[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

                              ----------                              
                                                                   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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