to work
    with you and other members of this committee on setting them in
    the appropriate place.
        Another thing that I just want to make sure I comment on,
    trading. Part of the attraction of going public is trading. To
    the extent that we can facilitate better trading, more liquid
    trading in our small- and medium-sized companies, I think we
    should be looking to do so.
        Mr. Rothfus. Chairman Hensarling touched a little bit on
    Sarbanes-Oxley with his opening round. This legislation was
    enacted 15 years ago in response to Enron and WorldCom and the
    scandals that they had. In your opinion, has Sarbanes-Oxley
    been effective?
        Mr. Clayton. It is interesting. A sweeping piece of
    legislation--to come to a single statement about any sweeping
    piece of legislation from a markets point of view is very
    difficult. There are aspects of Sarbanes-Oxley that I think
    investors got a significant bang for the buck. Independent
    audit committees, the focus on high-quality financial
    statements, that is a big bang for the buck. Some other things,
    good, but not as significant as those.
        Mr. Rothfus. What components of Sarbanes-Oxley represent
    the biggest cost and/or compliance challenges for companies?
        Mr. Clayton. I do think that from a--let me give you an
    example. We are going to be looking at 404, OK? 404 applied to
    a large company and 404 applied to a smaller company, the
    relative burden on the smaller company has been higher. I have
    seen improvements in the area of application of 404. But I do
    think that we should look at that relative cost to the size of
    smaller companies and intend to do so.
        Mr. Rothfus. What is the timeframe for your review of 404?
    It is already started?
        Mr. Clayton. Our staff is looking at 404 now. We are going
    to be discussing it--at least plans for discussion--at next
    Thursday's open meeting.
        Mr. Rothfus. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Maine, Mr.
    Poliquin.
        Mr. Poliquin. Thank you, Mr. Chairman, very much.
        Chairman Clayton, I am glad you could find me in this room.
    There are so many other people here now. But I am sure--this is
    only your second time before us, but I want to let you know, as
    Mr. Chairman knows, that he always saves the toughest questions
    for the end, but I am sure you and I can get through this, so I
    appreciate very much you being here.
        I noticed that you folks over at the SEC have finalized
    Rule 30e-3, and I am very grateful, sir, that you and I had a
    back-and-forth many times on this, and you are going to be
    looking out for the interests of small savers and investors
    throughout the State of Maine and throughout rural America. I
    will be closely following this as the SEC implements its rule.
    But thank you very much for listening to my concerns.
        You folks are the primary regulator, Mr. Clayton, for non-
    bank financial institutions like pension advisers. I worry a
    lot about our small businesses and our small savers and
    investors up in the State of Maine. On FSOC, you are one of 10
    votes, and you are the individual as the regulator that has the
    most influence, I would believe, on FSOC because your space is
    the asset manager space when it comes to FSOC.
        Now, what I am concerned about, Mr. Clayton, is that when a
    non-bank financial institution like a pension adviser or mutual
    fund company is designated FSOC or if it would be designated
    FSOC, we all know the studies that regs costs will go up, rates
    of return will go down. I think Doug Holtz-Eakin concluded that
    something like a 25 percent reduction over time is the result
    of being designated in a SIFI.
        What drives me batty about this, sir, is that if you are in
    the asset management community, the assets that you are
    running, the assets that you have under management are not in
    your balance sheet. You are an agent for the customer. There is
    no systemic risk to the economy if something goes wrong,
    because it means that if my performance is better than yours,
    your clients will go from you to me and life goes on.
        All I am asking you, sir, is to take a hard look at Ross-
    Delaney that passed this Congress on the floor, a big
    bipartisan vote, and obviously out of the Committee. It
    establishes transparency and clear guidelines such that a fund
    company or an asset manager, if they are concerned about being
    designated a SIFI and going through these additional
    regulations and costs, and the investors get hurt, because of
    those additional costs that are unnecessary, that there is an
    off-ramp, there is a set of guidelines that says, if I do this,
    I can get underneath this regulatory regime that is
    unnecessary.
        Can I get a commitment from you today, Mr. Clayton, that
    you are going to be looking really hard making sure that there
    is transparency and clear guidelines when it comes to non-bank
    financial institutions being designated or not as SIFIs?
        Mr. Clayton. I am not going to commit my other members of
    FSOC to a particular process--
        Mr. Poliquin. No, but you have the most influence when it
    comes to this space on FSOC, I would argue.
        Mr. Clayton. What I can say is I understand the comments
    you are making, I understand the concerns, and I am certain
    that those concerns and comments will be discussed by that
    group.
        Mr. Poliquin. I would encourage you to discuss them in the
    most energetic and passionate way on behalf of those that
    should not be designated SIFIs. Thank you, sir.
        Moving on to another issue, the last time the SEC updated
    its rules on promotion and advertisement when it comes to asset
    managers was--I think it was 1961. In 1961, Roger and I were
    just kids. I don't think, if I am not mistaken, the Internet
    and social media hadn't even been invented yet.
        Will you take a look, sir, and commit today to the people
    listening that you will commit to taking another look at social
    media and the use of the Internet for asset managers to do what
    other companies do in this world, which is promote what they
    are selling?
        Mr. Clayton. We are, and when we rolled out 30e-3, we also
    rolled out investor experience questions. We are looking at
    enhancing our communications with investors, and in particular,
    to make sure that investor communications reflect the
    communication technologies of today.
        Mr. Poliquin. I hear that as a lean yes. Thank you very
    much, Mr. Clayton.
        Last, in my remaining time here, Rule 14a-8, dealing with
    shareholder proposals, last time you were here, sir, we
    discussed this a little bit. Look, every shareholder has the
    opportunity to weigh in with management when it comes to how
    the company is being run, products offered and so forth and so
    on.
        But a $2,000 threshold, owning that for 1 year gives you an
    opportunity to express your views, I understand that. But it
    also drives up the costs, drives up what Mr. Hensarling said a
    short time ago about the hassles about going public, and I
    worry about every other small investor in Maine and in America
    that wants the opportunity to own part of America. Are you
    going to be looking at 14a-8, also, sir?
        Mr. Clayton. I want to look at the whole proxy process,
    including 14a-8.
        Mr. Poliquin. Thank you for that commitment, Mr. Chairman.
    Appreciate it.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr.
    Williams.
        Mr. Williams. Thank you, Mr. Chairman. The last time you
    were here before this committee, you and I had a productive
    discussion about retail and affinity fraud. You mentioned that
    it was important to think creatively about ways that we can
    structure our behavior so that it is more difficult to commit
    fraud.
        I am encouraged to hear that you have turned your attention
    to Main Street businesses that play such a critical role in our
    economy and in our local communities. My question, Mr.
    Chairman, since your last visit, can you provide any updates on
    retail fraud or any related tasks that your teams may be
    undertaking to target and prevent future fraud?
        Mr. Clayton. We did form a Retail Fraud Strategy Task
    Force. I shouldn't say we. Our Division of Enforcement did. I
    appreciate that they have done that to focus on this. A group
    of people dedicated to rooting out retail fraud.
        More importantly, there are a number of Ponzi schemes where
    we have identified them, brought asset freezes, and brought
    them to a halt, I would like to think as quickly as we could
    because the longer they go on, the more money that goes away,
    and the less money we can get back for investors. That has been
    a focus of ours.
        The ICO space--let me preface this by saying like I do, the
    distributed ledger technology and blockchain technology,
    whatever you want to call it, has promise. But the ICO space
    has a great deal of retail fraud. I am very pleased that our
    Enforcement Division has pivoted to addressing that issue.
        Mr. Williams. Thank you. Now, you yourself have rightly
    recognized that a vibrant IPO market allows Main Street
    investors to be able to participate in crucial growth process
    of growing. Can you touch on the role of the small business
    capital formation advocate office and what steps it will take
    to allow for growth in Main Street investor participation?
        Mr. Clayton. Thanks for that question. Obviously, that
    office is new and will be--as any new office, it will find its
    way. It has some directions from Congress. What I really want,
    and when I am talking to candidates for that, I want somebody
    who when we are making rules or a policy, says, ``Hey, this is
    how this is going to affect the small business, so think about
    it when you do this.''
        In particular, ``You know what? This is too costly to apply
    to a small business.'' Or, ``This won't help a small business.
    Here is how we could adjust the rule without adversely
    affecting investor protection or transparency.'' It will be
    good to have somebody in the building where that is their job.
        Mr. Williams. Last, you have a unique vantage point in your
    current role, one that requires you to work across several
    industries and countless stakeholders. If possible, can you
    give this committee your personal assessment on the health of
    the economy and what we should be concerned about or excited
    about?
        Mr. Clayton. Health of the economy, that is out of my lane.
        Mr. Williams. But it is good, I will tell you that.
        Mr. Clayton. It is good.
        Our job is to make sure that the markets function as well
    as they can to support our economy. There is always room for
    improvement in that. We come to work--not just me, we come to
    work every day looking to improve the functioning of our
    markets so the economy can be as good as it possibly can be.
        Mr. Williams. Thank you. I have some time left. I yield
    back to the chairman.
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentleman from North Carolina, Mr. Budd.
        Mr. Budd. Thank you, Mr. Chairman and also Chairman
    Clayton. We are fortunate to have you at the helm. I guess that
    makes you captain of the ship, as we heard earlier, so we
    appreciate you being here and being our captain.
        I wanted to get your views on some recent legislation that
    the Committee approved that would raise thresholds for
    shareholder resubmissions. It seems pretty straightforward in
    the simple proposal for the SEC to enact, and I think Mr.
    Duffy's legislation offers a much more reasonable threshold
    that allows shareholders to have a voice, while not burdening
    public companies with proposals supported by a very, very small
    group of shareholders. While I strongly support this
    legislation moving forward, what can the SEC do to make these
    changes in the meantime?
        Mr. Clayton. We can look at the proxy process, and I intend
    to look at that as part of an overall assessment of the proxy
    process. I think, if you don't mind, I will take a minute.
        Mr. Budd. Please do.
        Mr. Clayton. The ordinary investor, the retail investor,
    the Main Street investor, the people we think about, I think
    they should understand that corporate governance in America has
    changed substantially in the last decade as a result of various
    changes and that the ability of shareholders to directly
    influence the actions of management has increased.
        Now, that has benefits. But it has been a change. We should
    be looking at that change and how it has changed the way
    corporations behave and, I think, communicate with American
    investors on what that change means.
        Mr. Budd. You mentioned looking at the proxy process. What
    timeline would you anticipate for the SEC looking at that
    process?
        Mr. Clayton. We had an open comment period in the past. I
    am contemplating opening that again to get updates on this
    issue and other issues that are around the proxy process.
        Mr. Budd. Thank you.
        Mr. Clayton. Including the plumbing. Do we have the right
    plumbing in light of--with the theme of modernization, do we
    have the right plumbing for the proxy process?
        Mr. Budd. Very good questions. I look forward to hearing
    the results on that.
        Further, I want to switch over to virtual currencies for a
    moment, and it tag teams a little bit with Mr. Williams, my
    colleague, about investor fraud. Can you just tell me what
    criteria the SEC is using to determine which token projects
    should be targeted for enforcement actions? Then further, is
    that criteria focused on promises made by the developers of
    those token projects or is it focused on the expectations of
    purchasers, irrespective of any promises or marketing materials
    made by the developers of these projects, or some combination?
        Mr. Clayton. Let me say what I am not going to do. I am not
    going to discuss allocations of enforcement resources to one
    particular type of bad activity versus another. If you are
    behaving badly in this market, we don't want you to do that.
        In terms of what I would like people in this market to
    understand is that there is a way to raise capital that is
    compliant with the law. I want people in this space to
    recognize that and do that. If after a year of this dialog that
    we have been having people aren't moving to that, I have a
    problem with that.
        Mr. Budd. Noted. Thank you for your time, Mr. Chairman.
        Chairman, I yield back.
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentlelady from New York, Ms. Tenney.
        Ms. Tenney. Thank you, Mr. Chairman. Thank you, sir.
        I am always last in line, so hopefully I am not going to be
    too repetitive. I just have a couple of quick ideas. Obviously,
    in my region there has been this vilification of anyone who
    operates a so-called corporation or entity that seeks to look
    like a corporation, whether it is an S corp, a C corp, an LLC.
        But in that realm, we have had a number of issues trying to
    get into the initial public offering space, and we appreciate
    your efforts in trying to move us more to an entrepreneurial
    ability and providing more capital formation and chances.
        What do you think are the key steps that you are looking to
    take in addition to what you--I missed some of your testimony--
    what you may have said to getting us to get the smaller
    businesses and to assist the formation of capital and growth in
    an area, for example, where I am from in upstate New York,
    where we don't have the city next to us. We have small banks.
    We have fintech and others. How is SEC going to impact us, your
    new rules on helping us get there with some of our new
    businesses?
        Mr. Clayton. I talked before about providing a path to
    being a larger company. Let's just stay in the smaller company
    space, I would like to see us modernize the accredited investor
    definition to make it easier for more people to participate in
    funding small businesses. I would like us to use technology to
    eliminate some of the unnecessary frictions that go into
    raising capital on a smaller scale. Those are things that we
    are looking at.
        In terms of availability of funds in different parts of the
    country outside of places that have a great deal of venture
    funding, I am hopeful that some of the things that we are doing
    in Volcker or proposed to be doing in Volcker will free some
    more local capital.
        Ms. Tenney. Have you seen any of that happening yet in any
    of the initiatives you have taken? Because I know, in my prior
    life before I got involved in this job in Congress, I had a lot
    of trouble getting some of my entrepreneurs to find investors,
    and they feared the IPO space a little bit because of just the
    rules, the regulations, and the SEC.
        Can you identify a couple of things you are doing to
    simplify that and also if you have seen progress, if you have
    seen more IPOs coming forward in the small business space, is
    that something you have data on or something you can provide us
    with? Because I would love to know if what you are doing is
    actually helping. Are we actually moving more people into the
    space with data of some kind?
        Mr. Clayton. Let me say this, I think a year is too early
    to tell. One of the issues about measuring success in this
    space is sometimes it takes a fair amount of time. The IPO
    process itself, from the time a company thinks about a public
    offering until they actually achieve a float, it starts long
    before they contact us, and it takes a while. That is a long-
    winded way of saying, I don't want to take credit for any
    uptick in IPOs, I don't want to say we are unsuccessful. I
    think we are doing the right things.
        Ms. Tenney. Yes, I believe you. I have been in the
    situation where I have taken my clients to other areas to try
    to find ways of getting them resources and getting them
    funding. I think that now it looks like we are in a better
    space than we were. I just was wondering if there is any
    demonstrable change.
        Mr. Clayton. I think that we are in a better space than we
    were. It feels like we are in a better space. The activity that
    I am seeing, I like. Do I want to say, absolutely, here is some
    demonstrable evidence?
        Ms. Tenney. Next year you will have some more data for us
    when we get to that.
        Mr. Clayton. I hope so.
        Ms. Tenney. I just want to jump to the whole
    cryptocurrency, bitcoin, everything, that is the excitement of
    the day, and what the SEC is doing about that. What are we
    going to be looking at as this becomes very popular and more
    and more investors and people are getting involved in the
    cryptocurrency? What is the SEC's reaction? Maybe if you could
    point out one or two things in the last 30 seconds about what
    you are doing in that, because I am running out of time.
        Mr. Clayton. OK. In the pure cryptocurrency space, the
    examples that people cite are bitcoin or Ethereum. That is not
    in our direct jurisdiction, although there are issues with
    those crypto assets, including in the trading and what people
    use.
        I want to be clear, to the extent that somebody is bringing
    those assets to a regulated entity of ours, that regulated
    entity needs to go through the same KYC, AML procedures. In the
    same token space, I think we have raised the consciousness for
    people to understand that these are securities, and they need
    to follow our rules. I do think this technology has a lot of
    promise, and it can eliminate costs. I would focus on that. I
    am sorry.
        Ms. Tenney. Thank you. I am sorry, my time has expired.
    Thank you.
        Chairman Hensarling. The time of the gentlelady has
    expired. The Chair now recognizes the gentleman from Minnesota,
    Mr. Ellison.
        Mr. Ellison. Yes, thank you, sir, for joining us today, Mr.
    Chairman. Appreciate it.
        Last year, Congress passed a multi-trillion dollar tax cut
    for--as you are well aware--and I think the theory behind it is
    as reported in the press and by some of my colleagues was that
    it would spur investment and thereby increase hiring for
    working people.
        But some of the data has really come in, and according to
    the Bureau of Labor Statistics, wages for most workers, by 80
    percent, are actually down since the tax cut passed. What are
    the companies doing with the windfall? I guess one of the
    things that the popular press indicates is that there has been
    a lot of stock buybacks. How do you react to that assessment?
        Mr. Clayton. I don't have the data, but if what you are
    asking me, to be direct, is companies that have repatriated
    capital and are holding cash, what are they using that cash
    for?
        Mr. Ellison. Yes.
        Mr. Clayton. To the extent they are using it for stock
    buybacks, what do I think about that? Is that--
        Mr. Ellison. I suppose that is what I am--yes.
        Mr. Clayton. Stock buybacks are an efficient means to
    return capital to shareholders. They are more tax efficient
    than a dividend, for example.
        Mr. Ellison. OK.
        Mr. Clayton. That is probably going into the judgment.
        Mr. Ellison. That is a policy that you support?
        Mr. Clayton. Like I said--
        Mr. Ellison. You think it is a legitimate way to operate in
    light of--
        Mr. Clayton. Here is what I think. If a company decides to
    do that, they should be telling the shareholders what they are
    doing with their money and do it in the most responsible way.
        Mr. Ellison. OK. In the first quarter of 2018 alone,
    corporations bought back a record $178 billion in stock.
    According to a survey of major corporations, CEOs say that the
    stock buybacks are their number one use of capital. Instead of
    spending the money on wages or investment in research and
    development, they are going big into these stock buybacks, as
    you indicated.
        I guess my question for you is, last week, your colleague,
    Commissioner Jackson, called on the SEC to revisit its stock
    buyback rule, which hasn't been revised in 15 years. Do you
    agree? Or how do you react to the suggestion that Commissioner
    Jackson made? Do you think it is a good time to open up for
    public comment the rule on stock buybacks?
        Mr. Clayton. I asked Mr. Jackson what he meant because I
    think our rule around stock buybacks doesn't go to the decision
    of whether you should do a buyback or not. In fact, it doesn't
    really go to the--we have rules that go to the disclosure of
    stock buybacks. I don't think he was talking about that.
        I do think disclosure of stock buybacks is important.
    People who are shareholders should know whether you are buying
    back stock or using it for other things. But our rule goes to
    how you actually effect it in the market.
        Mr. Ellison. Given the time is wasting, I hope you will
    forgive me for cutting in.
        Mr. Clayton. No problem.
        Mr. Ellison. Do you agree with Commissioner Jackson that
    the huge surge in stock buyback activity can lead to problems,
    particularly since the research shows that a substantial number
    of CEOs use buybacks to cash out their own shares?
        Mr. Clayton. What is interesting is, executives sell stock
    on a regular basis, and they have to tell us. They have to file
    forms when they are selling stock. I am not sure about a
    connection between stock buybacks and executive selling, but
    what I want to make clear is that activity, it has to be
    disclosed to the marketplace so that we can look at it to see
    if there is any connection.
        Mr. Ellison. OK. Let me just tell you this. There is a
    report my office just recently drafted. I would like to share
    this with you and submit one for the record, without objection.
        Mr. Hill [presiding]. Without objection.
        Mr. Ellison. Just so you know, in 1968, the average CEO
    made about 20 to 1, about 1980, about 34 to 1, now it is 339 to
    1, but that hides a few facts there, Mr. Chairman. One, Mattel
    has nearly 5,000 to 1. McDonald's, 3,100 to 1, the Gap, 2,900
    to 1, Walmart, 1,100 to 1. Are you concerned by those numbers?
        Does that level of executive compensation create
    instability in the market? Isn't at least part of our income
    inequality problem because of the dramatic shift in how people
    are compensated?
        Mr. Hill. The gentleman's time is expired. Quickly, you can
    respond.
        Mr. Clayton. Quickly respond? I want to make sure that
    shareholders understand how people are being compensated and
    the criteria that go into making those decisions. How is the
    comp committee making those decisions? That is an important
    part of shareholder communications.
        Mr. Ellison. Thank you, sir.
        Mr. Clayton. Thank you.
        Mr. Hill. The gentleman yields back. The Chairman
    recognizes himself for 5 minutes.
        Chairman Clayton, glad to have you before the Committee
    today. Thanks for your incredible stamina for being here today.
    We are glad to have your answers to all of our questions.
        I wanted to start and talk about a FINRA rule, Rule 4210,
    which I have concerns about in terms of the fairness issue
    between bank-owned broker-dealers and nonbank-owned broker-
    dealers that relates to the agency's security market and
    posting margin for that. I won't debate with you today whether
    or not the SEC has the authority to impose margin requirements,
    thinking that perhaps the Reserve Act governs that.
        But would you agree that we don't want to have public
    policy that on the face of it discriminates by organizational
    entity? In other words, in this example, bank-owned versus
    nonbank-owned broker-dealers?
        Mr. Clayton. I agree.
        Mr. Hill. Mr. Quarles when he was here representing the
    Federal Reserve, he agrees, as well. Would you be willing to
    work with the Federal Reserve to create a commonsense solution
    here that is fair to the brokerage community at large?
        Mr. Clayton. Yes.
        Mr. Hill. Thank you. I appreciate that.
        Also, I have introduced a bill, H.R. 6021, which is of
    interest also to the brokerage community. This goes back to my
    days in the industry as an independent broker-dealer and a bank
    broker-dealer, as well, as it relates to small, privately held
    dealers that don't hold customer funds and are purely
    introducing brokers under the rules.
        This goes all the way back to Sarbanes-Oxley, where all
    brokerage firms were required to have a public accounting
    oversight board qualified auditor, no matter their size or
    complexity. This bill, and Senator Cotton has introduced a
    companion in the Senate, would permanently waive that for
    small, private, noncustodial broker-dealers, something we got
    waivers for along the way between 2002 and recent years.
        Is that something you think the Commission could support,
    knowing that they still fully comply with SEC rules, FINRA
    rules on audited financial statements in accordance with GAAP
    (generally accepted accounting principles)? Because the other
    thing I have learned in this process in the ensuing years is
    the number of qualified firms has dropped, something that I
    personally had not known until I started studying this issue.
        Mr. Clayton. The short answer is yes. The longer answer is
    I like the criteria that you cited in terms of who we are
    talking about, and we have actually raised this issue with the
    PCAOB to get their views. I don't want to get ahead of them,
    but I expect their views would be that this is an area where we
    should question whether this is a necessary step. Particularly
    in light of the criteria you cited.
        Mr. Hill. Thanks for that constructive nature. This
    hearing, this committee hears testimony all the time about
    tailoring regulations for community banks. It is weekly for 8
    years, at least. We don't always pay attention to tailoring our
    rules through FINRA and through the Commission for our very
    small entrepreneurial broker-dealers, and yet the burden shift
    is very similar, so I appreciate your--
        Mr. Clayton. Particularly those, like you said, that don't
    hold customer assets.
        Mr. Hill. Correct. Yes, and let's be clear, again, just for
    our viewers, these are privately held companies that are
    introducing brokers, which means they clear all their
    securities through a clearing agent, and so they are not
    holding customer funds, because we are all sensitive to making
    sure that you oversee these entities in a safe and sound
    manner.
        Mr. Clayton. Thank you for doing that because I just want
    to make clear, because that is a distinction that is very
    important to me.
        Mr. Hill. It is. It is important to these members, but you
    would be--I don't think in any way--what I have seen is just
    audit fees have gone from maybe $5,000 to $8,000 a year for a
    typical GAAP small introducing broker that is overseen by FINRA
    at your direction, and some of those have tripled as the number
    of compliant accounting firms drops and the complexity of doing
    that exam goes up. I am not sure the Commission is getting
    concomitant big safety and soundness gains. Thank you for that.
        Last topic I want to just introduce is one of my favorites,
    and that is how the Federal Government is trying to interpret
    the Volcker rule. The SEC has recently participated in the
    release of a Volcker 2.0. A lot of us up here found it very
    complex; I am not sure you made a big improvement there. Not
    you personally, but the collective agencies did. Are you going
    to be very diligent in looking at the comments for the Volcker
    rule re-proposal?
        Mr. Clayton. Certainly, around the commentary, certainly. I
    think this is an area where the comments are going to be
    illuminating.
        Mr. Hill. Thank you. I appreciate that. The chairman's time
    has more than expired.
        I am going to now recognize the gentleman from West
    Virginia for 5 minutes, Mr. Mooney.
        Mr. Mooney. Thank you, Mr. Chairman. Chairman Clayton,
    thank you for coming here and taking all these questions and
    the good work you are doing there.
        I wanted to make a comment and then a question. I want to
    add my appreciation for your leadership in proposing an
    expansive loan rule aperture. As private equity's role in the
    capital markets has expanded and as technology has changed
    business models, the opportunity to update regulations to
    reflect these changes is long overdue. Current regulatory
    impediments, they deter capital formation, they limit
    competition and decrease efficiencies. Just thank you for
    addressing this. That is very important.
        I am from a rural area, West Virginia, and I think there is
    a misconception out there that investing in business startups
    and a lot of things we need in this country are for people in
    big cities or people with large bank accounts, but they are for
    people in rural areas, too. I would like for you to tell me the
    importance of capital formation to investments in workers in
    rural areas.
        Mr. Clayton. All I can say is, I agree with you. The
    availability of capital, whether it is through investment or
    through credit, is essential to starting a business. That is
    just all there is to it. I agree.
        Mr. Mooney. I was at a fair about a year ago, and a young
    lady there had found a way in West Virginia to get syrup from
    trees. She started a small business to make this syrup and sell
    it. She was at a craft fair and she was showing her display
    there. She had the hardest time finding anyone to give her an
    initial startup loan to invest in this product. Went to banks,
    went to administrations, just couldn't find anybody to do it.
        These regulations and restrictions, I think they are well
    intended by the other side, but they are hurting the people
    that need these investment startup dollars. This is a family
    that had a dream in my district, and they can make it come
    true. It was a great product. I tasted it. They just couldn't
    find anyone to invest.
        I just want to encourage you to continue this deregulation,
    get these impediments out of the way for Americans in rural
    areas, as well as cities, so they can have their dream of
    owning their own business come true.
        With that, Mr. Chairman, I will go ahead and yield back the
    balance of my time.
        Mr. Hill. The gentleman from West Virginia yields back the
    balance of his time.
        The gentleman from Georgia, Mr. Loudermilk, is recognized
    for 5 minutes.
        Mr. Loudermilk. Thank you, Mr. Chairman. Looks like maybe I
    am batting cleanup here today. I will try to keep this as brief
    as possible.
        Thank you, Mr. Chairman, for being here, and taking this
    amount of time. It is very encouraging. I also want to thank
    you for your work in the best interest standard for brokers. I
    can tell you, every time I would be at home after the
    Department of Labor's fiduciary rule, I was inundated with
    brokers and those advisers with the confusion and the
    difficulty that this provided them. It was a significant
    impact, and I thank you for the work that you have done there.
        Now, you stated that the slow pace of initial public
    offerings is a significant problem. With what I would call
    mind-boggling growth of our economy--GDP is up 3 percent,
    knocking at the door of 4 percent possibly. Wages are
    increasing. Consumer confidence is growing. Every statistic is
    way beyond anything that anyone ever anticipated we would be at
    2 years ago. We are all celebrating that, or at least most of
    us are.
        Because of all that growth, it may not be clear why the
    slow pace of IPOs is a problem. Can you explain why we're not
    seeing new initial public offerings in the light of a robust
    economy is a real concern?
        Mr. Clayton. We just talked about the capital being
    essential to growth. The availability of capital is strong. We
    have private capital markets that are as strong as they have
    ever been, the availability of private capital to finance
    growth.
        That said, it still does trouble me that our public capital
    markets are less attractive. I don't want to do anything to
    impede capital. I don't want to do anything to the private
    capital market in order to make the public capital market
    relatively better. This is a good thing, let's not do anything
    to it.
        But broad participation in capital formation and investment
    in America is a good thing, and I want to make sure we continue
    to have broad participation, and the public capital markets are
    the most efficient way for ordinary Americans to get access to
    investment opportunities.
        Mr. Loudermilk. I do agree with you. I just think there is
    a confusion with a lot of folks in that. How does this interact
    with the anticipated increase of mergers and acquisitions we
    are expecting?
        Mr. Clayton. The number of companies in our public capital
    markets can be reduced for a number of reasons. People go
    private, they merge, things like that. To the extent that
    pipeline isn't being filled, you have fewer choices. Now, when
    two public companies merge, you have a larger--
        Mr. Loudermilk. Right.
        Mr. Clayton. You don't lose capital in the public markets,
    but you do lose the numbers.
        Mr. Loudermilk. OK. Let's move on to another topic,
    cryptocurrency, something I have been following for a while
    with an IT background. I agree that we have seen
    cryptocurrencies being used for nefarious purposes, money
    laundering, terrorism financing, human trafficking, drugs.
        However, I believe the underlying technology of blockchain
    is something that we should pay close attention to, and I think
    we need to divest the cryptocurrency from the underlying
    technology. I have been advocating for us to look at the
    blockchain technology as a potential technology to resolve some
    of our cybersecurity concerns and issues. I just wanted to get
    your thoughts on that.
        Mr. Clayton. I agree with you.
        Mr. Loudermilk. OK. Thank you. Mr. Chairman, I yield back.
        Mr. Hill. The gentleman from Georgia yields back. Now it is
    my pleasure to recognize my good friend from Connecticut, Mr.
    Himes, for 5 minutes.
        Mr. Himes. Thank you, Mr. Chairman.
        Chairman Clayton, it is great to see you. Thank you for
    being here. I think I may be the last here, although you never
    know who is going to appear. But great to see you here.
        I really want to just start by commending you. I read the
    testimony here, and this emphasis on Main Street investors and
    all that gives them confidence. I think that is a great
    approach. I really appreciate your intense focus on ICOs. To
    me, the frenzy in that space feels a lot like what I remember
    in 1999 and 2000 around the Internet space, and I think there
    is a real opportunity for people to get hurt, and so I really
    appreciate your focus and aggressive attention to that.
        I want to bring up two topics, neither of which will
    surprise you, both of which I think are consistent with Main
    Street confidence, one indirectly, which is something I know we
    have talked about before, but my ongoing obsession with what I
    think is questionable behavior in the charging of fees and
    initial public offerings and the absolute perfect consistency
    of the 7 percent growth spread.
        The reason I care about that, maybe it is not so much Main
    Street investors, but you tout the JOBS Act, and we are working
    on Jobs 2.0, and we are talking about saving young companies $1
    million, $2 million, $3 million max in their early stages, and
    an IPO of $200 million with 7 percent growth spread, that is
    $14 million. We are talking about very real money that comes at
    a very sensitive time for young companies.
        Since we last talked about this, I have sent you a letter
    noting that one of your fellow Commissioners has taken an
    interest in this, and Mr. Eggers, who was before us, agreed
    with me that it didn't feel like competitive behavior.
        Anyway, I sent you a letter and very much hope--I am not--
    again, I am not prejudging this, but I am saying there is
    enough there that we and FINRA and you need to take a look and
    make sure that we have good, competitive market capitalism
    operating in IPO pricing. There is no question there, but--
        Mr. Clayton. You and I share a passion for competitive
    markets.
        Mr. Himes. The letter makes a specific ask that you and
    FINRA study it. I am not going to hold you to that right now
    because I suspect you probably have just gotten the letter and
    are looking at it, but I do think it is important to young
    companies.
        More to, again, consistent with Main Street investors--and
    this is really about Main Street confidence. I continue to be
    very concerned about what I regard as the legal ambiguity and
    mess around insider trading. I continue to be troubled by the
    fact that it looks like we have inconsistent, unpredictable,
    fuzzy law around insider trading, driven largely by decisions,
    some of which go with each other and some of which don't in the
    Second Circuit.
        I would like to--there actually is a question attached to
    this speech--which is I would like to just hear you for a
    minute or 2 on whether you think the time is right for Congress
    to finally in statute define the crime of insider trading.
        Mr. Clayton. You and I have talked about this. I have
    talked about it with people who are very experienced, including
    judges, people who hear the cases. There are arguments both
    ways on this. Bringing more certainty to the space eliminates
    some of the behavior that troubles you that you feel is not
    caught. I think if I am--I don't want to assume that you are--
    you are troubled by the fact that there is probably some
    behavior that you think should be sanctioned and isn't?
        Mr. Himes. Yes, but I am actually--in the spirit of Main
    Street--look, I am not a lawyer and I am not an expert on a lot
    of things, but I am an expert on public sentiment because that
    is what I do, and there is just a general sense out there with
    all the reversals of convictions and with all the activity in
    the Second Circuit in particular that we really have no idea
    what insider trading is, and somebody gets convicted and the
    conviction gets overturned. That in the aggregate is a huge
    source of uncertainty and therefore risk in the minds of
    individual investors who say, why should I play if I am at a
    disadvantage because I am doing this honestly?
        Mr. Clayton. I understand that. I am not sure that a
    statutory approach would bring any more clarity. That is my
    issue. I am very happy to discuss it, look at it, but when you
    look at jurisdictions that do have a statutory approach, I am
    not sure that there is any greater clarity regarding behavior.
        I can tell you--and, look, you know how I feel about this--
    I may be biased. When people bring me, when I was in the
    private sector, fact patterns, and would say, ``Hey, what do
    you think about this activity,'' it wasn't very hard to say I
    don't like that.
        Mr. Himes. OK, to be continued. Thank you very much, Mr.
    Chairman.
        Chairman, I yield back the balance of my time.
        Mr. Hill. The gentleman from Connecticut yields back. The
    gentleman from Ohio, Mr. Davidson, is recognized for 5 minutes.
        Mr. Davidson. Chairman, thank you so much for being here,
    and thanks for the work you and your team are doing at the SEC
    to make sure our capital markets stay the world's best. I
    especially appreciate the work you are doing on ICOs, and we
    will spend a lot of time on that, hopefully, or what little
    time I have, with one sidebar.
        Earlier this year, I introduced the Due Process Restoration
    Act, earlier this Congress. It relates to the SEC's use of
    administrative law judges. As you now know, the Supreme Court
    has ruled that this practice is unlawful, unconstitutional, and
    should not proceed. Could you give us any guidance or reaction
    to that decision?
        Mr. Clayton. No, because I haven't read it.
        Mr. Davidson. Fair point. I look forward to working with
    the SEC on how to move forward and how might our existing law
    or bill, really, fit with the path forward.
        Toward that end, our office is building what we hope to be
    the first ICO body of law in terms of clarity around the
    regulatory framework for ICOs, because I think a light-touch
    regulatory framework can do for our capital markets with ICOs
    what it has done on so many other things, provide certainty,
    provide clarity, and provide security, not just national
    security, but for protections against fraud.
        I have been concerned that the disparate set of court
    opinions might not be as coherent as we would like or, frankly,
    the SEC would like, consumers would like, and in particular,
    investors would like. If the U.S. is going to truly be a world
    leader in this critical distributed ledger technology, I think
    we need to get this regulatory certainty.
        To use an example of folks that have tried to do this,
    Ripple is just one of many digital assets that come to mind. I
    am aware there are numerous court cases regarding this company.
    Do you think it is prudent for Congress or the SEC to lead the
    way in clarifying what is a security or commodity, instead of
    waiting for the courts?
        Mr. Clayton. I think, as regulators of the securities
    market, it is important for us to bring clarity to those
    markets. I do. But I think we are doing that.
        We have turned to this space. We have issued guidance. The
    space is developing. But all of that guidance and our
    enforcement actions are rooted in a very well-tested approach
    to the raising of capital in the United States. I can't be more
    clear about this. I am not going to advocate for any
    fundamental changes in the way we raise capital to accommodate
    the technology. Now, the technology can make what we do more
    efficient, but I am not going to change the rules because we
    have a new technology.
        Mr. Davidson. Yes, fair point. The Howey test has been
    there, and I appreciate, frankly, Director Hinman last week
    clarifying that Ether is not viewed as a security. There had
    been some concern after some of your remarks that everything
    looks like it fits with the Howey test and--
        Mr. Clayton. When you are raising capital for a project--
        Mr. Davidson. Right. As I think you and I agree, certainly
    many companies have essentially engaged in regulatory arbitrage
    and used white papers to raise more capital than they could
    through the existing framework. However, some companies--for
    securities. That body of law, I think you guys have taken an
    effective approach.
        Mr. Clayton. We want to help people. Look, I am not saying
    do it, then--we want to help people--
        Mr. Davidson. You set up an office to be able to do that
    and equipped it with resources, so I appreciate that. One
    example, though, of people that have tried to follow like the
    Reg A+, that has a 90-day period where they are supposed to
    receive feedback, but there are companies that have gone well
    past 90 days at this point and they are waiting for a decision.
    Is that decision delayed because Reg A+ decisions are normally
    delayed? Or is that because we are going through a certain set
    of scrutiny for ICO-type companies?
        Mr. Clayton. I am not aware of any specific facts, but I
    can tell you that the Reg A process, if somebody submits a
    deficient filing, is going to take longer than the usual period
    of time because you have to send it back to them and have them
    resubmit, as if it doesn't have financial statements.
        Mr. Davidson. Correct. It could be specific things, but I
    just want to highlight, you guys have made a way forward for
    people to comply with existing securities laws, and you have
    done good enforcement actions. I look forward to seeing how you
    move forward and look forward to continuing to cooperate to
    launch this legislative certainty.
        My time is expired and I yield, chairman.
        Mr. Clayton. Thank you.
        Mr. Hill. The gentleman's time has expired. Now the
    gentleman from Nevada is recognized for 5 minutes.
        Mr. Kihuen. Thank you, Mr. Chairman, and thank you,
    Chairman Clayton, for being here this afternoon.
        As you are aware, Las Vegas suffered the worst mass
    shooting in modern history last October 1st. Las Vegas is my
    hometown. I represent part of Las Vegas. Fifty-eight people
    lost their lives and over 500 people were injured.
        My community, as you can imagine, is still trying to heal
    from this tragedy. Now, given Congress's refusal to take any
    efforts to prevent gun violence, we have seen many corporations
    step up, from Dick's Sporting Goods to Delta Air Lines. CEOs
    are rejecting those who say there is nothing we can do. I
    applaud them for leading corporate social responsibility and to
    help save lives and prevent gun violence in the future.
        Now, like Congresswoman Maloney mentioned earlier, I would
    also like to talk a little bit about Citigroup. After the
    tragedy at Parkland a few weeks ago, Citi announced the new gun
    policies for their financial partners to require background
    checks and prohibit guns for teenagers. I know that you are
    familiar with those guidelines.
        It is reported that in April, a Republican member of the
    SEC, Michael Piwowar, threatened Citigroup, saying that because
    of their private gun policies, the bank lacked support for
    their agenda at the SEC. Now, Republicans and Democrats can
    agree that no regulated entity like Citibank should be punished
    at the SEC.
        I have a couple of questions, Mr. Chairman. Have you ever
    been contacted by anyone at the NRA about Citi or Bank of
    America gun policies?
        Mr. Clayton. No.
        Mr. Kihuen. Never?
        Mr. Clayton. I have been contacted--well, let me--
        Mr. Kihuen. In regards to this specific policy, that
    somebody will be punished if they follow background checks on
    their policies.
        Mr. Clayton. No.
        Mr. Kihuen. OK. Have you ever spoken with Citigroup or Bank
    of America about their gun policies?
        Mr. Clayton. No.
        Mr. Kihuen. OK. Have you ever discussed any company's gun
    policies with the SEC staff?
        Mr. Clayton. Not that I recall.
        Mr. Kihuen. You have never had any conversation in regards
    to any gun policies with any of these entities?
        Mr. Clayton. No, I am thinking because people have
    disclosures, they make disclosures, but have I--are you asking,
    like, gun policy in terms of SEC policy vis-a-vis gun policy?
        Mr. Kihuen. Absolutely, yes.
        Mr. Clayton. No. No.
        Mr. Kihuen. Again, as I stated before, a Republican member
    of the SEC, Michael Piwowar, threatened Citigroup. This is back
    in April, saying that because of their private gun policies,
    that the bank lacked support for their agenda at the SEC. Not
    only is that unethical, that is illegal. I am asking you, as a
    chairman if you have ever had that type of conversation?
        Mr. Clayton. That specific--that report and that incident,
    I am not going to discuss that. That has been a subject raised
    before, and as I said, the question of whether there should be
    an investigation is on the table, and it is inappropriate for
    me to discuss anything related to that subject. But as far as
    your other questions to me--
        Mr. Kihuen. Let me ask you this, are you aware of the gun
    policies?
        Mr. Clayton. Yes.
        Mr. Kihuen. The new implemented gun policies?
        Mr. Clayton. I mean, the--
        Mr. Kihuen. OK.
        Mr. Clayton. When you say the gun policies, you mean the
    policies that private companies have adopted?
        Mr. Kihuen. Correct.
        Mr. Clayton. Yes. Yes, I am aware of them.
        Mr. Kihuen. OK. Now, do you believe that Commissioners and
    staff should require greater ethics training to prevent this
    type of conflict of interest from happening in the future?
        Mr. Clayton. I think that touches on what we talked about.
    I am not going to comment on that in this forum at this time.
        Mr. Kihuen. OK. Now, I understand that an IG investigation
    has been requested. Will you agree to fully cooperate with this
    investigation?
        Mr. Clayton. I always cooperate with the IG investigations.
        Mr. Kihuen. Thank you, Mr. Chairman.
        Last, I just want to, again, thank you for being here.
    Thank you for being so patient with all of us. I hope that this
    is addressed and that our regulatory agencies, including the
    SEC, are not threatening private companies on behalf of the NRA
    or any other special interest group, because again, as I said,
    it is not only unethical, but it is also illegal.
        Thank you, Mr. Chairman. I yield the remaining balance of
    my time.
        Mr. Hill. The gentleman from Nevada yields the balance of
    his time. That concludes our hearing.
        I want to thank the patience, as the gentleman from Nevada
    noted, of our witness, and appreciate his testimony today. The
    Chair notes that some Members may have additional questions for
    this panel, which they may wish to submit in writing. Without
    objection, the hearing record will remain open for 5
    legislative days for Members to submit written questions to
    these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        [Whereupon, at 1:24 p.m., the committee was adjourned.]

                  A P P E N D I X

                   June 21, 2018

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