[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]





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                     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\
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     \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.
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    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.
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     \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.
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    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\
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     \3\ Board of Governors of the Federal Reserve System, 2016 Survey 
of Consumer Finances (2016).
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    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.
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     \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.
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    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.
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     \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&currentPub=true&agencyCode=&showStage=active&agencyCd=3235.; see 
also Appendix B.
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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\
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     \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.
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    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\
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     \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.
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    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.
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     \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.
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    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\
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     \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.
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    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.
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     \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.
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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.
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     \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.
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    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.
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    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.
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    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.
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     \17\ See ``Amendments to Smaller Reporting Company Definition'', 
83 Federal Register 31,992 (July 10, 2018).
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    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\
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     \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.
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    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.
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    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.
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     \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.
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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.
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     \21\ See November 15, 2018: ``Roundtable on the Proxy Process'', 
available at https://www.sec.gov/proxy-roundtable-2018.
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    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\
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     \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.
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    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.
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    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.
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     \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.
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    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\
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     \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.
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    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.
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    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.
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    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\
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     \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.
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    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.
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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.
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     \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.
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    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.
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     \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.
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     \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.
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    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.
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    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.
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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.
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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.
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    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.
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     \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\
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     \2\ https://www.sec.gov/news/public-statement/clayton-overview-
standards-conduct-investment-professionals-rulemaking
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    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\
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     \3\ https://www.sec.gov/news/public-statement/statement-clayton-
082218
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    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.