    [Senate Hearing 115-429]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 115-429

            OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                       ON

       EXAMINING THE WORK AND AGENDA OF THE U.S. SECURITIES AND EXCHANGE
                                   COMMISSION

                                   __________

                               DECEMBER 11, 2018

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                                       ______

                         U.S. GOVERNMENT PUBLISHING OFFICE

    34-221 PDF                WASHINGTON : 2019

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

    RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
    BOB CORKER, Tennessee                JACK REED, Rhode Island
    PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
    DEAN HELLER, Nevada                  JON TESTER, Montana
    TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
    BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
    TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
    MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
    DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
    THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
    JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
    JERRY MORAN, Kansas                  DOUG JONES, Alabama

                         Gregg Richard, Staff Director

                     Mark Powden, Democratic Staff Director

                         Jonathan Gould, Chief Counsel

                      Jenn Deci, Professional Staff Member

                Laura Swanson, Democratic Deputy Staff Director

                           Dawn Ratliff, Chief Clerk

                          Cameron Ricker, Deputy Clerk

                         James Guiliano, Hearing Clerk

                          Shelvin Simmons, IT Director

                              Jim Crowell, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                           TUESDAY, DECEMBER 11, 2018

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    24

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     2
            Prepared statement.......................................    24

                                    WITNESS

    Jay Clayton, Chairman, U.S. Securities and Exchange Commission...     4
        Prepared statement...........................................    25
        Responses to written questions of:
            Senator Brown............................................    50
            Senator Sasse............................................    53
            Senator Cotton...........................................    59
            Senator Rounds...........................................    60
            Senator Reed.............................................    61
            Senator Menendez.........................................    63
            Senator Warner...........................................    66
            Senator Warren...........................................    68
            Senator Cortez Masto.....................................    75

                                     (iii)

            OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

                                  ----------

                           TUESDAY, DECEMBER 11, 2018

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10:04 a.m., in room SD-538, Dirksen
    Senate Office Building, Hon. Mike Crapo, Chairman of the
    Committee, presiding.

                OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

        Chairman Crapo. This hearing will come to order.
        Today we will receive testimony from Securities and
    Exchange Commission Chairman Jay Clayton regarding the work and
    agenda of the SEC.
        Your appearance before the Committee, Mr. Chairman, is
    appreciated, and it is essential to the oversight of the SEC. I
    thank you for your willingness to testify today.
        The SEC has a critical mission to protect investors;
    maintain fair, orderly, and efficient markets; and facilitate
    capital formation.
        The SEC plays an important role in public confidence and
    trust in our Nation's capital markets. It provides information
    to investors to ensure that as Americans prepare for their
    futures, they have the information necessary to make informed
    investment decisions. I commend the SEC for its work to advance
    these missions.
        Last week, this Committee held a hearing to discuss the
    appropriate role of proxy advisory firms, the shareholder
    proposal process, and the level of retail shareholder
    participation.
        Many Members expressed interest in continuing the
    discussion on the appropriate relationship between proxy
    advisory firms and market participants as it relates to
    shareholder proposals and corporate governance.
        I am concerned about the misuse of the proxy voting process
    and other aspects of the corporate governance system to
    prioritize environmental, social, or political agendas over the
    economic interests of end investors.
        Last week, you stated your intent to address aspects of our
    proxy system, including proxy ``plumbing,'' ownership and
    resubmission thresholds for shareholder proposals, and proxy
    advisory firms.
        Many of the rules governing our proxy system have not been
    examined for decades, and I encourage the SEC to take an
    aggressive approach assessing the scope and appropriateness of
    previous regulatory actions.
        Capital markets are also vital to facilitating job growth
    and expanding American investment opportunities. This Committee
    worked hard in the 115th Congress to pass a number of
    bipartisan securities and capital formation bills.
        I will continue to work with Members to identify additional
    legislative proposals that encourage capital formation and
    reduce burdens for small businesses and communities.
        The SEC has also taken a number of steps this year to make
    it easier for emerging companies to go public while not
    discouraging the availability of capital in the private market.
        Additionally, this year the SEC proposed Regulation Best
    Interest and a related interpretation to establish standards of
    conduct for broker-dealers and investment advisers. This is a
    significant step forward, and I look forward to seeing a final
    rule in the near term.
        Finally, the SEC has been proactive in addressing
    cryptocurrencies and coin offerings. For example, the
    Enforcement Division created a new Cyber Unit this year, which
    led efforts to counter fraud against retail investors involved
    in initial coin offerings and brought charges against a
    bitcoin-denominated platform operating as an unregistered
    securities exchange.
        I look forward to receiving updates on these and other SEC
    initiatives, including your views on when we can expect final
    rules in these areas.
        Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Chairman Crapo. Welcome, Chair
    Clayton. Nice to see you again. Thank you for your service.
        Since I assume this will be the last Banking Committee
    hearing for this Congress, I would like to express my thanks
    and appreciation for the work of Senators Donnelly and Heitkamp
    and Corker and Heller over the years. So thanks to all of them.
        We have discussed the SEC's enforcement program in previous
    hearings and our recent meeting, Chairman Clayton. As you have
    highlighted, the SEC has worked hard to return money to harmed
    investors. I agree that is an important goal, but enforcement
    can begin and end with protecting wealthy investors.
        Ten years ago today, Bernie Madoff was arrested. His giant
    Ponzi scheme was exposed. There is no doubt that Ponzi schemes
    still exist. Your enforcement report shows that SEC is focused
    on finding them and punishing the wrongdoers, as you should.
        We also know a decade ago Bernie Madoff was far from the
    biggest threat to most families. It was Wall Street firms that
    had just wrecked our economy. And just as the SEC will continue
    to pursue Ponzi schemes, it must also continue to pursue in
    many ways the harder, the complex cases against the big banks
    when they break the rules and threaten families' homes and
    savings. I have said to this Committee a number of times that
    my Zip code, 44105, where Connie and I live in Cleveland, had
    more foreclosures in the first half of 2007 than any Zip code
    in the United States, so I still see the remnants of inaction
    and wrong actions by regulators and by Wall Street.
        The big banks have not turned into angels over the last 10
    years. Last month, German authorities conducted a 2-day raid of
    Deutsche Bank's headquarters in a money-laundering and tax
    evasion investigation. Last year, both the Fed and New York
    State regulators imposed fines totaling more than $500 million
    on Deutsche Bank's U.S. entity for anti- money-laundering
    violations. And Deutsche Bank is not alone. Similar problems
    persist at other banks.
        Looking at your Strategic Plan, I see a lot missing. There
    is nothing about stock buybacks. There is nothing about
    excessive corporate debt. Take a look at what has happened
    since the Republican tax overhaul.
        Since last year, corporations have announced more than $1
    trillion in stock buybacks, $1,000 billion, $1 trillion in
    stock buybacks. Take one example. GM has spent more than $10
    billion on stock buybacks since 2015. Last month, on the same
    day it announced--last month, it announced it is laying off
    14,000 workers and closing five plants, including the Chevy
    Cruze plant in Lordstown, Ohio. Close to 5,000 lost jobs, 5,000
    more jobs in the supply chain at least, and probably another
    10,000 jobs in Mahoning Valley. The same day they laid off
    shift two several months ago, they announced they were
    expanding production in Mexico. Yet the stock buybacks
    continue, and executive compensation continues to go up.
        The priority of these corporations are clear. Buying back
    shares boosts companies' stock prices, which means even bigger
    bonuses for corporate executives. Investing in a company's
    workers supports the long-term health of the company, but that
    is not what Wall Street rewards.
        Our economy functioned fine without massive stock buybacks.
    The SEC rule facilitating buybacks was adopted 36 years ago,
    but since then, the size, the use, the frequency of stock
    buybacks has increased dramatically. My colleagues and I have
    asked you to take a look at that rule and ask probing questions
    as you do it. It is time to question whether it is too easy for
    companies to buy back their shares. The GM case shows us the
    risks to workers and communities when companies think only
    about short-term profits. We should be looking at the record
    levels of risky corporate debt and leveraged loans, how that
    debt is packaged in collateralized loan obligations, the
    complex securities that allow investors to trade pools of
    loans. The Fed and the OCC are looking at banks' exposure to
    leveraged loans, but they say the risks are manageable and they
    are not worried.
        We have heard that one before. It was a little over 10
    years ago before the economy came crashing down. Leveraged
    lending CLO investors include hedge funds, mutual funds, other
    market participants under SEC oversight. As the shadow banking
    market plays a larger role in leveraged lending, watchdogs
    cannot just focus on the big banks. It is your job to worry
    when it seems like there is nothing to worry about. And I will
    say that again. It is your job to worry when the public seems
    to think there is nothing to worry about. That is what
    consumers and investors expect so that risks do not buildup
    across the financial system.
        A decade ago, the regulators in the Bush administration
    failed the country, and the price was enormous. The SEC needs
    to be closely watching this market not just to make sure
    disclosures and credit ratings are adequate, but to complement
    the work of the banking regulators. We know the financial
    system is more interconnected than ever and the systemic risks
    are more likely. Main Street cannot afford for you to stand by
    watching Wall Street greed again, every decade perhaps, grow
    out of control. Any Strategic Plan for any agency guiding our
    economy needs to focus on the American workers who drive
    growth, not just wealthy investors.
        Thank you.
        Chairman Crapo. Thank you, Senator Brown.
        And, again, Chairman Clayton, we appreciate you being with
    us. You may proceed.

        STATEMENT OF JAY CLAYTON, CHAIRMAN, U.S. SECURITIES AND
                          EXCHANGE COMMISSION

        Mr. Clayton. Chairman Crapo, Ranking Member Brown, Members
    of the Committee, thank you for the opportunity to testify
    before you today about the work of the Securities and Exchange
    Commission. On behalf of my fellow Commissioners and the 4,500
    women and men of the SEC, I would like to thank this Committee
    for its support.
        Congress' funding of the agency enables us to improve our
    tools and expertise relating to our markets, capital formation,
    and protecting Main Street investors. Further, your interest in
    and engagement on our rulemaking and other initiatives have
    helped us refine and improve these initiatives, often to the
    benefit of our long-term Main Street investors. Thank you for
    your input.
        From a day-to-day management perspective, I see our job as
    having four principal areas of focus: One, protecting investors
    through forward-looking policies and rulemakings and through
    inspections and strong enforcement of our securities laws; two,
    monitoring our disclosure-based capital markets and the
    numerous market participants, including through oversight of
    issuers, gatekeepers, and intermediaries; three, ensuring that
    our trading markets function effectively and fairly, including
    during times of volatility and price discovery; and, four,
    identifying, evaluating, and addressing emerging market risks.
        With regard to the fourth category, I want to note several
    key risks that are front of my mind.
        First, cybersecurity continues to be a pressing threat to
    our capital markets and many market participants. The SEC deals
    with cybersecurity risk through a number of perspectives, both
    within and outside the agency. Combating these challenges will
    continue to require significant resources and attention as well
    as an understanding that this is both an entity-specific and a
    systemic risk.
        Second, the potential effects of Brexit on U.S. investors
    and securities markets and on global financial markets more
    broadly is a matter of increased focus for me and my colleagues
    at the SEC. In short, I believe that the potential adverse
    effects of a poorly executed Brexit are not well understood
    and, in some areas where they are understood, are
    underestimated. The SEC's responsibility is primarily related
    to the effects of Brexit on our capital markets, and I have
    directed the staff to focus on the disclosures companies make
    about Brexit and the functioning of our market utilities and
    infrastructures.
        Third, managing the transition from LIBOR to a new rate
    such as SOFR is a significant issue for many market
    participants, including Main Street investors, as borrowers,
    for example, have consumer credit tied to LIBOR. We and our
    colleagues at the Federal Reserve, Treasury Department, and
    other financial regulators are monitoring this issue and
    working to facilitate a reasonable transition. However, an
    effective transition requires participants to take actions well
    ahead of year-end 2021 when the bank's itment to submitting the
    information used to set LIBOR ends.
        Finally, the process for developing and implementing the
    Consolidated Audit Trail, or CAT, remains slow and cumbersome
    and significantly behind deadlines. According to the SROs,
    substantial delivery of the first phase of CAT is now not
    expected until 16 months after the initial deadline. While I
    believe the CAT should be completed with deliberate speed,
    protection of CAT data, particularly any form of PII, remains a
    threshold issue for me.
        As the SROs continue to make progress in the development
    and implementation and operation of the CAT, I believe that the
    Commission, the SROs, and the plan processor must continuously
    evaluate their approach to the collection, retention, and
    protection of PII and other sensitive data. More generally, I
    have stated before that the SEC will not retrieve sensitive
    information from the CAT unless we need it and believe
    appropriate protections are in place to safeguard it.
        In closing, I would like to again thank the Committee for
    its continued support of the SEC, its mission, and its people.
    I would also like to note that my colleague Commissioner Kara
    Stein will be leaving us at the end of this year, and I thank
    her for her contributions to the Commission and to investors.
        I look forward to answering your questions. Thank you.
        Chairman Crapo. Thank you, Chairman Clayton.
        I will start out on the proxy voting process. That has been
    a focus of both the SEC and this Committee recently. In your
    testimony, you note that there is consensus on the need for
    major overhaul of certain aspects of the proxy voting process,
    including proxy plumbing and proxy advisory firms. As staff
    recommends comprehensive overhaul proposals, what reforms can
    you enact in the short term, if any?
        Mr. Clayton. So with respect to proxy, I put this into
    three categories, Chair Crapo. First is proxy plumbing. Our
    proxy plumbing, the voting from end investor back to the
    company, is very complex, and the verification of that process,
    the facilitation of that process, does not work as well as it
    should. We are looking for short-term fixes. We are looking to
    the industry to propose them, so in that area I am looking for
    short-term fixes. We do need a long-term overhaul.
        In the area of shareholder voting, I believe there are
    things that we can do to that process that will not in any way
    diminish engagement, but will, what I would say, eliminate
    unnecessary processes.
        And then in the area of proxy advisers, I think that there
    is broad agreement that there are elements of the proxy
    advisory, what I will call, ecosystem that can be improved
    fairly quickly. And I would be happy to discuss more detailed
    views.
        Chairman Crapo. All right. I appreciate that. And one last
    question from me. The SEC has devoted significant time and
    resources to issues surrounding digital assets and
    cryptocurrencies. Do you feel that the regulatory framework is
    sufficiently in place to provide certainty and predictability
    for market participants?
        Mr. Clayton. So I want to thank this Committee for holding
    a hearing, I think it may have been 9 months ago, on this very
    issue as the emergence of ICOs and cryptocurrencies became, I
    would say, of broad interest to our investment community. At
    the time, Chairman Giancarlo and I noted that we thought the
    securities laws functioned well for securities, the commodities
    laws functioned well for commodities, and that to the extent
    there were cryptoassets that fell outside either of those--for
    example, we talked about bitcoin at that hearing--we should
    continue to monitor whether other laws such as anti- money-
    laundering laws needed to be supplemented. We are continuing to
    monitor that, but I very much appreciate this Committee's
    attention to it and vigilance.
        Chairman Crapo. All right. Thank you very much.
        I am going to yield back my time. We do have a vote coming
    up sometime after 11, maybe 11:15 or 11:30, so I am going to
    yield back 2 minutes to help us meet that deadline. Senator
    Brown.
        Senator Brown. Not that that is going to spread.
        Chairman Crapo. Yeah.
        [Laughter.]
        Chairman Crapo. No, actually, I am setting a new standard,
    3 minutes.
        Mr. Clayton. I can hope.
        Senator Brown. Thank you, Chairman Crapo.
        Recently, banking regulators have noted the risks in the
    leveraged lending market, but only well after the market has
    reached record highs. We have seen lending move outside the
    banking system and fuel the significant increase in
    collateralized loan obligations. What is the SEC doing to
    monitor the growth of risky loans outside the traditional
    banking system?
        Mr. Clayton. So what I could say is many months ago--and I
    do not want to say too many, but 4 or 5--we started looking at
    this issue in detail, and you touched on a number of things
    that we should be looking at in your opening remarks, so kind
    of from beginning to end, you have got issuers on the one hand,
    which, you know, do we have too much leverage at the issuer end
    of the spectrum, companies borrowing too much money, too much
    increased leverage, all the way through to the end investors,
    whether it is mutual funds, pension funds, and the like. And
    there are entities in between, including rating agencies, banks
    which originate loans, and then what I will call the CLO
    packagers who buy the loans from the banks, form the CLOs, and
    send them to the end investors.
        We are looking at each component of that, and we are
    looking at it with two ideas in mind. One is systemic risk. Are
    there elements of this market that are going to cause the kind
    of systemic issues that you discussed, you know, knock-on
    effects?
        One thing that we are looking at in particular is will the
    change in ratings for these types of securities trigger
    substantial selling that would not be picked up by ordinarily
    expected demand. If you go from investment grade to below
    investment grade, do things like investment restrictions cause
    selling where the credit really has not changed that much but
    there is nobody there to pick it up? That is one of the many
    issues we are looking at.
        I can go on for a long time. I do not want to take more of
    your time.
        Senator Brown. Let me shift. FSOC does not seem as engaged
    as many of us would like it to be. They have moved in the wrong
    direction by de-designating the insurance companies that were
    deemed systemically important, as you know. As a member of
    FSOC, what are you doing to push a greater focus on leveraged
    lending and the interconnectedness of banks and shadow banks?
        Mr. Clayton. Well, the discussion that I was going through,
    I would say the components of the CLO--I will call it the CLO
    ecosystem--the leveraged lending that is outside of--the
    traditional high-yield debt market, bringing our knowledge and,
    what I would say, continued analysis of that market to the
    other members of the FSOC is one of the things that we are
    doing.
        Senator Brown. Well, and I am hopeful that--I guess I will
    ask you on the record: Will you commit to pursue these
    interests with the rest of FSOC? Is that something you will
    absolutely plan to do?
        Mr. Clayton. I think it is--I generally try not to commit,
    but it is easy to commit for that because I am already doing
    it.
        Senator Brown. OK. I cannot underemphasize the importance
    of that. Yesterday former Federal Reserve Chair Janet Yellen
    said that corporate debt is at high levels and would prolong
    the damage of an economic downturn if it were to come or
    whenever it comes, leading to more corporate bankruptcies. I am
    inclined to believe her. I hope you and other regulators take
    the appropriate action as corporate debt seems to continue to
    mount and continues to play the role that it has in this
    economy.
        Mr. Clayton. Thank you.
        Senator Brown. Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Toomey.
        Senator Toomey. Thank you, Mr. Chairman.
        Mr. Chairman, thanks for coming back. Good to see you
    again. You know, we have discussed in the past, including at a
    public hearing, that we have had this amazing decline in the
    number of public companies in America, the number of IPOs that
    we launch in the United States. I for one think it is a
    terrible thing if people are choosing to finance their business
    through private capital because of the costs and regulatory
    implications of going public. Obviously, a public company
    creates an investment opportunity for a Main Street investor.
    It creates another vehicle for capital raising. The competition
    between the public markets and the private markets has the
    effect of lowering the cost of capital. So in any way I can
    think about it, very robust public equity markets is a very
    good thing for our economy.
        I think in the past you have acknowledged that the
    regulatory costs of being a public company are probably a
    contributing factor to the relative decline and the absolute
    decline in public companies. Is that still your view that that
    is a contributing factor?
        Mr. Clayton. Yes, it is.
        Senator Toomey. One of my concerns is that, as we all know,
    there is a subset of activist shareholders who engage in
    forcing votes, shareholder votes, sometimes repeatedly on
    issues that they have no chance of succeeding on. Other times
    it is an effort to impose an ESG agenda on a company. Does this
    activity contribute, do you think, in any way to companies'
    reluctance to go public?
        Mr. Clayton. So, look, I think the answer to that question
    is do the decision makers who decide whether a company should
    go public or not, when they look at that kind of activity, is
    it a check mark in the negative box? Yes.
        Senator Toomey. OK. That is what I was getting at. Vanguard
    is headquartered in Pennsylvania. It is a great, great American
    success story, great innovative institution that has made
    investing affordable for millions of Main Street investors. But
    Jack Bogle, the founder, recently made an interesting
    observation. He warned, and I quote, ``If historical trends
    continue, a handful of giant institutional investors will one
    day hold voting control of virtually every large U.S.
    corporation.''
        Now, if the trend continues, which is Bogle's caveat,
    wouldn't that be a bad thing if a handful of institutional
    investors had voting control of virtually every large company
    in America?
        Mr. Clayton. The short answer to your question is yes. The
    broader answer is a continued reduction in the number of public
    companies has, I would say, negative effects--I believe has
    negative effects that go beyond just opportunities for Main
    Street investors to invest. A vibrant public capital market has
    a number of other benefits to our society.
        Senator Toomey. Yes, I mentioned some of them. I totally
    agree. But I do have this concern that we have this regime that
    is discouraging companies from going public, and when they do
    go public, we have got processes that may result in votes being
    cast that are not really well aligned with the interests of the
    investors.
        One thing just by point of clarification. Former SEC
    Commissioner Dan Gallagher was here just last week, and he
    reminded us that it is perfectly permissible under existing law
    and regulation for a fund manager to come to the conclusion
    that it is not in the best interest of their investor clients
    to be voting on every proxy matter. That is factually correct,
    right? It is not required to have those votes.
        Mr. Clayton. I saw former Commissioner Gallagher's
    testimony, and I think he described the staff position
    appropriately, yes.
        Senator Toomey. So one idea that has been floated as a way
    to increase the likelihood that when votes are cast they
    actually reflect the wishes of the investor who is the ultimate
    shareholder is client-directed voting. Do you have an opinion
    on the merits of that? And is it your view, are there any
    regulatory changes the SEC would need to make in order to
    facilitate client-directed voting?
        Mr. Clayton. So I do not have a specific opinion today on
    client-directed voting. On the core question of are the
    intermediaries, fund managers or others, voting shares in the
    interests of their clients, that is something that was the
    subject of our roundtables. It goes to the question of
    regulation of proxy advisers, and it is something that I intend
    for the Commission to continue to look at. And I think we can
    improve it.
        Senator Toomey. So you do not have an opinion on client-
    directed voting? Is that what I hear you saying?
        Mr. Clayton. I do not have one here today, Senator.
        Senator Toomey. That is something I would like to pursue
    with you.
        Mr. Clayton. Thank you.
        Chairman Crapo. Thank you, Senator Toomey. And before I
    move to Senator Reed, I would like to notify the Committee the
    vote has now been moved up to 11. I would like to finish by
    then. I want to congratulate Senator Brown for giving back a
    minute and a half and encourage everybody to really stay tight
    on your questions.
        Senator Reed.
        Senator Reed. So you want me to be short.
        Chairman Crapo. Yeah. See if you can beat my record. I gave
    2 minutes back.
        Senator Reed. I will try. Thank you, Mr. Chairman. Thank
    you, Chairman Clayton.
        Following up on some of the comments that Senator Brown
    made about share buybacks, not only is it difficult to look at
    GM buy back significant stock and then lay off thousands of
    workers, but your whole approach has been for the long-term
    Main Street investor. And one of the options that GM had was
    investing in innovation, investing in more sophisticated
    products, and effectively they chose not to do that. They gave
    the money back. So this issue of stock buybacks has several
    dimensions, one of which is not investing in the long-term
    future of the company. Is that something that concerns you? And
    is that something that the SEC can take steps to try to
    correct?
        Mr. Clayton. Senator Reed, I want to be clear about the
    SEC's authority. We do not have authority over capital
    allocation, over whether a company chooses to allocate its
    capital by distributing it to its shareholders or investing.
    But I agree with a number of observers that, in terms of how
    companies should communicate what they intend to do with their
    capital, we can do a better job around disclosure. So you
    have--what are your capital allocation decisions? Our
    disclosure rules are based on, I think, historic facts, plant,
    property, equipment, how am I going to spend my money on plant,
    property, and equipment? In today's economy, I think we should
    be driving disclosure more toward human capital, intellectual
    property, and the types of advantages we have from things like
    supply chain management, distribution management, and our
    relationships with other vendors. Those are the things that
    drive companies' value today, and I would like to see our
    disclosures evolve toward that.
        Senator Reed. But in terms of the SEC's role, as I
    understand it--and please correct me--36 years ago you could
    not have these stock buybacks under SEC rules. Is that----
        Mr. Clayton. I do not think that is correct. What happened
    36 years ago was the SEC said if you are going to buy back
    stock in the market, here is a way you can do it where, if your
    intent is not to manipulate--there is no safe harbor if you are
    trying to manipulate. But if your intent is not to manipulate
    and you do it this way, you can feel comfortable that the
    buyback is being done without subjecting you to a claim of
    manipulation.
        Senator Reed. Essentially what you did is provide a pathway
    to buyback which previously was considered somewhat risky
    because of the implications of inside information, of timing,
    of the self-aggrandizement by the CEOs. So you do have the
    authority to look at that rule again.
        Mr. Clayton. We do, but I just want to be clear what
    authority we have, which is the authority over whether to
    provide a pathway where you will not be--you will be presumed
    not to be manipulating the stock.
        Senator Reed. Well, again----
        Mr. Clayton. It is not prohibiting or allowing buybacks.
        Senator Reed. Again, I think given what we have seen, you
    have to go back and sort of reroute that pathway, not only for
    modernization and innovation, but also because the choice for
    many individuals, I presume--and if I was in that position, I
    would certainly be thinking of this--is if I do a stock
    buyback, my stock options suddenly are hugely beneficial to me,
    oh, and by the way, my pay based each year is on the value of
    the stock, so this could be nothing to do with the
    shareholders, nothing to do with the workers, nothing to do
    with the future of the company, but it is a very good payday
    for me. And that I think goes against, you know, the notion 36
    years ago of manipulation.
        Mr. Clayton. Let me say I agree that if the purpose of the
    buyback is to drive the price up for the benefit of an
    individual, that is a problematic situation. And I just want to
    say I would encourage compensation committees who set
    compensation and structure compensation to look at that issue.
        Senator Reed. Well, I have to give at least 20 seconds
    back, so I would encourage the SEC, not deferring to the
    compensation committees, which are not that rigorous in many
    cases, to take strong and appropriate action. Thank you.
        Mr. Clayton. Thank you.
        Senator Brown [presiding]. Good question. Good assertion.
        Senator Rounds.
        Senator Rounds. Thank you, and in the interest of following
    the Chairman's lead, I will ask just one question, and I will
    submit several for the record.
        In your written testimony, you discuss the impact of Brexit
    on the American markets. From a securities standpoint, I have
    been following how Brexit could complicate the ability of
    American clearinghouses to compete in the EU and the U.K.
    markets. For U.S. clearinghouses to operate in the EU, EU
    authorities must determine that U.S. regulatory regimes are
    equivalent to the EU's; otherwise, market participants would
    face higher capital charges for accessing American markets.
        Although the U.S. and the EU agreed that the CFTC's regime
    was equivalent in 2016, there has yet to be any determination
    for the SEC's regime. Progress in these areas is under threat
    thanks to Brexit and legislation pending in the European
    Parliament. If that legislation passes, large American clearing
    firms would only be allowed to continue operating in the EU if
    the EU regulators could jointly supervise them. Such
    legislation would violate the 2016 agreement, hurt American
    companies and taxpayers by making the market for U.S. Treasury
    bonds less liquid and increase the cost of trading derivatives
    for farmers and ranchers.
        My question is: Can you share your thoughts on the U.S.-EU
    clearinghouse issue? And do you foresee any other regulatory
    challenges associated with Brexit and clearing securities? And
    if so, how would we work to resolve them?
        Mr. Clayton. So, Senator, I think your premise described
    the issue very well. It is complicated. It requires
    international cooperation and recognition, and if we fail to
    identify what I will call a smooth path forward, there will be
    costs. I have made that clear, Chairman Giancarlo has made that
    clear to our European counterparts. I know that they recognize
    it. This is part of a broader issue. It is one of the reasons I
    am worried about Brexit--there are a number of issues just like
    the issue that you describe that seem to get kicked down the
    road as the broader issue unfolds.
        Senator Rounds. Do you see a format for resolving the
    issues?
        Mr. Clayton. Pursuing several. Pursuing several.
        Senator Rounds. Can you share any thoughts?
        Mr. Clayton. I think I should leave it at that out of
    respect for the international nature of the negotiations, but
    this is very much front of mind.
        Senator Rounds. Very good. Thank you. And I will yield back
    my 2 minutes and 8 seconds.
        Senator Brown. Thank you, Senator.
        Senator Menendez.
        Senator Menendez. Thank you. Can I take Senator Rounds' 2
    minutes and 8 seconds?
        [Laughter.]
        Senator Menendez. No. Mr. Chairman, thank you for being
    here. In your testimony, you state that you have made
    protecting Main Street investors a key guiding principle of
    your tenure at the SEC. So let me ask you, do you agree that
    Main Street investors were harmed by excessive risk taking on
    Wall Street in the years leading up to the financial crisis?
        Mr. Clayton. I do. I think that excessive risk taking in
    our markets--let me just say this: Excessive risk taking in our
    markets from my perspective is more likely to have an adverse
    effect on Main Street investors than just about any other class
    of people.
        Senator Menendez. I agree with you. Do you agree that pay
    practices at big banks and financial institutions have at times
    ignored long-term consequences in favor of rewarding risky
    behavior to make short-term gains?
        Mr. Clayton. I do not want to make a general statement
    about this, but what I will agree with you on this: I think
    that your concept is when you take someone's activity and you
    bring forward the benefits--so let us say I am working
    somewhere and I do something that is going to last for 5 years,
    and then I say to you, hey, over the 5 years this is going to
    make 100, so pay me based on 100 today--that type of incentive
    drives short-term behavior.
        Senator Menendez. Do you think Main Street investors might
    object to the fact that Wells Fargo CEO Tim Sloan was paid
    $17.4 million last year, the same year other regulators
    investigated and took actions on scandals relating to the
    bank's auto lending, mortgage lending, and investment
    management practices?
        Mr. Clayton. Senator, I am not going to comment about a
    specific institution here in this forum.
        Senator Menendez. Well, OK. So do you think Main Street
    investors might object to the fact that any CEO would be paid,
    you know, tens of millions of dollars after they faced all of
    those investigations and all of those consequences for
    fraudulent behavior at their institution?
        Mr. Clayton. I do think that investors in companies should
    have clear disclosure of what the senior executives of those
    companies are making, and they should have input through
    various engagement processes, including some of the processes
    that we have discussed here today.
        Senator Menendez. So with that in mind----
        Mr. Clayton. Senator, in a word--I am sorry. In a word,
    there should be accountability.
        Senator Menendez. Good. Why is it then that the Commission
    has not made it a priority to finish congressionally mandated
    rules to rein in pay practices that put Main Street investors
    at risk?
        Mr. Clayton. You are speaking about the Dodd-Frank mandates
    around pay practices, I believe.
        Senator Menendez. Yes.
        Mr. Clayton. Yes, I am aware of those. I keep track of the
    Dodd-Frank mandates. I am pursuing them, working with my fellow
    Commissioners. We proposed rules around some of those. We are
    reviewing the comments. We received a number of comments. Some
    of them raised very significant issues.
        Senator Menendez. Can you give me a timeframe in which you
    would expect the Commission actually to be able to promulgate
    rules in this regard?
        Mr. Clayton. I have the hedging rule on our near-term
    agenda. I expect that in the near term. The others I cannot be
    as precise.
        Senator Menendez. Well, let me just say that if we agree in
    principle that runaway executive pay which rewards risk taking
    can be harmful to investors and you have a mandate from
    Congress to do something about it, it just seems to me that
    this should be a priority. It falls right in line with your
    Main Street investor priorities, so I hope you will make it
    such at the end of the day, and I hope the next time you come
    before the Committee, we will have rules promulgated.
        Let me ask you one other question. I read your statement
    issued on Friday regarding the SEC's difficulties assessing
    information about Chinese companies that are listed on U.S.
    exchanges. There are 224 companies listed on U.S. exchanges
    with a combined market capitalization of $1.8 trillion that are
    located in countries, primarily China, that make it difficult
    for U.S. regulators to review their financial reporting. This
    presents a major risk to U.S. investors who may assume that the
    financial reporting of these companies is in line with U.S.
    requirements. Moreover, it is fundamentally unfair for Chinese
    companies to take advantage of the strength and liquidity of
    U.S. capital markets but do not have to play by the rules.
        The U.S.-China Economic and Security Review Commission
    recommended that Congress consider legislation providing
    authority to ban and de-list companies that have refused to
    sign reciprocity agreements with the Public Company Accounting
    Oversight Board. Despite the SEC and the Board's best efforts
    to reach an agreement, it appears unlikely that Beijing will
    cooperate.
        Would such authority strengthen your hand in negotiations
    with your Chinese counterparts?
        Mr. Clayton. Let me say this, Senator: I think your
    characterization of where we are, where there are information
    barriers to us receiving what I would say is the same
    information and the PCAOB receiving the same information that
    we would expect to receive in other jurisdictions that exist
    today, yes. Are we working through those? Yes. I am not
    prepared to support a specific remedial action in this forum,
    but we need to make progress.
        Senator Menendez. I will just close with this. We cannot
    continue this process, $1.8 trillion, investors under your own
    previous statement about our other line of questions about
    transparency, should have transparency to know that these
    companies are living up to the standards for which investors
    rely upon to make investment decisions.
        Mr. Clayton. And that transparency is why we put the
    statement out. People should know where we sit today and know
    that we need to improve.
        Senator Menendez. Yeah, but all I will say is that we do
    not know exactly what their accountability is. We just know
    that there is an accountability. So at the end of the day, you
    should--I would hope the Commission would embrace us giving you
    the tools to get the Chinese and other companies similarly
    situated to disclose.
        Thank you, Mr. Chairman.
        Senator Brown. Senator Kennedy.
        Senator Kennedy. Mr. Chairman, thanks for being here. I
    think you are doing a great job.
        Mr. Chairman, would you buy a bond issued by a State if you
    did not know whether they were broke or not?
        Mr. Clayton. No, I would not.
        Senator Kennedy. OK. I read you gave a speech recently. I
    was reading it the other night. It was very good. One of your
    statistics says the issuers in States, municipalities, et
    cetera, who file either annual financial information or audited
    financial statements within 12 months of their fiscal year do
    so on an average of 188 and 200 days after the end of the
    fiscal year. So their financial statements are between 188 and
    200 days left. Why is MSRB allowing that to happen? Are they
    doing anything over there other than standing around and
    sucking on their teeth?
        Mr. Clayton. What I will say is this--the reason I gave
    that speech is I think this is an area that needs to improve.
    The first step in improving it is to make sure that investors
    understand that the financial statements they are looking at in
    some cases are 18 months old.
        Senator Kennedy. Yeah, well, let me----
        Mr. Clayton. That is pretty old.
        Senator Kennedy. Let us suppose that you are an individual
    investor and you want to research the bonds. Aside from the
    fact MSRB, which is supposed to regulate themselves, you want
    some information about the bond issue or about the State. Are
    you aware MSRB charges 60,000 bucks to download bulk data?
        Mr. Clayton. Actually, I was not aware of that, Senator.
        Senator Kennedy. Would you look into that for me?
        Mr. Clayton. I would be happy to.
        Senator Kennedy. OK. Do you need disgorgement of ill-gotten
    gains to do your job?
        Mr. Clayton. I think you are referring to the effects of
    the Kokesh Supreme Court decision.
        Senator Kennedy. Yes.
        Mr. Clayton. I believe that the Kokesh Supreme Court
    decision--we need some help. We need some help, because what it
    did was it said basically Ponzi schemes and other types of
    frauds like that that go on beyond 5 years, we are not able to
    reach back and get the money back for people who were a victim
    of those schemes, because disgorgement was viewed in that case
    as a penalty subject to the 5-year statute of limitations.
        Senator Kennedy. And you do not have that authority now?
        Mr. Clayton. We do not have the authority in those----
        Senator Kennedy. Only Congress can give you that authority.
        Mr. Clayton. I am not going be a lawyer here, but yes.
        Senator Kennedy. OK. Let me ask you one final question. Are
    you familiar with the Stanford case where Allen Stanford stole
    $7.2 billion in a Ponzi scheme from about 21,000 people?
        Mr. Clayton. Yes.
        Senator Kennedy. OK. Well, we are doing great getting the
    money back from Bernie Madoff and his people. We have collected
    over 75 cents on the dollar. We are not doing as well with
    Stanford. We have clawed back $431 million, and the lawyers
    took $226 million.
        SEC took a position to oppose a motion to eliminate the
    restriction to file involuntary bankruptcy which will help the
    people get their money back. Why did the SEC do that? And would
    you reconsider? I know I am catching you cold. Just trust me.
    It would be a good idea.
        [Laughter.]
        Mr. Clayton. How about I say I trust you?
        Senator Kennedy. OK. I am going to yield back 1 minute and
    17 seconds, Mr. Chairman.
        Chairman Crapo [presiding]. Thank you, Senator Kennedy.
        Before I go on, for some of those who have just arrived, we
    have a vote at 11 o'clock, and I am encouraging all Members to
    shrink down their questioning. Three of them have given back a
    minute or two--counting me, four of them have given back a
    minute or two. So you do not have to, but please help us get
    there.
        Senator Warren.
        Senator Warren. Thank you, Mr. Chairman. It is good to see
    you again, Chairman Clayton.
        As you know, right now investment advisers are subject to
    what is called a fiduciary standard. That means they are
    legally required to put the financial interests of their
    clients ahead of their own interests.
        Brokers who get a commission for every trade that they make
    follow different rules, and, in fact, they can recommend a
    product that boosts their own commission even if it is not the
    best deal for the customer. And we also know that brokerage
    firms artificially create all sorts of perverse incentives to
    encourage brokers to make certain recommendations that are very
    profitable for the firm or for the broker, even if they are not
    real good for the customers. So that is a problem, and in
    April, the SEC proposed some new rules for brokers.
        Now, Mr. Clayton, as you have told me before, the idea
    behind these new rules is to help regular retail investors--you
    like to call them ``Mr. and Mrs. 401(k)''--to make informed
    choices, right?
        Mr. Clayton. That is one component of it. There are several
    components of the rules.
        Senator Warren. OK, but it is trying to help investors make
    informed choices, right? That is what this is about.
        Mr. Clayton. Absolutely.
        Senator Warren. OK. So one option would simply be to make
    brokers subject to the same fiduciary standard that investment
    advisers are subject to, but you did not do that. Instead, the
    SEC's proposal says that brokers have to act in the best
    interests of the client, but then you never define what ``best
    interest'' actually means.
        So here is where I am stuck. For the proposal to help
    customers make good decisions, they need first to understand
    the difference between a broker and an investment adviser; and,
    second, how the fiduciary standard for investment advisers is
    different from the best interest standard for brokers, which is
    something you do not define. Do I have that right so far?
        Mr. Clayton. I do not think so. I think we are pretty clear
    on what the best interest standards--and we are going to be
    clear on----
        Senator Warren. You are saying you do define it in the
    rules?
        Mr. Clayton. The best interest standard as we have proposed
    means that you as a----
        Senator Warren. I am sorry. Is it defined in the rules?
        Mr. Clayton. Is there a specific definition that says this
    is what it means? No. But there is no specific definition that
    says this is what the investment adviser standard means.
        Senator Warren. So I just want to be clear then. Anybody
    who is trying to figure this out first has to figure out do you
    have a broker or an investment adviser, and then, second, they
    have to figure out, depending on which one you have, what the
    difference is between the fiduciary rule and the best interest
    test. Is that right? Otherwise, you cannot----
        Mr. Clayton. Almost, because you also have to understand
    the relationship. You have got it right, but there are three
    components to it. The adviser relationship, the reason it is
    important to understand who you are dealing with, whether it is
    a broker or an adviser, is the adviser relationship is a
    portfolio relationship.
        Senator Warren. OK. You have got two, and you are just
    telling me it is even more complex than that. All I want to get
    to----
        Mr. Clayton. That is where we sit today.
        Senator Warren. ----you cannot start--I know. And we could
    have fixed that by just giving everybody the same rule, but we
    did not. So here is the question: You have got to start with
    the difference between an investment adviser and a broker. The
    SEC has done a study on this, and your own data show that a lot
    of investors have no idea what the difference between brokers
    and investment advisers is and the legal standards that are
    different for each of them. Your Office of the Investor
    Advocate commissioned a study of whether investors could figure
    out these differences based on the standard disclosures that
    you gave them, and the bottom line was they cannot.
        I do not have time to go through every example in the
    study, but I picked one out. One participant told an
    interviewer, after reading side-by-side descriptions of the
    best interests and the fiduciary standards, ``I do not know. It
    is basically the same language, but the same, they just kind of
    word it differently. Yeah, so it is pretty much the same.''
        But, of course, the standards are not the same, which is
    the whole point here. When your own study shows that
    disclosures do not work to help regular investors make informed
    decisions, will you move away from a disclosure-based approach
    in your final rule and just adopt a uniform fiduciary standard
    for both advisers and brokers as Congress instructed in Section
    913 of Dodd-Frank?
        Mr. Clayton. That is a good summary of where we are.
        Senator Warren. Good. Thank you.
        Mr. Clayton. Let me tell you what we are doing. It is very
    good. Let me tell you what we are doing. The adviser standard--
    and I am going to call it the baseline adviser standard because
    advisers are allowed to contract around this standard. It is
    not well known. This is something that we want people to
    understand. The baseline adviser standard is the adviser cannot
    put their interests ahead of the client's interests. Now, they
    are able to say, you know, but I am going to do these things,
    and within informed consent they can cut back on that standard.
    That is not well understood. We want that to be understood. But
    on the broker side, the fundamental duty is going to be that
    the broker cannot put her or his interests ahead of the
    client's. So it is the same, but it is a different----
        Senator Warren. Well, if it is the same----
        Mr. Clayton. ----type of relationship.
        Senator Warren. Let me suggest, Mr. Chairman, if it is the
    same, just use the same words.
        Mr. Clayton. We may do that.
        Senator Warren. Because when you are not using the same
    words and, in fact, trying to give a description so that people
    have to sort out which of the two kinds of people they are
    dealing with and how the standards differ from each other, it
    means the disclosure is not working.
        Look, we have had study after study after study that shows
    that pages of disclosures do not work. And even if people read
    the disclosures, they cannot make heads nor tails from it. Now
    your own study reaches exactly the same conclusion. You know,
    the inference I draw from this is that we need a clear, uniform
    fiduciary standard for advisers and brokers. It is the only way
    to make sure that people who are trying to save for their kids'
    college education or their retirement are getting the advice
    that is best for them, instead of what is most profitable for
    the person giving the advice.
        Mr. Clayton. I believe--oh, sorry.
        Senator Warren. OK.
        Chairman Crapo. We need to shut it down.
        Senator Warren. Thank you, Mr. Chairman.
        Mr. Clayton. OK. Thank you.
        Chairman Crapo. Senator Corker.
        Senator Brown. I just want to thank Senators Donnelly and
    Corker for their service on this Committee, so thank you, Joe,
    very much.
        Chairman Crapo. And I join in that.
        Senator Corker. Thank you. It has been a great privilege.
    It really has.
        I am going to be very brief and defer to Senator Cotton
    because I know the Chairman and Ranking Member want to have
    this end at an appropriate time, and we have got a lot of other
    things happening. I have had the opportunity to get to know our
    Chairman, both prior to him being confirmed and throughout the
    process. I just want to say I am really proud of what he is
    trying to do at the SEC. I am proud of his leadership. I know
    that he is acting in an independent manner, which I appreciate
    very much, and I wish him well as he continues, and all those
    on the Committee as you continue to wrestle with issues
    relative to our financial system.
        And with that, thank you, and I will defer to Cotton.
        Chairman Crapo. Thank you.
        Senator Cotton.
        Senator Cotton. Did not know we get to work that way. Thank
    you, Senator Corker.
        Chairman Clayton, I want to discuss with you the SEC gag
    rule on settlements. It was addressed in a Wall Street Journal
    opinion piece on November 14th. Here is how Judge Jed Rakoff
    from the Southern District referred to them in 2011: ``The
    result is a stew of confusion and hypocrisy unworthy of such a
    proud agency as the SEC. The defendant is free to proclaim that
    he has never remotely admitted the terrible wrongs alleged by
    the SEC, but by gosh, he had better be careful not to deny them
    either. Here an agency of the United States is saying, in
    effect, although we claim that these defendants have done
    terrible things, they refuse to admit it, and we do not propose
    to prove it, but will simply resort to gagging their right to
    deny it. The disservice to the public inherent in such a
    practice is palpable.''
        Would you explain to the Committee what public interest the
    gag order on discussing settlements with the Commission serves?
        Mr. Clayton. It has been an effective means to reach a
    settlement that is in the interests of the public. Let me just
    say that if we can settle matters quickly, we can move on to
    look at other matters. And the no-admit/no-deny approach has
    enabled us to get to settlements, to get people their money
    back, get bad actors out of the marketplace, and draw a line
    under that matter. So it has been an effective means of
    pursuing remedies.
        Senator Cotton. One might also say it allows a company and
    an agency who have both failed in a particular matter to
    conceal that failure from the public as well.
        Mr. Clayton. It is not the right approach in every matter.
        Senator Cotton. So there is a wrinkle in the roll that says
    if a defendant who has reached a settlement and is under one of
    these orders testifies in a court of law that he is no longer
    bound by that gag order, which implies that the gag order might
    require him to say something untruthful, what are your thoughts
    on that wrinkle?
        Mr. Clayton. I think that is a--how would I say this? It is
    a result of the unique nature of testifying in those types of
    situations.
        Senator Cotton. So it is OK to have defendants who have
    reached a settlement with the SEC to say things to the public
    that might be untruthful but not to say them in court? We are
    talking about a prior restraint on speech that is also content-
    based, the most disfavored kind of regulations under Supreme
    Court First Amendment precedent. They require a compelling
    Government interest in the most narrowly tailored means.
        Mr. Clayton. Look, we all know that the First Amendment,
    you know, does not permit all speech without sanction. You
    cannot commit fraud, you know, using words. I think this was
    developed in part to restrict somebody who had done prior wrong
    or we think had done prior wrong from telling people, ``Pay no
    attention to that.'' And when you are dealing with somebody in
    the securities industry, their history is something that is of
    relevance.
        Senator Cotton. Well, they can say that they did not commit
    what was alleged against them. They just cannot deny the
    allegations that were made. I know this is not a Jay Clayton
    initiative. It goes back since before I was born, but it has
    come under criticism for a very long time. I mean, do you think
    that this gag order has First Amendment problems? You
    personally.
        Mr. Clayton. Me personally? I think that we have a long
    history of people agreeing to restrict certain things that they
    can say in the commercial arena.
        Senator Cotton. OK. My time has almost expired. Thanks for
    the exchange. I think the SEC probably----
        Mr. Clayton. I did not know this was going to be a con law
    class. I am struggling.
        Senator Cotton. I think the SEC should probably reconsider
    it. I mean, it was passed at a time in 1972 when First
    Amendment precedent was much different and, frankly, more
    favorable to the Government than it probably should have been.
    I understand the points that you are making about public
    interest, but I do think it is quite overbroad. It is not at
    all narrowly tailored anymore, and it can undermine other
    legitimate public interest.
        Mr. Clayton. I understand.
        Senator Cotton. Thank you, Mr. Clayton.
        Mr. Clayton. Thank you.
        Chairman Crapo. Senator Van Hollen.
        Senator Van Hollen. Thank you, Mr. Chairman. Welcome, Mr.
    Chairman.
        I want to pursue some of the questions Senator Reed had on
    stock buybacks because the claim that many made at the time
    that the big tax cut was passed was that companies were going
    to use all this extra money that they got from their tax cuts
    to invest in more plant and equipment and wages increasing for
    their workers. And the evidence is overwhelming that, in fact,
    they are using that money for stock buybacks. We are up to $800
    billion in stock buybacks today since the passage of the bill.
        Now, we can all debate the merits of a stock buyback, but
    as I understand your testimony, you agree that if executives
    are using stock buybacks to elevate the price of their stock
    and then quickly cash out their own compensation, that would be
    a problem from your perspective. Am I understanding you
    correctly?
        Mr. Clayton. Let me be clear on what I said. Senator Reed
    and also others said, you know, if the motivation is driven by
    a compensation scheme, I think that is something----
        Senator Van Hollen. So let me ask you this----
        Mr. Clayton. I think that is something compensation
    committees ought to----
        Senator Van Hollen. Well, let me ask you this: So there is
    mounting evidence that executives are cashing out more
    frequently after a stock buyback than before. Well, I mean,
    there has been evidence that, in fact, twice as many companies
    have insider selling in the 8 days after a buyback announcement
    as sell on an ordinary day. Would that trouble you if that was
    a pattern?
        Mr. Clayton. I saw that stat, and it is kind of
    interesting. The question there is: Are the announcements
    coincident for the window where they are actually permitted to
    sell their stock? So, you know, I think a little more work
    needs to be done on that. So if the only time you can sell as
    an executive is right after earnings are announced, which is
    most--then if you needed to sell as part of your planning, it
    is going to be coincident----
        Senator Van Hollen. I just--it is possible the data is
    wrong, but if the data is correct----
        Mr. Clayton. No, I think the data are correct.
        Senator Van Hollen. ----you are finding though--but those--
    in other words, if it is happening a lot more frequently in
    this period in the 8 days after stock buybacks, I think that
    would be a problem. But let me just ask you this: Would you be
    willing to host a roundtable discussion to look into this
    issue?
        Mr. Clayton. Let me say this: I am happy to continue to
    discuss this issue. I do not want to commit to a roundtable,
    but the SEC's role in this is clearly something that people are
    focused on. I want to be as clear as I can about what our role
    is, so I am happy to continue the conversation to bring
    clarity----
        Senator Van Hollen. But I understood--and a number of us
    wrote you a letter on this. I understand your position with
    respect to decisions that have to be made by corporations for
    the benefit of their shareholders. But what we appear to be
    seeing is a pattern where more executives are cashing out when
    they have had stock buybacks, which boosts the price. And that
    would be decisions made for their own benefit as opposed to the
    stockholders. So I would like to pursue this----
        Mr. Clayton. I would be happy to.
        Senator Van Hollen. ----because you have, as you know,
    hosted a roundtable on something which I think is a lot less of
    a priority, which is proxy shareholding. And, you know, where
    you have chosen to focus your efforts I think is a little bit
    troublesome. But let me just ask you this on shareholder
    voting, proxy shareholder voting, because we had an earlier
    hearing on this, and I mentioned a statement from T. Rowe
    Price, which is a Maryland-based company, that is on both sides
    of the shareholder proxy issue. They are an institutional
    client to proxy advisory firms, but they are also an issuer
    where others use proxies to decide whether to purchase--how to
    cast their votes with respect to T. Rowe Price. And what they
    say very clearly in this letter is that they think that the
    requirements that proxy firms run their advice or proposals or
    concerns through the corporations first would actually
    significantly diminish the value of that advice to T. Rowe
    Price.
        Do you agree that we should not be dictating to the market
    that these proxy advisers have to somehow show the executives
    or the corporations their information before they give it to
    the clients who are paying for it?
        Mr. Clayton. So I am certainly not wedded to that method of
    improving the process. There is an issue in the process, which
    is the proxy advisory firm comes out with their analysis, and
    the company wants to respond, and you have to look all over the
    place. It would be nice if you could see the responses side by
    side, or something else like that. But I am not wedded to
    running it through the company before it is published.
        Senator Van Hollen. OK. I just find it curious. We have had
    people advocating here that a firm like T. Rowe Price just does
    not know what it is doing and it needs this extra step in order
    to make good decisions.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you. We have 10 minutes left in the
    vote. I will be glad to recess and come back for those that
    want 5 minutes, but I understand that a number of you are
    willing to avoid that by just going a couple of minutes.
        Senator Moran. Mr. Chairman, I will ask just one question.
        Chairman Crapo. OK. Go ahead.
        Senator Moran. Chairman Clayton, thank you for being here.
    The Consolidated Audit Trail will be the second largest
    database in the world, and it will be a repository for both
    personally identifiable information and sensitive trade data.
    As such, the CAT will be a major target for cybercriminals and
    other bad actors. Broker-dealers will be required to report
    consumers' personally identifiable information to the CAT and
    then rely upon the security measures set up by CAT operators.
        What is the SEC doing to require that CAT operators will
    provide prompt and accurate notification of a data breach? And
    how will the SEC assure that broker-dealers are not held liable
    by their customers for data breaches caused by the CAT?
        Mr. Clayton. What I can tell you, Senator, is I think all
    three significant issues in your question are things we are
    focusing on, including whether retail customer PII is actually
    going to go into the CAT or whether we are going to do
    something, a ``hashing'' is the technical term, and that is
    about as much as I know about hashing, to ensure that the data
    that goes into the CAT is not PII for those retail investors.
    And in terms of issues around liability, I am not going to
    speak about who owes what to whom and what the law applies, but
    we are sensitive to those issues.
        Senator Moran. With the time constraints, perhaps we can
    have this conversation in my office or your office as well.
        Mr. Clayton. Happy to.
        Senator Moran. Thank you, Mr. Chairman.
        Mr. Clayton. Thank you.
        Chairman Crapo. Thanks, Senator Moran.
        Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman. Thank you,
    Chairman, for being here.
        I want to follow up on a conversation we had just about a
    year ago. The SEC issued guidance in 2010 on climate risk. Many
    in the investment community like BlackRock and Bloomberg have
    called these disclosures inadequate. Currently, less than half
    of America's largest companies even make these disclosures. In
    October, a group of investors representing $5 trillion in
    assets, 15 leading securities law professors sent a petition to
    the SEC arguing that improved disclosure rules would increase
    market efficiency and that the SEC has the authority to issue
    such rules.
        Yesterday a group of 415 investors that represent $32
    trillion in assets wrote that Governments need to act on
    climate change, and they specifically say it is vital that
    Governments commit to improve climate-related financial
    reporting standards.
        I thought we had a good conversation about this. I thought
    you expressed a willingness to work on this. I have seen no
    evidence that you are working on this, and what little evidence
    I have seen goes to the contrary in terms of the shareholder
    proposals which are putatively not about climate; it is just
    that every example given in raising thresholds for shareholder
    action is about climate.
        So what are you going to do to make sure that publicly
    traded companies disclose climate risk?
        Mr. Clayton. So our Division of Corporation Finance, which
    reviews public company filings, this is one of the issues that
    they are reviewing filings for. They make company-specific
    comments, ask company-specific questions. We are doing that. I
    have been in discussions with our head of Corp. Fin., Bill
    Hinman, about whether we should do more, what that would be.
        Senator Schatz. They are sandbagging, and I will leave it
    there. We will follow up for the record, and I would like a
    meeting in person. I understand that they are working in good
    faith, but they view this as an ideological question, and 8
    years later, this is very clearly an issue of economics. And
    there was a point at which you could say, well, you know, we
    cannot measure this, we cannot know this, this is not short
    term. None of that is true anymore. All of this is proveably an
    economic question, and in the interest of time--I do not mean
    to cut you off--I will yield back.
        Chairman Crapo. Senator Cortez Masto.
        Senator Cortez Masto. Thank you. Chairman, it is good to
    see you again. I want to jump back to the best interest
    standard that you were talking with Senator Elizabeth Warren
    about. First of all, I supported the Department of Labor's
    fiduciary standard, and if you do not know, Nevada is the
    first, I think, State in the country that passed a State
    statute for a fiduciary requirement for broker-dealers. I am
    curious with respect to the proposed regulation that was just
    introduced by the SEC. Under that proposed regulation, can
    brokers create sales incentives for recommending certain
    products to its customers, to their customers?
        Mr. Clayton. The short answer to your question is some
    sales incentives, like growing assets under management or total
    assets, you would think you would compensate somebody for
    bringing in new customers and growing assets just like happens
    in the investment advisory space. But there are some activities
    like that that I believe--and I am speaking for myself, not for
    the Commission--That I believe are inconsistent with--not
    putting your interests ahead of the client's. High-pressure
    products, specific sales contests, I have been clear, they do
    not work for me. Get this out the door.
        Senator Cortez Masto. And I agree with you because--in the
    interest of time, I agree with you, but isn't it true that just
    any incentive works against the best interest of the client?
        Mr. Clayton. Well, I do not think so because if what you
    are doing is saying to a broker, ``Hey, if you now have $100
    million, for example, and you grow it to $200 million, you
    should make more money.'' I think that is OK. That is the way
    the investment advisory firm works. If you are managing a
    pension plan for someone and you get another pension plan to
    manage, you may get paid more. I think that is OK.
        Senator Cortez Masto. OK. Let me ask you this: Does the
    proposal--can brokers create bonuses for recommending certain
    products to customers under this proposal?
        Mr. Clayton. I think it depends on the structure.
        Senator Cortez Masto. Again, there is another opportunity
    for somebody to make money that really, in reality, they are
    supposed to be looking at the best interest of the client, but
    there is now an incentive for them to make money. And I have
    always found--and I was a former Attorney General--that when
    you put those incentives there, it really erodes looking out
    for the best interest of the client, and that is my concern.
        So let me jump to one final thing because in the
    conversation with Senator Warren, you talked about the
    potential--did I hear you correctly that when she talked about
    defining the best interest standard and looking out for that
    fiduciary relationship, you said that this proposal may use the
    same words for defining a fiduciary? Is that correct? What did
    you mean by that?
        Mr. Clayton. What I mean is what I just said to you, that
    the bedrock principle is that I cannot put my interests ahead
    of my client's interests.
        Senator Cortez Masto. But that to me is pretty clear, and
    so that means no bonus, no incentive, nothing should be looking
    out for your own interests over somebody else's. That is my
    concern.
        Mr. Clayton. They have to get paid.
        Senator Cortez Masto. Well, that is different. That is
    different.
        Mr. Clayton. And I have engaged a lot with investors around
    this just to hear what they think, and they recognize that
    people should get paid. What they do not want are hidden
    incentives or incentives that are clearly inconsistent with
    making a recommendation that is in the interest of the client.
        Senator Cortez Masto. OK. In the interest of time, I
    appreciate you coming here today. Thank you.
        Mr. Clayton. Thank you.
        Chairman Crapo. Senator Jones.
        Senator Jones. Thank you, Mr. Chairman. Chairman Clayton,
    thank you for coming today.
        Real quickly, you have been outspoken about the need for
    disclosures for companies that face unpredictable risk, such as
    Brexit, which seems to be becoming more unpredictable by the
    hour. Cybersecurity is also another one. Recently, the SEC
    issued guidance on cybersecurity disclosures, and I am hoping
    that the SEC does not lose focus.
        What I want to ask you, there were a couple of your
    colleagues that thought that the guidance did not quite go far
    enough, and I am just wondering if you could talk briefly about
    what you are seeing from companies after the guidance was
    issued and if there are other improvements for these
    disclosures that you think might be prudent going forward.
        Mr. Clayton. I have discussed those issues with my
    colleagues and understand--I think that they understand how
    difficult it would be to be more precise. For a long time, I
    thought that disclosure was not where it should be in terms of
    what the real risk was. I think we have seen improvement. We
    have seen improvement in, OK, here is the general risk, and we
    have seen some improvement in reporting when you have an issue.
    And when I say the general risk, how that general risk applies
    to your company. I would like to see more disclosure around
    what companies are doing to minimize that risk. Are we
    collecting less data? Are we looking at how we operate our
    business so that, you know, you are less susceptible and are
    now not just looking inside the company, but looking at your
    vendors and suppliers and data that comes in from the outside
    that, if corrupted, creates a risk for you. It is increasing in
    terms of sophistication, but we have a ways to go.
        Senator Jones. This can be just yes or no. I am assuming it
    is a work in progress for the SEC.
        Mr. Clayton. This is a work in progress for our economy.
        Senator Jones. OK. That is all. Thank you, Mr. Chairman.
    Thank you, Chairman Clayton.
        Mr. Clayton. Thank you.
        Chairman Crapo. Thank you, Senator Jones.
        That does wrap up the questioning. Thank you for being here
    today, Mr. Chairman. We appreciate the work that you are doing.
        For Senators who wish to submit questions for the record,
    those questions are due on Tuesday, December 18th, and I
    encourage you, Mr. Chairman, to respond to them promptly.
        This is our last hearing for this Congress. We have had a
    lot of productive hearings, and I thank all of our Senators for
    making that happen. I especially want to, as has already been
    done, thank Senators Corker, Heller, Heitkamp, and Donnelly for
    all the work they have done on this Committee. We will miss
    them.
        With that, this hearing is adjourned.
        [Whereupon, at 11:16 a.m., the hearing was adjourned.]
        [Prepared statements and responses to written questions
    supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        Today we will receive testimony from Securities and Exchange
    Commission Chairman Jay Clayton regarding the work and agenda of the
    SEC.
        Your appearance before the Committee is essential to our oversight
    of the SEC. I thank you for your willingness to testify today.
        The SEC has a critical mission to protect investors; maintain fair,
    orderly, and efficient markets; facilitate capital formation; and
    enforce securities laws.
        The SEC plays an important role in public confidence and trust in
    our Nation's capital markets.
        It provides information to investors to ensure that as Americans
    prepare for their futures, they have the information necessary to make
    informed investment decisions.
        I commend the SEC for its continued work to advance these missions.
        Last week, this Committee held a hearing to discuss the appropriate
    role of proxy advisory firms, the shareholder proposal process and the
    level of retail shareholder participation.
        Many Members expressed interest in continuing the discussion on the
    appropriate relationship between proxy advisory firms and market
    participants as it relates to shareholder proposals and corporate
    governance.
        I am concerned about the misuse of the proxy voting process and
    other aspects of corporate governance to prioritize environmental,
    social, or political agendas over the economic interests of end-
    investors.
        Last week, you stated your intent to address aspects of our proxy
    system, including proxy ``plumbing,'' ownership, and resubmission
    thresholds for shareholder proposals and proxy advisory firms.
        Many of the rules governing our proxy system have not been examined
    for decades, and I encourage the SEC to take an aggressive approach
    assessing the scope and appropriateness of previous regulatory actions.
        Capital markets are vital to facilitating job growth and expanding
    American investment opportunities.
        This Committee worked hard in the 115th Congress to pass a number
    of bipartisan securities and capital formation bills.
        I will continue to work with Members to identify additional
    legislative proposals that encourage capital formation, and reduce
    burdens for small businesses and communities.
        The SEC has also taken a number of steps this year to make it
    easier for emerging companies to go public while not discouraging the
    availability of capital in the private market.
        Additionally, this year the SEC proposed Regulation Best Interest
    and a related interpretation to establish standards of conduct for
    broker-dealers and investment advisers. This is a significant step
    forward, and I look forward to seeing a final rule in the near term.
        Finally, the SEC has been proactive in addressing cryptocurrencies
    and coin offerings.
        For example, the Enforcement Division created a new Cyber Unit this
    year, which led efforts to counter fraud against retail investors
    involved in initial coin offerings and brought charges against a
    bitcoin-denominated platform operating as an unregistered securities
    exchange.
        I look forward to receiving updates on these and other SEC
    initiatives, including your views on when we can expect final rules in
    these areas.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        Thank you Chairman Crapo, and welcome to Chair Clayton.
        As I believe this will be the last Banking Committee hearing for
    this Congress, I would like to express my thanks and appreciation for
    the work of Senators Heitkamp, Donnelly, Corker, and Heller over the
    years.
        Chair Clayton, we've discussed the SEC's enforcement program in
    previous hearings and in our recent meeting. As you've highlighted, the
    SEC has worked hard to return money to harmed investors. I agree that
    is an important goal, but enforcement can't begin and end with
    protecting wealthy investors.
        Ten years ago today, Bernie Madoff was arrested and his giant Ponzi
    scheme was exposed. There's no doubt that Ponzi schemes still exist,
    and your enforcement report shows the SEC is focused on finding them
    and punishing the wrongdoers.
        But, we also know that a decade ago, Bernie Madoff was far from the
    biggest threat to most families. It was Wall Street firms that had just
    wrecked our economy. And just as the SEC will continue to pursue Ponzi
    schemes, it must also continue to pursue complex cases against the big
    banks when they break the rules and threaten families' homes and
    savings.
        The big banks have not turned into angels over the past 10 years.
    Last month, German authorities conducted a 2-day raid of Deutsche
    Bank's headquarters in a money laundering and tax evasion
    investigation.
        Last year, both the Federal Reserve and New York State regulators
    imposed fines totaling more than five hundred million dollars on
    Deutsche Bank's U.S. entity, for anti- money-laundering violations. And
    Deutsche Bank is not alone--similar problems persist at other banks.
        Looking at your strategic plan, I frankly see a lot missing--
    there's nothing about stock buybacks, and nothing about excessive
    corporate debt.
        Take a look at what has happened since the Republican tax overhaul.
    Since last year, corporations have announced more than one trillion
    dollars in stock buybacks.
        To take one example, GM has spent more than 10 billion dollars on
    stock buybacks since 2015, and last month it announced it's laying off
    14,000 workers and closing five plants, including the Chevy Cruze plant
    in Lordstown, Ohio. At the same time, it's expanding production in
    Mexico.
        The priorities of these corporations are clear--buying back shares
    can boost a company's stock price, which can mean even bigger bonuses
    for corporate executives. Investing in a company's workers supports the
    long-term health of the company--but that's not what Wall Street
    rewards.
        But there's nothing intrinsic to our economy about stock buybacks.
    The SEC rule facilitating buybacks was adopted 36 years ago, and since
    then, the use, size, and frequency of stock buybacks has increased
    dramatically.
        My colleagues and I have asked you to take a hard look at that
    rule.
        It is time to question whether it is too easy for companies to buy
    back their shares. The GM case shows us the risks to workers and
    communities when companies think only about short-term profits.
        We should also be looking at the record levels of risky corporate
    debt and leveraged loans, and how that debt is packaged into
    collateralized loan obligations--the complex securities that allow
    investors to trade pools of loans.
        The Federal Reserve and the OCC are looking at banks' exposure to
    leveraged loans, but they say the risks are manageable and they are not
    worried.
        We've heard that one before--it was a little over 10 years ago,
    before the economy came crashing down.
        Leveraged lending and CLO investors include hedge funds, mutual
    funds, and other market participants under SEC oversight. As the shadow
    banking market plays a larger role in leveraged lending, watchdogs
    can't just focus on the big banks.
        It's your job to worry when it seems like there is nothing to worry
    about. That's what consumers and investors expect, so that risks don't
    build up across the financial system.
        The SEC needs to be closely watching this market--not just to make
    sure disclosures and credit ratings are adequate, but to complement the
    work of the banking regulators. We know the financial system has become
    more interconnected and that systemic risks are more likely.
        Main Street cannot afford for you to stand by watching Wall Street
    greed grow out of control. And any ``strategic plan'' for any agency
    guiding our economy needs to focus on the American workers who drive
    growth--not just wealthy investors.
        Thank you Mr. Chairman.
                                     ______

                       PREPARED STATEMENT OF JAY CLAYTON
               Chairman, U.S. Securities and Exchange Commission
                               December 11, 2018
        Chairman Crapo, Ranking Member Brown, and Senators of the
    Committee, thank you for the opportunity to testify before you today
    about the work of the U.S. Securities and Exchange Commission (SEC or
    Commission or Agency). Chairing the Commission is a great privilege,
    and I am fortunate to be able to observe firsthand the incredible work
    done by the agency's almost 4,500 dedicated staff, approximately 41
    percent of whom are outside of Washington, DC, in our 11 regional
    offices. \1\
    ---------------------------------------------------------------------------
         \1\ The views expressed in this testimony are those of the
    Chairman of the U.S. Securities and Exchange Commission and do not
    necessarily represent the views of the President, the full Commission,
    or any Commissioner.
    ---------------------------------------------------------------------------
        Our people are our greatest assets, and they are our direct
    connection to the investors we serve. None of the important work
    described in this testimony would have been achieved without the
    solutions-oriented attorneys, accountants, examiners and economists at
    the SEC, whose work, in turn, is made possible thanks to the important,
    often behind-the-scenes work of the agency's administrative and
    operations personnel. The agency's supervisors and program managers
    also play a critical role in ensuring effective and efficient
    operations and activities.
        Across the SEC, we recognize the importance of our capital markets
    to the U.S. economy and millions of diverse American households. Our
    people are skilled and committed. They accomplish a great deal with the
    resources at their disposal, and they are proud to serve. This
    testimony embodies the record of their work over the past year in
    pursuit of the SEC's tripartite mission of protecting investors,
    maintaining fair, orderly, and efficient markets and facilitating
    capital formation.
    New Strategic Plan
        We recently released our Strategic Plan for 2018-2022, which
    outlines three goals that will guide the work of the SEC moving
    forward. \2\ I hope you will agree that we have made meaningful
    progress over the past year toward satisfying these goals.
    ---------------------------------------------------------------------------
         \2\ See U.S. Sec. and Exch. Comm'n Strategic Plan: Fiscal Years
    2018-2022 (Oct. 2018), available at https://www.sec.gov/files/
    SEC_Strategic_Plan_FY18-FY22_FINAL.pdf.
    ---------------------------------------------------------------------------
        Our first goal, which has been a priority of mine since I became
    Chairman, is focusing on the interests of our long-term Main Street
    investors. The past year has presented many opportunities for me, my
    fellow Commissioners and SEC staff to interact directly with investors
    from across the country. Those discussions allowed us to better answer
    the question we ask ourselves every day: how does our work benefit the
    Main Street investor? Each proposal or action we take is guided by that
    principle.
        Our second goal--to be innovative and responsive--reflects the
    changing nature of our markets. As technological advancements and
    commercial developments have changed how our securities markets
    operate, the SEC's ability to remain an effective regulator requires
    that we continually monitor the market environment and adapt our rules,
    regulations and oversight. This maxim applies to nearly every facet of
    what we do at the SEC. For example, it drove the establishment of a
    Cyber Unit in the Division of Enforcement (Enforcement or Division) in
    September 2017, a Fixed Income Market Structure Advisory Committee in
    November 2017, and more recently, our new Strategic Hub for Innovation
    and Financial Technology (FinHub).
        Our third goal--elevating the agency's performance through
    technology, data analytics and human capital--embodies our commitment
    to maintaining an effective and efficient operation. We are using
    technology, analyzing data and promoting information-sharing and
    collaboration across the agency, while also maintaining the work
    environment that has resulted in consistent high levels of employee
    satisfaction. Maintaining a high level of staff engagement, performance
    and morale is critical to our ability to execute the SEC's mission. We
    are committed to continued investment in both new technology and human
    capital.
    The Commission's Fiscal Year 2018 Initiatives and Upcoming Agenda
        I am proud of what our people have accomplished in Fiscal Year (FY)
    2018 and look forward to building on this work as we continually review
    and recalibrate our approach to accomplishing the SEC's mission.
    Overall, America's historic approach to our capital markets has
    produced a remarkably deep pool of capital with unprecedented
    participation. It is our Main Street investors and their willingness to
    commit their hard-earned money to our capital markets for the long term
    that have ensured that the U.S. capital markets have long been the
    deepest, most dynamic and most liquid in the world. Their capital
    provides businesses with the opportunity to grow and create jobs, and
    supplies the capital markets with the funds that give the U.S. economy
    a competitive advantage. In turn, our markets have provided American
    Main Street investors with better investment opportunities than
    comparable investors in other jurisdictions.
        To place this historic achievement in perspective, I note that the
    United States has approximately 4.4 percent of the world's population,
    yet the U.S. markets are the primary home to 56 of the world's 100
    largest publicly traded companies, and U.S. households have over $22.4
    trillion invested in the world's equity markets. \3\
    ---------------------------------------------------------------------------
         \3\ Board of Governors of the Federal Reserve System, 2016 Survey
    of Consumer Finances (2016).
    ---------------------------------------------------------------------------
        More significantly, at least 52 percent of U.S. households are
    invested directly or indirectly in our capital markets. \4\ This level
    of retail investor participation stands out against other large
    industrialized countries and is especially important to keep in mind as
    our Main Street investors--whether they participate in our markets
    directly or through an intermediary such as an investment adviser or
    broker-dealer--now, more than ever, have a substantial responsibility
    to fund their own retirement and other financial needs. As a result of
    increased life expectancy and a shift from defined benefit plans (e.g.,
    pensions) to defined contribution plans (e.g., 401(k)s and IRAs), the
    interests and needs of our Main Street investors have changed.
    ---------------------------------------------------------------------------
         \4\ See Jesse Bricker et al., ``Changes in U.S. Family Finances
    From 2013 to 2016: Evidence From the Survey of Consumer Finances'',
    Federal Reserve Bulletin, vol. 103 (September 2017), available at
    https://www.federalreserve.gov/publications/files/scf17.pdf; see also
    Rel. No. 34-83063, Form CRS Relationship Summary; Amendments to Form
    ADV; Required Disclosures in Retail Communications and Restrictions on
    the use of Certain Names or Titles (Apr. 18, 2018) (for statistics
    except the mutual fund data); 2018 Investment Company Fact Book (mutual
    fund statistics), available at https://www.ici.org/pdf/
    2018_factbook.pdf.
    ---------------------------------------------------------------------------
        We are responding to that change. It is our obligation to preserve,
    foster, and build on the successful history of our capital markets, and
    history and experience demonstrate our work is never complete. Markets
    change, and new risks to our markets and investors will emerge. We know
    we must continuously assess whether we are focused on the right areas
    and doing the right things, keeping the interests of our long-term Main
    Street investors top of mind.
        My testimony summarizes our important FY2018 initiatives, grouping
    them in five areas: (1) the regulatory and policy agenda; (2)
    enforcement and compliance; (3) enterprise risk and cybersecurity; (4)
    increasing our engagement with investors and other market participants;
    and (5) emerging market risks and trends. It also discusses a number of
    forward-looking initiatives that we are pursuing as our 2019 near-term
    agenda is now publicly available. \5\ Continuing with the themes of
    transparency, accountability, and clarity of mission, the 2019 near-
    term agenda focuses on the initiatives we reasonably expect to complete
    over the next 12 months. I welcome feedback from all interested parties
    on areas in need of focus and how we can best allocate our resources.
    ---------------------------------------------------------------------------
         \5\ The agenda for 2019 rulemaking was published in the Federal
    Register on August 7, 2018, available at https://www.reginfo.gov/
    public/do/eAgendaMain?operation=Operation-Get-Agency-Rule-
    List¤tPub=true&agencyCode=&showStage=active&agencyCd=3235.; see
    also Appendix B.
    ---------------------------------------------------------------------------
    Regulatory and Policy Agenda
        During my September 2017 testimony, I noted that the near-term
    Regulatory Flexibility Act agenda would be streamlined to increase
    transparency and accountability to the public and Congress, as well as
    to provide greater clarity to our staff. The 2017 agenda embodied a
    collective effort, benefiting from the input of my fellow
    Commissioners, our division and office heads and many members of our
    staff on key questions, including: (1) what initiatives the agency
    could reasonably expect to complete over the next 12 months, and (2) of
    those initiatives, which ones would have the most positive impact on
    our Main Street investors.
        During the last year, the Commission advanced 23 of the 26 rules in
    the near-term agenda, a good result on both a percentage basis (88
    percent) and an absolute basis. \6\
    ---------------------------------------------------------------------------
         \6\ See Appendix A. Over the past 10 years, the Commission
    completed, on average, approximately one-third of the rules listed on
    the near-term agenda.
    ---------------------------------------------------------------------------
        In addition, the Commission responded to major events and changes
    in the broader regulatory landscape by advancing several other
    initiatives not in the original agenda. For example, we issued guidance
    to public companies about disclosures of cybersecurity risks and
    incidents. \7\ During FY2018, the Commission also responded to a new
    congressional mandate from the Economic Growth, Regulatory Relief, and
    Consumer Protect Act by expanding a key registration exemption used by
    nonreporting companies to issue securities pursuant to compensatory
    arrangements, \8\ and provided relief for those affected by Hurricane
    Florence. \9\ In addition, to facilitate more accurate, clear, and
    timely communications between issuers and shareholders, the staff
    released guidance on how to approach near-term financial reporting
    uncertainties resulting from tax law changes on the same day the bill
    was signed by the President. \10\
    ---------------------------------------------------------------------------
         \7\ See Press Release 2018-22, ``SEC Adopts Statement and
    Interpretive Guidance on Public Company Cybersecurity Disclosures''
    (Feb. 21, 2018), available at https://www.sec.gov/news/press-release/
    2018-22.
         \8\ Rule 701--``Exempt Offerings Pursuant to Compensatory
    Arrangements'', 83 Federal Register 34,940 (July 24, 2018); see also,
    ``Concept Release on Compensatory Securities Offerings and Sales'', 83
    Federal Register 34,958 (July 24, 2018).
         \9\ See Press Release 2018-202, ``SEC Provides Regulatory Relief
    and Assistance for Hurricane Victims'' (Sept. 19, 2018), available at
    https://www.sec.gov/news/press-release/2018-202.
         \10\ See Press Release, ``Commission Staff Provides Regulatory
    Guidance for Accounting Impacts of the Tax Cuts and Jobs Act'' (Dec.
    22, 2017), available at https://www.sec.gov/news/press-release/2017-
    237.
    ---------------------------------------------------------------------------
        To be sure, statistics--such as an 88 percent completion rate--
    often fail to tell more than a narrow story. Main Street investors--the
    market participants we have at the front of our minds--will not assess
    our work by the number or percentage of rules and initiatives we
    complete, but rather will be looking at what our efforts substantively
    do for them. With this metric--the interests of our long-term Main
    Street investors--in mind, I will discuss in more detail a few examples
    of our work in 2018.
    Standards of Conduct Proposals
        In April 2018, the Commission proposed for public comment a
    significant rulemaking package designed to serve Main Street investors
    that would: (1) require broker-dealers to act in the best interest of
    their retail customers; (2) reaffirm, and in some cases clarify, the
    fiduciary duty owed by investment advisers to their clients; and (3)
    require both broker-dealers and investment advisers to state clearly
    key facts about their relationship, including their financial
    incentives. \11\ This package of rulemakings is intended to enhance
    investor protection by applying fiduciary principles across the
    spectrum of investment advice, bringing the legal requirements and
    mandated disclosures of financial professionals in line with investor
    expectations.
    ---------------------------------------------------------------------------
         \11\ See Press Release 2018-68, ``SEC Proposes To Enhance
    Protections and Preserve Choice for Retail Investors in Their
    Relationships With Investment Professionals'' (Apr. 18, 2018),
    available at https://www.sec.gov/news/press-release/2018-68.
    ---------------------------------------------------------------------------
        Broker-dealers and investment advisers both provide investment
    advice to retail investors, but their relationships are structured
    differently and are subject to different regulatory regimes. However,
    it has long been recognized that many investors do not have a firm
    grasp of the important differences between broker-dealers and
    investment advisers--from differences in the types of services that
    they offer and how investors pay for those services, to the regulatory
    frameworks that govern their relationships. This confusion could cause
    investor harm if, for example, investors fail to select the type of
    service that is appropriate for their needs or if conflicts of interest
    are not adequately understood and addressed. Our proposals would work
    together to better align the standards of conduct and mandated
    disclosures for both broker-dealers and investment advisers with what
    investors expect of these financial professionals, while preserving
    investor access and investor choice.
        Specifically, proposed Regulation Best Interest would enhance
    broker-dealer standards of conduct by establishing an overarching
    obligation requiring broker-dealers to act in the best interests of the
    retail customer when making recommendations of any securities
    transaction or investment strategy involving securities. Simply put,
    under proposed Regulation Best Interest, a broker-dealer cannot put her
    or his interests ahead of the retail customer's interests. The proposal
    incorporates that key principle and goes beyond and enhances existing
    suitability obligations under the Federal securities laws. To meet this
    requirement, the broker-dealer would have to satisfy disclosure, care,
    and conflict of interest obligations.
        Among other things, the obligations under proposed Regulation Best
    Interest would put greater emphasis on costs and financial incentives
    as factors in evaluating the facts and circumstances of a
    recommendation. Additionally, the proposed standard would require
    broker-dealers to establish, maintain and enforce written policies and
    procedures reasonably designed to identify and eliminate material
    conflicts of interest, or disclose and mitigate, material conflicts of
    interest related to financial incentives. This is a significant and
    critical enhancement as today the Federal securities laws largely
    center on conflict disclosure rather than conflict management.
        Proposed Regulation Best Interest and its ``best interest''
    standard draw upon fiduciary principles in other contexts, including
    those underlying an investment adviser's fiduciary duty, recognizing
    that while their relationship models differ, both broker-dealers and
    investment advisers often provide advice in the face of conflicts of
    interest. These common principles are easier to compare given that we
    issued as another part of our reform package a proposed interpretation
    reaffirming--and, in some cases, clarifying--the fiduciary duty that
    investment advisers owe to their clients. This interpretation is
    designed to provide advisers and their clients with a reference point
    for understanding the obligations of investment advisers to their
    clients and, specifically, reaffirms that an investment adviser also
    must act in the best interests of her or his client.
        While the two standards are based on common principles, under the
    proposal, some obligations of broker-dealers and investment advisers
    will differ because the relationship models of these financial
    professionals differ. But--importantly--the principles are the same,
    and I believe the outcomes under both models should be the same: retail
    investors receive advice provided with diligence and care that does not
    put the financial professional's interests ahead of the investor's
    interests. I believe our proposals are designed to make investors get
    just that whether they choose a broker-dealer or an investment adviser.
        In order to hear first-hand from retail investors who will be
    directly impacted by the rulemaking package, the staff organized seven
    roundtables across the country to provide Main Street investors the
    opportunity to speak directly with me, my fellow Commissioners and
    senior SEC staff to tell us about their experiences and views on what
    they expect from their financial professionals. I had the opportunity
    to lead five of these discussions--in Houston, Atlanta, Miami, Denver,
    and Baltimore--and attend another in Washington, DC. These candid,
    experience-based conversations were incredibly valuable and are
    informing our work moving forward. The transcripts from these
    roundtables are included in our public comment file. We also have
    invited investors to view samples of the proposed disclosure form to
    share their insights and feedback with the Commission by going to
    https://www.sec.gov/tell-us. In addition, our Office of the Investor
    Advocate engaged RAND Corporation to perform investor testing of the
    proposed disclosure form. The results of the investor testing are
    available on the SEC's website in order to allow the public to consider
    and comment on this supplemental information. \12\
    ---------------------------------------------------------------------------
         \12\ See Press Release 2018-257, ``Investor Testing of the
    Proposed Relationship Summary for Investment Advisers and Broker-
    Dealers'' (Nov. 7, 2018), available at https://www.sec.gov/news/press-
    release/2018-257.
    ---------------------------------------------------------------------------
        The staff of the Division of Trading and Markets and the Division
    of Investment Management are reviewing all of this information, and the
    more than 6,000 comment letters, \13\ as they work diligently together
    to develop final rule recommendations.
    ---------------------------------------------------------------------------
         \13\ See Comments on ``Proposed Rule: Regulation Best Interest'',
    available at https://www.sec.gov/comments/s7-07-18/s70718.htm. Of the
    more than 6,000 comment letters, approximately 3,000 were unique
    letters.
    ---------------------------------------------------------------------------
    Facilitating Capital Formation
        The SEC took meaningful steps during FY2018 to encourage capital
    formation for emerging companies seeking to enter our public capital
    markets while maintaining, and, in many cases, enhancing investor
    protections. Doing so provides greater investment opportunities for
    Main Street investors, as it is generally difficult and expensive for
    them to invest in private companies. As a result, Main Street investors
    may not have the opportunity to participate in the growth phase of
    these companies if they choose not to enter our public markets or do so
    only later in their life cycle. Additionally, it is my experience that
    companies that go through the SEC public registration and offering
    process often come out as better companies, providing net benefits to
    the company, investors, and our capital markets.
        As a result of the July 2017 expansion of the draft registration
    statement submission process to all first-time registrants and newly
    public companies conducting initial public offerings (IPOs) and
    offerings within one year of an IPO, the Division of Corporation
    Finance (Corporation Finance) has received draft submissions for more
    than 40 IPOs and from more than 75 existing reporting companies that
    have utilized the expanded accommodation. This change has given
    companies more control over their offering schedules and has limited
    their exposure to market volatility and competitive harm--providing a
    benefit to their shareholders without diminishing investor protection.
        Additionally, in June 2018, the Commission voted to adopt
    amendments to the ``smaller reporting company'' definition that expand
    the number of companies that can qualify for certain existing scaled
    disclosure requirements. \14\ The new definition recognizes that a one-
    size regulatory structure for public companies does not fit all and
    will allow approximately 1,000 additional companies to benefit from
    smaller reporting company status. The amended definition should benefit
    both smaller companies, by making the option to join our public markets
    more attractive, and Main Street investors, who, in turn, will have
    more investment options.
    ---------------------------------------------------------------------------
         \14\ See Press Release 2018-116, ``SEC Expands the Scope of
    Smaller Public Companies That Qualify for Scaled Disclosures'' (June
    28, 2018), available at https://www.sec.gov/news/press-release/2018-
    116.
    ---------------------------------------------------------------------------
        The Commission also has taken steps to simplify and update
    financial disclosures. In July 2018, we proposed amendments to
    financial disclosures to encourage guaranteed debt offerings to be
    conducted on a registered rather than a private basis. \15\ I believe
    these measures have the potential to save issuers significant time and
    expense, enhance the quality of disclosure and increase investor
    protection.
    ---------------------------------------------------------------------------
         \15\ See Press Release 2018-143, ``SEC Proposes Rules To Simplify
    and Streamline Disclosures in Certain Registered Debt Offerings'' (July
    24, 2018), available at https://www.sec.gov/news/press-release/2018-
    143.
    ---------------------------------------------------------------------------
        Further, in August 2018, the Commission adopted final rules that
    simplify and update disclosures by eliminating requirements that are
    outdated, overlapping or duplicative of other Commission rules or U.S.
    GAAP. \16\ These amendments were part of a larger initiative by
    Corporation Finance to review disclosure requirements applicable to
    issuers and consider ways to improve the requirements for the benefit
    of investors and issuers. While these rule changes may appear
    technical, I anticipate that they will yield substantial benefits for
    public companies and investors, especially when taken together with
    other capital formation initiatives at the Commission. Importantly,
    they will not adversely affect the availability of material information
    and, in many cases, will enhance the quality of available information
    and increase investor protection.
    ---------------------------------------------------------------------------
         \16\ See Press Release 2018-156, ``SEC Adopts Amendments To
    Simplify and Update Disclosure Requirements'' (Aug. 17, 2018),
    available at https://www.sec.gov/news/press-release/2018-156.
    ---------------------------------------------------------------------------
        Corporation Finance has several proposals on the horizon designed
    to encourage capital formation for emerging companies seeking to enter
    our public capital markets. Specifically, I anticipate the Commission
    will consider a proposal to amend the definition of ``accelerated
    filer'' that triggers Section 404(b) of the Sarbanes-Oxley Act of 2002,
    which requires registrants to provide an auditor attestation report on
    internal control over financial reporting, that if adopted will have
    the effect of reducing the number of companies that need to provide the
    auditor attestation report, while maintaining appropriate investor
    protections. \17\ While Section 404(b) has become a familiar, and in
    many cases important, component of our public company regulatory
    regime, we have heard from market participants and our former Advisory
    Committee for Small and Emerging Companies that, particularly for
    smaller companies, the costs associated with this requirement can
    divert significant capital from the core business needs of companies
    without a corresponding investor benefit. I look forward to considering
    the staff's recommendations.
    ---------------------------------------------------------------------------
         \17\ See ``Amendments to Smaller Reporting Company Definition'',
    83 Federal Register 31,992 (July 10, 2018).
    ---------------------------------------------------------------------------
        Additionally, I anticipate that the Commission will consider
    expanding the ability of companies that are contemplating raising
    capital to ``test-the-waters'' by engaging in communications with
    certain potential investors prior to or following the filing of a
    registration statement for an IPO. I have seen firsthand how this has
    benefited companies considering an IPO, as they are able to engage
    investors earlier to explain their business and obtain feedback in
    advance of an offering. This also benefits investors and shareholders
    as companies are better able to determine the appropriate time for an
    offering and to more effectively size and price the offering. I look
    forward to the Commission considering this initiative in the coming
    year.
        Further, I expect that the Commission will consider a proposal, as
    required by the Economic Growth, Regulatory Relief, and Consumer
    Protection Act, to expand Regulation A offering eligibility to public
    reporting companies.
        Finally, I believe it is important to encourage long-term
    investment in our country. I expect that the Commission will soon
    consider a release soliciting input on how we can reduce compliance
    burdens on reporting companies with respect to quarterly reports while
    maintaining, and in some cases enhancing, investor protections. There
    is an ongoing debate regarding our approach to mandated quarterly
    reporting and the prevalence of optional quarterly guidance, and
    whether our reporting system more generally drives an overly short-term
    focus. I encourage all market participants to share their views and to
    let us know if there are other aspects of our regulations that drive
    short-termism inappropriately.
        Beyond our public markets, I anticipate the Commission will take a
    fresh look at the exempt offering framework to consider whether changes
    should be made to harmonize and streamline the framework. Congress and
    the SEC have taken a number of steps to expand the options that small
    businesses have to raise capital. Small businesses today have more
    options to reach investors within their State using the intrastate
    exemption, or tap the ``crowd'' using the power of the Internet through
    Regulation Crowdfunding offerings. Small businesses can decide to limit
    their offerings to sophisticated investors in reliance on Regulation D,
    or open those offerings to retail investors using Regulation A. \18\
    ---------------------------------------------------------------------------
         \18\ See ``Remarks on Capital Formation at the Nashville 36/86
    Entrepreneurship Festival'' (Aug. 29, 2018), available at https://
    www.sec.gov/news/speech/speech-clayton-082918. Since these rules have
    gone into effect, small businesses have conducted over 900 offerings
    that reported raising more than $90 million collectively using
    Regulation Crowdfunding. And there have been over 300 offerings that
    reported raising a total in excess of $1 billion pursuant to Regulation
    A. Those amounts, however, are eclipsed by the $147 billion reportedly
    raised in 2017 using Rule 506(c) of Regulation D, the new exemption
    that lifted the ban on general solicitation. And even that is dwarfed
    by use of the traditional private placement exemption in Rule 506(b) of
    Regulation D to raise over $1.7 trillion in 2017. Id.
    ---------------------------------------------------------------------------
        Additionally, pursuant to the Economic Growth, Regulatory Relief,
    and Consumer Protection Act, the SEC recently expanded the exemption
    that permits private companies to issue securities to employees,
    consultants and advisors as compensatory awards--a transaction that
    preserves cash for the company's operations and aligns the incentives
    of employees with the success of the company--and solicited comment on
    further ways to modernize the rules related to these compensatory
    arrangements. \19\ The so-called ``gig economy'' has changed how
    companies and individuals design alternative work arrangements, and,
    therefore, individuals may not be ``employees'' eligible to receive
    securities as compensatory awards under our current exemption.
    ---------------------------------------------------------------------------
         \19\ See Press Release 2018-135, ``SEC Adopts Final Rules and
    Solicits Public Comment on Ways To Modernize Offerings Pursuant to
    Compensatory Arrangements'' (July 18, 2018), available at https://
    www.sec.gov/news/press-release/2018-135.
    ---------------------------------------------------------------------------
        While the options to raise capital in exempt offerings have grown
    significantly since the JOBS Act, there has not been a comprehensive
    review of our exemptive framework to ensure that the system, as a
    whole, is rational, accessible, and effective. In fact, I doubt anyone
    would have come up with anything close to the complex system we have
    today if they were starting with a blank slate. So, I believe we should
    take a critical look at our exemption landscape, which can be fairly
    described as an elaborate patchwork. \20\ The staff is working on a
    concept release that I expect will bring to the forefront these and
    other topics on how we can harmonize exempt offerings. Receiving input
    from investors, startups, entrepreneurs and other market participants
    who have first-hand experience with our framework is extremely
    important to make sure we get it right.
    ---------------------------------------------------------------------------
         \20\ As we embark on this project, I believe there are several
    things we should consider. We should evaluate the level of complexity
    of our current exemptive framework for issuers and investors alike, and
    consider whether changes should be made to rationalize and streamline
    the framework. For example, do we have overlapping exemptions that
    create confusion for companies trying to navigate the most efficient
    path to raise capital? Are there gaps in our framework that impact the
    ability of small businesses to raise capital at key stages of their
    business cycle? We also should consider whether current rules that
    limit who can invest in certain offerings should be expanded to focus
    on the sophistication of the investor, the amount of the investment, or
    other criteria rather than just the wealth of the investor. And we
    should take a look at whether more can be done to allow issuers to
    transition from one exemption to another and, ultimately, to a
    registered IPO, without undue friction.
    ---------------------------------------------------------------------------
    Improving the Proxy Process
        Another significant initiative for 2019 is improving the proxy
    process. Last month, the SEC staff held a proxy roundtable to discuss:
    (1) the proxy solicitation and voting process; (2) shareholder
    engagement through the shareholder proposal process; and (3) the role
    of proxy advisory firms. \21\ I was pleased with this solutions-
    oriented event, which included a diverse group of panelists
    representing the views of investors, companies and other market
    participants. While we heard a wide range of views, we saw more
    agreement than disagreement, and I believe that we should act to
    improve each of these areas.
    ---------------------------------------------------------------------------
         \21\ See November 15, 2018: ``Roundtable on the Proxy Process'',
    available at https://www.sec.gov/proxy-roundtable-2018.
    ---------------------------------------------------------------------------
        There was consensus among the panelists that the proxy ``plumbing''
    needs a major overhaul. I encourage market participants to explore what
    such an overhaul would entail and to consider how technology, including
    distributed ledger technology, could improve the proxy plumbing. I
    realize a major overhaul could take time. So, I believe we should focus
    on what the Commission can do in the interim to improve the current
    system. The comment box for the roundtable remains open, and I
    encourage all those interested in improving the proxy plumbing to share
    their thoughts, particularly regarding actionable, interim
    improvements.
        I also believe it is clear that we should consider reviewing the
    ownership and resubmission thresholds and related criteria for
    shareholder proposals. The current $2,000 ownership threshold and
    related criteria were adopted 20 years ago in 1998, and the
    resubmission thresholds have been in place since 1954. A lot has
    changed since then. We need to be mindful of these changes, and make
    sure our approach to the very important issue of shareholder engagement
    reflects the realities of today's markets and today's investors. As I
    have said before, when looking at the ownership and resubmission
    thresholds and related criteria, we need to consider the interests of
    the long-term retail investors who invest directly in public companies
    and indirectly through mutual funds, ETFs and other products. With
    these long-term, retail investors in mind, we also should consider
    whether there are factors, in addition to the amount invested and the
    length of time shares are held, that reasonably demonstrate that the
    proposing shareholder's interests are aligned with those of a company's
    long-term investors.
        For proxy advisory firms, I believe there is growing agreement that
    the current dynamics among four parties, (1) proxy advisory firms, (2)
    investment advisers who employ those firms and have a fiduciary duty to
    their investors, (3) issuers, and (4) investors at large, including our
    Main Street investors, can be improved. For example, there should be
    greater clarity regarding the division of labor, responsibility and
    authority between proxy advisors and the investment advisers they
    serve. We also need clarity regarding the analytical and decision-
    making processes advisers employ, including the extent to which those
    analytics are company or industry specific. On this last point, it is
    clear to me that some matters put to a shareholder vote can only be
    analyzed effectively on a company-specific basis, as opposed to
    applying a more general market or industrywide policy.
        Finally, there were other issues raised at the roundtable that we
    should consider, including: (1) the framework for addressing conflicts
    of interests at proxy advisory firms, and (2) ensuring that investors
    have effective access to issuer responses to information in certain
    reports from proxy advisory firms.
        The staff is looking at these and other issues, and I have asked
    them to formulate recommendations for the Commission's consideration.
    On timing, it is clear to me that these issues will not improve on
    their own with time, and I intend to move forward with the staff
    recommendations, prioritizing those initiatives that are most likely to
    improve the proxy process and our markets for our long-term Main Street
    investors.
    Modernizing Trading and Market Structure
        Another area of focus for the Commission is ensuring fair and
    efficient trading markets for our Main Street investors. We know that
    transparency is a bedrock of healthy and vibrant markets, and I am
    pleased to report that we have taken significant steps to make our
    trading markets more transparent.
        In July 2018, we adopted amendments that enhance the transparency
    requirements governing alternative trading systems, commonly known as
    ``ATSs.'' \22\ These amendments provide investors, brokers and other
    market participants--and the Commission--with increased visibility into
    the operations of these important markets for equity trading.
    Additionally, last month, the Commission adopted amendments to
    Regulation NMS to provide investors with greater transparency
    concerning how brokers handle and execute their orders. \23\
    ---------------------------------------------------------------------------
         \22\ See Press Release 2018-136, ``SEC Adopts Rules To Enhance
    Transparency and Oversight of Alternative Trading Systems'' (July 18,
    2018), available at https://www.sec.gov/news/press-release/2018-136.
         \23\ See Press Release 2018-253, ``SEC Adopts Rules That Increase
    Information Brokers Must Provide to Investors on Order Handling'' (Nov.
    2, 2018), available at https://www.sec.gov/news/press-release/2018-253.
    ---------------------------------------------------------------------------
        Further, in March 2018, the Commission proposed a transaction fee
    pilot for National Market System (NMS) stocks, which, if adopted, would
    provide the Commission with data to help us analyze the effects of
    exchange fees and rebates on order routing behavior, execution quality
    and our market structure generally. \24\ This topic has received
    significant attention ever since the implementation of Regulation NMS.
    More recently, the development of a pilot program on transaction fees
    was one of the SEC's Equity Market Structure Advisory Committee's most
    prominent recommendations to the Commission. \25\ In my view, the
    proposed pilot--which I expect the Commission to consider for adoption
    in the near future--would lead to a more thorough understanding of
    these issues, which would help the Commission make more informed and
    effective policy decisions in the future, all to the benefit of retail
    investors.
    ---------------------------------------------------------------------------
         \24\ See Press Release 2018-43, ``SEC Proposes Transaction Fee
    Pilot for NMS Stocks'' (Mar. 14, 2018), available at https://
    www.sec.gov/news/press-release/2018-43.
         \25\ See ``Equity Market Structure Advisory Committee,
    Recommendation for an Access Fee Pilot'' (July 8, 2016), available at
    https://www.sec.gov/spotlight/emsac/recommendation-access-fee-
    pilot.pdf.
    ---------------------------------------------------------------------------
        Our fixed income markets are also critical to our economy and Main
    Street investors, though historically, less attention has been focused
    on these relative to the equity markets. With large numbers of
    Americans retiring every month and needing investment options, fixed
    income products attract more and more Main Street investors. Yet, many
    of those investors may not appreciate that fixed income products are
    part of markets that differ significantly from the equity markets.
        In November 2017, the SEC created the Fixed Income Market Structure
    Advisory Committee (FIMSAC) to provide diverse perspectives on the
    structure and operations of the U.S. fixed income markets, as well as
    advice and recommendations on fixed income market structure. The
    Committee has held four public meetings and has provided the Commission
    with five thoughtful recommendations on ways to improve our fixed
    income markets. \26\ I look forward to an equally successful second
    year.
    ---------------------------------------------------------------------------
         \26\ See ``Fixed Income Market Structure Advisory Committee'',
    available at https://www.sec.gov/spotlight/fixed-income-advisory-
    committee. FIMAC's recommendations include the following: (1) the
    development of a pilot program to delay public dissemination for 48
    hours of trades in any investment grade corporate bond above $10
    million and any high-yield corporate bond above $5 million (requires
    Financial Industry Regulatory Authority (FINRA) rulemaking); (2) the
    formation of a joint SEC, FINRA, and Municipal Securities Rulemaking
    Board (MSRB) working group to review the regulatory framework for
    electronic trading platforms in corporate and municipal bonds; (3) the
    adoption of a comprehensive classification scheme for exchange traded
    products; (4) for the SEC to encourage the formation of an industry
    group to promote investor education and work towards the establishment
    of a centralized and widely accessible database of key ETF data; and
    (5) that the SEC, in conjunction with FINRA, establish a new issue
    reference data service for corporate bonds that would be widely
    accessible on commercially reasonable terms.
    ---------------------------------------------------------------------------
        Finally, new FINRA and MSRB requirements regarding the disclosure
    of corporate and municipal bond mark-ups and mark-downs went into
    effect, and I am pleased that investors now have substantially greater
    transparency into the costs of participating in those markets. I
    believe this transparency will increase competition and reduce trading
    costs, all to the benefit of Main Street investors.
    Consolidated Audit Trail
        Another market structure initiative that is garnering significant
    staff attention is the implementation of the Consolidated Audit Trail
    (CAT). The CAT is designed to provide a single, comprehensive database
    that, when fully implemented, will allow regulators to more efficiently
    and accurately track trading in equities and options throughout the
    U.S. markets. Among other things, the CAT is intended to allow the
    Commission to better carry out its oversight responsibility by
    improving our ability to reconstruct trading activity following a
    market disruption or other event, which in turn would allow us to more
    quickly understand the causes of such an event and respond
    appropriately.
        Under the CAT NMS Plan, the self-regulatory organizations (SROs)--
    the national securities exchanges and FINRA--are responsible for
    developing and implementing the CAT and were required to begin
    reporting data to the CAT by November 15, 2017. The SROs missed that
    deadline. While the CAT has now begun receiving equity and options data
    with limited functionality, the SROs remain out of compliance with the
    CAT NMS Plan today.
        The SROs are making some progress, but the development and
    implementation process remains slow and cumbersome due largely to what
    I believe are project governance and project management issues
    experienced by the SROs. While, pursuant to SEC staff requests, the
    SROs recently set forth a revised timeline with detailed milestones,
    more recently Thesys (the plan processor) informed the SROs that it
    does not plan to deliver full functionality of CAT's first phase in
    accordance with these milestones. The SROs have reported to our staff
    that they currently expect to deliver the first phase of CAT (which,
    again, was required to be delivered by November 15, 2017) by March 31,
    2019. We remain frustrated with failure of the SROs to meet their
    obligations and the delays in the development of the CAT.
        I know there are substantial concerns about the protection of
    investors' personally identifiable information (PII) that would be
    stored in the CAT. I have the same concerns and continue to make the
    protection of CAT data, particularly any form of PII, a threshold
    issue. In November 2017, I asked the Commission staff to evaluate the
    need for PII in the CAT. This evaluation includes consideration of,
    among other things, what PII data elements need to be collected and
    retained in the CAT in order to achieve the regulatory goals of the
    CAT, and how PII in the CAT would be used by the SEC and the SROs. We
    are considering what alternatives to the scope of PII that would be
    collected and retained by the CAT under the current plan could provide
    the Commission and the SROs with the market surveillance and
    reconstruction data necessary to conduct our regulatory and enforcement
    functions. As I have stated before, as the SROs continue to make
    progress in the development, implementation and operation of the CAT, I
    believe that the Commission, the SROs and the plan processor must
    continuously evaluate their approach to the collection, retention and
    protection of PII and other sensitive data. More generally, I have made
    it clear that the SEC will not retrieve sensitive information from the
    CAT unless we have a regulatory need for the information and believe
    appropriate protections to safeguard the information are in place.
    Distributed Ledger Technology, Digital Assets, and Initial Coin
            Offerings
        The Commission and its staff have been focusing a significant
    amount of attention and resources on digital assets and initial coin
    offerings (ICOs). I am optimistic that developments in distributed
    ledger technology can help facilitate capital formation, providing
    promising investment opportunities for both institutional and Main
    Street Investors. Overall, I believe we have taken a balanced
    regulatory approach that both fosters innovation and protects
    investors. For example, our staff meets regularly with entrepreneurs
    and market professionals interested in developing new and innovative
    investment products in compliance with the Federal securities laws.
    Recently, Corporation Finance's Director, Bill Hinman, outlined factors
    for participants to consider when evaluating whether a digital asset is
    a security \27\ and also named a new Associate Director in Corporation
    Finance to serve as the Senior Advisor for Digital Assets and
    Innovation and coordinate efforts in this area across the agency. \28\
    SEC staff is also meeting regularly with staff from other regulatory
    agencies to coordinate efforts and identify any areas where additional
    regulatory oversight may be needed. Divisions and offices across the
    Commission have worked together, as well as with other regulators, to
    issue public statements regarding ICOs and virtual currencies. \29\
    ---------------------------------------------------------------------------
         \27\ See William Hinman, ``Digital Asset Transactions: When Howey
    Met Gary'' (Plastic) (June 14, 2018), available at https://www.sec.gov/
    news/speech/speech-hinman-061418.
         \28\ See Press Release 2018-102, ``SEC Names Valerie A. Szczepanik
    Senior Advisor for Digital Assets and Innovation'' (June 4, 2018),
    available at https://www.sec.gov/news/press-release/2018-102.
         \29\ See ``Statement on Digital Asset Securities Issuance and
    Trading'' (Nov. 16, 2018), available at https://www.sec.gov/news/
    public-statement/digital-asset-securites-issuuance-and-trading.
    ---------------------------------------------------------------------------
        In an effort to further coordinate the Commission's work on these
    important issues, in October of this year the SEC announced the
    formation of a FinHub within the agency. \30\ Staffed by
    representatives from across the Commission, the FinHub will serve as a
    public resource for FinTech-related issues at the SEC, including
    matters dealing with distributed ledger technology, automated
    investment advice, digital marketplace financing, and artificial
    intelligence/machine learning. In addition to serving as a portal for
    public engagement, FinHub will also serve as an internal resource
    within the SEC, coordinating the agency staff's work on these and other
    FinTech-related issues. As the work of FinHub and our other activities
    demonstrate, the agency is focused on issues presented by new
    technologies, and our door remains open to those who seek to innovate
    and raise capital in accordance with the law.
    ---------------------------------------------------------------------------
         \30\ See Press Release 2018-240, ``SEC Launches New Strategic Hub
    for Innovation and Financial Technology'' (Oct. 18, 2018), available at
    https://www.sec.gov/news/press-release/2018-240.
    ---------------------------------------------------------------------------
        Unfortunately, while some market participants have engaged with our
    staff constructively and in good faith with questions about the
    application of our Federal securities laws, others have sought to prey
    on investors' excitement about cryptocurrencies and ICOs to commit
    fraud or other violations of the Federal securities laws. Enforcement
    has recently brought a number of landmark cases in this area, and I
    have asked the Division's leadership to continue to police these
    markets vigorously and recommend enforcement actions against those who
    conduct ICOs or engage in other actions relating to digital assets in
    violation of the Federal securities laws. The Commission acted swiftly
    to crack down on allegedly fraudulent activity in this space,
    particularly where the misconduct has targeted Main Street investors.
    Regardless of the promise of this technology, those who invest their
    hard-earned money in opportunities that fall within the scope of the
    Federal securities laws deserve the full protections afforded under
    those laws.
    Modernizing Asset Management Regulations
        In June 2018, the Commission proposed for public comment a new rule
    to replace the process of individually issued orders for exemptive
    relief for certain exchange traded funds (ETFs). \31\ The proposal is
    designed to create a consistent, transparent, and efficient regulatory
    framework for ETFs would facilitate greater competition and innovation
    among these products. The ETF market, which has a volume of
    approximately $3.6 trillion, currently operates under more than 300
    individually issued exemptive orders that have varied over time in
    wording and terms. I anticipate that the Commission will consider
    recommendations to adopt a final ETF rule in the coming year, which
    will enable staff to focus more time and attention on novel or unusual
    ETF products instead of more routine ETF-related issues.
    ---------------------------------------------------------------------------
         \31\ See Press Release 2018-118, ``SEC Proposes New Approval
    Process for Certain Exchange-Traded Funds'' (June 28, 2018), available
    at https://www.sec.gov/news/press-release/2018-118.
    ---------------------------------------------------------------------------
        The agency is working to promote research in the ETF market and
    provide investors greater access to that research. On November 30,
    2018, the Commission adopted rules and amendments that are intended to
    reduce obstacles to providing research on investment funds in
    furtherance of the Fair Access to Investment Research Act of 2017. The
    adopted rules seek to harmonize the treatment of investment fund
    research with research on other public companies by establishing a safe
    harbor for a broker-dealer to publish or distribute research reports on
    investment funds under certain conditions. Overall, these rules aim to
    promote research on mutual funds, ETFs, registered closed-end funds,
    business development companies (BDCs) and similar covered investment
    funds and provide investors with greater access to research to aid them
    in making investment decisions.
        Additionally, the Small Business Credit Availability Act directs
    the Commission to revise certain securities offering and proxy rules in
    order to harmonize existing registration and reporting requirements to
    allow BDCs to be treated in the same manner as public corporate
    issuers. The Economic Growth, Regulatory Relief, and Consumer
    Protection Act similarly directs the Commission to issue rules to allow
    certain registered closed-end funds to use the securities offering and
    proxy rules that are available to public corporate issuers. The
    Division of Investment Management is working to develop rule
    recommendations related to these two bills.
    Improving the Investor Experience
        The Division of Investment Management is leading a long-term
    project to explore modernization of the design, delivery and content of
    fund disclosures and other information for the benefit of investors.
    These initiatives are an important part of how the Commission can serve
    investors in the 21st century. Fund disclosures are especially
    important because millions of Americans invest in funds to help them
    reach personal financial goals, such as saving for retirement and their
    children's educations. As of the end of 2017, over 100 million
    individuals representing nearly 60 million households, or 45 percent of
    U.S. households, owned funds (generally ETFs or open-ended mutual
    funds). \32\
    ---------------------------------------------------------------------------
         \32\ ``2018 Investment Company Fact Book'', supra note 4, at ii.
    ---------------------------------------------------------------------------
        In June 2018, the Commission issued a request for comment on
    enhancing disclosures by mutual funds, ETFs and other types of
    investment companies to improve the investor experience and to help
    investors make more informed investment decisions (Fund Disclosure
    RFC). \33\ The Fund Disclosure RFC seeks input from retail investors
    and others on how they use fund disclosures and how they believe funds
    can improve disclosures to aid investment decision making. In order to
    facilitate retail investor engagement and comment on improving fund
    disclosure, the Commission has provided a short Feedback Flier on
    Improving Fund Disclosure, which can be viewed and submitted at
    www.sec.gov/tell-us.
    ---------------------------------------------------------------------------
         \33\ See Press Release 2018-103, ``SEC Modernizes the Delivery of
    Fund Reports and Seeks Public Feedback on Improving Fund Disclosure''
    (June 5, 2018), available at https://www.sec.gov/news/press-release/
    2018-103.
    ---------------------------------------------------------------------------
        The Commission also adopted a new rule that creates an optional
    ``notice and access'' method for delivering fund shareholder reports.
    \34\ The reforms include protections for those without internet access
    or who simply prefer paper by preserving the ability to continue to
    receive reports in paper. Under the rule, a fund may deliver its
    shareholder reports by making them publicly accessible on a website,
    free of charge, and sending investors a paper notice of each report's
    availability by mail. To inform investors in advance of this new
    delivery method, there is an extended transition period so that the
    earliest a fund could begin to rely on the rule would be January 1,
    2021. During this time, funds that choose to implement the new delivery
    method must provide prominent disclosures in prospectuses and certain
    other shareholder documents that will generally notify investors of the
    upcoming change in delivery format on a recurring basis for a period of
    2 years.
    ---------------------------------------------------------------------------
         \34\ Id.
    ---------------------------------------------------------------------------
    Security-Based Swaps and Other Interagency Efforts
        With respect to our security-based swap regime, the Commission has
    finalized many, but not all, of the security-based swap rules mandated
    by Title VII of the Dodd-Frank Act. In the coming year, I anticipate
    that the Commission will continue with our efforts to lay out a
    coherent package of rules to finalize our statutory security-based swap
    rulemaking obligations.
        As part of this effort, our staff has been actively engaged with
    our counterparts at the Commodity Futures Trading Commission (CFTC) to
    explore ways to further harmonize our respective security-based swap
    rules with the swap rules developed by the CFTC to increase
    effectiveness and reduce complexity and costs. I am pleased to note
    that earlier this year CFTC Chairman Giancarlo and I executed a
    memorandum of understanding (MOU) between our two agencies. \35\ The
    MOU explicitly acknowledges where we have shared regulatory interests,
    including but not limited to Title VII, and reconfirms our commitment
    to work together to facilitate efficient markets for the benefit of all
    market participants.
    ---------------------------------------------------------------------------
         \35\ See Press Release 2018-114, ``SEC and CFTC Announce Approval
    of New MOU'' (June 28, 2018), available at https://www.sec.gov/news/
    press-release/2018-114.
    ---------------------------------------------------------------------------
        In addition to continued discussions with the CFTC regarding Title
    VII harmonization, the Commission and staff has engaged with our fellow
    financial regulators to address the key issues in our markets in a
    holistic, consistent manner. These efforts will continue, including
    efforts to simplify, tailor, and make more effective the Volcker Rule,
    cooperate on innovative issues like distributed ledger technology and
    digital assets and address emerging risks to the financial sector
    through the Financial Stability Oversight Council.
    Other Dodd-Frank Act Issues
        The Commission also has several other outstanding mandates from the
    Dodd-Frank Act. Earlier this year, I addressed how I plan to prioritize
    and tackle these remaining responsibilities. \36\ Generally speaking,
    in addition to the Title VII regime, there are three categories of
    Dodd-Frank Act-mandated rules remaining:
    ---------------------------------------------------------------------------
         \36\ See ``Opening Remarks at the Securities Regulation
    Institute'' (Jan. 22, 2018), available at https://www.sec.gov/news/
    speech/speech-clayton-012218.

      1.  Executive compensation rules for both public companies and SEC-
            regulated entities, for which, as a result of the complexity
            and scope of the existing executive compensation disclosure
            regime, as well as the nature of the mandates, I believe a
            serial approach is likely to be most efficient and best serve
    ---------------------------------------------------------------------------
            the SEC's mission;

      2.  Specialized disclosure rules, such as resource extraction
            disclosure, which pose additional challenges, including how the
            SEC can meet its obligations under the Administrative Procedure
            Act and, in the case of resource extraction, the Congressional
            Review Act; and

      3.  Mandates, some of which overlap with examples given above, for
            which market developments--including developments resulting
            from shareholder engagement--have, at least in part, mitigated
            some of the concerns that motivated the statutory requirements.
            \37\ Our rulemaking priorities, as well as the rules
            themselves, should reflect these observable developments.
    ---------------------------------------------------------------------------
         \37\ For example, several companies already have made public their
    policies regarding compensation clawbacks. Some of these policies go
    beyond what would be required under Dodd-Frank. We have seen a few
    companies attempt to claw back compensation from their executives under
    these policies.

        Several of these, including hedging disclosure and resource
    extraction disclosure, are on the Commission's near-term agenda.
    Overall, it is the SEC's obligation to complete the rules mandated by
    Congress in Dodd-Frank, and I intend to do so.
    Enforcement and Compliance
    Pursuing Enforcement Matters That Are Meaningful to Main Street
            Investors
        The ongoing efforts made by Enforcement to deter misconduct and
    punish securities law violators are critical to safeguarding millions
    of investors and instilling confidence in the integrity of our markets.
    The nature and quality of the SEC's enforcement actions during the last
    year speak volumes to the hard work of the women and men of the agency.
    The efforts of the Enforcement staff over the past year have made our
    capital markets a safer place for investors to put their hard-earned
    money to work.
        As noted by Enforcement's Co-Directors, Stephanie Avakian and
    Steven Peikin, in their Annual Report, our success is best judged both
    quantitatively and qualitatively and over various periods of time. \38\
    Relevant qualitative factors include, among other things, asking
    whether we are: bringing meaningful actions that target the most
    serious violations, pursuing individual sanctions in appropriate cases,
    obtaining punishments that deter unlawful conduct and returning money
    to harmed investors. Based on such an evaluation--and in my opinion by
    any measure--Enforcement has been successful. I can assure you that the
    Division will continue its vigorous enforcement of the Federal
    securities laws and hold bad actors accountable, whether on Main Street
    or Wall Street.
    ---------------------------------------------------------------------------
         \38\ See U.S. Sec. and Exch. Comm'n, Div. of Enforcement, ``Annual
    Report: A Look Back at Fiscal Year 2018'' (Nov. 2, 2018), available at
    https://www.sec.gov/files/enforcement-annual-report-2018.pdf.
    ---------------------------------------------------------------------------
        I would like to highlight the work of four investor-oriented
    enforcement initiatives over the past year that show the Enforcement
    staff's commitment to investor protection: (1) the Retail Strategy Task
    Force, (2) the Cyber Unit, (3) the Share Class Selection Disclosure
    Initiative and (4) Enforcement's work in returning funds to harmed
    investors.
        In September 2017, the SEC announced the formation of a Retail
    Strategy Task Force (RSTF), which has two primary objectives: (1) to
    develop data-driven, analytical strategies for identifying practices in
    the securities markets that harm retail investors and generating
    enforcement matters in these areas; and (2) to collaborate within and
    beyond the SEC on retail investor advocacy and outreach. \39\ Each of
    these objectives directly impacts the lives of Main Street investors
    and involves collaboration between many divisions and offices. We
    anticipate that new data-driven approaches will yield significant
    efficiencies in case generation and resource allocation by targeting
    enforcement efforts where the risks to Main Street investors are the
    most significant. Although it has been operative for only a little over
    a year, the RSTF has already undertaken a number of lead-generation
    initiatives built on the use of data analytics (i.e., promptly
    searching for matters to investigate on behalf of retail investors).
    ---------------------------------------------------------------------------
         \39\ See Press Release 2017-176, ``SEC Announces Enforcement
    Initiatives to Combat Cyber-Based Threats and Protect Retail
    Investors'' (Sept. 25, 2017), available at https://www.sec.gov/news/
    press-release/2017-176.
    ---------------------------------------------------------------------------
        Enforcement also in September 2017 announced the creation of a
    Cyber Unit to combat cyber-related threats. The Cyber Unit focuses the
    Division's resources and expertise on, among others things, hacking to
    obtain material, nonpublic information, violations involving
    distributed ledger technology and cyberintrusions. \40\ Together with
    the FinHub, discussed above, the resources we have dedicated to the
    Cyber Unit's important work demonstrate the high priority that we
    continue to place on cyber-related issues affecting investors and our
    markets. In its first year, the Cyber Unit led investigations that
    resulted in several emergency actions to stop ongoing alleged frauds
    against retail investors that involved ICOs, as well as charges against
    a bitcoin-denominated platform and its operator for running an
    unregistered securities exchange and defrauding users of that exchange.
    ---------------------------------------------------------------------------
         \40\ Id.
    ---------------------------------------------------------------------------
        Beyond ICOs and digital assets, the Cyber Unit also led important
    investigations that resulted in SEC actions involving alleged cyber-
    related market manipulations, account takeovers and other cyber-related
    trading violations. The cases brought by the SEC in FY2018 included
    charges for allegedly scheming to manipulate the price of a stock by
    making a phony regulatory filing and for allegedly hacking into over
    100 online customer brokerage accounts and making unauthorized trades
    to manipulate stock prices and profit from the artificial price
    movements.
        Additionally, Enforcement expanded its efforts to identify advisers
    that did not disclose conflicts as a result of their receipt of
    compensation in the form of 12b-1 fees. Prior efforts by Enforcement
    and the Office of Compliance Inspections and Examinations (OCIE)
    suggested that many investment advisers were not disclosing conflicts
    of interest to their retail customers relating to the selection of
    more-expensive mutual fund share classes, which involved the receipt of
    12b-1 fees, when cheaper alternatives were available. Enforcement
    announced a Share Class Selection Disclosure Initiative in February
    2018, representing an innovative approach intended to facilitate the
    efficient return of money to harmed investors and prompt remediation of
    misconduct. \41\
    ---------------------------------------------------------------------------
         \41\ See Press Release 2018-15, ``SEC Launches Share Class
    Selection Disclosure Initiative To Encourage Self-Reporting and the
    Prompt Return of Funds to Investors'' (Feb. 12, 2018), available at
    https://www.sec.gov/news/press-release/2018-15.
    ---------------------------------------------------------------------------
        Finally, in my view, protecting retail investors also means,
    whenever possible, putting money back in their pockets when they are
    harmed by violations of the Federal securities laws. In FY2017 and
    FY2018, the Commission returned $1.07 billion and $794 million to
    harmed investors, respectively. We remain committed to this important
    part of our work, and we expect to continue our efforts to return funds
    to victims this year as well.
        The unanimous Supreme Court decision in Kokesh v. SEC, however, has
    impacted our ability to return funds fraudulently taken from Main
    Street investors. In Kokesh, the Supreme Court found our use of the
    disgorgement remedy operated as a penalty, which time limited the
    ability of the Commission to seek disgorgement of ill-gotten gains
    beyond a 5-year statute of limitations applicable to penalties.
        I do not believe it is productive to debate the merits of the
    Kokesh decision. I agree that statutes of limitation serve many
    important functions in our legal system, and certain types of actions
    as well as penalties and certain other remedies should have reasonable
    limitations periods. Civil and criminal authorities, including the SEC,
    should do everything in their power to bring appropriate actions
    swiftly, and, in our markets, particularly our public markets, the
    certainty brought by reasonable limitations periods has value for
    investors.
        However, as I look across the scope of our actions, including most
    notably Ponzi schemes and affinity frauds, I am troubled by the
    substantial amount of losses that we may not be able to recover for
    retail investors. Said simply, if the fraud is well-concealed and
    stretches beyond the 5-year limitations period applicable to penalties,
    it is likely that we will not have the ability to recover funds
    invested by our retail investors more than 5 years ago. Allowing clever
    fraudsters to keep their ill-gotten gains at the expense of our Main
    Street investors--particularly those with fewer savings and more to
    lose--is inconsistent with basic fairness and undermines the confidence
    that our capital markets are fair, efficient and provide Americans with
    opportunities for a better future.
        I welcome the opportunity to work with Congress to address this
    issue to ensure defrauded retail investors can get their investment
    dollars back. I believe that any such authority should be narrowly
    tailored to that end while being true to the principles embedded in
    statutes of limitations.
    Protecting Main Street Investors and Improving Investment Options by
            Promoting Compliance
        Earlier this year, our OCIE published its 2018 examination
    priorities, which reflected a continued focus on the SEC's commitment
    to protecting retail investors. \42\ In particular, OCIE has looked
    closely at products and services offered to retail investors, the
    disclosures they receive about those investments and the financial
    services professionals who serve them. OCIE has also focused its
    attention on several other areas that present heightened risks,
    including: (1) compliance and risks in critical market infrastructure,
    such as exchanges and clearing agencies; (2) the continued growth of
    cryptocurrencies and ICOs; (3) cybersecurity; and (4) anti- money
    laundering programs.
    ---------------------------------------------------------------------------
         \42\ U.S. Sec. and Exch. Comm'n, Off. of Compliance Inspections
    and Examinations, ``2018 Nat'l Exam Program Examination Priorities''
    (Feb. 7, 2018), available at https://www.sec.gov/about/offices/ocie/
    national-examination-program-priorities-2018.pdf.
    ---------------------------------------------------------------------------
        OCIE conducts risk-based examinations of SEC-registered entities,
    including broker-dealers, investment advisers, investment companies,
    municipal advisors, national securities exchanges, clearing agencies,
    transfer agents, and FINRA, among others. During FY2018, OCIE conducted
    over 3,150 examinations, an overall increase of 11 percent from FY2017.
    This includes a 17 percent coverage ratio for investment advisers--
    which increased 13 percent from FY2017, even as the number of
    registered investment advisers increased by approximately 5 percent.
    OCIE also continued to leverage data analysis to identify potentially
    problematic activities and firms as well as to determine how best to
    scope the examinations of those activities and firms.
        In conjunction with our examination activities, OCIE published a
    number of risk alerts to inform registered firms and investors of
    common compliance issues we observed. \43\ This year, OCIE risk alerts
    addressed topics ranging from municipal advisor examinations to fee and
    expense compliance issues for investment advisers. These alerts sharpen
    the identification and correction of potentially deficient practices,
    maximize the impact of our examination program and better protect the
    interests of Main Street investors.
    ---------------------------------------------------------------------------
         \43\ U.S. Sec. and Exch. Comm'n, Off. of Compliance Inspections
    and Examinations, ``Risk Alerts'', available at https://www.sec.gov/
    ocie.
    ---------------------------------------------------------------------------
    Enterprise Risk and Cybersecurity
        Cybersecurity at the SEC continues to be a top priority. The SEC
    and other agencies are the frequent targets of attempts by threat
    actors who seek to penetrate our systems, and some of those actors may
    be backed by substantial resources. Recognizing the twin realities that
    electronic data systems are essential to our mission and no system can
    ever be entirely safe from a cyberintrusion, it is incumbent upon us to
    devote substantial resources and attention to cybersecurity, including
    the protection of PII. Over the past year, we have been focused on a
    number of areas for improvement, including with respect to IT
    governance and oversight, security controls, risk awareness related to
    sensitive data, incident response, and reliance on legacy systems--and
    much work remains to be done.
        We are closely scrutinizing how we can reduce any potential
    exposure of PII contained in SEC systems, including EDGAR. In this
    regard, earlier this year, the Commission acted to eliminate the
    collection of social security numbers and dates of birth on a number of
    EDGAR forms where we concluded that the information was not necessary
    to our mission. \44\ Moreover, return copies of test filings are no
    longer stored within the EDGAR system. The staff also continues to
    explore alternatives to the current approach, including the possibility
    of implementing a new electronic disclosure solution.
    ---------------------------------------------------------------------------
         \44\ Amendments to Forms and Schedules To Remove Provision of
    Certain Personally Identifiable Information, Rel. Nos. 33-10486, 34-
    83097, IC-33077 (Apr. 24, 2018), available at https://www.sec.gov/
    rules/final/2018/33-10486.pdf.
    ---------------------------------------------------------------------------
        The agency has also focused closely on its cybersecurity risk
    governance structure. We now have a Chief Risk Officer who helps
    coordinate our risk management efforts across the agency. We have
    worked to promote a culture that emphasizes the importance of data
    security throughout our divisions and offices. The staff has also been
    engaging with outside experts to assess and improve our security
    controls. For example, on a technical level, these efforts include the
    deployment of enhanced security capabilities, additional penetration
    testing and code reviews, investment in new technologies and
    experienced cybersecurity personnel and acceleration of the transition
    of certain legacy information technology systems to modern platforms.
    We will also continue to coordinate and partner with both other Federal
    agencies to identify and mitigate risks to our information technology
    environment and assets.
        We also look at cybersecurity from perspectives outside of our
    internal risk profile. From an issuer disclosure perspective, it is
    important that investors are sufficiently informed about the material
    cybersecurity risks and incidents affecting the companies in which they
    invest. Earlier this year, the Commission issued interpretive guidance
    to assist public companies in preparing these types of disclosures.
    \45\ The guidance also emphasized the importance of disclosure controls
    and procedures that enable public companies to make accurate and timely
    disclosures about material cybersecurity events, as well as policies
    that protect against corporate insiders trading in advance of company
    disclosures of material cyberincidents. Further, the guidance expanded
    on prior staff guidance by addressing the board's oversight functions.
    Existing SEC rules require a company to disclose the extent of the
    board's role in risk oversight. The guidance noted that this disclosure
    should specifically include a discussion of the board's role in
    overseeing cybersecurity risk management, to the extent those risks are
    material. We are monitoring the market's response to our guidance.
    ---------------------------------------------------------------------------
         \45\ Press Release 2018-22, supra note 7.
    ---------------------------------------------------------------------------
        From a market oversight perspective, we continue to prioritize
    cybersecurity in our examinations of market participants, including
    broker-dealers, investment advisers, and critical market infrastructure
    entities. In assessing how firms prepare for a cybersecurity threat,
    safeguard customer information and detect red flags for potential
    identity theft, for example, we have focused on areas including risk
    governance, access controls, data loss prevention, vendor management
    and training, among others. And given the interconnectedness of our
    markets, we will continue to work closely with our counterparts at
    other Federal financial regulatory agencies and the international
    community to discuss cybersecurity risks and coordinate potential
    response efforts.
        From an enforcement perspective, as previously mentioned, our Cyber
    Unit is dedicated to targeting cyber-related misconduct in our markets,
    including failures by issuers to make material disclosures. \46\ And
    finally, from an investor education perspective, our Office of Investor
    Education and Advocacy has worked hard to inform investors about
    cybersecurity hygiene and red flags of cyberfraud, in order to prevent
    investors from becoming victims in the first place.
    ---------------------------------------------------------------------------
         \46\ See Press Release 2018-71, ``Altaba, Formerly Known as
    Yahoo!, Charged With Failing To Disclose Massive Cybersecurity Breach;
    Agrees To Pay $35 Million'' (Apr. 24, 2018), available at https://
    www.sec.gov/news/press-release/2018-71.
    ---------------------------------------------------------------------------
    Increasing Engagement With Investors and Other Market Participants
        To effectively fulfill our responsibility to American investors and
    markets, it is essential that the SEC maintain an open line of
    communication with investors and other market participants. In FY2018,
    the SEC substantially increased its engagement with an array of market
    participants to help us improve our work and better focus our resources
    and efforts.
    Engagement With Main Street Investors
        Over the past year, SEC staff, my fellow Commissioners and I have
    engaged directly with Main Street investors from around the country
    through town halls, outreach tours, new digital tools, and other
    methods.
        In a first-of-its-kind event, on June 13, 2018, the full
    Commission--all five Commissioners--and SEC leadership met with more
    than 400 members of the public during an investor town hall at the
    Georgia State University College of Law in Atlanta, Georgia. This
    event, organized by the SEC's Office of the Investor Advocate and the
    Atlanta Regional Office, marked the first time the full Commission met
    with Main Street investors outside of Washington, DC. During the main
    session of the town hall meeting, Commissioners provided a range of
    information to investors and answered questions from attendees. My
    fellow Commissioners, other SEC leaders and I also participated in
    break-out sessions with smaller groups of investors to hear their views
    on specific investor-oriented topics such as combating fraud. The
    following day, the agency's Investor Advisory Committee hosted a
    meeting at the same location, providing another opportunity for the
    public to engage with the Commission.
        This event kicked off the SEC's ``Tell Us'' campaign, which
    included the additional roundtable meetings with retail investors I
    mentioned in Houston, Miami, Washington, DC, Philadelphia, Denver, and
    Baltimore. As mentioned, to complement these open discussions, the
    agency also developed a new ``Tell Us'' website and feedback flier,
    specifically designed for Main Street investors to provide feedback on
    the proposed disclosures in the standards of conduct proposals without
    needing to write a formal letter.
        The SEC also conducted investor research and surveys in FY2018 in
    order to better understand how investors interact with markets. The
    agency conducted eight surveys and conducted four rounds of qualitative
    research involving focus groups and one-on-one interviews. In addition
    to these events, day in and day out the SEC staff engages with
    individual investors as well as with investor groups to promote
    awareness of the SEC's work and to solicit feedback.
    Empowering Main Street Investors Through Information and Education
        Across our seven investor town halls, one common theme--regardless
    of demographics and geography--was that investors wished they had known
    more about investing and our markets earlier in their lives. This
    sentiment was universal and deeply held and, while not entirely within
    the purview of the Commission to address, will continue to resonate
    with me during my tenure at the Commission.
        The SEC promotes informed investment decision making through
    education initiatives aimed at providing Main Street investors with a
    better understanding of our capital markets and the opportunities and
    risks associated with the array of investment choices presented to
    them. Our Office of Investor Education and Advocacy spearheads these
    efforts and participation extends throughout our divisions and offices.
        In FY2018, the SEC conducted over 150 in-person investor education
    events focused toward various segments of the population, including
    senior citizens, military personnel, younger investors and affinity
    groups. In addition to in-person education events, we developed
    informative, innovative, and accessible educational initiatives.
        A primary focus of our educational efforts is preventing fraud.
    Unfortunately, it does not cost much to finance a scam, and it often is
    easy for bad actors to reach their targets, particularly over the
    internet. If investors know that, as well as some of the hallmarks of
    fraud and key questions to ask before they invest or provide personal
    information, they are less likely to become victims.
        We use a variety of channels to deliver this message to investors.
    For example, we created a website to educate the public about frauds
    involving ICOs and just how easy it is for bad actors to engineer this
    type of fraud--Our HoweyCoins.com mock website promoted a fictional
    ICO. \47\ The website was created in-house, very quickly and with few
    resources. It attracted over 100,000 people within its first week. We
    also published a variety of investor alerts and bulletins to warn Main
    Street investors about other possible schemes, including certain using
    celebrity endorsements, self-directed individual retirement accounts,
    the risks in using credit cards to purchase an investment and the
    potential harm resulting from sharing their personal contact
    information with online investment promoters.
    ---------------------------------------------------------------------------
         \47\ See Press Release 2018-88, ``The SEC Has an Opportunity You
    Won't Want To Miss: Act Now!'' (May 16, 2018), available at https://
    www.sec.gov/news/press-release/2018-88.
    ---------------------------------------------------------------------------
        We also continued to promote our national public service campaign,
    ``Before You Invest, Investor.gov''. This initiative encourages
    investors to research the background of their investment professional.
    Our experience demonstrates that working with unlicensed promoters who
    have a history of misconduct greatly increases the risk of fraud and
    losses. In May 2018, we supplemented this information service with a
    new online search tool, the SEC Action Lookup for Individuals--or SALI.
    \48\ This tool enables investors to find out if the individual or firm
    he or she is dealing with has been sanctioned as a result of SEC
    action, for both registered and unregistered individuals. SALI
    continues to be updated on an ongoing basis, making it an ever better
    resource for Main Street investors. We are encouraged by the fact that
    unique page views on Investor.gov increased by 45 percent compared to
    FY2017.
    ---------------------------------------------------------------------------
         \48\ See Press Release 2018-78, ``SEC Launches Additional Investor
    Protection Search Tool'' (May 2, 2018), available at https://
    www.sec.gov/news/press-release/2018-78.
    ---------------------------------------------------------------------------
        SEC regional offices also engaged in investor initiatives in their
    local communities. For example, the San Francisco Regional Office has
    conducted extensive outreach to California teachers through its Teacher
    Investment Outreach Initiative. This project seeks to help teachers
    make informed decisions on investment portfolio options, fees, and
    risk. Regional staff, many of whom have personal connections to the
    teaching community, created this initiative in response to learning
    about the limitations of the investment options offered to public
    school teachers under the defined contribution portion of their
    retirement plans.
    Engagement With Market Participants
        Our capital markets are far different today than they were a decade
    ago. They are increasingly global and highly data dependent.
    Investments are channeled through intermediaries and vehicles, such as
    mutual funds and ETFs, to a much greater extent. Our markets also are
    ever changing and the pace of that change has increased. It is
    essential that the SEC understand the markets of today and continually
    prepare for and adjust to market developments. As a result, engagement
    with those who participate in our markets extensively, including public
    and private companies, institutional investors, broker-dealers and
    auditors, as well as those who monitor and oversee markets, including
    U.S. and foreign authorities, elected officials and academics, is
    essential.
        In 2018, the SEC held numerous public roundtables at which the
    Commission and SEC staff engaged in an open forum with market
    participants on some of the most salient issues affecting our markets
    today.

        In April, the Division of Trading and Markets hosted a
            roundtable on market structure for thinly traded securities,
            both equities and exchange-traded products. The panelists
            discussed the challenges faced by participants in the market
            for thinly traded exchange-listed securities, including small
            and medium-sized companies looking to enter our public markets,
            and potential actions to address those concerns. The staff is
            analyzing a number of the suggestions and comments made at that
            roundtable, and, more generally, is considering ways to improve
            secondary market liquidity for smaller companies.

        In September, the Division of Trading and Markets hosted a
            roundtable on regulatory approaches to combating retail
            investor fraud. At this event, a broad range of market
            participants, regulators, and industry experts shared their
            views on potential steps that might be taken to enhance the
            ability of regulators, broker-dealers, and others to combat
            retail investor fraud.

        In October, the Division of Trading and Markets hosted a
            roundtable on market data and market access. At this event, a
            diverse group of panelists, representative of a broad spectrum
            of perspectives and views--including those of exchanges, market
            participants and various industry experts--discussed the
            current landscape of market data products and market access
            services. The panelists also provided views on potential steps
            to improve market data products and access services.

        In November, the Divisions of Corporation Finance and
            Investment Management held a roundtable, discussed above,
            focusing on key aspects of the U.S. proxy system.

        In addition to events of this type, the leadership in our divisions
    and offices, as well as our dedicated staff, is open to hearing from
    and meeting with investors and market participants on areas where our
    markets are not working as they should or can be improved--particularly
    as it relates to our long-term Main Street investors.
    Emerging Market Risks and Trends
        I want to briefly discuss two risks, in addition to cybersecurity
    risks, we are monitoring closely: the impact to reporting companies of
    the United Kingdom's exit from the European Union, or ``Brexit''; and
    the transition away from the London Interbank Offered Rate, or
    ``LIBOR,'' as a reference rate for financial contracts. While these are
    not the only areas of market risk that the Commission is monitoring,
    their impacts are likely significant for American investors.
    Brexit
        First, the potential effects of Brexit on U.S. investors and
    securities markets, and on global financial markets more broadly, is a
    matter of increased focus for me and many of my colleagues at the SEC.
    To be direct, I am concerned that:

      1.  The potential adverse effects of Brexit are not well understood
            and, in the areas where they are understood, are
            underestimated. \49\
    ---------------------------------------------------------------------------
         \49\ Chris Giles and Sylvia Pfeifer, ``BoE Sounds Alarm Over No-
    Deal Brexit Planning'', Fin. Times, Nov. 29, 2018 (noting that the Bank
    of England's Governor Mark Carney says that less than half of the
    businesses in the U.K. are not prepared for the risk of a no-deal
    Brexit).

      2.  The actual effects of Brexit will depend on many factors, some of
            which may prove to be beyond the control of the U.K. and EU
    ---------------------------------------------------------------------------
            authorities.

      3.  Our markets, at many levels--from multinational companies, to
            market infrastructure, to investment products and services--are
            international, and the effects of Brexit will be international,
            including on U.S. markets and our Main Street investors.

      4.  The actual effects of Brexit are likely to manifest themselves in
            advance of implementation dates and, based on corporate
            disclosures, some of those effects are upon us.

      5.  The actual effects of Brexit will depend in large part on the
            ability of U.K., EU, and EU member State officials to provide a
            path forward that allows for adjustment without undue
            uncertainty, disruption, or cost. That is a tall order that I
            believe requires: (a) a broad understanding of market
            interdependencies--knowledge that goes well beyond the labor
            and financial markets; (b) foresight--people and firms will act
            in their own interests and the interests of their shareholders;
            and (c) flexibility--miscalculations are inevitable and will
            need to be addressed promptly. More generally, limiting the
            adverse effects of Brexit requires a willingness of
            governmental authorities to look beyond potential immediate,
            local economic and other opportunities provided by a blunt
            transition and pursue a course that focuses on broad, long-term
            economic performance and stability. While many involved in the
            Brexit process agree with this perspective, and some important
            steps have been taken, \50\ I do not yet see wide acceptance of
            this principle.
    ---------------------------------------------------------------------------
         \50\ European Commission Communication, ``Preparing for the
    Withdrawal of the United Kingdom From the European Union on 30 March
    2019: A Contingency Action Plan (Nov. 13, 2018), available at https://
    ec.europa.eu/info/publications/communication-preparing-withdrawal-
    united-kingdom-european-union-30-march-2019-contingency-action-plan-13-
    11-2018_en.

        To be clear, these are my personal views, but it is appropriate to
    share them as they are reflective of the SEC's approach to Brexit. The
    SEC's responsibility is primarily related to the effects of Brexit on
    our capital markets. For example, I have directed the staff to focus on
    the disclosures companies make about Brexit and the functioning of our
    market utilities and other infrastructure.
        We have seen a wide range of disclosures, even within the same
    industry. Some companies have fairly detailed disclosures about how
    Brexit may impact them, while others simply state that Brexit presents
    a risk. I would like to see companies providing more robust disclosure
    about how management is considering Brexit and the impact it may have
    on the company and its operations.
        With regard to market utilities and infrastructure, following the
    2016 Brexit vote, SEC staff commenced discussions with other U.S.
    financial authorities, with our U.K. and EU counterparts, and with
    market participants, all with an eye toward identifying and planning
    for potential Brexit-related impacts on U.S. investors and markets.
    These discussions are ongoing, and I expect their pace to increase.
    Transition Away From LIBOR
        The second risk that I want to highlight relates to the transition
    away from LIBOR as a benchmark reference for short-term interest rates.
    LIBOR is used extensively in the U.S. and globally as a benchmark for
    various commercial and financial contracts, including interest rate
    swaps and other derivatives, as well as floating-rate mortgages and
    corporate debt. It is likely, though, that the banks currently
    reporting information used to set LIBOR will stop doing so after 2021,
    when their commitment to reporting information ends. The Federal
    Reserve estimates that in the cash and derivatives markets, there are
    approximately $200 trillion in notional transactions referencing U.S.
    Dollar LIBOR and that more than $35 trillion will not mature by the end
    of 2021. \51\
    ---------------------------------------------------------------------------
         \51\ These estimates are as of the end of 2016. Of the $200
    trillion in notional exposure, approximately 95 percent relates to
    derivatives products. Over $8 trillion of exposure relates to business
    loans, consumer loans, floating/variable rate notes, and
    securitizations. See ``Second Report of the Alternative Reference Rates
    Committee'' (March 2018), available at https://www.newyorkfed.org/
    medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.com.
    ---------------------------------------------------------------------------
        The Alternative Reference Rate Committee (Committee)--a group
    convened by the Federal Reserve that includes major market
    participants, and on which SEC staff and other regulators participate--
    has proposed an alternative rate to replace U.S. Dollar LIBOR--the
    Secured Overnight Financing Rate, or ``SOFR.'' The Committee has
    identified benefits to using SOFR as an alternative to LIBOR. For
    example, SOFR is based on direct observable transactions and based on a
    market with very deep liquidity, reflecting overnight Treasury
    repurchase agreement transactions with daily volumes regularly in
    excess of $700 billion.
        A significant risk for many market participants--whether public
    companies who have floating-rate obligations tied to LIBOR, or broker-
    dealers, investment companies or investment advisers that have exposure
    to LIBOR--is how to manage the transition from LIBOR to a new rate such
    as SOFR, particularly with respect to those existing contracts that
    will still be outstanding at the end of 2021. Accordingly, although
    this is a risk that we are monitoring with our colleagues at the
    Federal Reserve, Treasury Department, and other financial regulators,
    it is important that market participants plan and act appropriately.
        For example, if a market participant manages a portfolio of
    floating rate notes based on LIBOR, what happens to the interest rates
    of these instruments if LIBOR stops being published? What does the
    documentation provide? Does fallback language exist and, if it exists,
    does it work correctly in such a situation? If not, will consents be
    needed to amend the documentation? Consents can be difficult and costly
    to obtain, with cost and difficulty generally correlated with
    uncertainty.
        In the area of uncertainties, we continue to monitor risks related
    to the differences in the structure of SOFR and LIBOR. SOFR is an
    overnight rate, and more work needs to be done to develop a SOFR term
    structure that will facilitate the transition from term-based LIBOR
    rates. \52\
    ---------------------------------------------------------------------------
         \52\ Relying on daily compounding over a 3-month period, for
    example, may result in issuers not having certainty about the size of
    their interest payment until the end of the period. Also, SOFR does not
    correspond one-to-one with LIBOR; LIBOR incorporates a credit risk
    premium whereas SOFR is a secured rate. In a transition, a methodology
    needs to be developed to determine fair spreads between the two rates.
    ---------------------------------------------------------------------------
        To be clear, a lot of progress has been made to facilitate the
    transition from LIBOR to SOFR. We have started to see more SOFR-based
    debt issuances, and we have seen promising developments in the SOFR
    swaps and futures markets. \53\ But I want to make sure that market
    participants are aware of the need to plan for this important
    transition, as a lot of the work will fall on them.
    ---------------------------------------------------------------------------
         \53\ For example, trading in SOFR futures in the U.S. commenced in
    May. See ``CME Group Announces First Trades of New SOFR Futures'' (May
    8, 2018), available at https://www.cmegroup.com/media-room/press-
    releases/2018/5/08/cme_group_announcesfirsttradesofnewsofrfutures.html.
    The market's first-ever SOFR-linked debt securities were issued in
    July, and since then additional issuances have occurred. See ``Fannie
    Mae Pioneers Market's First-Ever Secured Overnight Financing Rate
    (SOFR) Securities'' (July 26, 2018), available at http://
    www.fanniemae.com/portal/media/financial-news/2018/fannie-mae-pioneers-
    sofr-securities-6736.html. In addition, central counterparties have
    commenced clearing of SOFR swaps. See ``LCH Clears First SOFR Swaps''
    (July 18, 2018), available at https://www.lch.com/resources/news/lch-
    clears-first-sofr-swaps. See also ``CME Group Announces First OTC SOFR
    Swaps Cleared'' (Oct. 9, 2018), available at https://www.cmegroup.com/
    media-room/press-releases/2018/10/09/
    cme_group_announcesfirstotcsofrswapscleared.html.
    ---------------------------------------------------------------------------
    Conclusion
        Thank you for the opportunity to testify today and for the
    Committee's continued support of the SEC, its mission and its people. I
    look forward to working with each of you to advance our mission to the
    benefit of our capital markets and our Main Street investors.

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                            FROM JAY CLAYTON

    Q.1. The Consolidated Audit Trail (CAT) plan processor, Thesys
    CAT LLC, announced last month the initiation of reporting by
    exchanges and FINRA of order and transaction data. As Trading
    and Markets Division Director Redfearn noted, the Master Plan
    first phase launch on November 15, 2018, reflects a 1-year
    delay from the original plan.
        Thesys CAT's press release noted that it ``continues to
    work to provide the capabilities required for the first
    reporting phase,'' and that it expects to complete full
    functionality on or before March 31, 2019.
        Given that each successive phase of the CAT was delayed by
    at least one year, please explain the significance of the delay
    in achieving full functionality described by Thesys CAT and
    whether following phases will further delayed.

    A.1. The SROs have missed numerous deadlines relating to the
    CAT required in the CAT NMS Plan, as well as various milestones
    set by the SROs and communicated to the Commission. This
    failure to meet these deadlines and milestones has become a
    clear pattern over the course of the CAT's development.
        As background, shortly after my arrival at the Commission
    in May 2017, I was informed by the CEO of Thesys, the firm
    engaged by the SROs to build and deliver the CAT, that they
    were on track towards launching the CAT for SRO reporting on
    November 15, 2017. The SROs were aware of this information.
    Similarly, until late summer 2017, the Commission was led to
    believe that the November 15, 2017, deadline for SRO reporting
    to the CAT was achievable. This information proved to be
    incorrect.
        In the fall of 2017, when it was readily apparent that
    Thesys and the SROs would fail to deliver the CAT as required,
    I asked for a revised time table and work plan. The SROs
    developed a time table and work plan, which contained a number
    of milestones, including SRO reporting to the CAT by November
    15, 2018, a year past the deadline in the CAT NMS Plan. The
    SROs subsequently informed Commission staff that certain
    functionalities that were supposed to be part of that first
    phase of reporting would not be available until March 31, 2019.
    Shortly after that, it became clear that Phase 1 would not be
    complete in March since the SROs announced that they are
    transitioning away from Thesys and have selected FINRA to be
    the new plan processor. The SROs are currently revising their
    master plan.
        Further, the SROs have not yet begun collecting data from
    industry members. I expect the SROs to work diligently to
    ensure that industry member reporting begins as soon as
    possible. I have asked the staff to explore potential
    amendments to the CAT NMS Plan in light these significant
    delays. Compliance with the CAT NMS Plan is the legal
    obligation of the SROs. Separately, I have hired Manisha
    Kimmel, who has a wealth of experience and expertise in audit
    trail reporting, as a Senior Policy Advisor for Regulatory
    Reporting. In this capacity, she will coordinate the
    Commission's oversight of the SROs' creation and implementation
    of the CAT.

    Q.2. In your testimony, you discussed the standards for
    investment advisers and brokers and the Regulation Best
    Interest proposal.
        Specifically, you stated that under current standards the
    ``baseline adviser standard is the adviser cannot put their
    interests ahead of the client's interests''. You added that,
    ``with informed consent they can cut back on that standard.
    That is not well understood.''
        Please explain what constitutes informed consent in such a
    relationship?
        How has the SEC evaluated situations where informed consent
    was given to allow reducing the adviser's standard of care?
        Also, what has the SEC done, or what can it do, to make
    sure the potential of a lower standard is better understood?

    A.2. In the proposed Commission interpretation of the standard
    of conduct for investment advisers, the Commission stated that
    the client cannot waive the Federal fiduciary duty. Although
    the investment adviser fiduciary duty is not waivable, it is
    well established that the terms of the investment adviser
    relationship--and therefore the scope of the duty in that
    relationship--may be shaped by disclosure and informed consent.
    Our proposed interpretation provides further details on this
    widely accepted process--that disclosures regarding the scope
    and terms of the relationship should be sufficiently specific
    so that a client is able to decide whether to provide informed
    consent.
        This process of scoping the terms of the advisory
    relationship, which is regularly effectuated through account
    agreements and Form ADV, is widely accepted in the industry and
    provides for arrangements such as limited account services and
    certain third-party compensation to the investment adviser. Our
    proposed relationship summary, if adopted, will increase retail
    investor awareness of the material terms of common arrangements
    with investment professionals, and the fees and conflicts of
    interest that apply. I have been surprised that, with all of
    the public dialogue about the fiduciary duty, there is not more
    acknowledgment of the fact that the application of that duty
    can and does vary depending on the terms of the agreement
    between the client and adviser. The proposed requirements of
    the relationship summary would highlight the nature of an
    advisory relationship and the scope of services that the
    investment adviser provides.
        We have received a lot of thoughtful comments on the
    proposed interpretation of the standard of conduct for
    investment advisers and Commission staff is reviewing comments
    carefully, engaging further with commenters and thinking about
    what next steps it might recommend to the Commission.

    Q.3. The Conflict of Interest Obligations in the Regulation
    Best Interest proposal requires that: a broker or dealer
    establishes, maintains, and enforces written policies and
    procedures reasonably designed to identify and at a minimum
    disclose, or eliminate, all material conflicts of interest that
    are associated with such recommendations.
        A broker or dealer establishes, maintains, and enforces
    written policies and procedures reasonably designed to identify
    and disclose and mitigate, or eliminate, material conflicts of
    interest arising from financial incentives associated with such
    recommendations.
        Please provide examples of ``material conflicts of
    interest'' that are distinguishable from ``material conflicts
    of interest arising from financial incentives''.
        Also, please provide examples of how material conflicts of
    interest arising from financial incentives can be mitigated.

    A.3. Proposed Regulation Best Interest reflected our concern
    that disclosure alone may not be enough when a conflict
    involves a financial incentive.
        Our proposal would require broker-dealers to establish,
    maintain and enforce written policies and procedures reasonably
    designed to identify and disclose and mitigate, or eliminate,
    material conflicts of interest related to financial incentives,
    in addition to the proposed requirement to establish, maintain
    and enforce written policies and procedures reasonably designed
    to identify and at a minimum disclose or eliminate general
    material conflicts of interest.
        As a practical matter, the vast majority of broker-dealer
    conflicts would likely be ``financial incentives,'' and the
    proposed conflict and disclosure obligations would require
    broker-dealers to establish, maintain and enforce written
    policies and procedures reasonably designed to, at a minimum,
    mitigate and disclose those conflicts. The proposal defined
    financial incentives broadly to cover a wide variety of
    compensation practices established by the broker-dealer,
    including quotas, bonuses, sales contests, special awards,
    differential, or special compensation, as well as the sale of
    proprietary products and effecting transactions in a principal
    capacity. So, for example, if a broker-dealer provides
    incentives to its representatives to favor one type of large
    cap mutual fund over another, under the proposal, the broker-
    dealer would need to mitigate that conflict to minimize the
    potential for the conflict to taint the recommendation.
        The proposal aimed to provide broker-dealers flexibility to
    develop and tailor reasonably designed policies and procedures
    that include conflict mitigation measures, based on each firm's
    circumstances. We gave examples of potential mitigation
    measures in the release, such as minimizing compensation
    incentives to favor certain products over others and enhanced
    supervision of recommendations involving higher compensating
    products.
        The proposal also acknowledged that some material conflicts
    may be too difficult to mitigate and may be more appropriately
    avoided entirely or for certain categories of retail customers.
    For example: payment or receipt of certain noncash compensation
    that presents conflicts of interest for broker-dealers, such as
    certain sales contests, trips, prizes, and other similar
    bonuses.
        The proposal requested comment on whether the Commission
    should prohibit receipt of certain noncash compensation. We
    have received a lot of thoughtful comments on this issue and
    Commission staff is reviewing comments carefully, engaging
    further with commenters and developing a recommendation for the
    Commission.
        I believe the mitigation requirement is a very significant
    step forward in aligning the broker-dealer standard of conduct
    with retail customers' reasonable expectations. Investors can
    generally understand a commission-based model and, if the
    commission structure is reasonable and understandable, existing
    supervisory requirements supplemented with disclosure would be
    sufficient. However, I do not believe a reasonable investor
    would expect that disclosure alone would be enough to
    effectively reduce the impact of certain sales incentives on a
    broker-dealer's recommendations and, therefore, I believe those
    incentives would need to be mitigated or eliminated, which is
    consistent with what a reasonable retail investor would expect.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
                            FROM JAY CLAYTON

    Q.1. I would like to elaborate on your recent efforts to
    increase cybersecurity at the SEC, which you mentioned briefly
    in your opening statement. On September 20th you announced the
    establishment of a senior-level cybersecurity working group and
    the creation of a Chief Risk Officer position.
        Can you provide a detailed update on these efforts?
        Who participates in the working group and when are
    recommendations expected?

    A.1. The SEC has appointed a Chief Risk Officer (CRO), Mr.
    Gabriel Benincasa, whose background includes significant senior
    leadership experience in enterprise risk and compliance in the
    financial sector. The SEC's Cybersecurity Working Group's
    membership includes senior leadership in the agency's divisions
    and major offices, the Chief Operating Officer, Chief
    Information Officer, Chief Information Security Officer, and
    the Cybersecurity Adviser to the Chairman. The purpose of the
    group is to coordinate information sharing, risk and threat
    monitoring, incident response and other cross-divisional and
    inter-agency efforts. During the past year, the group
    coordinated, among other things, an update to the agency's
    procedures for handling cybersecurity incidents and
    participated in tabletop exercises to train staff on the new
    procedures.

    Q.2. In your submitted testimony you also indicate that you are
    contracting with outside entities to perform penetration
    testing.
        How were vendors selected for penetration testing and how
    often are comprehensive source code reviews being conducted?

    A.2. The SEC obtains penetration testing services from
    cybersecurity experts at the Department of Homeland Security
    (DHS) and the private sector, which allow us to periodically
    assess and continuously improve the security of our network and
    information systems. The agency's agreement with DHS enables us
    to receive operational and technical assistance at no cost. The
    agency through our Office of Acquisitions has also leveraged
    government-wide acquisition contracts to obtain penetration
    testing services from multiple third-party entities, who are
    selected based on their ability to provide thorough testing
    services. These outside vendors are also required to meet
    certain prescriptive personnel security requirements. With
    respect to code reviews, the SEC is utilizing such reviews to
    assist in our efforts to uplift our EDGAR system as well as
    other critical agency systems. To facilitate additional code
    review, the SEC's Office of Information Technology has acquired
    and is currently integrating the use of newly acquired code
    review tools into the agency's application development process.
    We expect these tools to be implemented during 2019.

    Q.3. Within the SEC's Division of Enforcement, can you
    characterize how much enforcement activity takes place within
    the newly created Cyber Unit?
        Of the 754 enforcement actions and $3.8 billion in
    penalties in 2017, how much of this activity was cyber-related?
        How much was related to fraud against retail investors of
    ICOs?
        How much was related to failures by issuers to make
    material disclosures?
        How many employees are staffing this unit and how
    aggressively are they targeting fraud?

    A.3. The Division of Enforcement's Cyber Unit centralizes,
    leverages and builds upon the significant expertise that the
    SEC's Enforcement Division has developed on cyber-related
    issues over the past several years. Because cyber is a growing
    threat to the markets, this area benefits from specialization,
    formalization and enhanced coordination. The Cyber Unit is
    staffed by 30 personnel nationwide, and each of the SEC's
    regional offices has a liaison to the Unit who serves as a
    resource to non-Unit personnel conducting cyber-related
    investigations and litigation. The Cyber Unit focuses its
    efforts on the following key areas:

        Market manipulation schemes involving false
            information spread through electronic and social media;

        Hacking to obtain material nonpublic information
            and trading on that information;

        Violations involving distributed ledger technology
            and initial coin offerings;

        Misconduct perpetrated using the dark web;

        Intrusions into retail brokerage accounts; and

        Cyber-related threats to trading platforms and
            other critical market infrastructure.

        Since the formation of the Cyber Unit at the end of FY2017,
    the Division's focus on cyber-related misconduct has steadily
    increased. In FY2017 and FY2018, the Commission brought a
    combined 26 standalone cases, including cases involving ICOs
    and digital assets. So far, more than $120 million has been
    ordered in 10 of the 26 cases. The other 16 cases are still in
    litigation. At the end of FY2018, the Division had more than
    225 cyber-related investigations ongoing. These cases and
    ongoing investigations are being handled by both Unit and non-
    Unit personnel. Thanks to the work of the Cyber Unit and other
    staff focusing on these issues, in FY2018 the SEC's enforcement
    efforts impacted a number of areas where the Federal securities
    laws intersect with cyberissues.
        Cyber Unit personnel, as well as other staff of the
    Division of Enforcement who are conducting cyber-related
    investigations and litigation, are aggressively targeting fraud
    and other types of misconduct in this space. For instance, last
    year, the SEC brought charges against a second defendant in
    connection with a scheme to allegedly manipulate the price of
    Fitbit securities through false regulatory filings. \1\ The SEC
    also charged a day trader with allegedly participating in a
    scheme to access the brokerage accounts of more than 100
    unwitting victims and make unauthorized trades to artificially
    inflate the stock prices of various companies. \2\ And, at the
    end of FY2018, the SEC brought settled proceedings against an
    Iowa-based broker-dealer and investment adviser related to its
    failures in cybersecurity policies and procedures surrounding a
    cyberintrusion that compromised personal information of
    thousands of its customers, in violation of Regulations S-P and
    S-ID. This was the SEC's first action charging violations of
    Regulation S-ID, known as the Identity Theft Red Flags Rule,
    which is designed to protect customers from the risk of
    identity theft. \3\
    ---------------------------------------------------------------------------
         \1\ Press Release 2018-130, ``SEC Files Additional Charges in
    Fitbit Stock Manipulation Scheme'' (July 11, 2018), available at
    https://www.sec.gov/news/press-release/2018-130. The first defendant
    was charged in 2017. Press Release 2017-107, ``SEC Charges Fake Filer
    With Manipulating Fitbit Stock'' (May 19, 2017), available at https://
    www.sec.gov/news/press-release/2017-107.
         \2\ Press Release 2017-202, ``Day Trader Charged in Brokerage
    Account Takeover Scheme'' (Oct. 30, 2017), available at https://
    www.sec.gov/news/press-release/2017-202.
         \3\ Press Release 2018-213, ``SEC Charges Firm With Deficient
    Cybersecurity Procedures'' (Sept. 26, 2018), available at https://
    www.sec.gov/news/press-release/2018-213.
    ---------------------------------------------------------------------------
        The Division, including its Cyber Unit, is focused on
    issues related to ICOs and digital assets. Many of the cases
    that have resulted from this focus have involved allegations of
    fraud. Since the Commission's publication of The DAO 21(a)
    Report in FY2017, \4\ the Commission has brought 19 actions
    involving ICOs, 10 of which involved allegations of fraud, and
    has utilized its trading suspension authority to suspend
    trading in the stock of over a dozen publicly traded issuers
    because of questions concerning, among other things, the
    accuracy of assertions regarding their investments in ICOs and
    operation of cryptocurrency platforms. \5\
    ---------------------------------------------------------------------------
         \4\ Press Release 2017-131, ``SEC Issues Investigative Report
    Concluding DAO Tokens, a Digital Asset, Were Securities; U.S.
    Securities Laws May Apply to Offers, Sales, and Trading of Interests in
    Virtual Organizations'' (July 25, 2017), available at https://
    www.sec.gov/news/press-release/2017-131.
         \5\ A full list of the ICO- and cyber-related actions that the
    Commission has brought is catalogued on Sec.gov. U.S. Sec. and Exch.
    Comm'n, Cyber Enforcement Actions, https://www.sec.gov/spotlight/
    cybersecurity-enforcement-actions.
    ---------------------------------------------------------------------------
        Aside from ICOs, fulsome disclosure of cyber-related issues
    is a priority. In FY2018, the Commission brought its first
    enforcement action involving charges against a public company
    for failing to properly inform investors about what was then
    the largest known cyberintrusion in history. The SEC's order
    found that Yahoo! failed to properly assess the scope, business
    impact, or legal implications of the breach, including whether,
    when, and how the breach should have been disclosed. To settle
    the action, the entity formerly known as Yahoo! agreed to pay a
    $35 million penalty. \6\
    ---------------------------------------------------------------------------
         \6\ Press Release 2018-71, ``Altaba, Formerly Known as Yahoo!,
    Charged With Failing To Disclose Massive Cybersecurity Breach; Agrees
    To Pay $35 Million'' (Apt. 24, 2018), available at https://www.sec.gov/
    news/press-release/2018-71.

    Q.4. There is no existing requirement in securities law that
    explicitly refers to cyber risks, and SEC policy regarding the
    necessary disclosure of breaches on the part of public
    companies is murky at best. Last month, for example, Marriott
    International disclosed a data breach to the SEC that may have
    exposed the personal information of up to 500 million guests
    and that has been going on undetected since 2014.
        How can this process be improved, rather than considering
    whether companies are properly disclosing ``material
    information'' on a one-off basis?

    A.4. In February 2018, the Commission issued interpretative
    guidance to assist public companies in preparing disclosures
    concerning material cybersecurity risks and incidents. The
    guidance highlights the disclosure requirements under the
    Federal securities laws that public companies must evaluate
    when considering their disclosure obligations with respect to
    cybersecurity risks and incidents.
        The existing disclosure framework seeks to elicit
    disclosure of cybersecurity incidents and risks that are
    material to investors in a timely fashion. Generally,
    information is material if the information would be viewed by
    the reasonable investor as important in making an investment
    decision or as having significantly altered the total mix of
    information available. As the cybersecurity landscape and the
    risks associated with it continue to evolve, the Commission and
    staff will continue to evaluate the guidance in light of such
    disclosures, the cybersecurity environment, and its impacts on
    issuers and the capital markets generally and consider feedback
    about whether any further guidance or rules are needed.

    Q.5. What oversight authority does the SEC have when a digital
    asset is not considered a security, or when there is dispute
    about whether an asset meets the definition of a security or
    commodity?

    A.5. The SEC has jurisdiction over securities, securities
    market participants and securities-related conduct. Even if a
    digital asset is not a security, the SEC could have
    jurisdiction over a particular activity if a digital asset is
    used in connection with some securities-related conduct or
    product. For example, even when a digital asset is not itself a
    security, the SEC has jurisdiction over a security that
    references that digital asset, such as a structured note
    referencing a digital asset. Whether a token or a digital asset
    called a cryptocurrency is a security is determined by applying
    long established law, including the Howey test, to the facts
    and circumstances of the particular instrument being sold.
        As part of the legal framework regulating financial
    instruments, the Commodity Exchange Act and the Federal
    securities laws contain provisions that determine which
    regulatory scheme applies to different financial instruments.
    As a general matter, the SEC has jurisdiction over derivatives
    (such as options) based on securities. The Commodity Futures
    Trading Commission (CFTC) has jurisdiction over swaps, but the
    SEC has jurisdiction over swaps based on a single security or
    narrow-based security index and has antifraud authority over
    swaps based on a broad-based security index. The CFTC and the
    SEC have joint jurisdiction over security-futures and share
    jurisdiction over mixed swaps. For example, the SEC and the
    CFTC would share jurisdiction over a future on a digital asset
    that is a security and the SEC would have jurisdiction over an
    option or a swap on a digital asset that is a security.
        Staff of the CFTC and SEC coordinate and have frequent
    discussions about novel products, including in the digital
    asset space.

    Q.6. When we communicated last February regarding
    cryptocurrencies, you indicated that the SEC has generally
    developed their regulatory approach on a case-by-case basis,
    primarily focusing on fraudulent initial coin offerings (ICOs).
    While I believe blockchain technology and virtual currencies
    have the potential for positive disruption of our institutions
    and processes, one recent study indicated that roughly 80
    percent of all ICOs were found to be scams.
        You may have seen that this Committee held a hearing in
    October considering opposing perspectives on the benefits of
    virtual currencies.
        Based on your perspective as a regulator, what are the
    potential benefits and drawbacks of ICOs?

    A.6. Blockchain technology and the creative use of digital
    tokens that are recorded on distributed ledgers offer
    opportunities for new forms of capital raising and finance, can
    facilitate allocations of capital and can reduce the costs of
    funding by making that process more efficient. We meet with
    industry participants to learn about innovative blockchain
    mediated business. We also recognize that much of this promise
    is yet to be realized. Although the ICOs we have seen to date
    involve the offer and sale of securities, many of those
    offerings are not following our securities laws. These unlawful
    offerings seek all the benefits of a registered public
    offering--such as broad investor solicitation, no investor
    sophistication requirement and immediate secondary market
    liquidity--and also all the benefits of an exempt private
    offering, such as reduced regulatory costs and disclosure
    requirements. However, these offerings often are not following
    the private placement rules that limit the purchases to high
    net-worth or high income investors and are not registered
    offerings that must provide investors with full disclosures and
    the protections that follow from registration.
        This is something we are very focused on, as some of our
    recent enforcement actions reflect. The Federal securities laws
    provide important market and investor protections in connection
    with the offer and sale of securities--regardless of whether
    they are called shares of stock or digital assets or tokens. If
    you are offering digital asset or tokens that are securities to
    U.S. investors, you have two options: (1) comply with an
    exemption from registration; or (2) register the offering with
    the SEC.
        Secondary market activities in the digital asset markets
    also raise concerns. As currently operating, trading platforms
    in this space often permit the trading of securities but offer
    substantially less investor protection than in our traditional
    securities markets, with correspondingly greater opportunities
    for fraud and manipulation.
        Finally, ICO markets span national borders and significant
    trading may occur on systems and platforms outside the U.S. As
    a result, risks can be amplified, including the risk that
    market regulators, like the SEC, may not be able to effectively
    pursue bad actors or recover funds.
        We are cognizant of both the benefits and risks presented
    by this rapidly evolving area. We recognize its potential to
    facilitate capital formation--one of our three core missions.
    At the same time we continuously balance that goal with our
    other two core missions--to protect investors and maintain
    fair, orderly and efficient markets.

    Q.7. For example, is it fair to say that ICOs have the
    potential to expand access to capital for small businesses?
        If so, do you have any data that indicates this?

    A.7. I have said before that technological innovations have
    improved our markets, including through increased competition,
    lower barriers to entry and decreased costs for market
    participants. Distributed ledger and other emerging
    technologies have the potential to further influence and
    improve the capital markets and the financial services
    industry. Businesses, especially smaller businesses without
    efficient access to traditional capital markets, can be aided
    by financial technology in raising capital to establish and
    finance their operations, thereby allowing them to be more
    competitive both domestically and globally. And these
    technological innovations can provide investors with new
    opportunities to offer support and capital to novel concepts
    and ideas.
        But technological advancement--including the introduction
    of technological developments into our securities offering and
    trading infrastructure and the raising of capital to fund
    technological advancement--must be pursued in harmony with our
    Federal securities laws. These laws reflect our tripartite
    mission to protect investors, maintain fair, orderly and
    efficient markets and facilitate capital formation. We should
    embrace beneficial innovations, including new techniques for
    capital raising, but not at the expense of the principles
    undermining our well-founded and proven approach to protecting
    investors and markets.
        We have not performed a quantitative study of this nature;
    however, we have implemented a number of initiatives designed
    to aid innovators, including those in the distributed ledger
    technology space. In October 2018, the SEC announced the
    formation of the Strategic Hub for Innovation and Financial
    Technology (FinHub), which serves as a public resource for
    FinTech-related issues at the SEC, including matters dealing
    with distributed ledger technology. The FinHub provides a
    portal for industry and the public to engage directly with SEC
    staff on innovative ideas and technological developments.
    Additionally, the FinHub is a warehouse of information
    regarding the SEC's activities and initiatives involving
    FinTech and will serve as a platform and clearinghouse for SEC
    staff to acquire and disseminate information and FinTech-
    related knowledge within the agency.

    Q.8. In your testimony, you mention regular meetings with other
    agencies to consider areas where additional regulatory
    oversight of ICOs and digital assets may be necessary.
        Can you provide specific updates on the changes that you
    are considering to your policy and oversight of virtual
    currencies?

    A.8. The SEC will continue to closely coordinate with our
    regulatory and law enforcement partners across the globe on
    these issues. Through collaborations such as cross-agency
    working groups like the Financial Stability Oversight Council's
    Digital Assets and DLT Working Group, and in other contexts, we
    will continue to explore whether there are regulatory gaps and
    consider the appropriate regulatory approach going forward. To
    the extent that new issues arise in our markets that the SEC is
    unable to address, we will alert Congress to gaps in authority
    and request additional authority where necessary.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                            FROM JAY CLAYTON

    Q.1. I want to draw your attention to a concerning trend: U.S.-
    listed, Cayman-incorporated, Chinese companies continue to
    exploit American capital markets at the expense of American
    investors. After enjoying the benefits of a U.S. listing, a
    controlling Chinese shareholder takes the company private at a
    low valuation, then relists in Shanghai or Hong Kong at a
    dramatically higher price. Through this scheme, Chinese
    shareholders are making billions at the expense of American
    minority investors.
        What tools does the SEC currently have--or need--to protect
    U.S. investors, maintain fair markets, and prevent Chinese
    exploitation of take-private transactions?

    A.1. Going-private transactions are subject to both Federal and
    State (or foreign) law. The Federal securities laws are focused
    on the disclosure of material information in a going-private
    transaction and the imposition of liability for such
    disclosures. State or foreign law (such as Cayman law) governs
    the other important issues in a going-private transaction that
    your question raises, such as the board of directors' fiduciary
    duties (including with respect to the consideration offered in
    the transaction), procedural safeguards to address self-dealing
    concerns and the requisite security holder votes needed for
    approval of the transaction.
        Exchange Act Rule 13e-3 is the key SEC rule that governs
    going-private transactions. Under the rule, a disclosure
    document (Schedule 13E-3) must be publicly filed and delivered
    to all security holders of the target company prior to the
    closing of the transaction. Schedule 13E-3 requires disclosure
    specifically targeted at the fairness of the consideration
    offered in a going-private transaction and possible conflicts
    of interest, including: (1) the negotiations leading up to the
    execution of a transaction agreement, including any alternative
    transactions proposed; (2) the purposes of the transaction; (3)
    any plans or proposals for the company following the
    transaction; (4) historical and pro forma financial statements,
    in certain circumstances; and (5) the substantive and
    procedural fairness of the transaction to unaffiliated security
    holders, including: whether a report or opinion about the
    transaction's fairness was received; whether the controlling
    security holder reasonably believes the transaction is fair to
    unaffiliated security holders; and the factors considered by
    the controlling security holder in making this fairness
    determination.
        This disclosure is subject to staff review and the
    liability provisions of Rule 13e-3, which prohibits any
    materially false misstatement or omission, and to the general
    anti-fraud provisions of the Federal securities laws.
        The SEC has pursued securities law violations by foreign-
    based issuers involving market manipulation, accounting and
    disclosure violations and auditor misconduct, among others. The
    SEC has various tools at its disposal for doing so. For
    instance, it can conduct investigations to determine whether
    any Federal securities laws have been violated, and, if there
    is evidence of any violation, it can bring charges in Federal
    district court against the entity. To conduct these
    investigations, the SEC can utilize tools such as the IOSCO
    Multilateral Memorandum of Understanding to obtain documents
    and testimony from foreign jurisdictions, as well as leverage
    Mutual Legal Assistance Treaties with the assistance of the
    U.S. Department of Justice.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
                            FROM JAY CLAYTON

    Q.1. I understand that the SEC has delegated the authority for
    creating accounting standards to the Financial Accounting
    Standards Board or FASB. FASB has led the way globally when it
    comes to accounting regulation. In light of pressure for the
    International Accounting Standards Board to assume a greater
    importance compared to FASB or perhaps even replace FASB, this
    may be an appropriate time to reevaluate FASB's standard-
    setting practices.
        To that end it would be helpful to hear your perspective as
    to how the SEC estimates the impact of new accounting rules
    before they're implemented. The Current Expected Credit Loss
    (CECL) and Long Duration Contract rules in particular seem like
    they are having adverse consequences that could have been fixed
    before the respective rules had been finalized if there had
    been a more thorough vetting process.
        Is the SEC still accountable for understanding the full
    impact of new accounting rules? If so, do you think it's
    appropriate to require field testing, stakeholder input, and
    cost-benefit analyses before moving forward with new accounting
    standards?

    A.1. Consistent with Federal law, in 2003 the SEC determined
    that the FASB and its parent organization, the Financial
    Accounting Foundation (FAF), satisfy the criteria Congress set
    forth in Section 108 of the Sarbanes-Oxley Act and,
    accordingly, the FASB's financial accounting and reporting
    standards are recognized as ``generally accepted'' for purposes
    of the Federal securities laws.
        As a result, the Commission necessarily oversees the FASB's
    activities in order to carry out our responsibilities under the
    Federal securities laws in an effective manner and works with
    the FAF and the FASB to ensure that the FASB continues to meet
    the required characteristics of a designated accounting-
    standard setter under the Sarbanes-Oxley Act. At the same time,
    we also recognize the importance of the FASB's independence.
        I believe the FASB must use independent judgment in setting
    accounting standards and not be constrained in its discussion
    of issues. This is necessary to ensure that the standards
    developed have the highest degree of credibility in the
    business and investing communities. The alternative, whereby
    FASB sets accounting standards that privilege certain economic
    activities or are designed to achieve certain economic results,
    could result in many harms, including causing investors to lose
    confidence in the accuracy or quality of the reported
    information. Such an outcome could hinder our markets and raise
    the cost of capital for everyone.
        That being said, I believe it is useful for the FASB to
    perform field testing, gather stakeholder input and conduct
    cost-benefit analyses as it already does as part of its
    deliberative process. The process benefits from a two-way
    dialogue between the FASB and its constituents, as the FASB
    develops standards that meet a specific need with justification
    that balances the related costs and benefits. Specifically,
    when setting standards, the FASB states that it weighs whether
    the expected improvement in the quality of the information
    provided to users justifies the cost of preparing and providing
    that information.
        For example, the CECL outreach included significant
    outreach, including meeting with over 200 users of financial
    statements, and holding more than 85 meetings and workshops
    with preparers (including field work at 25 company locations)
    to get direct input on the proposed standard. Overall, I also
    remain supportive of all parties engaging in productive
    dialogue regarding the new accounting standard to further our
    shared goal of maintaining high-quality financial reporting for
    the benefit of investors in the U.S. capital markets and
    addressing unintended negative consequences.
                                    ------

             RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                            FROM JAY CLAYTON

    Q.1. Some have criticized the SEC's February 21, 2018,
    Cybersecurity Guidance for not being clear enough about when
    companies should disclose cybersecurity incidents. In your
    testimony, you footnote to an April 24, 2018, SEC press release
    announcing that the ``entity formerly known as Yahoo! Inc. has
    agreed to pay a $35 million penalty to settle charges that it
    misled investors by failing to disclose one of the world's
    largest data breaches in which hackers stole personal data
    relating to hundreds of millions of user accounts.'' The
    release notes that the cyberintrusion occurred in December
    2014, but states that ``when Yahoo filed several quarterly and
    annual reports during the 2-year period following the breach,
    the company failed to disclose the breach or its potential
    business impact and legal implications.''
        Based on the SEC's 2018 Cybersecurity Guidance, when should
    Yahoo have disclosed this breach?

    A.1. The Commission's February 2018 Guidance on Public Company
    Cybersecurity Disclosures expresses our belief that it is
    critical that public companies take all required actions to
    inform investors about material cybersecurity risks and
    incidents in a timely fashion. The guidance also stresses the
    importance for public companies to have disclosure controls and
    procedures in place to, among other things, help ensure that
    the company makes timely disclosures of material events,
    including those related to cybersecurity.
        Although our disclosure rules do not specifically refer to
    cybersecurity risks and incidents, a number of the requirements
    impose an obligation to disclose such risks and incidents
    depending on a company's particular circumstances. \1\ In
    addition, a company generally must disclose such material
    information as may be necessary to make the company's required
    disclosures not misleading. Generally, the Commission considers
    information to be material if it would be viewed by the
    reasonable investor as important in making an investment
    decision or as having significantly altered the total mix of
    information available. Where a company has become aware of a
    material cybersecurity incident or risk, it must make timely
    disclosures pursuant to its obligations in periodic or current
    reports under the Exchange Act, and in registration statements
    under the Securities Act.
    ---------------------------------------------------------------------------
         \1\ You note that some have criticized this approach and called
    for greater specificity. On occasions where these concerns have been
    raised to me, I have requested that those commentators provide specific
    language that would address their objectives in a manner consistent
    with the Commission's long-standing and proven approach to disclosure
    mandates, including materiality. We have not received any such
    submissions for consideration.
    ---------------------------------------------------------------------------
        As outlined in its April 24, 2018, order, the Commission
    found that when Yahoo filed several quarterly and annual
    reports during the 2-year period following the breach, the
    company failed to disclose the breach or its potential business
    impact and legal implications. Instead, the company's SEC
    filings stated that it faced only the risk of, and negative
    effects that might flow from, data breaches. The Commission
    found that Yahoo! knew, or should have known, that its
    disclosures in its annual reports on Form 10-K for the fiscal
    years ending December 31, 2014, and December 31, 2015, and in
    its quarterly reports on form 10-Q for the first three quarters
    of 2015 and the first two quarters of 2016, among other
    filings, were materially misleading.

    Q.2. You have called for more robust disclosures in certain
    instances, such as Brexit related risks. However, according to
    a February 2018 GAO report, the ``SEC faces constraints in
    reviewing climate-related and other disclosures because it
    primarily relies on information that companies provide. SEC
    senior staff explained that SEC's Division of Corporation
    Finance staff . . . do not have the authority to subpoena
    additional information from companies.'' In the same report,
    GAO notes that ``in an investigation of Peabody Energy under a
    New York State law, the Attorney General of New York State
    subpoenaed the company's internal documents and found that
    although the company's disclosures denied it had the ability to
    reasonably predict the impact of future climate change laws and
    regulations on its business, Peabody had made internal market
    projections showing severe negative impacts from certain
    potential laws and regulations and failed to disclose those
    projections to the public.''
        How is the SEC addressing the constraints identified in the
    GAO report regarding the SEC's ability to review disclosures
    effectively?

    A.2. In its February 2018 report, the GAO noted that the scope
    of a compliance review conducted by our Division of Corporation
    Finance differs from the scope of an investigation by our
    Division of Enforcement, State attorneys general or other law
    enforcement authorities who have authority to require the
    production of nonpublic information for law enforcement
    purposes. As a result, as GAO noted, the detailed information
    companies rely on in making materiality decisions when
    providing disclosures in compliance with the Federal securities
    laws is generally not available in the course of a compliance
    review by SEC Division of Corporate Finance staff.
        Regardless of the availability of such information during a
    compliance review, the company is subject to provisions in the
    Federal securities laws and well established case law precedent
    that specify what information it must disclose in its filings.
    Our staff approaches each filing review with professional
    skepticism and does not, in the normal course, question
    disclosures that appear to be in compliance with our rules and
    the Federal securities laws. Many of these disclosures are in
    response to principles-based requirements based upon
    materiality.
        The SEC's regulatory, disclosure-based framework is working
    as designed. The Commission establishes rules and regulations;
    the Commission and staff communicate requirements and encourage
    full compliance; the Division of Corporation Finance, through
    its selective review of company filings, may question
    disclosure decisions, request support for those decisions as it
    assesses compliance and may refer instances of material
    noncompliance to our Division of Enforcement; and our Division
    of Enforcement investigates potential violations, including
    exercising the Commission's subpoena authority, after which the
    Commission may file an action in Federal district court or
    institute an administrative proceeding. Although the GAO stated
    that our compliance review staff faces constraints because it
    does not have access to all of the information companies use to
    determine materiality, the Federal securities laws and well
    established case law precedent provide ample incentive for
    companies to take these disclosure decisions seriously.
    Furthermore, after a thorough evaluation of our filing review
    process to assess compliance with the identified disclosure
    requirements, the GAO did not have any recommendations for
    improving the process or changing the way in which the
    Commission delegates or exercises its subpoena power.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                   SENATOR MENENDEZ FROM JAY CLAYTON

    Q.1. Please provide a timeline for the SEC's work on the five
    remaining executive compensation rules mandated by the Dodd-
    Frank Street Reform and Consumer Protection Act.

    A.1. On December 18, 2018, the SEC approved final hedging
    disclosure rules. Those rules, which were mandated by the Dodd-
    Frank Act, require companies to disclose in proxy and
    information statements their practices or policies regarding
    the ability of employees or directors to engage in certain
    hedging transactions with respect to company equity securities.
        The remaining Dodd-Frank Act executive compensation
    rulemakings are on the Commission's rulemaking agenda, and we
    are continuing our work to finalize them. As I noted in my
    written testimony, as a result of the complexity and scope of
    the existing executive compensation disclosure regime, as well
    as the nature of the mandates, I believe a serial approach is
    likely to be the most efficient and best serve the SEC's
    mission.

    Q.2. According to the SEC's joint statement with the PCAOB,
    there are 224 companies listed on U.S. exchanges with a
    combined market capitalization of $1.8 trillion that are
    located in countries, primarily China, that make it difficult
    for U.S. regulators to review their financial reporting. This
    presents a major risk to U.S. investors who may assume that the
    financial reporting of these companies is in line with U.S.
    requirements. Moreover, it's fundamentally unfair for Chinese
    companies to take advantage of the strength and liquidity of
    U.S. capital markets, but not have to play by the rules.
        The U.S.-China Economic and Security Review Commission
    recommended that Congress consider legislation providing
    authority to ban and delist companies that have refused to sign
    reciprocity agreements with the Public Company Accounting
    Oversight Board.
        Despite the SEC and PCAOB's best efforts to reach an
    agreement, it appears unlikely that Beijing will cooperate.
        Would such authority strengthen your hand in negotiations
    with your Chinese counterparts?

    A.2. The joint statement by SEC Chief Accountant Wes Bricker,
    PCAOB Chairman William D. Duhnke III and me outlines current
    challenges facing U.S. regulators to obtain information related
    to U.S. listed companies with significant operations in China,
    and how they may adversely affect investors in the U.S. markets
    and the interests they own in these companies. For example,
    these challenges impact the PCAOB's ability to inspect the
    audits of these companies in question.
        I understand that the PCAOB has been in negotiations with
    foreign audit regulators in certain countries, including China,
    that currently prevent the PCAOB from carrying out its
    inspection process with respect to the audits of companies
    based in those countries. I note that even while these
    negotiations are continuing, a refusal to cooperate by an audit
    firm, either in an inspection or an investigation, could
    subject the firm to SEC or PCAOB sanctions and remedial
    measures. Having the ability to impose sanctions and remedial
    measures certainly may enhance the ability to make further
    progress with respect to such negotiations, although the
    imposition of such sanctions and remedial measures would
    require an assessment of their potential impact on U.S.
    investors and the broader capital markets.
        As we continue our efforts to obtain appropriate access to
    information, I would welcome an opportunity to further discuss
    these issues with you and to have SEC staff provide technical
    assistance or other information about draft legislation.

    Q.3. The statement mentions ``remedial actions involving U.S.-
    listed companies'' as a possible consequence for in certain
    company-specific issues.
        Under existing authorities, what are the specific remedial
    actions the SEC and PCAOB could employ to address such issues?

    A.3. The joint statement noted that if information barriers
    continue to exist, we may consider remedial actions, which
    could include, among other things: (1) requiring affected
    companies to make additional disclosures to investors; (2)
    placing additional restrictions on new securities issuances
    from companies with activities in China; and (3) bringing
    actions against auditors who do not meet our requirements.
        All of these actions have collateral consequences that must
    be carefully evaluated as we and the PCAOB seek to meet our
    objectives.

    Q.4. I noted your recent comments on the implications of Brexit
    for our own financial sector.
        In light of the recent collapse of the plan to vote on a
    Brexit deal last week, will you provide the Commission's
    current view of the options facing the U.K. in its dealings
    with the EU, with a focus on the implications for the U.K.
    financial sector and the risks to the many U.S. banks that base
    their European options in the U.K.?

    A.4. I continue to be concerned that the effects of Brexit will
    be international, including on our U.S. markets and our
    investors. I am encouraged by memoranda of understandings
    entered into by the European Securities Markets Authority and
    the Bank of England and the U.K. Financial Conduct Authority in
    February 2019. These agreements are important steps towards
    preventing significant disruption of securities and derivatives
    transactions in the event that the U.K. exits from the European
    Union without a deal in place.
        The Commission's responsibility with respect to Brexit is
    focused on its potential effects on U.S. investors and
    securities markets. The Brexit-related concerns you have
    highlighted with the U.K. financial sector will have
    international effects given the interconnectedness of our
    global financial markets. We are monitoring company disclosure
    concerning the potential impact that Brexit may have. This
    effort includes monitoring disclosures made by banks and
    financial institutions with significant U.K. exposure.
    Additionally, we continue to engage and communicate with other
    U.S. financial authorities, with our U.K. and EU counterparts,
    and with market participants to consider the effects of Brexit
    to our market utilities and infrastructure. We will remain
    focused on identifying and planning for potential Brexit-
    related impacts on U.S. investors and markets.

    Q.5. I worked to include the honest broker provision in the
    Wall Street Reform law, and our clear intent was for the SEC to
    establish a uniform standard of conduct, if warranted by a
    study. Despite the 2011 SEC study recommending a uniform
    standard of conduct for brokers and investment advisers, the
    SEC's recent proposal fails to establish a uniform standard of
    conduct for broker-dealers and investment advisers, and it puts
    the burden on the customer to understand the difference between
    brokers and investment advisers--ignoring the SEC's own
    findings.
        Moreover, the SEC's own Investor Advisory Committee
    recommended in November that everyone--investment advisers and
    brokers--be held to a uniform standard.
        Will you commit to personally taking another look at the
    SEC's 2011 study on the issue as well as the recommendations
    from the SEC's Investor Advisory Committee before you move
    forward with a formal rule?

    A.5. The recommendations of the staff's 2011 study were useful
    to us in evaluating how to specifically enhance investor
    protection and improve the obligations that apply to broker-
    dealers when making recommendations to retail customers. After
    considering the staff's recommendations from the 2011 study,
    the information that the public has submitted over the years
    and our extensive experience regulating broker-dealers and
    investment advisers, the Commission proposed an approach
    focusing on enhancements to broker-dealer regulation, taking
    into consideration the characteristics of the broker-customer
    relationship. The broker-dealer relationship generally is
    different from the investment adviser-client relationship.
        I believe our proposal requires financial professionals,
    whether broker-dealers, investment advisers, or both (aka
    ``dual-hatted persons''), to follow standards of conduct that
    reflect key fiduciary principles tailored to the client
    relationship. This framework draws from the recommendations of
    the 2011 study.
        The staff is considering all comments, including
    recommendations from the SEC's Investor Advisory Committee and
    the SEC 2011 study, as it develops a recommendation for the
    Commission.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                            FROM JAY CLAYTON

    Q.1. SEC Disgorgement--In your written testimony you mentioned
    the effects that the Supreme Court case Kokesh v. SEC has had
    on the SEC's ability to recover ill-gotten gains from bad
    actors and return them to wronged investors. The most recent
    SEC enforcement report said that to date the SEC may have to
    forgo $900 million in disgorgement from cases filed in the last
    year and a half. That's a significant number, particularly in
    light of the fact that the SEC recently reported that in its
    last fiscal year it collected $3.9 billion in total enforcement
    actions returned $794 million to harmed investors in 2018.
        Can you describe in more detail how Kokesh is affecting the
    SEC's ability to return illegally obtained funds to investors?
        Can you explain what this means for the average investor
    who is the victim of fraud?

    A.1. In Kokesh v. SEC, the Supreme Court held that our claims
    for disgorgement are subject to a 5-year statute of
    limitations. From a remediation standpoint, I am concerned that
    we may be unable to recover a fraudster's illegal profits to
    remedy the losses of investors, particularly retail investors,
    if they were defrauded in well-concealed and long-running
    frauds. Said simply, if the fraud is well-concealed and
    stretches beyond the 5-year limitations period applicable to
    penalties, it is likely that we will not have the ability to
    recover funds invested by our retail investors more than 5
    years ago. And our experience under Kokesh is showing that this
    already is happening. With respect to matters that have already
    been filed, the Division of Enforcement estimates that the
    Court's ruling in Kokesh may cause the Commission to forgo up
    to approximately $900 million in disgorgement, of which a
    substantial amount potentially could have been returned to
    retail investors. As we continue to bring new Enforcement
    actions, this number is likely to increase.

    Q.2. Human Capital Management Disclosure--Earlier this summer I
    sent you a letter describing my belief that time is past due
    for the SEC to provide more requirements and guidance regarding
    human capital management disclosure. Currently, the only data
    required to be disclosed under SEC rules are the number of
    employees a company has, the median pay of those employees and
    the compensation of the CEO. But other information is clearly
    important to investors, including the amount spent by the
    company on worker training, and average turnover, among others.
    Increasing disclosure requirements doesn't mean we have to
    impose significant costs on businesses. A Harvard Law School
    study finds that a majority of companies in their dataset
    already collect a variety of human capital metrics of
    increasing interest to investors through their internal
    management processes. I appreciate your response to my letter
    on this topic and the discussions we've had on it.
        Do you agree that human capital management issues are very
    important to businesses?
        Will you work with me to expand human capital management
    disclosure requirements and improve disclosures in this area?

    A.2. I appreciate your focus on the importance of human capital
    management. As I stated in my response to your letter, I
    believe the strength of many of our public companies is due, in
    important part, to their human capital.
        In February 2019, I shared some thoughts on human capital
    disclosure on a call with members of the SEC's Investor
    Advisory Committee. Specifically, I expressed that human
    capital, like intellectual property, often represents an
    essential resource and driver of performance for many of
    today's companies. While I am wary of rules or guidance that
    would mandate rigid human capital standards or metrics for all
    public companies given that each industry, and even each
    company within a specific industry, has its own human capital
    circumstances, I believe investors would be better served by
    understanding the lens through which each company looks at
    their human capital. For example, does management focus on the
    rate of turnover, the percentage of their workforce with
    advanced degrees or relevant experience, the ease or difficulty
    of filling open positions, or some other factors? The
    principles of materiality, comparability, and efficiency should
    be guideposts for human capital disclosure. I have asked the
    Investor Advisory Committee for their input and feedback on
    what they look for as investors and, when making an investment
    decision, what questions they ask issuers relating to human
    capital.
        Additionally, the Division of Corporation Finance has been
    working to evaluate and recommend improvements to our public
    company disclosure requirements. I expect human capital
    disclosures will be among the issues under consideration. I
    have asked the Division of Corporation Finance to consider
    feedback from investors, registrants, and other parties, and
    make recommendations to the Commission regarding additional
    action, as appropriate.
        I welcome further engagement with you as we continue as to
    consider the best way forward.

    Q.3. Volcker Rule--I have a question about the covered funds
    section of the Volcker Rule and the recent proposed rulemaking.
    Despite very clear legislative intent, banks are prohibited
    under the current rule from investing in certain fund
    structures that would otherwise be permitted investments if a
    bank made a direct investment from its own balance sheet, even
    if the fund simply wants to extend credit or make long-term
    investments to potential investors (such as startup companies).
    Investing through a fund structure supports safety and
    soundness due to the ability to diversify risk as well as
    ensuring that companies looking to grow and innovate have the
    capital that they need. It is clear to me that the agencies
    have the legal authority they need since they've already
    allowed for certain specific exclusions for permissible
    investments in fund structures.
        Wouldn't you agree that if a bank can make an investment on
    its balance sheet that it should be allowed to make that same
    investment through a fund structure?

    A.3. Since the adoption of the Volcker Rule in 2013, banking
    entities and the agencies charged with implementing the rule
    have gained experience through its implementation, including
    through examinations. Based on that experience, and in response
    to feedback received in the course of administering the Volcker
    Rule, we and the other agencies have identified opportunities,
    consistent with the statute, for improving the implementation
    of the Volcker Rule. In short, we recognize that to effectively
    implement the Volcker Rule its terms should reflect our
    collective experience with prudential regulation and market
    activities.
        The amendments we proposed June 2018 included a request for
    comment regarding issues relating to the ``covered fund''
    definition. Among the requests for comment are requests
    generally about whether the definition of ``covered fund''
    effectively implements the statute and is appropriately
    tailored. We have received many comments responding to these
    requests, as well as the multiple other requests about the
    ``covered fund'' definition. SEC staff is carefully reviewing
    these comments and remains engaged in regular and ongoing
    dialogue with the staffs at our fellow Federal financial
    regulators. I look forward to considering the issues raised,
    including concerns about the scope of the ``covered fund''
    definition.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                            FROM JAY CLAYTON

    Q.1. In response to my suggestion that you reduce investor
    confusion by using the same language for investment advice
    standards that apply to registered investment advisers and for
    those that apply to broker-dealers, you indicated that the SEC
    is considering doing so, saying that ``we may do that.''
        To clarify that statement, will you commit that, in its
    finalized form, Regulation Best Interest will comply with
    section 913(g) of the Dodd-Frank Wall Street Reform and
    Consumer Protection Act, in that ``the standard of conduct for
    such broker or dealer with respect to such customer shall be
    the same as the standard of conduct applicable to an investment
    adviser under section 211 of the Investment Advisers Act of
    1940,'' and that broker-dealers and registered investment
    advisers will all be required to give advice ``without regard
    to [their] financial or other interest?'' \1\
    ---------------------------------------------------------------------------
         \1\ https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-
    111publ203.pdf

    A.1. We believe our proposal is consistent with the underlying
    intent of Section 913, including that a broker-dealer should
    not put its interests ahead of the retail customer's interests
    when making a recommendation to a retail customer.
        Our proposal sets a clear, enhanced standard of conduct for
    broker-dealers that is drawn from the principles applicable to
    an investment adviser's fiduciary duty. The commonality of
    these conduct standards is clear when the requirements of
    proposed Regulation Best Interest are compared to the standards
    of conduct required of investment advisers under the Advisers
    Act.
        While the two standards draw from common principles, under
    the proposal, their application would differ in practice
    because the relationship models of broker-dealers and
    investment advisers differ. But--importantly--the overall
    principles are the same, and the proposal is designed to make
    sure that, at the point in time at which the recommendation or
    advice is provided, the analytical process followed by the
    financial professional should be the same regardless of whether
    the retail investor chooses an investment adviser or broker-
    dealer: advice provided with diligence and care by a financial
    professional that is prohibited from placing its own interests
    ahead of the retail investor's interests.

    Q.2. In response to my suggestion that broker-dealers should be
    held to the same fiduciary standard that investment advisers
    are held to, you stated that, ``Investment Advisers are allowed
    to contract around this standard. It's not well known. This is
    something that we want people to understand. The baseline
    Advisers standard is the Adviser cannot put their interests
    ahead of the client's interests. Now, they are able to say `But
    I'm going to do these things' and with informed consent, they
    can cut back on that standard.''
        While investors may consent to limitations on a broker-
    dealer's or investment adviser's services, and to the existence
    of certain conflicts of interest, do you believe that a
    reasonable investor would ever consent to be harmed?
        Will you commit that, for both broker-dealers and
    investment advisers alike, disclosure and consent to conflicts
    of interest will never be deemed to satisfy either a broker-
    dealer's or investment adviser's obligations to act in the best
    interests of the customer if the advice results in harm to the
    investor?

    A.2. Under proposed Regulation Best Interest, a broker-dealer
    would be required to act in the best interest of the retail
    customer when making a recommendation, and would be prohibited
    from placing its financial or other interest ahead of the
    interest of the retail customer. In order to discharge the
    duty, a broker-dealer would need to: first, disclose material
    facts relating to its relationship with the customer; second,
    enhance its current compliance framework to meet the demands of
    a more rigorous best interest standard; and third, eliminate,
    or mitigate and disclose, material conflicts of interest
    related to financial incentives. In other words, even if a
    broker-dealer has mitigated and disclosed its conflicts, it
    must still have a reasonable basis to believe that a
    recommendation is in the best interest of the retail customer
    and the broker-dealer must have written policies and procedures
    reasonably designed to prevent it from placing its interests
    ahead of the interest of the retail customer.
        In the proposed Commission interpretation of the standard
    of conduct for investment advisers, the Commission stated that
    the client cannot waive the Federal fiduciary duty. Although
    the investment adviser fiduciary duty is not waivable, it is
    well established that the terms of the investment adviser
    relationship--and therefore the scope of the duty in that
    relationship--may be shaped by disclosure and informed consent.
    Our proposed interpretation provides further details on this
    widely accepted process--that disclosures regarding the scope
    and terms of the relationship should be sufficiently specific
    so that a client is able to decide whether to provide informed
    consent.
        This process of scoping the terms of the advisory
    relationship, which is regularly effectuated through account
    agreements and Form ADV, is widely accepted in the industry and
    provides for arrangements such as limited account services and
    certain third-party compensation to the investment adviser. Our
    proposed relationship summary, if adopted, is designed to
    increase retail investor awareness of the material terms of
    common arrangements with investment professionals, and the fees
    and conflicts of interest that apply. I have been surprised
    that, with all of the public dialogue about the fiduciary duty,
    there is not more acknowledgment of the fact that the
    application of that duty can and does vary depending on the
    terms of the agreement between the client and adviser. The
    proposed requirements of the relationship summary would
    highlight the nature of an advisory relationship and the scope
    of services that the investment adviser provides.
        We have received a lot of thoughtful comments on the
    proposed interpretation of the standard of conduct for
    investment advisers and Commission staff is reviewing comments
    carefully, engaging further with commenters and thinking about
    what next steps it might recommend to the Commission.

    Q.3. When the SEC proposed the Standards of Conduct for
    Investment Professionals Rulemaking Package in April, you
    stated that you intend for it to ``rais[e] the standard of
    conduct for broker-dealers when they provide recommendations to
    retail investors.'' \2\
    ---------------------------------------------------------------------------
         \2\ https://www.sec.gov/news/public-statement/clayton-overview-
    standards-conduct-investment-professionals-rulemaking
    ---------------------------------------------------------------------------
        Please list any broker-dealer practices that are permitted
    under current FINRA suitability rules but that would be
    prohibited under the SEC's proposal.

    A.3. Under current standards, it has been argued that broker-
    dealers are permitted to recommend to their retail customer a
    product that is suitable but more costly for the customer than
    another product that the broker-dealer offers--because the
    first product makes the broker-dealer more money.
        Proposed Regulation Best Interest would address this
    concern. Under proposed Regulation Best Interest, a broker-
    dealer, when making a recommendation of a securities
    transaction or investment strategy to a retail customer, will
    be required to act in the best interest of that customer at the
    time the recommendation is made, including the broker-dealer
    being prohibited from placing its financial or other interest
    ahead of the interest of the retail customer.
        The proposal acknowledged that the cost (including fees,
    compensation, and other financial incentives) associated with a
    recommendation would generally be an important factor in
    evaluating whether a recommendation is in the best interest of
    a retail customer. Specifically, the proposal noted that in
    order to meet its Care Obligation, when a broker-dealer
    recommends a more expensive product over another reasonably
    available alternative offered by the broker-dealer, the broker-
    dealer would need to have a reasonable basis to believe that
    the higher cost is justified based on other factors (e.g., the
    product's objectives, characteristics, liquidity, risks and
    potential benefits, volatility, and likely performance in a
    variety of market and economic conditions), in light of the
    retail customer's investment profile.

    Q.4. In August, you stated that, based on what you heard at a
    series of investor roundtables, ``Main Street investors have no
    tolerance for certain questionable sales practices such as
    high-pressure, product-based sales contests,'' that you believe
    ``these practices should be eliminated,'' and that their
    elimination ``would enhance investor protection but would not
    adversely affect investor choice and opportunity.'' \3\
    ---------------------------------------------------------------------------
         \3\ https://www.sec.gov/news/public-statement/statement-clayton-
    082218
    ---------------------------------------------------------------------------
        Do you believe that firms should be permitted to use other
    sales practices that create harmful conflicts of interest,
    including sales contests based on total production, bonuses for
    recommending certain products, and quotas for sales of certain
    products (such as proprietary funds)?
        Why or why not?

    A.4. I do not believe that broker-dealers or investment
    advisers should be permitted to use sales practices that harm
    retail investors. As I have stated publicly, I believe that
    certain questionable sales practices such as high-pressure,
    product-based sales contests should be eliminated. In my view,
    eliminating these practices would enhance investor protection
    but would not adversely affect investor choice and opportunity.
    However, there is an important distinction between compensating
    individuals based on broad performance metrics--an important
    component of the compensation structure of many professional
    services firms that have served clients well--and incentivizing
    individuals to recommend a particular product through time-
    based quotas, bonuses, or sales contests.
        As proposed, Regulation Best Interest would not specify
    particular compensation practices as impermissible. Broker-
    dealers, however, would be required to act in the best interest
    of the retail customer when making recommendations, without
    placing the financial or other interest of the broker-dealer
    making the recommendation ahead of the interest of the
    customer. The proposed rule includes specified requirements to
    meet this obligation. Importantly, even if a broker-dealer has
    eliminated or appropriately mitigated and disclosed its
    conflicts, it still must have a reasonable basis to believe
    that its recommendations are in the best interest of the retail
    customer.
        For example, it would be inconsistent with the Care
    Obligation of proposed Regulation Best Interest if the broker-
    dealer made the recommendation to a retail customer in order
    to: maximize the broker-dealer's compensation (e.g.,
    commissions or other fees); further the broker-dealer's
    business relationships; satisfy firm sales quotas or other
    targets; or win a firm-sponsored sales contest.
        To be clear, the proposal acknowledges that broker-dealers
    may not be able to appropriately address certain conflicts
    through disclosure and mitigation and that such conflicts may
    be more appropriately avoided entirely. For example: payment or
    receipt of certain noncash compensation that presents conflicts
    of interest for broker-dealers, such as certain sales contests,
    trips, prizes, and other similar bonuses. The Commission
    requested comment on whether the Commission should prohibit
    receipt of certain noncash compensation. We have received a lot
    of thoughtful comments on this issue, and Commission staff is
    reviewing comments carefully, engaging further with commenters
    and developing a recommendation to the Commission. In
    developing our final rule, I believe we should address the
    issues of elimination and mitigation with the goal of better
    aligning the legal obligations with retail investors'
    reasonable expectations.

    Q.5. Will you commit that any final Standards of Conduct for
    Investment Professionals rule will prohibit firms from creating
    incentives that would result in recommendations based on the
    financial interests of the firm or financial professional
    rather than the best interests of the investor?
        For example, will you commit than any final Standards of
    Conduct will prohibit: sales quotas, bonuses for recommending
    certain products, and other forms of sales contests; the use of
    trips and other awards for meeting production thresholds that
    may encourage inappropriate rollover recommendations; and
    ratcheted compensation grids, which retroactively and
    precipitously increase professionals' compensation?

    A.5. I do not believe that broker-dealers should be permitted
    to use sales practices that harm retail investors. As I have
    stated publicly, I believe that certain questionable sales
    practices such as high-pressure, product-based sales contests
    should be eliminated. In my view, eliminating these practices
    would enhance investor protection but would not adversely
    affect investor choice and opportunity.
        To be clear, the proposal acknowledges that broker-dealers
    may not be able to appropriately address certain conflicts
    through disclosure and mitigation and may be more appropriately
    avoided entirely. For example: payment or receipt of certain
    noncash compensation that presents conflicts of interest for
    broker-dealers, such as certain sales contests, trips, prizes,
    and other similar bonuses. The Commission requested comment on
    whether the Commission should prohibit receipt of certain
    noncash compensation. We have received a lot of thoughtful
    comments on this issue and Commission staff is reviewing
    comments carefully, engaging further with commenters and
    developing a recommend to the Commission. In developing our
    final rule, I believe we should address the issues of
    elimination and mitigation with the goal of better aligning the
    legal obligations with investors' reasonable expectations.

    Q.6. Will you commit that any final rule will include strong
    enforcement mechanisms to enforce such a prohibition, including
    a private right-of-action to allow investors to sue advisers
    and broker-dealers who cheat them through the use of these
    practices?
        If not, why not?

    A.6. Regulation Best Interest is designed to enhance the
    Commission's enforcement mechanisms. We do not believe it would
    create any new private right of action or rescission, nor did
    we intend for it to do so.
        The Commission has experience examining and enforcing
    compliance with a variety of obligations under the Federal
    securities laws, including existing obligations that are more
    principles-based or that are based on facts-and-circumstances,
    such as suitability, which is enforced under our anti-fraud
    authority.
        If Regulation Best Interest is adopted, I would expect our
    exam and enforcement staff to assess compliance and potential
    violations, as is the case with any rule. Commission staff is
    engaging with experienced professionals from our Division of
    Enforcement and our Office of Compliance Inspections and
    Examinations to help ensure that if Regulation Best Interest is
    adopted, compliance with the rule can be efficiently examined
    and breaches of the rule can be effectively addressed. We have
    encouraged public comment on any potential issues or concerns
    and have received a lot of thoughtful comments on this issue,
    which Commission staff is considering.

    Q.7. Section 913(g) of the Dodd-Frank Act states that, ``The
    Commission shall . . . examine and, where appropriate,
    promulgate rules prohibiting or restricting certain sales
    practices, conflicts of interest, and compensation schemes for
    brokers, dealers, and investment advisers that the Commission
    deems contrary to the public interest and the protection of
    investors.''
        The Regulation Best Interest proposal does not include an
    in-depth discussion of broker-dealer compensation structures or
    a meaningful examination of how certain sales practices,
    conflicts of interest, and compensation schemes can be and
    often are contrary to the public interest and harmful to
    investors. Similarly, the Investment Adviser guidance provided
    no discussion of these topics. Has the Commission completed
    this Dodd-Frank regulatory requirement elsewhere? If so, please
    provide a written copy of your analysis on these matters.
        To the extent that the Commission has not satisfied this
    regulatory requirement, will you commit to doing so before you
    issue a final rule?

    A.7. In proposing Regulation Best Interest, the Commission
    examined the impact that financial professionals' conflicts of
    interest--specifically those caused by financial incentives--
    can have on the provision of recommendations to retail
    investors. The rule proposing release also discussed certain
    existing sales practices and compensation structures, drawing
    on a range of sources, including our own experience overseeing
    and examining broker-dealers. The Commission recognized the
    harm that conflicted recommendations can cause investors and
    also discussed that conflicts of interests can be particularly
    significant when involving certain types of sales practices and
    compensation structures. The staff continues to consider these
    issues through the ongoing review of comment letters and
    economic studies, as well as discussions with market
    participants and investors.

    Q.8. The one-on-one interviews conducted as part of the RAND
    report on investor testing are an importance source of data for
    understanding the ability of the SEC's proposed disclosures to
    enable investors to make informed decisions.
        Will you commit to publishing full transcripts of these
    interviews?
        If not, why not?

    A.8. The Commission and staff have made significant efforts to
    connect directly with investors, including through investor
    testing and outreach. The SEC's Office of the Investor Advocate
    and the RAND Corporation prepared a research report that sought
    to determine how well investors understood the retail market
    for investment advice. The report was added to the public
    comment file for the Commission's package of rulemakings
    regarding standards of conduct for financial professionals on
    October 12, 2018.
        The SEC's Office of the Investor Advocate also engaged the
    RAND Corporation to conduct investor testing of a sample of the
    Commission's proposed Form CRS Relationship Summary. On
    November 7, 2018, the results of this investor testing were
    added to the public comment file. The testing consisted of a
    nationwide survey and qualitative one-on-one interviews. In the
    report, the RAND Corporation synthesizes its findings from the
    one-on-one interview component of the investor testing, noting
    that although the one-on-one interviews have certain
    limitations, they serve as a valuable complement to the
    nationally representative quantitative survey that the RAND
    Corporation conducted. At that time, we issued a press release
    encouraging the public to submit comments on RAND's investor
    testing report by December 7, 2018.
        The Commission staff also organized seven roundtables
    across the country to provide Main Street investors the
    opportunity to speak directly to me, my fellow Commissioners
    and senior SEC staff to tell us about what they expect from
    financial professionals. These candid, experience-based
    conversations were incredibly valuable and are informing the
    staff's work moving forward. The transcripts from these
    roundtables have been added to the comment files. The
    Commission has also invited investors to share their insights
    and feedback on the proposed Relationship Summary by going to a
    new ``Tell Us'' website. Through these efforts, the Commission
    has received nearly 100 individual feedback submissions.
        The rules' comment files continue to receive and publish
    public comments, and the staff will continue to consider the
    rulemaking record as it develops a recommendation.

    Q.9. If the SEC's own research, such as the data included in
    the RAND report, does not indicate that the SEC's proposed
    disclosures serve their intended purpose of enabling investors
    to make an informed decision between brokerage and advisory
    accounts, will you consider applying a strong, uniform
    fiduciary standard across all accounts, so that investors will
    be protected regardless of whether they fully understand the
    disclosures?

    A.9. All of the feedback we have received, including the data
    included in the RAND report regarding the proposed disclosure
    form, has been very helpful. The staff is considering all
    comments and will take them under consideration in developing a
    recommendation for the Commission.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                 SENATOR CORTEZ MASTO FROM JAY CLAYTON

    Q.1. Protecting Investors With ``Best Interest'' Standard--Can
    you name one or more broker-dealer practice that is permitted
    under current FINRA suitability rules that would be prohibited
    under the proposal?

    A.1. Under current standards, it has been argued that broker-
    dealers are permitted to recommend to their retail customers a
    product that is suitable but more costly for the customer than
    another similar product that the broker-dealer offers--because
    the first product makes the broker-dealer more money.
        Proposed Regulation Best Interest would address this
    concern. Under proposed Regulation Best Interest, a broker-
    dealer, when making a recommendation of a securities
    transaction or investment strategy to a retail customer, would
    be required to act in the best interest of that customer at the
    time the recommendation is made. This would prohibit the
    broker-dealer from placing its financial or other interest
    ahead of the interest of the retail customer.
        The proposal acknowledged that the cost (including fees,
    compensation, and other financial incentives) associated with a
    recommendation would generally be an important factor in
    evaluating whether a recommendation is in the best interest of
    a retail customer. Specifically, the proposal noted that when a
    broker-dealer recommends a more expensive product over another
    reasonably available alternative offered by the broker-dealer,
    in order to meet its Care Obligation, the broker-dealer would
    need to have a reasonable basis to believe that the higher cost
    is justified based on other factors (e.g., the product's
    objectives, characteristics, past preference, liquidity, risks
    and potential benefits, volatility, and likely performance in a
    variety of market and economic conditions), in light of the
    retail customer's investment profile.

    Q.2. Does this proposal require all financial professionals who
    make investment recommendations related to retail customers to
    do so as fiduciaries?

    A.2. Proposed Regulation Best Interest and its ``best
    interest'' standard draws upon principles that apply to
    investment advice in other contexts. Simply put, under proposed
    Regulation Best Interest, a broker-dealer cannot put her or his
    interests ahead of the retail customer's interests. The similar
    levels of protection are clear when proposed Regulation Best
    Interest is compared to the standards of conduct applicable to
    investment advisers.
        Specifically, our proposal is designed to enhance broker-
    dealer regulation by building upon, and being tailored to, the
    unique structure and characteristics of the broker-dealer
    relationship with retail customers and existing regulatory
    obligations, while taking into consideration and drawing on (to
    the extent appropriate) the duties of loyalty and care as
    interpreted under the Advisers Act.
        Our proposal is designed to make sure that, at the point in
    time at which the recommendation or advice is provided, the
    analytical process followed by the financial professional
    should be the same regardless of whether the retail investor
    chooses an investment adviser or broker-dealer: advice provided
    with diligence and care by a financial professional that is
    prohibited from placing its own interests ahead of the retail
    investor's interests. I believe our proposals are designed to
    make investors get just that whether they choose a broker-
    dealer or an investment adviser. And I believe that they should
    have that choice.

    Q.3. Does this proposal require financial professionals to
    provide retail customers with the best available options?

    A.3. Under the proposed Regulation Best Interest's Care
    Obligation, a broker-dealer would be required to have a
    reasonable basis to believe, based on its diligence and
    understanding of the risks and rewards of the recommendation,
    and in light of the retail customer's investment profile, that
    a recommendation is in the best interest of the retail
    customer.
        As described in the proposal, the broker-dealer's diligence
    and understanding of the risks and rewards of the
    recommendation would generally involve consideration of
    factors, such as the costs, the investment objectives and
    characteristics associated with a product or strategy
    (including any special or unusual features, liquidity, risks
    and potential benefits, volatility, and likely performance in a
    variety of market and economic conditions), as well as the
    financial and other benefits to the broker-dealer. The broker-
    dealer would be required to match this understanding of the
    security or strategy to the particular retail customer to form
    a reasonable belief that the security or strategy is in the
    retail customer's best interest.
        This ``facts and circumstances'' approach is similar to
    ``best interest'' approaches under other advice standards,
    including the fiduciary standard applicable to investment
    advisers. These approaches do not specifically define ``best
    interest'' but provide principles-based guidelines. Another
    similarity with those approaches is the recognition that a
    requirement for financial professionals to provide retail
    customers with the ``best available option'' or ``perfect
    advice'' would create a standard that would be virtually
    impossible to meet, particularly with 20-20 hindsight. Instead,
    the proposed standard of conduct for broker-dealers requires
    the recommendation to be in the best interest of the retail
    customer at the time and in the circumstances in which it is
    made, which is similar to how I view the duty of care of an
    investment adviser.

    Q.4. Cryptocurrencies--Will the SEC continue to reject creating
    a cryptocurrency-linked ETF?

    A.4. Certain national securities exchanges registered with the
    SEC have filed proposed rule changes seeking to list and trade
    shares of exchange-traded products based on digital assets,
    such as bitcoin and ether. The proposed exchange-traded
    products have been structured as commodity trusts directly
    holding the digital assets, as trusts holding exchange-traded
    futures on digital assets, managed funds issuing shares whose
    value relates to digital assets, or instruments based on
    digital assets held by the fund. Several of these proposals
    have been disapproved by the Commission, or by the Division of
    Trading and Markets acting pursuant to its delegated authority,
    and several have been withdrawn.
        To approve an exchange's proposed rule change--such as a
    proposal to list a new exchange-traded product--the Commission
    must find that the proposed rule change is consistent with the
    applicable requirements of the Securities Exchange Act of 1934
    (Exchange Act) and the rules and regulations thereunder. The
    Commission's Rules of Practice provide that the submitting
    exchange bears the burden to demonstrate that its proposed rule
    change is consistent with the requirements of the Exchange Act.
        The Commission has emphasized in its disapproval orders
    that its actions to date regarding digital-asset exchange-
    traded products have not rested on an evaluation of whether
    bitcoin, or blockchain technology more generally, has utility
    or value as an innovation or as an investment.
        Instead, the Commission's actions have reflected a finding,
    in each case, that the submitting exchange had not met its
    burden to demonstrate that the proposal was consistent with the
    requirements of the Exchange Act, including Section 6(b)(5),
    which requires that the rules of a national securities exchange
    be designed to ``prevent fraudulent and manipulative acts and
    practices'' and ``protect investors and the public interest.''
        The Commission has also specifically noted that bitcoin
    markets are in the early stages of their development and that,
    over time, regulated bitcoin-related markets may continue to
    grow and develop. Should circumstances change in this manner or
    in a way that otherwise affects the Commission's analysis under
    the Exchange Act, the Commission would then have the
    opportunity to consider, among other things, whether a digital-
    asset exchange-traded product would be consistent with the
    requirements of the Exchange Act.

    Q.5. How is the SEC coordinating with State Attorneys General
    on oversight of cryptocurrencies?

    A.5. Federal and State regulators share an interest in making
    sure investors in digital asset securities and related
    investment products are appropriately protected. SEC staff have
    ongoing interactions with State regulators about securities law
    issues involving digital assets that may affect the citizens of
    their States. We also communicate about digital asset related
    conduct that may be occurring in their States--such as initial
    coin offerings (ICOs). Last year, together with former
    Commissioners Kara Stein and Michael Piwowar, I commended the
    North American Securities Administrators Association on their
    release highlighting important issues and concerns relating to
    ICOs, among other digital asset products.

    Q.6. Have you collaborated on any enforcement actions related
    to fraud in cryptocurrencies? Please describe.

    A.6. Yes. As a general matter, we closely coordinate with our
    domestic and international regulators and law enforcement
    partners in this space. The AriseBank ICO matter is one example
    of a case involving parallel SEC and criminal investigations.
    In that case, two former executives behind an allegedly
    fraudulent ICO settled the SEC's charges brought in the
    Northern District of Texas. The U.S. Attorney's Office in that
    district also brought parallel criminal charges against one of
    the executives.

    Q.7. Nearly two dozen Nevadans have complained to the Consumer
    Financial Protection Bureau about virtual currencies using the
    Consumer Complaint Database. The Bureau has nearly 2,000
    complaints about virtual currencies in its Consumer Complaint
    Database.
        Is the SEC collaborating with the Consumer Bureau to
    respond to frauds in cryptocurrencies?

    A.7. Yes. SEC staff continues to closely coordinate with our
    regulatory partners in this space, including with staff of the
    CFPB.

    Q.8. Has the SEC endorsed any cryptocurrencies?
        Does the SEC have any plans to endorse a cryptocurrency as
    a valid investment?

    A.8. The SEC does not endorse any investments, including
    digital assets, and has no plans to do so.

    Q.9. Disclosure Rules (Pay Gap)--Wells Fargo announced on
    February 1, 2018, that they would voluntarily disclose
    disparities in pay broken down by gender and minority status.
    They are among a few big banks that already disclose this data,
    although not required to by law. The SEC has purview over
    similar compensation disclosure regulations (e.g., the CEO-
    median worker pay ratio rule or the pay for performance
    incentive structures for management).
        Since companies are already headed this direction, would
    you favor disclosure requirements for publicly traded companies
    regarding compensation gaps regarding gender, ethnicity, and
    race?

    A.9. The Commission's disclosure requirements are rooted in the
    concept of materiality, and what a reasonable investor would
    consider material today may be different than when those
    requirements were first adopted. As such, the SEC regularly
    evaluates our existing rules and attempts to ensure that they
    have not become outdated. In the context of our disclosure
    requirements under Regulation S-K, this means ensuring that
    public company disclosures allow investors to make informed
    investment decisions.
        Materiality will continue to be the touchstone through
    which we approach our efforts in this area. I do note that
    compensation is an area where the marketplace is continually
    active in shaping policies and practices, and the staff and I
    regularly engage with investors on compensation disclosure and
    related matters. A requirement of the type you cite is not
    under consideration. When we consider changes to our approach
    to disclosure, I believe it is important to remain mindful
    that, while there are many factors that drive the decision of
    whether to be a public company, increased disclosure and other
    burdens may render alternatives for raising capital, such as
    the private markets, increasingly attractive to companies that
    only a decade ago would have been all but certain candidates
    for the public markets. I would be happy to discuss this issue
    with you.

    Q.10. Proxy Advisors--Shareholder proposals as early warning
    signs about potential problems at a company. For example,
    shareholders sought proposals seeking votes to get more
    information from Wells Fargo about its employee compensation
    system in 2014 and information on predatory lending activities
    from Washington Mutual, Merrill Lynch, and Lehman Brothers.
    Yet, at the request of those companies, the SEC denied the
    proposal under the ``ordinary business exclusion.'' The SEC
    agreed to prevent the shareholder proposal from coming to a
    vote.
        Do you agree that history has shown it can be far more
    detrimental to make errors of omission than inclusion when
    considering shareholder proposals?

    A.10. The SEC's shareholder proposal rule, Rule 14a-8, enables
    a shareholder to have a proposal included in a company's proxy
    materials for a vote by shareholders if certain requirements
    are met. The rule provides a number of procedural and
    substantive bases on which a proposal can be excluded from a
    company's proxy statement. A company that believes it has a
    basis to exclude a proposal may seek the staff's views
    regarding whether the staff would recommend enforcement action
    to the Commission if the proposal were excluded. In such cases,
    the staff carefully evaluates the proposal and the arguments
    made by the company and shareholder proponent, if any, to
    determine whether it would recommend enforcement action to the
    Commission if the company were to exclude the proposal. The
    staff applies the requirements of Rule 14a-8 and is not charged
    with weighing the merits of a proposal or the underlying policy
    issues it may raise when deciding whether the proposal falls
    within one or more bases for exclusion under the rule. It is
    important to note that the staff's shareholder proposal process
    reflects only informal views of the staff regarding whether it
    is appropriate for the Commission to take enforcement action
    based on a violation of the Commission's proxy rules. The views
    expressed by the staff are not binding on the Commission or
    other parties and do not and cannot definitively adjudicate the
    merits of a company's position with respect to the legality of
    a shareholder proposal. Shareholder proponents and issuers have
    the ability to seek a more definitive determination from a
    court of competent jurisdiction.

    Q.11. How will ensure that your legacy at the SEC is not marred
    by SEC staff decisions to kill shareholder proposals that
    warned us of pending problems?
        Like not acting on Wells Fargo incentive pay problems or
    WAMU's predatory loans?

    A.11. Above all, it is important that the shareholder proposal
    process is administered fairly, consistently and without bias,
    and the staff is committed to administering the process in this
    manner. In evaluating a company's arguments for excluding a
    shareholder proposal from its proxy materials, the staff does
    not consider the merits of a shareholder proposal or the
    underlying policy issues. Instead, the staff's evaluation is
    limited to whether there is a basis for excluding the proposal
    under Rule 14a-8. Stakeholders are best served when the rule is
    administered in such a fair and consistent manner.
        As noted above, the staff's shareholder proposal process
    reflects only informal views of the staff regarding whether it
    is appropriate for the Commission to take enforcement action
    based on a violation of the Commission's proxy rules. The views
    expressed by the staff are not binding on the Commission or
    other parties and do not and cannot definitively adjudicate the
    merits of a company's position with respect to the legality of
    a shareholder proposal. Shareholder proponents and issuers have
    the ability to seek a more definitive determination from a
    court of competent jurisdiction.

    Q.12. The consensus problem at the SEC's proxy advisors
    roundtable was vote accuracy. Proxy votes seem to have a high
    incidence of over and under voting as well as absence of retail
    investors.
        If you engage in any changes to the proxy system, would you
    prioritize election accuracy first?

    A.12. Improving the proxy process will be a significant SEC
    initiative for 2019. The fundamental right of shareholders to
    participate in the governance of their companies can be fully
    exercised only to the extent shareholders are assured that
    their votes are accurately counted. While the current proxy
    process has worked well for the vast majority of public company
    meetings, legitimate concerns have been raised about the
    accuracy and efficiency of the proxy voting process.
    Complications and delays in tabulating the final votes at
    several recent shareholder meetings highlighted the need for
    the SEC to renew its focus on this important area.
        The SEC staff's recent proxy roundtable led to a productive
    dialogue among issuers, investors, proxy service providers and
    others about the current proxy voting process and important
    developments since the Commission's 2010 proxy plumbing concept
    release. Perhaps most encouraging was the common desire
    expressed by all the roundtable participants to work
    collaboratively to explore possible improvements to the proxy
    process, including through the use of distributed ledger
    technology and other promising new innovations. As I noted in
    my written testimony, we should focus on what the Commission
    can do in the interim to improve the current system, and I
    encourage all those interested in improving the proxy plumbing
    to share their thoughts, particularly regarding actionable,
    interim improvements. As a part of this effort, I have
    therefore asked the staff to facilitate discussions among
    market participants for possible private-sector solutions and
    to formulate recommendations for interim improvements that the
    Commission could consider as well.

    Q.13. IPOs--Mr. Chairman, you have made boosting Initial Public
    Offerings (IPOs) one of your top priorities. The decline in
    IPOs is mostly due to mergers and acquisitions, not
    regulations. Entrepreneurs can more easily--and profitably--
    sell their firms to another corporation or wealthy individual
    than going public.
        Do you agree that the regressive tax bill that has led to
    much higher corporate profits and greater wealth for CEOs and
    executives is exacerbating the decline in publicly traded
    firms?
        Will you take steps to strengthen transparency and investor
    protections in the private markets, so investors better
    understand the private market? Then, there would be less of a
    gap with the public markets?
        Have you thought about deploying the tools that the SEC has
    to take on monopoly--such as enhanced disclosure of
    competition?
        Will you commit to use normal administration process for
    all your substantive actions regarding IPOs? We need
    transparency about what the impact of various rule changes
    might be.

    A.13. I have long viewed with concern the reduction in the
    number of public companies because it has resulted in fewer
    investment opportunities for Main Street investors. I believe
    we can attribute the reduction to a number of reasons,
    including economic and regulatory factors, such as the cost of
    compliance. I am not in a position to comment on whether the
    Tax Cuts and Jobs Act legislation has affected the decline,
    though I would note that this decline has been occurring over a
    longer period of time. Based on my review and discussions with
    Commission staff, issuers, long-term investors, entrepreneurs
    and others, it is clear that the reporting, compliance, and
    oversight dynamic between private and public markets, as well
    as the costs associated with being a public company, may incent
    certain companies to remain private or stay private longer. The
    SEC has taken meaningful steps during my tenure to encourage
    capital formation for companies seeking to enter our public
    capital markets while maintaining, and in many cases, enhancing
    investor protections. While we do not take credit for the
    numbers, I am encouraged by reports indicating that the number
    of IPOs in the United States increased year-over-year from 2016
    to 2018 in both volume and dollar amount raised.
        One of our upcoming capital formation initiatives is to
    look at the private offering framework. The Division of
    Corporation Finance is working on a concept release to take a
    critical look at our ``patchwork'' private offering system to
    see how it can be improved, harmonized, and streamlined, while
    at the same maintaining or enhancing investor protection. I
    look forward to receiving comments from entrepreneurs,
    investors and other market participants on this release.
        In furtherance of promoting capital formation, the
    Commission promulgates rules and regulations, which have the
    force and effect of law. Such rules and regulations generally
    take effect only after the Commission publishes a notice of
    proposed rulemaking in the Federal Register and adopts a final
    rule that considers public comments on the proposal in
    accordance with the Administrative Procedure Act. As I stated
    in my Statement Regarding SEC Staff Views in September 2018,
    any views of the staff of the SEC are nonbinding and create no
    enforceable legal rights or obligations of the Commission or
    other parties.
        With respect to your question on monopoly concerns, the
    Federal securities laws do not give the SEC jurisdiction over
    antitrust issues. The Commission's disclosure requirements seek
    to provide investors with material information in order to make
    informed investment decisions. Item 101 of Regulation S-K
    requires disclosure on competitive business conditions. The
    Division of Corporation Finance selectively reviews filings
    both to monitor and to enhance compliance with disclosure
    requirements, including the requirements of Item 101 of
    Regulation S-K.

    Q.14. Enforcement--Individual accountability has a greater
    deterrent effect across the market. One such tool to hold
    individuals accountable is the so-called ``Yates Memo'' from
    the previous Administration. This memo outlined six key steps
    prosecutors should take to quote, ``strengthen the pursuit of
    individual corporate wrongdoing.'' Last week, the Department of
    Justice changed how the Yates Memo was implemented. No longer
    would companies seeking cooperation credit need to identify
    ``all'' individuals ``all'' individuals involved in the
    wrongdoing, so long as the companies identify those who were
    ``substantially involved'' in the misconduct. We are already
    seeing this at the Consumer Financial Protection Bureau.
    Enforcement actions are taken against firms without naming
    those who defrauded consumers.
        Does the SEC have any plans to avoid identifying all
    individuals involved in misconduct?

    A.14. As we have discussed, I strongly believe in the deterrent
    effect of enforcement proceedings pursuing individual
    accountability and believe that individual accountability
    drives behavior more than corporate accountability. I also
    recognize that bad actors undermine the hard-earned confidence
    that is essential to the efficient operation of our capital
    markets.
        The Commission considers individual liability in every
    case; it is a core principle of our enforcement program and
    holding individuals accountable for wrongdoing is a priority
    for me. To date, the Commission's enforcement actions have
    borne out the premium I place on individual accountability;
    during fiscal years 2017 and 2018, the SEC has charged
    individuals in more than 70 percent of our stand alone cases.
    As I continue to serve as Chairman, I will continue to support
    the Enforcement Division's efforts to hold individuals
    accountable when it is appropriate to do so under the facts and
    the law. To evaluate whether, and how much, to credit entity
    self-policing, self-reporting, remediation, and cooperation,
    the Commission looks to the criteria described in the Seaboard
    21(a) report. \1\ Among the criteria described in the report
    are whether the company ``promptly, completely and effectively
    disclosed the existence of the misconduct to the public, to
    regulators and to self-regulators.'' \2\
    ---------------------------------------------------------------------------
         \1\ U.S. Sec. and Exch. Comm'n, Report of Investigation Pursuant
    to Section 21(a) of the Securities Exchange Act of 1934 and Commission
    Statement on the Relationship of Cooperation to Agency Enforcement
    Decisions, Exchange Act Release No. 44969 (Oct. 23, 2001), available at
    http://www.sec.gov/litigation/investreport/34-44969.htm.
         \2\ Id.

    Q.15. Does the Department of Justice's changes to the Yates
    Memo impact your work with your law enforcement partners? If
    ---------------------------------------------------------------------------
    so, how?

    A.15. Our work with our law enforcement partners has not been
    impacted. In each case, the Commission, acting upon
    recommendations from Enforcement staff, makes an independent
    decision as to whether the facts and the law support charging
    an individual with misconduct and, in cases involving entities,
    whether and to what extent to credit self-policing, self-
    reporting, remediation, and cooperation.

    Q.16. In his famous retirement speech, SEC attorney James
    Kidney cautioned against ``bosses who mouthed serious regard
    for the mission of the SEC--to be a strong public protector in
    the securities market--but their actions were tentative and
    fearful in many instances. They see an agency that polices the
    broken windows on the street level and rarely goes to the
    penthouse floor.''
        Are the SEC's investigation resources well-spent and
    properly distributed? If not, what challenges remain? What
    funding level is needed to properly staff the SEC regarding
    investigations, cybersecurity, investor protection, etc.?

    A.16. The SEC--agency wide--has approximately 4,400 people.
    Approximately 6.3 million people work in the financial services
    sector in the United States. We are less than one-one
    thousandth of that amount. In order to adequately police this
    sector for wrongdoing, it is important that the agency have
    adequate resources to do so.
        Over the past year, the SEC generally, and the Enforcement
    Division specifically, have been focused on maximizing our
    impact with the resources we have. The sheer size of the
    financial industry and the volume of potential wrongdoing mean
    that we will always have to make decisions about where to
    allocate our resources and how best to coordinate with other
    authorities for the maximum impact.
        I believe that the Commission's enforcement resources are
    well spent and properly allocated to address key priorities--
    retail investor protection (both directly and through
    institutional enforcement actions) and the investigation and
    prosecution of cyberbased threats--as well as other critical
    areas including, but not limited to, investment professional
    misconduct, insider trading, market manipulation, and
    accounting fraud.
        For FY2019, the Commission requested funds for critical
    investments in our ability to protect investors by restoring 17
    positions for Enforcement to support key enforcement
    priorities, including expanding the work of the Cyber Unit and
    the Retail Strategy Task Force, and I am pleased that Congress
    recently provided those resources. Moving forward, I will
    continue working with the Division of Enforcement to evaluate
    their resource needs to ensure they can continue vigorously
    protecting investors and expect to request additional resources
    in FY2020.

    Q.17. The President required a hiring freeze at the SEC.
        How has this hiring freeze--two years now--made your work
    more difficult--from everything from investigating fraud to
    strengthening your defenses against cyberattacks?

    A.17. The Commission has operated under an agency-wide hiring
    freeze since late 2016. Consequently, the Division of
    Enforcement's employee and contractor staffing levels have
    decreased since the freeze was imposed. The combined number of
    positions in the Division and the number of contractors
    supporting our investigation and litigation efforts fell by
    approximately 10 percent between FY2016 and FY2018. These
    reductions in human capital have created challenges for the
    Division of Enforcement in staffing, resource allocation, and
    prioritizing investigations and litigation. But despite these
    challenges, the Division has risen to the challenge and
    continued to exhibit significant enforcement-related activity.
        On a qualitative basis, which I believe is the most
    meaningful basis by which to judge the Division's
    effectiveness, the SEC achieved many notable enforcement-
    related successes in FY2018--recommending that the Commission
    bring significant actions against important individuals and
    market participants, achieving successes for retail investors,
    fashioning meaningful and effective remedies and relief, and
    addressing emerging and developing risks. And, while I believe
    that often cited quantitative metrics such as number of cases
    filed or the total amounts of fines and penalties assessed, do
    not provide, without substantial additional information, a
    meaningful measure of the effectiveness of an enforcement
    program, FY2018 nonetheless reflected a high level of
    enforcement-related activity by the Commission. The Commission
    brought 821 actions (490 of which were ``stand alone'' actions)
    and obtained judgments and orders totaling more than $3.9
    billion in disgorgement and penalties. Significantly, it also
    returned $794 million to harmed investors, suspended trading in
    the securities of 280 companies, and obtained nearly 550 bars
    and suspensions.
        While these achievements are a testament to the hardworking
    women and men of the Division, with more resources the SEC
    could focus more on individual accountability, as individuals
    are more likely to litigate and the ensuing litigation is
    resource intensive. Moreover, additional resources that we
    requested for FY2019 will support two key priorities of the
    Division: protecting retail investors and combating cyber-
    related threats.

    Q.18. How have two recent Supreme Court decisions--Kokesh v.
    SEC and Lucia v. United States--made SEC enforcement actions
    more difficult?

    A.18. The Supreme Court's decisions in Kokesh v. SEC and Lucia
    v. SEC have significantly impacted the Commission's enforcement
    program. In Kokesh v. SEC, the Supreme Court held that our
    claims for disgorgement are subject to a 5-year statute of
    limitations. The Supreme Court's holding in Kokesh is obviously
    a very significant decision, and one that has limited our
    ability to return ill-gotten gains to Main Street investors in
    longer running frauds. I do not believe it is productive to
    debate the merits of the Kokesh decision. I agree that statutes
    of limitation serve many important functions in our legal
    system, and certain types of claims should have reasonable
    limitations periods. Civil and criminal authorities, including
    the SEC, should do everything in their power to bring
    appropriate actions swiftly, and, in our markets, particularly
    our public markets, the certainty brought by reasonable
    limitations periods has value for investors.
        However, as I look across the scope of our actions,
    including most notably Ponzi schemes and affinity frauds, which
    often target retail investors, I am troubled by the substantial
    amount of losses that we may not be able to recover for retail
    investors. Said simply, if the fraud is well-concealed and
    stretches beyond the 5-year limitations period applicable to
    penalties, it is likely that we will not have the ability to
    recover funds invested by our retail investors more than 5
    years ago. Allowing clever fraudsters to keep their ill-gotten
    gains at the expense of our Main Street investors--particularly
    those with fewer savings and more to lose--is inconsistent with
    basic fairness and undermines the confidence that our capital
    markets are fair, efficient and provide Americans with
    opportunities for a better future.
        And, our experience post-Kokesh is showing that this may
    already be happening. With respect to matters that have already
    been filed, the Division of Enforcement has estimated that the
    Court's ruling in Kokesh may cause the Commission to forgo up
    to approximately $900 million in disgorgement, of which a
    substantial amount potentially could have been returned to
    retail investors. I welcome the opportunity to work with
    Congress to address this issue to ensure defrauded retail
    investors can get their investment dollars back. I believe that
    any such authority should be narrowly tailored to that end
    while being true to the principles embedded in statutes of
    limitations.
        In Lucia v. SEC, the Court held that the Commission's
    Administrative Law Judges (ALJs) were inferior officers of the
    United States who must be appointed in the manner required by
    the Appointments Clause of the U.S. Constitution. The Court
    held that the SEC's ALJs had not been appointed in a manner
    consistent with the Appointments Clause and that the
    appropriate remedy for an adjudication tainted with an
    appointments violation was a new hearing before a properly
    appointed official. Examining the facts of Lucia, the Court
    further held that, the adjudication at issue could not occur
    before the same ALJ who heard the case, even if she or he had
    now received a constitutional appointment. According to the
    Court, having already both heard Lucia's case and issued an
    initial decision on the merits, she or he could not be expected
    to consider the matter as though she or he had not adjudicated
    it before. The court ruled that to cure the constitutional
    error, another ALJ (or the Commission itself) must hold the new
    hearing.
        After Lucia, the Commission stayed all pending
    administrative proceedings. The Commission lifted the stay on
    August 22, 2018, and approximately 200 administrative
    proceedings were reassigned at that time. Many of the 200
    administrative proceedings have now been substantially
    resolved. The remaining reassigned APs will require substantial
    litigation resources going forward.

    Q.19. The Dodd-Frank Act included a provision (Sec. 954) that
    would require public companies to clawback compensation that
    were erroneously awarded to executives whenever their companies
    had accounting restatements. The SEC proposed a rule in 2015.
        What is the status of this rule?
        When will it be final?

    A.19. Because of the complexity and scope of the SEC's existing
    executive compensation disclosure regime, as well as the nature
    of the Dodd-Frank Act's executive compensation rule mandates, I
    believe a serial approach to these rules is likely to be most
    efficient and best serve the SEC's mission. To that end, we
    issued final rules in December 2018 to implement Section 955 of
    the Dodd-Frank Act to require companies to disclose in proxy
    and information statements their practices or policies
    regarding the ability of employees or directors to engage in
    certain hedging transactions with respect to company equity
    securities.
        The clawbacks rule and the remaining Dodd-Frank Act
    executive compensation rulemakings are on the Commission's
    rulemaking agenda, and we are continuing our work to finalize
    them. As I noted in my written testimony, several companies
    already have made public their policies regarding compensation
    clawbacks, and some of these policies go beyond what would be
    required under the Dodd-Frank Act. We have seen a few companies
    attempt to claw back compensation from their executives under
    these policies. Our rulemaking priorities, as well as the rules
    themselves, should reflect these observable developments.

    Q.20. The Dodd-Frank Wall Street Reform and Consumer Protection
    Act included other permissive rules.
        What are the status of those rules?

    A.20. The Commission has had an active rulemaking calendar in
    recent years, focusing on, among other things, the 80 mandatory
    rulemaking requirements applicable to the SEC under the Dodd-
    Frank Act, congressional mandates in the Economic Growth,
    Regulatory Relief, and Consumer Protection Act, and responding
    to major events and changes in the broader regulatory landscape
    that have required our immediate attention.
        With respect to the Dodd-Frank Act, the Commission has
    undertaken both mandatory and permissive rulemakings. For
    example, the Commission has now completed many, but not all, of
    the security-based swap rules mandated by Title VII of the Act,
    and I anticipate that in the coming year the Commission will
    move forward with a package of rulemakings to complete our
    Title VII rulemaking obligations. The Commission also has taken
    action on some of the permissive rulemakings under the Act. For
    example, the Commission proposed Regulation Best Interest
    regarding the standard of conduct for broker-dealers when
    making a recommendation of any securities transaction or
    investment strategy involving securities to a retail customer.

    Q.21. Information in the Market--What is the status of Inline-
    XBRL--eXtensible Business Reporting Language--that makes it
    easier to search data in an open and interactive way?

    A.21. In June 2018, the Commission adopted amendments requiring
    the use of Inline XBRL for the submission of operating company
    financial statement information and fund risk/return summary
    information. The amendments are intended to improve the data's
    usefulness, timeliness, and quality, benefiting investors,
    other market participants, and other data users. The amendments
    are also intended to decrease, over time, the cost of preparing
    the data for submission to the Commission.
        The amendments will go into effect in phases. Operating
    companies that are currently required to submit financial
    statement information in XBRL will transition to Inline XBRL on
    the following phased basis:

        Large accelerated filers that use U.S. GAAP will be
            required to comply beginning with fiscal periods ending
            on or after June 15, 2019.

        Accelerated filers that use U.S. GAAP will be
            required to comply beginning with fiscal periods ending
            on or after June 15, 2020.

        All other filers will be required to comply
            beginning with fiscal periods ending on or after June
            15, 2021.

        Funds that are currently required to submit risk-return
    summary information in XBRL will transition to Inline XBRL on
    the following phased basis:

        Large fund groups (net assets of $1 billion or more
            as of the end of their most recent fiscal year) will be
            required to comply 2 years after the effective date of
            the amendments.

        All other funds will be required to comply 3 years
            after the effective date of the amendments.