[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
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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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