[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE SEC'S
DIVISION OF INVESTMENT MANAGEMENT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
SECURITIES, AND INVESTMENT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 26, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-118
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
32-369 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Capital Markets, Securities, and Investment
BILL HUIZENGA, Michigan, Chairman
RANDY HULTGREN, Illinois, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
PETER T. KING, New York BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri KEITH ELLISON, Minnesota
LUKE MESSER, Indiana BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana
C O N T E N T S
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Page
Hearing held on:
September 26, 2018........................................... 1
Appendix:
September 26, 2018........................................... 25
WITNESSES
Wednesday, September 26, 2018
Blass, Dalia, Director, Division of Investment Management, U.S.
Securities and Exchange Commission............................. 5
APPENDIX
Prepared statements:
Blass, Dalia................................................. 26
OVERSIGHT OF THE SEC'S
DIVISION OF INVESTMENT MANAGEMENT
----------
Wednesday, September 26, 2018
U.S. House of Representatives,
Subcommittee on Capital Markets,
Securities, and Investment,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:16 a.m., in
room 2128, Rayburn House Office Building, Hon. Bill Huizenga
[chairman of the subcommittee] presiding.
Present: Representatives Huizenga, Hultgren, Stivers, Hill,
Emmer, Mooney, Davidson, Budd, Hollingsworth, Maloney, Sherman,
Lynch, Vargas, Gottheimer, and Gonzalez.
Chairman Huizenga. The committee will come to order. The
Chair is authorized to declare a recess of the committee at any
time. The hearing is entitled, ``Oversight of the SEC's
Division of Investment Management.'' And I will now recognize
myself for 3 minutes to give an opening statement.
Hardworking families in West Michigan and across the Nation
rely on the capital markets to save for each stage of life,
whether it is saving for college, home ownership or retirement,
the capital markets play an integral part in each of these
milestones. In order to help more Americans achieve financial
security in the future, we must continually improve our capital
markets so they are as efficient as possible.
By focusing on this priority, investors will have a better
opportunity to receive the greatest return on their investment.
Additionally, we must continue to expand access for Main Street
investors and ensure that they are able to invest in a better
future, not only for themselves, but for their children and
grandchildren as well.
Today's hearing will focus on the policies and procedures
of the SEC's (Securities and Exchange Commission's) Division of
Investment Management (I.M.). The role of this Division is to
protect investors, promote informed decisionmaking, and
facilitate appropriate innovation in investment products and
services through regulating the asset management industry.
The I.M. Division is also responsible for the Commission's
regulation of investment companies, variable insurance
products, and federally registered investment advisers. These
types of investment companies include mutual funds, closed-end
funds, business development companies, unit investment trusts
and exchange traded funds.
Over 100 million individuals, representing nearly 60
million households, or roughly 45 percent of U.S. households,
own funds that fall under the purview of the Division of
Investment Management.
Additionally, of the over 13,000 registered investment
advisers, approximately half of those advisers served 35
million retail investor clients with over 12 trillion in retail
client assets under management. Because of the significant role
the I.M. Division plays in the capital markets, I am pleased to
see the Commission is working diligently on several initiatives
to improve investment options and experience for Mr. and Mrs.
401(k).
Main street investors should have the tools they need in
order make informed investment decisions and build a better
financial future. Now more than ever, sound financial advice
has become critical for every individual looking to invest and
save for their future.
I was pleased that the SEC finally assumed leadership as
the expert regulator and crafting regulations for the standard
of care for broker-dealers and disclosures by financial
professionals.
Additionally, we need to modernize our current regulatory
framework. Our capital markets are the envy of the world. But
while we have a 21st century financial marketplace, we are
operating under a 20th century regulatory structure. I am a big
believer in looking at the rearview mirror in order to assess
existing policies to determine whether or not they are still
appropriate for today's markets.
For example, the I.M. Division made the right decision to
withdraw the 2004 staff guidance letters, regarding investment
adviser's responsibilities and voting client proxies, and
retaining proxy advisory firms in preparation for the November
roundtable that will more closely examine this issue.
Needless to say, I am encouraged by the work and priorities
of the SEC's Division of Investment Management. And I look
forward to hearing more about how its agenda is consistent with
the SEC's congressionally mandated trifold mission to protect
investors; maintain fair, orderly, and efficient markets; and
to facilitate capital formation.
So, my time is expired. But the Chair now recognizes the
Ranking Member of the subcommittee, the gentlelady from New
York, Mrs. Maloney, for 5 minutes for an opening statement.
Mrs. Maloney. Thank you so much, Mr. Chairman. SEC's
Division of Investment Management is one of the agency's most
important divisions, because it regulates the asset management
industry, including investment advisors, mutual funds, and
exchange-traded funds or ETFs.
Mutual funds and ETFs have been growing at an incredible
speed. Our mutual funds have grown from $4.4 trillion in assets
in 2000 to a staggering $18.7 trillion in assets presently. And
ETFs have grown from just $1.5 billion in assets in 2003 to
nearly $3.3 trillion today.
The Investment Management Division oversees more than
12,000 registered investment advisors, and these investment
advisors collectively have over $71 trillion in assets under
management.
The Division has taken some positive steps during Director
Blass's tenure. In particular, I was pleased that Director
Blass outlined a number of critical investor protection issues
that mutual funds need to answer before they start holding
significant amounts of cryptocurrencies.
There are many outstanding questions about whether
cryptocurrencies are appropriate investments with mutual funds,
and I want to thank you for your thoughtful investor protection
focused approach on this issue.
The Division has also taken a couple of actions that I am
concerned about. For example, earlier this month, the
Investment Management Division, suddenly and without any
explanation, withdrew two no-action letters from 2004 relating
to proxy advisors. Proxy advisors provide recommendations to
institutional investors, including mutual funds, on how to vote
on board of director elections and shareholder resolutions.
Mutual funds typically delegate the decision on how to vote
on shareholder resolutions to the investment advisor managing
the fund. Because mutual funds are often shareholders at
hundreds, or even thousands, of different public companies,
investment advisors sometimes rely on the recommendations of
proxy advisors for how to vote on these matters.
The SEC had provided detailed guidance on how and when
investment advisors could rely on the recommendations of proxy
firms in two no-action letters in 2004. And this system had
worked well for 14 years.
But then, 2 weeks ago, the SEC's Investment Management
Division suddenly withdrew these two letters. The only reasons
the SEC cited were unspecific developments since 2004 and a
desire to facilitate a discussion about proxy advisors at the
SEC roundtable in November.
Now, this is concerning. It is unclear why the SEC needed
to withdraw two no-action letters that have been extensively
relied upon for years, in order to simply facilitate discussion
about proxy advisors. Surely, it was possibly to have a robust
discussion about this without suddenly withdrawing the guidance
that the markets had been observing and relying on for years.
And I would be very interested in this hearing what
developments since 2004 necessitated the abrupt withdrawal of
these two letters.
In addition, in 2016, the SEC adopted a series of important
rules on liquidity management for mutual funds. One of these
rules would have enhanced the disclosures that mutual funds
make about the liquidity, allowing investors to make more
informed choices, and potentially avoiding investing in funds
that are riskier than the investor wants.
Unfortunately, about 18 months after this rule was
finalized, but before the new disclosure took effect, the SEC
voted to roll back the rule by eliminating the public
disclosure about funds' liquidity. So, I will be very
interested in hearing why the SEC thinks investors are not
capable of properly understanding statistics about a fund's
liquidity profile.
I look forward from--hearing from Director Blass about all
these issues. And I yield back the balance of my time.
Chairman Huizenga. The gentlelady yields back. And with
that, the Chair recognizes the Vice Chairman of the committee,
the gentleman from Illinois, Mr. Hultgren, for 2 minutes.
Mr. Hultgren. Thank you, Chairman Huizenga, for convening
this hearing. Throughout this Congress, the subcommittee has
made an effort to review our securities' laws to identify
reforms that will allow our regulators, and regulatory
framework, to support capital formation and drive economic
growth. This all culminated with the passage of the bipartisan
JOBS 3.0 package that is awaiting consideration in the Senate
and hopefully we will move forward sometime soon there.
This review of our regulatory framework is not an endeavor
that can be successful without regulators who are willing to do
the same. So far, I am very pleased with the efforts put forth
by the Commission to review the regulatory framework, and their
willingness to work with Congress, industry representatives,
and Main Street investors to support structure and certainty in
our capital markets.
Just 2 weeks ago, your Division withdrew staff guidance
letters issued in 2004 regarding the proxy process. I applaud
this step ahead of the SEC's upcoming roundtable on the U.S.
proxy process. These actions represent thoughtful engagements
and consideration of how to best protect shareholders and
promote transparency in our capital markets.
With millions of Americans already participating in our
asset management industry, the Division of Investment
Management plays a critical role in protecting the average
retail investor from fraud and abuse, as this Division
regulates the investment funds and advisors that interact
directly with these Main Street investors.
Additionally, as Congress looks for more ways to encourage
people to save for retirement, it is important that this
Division continuously strive to promote transparency and
accessibility to allow more Main Street investors to enter the
markets.
Ms. Blass, I look forward to your testimony and any
recommendations that you have for protecting Main Street
investors as they save for retirement, their children's
education, and much more. With that, Mr. Chairman, I yield back
the balance of my time.
Chairman Huizenga. The gentleman yields back. And with
that, today, I am very pleased to welcome the testimony of Ms.
Dalia Blass, Director of the Investment Management Division of
the SEC. Ms. Blass has extensive private sector industry
service, as well as serving at the SEC in a number of
leadership roles within the Division of Investment Management
prior to becoming Director.
Very pleased to see that--your team behind you. You have--
we have a few familiar faces. A couple of new faces, though, to
that team are your kids, Alexander and Kathleen, who are here
on--I believe, on an excused absence. If it is not an excused
absence, have the teacher come talk to me.
But just to--just to let you guys know, the work that your
mom does is very, very important. And we want to say thank you
to you because I know it might mean mom has to take some late-
night phone calls sometimes, or sometimes on a Saturday, or
things that are going on. But the work that she is doing is
very important for our country, right now, but also for the
country that you guys are going to be inheriting as well.
So, having a bunch of kids myself, I know that sometimes
they are on the front end of the challenges that the jobs that
mom and dad might have. But I just want to say thank you to you
and let you know your mom's doing an awesome job. So, thanks
for being here.
So, with that, Ms. Blass, you are going to be recognized
for 5 minutes, and thank you for being here.
STATEMENT OF MS. DALIA BLASS
Ms. Blass. Thank you. Chairman Huizenga, Ranking Member
Maloney, and Members of the subcommittee, thank you for
inviting me to testify before you today about the work of the
Division of Investment Management.
I would also like to thank my family for their support,
including my two oldest children who are seated behind me
today. This is a great opportunity for them to experience
government at work.
I am honored to serve as Director of the Division of
Investment Management, where I work every day with talented and
dedicated staff, to develop regulatory policy for the asset
management industry. It is an industry that is critical to the
U.S. economy and the retirement and financial needs of millions
of American investors.
As you said, Mr. Chairman, by way of example is that at the
end of last year, over 100 million investors, individuals,
representing nearly 60 million households, that is 45 percent
of U.S. households, owned funds.
In light of the importance of the asset management industry
to investors and the markets, since my appointment as Director
of the Division last year, we have embraced three principles
that guide our efforts in developing, assessing, and
implementing policy initiatives. First, improving the retail
investor experience. Second, modernizing the regulatory
framework and our engagement. And third, leveraging our
resources efficiently.
The Division has been hard at work in 2018, so I will just
touch on a few highlights from my written testimony. Improving
the retail investor experience is about assessing the
information needs of and our interactions with Main Street
investors. Technology has presented us new opportunities for
how we provide and solicit information.
With that in mind, the Division is working on several
initiatives to improve the investor experience. For example,
earlier this year, the Commission proposed a comprehensive
rulemaking package on the standards of conduct of financial
professionals. The package is designed to serve retail
investors by bringing the legal requirements and mandated
disclosures in line with investor expectations. The package
included regulation best interest, the relationship summary
disclosure, and an interpretation of the investment advisory
fiduciary standard.
Our Division led the staff's efforts on the relationship
summary, which is designed to educate investors about whether
they are dealing with a broker-dealer, an investment advisor,
or both, and why that matters when considering the services,
fees, and conflicts of the financial professional.
In the proposal, the Commission sought comments and ways to
optimize delivery of information to retail investors. This
rulemaking has also been an opportunity to try out new ways to
reach Main Street investors.
We have rolled out a new Website inviting investors to tell
us about their experience, developed simpler ways for investors
to provide comments, and held roundtables in seven cities. This
investor feedback has been valuable to the staff as we consider
the comments we have received.
Another example is our work to improve the design,
delivery, and content of fund disclosures. Disclosure is the
backbone of the Federal securities laws and is a critical tool
for investors when making investment decisions. With that in
mind, the Commission issued a request for comment to gain
insight in ways to improve and modernize fund disclosures.
Moving to the second principle, modernizing our regulatory
framework and engagement, the Division is working on several
initiatives to help our markets grow and develop for the
benefit of all market participants, including our Main Street
investors. This includes work on an ETF rule and revisiting the
role of fund boards.
We are also hard at work on important initiatives, like a
recommendation for adopting a rule under the FAIR Act and
proposing rule changes to modernize the ways BDCs and closed-
end funds are offered to the market.
Finally, with respect to the third principle, we are
looking at how we can employ our resources effectively and
efficiently. We are a Division of around 180 people responsible
for policy effecting more than 20,000 registered funds and
investment advisors.
In an industry that is approximately $80 trillion in assets
under management, enhanced use of technology and continuous
process improvements are critical to our effectiveness and our
efficiency. In that regard, one of our main focuses is enhanced
use of data analysis in our disclosure, oversight, and
regulatory initiatives.
Thank you, again, for inviting me to discuss the Division's
effort and the work of its dedicated and talented staff. I look
forward to answering your questions.
[The prepared statement of Ms. Blass can be found on page
26 of the Appendix.]
Chairman Huizenga. Thank you for your testimony. At this
time, I recognize myself for 5 minutes of questioning.
As the Ranking Member had brought up as well, there were
the no-action letters, the two letters that were issued in 2014
to Institutional Shareholder Services and the Egan-Jones Proxy
Services. Can you please elaborate on how rescinding these
letters will actually help investment advisors vote in their
clients' best interests and manage conflicts of interest?
Ms. Blass. Thank you for the question. So, the investor
advisors, the law has not changed. The Commission adopted a
rule back in 2003 with respect to proxy voting and that is the
basis. That is the foundation, if you will.
Since that time, there have been the two no-action letters
that were--interpretive letters that were issued, as well as
staff guidance thereafter. We have been undertaking a full
review of all guidance issued by the Division. This is part of
modernizing our regulatory framework to see which guidance
should be amended, rescinded, supplemented as we look at market
developments.
We have been doing extensive outreach to issuers, to proxy
advisors, to investors in this space. Our outreach resulted in
our determination to hold a roundtable to make sure that we
have a forum to discuss these issues, where all participants,
all interested parties can come together and have a good
discussion about the issues in this space, because it is
extremely important to investors. This is how they exercise
their voice in the market.
Chairman Huizenga. And that roundtable is scheduled for
when?
Ms. Blass. November 15th.
Chairman Huizenga. OK.
Ms. Blass. So, looking at the--our engagement led to we
needed this roundtable. It is a good path forward. And looking
at the roundtable, we also looked back at a roundtable that we
hosted back in 2013. And in that roundtable, those two letters
got a lot of air time.
There are significant issues that should be discussed in
the coming roundtable. So, with that in mind, and also in mind
the market developments since 2004 when they were issued, we
determined the best course of action would be to withdraw these
two letters and discuss the important issues with respect to
proxy advice.
Chairman Huizenga. OK. In light of that, do you believe
that the SEC should provide further guidance, what it means to
be a, quote, ``independent third party,'' or how an investment
advisor can satisfy the fiduciary duty as required by the 2003
rule?
Ms. Blass. That is one of the very questions that we are
hoping to get information about, during this roundtable, so
that we can make appropriate recommendations to the Commission.
Chairman Huizenga. OK. Well, it is interesting that the two
largest proxy advisory firms combined control is at least 97
percent of the proxy advisory industry. And, obviously, they
also sell services while they are then doing some of these
reviews. And I am very concerned about the potential conflicts
of interest on behalf of these firms and the folks that they
are trying to serve.
Let me quickly move on to exchange-traded funds, ETFs.
According to recent data by the ICI, Investment Company
Institute, ETFs contain $3.61 trillion in assets with 1,923
different ETFs. One of the reasons ETFs have grown so rapidly
is because they offer a lower cost alternative to mutual funds.
Can you please elaborate on why ETFs are less costly than
mutual funds and highlight other reasons that may prove to be
better--they may be a better alternative for investors?
Ms. Blass. ETFs are an investment company, and they are
different than mutual funds. They are open-end investment
companies, but they are different than mutual funds. An
investor can go in and out of an ETF intraday. At any point in
the day, they can buy and sell. Versus a mutual fund, you are
bound by end of day.
The structure of the ETF provides certain tax efficiencies
and that provides lower cost. A lot of that is due to the in-
kind nature of how they transact with the primary market, the
authorized participants.
They also have less fees and other respects as well. For
example, they usually don't have a load. The transfer agency
fees are less. A lot fewer fees in ETFs.
Chairman Huizenga. And there was a June 28, 2017, the SEC
voted to propose a new rule to modernize regulatory framework
of ETFs. And I am curious if you can explain how the proposed
rule leveled the playing field?
And then, finally, really quickly, last month, the SEC
rejected nine proposed Bitcoin ETF proposals and decided to
delay the decision allowing for CBOE Bitcoin ETF. Do you
believe that some version of Bitcoin ETF will be approved in
the near future? And can you speak to the pros and cons of
approving or not approving those product?
Ms. Blass. So, in June of this year, the Commission
proposed an ETF that would cover the ETFs that we usually see
in the exemptive application program. We have issued over 300
individual exemptive orders to ETF sponsors for them to launch
and operate to date.
So, a rule would create a transparent, consistent, and
efficient regulatory framework for these ETFs that
increasingly, investors have shown interest in holding these
products.
With respect to your question with respect to Bitcoin ETFs,
those were actually exchange-traded products, not exchange-
traded funds. And this is something that I do think is
important, because there is market confusion when the term ETF
is used, regardless of what the product is about.
An ETF is an investment company. It comes under the 1940
Act and has to comply with the mandates of the 1940 Act. An ETP
(exchange-traded product) is usually a commodity pool, and it
is a--it comes to market in the same way an operating company
would come to market. These are different products and so it is
important to understand the differences.
Chairman Huizenga. My time is well expired so we will have
a generous gavel with Ranking Member as well, who is recognized
for 5 minutes.
Mrs. Maloney. Thank you so much, Mr. Chairman. And thank
you, Director Blass, for your testimony.
I would like to ask you about the SEC's 2014 rule on money
market funds. As you know, the SEC's rule made certain money
market funds that invest in corporate and municipal debt, more
transparent, requiring them to tell investors the fund's true
market-based value every day, known as a floating Net Asset
Value, or NAV.
This is designed to take away the first mover advantage,
that gives the investor an incentive to be the first one to
withdraw their money, which is what leads to devastating
investor runs that can destabilize the entire market. So, I
think that this was one of the most important post-crisis
reforms that we made.
The rule has now been in effect for about 2 years. So, my
question to you is, have you seen any major problems in money
market funds since the rule came into effect that would
necessitate major changes to the SEC's 2014 rule?
Ms. Blass. The rule was adopted back in 2014. The
Commission, at the time, adopted that--the reform package for
money funds--to address certain structural risks presented by
money funds since their inception.
Ultimately, to answer your question about whether any
changes are necessary, that would be a decision of the
Commission. We, the staff, monitor money market funds daily. We
monitor them pretty closely.
During the implementation, we did see a significant shift
in assets from prime funds into government funds. A shift to
the tune of over $1 trillion. We have and we will continue
monitoring money funds, as well as our short-term funding
markets, to see how they evolve within our regulatory
framework.
Now, we do know that certain--people believe that further
changes may be necessary or are necessary with respect to money
funds. I will note that our doors are always open. We are happy
to engage and hear their perspectives.
Mrs. Maloney. OK. On the no-action letters, the SEC simply
said that it had decided to withdraw the letters, because,
quote, ``developments since 2004.'' So, I just would like to
know exactly what were the developments since 2004 that made it
necessary to just withdraw these two letters?
Ms. Blass. So, the Commission adopted the rule for proxy
voting toward the end of 2003. Since that time, investment
advisors have had experience with how to develop policies and
procedures to address conflicts. They have a better sense of
what those conflicts are.
The market has also changed significantly. Back then, the
assets of the asset management industry were just about $7.5
trillion. At this point, it is well over $20 trillion. That is
just the registered fund assets.
The passive investing has also grown tremendously since
that time. The regulatory landscape for those proxy advisors
has also changed. Technological changes in data analysis and
gathering has also been very significant in that time. There
have been a lot of market developments in that time.
What hasn't changed, this is--and you mentioned it in your
opening statement is this is about--fundamentally about how
shareholders exercise their rights. This is about shareholder
rights.
And the proxy firms are a very important part of this
ecosystem, if you will. We wanted to focus on discussing these
issues, which are really important to shareholders in the
upcoming roundtable, to see what changes, if any, should be
made since the adoption by the Commission of the rule in 2003.
Given how much airtime, whether rightly or wrongly, these
two letters have received, we determined the best course of
action, to make sure that we get robust discussion in the
roundtable, would be to withdraw these two letters.
Mrs. Maloney. Well, I would like to follow up by asking--
you mentioned that the 2014 legal bulletin on proxy advisors
remains in effect, right? So, do you believe that the guidance
in this bulletin is effectively identical to the two 2004
letters that you withdrew, meaning that nothing of SEC's
substantive guidance on proxy advisors has actually changed?
Ms. Blass. I don't--I wouldn't say those--the letters are
identical to the staff legal bulletin. And the staff legal
bulletin is closer to what the Commission said, with respect to
the investment advisors' fiduciary duty and duty to monitor--
fiduciary duty. It is a fiduciary with respect to its duty to
monitor the use of proxy advisory firms.
And I will note that the staff legal bulletin and the staff
statement we put out, with respect to the withdrawal, we did
note that we expect to discuss the staff legal bulletin in the
roundtable.
Mrs. Maloney. My time has expired. Thank you.
Ms. Blass. Thank you.
Chairman Huizenga. The gentlelady's time has expired. With
that, the gentleman from Illinois is recognized for 5 minutes.
Mr. Hultgren. Thank you again, Mr. Chairman. Ms. Blass,
thank you. Welcome. Glad you are here.
In my opening statement, I mentioned my appreciation for
the SEC's willingness to review current regulations and engage
with Congress, investors, and industry regarding reforms to fit
today's capital markets.
Just recently, the SEC reinforced this idea with the
announcement of a staff roundtable on the proxy process in
November. Additionally, just 2 weeks ago, your Division
withdrew two no-action letters from 2004 that were issued to
proxy advisory firms.
Your testimony states that these were revoked as part of
the preparation for the roundtable. I wondered, is this
intended to allow for a more complete consideration of the
proxy process as it stands today, compared to 2004 when the
letters were issued?
Ms. Blass. That is what we hope to have in the roundtable,
a wholesome discussion of all aspects of the proxy process.
Mr. Hultgren. OK. Understanding that this roundtable is
still to come, do you believe that rescinding these letters
will bring more transparency and accountability to the proxy
voting process? And is there further guidance that you already
anticipate will be needed?
Ms. Blass. I think it is important for us to use the
roundtable to get better information about the state of play,
the market developments, how proxy advisors are being used. I
can go on down the list. That is what the roundtable is about.
So we can get this information. Can have folks, in a
transparent fashion, talk together about where the state of
play is. And then, we can make appropriate recommendations to
the Commission.
Mr. Hultgren. Great. In July, I sent a letter to the
financial regulators, with responsibility for the Volcker Rule,
requesting that they reconsider the definition of covered funds
so that it excludes venture capital.
As my letter stated, the congressional record clearly
demonstrates through a--colloquy between Senator Boxer and then
Chairman Franks that investing in investor capital was never
intended to be prohibited by the Volcker Rule when Section 619
was drafted by Congress.
Additionally, in July when Chairman Powell came before this
Committee, I asked him about this issue. And he stated that
these activities are not a threat to safety and soundness.
I understand that the comment period is still open on this
issue. However, I would like to pose a hypothetical to you. Say
that a bank-controlled cover funds--excuse me, a bank-
controlled covered fund at a venture capital firm has an
agreement on a $200 million investment into a startup company
owned by the venture capital fund. However, the venture capital
fund says they would prefer to have the fund make an investment
into a credit or a debit instrument instead of an equity
instrument.
Based around the current construct, the bank fund would not
be allowed to invest, unless the company was willing to sell an
equity piece of the company. Why should it be that the Volcker
Rule--why should it be that the Volcker Rule should
differentiate between credit investments and equity
investments? And why should a bank be allowed to lend through
its own balance sheet but not through a fund?
Ms. Blass. We do appreciate that the definition of covered
funds is both overinclusive and underinclusive, in some
circumstances, and that there had been implementation
challenges with the definition of covered funds. That is why we
have the request for comment out.
I believe the comment period closes mid-October, and we did
ask a lot of questions in that regard. And we look forward to
seeing commentaries, thoughts, and opinions about this.
Mr. Hultgren. Great. We are looking forward to some clarity
as well on it. So, looking forward to resolution there.
Finally, as you know, the standard of care that governs
personalized investment has been a widely debated issue before
this committee and across the asset management industry. I am
pleased that the SEC has stepped in, following the rule by the
Fifth Circuit Court of Appeals that nullified the DOL
(Department of Labor) fiduciary rule.
I believe that the SEC is better suited to regulate this
standard. I have been following the regulation of the best-
interest rulemaking process. During this process, some
commenters expressed concern about the proposed form CRS. How
do you plan to incorporate the feedback you receive through the
comment process on that?
Ms. Blass. Thank you for the question. We have received
thousands of comment letters. I think there are north of 6,000,
at this point. We have also had investor roundtables. We have
had the ``Tell Us'' campaign, so investors can submit comments
directly into the comment file through our--the feedback form
that we have on the ``Tell Us'' page. And they have been doing
so.
So, we have received a--and we have also had third parties
perform investor testing and submit these results into the
comment file. We have a lot of great comments, and the staff is
going through it to see what changes--what recommendations
should be made to the--to the form--changes to be made to the
form, so we can make recommendations to the Commission.
Mr. Hultgren. Thank you, Director Blass. I will yield back
the last 30 seconds to the Chairman if he has any other
questions, or I just yield back my time.
Chairman Huizenga. It is an efficient day at the committee.
Well, thank you. The--with that, Mr. Sherman from California is
recognized for 5 minutes.
Mr. Sherman. First, I have a comment about
cryptocurrencies, then I will go into three questions.
Cryptocurrencies are either an investment or a medium of
exchange. To the extent they are a medium of exchange, they
undermine the power of the Federal Government.
We get seigniorage which is a huge profit center for the
U.S. Government. If the dollar wasn't used around the world, we
wouldn't get it. Second, we have lower borrowing costs. And
third, our sanctions policy around the world can bite because
the U.S. dollar is the medium of exchange.
There is a libertarian, almost anarchist, philosophy out
there that says disempower the U.S. Federal Government. As part
of the U.S. Federal Government, I disagree.
But you deal with investments. And if there was an
investment vehicle that wanted to register, that invested in
nothing but illegally issued securities--publicly traded
securities that had never been registered, violations of every
State and Federal law, I don't think you would say, well, you
can register a security whose assets consist exclusively of
illegally issued securities.
Cryptocurrencies are, if they are investment vehicles,
illegally issued securities. They are an investment vehicle
with none of the investment protection. So, I hope that you
would do everything possible to stop cryptocurrencies and
investments based on them, not to mention the billions that had
been lost by various investors.
Now, for questions. I want to congratulate the SEC on
advancing Rule 30e-3 which modernized the default method for
shareholder reports. You are saving $2 billion over the next 10
years and 2 million trees. What more can the SEC do to reduce
the clutter that builds up on my desk as I get these on paper
and to save the trees?
Ms. Blass. Thank you for the question. We have actually
launched the investor experience initiative to broadly look at
all fund disclosures and what we can do to improve the design,
delivery, and content. So, not just how we deliver the
documents--
Mr. Sherman. Yes.
Ms. Blass. Or a disclosure, but what we can do to make the
disclosure move into the 21st century. To make use of modern
technology. To provide it to investors in a way that they could
assimilate the disclosure--
Mr. Sherman. Yes.
Ms. Blass. So that they can make the informed investment
decisions. Disclosure--
Mr. Sherman. And an advantage there, if it is delivered
electronically, you could require to have a link in there. So,
I click here, and I see some other document.
Ms. Blass. You can use layered disclosure. Whether you use
paper or you use electronic delivery, you can use layered
disclosure to provide better information to investors.
Mr. Sherman. Yes. It works better electronically. I hope
you will save as many trees as possible. And I think it is
actually better for investors. Because when I get it on paper,
I lose it. When I get it electronically, six--two--I get some
extra time. Two weeks later, I can look it up and see it on my
iPad. Not that I would fail to pay attention to what is going
on in these hearings.
I have opposed legislation that would undo the SEC's 2014
money market reforms. These reforms were put in place to
increase transparency. Do you share the concerns of Chairman
Clayton, that making major changes to these reforms would be
disruptive of the--in particular, the insta--the money market
funds that invest in corporate debt and are held by
institutional investors?
Ms. Blass. So, I will let the Chairman speak for himself. I
do believe that he was acknowledging the shift in assets that I
mentioned, the one trillion dollars--over one trillion
dollars--that shifted from the prime funds into the government
funds. And that putting aside the merits of the rule or that
outcome, we should always carefully consider the impacts of
such shifts on investors and the markets.
Mr. Sherman. I hope we--well, I am going to move on to the
third question and final one. In 2014, the S&P and Russell
removed business development companies from their various stock
indexes. I spend a lot of time in this room. We are all
dedicated to providing capital to small business. But the
reason they did is over concerns the disclosure rule of the
index fund's overall expense ratio.
Given that the cost incorporated into an index fund's
expense ratio, under this disclosure rule, when it makes an
investment in a business development company are not additional
expenses of the index fund, what steps is the SEC staff taking
to look at the negative impacts of this, in effect, double
counting of expenses and the negative effect it has on capital
for small business?
Ms. Blass. I believe you are referring to the acquired fund
fees and expenses, which the Commission adopted back in 2006 to
provide transparency to investors with respect to fund-to-fund
investments.
We are aware of the--of the issue, with respect to business
development companies. There has been extensive engagement. And
I believe there is an application, exemptive application, now
on file, which the staff is working on.
Mr. Sherman. I hope you move forward with that and I yield
back.
Chairman Huizenga. The gentleman's time has expired. With
that, the gentleman from Ohio, Mr. Stivers, is recognized for 5
minutes.
Mr. Stivers. Thank you. And I want to follow up on a
question that Mr. Sherman just asked, just to make sure I
understand. So, obviously, the SEC's acquired fund fee rule--
fund fee and expense rule has had a negative impact on a lot of
business development companies that have faced potential
delisting from some indices and other things.
And, as you probably know, BDCs are not a passive
investment. They are much more like a REIT (real estate
investment trust). And they deserve the same kind of
consideration, like a REIT, with regard to the AFFE (acquired
fund fees and expenses). Do you think that that is something
you guys would be willing to look at? And do you see those as
similar investment tools with the same kind of operating costs
and expenses that could drive an artificial number on the AFFE
that could cause problems for the BDCs that want to be listed?
And would you be willing to look at some type of exemption from
the AFFE, similar to what REITs have?
Ms. Blass. So, as I mentioned, this was a rule that was
adopted by the Commission back in 2006. And, actually, I happen
to have been the staff attorney that worked on that rule.
Mr. Stivers. Great.
Ms. Blass. At the time, when the rule was adopted, BDC
assets were significantly--
Mr. Stivers. They were nothing almost.
Ms. Blass. Smaller.
Mr. Stivers. Rounded to zero, yes.
Ms. Blass. Maybe not zero, but pretty--
Mr. Stivers. Rounded to zero.
Ms. Blass. --close.
Mr. Stivers. Yes.
Ms. Blass. And we actually did not receive any input from
BDCs, at the time, no highlight of this issue that you are
raising. Since then, there has been outreach. They have raised
this particular issue. And they have filed a request for an
exemption from the--from this provision with the--with the
Division. And that is being actively reviewed by the staff.
Mr. Stivers. Great. I appreciate your review on it. I think
it is having a negative impact on an investment that allows a
lot of Main Street folks to be able to participate in middle-
market companies and investments that they haven't had access
to. Only accredited investors have, normally, had access to
those type of investment vehicles where they can share in the
upside of the growth of businesses. And it is a very big deal.
And it also funds Main Street jobs. So, I think it is a big
deal for our economy. It is a great opportunity for Main Street
investors. And it is just a different type of investment than a
passive investment. So, I appreciate your willingness to
consider that.
And that is all I had. I will yield back.
Chairman Huizenga. The gentleman yields back. With that,
the Chair recognizes the gentleman from Massachusetts for 5
minutes.
Mr. Lynch. Thank you, Mr. Chairman, and welcome, Director.
In a letter this summer to the SEC commissioners, our Secretary
of State, Bill Galvin in Massachusetts, asserted, in its best-
interest proposal, the SEC was simply offering a weak and
somewhat vague standard that, unless modified, would force
Massachusetts to adopt its own rules to protect investors and
require broker-dealers to provide non-conflicted advice that
puts the investors' interests ahead of the brokers' interests
and compensation.
Secretary Galvin also contends that the proposal merely
presents a veneer of a fiduciary standard and that would allow
existing weaknesses in FINRA's suitability standard to persist.
What are your--what are your responses to the concerns that--
and, by the way, I agree with Secretary Galvin. He has been
very vigilant on behalf of consumers, especially financial
consumers.
What are your responses to his concerns?
Ms. Blass. Thank you for the question. If I may, I just
want to start by recognizing my colleagues in the Division of
Trading and Markets who led our--the staff's efforts with
respect to developing recommendation and regulation best
interest. So, without stepping onto their turf too much, I will
offer you my perspective.
What the proposal does is it took the principles from the
investment advisor fiduciary standard, the duty of care and the
duty of loyalty. It looked at the principles in the DOL
fiduciary rule, the impartial conduct standards.
Taking these principles, it tailored the principles to the
broker-dealer relationship, a model to preserve that model.
This was important to provide--continue providing choice to
investment advisors--to the--to the--choice to investors in the
market with respect to commission accounts.
What we did notice, after the DOL fiduciary rule went into
effect, is that we did see a reduction in these commission-
based accounts. That was--that impacted the choice of
investors. So, while we were looking at these principles and
wanted to make sure these principles moved over were applied to
the broker-dealer model, we did it in a way we tailored it to
preserve that choice for the retail investor.
Mr. Lynch. You suggested there is some harmony there. But
we passed the Dodd-Frank Act, and I think it was Section 913.
It says that the investment--regarding the standard of conduct
for brokers.
In that--we put language in there that said that the
standard must be no less stringent that the fiduciary standard
under the Advisors Act. And, clearly, it is not--I understand
that the court overruled us in that effort. But there is still
statutory language that insists that the standard be no less
stringent.
And I think having a best-interest standard, which is
clearly less exacting than the fiduciary standard, we fail to
meet that obligation that is set forward in the Dodd-Frank Act.
Do you concede that that is a gap now? That there is a delta
between what we were hoping for in Dodd-Frank and what we are--
what we are receiving now under the SEC's rule?
Ms. Blass. As part of the Commission's proposed rulemaking
package, the Commission also put out a proposed interpretation
of the investment advisor fiduciary standard. I believe when
you look at the standard, as outlined, the Federal fiduciary
standard, and you look at Regulation Best Interest, you will
see core principles that are the same.
For example, neither--an investment advisor and a broker-
dealer must act in the best interest in the customer, the
retail customer. So, the principles, the core principles, are
the same. They were tailored in Regulation Best Interest to
apply to the broker-dealer model.
All that--I think it is also important to keep in mind,
this is a proposal. We have received north of 6,000 letters,
comment letters to this proposal. And we are in the process of
going through these comments to see what changes, if any, we
should be recommending up to the Commission.
Mr. Lynch. That is great. Thank you very much. I appreciate
your answer. And I hope that you do take those comments
seriously and try to hew to the stricter standard to protect
investors.
Thank you. I yield back.
Chairman Huizenga. The gentleman's time has expired. With
that, the gentleman from Minnesota, Mr. Emmer, is recognized
for 5 minutes.
Mr. Emmer. I thank the Chair and I thank Ms. Blass for
being here today. Appreciate your testimony.
I have a couple of areas that I am going to try and focus
on. First, last month, Chair Clayton announced that the SEC is
working on a concept release to explore, quote, ``broader
access to investing in privately held companies, among other
things.'' Can you walk me through the role that the Division of
Investment Management has in developing this concept release?
Ms. Blass. In my Division, we have private funds and we
have registered funds. And that is a statutory distinction, if
you will. We have had some requests to see how we can expand
some of these opportunities, for example, by way of registered
funds investing more in private funds.
We work with folks who are interested in this. Our doors
are always open to hear their perspectives. Ultimately, we
balance investor protection with making sure that we are also
looking to see in what ways we can provide more opportunities
for investors, for retail investors.
Mr. Emmer. Are--but are you--is your Division working on
this concept release?
Ms. Blass. This would impact our Division, so we would be
working closely with other divisions who are also at the center
of this, if you will.
Mr. Emmer. OK. And I think you have already covered, with
the Chair's questions, the issue about--well, I guess I would
ask it this way because he was asking about ETFs earlier. As
the Director, would you be willing to spend time and resources
to consider ways for Main Street investors to benefit from
private equity investments via ETFs or other investment
vehicles? Particularly, if this helps provide capital to
smaller and innovative companies?
Ms. Blass. So, as I mentioned, the--it is a statutory
delineation between private and public that said we do have
requests to see how that could be expanded. And we always
welcome people's thoughts. Our doors are open. And we are happy
to work with them, as long as we balance the investor
protection with the opportunities, if you will.
Mr. Emmer. Got it. Shifting gears to proxy advisors. In the
SEC's view, why is there so little competition in the proxy
advisor industry?
Ms. Blass. So, the proxy advisory industry is really high
volume, low margin. And with that, economies of scale kick in
and that is how you get the few numbers at hand. There are
about five proxy advisory firms, with two being the majority in
the market. And I do believe it is just economies of scale.
Mr. Emmer. Well, do you believe that the SEC needs to step
in to correct what is a distortion? Because clearly you don't
want it concentrated in just a few. I would imagine it would be
much better, despite the low margin, high volume. Much better
if you had many different choices out in the marketplace. Is
this something that you think the SEC should step in and
examine and try to--try to cure?
Ms. Blass. If I may, I will offer a couple of points on
this and this would be from the perspective of investment
management. Because I do know that proxy plumbing, in general,
is a bigger issue or a broader issue.
First, with respect to proxy voting, the investment advisor
is the fiduciary. The investment advisor is the one that is
tasked with voting in the best interest of its client. So, that
is one thing to keep in mind.
The other is these are issues, the ones you raised, had
been raised over time, and that is one of the reasons why we
are having the roundtable. We want to have this discussion. We
want to understand the market better. And we want this to be
done in a transparent, public forum so that we can get the
views of as many interested parties as possible. Including, I
should mention, that there is a comment file that is already
open for people to submit their viewpoints. Any point, at this
point, from today onward.
Mr. Emmer. And maybe I am beating it too much. But just
very quickly in the couple seconds I have left. Beyond the
roundtable, how is the SEC and your Division reviewing, in any
way, the state of competition transparency policies in
conflicts of interest among proxy advisory firms?
Ms. Blass. So, we actually have done--with colleagues from
the Division of Corporation Finance and other--and colleagues
from the Office of the Chief Accountant for the Commission, we
have been doing extensive outreach. We have reached out to
investors, to registered funds, VTO advisors, to the proxy
advisory firms.
So, we have done outreach in this area and it actually was
this outreach that led us down the path to a roundtable, so we
can have this broad, public forum to discuss all these issues.
Mr. Emmer. Thank you. My time has expired.
Chairman Huizenga. The gentleman's time has expired. With
that, the gentleman from Arkansas, Mr.--oh, I am sorry. Mr.
Davidson is here. Sorry. With that, gentleman from Ohio, Mr.
Davidson, is recognized for 5 minutes.
Mr. Davidson. Hi. Thank you so much for being here. Thanks
for you prior comments on ETFs involving cryptocurrencies. I
take it, from the fact that the SEC's deemed Bitcoin to be a
commodity, not a security. That is why you are calling it a
product. Is that accurate?
Ms. Blass. Well, it depends on how the fund--what the fund
holds. There is a test under the Investment Company Act. And
40--at least 40 percent of the fund's portfolio should be
investment securities. And then, they would come under the
Investment Company Act.
Mr. Davidson. OK. So, is that--what other criteria would
lead you to call it product instead of a fund? So, an ETF
versus an ETP?
Ms. Blass. So, when I look at ETFs, I think of them as
investment companies that meet the definition of investment
company under the Investment Company Act.
Mr. Davidson. OK.
Ms. Blass. So, it is the portfolio. It is the composition
of the portfolio.
Mr. Davidson. OK. So, I guess in the sense that there has
been an ongoing effort to create these, that an ETF that
involves cryptocurrencies or some form of token, has the SEC
come up with guidance or--I think the concern for the industry
is that we are getting regulation by enforcement, or regulation
by rejection in this case.
But it is hard to discern what actually would meet the
criteria. Do you have something like that in the works?
Ms. Blass. We do. So, the Investment Company Act, since its
inception in 1940, it is a--it is a very innovative act. It is
very flexible. It has allowed a lot of innovation, including
ETFs in general.
Several sponsors are interested in offering exchange-traded
funds that would hold crypto-related assets. We are engaging
with these sponsors to make sure that our engagement is as
broad and as transparent as possible.
Back in January, we issued a letter to the ICI and SIFMA
AMG, and that letter is--no, we have a Website now--
Mr. Davidson. Right.
Ms. Blass. --that has the letter. And we are interested in
any comments. We encourage the comments to come in on this
public Website, so that we can have a transparent dialog and
bring different viewpoints in.
That letter highlighted the issues that these sponsors
should consider before they are able to offer these funds to
the market. At this point in time, believe it or not even
though we issued it in January, they are just starting now to
come back to us with responses.
Mr. Davidson. OK. So, thanks for that. We will certainly,
by all means, look at the--if you are concerned about this
issue, look at the January 2018 letter and provide comment to
the SEC.
And then, I think the other part is one of the biggest
challenges that has been highlighted, with cryptocurrencies or
digital tokens of a broader range, is custody. What custody
issues do you see--do you--ways to resolve that or concerns
that it may not be able to be addressed? Where are you--where
is the SEC thinking about with respect to custody?
Ms. Blass. Yes. So, we did raise, in the letter of the
custody issues whether, for example, there would be a qualified
custodian. And, at this stage, we have had some good outreach,
folks who are considering how to structure and in a manner that
would be compliant with our rules.
Mr. Davidson. And so, I get that. But the whole premise of
a distributed ledger is there is a record. And, frankly, it is
not just a record in one place. It is a record all over the
planet. And it is not just available to the SEC. It is
available to the consumer. And, frankly, anyone can look and
say this is the--this is the address.
So, I think the concern so far, particularly with respect
to things that aren't really securities that the SEC is looking
at as part of a bundle. The underlying asset may not be a
security, but it is in a fund, so the SEC has oversight there.
If you look at the custody of it, you are going through a
path to create a duplication of effort to say, we have to find
a way to tag something that already has a ledger to say who
owns this account. It would be like saying, ``no, really,
really, who owns this Fidelity account?'' Well, Fidelity
already shows you this is the owner. And we are going to pay a
third party to tell you that this was the person that owns the
Fidelity account. But on a massive number of levels, because it
would be every token, or every coin in the case.
So, is there a way to address that without adding a third
party and just using the ledger?
Ms. Blass. I appreciate your concerns and the question.
So--and the promise of blockchain and distributed ledger
technology and what it could mean, not just in the custody
space, but broadly in the asset management space. What it could
do and that, ultimately, it would go to the benefit of Main
Street investors.
Mr. Davidson. Right, it would eliminate a lot of
intermediaries. And it would benefit the investor and the
consumer.
Ms. Blass. Yes. There is the promise of that technology.
Where we are, at this stage, is having that conversation of,
here is our law and this is the product you want to offer. What
are the issues, and how can we marry the two together?
So, that is the conversation we are having. I--the Federal
securities laws, the Investment Company Act, as I mentioned,
adopted back in 1940. Look at the innovation in the asset
management space since 1940. Amazing products have come to
markets. Different products have come to markets that provides
opportunities for retail investors. That has always happened
since 1940.
So, with that, this is a new flavor.
Mr. Davidson. Yes, still a 1940 act that needs updating. My
time is expired. I could talk for much longer. Thank you,
Chairman. And I yield.
Chairman Huizenga. The gentleman's time has expired. With
that, the gentleman from Arkansas is recognized for 5 minutes.
Mr. Hill. I thank the Chairman. I appreciate you holding
this hearing. And it is always terrific to have Director Blass
back before the committee. She brings all of her knowledge and
intellectual power to this committee. And we need it. We need
it desperately. So, thanks for representing the Commission.
Last Congress, it was--it was a pleasure to work with Dr.
Foster and complete the work on our ETF research bill, H.R.
910. It was a bipartisan, bicameral effort to improve research
available to individual investors who are using exchange-traded
funds which have proliferated since 2000.
And I would echo your comments about the 1940 Act. That
product is an example of a product that was innovated under the
act without really amending the 1940 Act itself. And think of
all the people benefited by that. So, thank you for your
leadership in this area.
On May 23rd, you issued the notice for the rulemaking under
H.R. 910, and comments were due in early July. So, when do you
expect the final rulemaking to be completed on research for
exchange-traded funds?
Ms. Blass. So, the comment period is now closed at the
beginning of July, July 7th I believe. The staff has looked
through the comments and has worked through our
recommendations. And we hope to get that to the Commission in
the near future.
Mr. Hill. Thank you. And you also--this summer, you have
been busy on ETFs. So, you also have participated in a
roundtable that we had under our Chairman's direction. And
talked about how to both make sure consumers have information,
but also have markets readily accept new ideas for ETFs. And
you have proposed to innovate that space. How do you think your
rule, that you proposed in June, will aid the Commission in
time-to-market for new exchanged-traded fund ideas?
Ms. Blass. So, for a sponsor to--a new sponsor to launch an
exchange-traded fund, at this point, they still have to go
through the exemptive application process. Even with a plain
vanilla ETF, as we call it, it still takes even a few weeks.
The notice period, alone, is about a month. That is time to
market.
Even if you put aside the process, the operating under the
exemptive rubric, if you will, we are, to date, over 300
exemptive orders. That creates inconsistencies, an unlevel
playing field. And an investor investing in an ETF, they would
not know that their ETF may have differences in their
exemptions from another ETF. They just think of it as an ETF.
So, the--what the proposal is seeking to do, is designed to
do, is create a transparent, effective, and efficient
regulatory framework for a segment of the asset management
industry that is now $3.6 trillion and growing, significantly.
Mr. Hill. And on that subject of ETF, as a term. You gave a
speech, recently, where you were--expressed some concern over
the nomenclature of an ETF, what is one and what isn't one.
Would that be contained in the same rule? And what is your
general intent there?
Ms. Blass. We did request comment on this issue.
Mr. Hill. Yes.
Ms. Blass. When you look at products outside and the ETF is
used, and it could be a commodity pool, it is not an ETF. In
some cases, I have seen the Financial Press refer to an
exchange-traded note as an ETF.
Mr. Hill. Yes.
Ms. Blass. And this creates market confusion. And investors
do not understand--would not understand what it is, exactly,
they are buying. So, we did request comment on this issue, and
we are looking forward to seeing what folks give us.
Mr. Hill. Good. I think that is important because they are
not all the same. And I think some creating a design where
consumers can easily put them in the proper bucket, when they
are considering their investment suitability, would be helpful.
In the time I have remaining, I was looking back at the
investment management decision to implement Volcker. And I
was--it seemed to me that it was--your interpretation has
treated it differently, whether it is an equity investment, or
a debt or a note investment. And didn't that--interposing the
SEC between the corporate finance, between a company owner and
a prospective investor. Shouldn't those be equally treated,
whether it is an equity investment or a debt investment?
Ms. Blass. I appreciate the concerns and the question. And
I appreciate all the implementation challenges--
Mr. Hill. Yes.
Ms. Blass. --that have been raised. The agent--the
agencies--the Volcker agencies, if you will, did put out a rule
proposal. On the covered-fund definition, we have a significant
amount of questions there in our request for comment.
And, ultimately, the--our goal with this is, hopefully, to
streamline the obstacle--the implementation challenges. And we
do have questions that--in the proposal that go to your--
Mr. Hill. I appreciate that. My time is expired. It speaks
to why we need a bicameral solution for this Volcker Rule. It
is complex. We need to have harmonization between the
regulatory agencies. I yield back. Thank you, Chairman.
Chairman Huizenga. All right. The gentleman makes an
excellent point. With that, the gentleman from North Carolina,
Mr. Budd, is recognized for 5 minutes.
Mr. Budd. Thank you, Mr. Chairman. And, Director Blass, it
is great to have you here. And it is great to have your family,
your children, with you. And I think it may have been mentioned
earlier, but we will provide notes for school teachers if
needed, absolutely.
So, we really appreciate your service. I want to start with
some concerns I have with the covered funds section in the
recent Volcker NPR. And I think my friend from Michigan, Mr.
Hultgren, touched on this earlier, but I want to echo those
concerns.
In my view, the current definition of covered funds, under
the rule, is too broad, and includes funds that engage in long-
term investing and lending which are already activities that
banks can do directly. However, they aren't able to do so
indirectly through a fund which are far less risky than on-
balance sheet lending. It doesn't seem to make sense to capture
these types of activities under a rule that was designed to
prohibit short-term speculative trading activity.
So, I asked Chairman Powell, when he was here, and I wanted
to get your view as well this morning. So, how will you revise
the fund's portion of the notice of proposed rulemaking, so
that these types of activities are no longer swept into the
rule? So that startups and small businesses can receive the
much-needed capital in lender banks to grow their businesses?
Ms. Blass. Thank you for the question. So, the request for
comment is out there, and the agencies look forward to
receiving information about this, and other aspects of the
current fund definition that have raised questions.
With respect to the long-term versus short-term
investments, if I may offer. I do appreciate the concerns
raised by banks that they can do this directly under the
merchant banking authority. And they cannot under the--through
a fund under the Volcker Rule.
Two things about--we do want to ease compliance. But there
are two things, if I--if I may, for your consideration. One is
the Volcker Rule includes private equity funds. Just the term,
private equity fund. And private funds invest in both short-
term and long-term investments.
And then, when you look at the--in the Volcker Rule, this
is statutory. Not the rule. The statute. The--there--it covers
the illiquid funds. And when you look at that one, that also
includes long-term investments which could be read as an intent
of Congress to cover long-term investments and not just short-
term.
That said, we do appreciate the concerns raised in this
area. And we do have the request for comment out.
Mr. Budd. Very good. Thank you so much. So, I also want to
ask some follow up questions on proxy advisors, but I think
that has been covered already.
So, I want to switch over to crypto for a moment. I am
leading a letter this week with--to Chairman Clayton, asking
the SEC to clarify the criteria used to determine when offers
and sales of digital tokens should be properly considered
investment contracts and, therefore, offerings of securities,
and properly clarify what makes an offer a non-security or a
commodity. So, the reason I am doing this is that not all
tokens are securities, and treating all tokens as securities
harms American innovation and leadership in the cryptocurrency
space.
So, I want to ask you, Director Blass, in your view, are
there any benefits to investing in cryptocurrencies?
Ms. Blass. So, in my role as a member of the staff and
Director of this Division, what I look at is the product that a
sponsor wants to offer, the law. And work with that sponsor to
see what issues are under the law. And work with them to see--
provide guidance, listen to their perspectives.
That is what we do and keeping in mind our mission which is
investor protection, capital formation, and fair and orderly
markets. So, that is our--the umbrella we work under. And what
we do is work with the sponsor, keeping in mind our regulatory
infrastructure.
Mr. Budd. Thank you for your engagement there. It is so
critical that we, in this country, are on the forefront of
this. So, it means a lot.
I want to ask you, also, do you think that cryptocurrencies
have the potential to help foster greater innovation and
provide more investment choices for investors?
Ms. Blass. When I look at the cryptocurrency space, I
actually look at the blockchain, the technology, the blockchain
technology, the distributed-ledger technology. And I do
understand that asset managers, and others in the financial
services industry, are looking at that technology to see how
they can bring it in-house. And, ultimately, that could really
be to the benefit of Main Street investors.
We would--we are--our doors are always open. We would love
to hear about what they are doing, how they are doing, and what
obstacles there are out there. But that is technology that we
are definitely very interested in.
Mr. Budd. I appreciate you drawing the distinction between
the currencies and the numerous currencies out there and the
technology that underlies it. So, thank you so much.
I want to appreciate you and thank you for joining us
today. And I yield back to the Chairman.
Chairman Huizenga. The gentleman yields back. With that,
seeing no other further questions, we would like to say thank
you to the--to our witness today, Ms. Blass and her special
guests. It might not have been the most exciting day for you.
There were a lot of acronyms. We call that the alphabet soup of
government. Lots of--lots of letters all attached to it. But,
again, I just want to say thank you for your--for what you do
and your family. And this is--this is important stuff. And we
really appreciate your time.
So, with that, I would like to allow--sorry, I have to get
back on script here. The Chair notes that some Members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 5 legislative days for Members to submit
written questions to these witnesses and to place their
responses in the record. Also, without objection, Members will
have 5 legislative days to submit extraneous materials to the
Chair for inclusion in the record.
So, again, Ms. Blass, thank you for your--for your time and
your expertise. And we look forward to working with you more in
the future.
With that, our hearing is adjourned.
[Whereupon, at 11:24 a.m., the subcommittee was adjourned.]
A P P E N D I X
September 26, 2018
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