[Senate Hearing 115-191]
[From the U.S. Government Publishing Office]




 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2018

                              ----------                              


                         TUESDAY, JUNE 27, 2017

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:05 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Shelley Moore Capito (chairwoman) 
presiding.
    Present: Senators Capito, Coons, Boozman, Daines, Moran, 
and Van Hollen.

                   SECURITIES AND EXCHANGE COMMISSION

STATEMENT OF HON. JAY CLAYTON, CHAIRMAN

           OPENING STATEMENT OF SENATOR SHELLEY MOORE CAPITO

    Senator Capito. Good morning. The subcommittee will come to 
order. And I would like to welcome our witnesses, SEC Chairman 
Jay Clayton and Acting CFTC Chairman Chris Giancarlo. Thank you 
both for being here. We look forward to hearing from both of 
you about the details of your budget requests and your plans to 
carry out your agency's missions.
    As Members of this subcommittee, we have a responsibility 
to ensure the funds we see are spent wisely. Both of your 
agencies are seeking increases for fiscal year 2018. The SEC is 
requesting $1.8 billion, which is $242 million, or 15 percent, 
higher than fiscal year 2017. Since fiscal year 2000, the SEC 
budget has grown from $377 million to now $1.6 billion.
    While the SEC is a fee-funded agency, congressional 
oversight over the Commission's budget is critical. Although 
these fees come from public companies and exchanges, they are 
borne by investors and Congress has a responsibility to ensure 
that those funds are being spent in a manner that protects 
investors, helps markets operate efficiently, and spurs 
economic growth for all Americans.
    The CFTC is requesting $281.5 million, almost 13 percent 
more than fiscal year 2017. For comparison, the CFTC was funded 
at $62.7 million in fiscal year 2000 and the budget has now 
reached at least $250 million. However, access to more funding 
does not necessarily ensure that an agency will successful 
achieve its mission or spend that funding responsibly. You both 
have challenges as you have taken the helm of your agencies.
    In the case of the CFTC, some leasing costs and practices 
have raised concerns about effective management of Federal 
funding. SEC has also had similar issues related to its leasing 
practices, which is of concern given the proposed budget 
increase for its upcoming move.
    All agencies have to make strategic decisions on how to 
best allocate resources. As we review your budget requests, I 
am most interested to hear what decisions you have made to 
operate more efficiently in order to carry out your 
responsibilities within current funding levels. We all benefit 
from a system that promotes fair and orderly markets, so I am 
concerned when regulations fragment the market, needlessly 
raising the cost of business and pushing trading overseas.
    I ask you to be persistent in trying to work together and 
coordinate with other Federal regulators, self-regulatory 
organizations, and your international counterparts. We are also 
interested in hearing more about your efforts to defend against 
cyber threats to investors and financial market infrastructure, 
as well as efforts to ease regulatory burdens. Your jobs have 
become more challenging with the rise of automated trading and 
constant technological innovation including areas such as 
financial technology or FinTech, and the need to operate in 
markets undergoing digital transformation.
    Again, I thank both of you for being here. I look forward 
to your testimony and learning more about these and other 
challenges that you face. I will turn to my Ranking Member, 
Senator Coons, for an opening statement.

               STATEMENT OF SENATOR CHRISTOPHER A. COONS

    Senator Coons. Thank you. Thank you for convening this 
hearing, Chairwoman Capito, and I look forward to working with 
you on these important issues. And I welcome our witnesses, Jay 
Clayton, Chairman of the SEC, and Chris Giancarlo, Acting 
Chairman of the CFTC.
    Both agencies operate at the forefront of our economy and 
provide critical protection to American consumers by helping 
stop fraud and manipulation in our securities and our futures 
markets. Market users, financial investors, and the U.S. 
economy as a whole rely on vigilant oversight by the SEC and 
the CFTC in today's fast-paced ever evolving and often volatile 
globalized marketplace.
    Given the concentration of publicly traded firms that are 
incorporated in my home State, I am particularly interested in 
making sure your agencies have the resources they need and are 
investing these funds efficiently and effectively. Our economy 
has made notable progress is emerging from the financial crisis 
of nearly a decade ago, but we can ill afford a rerun of the 
debacle that cost Americans more than 8 million jobs, more than 
$19 trillion in lost household wealth, and $10 million in 
housing foreclosures.
    That means we cannot let our guard down by reverting to the 
same practices that led to that crisis in the first place, but 
must make sure we have the necessary safeguards in place to 
keep our markets secure and stable. Investors of all types, 
large institutional investors, individual families, Americans 
saving for retirement, depend on the work of the SEC and the 
CFTC to protect against irresponsible and reckless practices. 
As the investors' advocate, the SEC is responsible for 
maintaining fair, orderly, and efficient securities markets and 
the CFTC carries out market surveillance, compliance, and 
enforcement programs in all futures and swaps areas.
    Unfortunately, the budgetary forecast for the 2018 fiscal 
year is a gloomy and uncertain one. The statutory budget caps 
impose challenging and I would say even unnecessary 
constraints, meaning we have many competing requests all vying 
for a share of shrinking resources. For the SEC, the President 
requests $1.602 billion, a $3 million drop below the fiscal 
year 2017 level, and for the CFTC the President seeks $250 
million, a freeze at the fiscal year 2017 level, which 
represented the third consecutive year of flat funding.
    And I note that Acting Chairman Giancarlo submitted an 
independent funding request seeking $281.5 million for the 
CFTC, an increase of $31.5 million or 13 percent above enacted 
fiscal year 2017. I look forward to discussing the merits of 
your proposal today.
    The subcommittee's task is to evaluate these requests in 
that challenging budgetary environment. Today's hearing 
provides a valuable public forum in which to ask the leaders of 
the SEC and CFTC a few key questions about whether your 
agencies are keeping pace with developments in the markets, 
particularly emerging new and complex financial products and 
trading platforms, whether you have the right mix of talent and 
specialized expertise to be vigilant watchdogs, whether you 
have state of the art information technology to augment and 
support that human capital and stay ahead of cyber threats, and 
what would the practical consequences be of budget cuts or a 
budget freeze and the accompanying reduced resources.
    So, Chairman Clayton, Chairman Giancarlo, I am eager to 
discuss how you are currently using funds provided in fiscal 
year 2017 to get an insight into that. And as we turn our 
attention to fiscal year 2018, I want to learn more about your 
most pressing funding priorities as well as your honest 
appraisal of the potential impacts of your operations should 
your funding requests fall short. In the face of many competing 
demands for tight funding, shortchanging your two agencies in 
particularly, in my view, would be exceedingly irresponsible.
    I also want to underscore my continuing opposition to using 
our appropriation process to impose restrictive policy riders 
that carry controversial authorizing language that should 
instead by done by the relevant authorizing committees. And I 
hope we will continue to work together towards that goal in the 
fiscal year 2018 cycle.
    Chairwoman Capito, I look forward to working with you this 
year as we evaluate the needs of these two important financial 
regulators as well as the many other accounts under our 
purview. Thank you for the opportunity.
    Senator Capito. Sounds great. Thank you, Senator Coons.
    Chairman Clayton, I now invite you to present your 
testimony. Thank you.

                 SUMMARY STATEMENT OF HON. JAY CLAYTON

    Mr. Clayton. Thank you, Chairwoman Capito, Ranking Member 
Coons, and Members of the subcommittee. Thank you for inviting 
me to testify today in support of the President's fiscal year 
2018 budget request for the Securities and Exchange Commission. 
I would like to congratulate you, Madam Chairwoman, on your new 
role as head of this subcommittee. I would also like to express 
my appreciation to the Members of this subcommittee for your 
support for the SEC's important mission. Your support has been 
crucial to the agency's success and I look forward to working 
with each of you on the agency's fiscal year 2018 request.
    I appreciate the opportunity to discuss with you how the 
SEC plans to use the $1.602 billion requested for fiscal year 
2018. This level is essentially the same as our fiscal year 
2017 appropriation and will provide the funding necessary for 
the SEC to continue meeting our important tripartite mission--
protect investors, maintain fair, orderly, and efficient 
markets, and facilitate capital formation.
    The requested budget will provide the agency with the 
resources necessary to maintain our oversight of the world's 
safest, deepest, and most liquid capital markets while 
continuing our efforts to further promote economic growth and 
protect American investors. The American public will receive 
significant value in return for the SEC's $1.602 billion.
    With a workforce of about 4,600 staff, the SEC oversees 
approximately $75 trillion in securities trading annually on 
U.S. equity markets. The disclosures of 8,800 public companies 
including 77 of the world's 100 largest companies, and the 
activities of over 26,000 registered market participants 
including investment advisers, mutual funds, exchange traded 
funds, broker-dealers, and transfer agents. We also engage with 
the investing public on a daily basis, from our investor 
education programs to our SEC.gov portal where on a typical 
day, investors view or download more than 50 million disclosure 
documents filed on the SEC's EDGAR system.
    As this subcommittee is aware, the SEC's funding is deficit 
neutral. Whatever amount Congress appropriates to the agency 
will be fully offset by transaction fees and will not impact 
the deficit or the funding available for other agencies. The 
current transaction fee rate is just over two cents for every 
$1,000 in securities sales. The fiscal year 2018 request seeks 
to solidify and maintain the SEC's progress in key areas. I 
will use my remaining time to highlight how we propose to use 
the resources entrusted with the focus on five key areas: 
effective agency management, protecting investors, facilitating 
capital formation, leveraging technology, and leasing.
    First, as the agency's senior responsible executive, I am 
committed to ensuring that the SEC is not only a good steward 
of the funds that you entrust to us, but also maximizes the 
value of those funds to the American investor. For fiscal year 
2018, the agency will work toward more efficient internal 
operations. This includes continuing to develop and leverage 
our capabilities for risk analysis to inform our 
decisionmaking, including how to most efficiently use our staff 
resources.
    Second, we are committed to protecting and enhancing the 
world's most vibrant markets. Under our request, more than 50 
percent of the resources will be invested in the agency's 
enforcement and examination programs. In fiscal year 2018, the 
SEC will continue a robust enforcement program with resources 
focused on key areas where misconduct harms investors, 
undermines confidence, and impairs market integrity. This 
includes: retail investor fraud, investment professional 
misconduct, insider trading, market manipulation, and 
accounting fraud.
    Within our national examination program, the SEC has 
introduced efficiencies that have the agency on track this 
year, fiscal year 2017, to deliver a 20 percent increase in the 
number of investment adviser examinations. For fiscal year 
2018, the SEC anticipates being able to deliver a further 5 
percent increase in the number of investment adviser exams. 
This is important since investment advisers now manage $70 
trillion in assets, more than three times 2001 levels.
    Third, the SEC in fiscal year 2018, will take steps to 
enhance capital formation, particularly for small and emerging 
companies and in our public capital markets. While the U.S. 
capital markets remain the envy of the world, fewer companies 
are choosing to enter the public capital markets than in the 
past. As a result, investment opportunities for main street 
investors are more limited. In fiscal year 2018, the SEC will 
pursue rule-making initiatives aimed at promoting firms' access 
to capital markets to generate economic growth while fostering 
important investor protections. Also in fiscal year 2018, we 
will take action to staff the new Office of the Advocate for 
Small Business Capital Formation so that it can pursue its work 
to better assist small businesses and small business investors.
    Fourth, the fiscal year 2018 budget request will help the 
SEC to stay on top of critical technological developments in 
our capital markets. The $240 million that the SEC requests to 
spend in IT in fiscal year 2018 is modest compared to the 
amounts that major Wall Street firms spend on their own IT 
systems. By way of comparison, in 2016 one large financial 
institution spent more than $9.5 billion on technology while 
another spent $6.6 billion. The fiscal year 2018 budget request 
relies on continued access to the SEC's Reserve Fund which will 
allow the SEC to commit to critical long-term IT initiatives 
that otherwise may have been more difficult to execute.
    Key technological initiatives planned for fiscal year 2018 
including: expanding data analytic tools to detect potential 
fraud; improving surveillance tools; increasing investments in 
cyber security; improving the access to and usefulness of 
information available through our EDGAR system.
    Fifth and last, with the SEC's existing headquarters leased 
expiring in the next few years, the budget request includes 
funding so that the General Services Administration (GSA) may 
commence a competitive procurement process for a successor 
headquarters lease. The requested funds represent potential 
expenses for buildout costs, infrastructure, and fees if the 
outcome of the GSA's competitive acquisition process should 
require us to relocate. The funds would not be used for SEC 
operations and, in the event the money is not needed for 
relocation, would be refunded to the fee payers.
    Thank you again for the opportunity to present the fiscal 
year 2018 budget. I deeply appreciate your continued support of 
the agency and look forward to working with you. I welcome your 
comments and advice and would be happy to answer any questions.
    [The statement follows:]
                 Prepared Statement of Hon. Jay Clayton
    Chairwoman Capito, Ranking Member Coons, and Members of the 
Committee:

    Thank you for inviting me to testify today, my first appearance 
before this subcommittee, in support of the President's fiscal year 
2018 budget request for the Securities and Exchange Commission (SEC). 
Before I begin, I would like to congratulate you, Madam Chairwoman, on 
your new role as head of this subcommittee. I would also like to 
express my appreciation to the Members of this subcommittee for your 
support of the SEC's important mission in previous budget cycles. Your 
support has been crucial to the agency's success, and I look forward to 
working with each of you on the agency's fiscal year 2018 request.
    I appreciate the opportunity to discuss with you how the SEC plans 
to use the $1.602 billion requested for fiscal year 2018.\1\ This 
level, which is essentially the same as our fiscal year 2017 
appropriation, will provide the funding necessary for the SEC to 
continue meeting our important tripartite mission--protect investors, 
maintain fair, orderly, and efficient markets, and facilitate capital 
formation. The requested fiscal year 2018 budget will provide the 
agency with the resources necessary to maintain our oversight of the 
world's safest, deepest, and most liquid capital markets while 
continuing our efforts to further promote economic growth and protect 
American investors.
---------------------------------------------------------------------------
    \1\ The views expressed in this testimony are those of the Chairman 
of the Securities and Exchange Commission and do not necessarily 
represent the views of the President, the full Commission, or any 
Commissioner. In accordance with past practice, the budget 
justification of the agency was submitted by the Chairman and was not 
voted on by the full Commission.
---------------------------------------------------------------------------
    Prior to my confirmation by the U.S. Senate last month, I spent 
more than two decades in private practice as a securities lawyer. 
During this time, I had the privilege and opportunity to engage with 
members of the SEC's exceptional staff on matters ranging from landmark 
capital-raising IPOs to important matters during the 2008 financial 
crisis and its aftermath. Now that I have joined the SEC, my experience 
during my first 6 weeks has strongly reinforced my view that our 
talented and committed staff is fundamental to the agency's 
effectiveness. The staff clearly shares the common belief that we serve 
the American people best when we promote an environment conducive to 
capital formation while striving to ensure that our markets and our 
investors remain well protected.
    The investing public, and Americans more generally, will receive 
significant value in return for the SEC's $1.602 billion budget. With a 
workforce of about 4,600 staff, the SEC oversees (1) approximately $75 
trillion in securities trading annually on U.S. equity markets; (2) the 
disclosures of 8,800 public companies including 77 of the world's 100 
largest companies; and (3) the activities of over 26,000 registered 
market participants including investment advisers, mutual funds, 
exchange traded funds, broker-dealers, and transfer agents. We also 
engage and interact with the investing public on a daily basis, from 
our investor education programs and alerts to our SEC.gov portal where, 
on a typical day, investors and other market participants view or 
download more than 50 million disclosure documents filed on EDGAR.
    Additionally, as this subcommittee is aware, the SEC's funding is 
deficit-neutral. Whatever amount Congress appropriates to the agency 
will, by law, be fully offset by transaction fees, and will not impact 
the deficit or the funding available for other agencies. The current 
transaction fee rate is just over 2 cents for every $1,000 in covered 
securities sales.
    The SEC also has been a net contributor to the U.S. Treasury in 
other ways that are not directly related to our appropriations. By law, 
companies pay a fee to the SEC at the time they register securities for 
sale. For fiscal year 2018, the fee rate will be set at a level 
sufficient to collect $620 million. A small portion of these 
collections--$50 million--will be put into the Reserve Fund, which the 
agency devotes to information technology improvements, while the 
remaining $570 million will be deposited in the general fund of the 
U.S. Treasury.
    The fiscal year 2018 request seeks to solidify and maintain SEC 
progress in key areas. I will now discuss how we propose to use the 
resources entrusted to us in these areas.
                      effective agency management
    As the agency's senior responsible executive, I am committed to 
ensuring that the SEC is not only a good steward of the funds that you 
entrust to our use, but also maximizes the value of those funds to the 
American investor. I have devoted a significant portion of my first 6 
weeks at the SEC developing a deeper understanding of the agency's 
internal operations and management, including how the agency's 
divisions and offices interact with investors, markets, and companies. 
For fiscal year 2018, the agency will continue to work toward more 
efficient internal operations, including through automation, 
streamlined internal processes, and better use of data. For example, we 
will continue to develop and leverage our capabilities for risk 
analysis to inform our decisionmaking, including how most efficiently 
to use staff resources. Given the pace of change in today's capital 
markets, it is more important than ever that agency operations be 
nimble so that we can direct resources where they are needed most.
                          protecting investors
    The SEC is the first line of defense safeguarding millions of 
investors, and as Chairman I am committed to protecting and enhancing 
the most vibrant markets in the world. The fiscal year 2018 budget will 
enable the SEC to have a robust program to monitor, investigate, and 
enforce compliance with the Federal securities laws. Under our request, 
more than 50 percent of the requested resources will be invested in the 
agency's enforcement and examination programs. These resources enable 
the agency to root out fraud and wrongdoing in our financial system. 
They also allow us to evaluate broker-dealers, investment advisers, and 
other regulated entities that interact with investors for compliance 
with investor protection rules.
    This request will enable the SEC to continue the Division of 
Enforcement's vigorous efforts to investigate and bring civil charges 
against violators of the Federal securities laws. Successful 
enforcement actions impose meaningful sanctions on securities law 
violators, deter future wrongdoing, and result in disgorgement of ill-
gotten gains that can be returned to harmed investors. The SEC's 
enforcement program is led by co-directors Stephanie Avakian, who 
served as the Enforcement Division's Deputy Director for the past 3 
years, and Steve Peikin, an experienced former Assistant U.S. Attorney 
who also served as chief of the securities fraud task force for the 
Southern District of New York. In fiscal year 2018, under their 
leadership, the SEC will continue to focus resources on key areas where 
misconduct harms investors, undermines confidence, and impairs market 
integrity. This includes such critical areas as retail investor fraud 
and investment professional misconduct, insider trading, market 
manipulation, and accounting fraud.
    Additionally, through our work to enforce the Federal securities 
laws, the Commission regularly obtains orders requiring securities 
violators to disgorge illegal profits and pay penalties. In fiscal year 
2016, these amounts totaled more than $4 billion. Our priority is to 
distribute these funds to harmed investors wherever reasonably 
possible.
    The request will also enable the SEC's national examination 
program, led by the Office of Compliance Inspections and Examinations 
(OCIE), to focus on conducting risk-based examinations of registered 
entities, including broker-dealers, investment advisers, investment 
companies, municipal advisors, national securities exchanges, SROs, 
transfer agents, and clearing agencies to evaluate their compliance 
with applicable regulatory requirements. This is an example of an area 
where flexibility is necessary. Registered investment advisers now 
manage more than $70 trillion in assets, which is more than three times 
2001 levels. In 2016, the SEC reassigned approximately 100 staff to the 
national examination program's investment adviser examination unit. As 
a result of this shift and the introduction of efficiencies, the SEC is 
on track to deliver a 20 percent increase in the number of investment 
adviser examinations in the current fiscal year. For fiscal year 2018, 
OCIE anticipates being able to deliver a further 5 percent increase in 
the number of investment adviser exams. I expect that for at least the 
next several years we will need to do more each year to increase the 
agency's examination coverage of investment advisers in light of 
continuing changes in the markets.
    In the coming fiscal year, OCIE plans to increase the number of 
inspections to assess compliance with Commission rules designed to 
ensure that the cybersecurity infrastructure that is critical to the 
U.S. securities markets is secure and resilient. OCIE also will 
continue to bolster its risk-based approach to exam selection through 
the continued development of data analytics tools. These tools help us 
identify activities that may warrant further examination and 
efficiently focus our examination efforts.
                     facilitating capital formation
    The SEC performs a critical function for companies seeking to raise 
capital to grow their businesses. The SEC's efforts in this area 
contribute to job growth and an expanding economy, as well as help 
ensure that investors--including Main Street Americans--have access to 
a broad range of investment choices. The Commission's rules seek to 
facilitate offerings by large and small companies engaged in all manner 
of commerce, while also protecting investors and maintaining confidence 
in the U.S. capital markets.
    In recent years, the SEC has carried out this responsibility 
through a number of key initiatives, including most recently in 
response to the JOBS Act and FAST Act, with a particular emphasis on 
expanded capital-raising opportunities for smaller businesses. While 
much progress has been made, I believe the SEC can and should strive to 
do more to enhance capital formation particularly (1) for small and 
emerging companies and (2) in our public capital markets. U.S. capital 
markets remain the envy of the world, but fewer companies are choosing 
to enter the public capital markets than in the past, and, as a result, 
investment opportunities for Main Street investors are more limited. 
Your support for our fiscal year 2018 budget request will enable the 
staff to develop and present to the Commission rulemaking initiatives 
aimed at promoting firms' access to capital markets to generate 
economic growth while fostering important investor protections. I 
recently named a new Director of the Division of Corporation Finance, 
Bill Hinman, who is leading these efforts and working with the staff to 
develop proposals for consideration. Bill is a recognized leader with 
more than three decades of experience advising companies of all sizes 
in capital-raising and acquisitions. We share the view that there is no 
better architecture for fostering capital formation, providing 
investment opportunities, and protecting investors than our public 
company disclosure-based system.
    The fiscal year 2018 request also will enable the agency to devote 
resources to staff the new Office of the Advocate for Small Business 
Capital Formation. In the near future, the SEC plans to commence a 
nationwide recruitment effort to identify and hire a Small Business 
Capital Formation Advocate who will serve as the head of this office. 
This Office will provide assistance to small businesses and small 
business investors, conduct outreach to better understand their 
concerns, and recommend to the Commission ways that the regulatory 
environment might be improved. Once the Advocate is on board, your 
support for our budget request will enable the agency to staff this 
office in fiscal year 2018.
                         leveraging technology
    Our capital markets have become increasingly complex, with advances 
in technology driving significant changes, including (1) the way that 
companies solicit investors and sell their securities to the public, 
(2) the channels through which individuals receive investment advice, 
and (3) the manner in which institutional and retail investors transact 
on our markets. Indeed, technology has contributed to changes in the 
fundamental structures of markets themselves.
    The fiscal year 2018 budget request will help the SEC to stay on 
top of these critical developments and promote our mission in an 
evolving landscape. The SEC has made progress in modernizing our 
technology systems, with the benefits of increasing our use of data 
analytics, increasing program effectiveness, and streamlining 
operations. The $240 million that the SEC plans to spend on information 
technology in fiscal year 2018 is quite modest, by way of comparison, 
to the amounts that the major Wall Street firms spend on their own 
information technology systems. For example, in 2016 one large 
financial institution alone spent more than $9.5 billion on technology 
firm-wide, with $3 billion of that dedicated toward new initiatives. 
Another large financial institution spent $6.6 billion in 2016 on 
technology initiatives.
    The fiscal year 2018 budget request relies on continued access to 
the Reserve Fund. These funds, which have been dedicated to technology, 
have been important in our efforts to keep pace with the rapid 
technology advancements occurring in areas regulated by the SEC, as 
well as meeting emerging cybersecurity challenges. The continued 
availability of the Reserve Fund historically has allowed us to commit 
to critical, long-term technology initiatives that otherwise may have 
been more difficult for us to execute.
    Key technology initiatives that will be supported with our fiscal 
year 2018 request include:
  --Expanding data analytics tools to integrate and analyze the large 
        and ever-increasing volume of financial data we receive, 
        enabling us to detect potential fraud or suspicious behavior 
        earlier and allocate resources more effectively;
  --Improving our examination program through risk assessment and 
        surveillance tools that help identify high-risk areas for 
        further examination;
  --Increasing investments in cybersecurity, including strengthening 
        our capabilities for monitoring and avoiding advanced 
        persistent threats;
  --Enhancing additional systems that support our enforcement program, 
        including applying sophisticated algorithms that foster the 
        detection of potential insider trading and manipulation;
  --Improving access and usefulness of information available to the 
        public through our EDGAR electronic filing system; and
  --Investing further in business processes automation and enhancements 
        including the retirement of legacy systems.
                                leasing
    As this subcommittee is aware, the existing SEC Washington, DC 
headquarters leases expire in the next few years. In addition to the 
$1.602 billion request for SEC operations, the budget request includes 
the $245 million that the General Services Administration (GSA) 
requires in fiscal year 2018 in order to commence a competitive 
procurement for a successor headquarters lease. None of these funds 
would be used for SEC operations. Rather, these funds represent 
potential expenses for build-out costs, IT infrastructure, security 
equipment, and fees if the outcome of GSA's competitive acquisition 
process should require the SEC to relocate. To provide the subcommittee 
with assurances that the funds will not be used for other purposes, the 
proposed appropriations language submitted as part of the budget 
request provides a mechanism whereby these funds would be refunded to 
fee payers in the event they are not needed for relocation.
                               conclusion
    Thank you again for the opportunity to present the President's 
fiscal year 2018 budget request. I deeply appreciate the President's 
and Congress' continued support of the agency. I look forward to 
working with the subcommittee to ensure that the SEC has the resources 
needed to fulfill our important responsibilities to investors and our 
capital markets. I welcome your comment and would be happy to answer 
any questions.

    Senator Capito. Thank you very much.
    And next, Chairman Giancarlo, I now invite you to present 
your testimony. Welcome.
                              ----------                              


                  COMMODITY FUTURES TRADING COMMISSION

STATEMENT OF HON. J. CHRISTOPHER GIANCARLO, ACTING 
            CHAIRMAN
    Mr. Giancarlo. Thank you. Good morning, Chairwoman Capito, 
Ranking Member Coons, and Members of the subcommittee. I am 
honored to testify before you on the CFTC's 2018 budget 
request.
    For more than 100 years, American farmers and manufacturers 
have used derivative markets to hedge the cost of production 
and their delivery price. It assures that we can always find 
plenty of food on grocery store shelves no matter what the 
conditions are on the American farm. But derivative markets are 
not just helpful for agricultural producers. They influence the 
price and availability of heating in American homes, electric 
power in our offices and factories, interest rates on 
homeowner's mortgages, and returns on retirement savings.
    These markets allow producers to manage changing production 
costs like the cost of raw materials, energy, foreign currency, 
and interest rates. They enable business risks to be 
transferred from those who cannot bear it to those who can and 
they free up capital for investment and boost economic growth, 
job creation, and American prosperity. Yet today these markets 
are more fragmented, more concentrated, less liquid, and less 
supportive of economic growth than in the past. The time has 
come for these markets and the efforts of those who regulate 
them to be put more fully into service of American economic 
recovery.
    Turning to our budget, the Commission is requesting $281.5 
million and 713 FTEs for fiscal year 2018 operations. This is 
an increase of $31.5 million and 36 FTEs over the fiscal year 
2017 level. Now the $31.5 million in additional funds is not an 
ad hoc number. It is a careful assessment of what the CFTC 
needs to execute its mission in fiscal year 2018.
    I recognize the enormous task of setting the Federal 
Government's $4 trillion budget and I respect the priorities of 
this Congress and President Trump to balance the budget rather 
than pile up more debt on American citizens. I know this 
subcommittee's essential role in appropriating and allocating 
the resources provided by our fellow taxpayers. Therefore, we 
did not take lightly the use of bypass authority to present our 
2018 budget directly to Congress.
    This is my first time directing a Federal agency in its 
budgeting process. Previously, I spent 30 years in the private 
sector where I was last a senior executive of a public company. 
It seemed to me that the budgeting process of government 
agencies always started with last year's budget to which was 
added an additional increase. When I became acting CFTC 
chairman a few months ago, I approached the budget a little 
differently, the way I did back in business. I sat down with 
the heads of every unit. I reviewed their missions and their 
spending. Together, we built this budget up from zero based 
upon real needs and real expenditures.
    No surprise, I found areas where the agency could be more 
efficient. For example, by returning to regular order in its 
operations, taking greater care and more precision in its rule 
drafting, adopting less contracted timeframes for public 
comment, reducing the docket of new rules and regulations to be 
absorbed by market participants, and adopting a proper 
specification process for new technology spending, 
reestablishing our central service model, and not over 
interpreting our mission.
    I hope that by implementing these changes I could have 
reduced our 2018 budget request below prior year levels or even 
held it steady, but it will take some time to see these 
efficiencies realized in our budget going forward. Rather, I 
discovered three critical areas where the agency falls short of 
its current mission.
    These are the Commission's budget priorities for fiscal 
year 2018. They explain the modest increase in our budget 
request. First, the Office of Chief Economist is under 
resourced to meet the challenges of the rapidly changing nature 
of global derivative markets. We must conduct more thorough 
cost benefit and econometric analysis to support better 
regulatory policy. Second, as clearing houses grow in size and 
scope, so too has the complexity of the counterparty risk 
management oversight programs and procedures of the firms we 
regulate.
    It is said that an ounce of prevention is worth a pound of 
cure. The better our process for examining derivatives clearing 
houses, the less taxpayers are at risk of bailing them out if 
something goes wrong. We must strengthen our examinations 
capacity to keep pace with the explosive growth and the amount 
and value of clearance swaps here and abroad.
    Third, and finally, to avoid being a twentieth century 
analog regulator of twenty-first century digital markets the 
CFTC must keep pace with emerging technology. The world is 
changing. Our parents' financial markets are gone. A digital 
transformation is well under way and shows no sign of stopping. 
For this reason, we have launched LabCFTC, an important 
financial technology initiative that will help us catch up with 
the changing nature of markets for which we are responsible.
    In conclusion, U.S. derivative markets should be neither 
the most regulated nor the least regulated in the world, but 
the best regulated. Providing effective oversight and robust 
enforcement of our laws motivates the talented men and women of 
the CFTC. Our standard is operational and regulatory excellence 
and our proposed budget will meet the standard for the American 
people.
    I submit my written testimony for the record and I welcome 
your questions. Thank you.
    [The statement follows:]
          Prepared Statement of Hon. J. Christopher Giancarlo
    Good morning, Chairwoman Capito, Ranking Member Coons and Members 
of the subcommittee. Thank you for the opportunity to testify on the 
Commodity Futures Trading Commission (``Commission'' or ``CFTC'') 
fiscal year 2018 budget request.
    I appreciate the support your Committee has shown the Commission 
and for understanding the critical role we play in regulating the 
derivatives markets. I am pleased to be here today with Securities and 
Exchange Commission's (SEC) Chairman Clayton, and I very much look 
forward to our discussion today and working collaboratively with him as 
we move forward.
    For more than 100 years, farmers and ranchers have used listed 
derivatives markets to hedge their costs of production and delivery 
price so that Americans can always find plenty of food on grocery store 
shelves. But derivatives markets are not just beneficial for 
agricultural producers. They influence the price and availability of 
heating in American homes, the energy used in factories, the interest 
rates borrowers pay on home mortgages and the returns workers earn on 
their retirement savings. In addition, more than 90 percent of Fortune 
500 companies use derivatives to manage commercial or market risk in 
their worldwide business operations. In short, derivatives serve the 
needs of society to help moderate price, supply and other commercial 
risks to free up capital for economic growth, job creation and 
prosperity.
    It is imperative that we get our regulation of America's 
derivatives markets right, and that regulation needs to be supportive 
of economic growth. To do that, our oversight of market participants, 
here and abroad, should provide a model of regulatory excellence. We 
need to review, and where it makes sense, reform, rewrite, and 
appropriately simplify our regulations to allow market participants to 
effectively manage risk.
    It is these basic tenets that form the basis of the Commission's 
fiscal year 2018 budget request. With this budget request, the 
Commission will be able to support regulatory excellence without 
sacrificing other important Commission work, such as Enforcement or 
Surveillance activities. In the fiscal year 2018 request, the 
Commission placed importance on specific capabilities that will allow 
the Commission to enhance economic cost benefit analysis capabilities; 
strengthen Commission examinations capabilities over swaps clearing 
houses; and address the regulatory challenges related to market 
innovation.
                             budget request
    The Commission is requesting $281.5 million and 739 full-time 
equivalents (FTE) for fiscal year 2018 operations. This is an increase 
of $31.5 million and 36 FTE over the fiscal year 2017 level. The $31.5 
million in additional funds is not a formulaic or superficial number, 
but a thorough and informed assessment of what the CFTC needs to 
execute its mission in fiscal year 2018. This amount differs from the 
President's budget request of $250 million.
    Under my direction, the Commission has utilized its ability to 
provide a budget directly to the Congress. This is the first budget 
submission under my leadership, and I believe it is important to 
articulate the needs of the Commission based on my perspective and 
vision for a renewed and refocused CFTC.
    On January 20, I began a process of looking at every function and 
every expenditure undertaken by the Commission. In the private sector, 
we would never simply take last year's budget number and add a 
percentage increase. Rather, each dollar requested had to serve a 
purpose. Likewise, when I sat down with our leadership team, my budget 
baseline was zero. We built our budget from the ground up. Drawing on 
my business experience, I have already identified several areas in 
which the agency can run more efficiently and save taxpayer dollars. 
For example, I reviewed the needs of the offices that provide various 
support services to our divisions, and I intend to gain efficiencies by 
instituting a central-services organizational model that is a best 
practice in the private sector. We also discovered areas within our 
current mission where we need additional investment. The $281.5 million 
fiscal year 2018 budget request reflects the current needs of the CFTC 
based on this analysis.
    The era of Dodd-Frank implementation at the CFTC is now drawing to 
a close. It is time for the agency to resume normalized operations and 
practices. That means a return to greater care and precision in rule 
drafting, more thorough econometric analysis, less contracted 
timeframes for public comment and a reduced docket of new rules and 
regulations to be absorbed by market participants. It also means that 
the CFTC will embrace the administration's directive that each Federal 
agency minimize the costs incurred by regulation. We plan to accomplish 
this through the KISS initiative I launched in March, which includes 
both internal and external reviews of rules and processes. It is 
another way of looking for opportunities where we can reinvest and 
maximize current resources.
    Normalizing operations at the CFTC also means working cooperatively 
with other Federal market regulators, like the SEC, and where 
appropriate, the CFTC should look to delegate responsibility to the 
National Futures Association and other SROs for certain compliance 
matters.
    In addition, we are reevaluating the focus of our enforcement 
efforts. The Commission's enforcement function is staffed by 
experienced and decorated former prosecutors, and I can proudly say is 
one of the premier civil law enforcement arms of the Federal 
Government. Yet, the Commission's enforcement efforts must look to 
benefit from cooperation, and where appropriate, defer to the civil and 
criminal capabilities of other Federal and State regulators and 
enforcement agencies.
         resources for increased economic cost benefit analysis
    The additional resources requested for economic analysis will be 
invested in building the Commission's capacity to systematically 
analyze large volumes of trade data and improve our understanding of 
the markets.
    The additional investment in economic capabilities will boost the 
CFTC's analytical expertise and monitoring of systemic risk in the 
derivatives markets, in particular with regard to central counterparty 
clearinghouses. It includes the expansion of sophisticated econometric 
and quantitative analysis devoted to risk modeling, stress tests, and 
other evaluations necessary for market oversight. Furthermore, such 
analysis will help the CFTC fulfill the Presidential Executive Order on 
Core Principles for Regulating the U.S. Financial System, relating to 
the core principle of fostering economic growth and vibrant financial 
markets through more rigorous regulatory impact analysis that addresses 
systemic risk and market failures, such as moral hazard and information 
asymmetry.
    A common criticism of the rule-making process has been the lack of 
quantitative assessments of costs and benefits. While there was a 
paucity of relevant data for Dodd-Frank implementation, we believe that 
market participants and the public expect the CFTC to leverage the data 
sources now available to inform future rulemaking. The current staff 
dedicated to economic analysis is inadequate to meet appropriate 
standards for econometric analysis required by a regulatory agency with 
oversight of more than 35 to 45 percent of the global derivatives 
markets.
    Looking beyond rulemaking, the new data sets have opened up 
possibilities for more effective analysis of the U.S. derivatives 
markets. For example, Commission economists are focused on developing 
the capability to integrate activity and positions across futures and 
swaps markets, and thus gain a holistic view into the derivative 
exposures of market participants and the interaction between the 
futures and swaps markets.
    There is growing awareness that just looking at the total notional 
size of activity in the market might not be representative of the true 
extent of risk transfer. We have taken some initial steps to convert 
notional amounts into risk-based measures; however, additional 
resources are necessary to develop these analytical capabilities. 
Without the requested increase, the CFTC will continue to rely on 
outdated, anachronistic models and metrics of studying our markets.
           resources for examinations to cover increased dcos
    The Commission is also requesting additional resources that would 
strengthen the Commission's examinations capability and enable it to 
keep pace with the explosive growth in the number and value of swaps 
cleared by designated clearing organizations (DCOs), pursuant to global 
regulatory reform implementation. As the size and scope of DCOs has 
increased, so too has the complexity of the counterparty risk 
management oversight programs and liquidity risk management procedures 
of the DCOs under CFTC regulation here and abroad.
    Currently, there are 16 DCOs registered with the Commission and 
there is one pending application for registration. The Commission 
projects that the number of DCOs will continue to expand in fiscal year 
2018, and volume will continue to grow at existing DCOs. Since the end 
of 2011, the total amount of initial margin held by registered DCOs for 
futures and swaps has grown by more than 168 percent from $119 billion 
to $320 billion. For swaps alone, the growth is even more dramatic. For 
example, at LCH Clearnet Ltd, the amount of initial margin held for 
swaps has grown by more than 600 percent since 2010.
    The growth in volume has been accompanied by an increase in the 
complexity of products. For example, the risks posed by credit default 
swaps differ from those posed by interest rate swaps. Accordingly, DCOs 
have developed a large number of individualized margin models and other 
risk management tools to address these risks. This, in turn, generates 
a corresponding increase in the complexity of the Commission's 
oversight responsibilities.
    The Commission is seeking to position additional resources to 
enable it to continue to fulfill its responsibilities relating to 
systemic risk. Increases in the number of DCOs, the volumes cleared, 
and the complexity of the products necessitate increases in the 
resources devoted to the oversight of clearing, through timely and 
thorough examinations of DCOs. These examinations cover a range of 
issues from the size of financial resources, to margin, to treatment of 
customer funds, and cyber security. In addition, the Commission will 
also continue to develop capabilities for conducting stress testing and 
back testing to assess the impact of stressful market scenarios across 
the clearinghouses.
    Many of the DCOs are expanding their registration in other 
jurisdictions around the world. Those jurisdictions look to the 
Commission to provide insight regarding the effectiveness of the 
programs implemented by the DCOs. The Commission supports the expanding 
market participant registrations through information sharing and 
compliance discussions in the areas of cybersecurity, liquidity risk 
management, default management and other high profile risk management 
issues.
                 resources to further implement fintech
    Earlier in the year, President Trump issued an Executive Order 
establishing an American Technology Council. The President said, ``It 
is the policy of the United States to promote the secure, efficient, 
and economical use of information technology to achieve its missions. 
Americans deserve better digital services from their Government. To 
effectuate this policy, the Federal Government must transform and 
modernize its information technology and how it uses and delivers 
digital services.''
    I could not agree more. That is why in fiscal year 2018, the 
Commission requests additional funds to increase staffing and resources 
to address financial technology innovation (FinTech). The Commission 
aims to address three fundamental issues arising from transformations 
in FinTech: (1) how the CFTC should leverage FinTech innovation to make 
it a more effective regulator; (2) how FinTech can help the CFTC 
identify rules and regulations that need to be updated for relevance in 
digital markets; and (3) the role of the Commission in supporting U.S. 
FinTech innovation in CFTC regulated markets. With these additional 
investments, I plan to execute a phased approach that will achieve 
these three objectives.
    So much of our world today, from information to music to 
manufacturing to transportation to commerce, and even farming, has 
undergone a digital transformation. It should be no surprise to anyone 
that our capital, commodity and futures markets are going through the 
same digital transformation. The electronification of markets over the 
past 30 to 40 years and the advent of exponential growth in digital 
technologies have altered trading, markets and the entire financial 
landscape with far ranging implications for capital formation and risk 
transfer.
    Other breaking digital innovations present equal regulatory 
challenges. These innovations include ``big data'' capability to enable 
more sophisticated data analysis and interpretation; artificial 
intelligence to guide highly dynamic trade execution; ``smart'' 
contracts that value themselves and calculate payments in real-time; 
behavioral biometrics that can detect and combat online fraud; and 
distributed ledger technology, more commonly known as blockchain, that 
will challenge orthodoxies that are foundational to today's financial 
market infrastructure.
    The pace of investment in these technologies, and in FinTech more 
broadly, has accelerated in recent years. According to one measure, 
investment has increased at a cumulative annual growth rate of more 
than 45 percent from 2011 to 2016. We are seeing a powerful 
convergence, as the costs of launching new ventures and applying new 
technologies have dropped enormously, while the speed and scalability 
with which they can be brought to market have increased dramatically.
    The world is changing. Our parents' financial markets are gone. The 
21st century digital transformation is well underway, and the digital 
technology genie will not go back in the bottle. In order for the CFTC 
to remain an effective regulator, it must keep pace with these changes 
or our regulations will become outdated and ineffective.
                       effective use of resources
    Just as I did in the private sector, I will strive as a government 
official to maximize how limited resources are used. Earlier this year, 
I notified you of actions we took to streamline and centralize business 
management functions from the mission delivery divisions to 
administrative services, a change that will produce long-term savings. 
In addition, we realigned portions of the surveillance staff under the 
enforcement division and refocused a team on developing improved market 
intelligence. Each of these actions leverages existing processes, and 
increases the efficiency and effectiveness of the Commission's core 
functions. Moreover, these actions will allow us to better manage our 
resources while maintaining, but not increasing, our Division of 
Enforcement's legal resources.
    The Commission has also worked to improve its administration of its 
leases. CFTC entered into a memorandum of understanding (MOU) with the 
General Services Administration (GSA) to administer all future CFTC 
leases. In addition, the CFTC cleared the lease accounting issues 
highlighted in the fiscal year 2015 financial statements audit, 
received an unmodified, or ``clean,'' opinion on its fiscal year 2016 
financial statements and earned the certificate of excellence in 
accountability reporting from the Association of Government 
Accountants.
    In fiscal year 2018, I have plans to review additional 
opportunities to streamline operations and further maximize the 
effective use of our resources. The Commission's organizational 
structure must evolve to support the changing times. These types of 
organizational reviews are critical to ensure that resources and staff 
are devoted to the most important priorities in the CFTC's mission to 
oversee the Nation's derivatives markets.
                               conclusion
    The U.S. derivatives markets should be neither the most regulated 
nor the least regulated of the world--but the best regulated. This 
quest for superior regulatory oversight and unswerving enforcement of 
our laws motivates the work of the hundreds of talented men and women 
who serve their country at the CFTC. Only with such a commitment can 
all Americans experience the economic benefits that risk-transfer 
markets afford. This budget request ensures that the CFTC can meet such 
a standard for the American people. The fiscal year 2018 budget 
submitted by the Commission reflects the true needs of a policy setting 
and civil law enforcement agency that has the duty to ensure the 
derivatives markets operate effectively. This budget will give the 
Commission the resources it needs to put in place and oversee 
responsible regulations that allow for innovation and enable our 
markets to remain competitive and safe at home and abroad.

    Senator Capito. Thank you very much, Director.
    And I am going to begin--or Chairman, excuse me--begin the 
questions and I will begin with my 5-minute question.
    Chairman Clayton, you mentioned in your opening statement 
that fewer companies are going public and your concern and some 
of the plans that you have to try to improve this situation. 
Could you kind of dig down more granular to what kind of impact 
that has on people's retirements, ability to invest, and what 
kind of choices are being curbed by this phenomenon and why is 
this occurring.
    Mr. Clayton. Well, thank you, Madam Chairwoman, and I would 
like to because when I started this job this was a matter of 
concern to me, the fact that we have gone from roughly 8,000 
public registrants to 4,400 or so in the last 15 years. Let me 
start with the impact on main street investors.
    Senator Capito. Right.
    Mr. Clayton. That is fewer choices for main street 
investors, 8,000 down to 4,400. If that number continues to 
shrink, the choices for main street investors will, in my view, 
by definition shrink. Our public capital markets are wonderful. 
They offer access to investments on a relatively costless basis 
compared to investing in private sector investments. Said 
another way, it is very difficult for main street investors to 
access----
    Senator Capito. Right.
    Mr. Clayton [continuing]. Private sector investments 
because of the fixed costs of making such investments, the 
compliance costs, et cetera. So this is troubling to me because 
the public equity markets, public debt markets are where our 
main street investors look for their investing needs.
    What are the drivers of this? I think they are 
multifaceted. I think that people would tell you it is one 
thing or another. Regulation is certainly one of them. The 
fixed costs and ongoing annual costs of being a public company 
have gotten higher. They have gotten--they have increased, you 
know, much in excess of inflation. The ability to raise capital 
in private markets has gotten easier. There is more private 
capital available. And there is something that we are 
continuing to explore, and I want to explore further, which is 
the liquidity available for small and mid-sized public 
companies that enter our public markets is not what people 
would like it to be. So----
    Senator Capito. And that is why you created your committee?
    Mr. Clayton. Yes.
    Senator Capito. Your small business committee.
    Mr. Clayton. Yes.
    Senator Capito. Yes.
    Mr. Clayton. That is one of the drivers, yes.
    Senator Capito. Thank you. I think that is concerning 
because obviously that is a lot of retirement dollars that 
people look to, you know, in the long term to be able to 
access. And you want to look at growth obviously to take you 
into your later years and if your options are curbed your 
ability to really have a comfortable retirement in your later 
years is certainly curbed as well.

                                LEASING

    I want to ask both of you something. Let us go to the space 
and the leased space area because you both have issues, I 
think, related to this and some questions. I will start with 
you, Chairman Giancarlo. You know, the Inspector General 
estimates that the CFTC will spend throughout four of its 
offices over the terms of the current lease between $44 to $56 
million on empty office space. What steps are you taking to 
reduce that footprint? And the other question I have and I am 
going to ask you to respond to this too, Mr. Clayton, is on the 
telework issue do you have--I understand that you have a lot of 
vacant offices because of your telework policies. Are you 
working to kind of reign the lease options in for that maybe 
shared space and all those kinds of things?
    Mr. Giancarlo. Thank you for that question. Our average----
    Senator Capito. Let's go to the empty offices first.
    Mr. Giancarlo. Yes. So we have four offices here in 
Washington, New York, Chicago, and Kansas City. Our average 
leasing percentage is about 85 percent occupancy, but in some 
of our offices such as Kansas City and New York, it is less 
than that. Those leases were entered into several years ago, I 
think at a time when perhaps there was an expectation among 
some that the CFTC would become a much bigger agency, and that 
space was taken on.
    We are handing that authority to enter into leases back to 
GSA and we are searching now as hard as we can to fill that 
space, whether through sub tenancy or otherwise. We have been 
working very hard in Kansas City in particular and have had a 
number of--or entertained a number of offers. Unfortunately, 
they were not--did not make economic sense for us. But we 
continue to find ways to utilize that space.
    In New York, our LabCFTC initiative that I talked about is 
one way that we would use some of that space in New York City 
by situating that effort in New York where a lot of the new 
innovation is taking place. I am sorry. Your second question 
was?
    Senator Capito. Well, let me go to Mr. Clayton now and then 
telework was my question, but I am running out of time, so let 
me hear.
    Mr. Clayton. Sure. And I will try and do both. Yes. 
Teleworking has increased. It is one aspect of technology that 
I believe and our staff that handles operations believes could 
actually reduce the required footprint per employee. We have 
been working to do that. Rough data, it used to be 290 square 
foot per employee. We are now down to about 245 square feet and 
we are looking to trend down to around 230 square feet per 
employee with teleworking and other technological advancements 
contributing to that efficiency.
    Senator Capito. Okay. And what about telework for you since 
I have--he gave me a quick answer?
    Mr. Giancarlo. Yes. So we are in negotiations with our 
union right now and that is one of their requests, for 
increased telework. I must say that having come from the 
private sector, telework is an idea that is less--found to be 
less attractive in the private sector. And IBM just, after 
going through a long experiment with it, is going in a 
different direction. I think there is value in having our 
employees together in one place. The ability to look at 
different ideas and stimulate one another, I think, is present 
when people are together in one space.
    Senator Capito. Thank you.
    Senator Coons.
    Senator Coons. Thank you, Chairwoman Capito. Thank you to 
both our witnesses. And I would like to ask unanimous consent 
that a written statement to us from Anthony Reardon, National 
President of the National Treasury Employees Union (NTEU), be 
entered in the record.
    Senator Capito. Without objection.
    [The statement follows:]
                Prepared Statement of Anthony M. Reardon
                           National President
                   National Treasury Employees Union
    Chairman Capito, Ranking Member Coons and Members of the 
Subcommittee on Financial Services and General Government 
Appropriations, thank you for the opportunity to present this statement 
on behalf of the National Treasury Employees Union (NTEU). Our union is 
proud to represent the bargaining unit staff at the Commodity Futures 
Trading Commission (CFTC) and the Securities and Exchange Commission 
(SEC).
    The employees of the CFTC and the SEC are among the most 
professional, hard working and dedicated of any in the public or 
private sector. The rapidly changing practices in the financial markets 
as well as new forms of fraud and wrongdoing mean that these two 
agencies must continue to recruit and retain employees with the highest 
level of skills. Commitment to this goal will mean that fraud will be 
reduced and investors, savers, retirees, end users and others who 
participate in the market will not be victimized by those who would do 
them financial harm.
                  commodity futures trading commission
    NTEU supports CFTC's request for $281.5 in funding for fiscal year 
2018. This request is extremely modest and in fact with the increased 
duties the CFTC has been given in recent years, resources above this 
amount would be entirely appropriate. Funding at least at this level is 
critically important to allow the employees of the CFTC to perform 
their work in an effective and professional manner. Every day, the 
duties of the CFTC to protect consumers in the marketplace grow more 
complex. Having a vigorous free market require that the ``cops'' 
detailed to that ``beat'' have the resources necessary to police the 
ever growing marketplace and the advancing technological developments 
that enable both market expansion and market fraud.
    Further, to the benefit of American families and businesses, the 
CFTC has returned billions of dollars to cheated investors, in fact 
more than its entire appropriation. Congress should not be penny wise 
and pound foolish when it comes to protecting the investments of 
American consumers, only to see the victimized lose retirement 
investments or life time savings.
    NTEU is seeking parity in pay and benefits with other financial 
regulatory agencies, particularly the SEC. There are many incidents of 
some of the brightest and most skilled CFTC employees leaving CFTC for 
positions at the SEC or elsewhere in Federal service because of better 
pay and benefits. Not only does CFTC lose these superior employees but 
morale problems develop for those employees remaining at CFTC.
    Even with the agency's request of $281.5 million, CFTC will still 
not fully have the resources it needs to perform its mission. However, 
we believe that this amount can be workable along with certain 
flexibilities and initiatives. Congress has imposed a fence of $50 
million within CFTC's budget for IT. This has not been requested by the 
agency nor by the previous administration. Yet it represents 20 percent 
of CFTC's appropriation and denies the agency the flexibility it needs 
to follow its mission under very limited funding. Congress should give 
CFTC more flexibility with its limited appropriation. Further, CFTC can 
benefit from the following workplace reforms:
  --Increased telework: many agencies allow employees 2 or more days of 
        telework per week, which increases productivity, efficiency, 
        and staff retention as well as cost savings for the Agency. 
        With increased telework, CFTC could promote office sharing and 
        reduce rented office space. In addition, one additional 
        telework day per week could save up to an estimated $300,000 
        per year in transit subsidies.
  --Insourcing: CFTC currently has just under 700 full-time equivalent 
        employees and 400-600 contractors. Contracting companies charge 
        overhead costs while contract employees lack the 
        accountability, expertise, and institutional knowledge of CFTC 
        employees. Moving these contractor responsibilities in-house 
        would translate into improved productivity, better work 
        product, and savings in overhead costs.
  --Restructuring: in some sections or divisions, supervisors are 
        responsible for very small numbers of employees (e.g., one 
        supervisor for three employees). This creates inefficiencies 
        both in reporting and in cross-unit coordination. Reducing the 
        number of administrative units and the layers of supervision 
        would improve efficiency at the CFTC.
  --Additional flexible work schedules: increased flexibility in work 
        schedules (such as a 4/10 schedule) would increase productivity 
        and staff retention as well as reduce the amount the Agency 
        spends on transit subsidies.
                   securities and exchange commission
    American investors benefit from the highly skilled employees at SEC 
and NTEU is pleased to be a part of the successful efforts to make the 
SEC a workplace that attracts the best and brightest of their field. 
Over the past 5 years NTEU has worked with SEC management to improve 
employee engagement. In the most recent Federal Employee Viewpoint 
Survey (FEVS), the results were increasingly positive for SEC. The 
Partnership for Public Service also recognized SEC as the ``most 
improved'' of any mid-sized agency. These positive results reflect the 
culmination of a persistent, multi-year effort by NTEU and the SEC 
management in working together to create an environment that engages 
employees and supports their commitment to excellence on behalf of 
America's investors and our markets. There must be no backtracking in 
this excellence.
    Therefore, NTEU believes that at least a modest increase in funding 
is required. The administration has proposed an appropriation of $1.602 
billion for SEC. NTEU believes that a minimum of $1.781 billion is 
needed for the Commission to perform its important duties in protecting 
investors and maintaining market fairness. This figure matches the 
previous administration's fiscal year 2017 request. Recent funding 
improvements at SEC have just begun to provide the staffing level 
needed for the additional duties created under the Dodd-Frank Act. But 
the continued growth of the regulated market demands that the SEC 
receive increased staffing just to stay even. $1.781 billion will allow 
SEC to hire an additional 250 FTEs.
    I would remind the subcommittee that SEC funding is deficit 
neutral. While the appropriations process allows this subcommittee to 
give important oversight to the SEC, the agency is not funded by tax 
revenue, rather it is fully funded by fees paid by the industry which 
are adjusted to cause no negative impact on the Federal budget deficit. 
Moreover, in these difficult financial times, in fiscal year 2015, SEC 
distributed over $4 billion (more than twice its budget) to cheated 
investors through disgorgement or contributed to the general fund 
through civil penalties. None of these monies are retained by SEC.
    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
established the Securities and Exchange Commission Reserve Fund. The 
Reserve Fund is a separate fund in the Treasury from which the 
Commission may obligate amounts determined necessary to carry out SEC 
functions. The Reserve Fund is funded by deposits from registration 
fees collected by the Commission. The 2018 Budget proposes to eliminate 
the Reserve Fund in 2019. Registration fees currently deposited in the 
Reserve Fund would be redirected to the General Fund of the Treasury. 
NTEU strongly opposes this proposal. First, it would deny SEC needed 
resources towards it mission. Second, it is contrary to the principles 
of the Investor and Capital Markets Fee Relief Act that fees paid to 
the SEC should be used for SEC purposes and not diverted to general 
revenue. To do so is to impose a hidden tax on registrants.
    NTEU is concerned about the use of government contractors 
performing sensitive work at SEC. The Office of Credit Ratings (OCR) is 
using contractors as part of their examination teams. The Office of 
Compliance Inspections and Examinations (OCIE) is using contractors to 
perform asset verification and net capital analysis, as well as to 
conduct examinations. These inherently governmental functions are being 
assigned to contractors who have insufficient training and are not 
covered by the same ethical standards or conflict of interest rules as 
SEC employees. These are short-term employees who work for outside 
companies and whose employment can be terminated at any time for any 
reason. On the other hand, SEC permanent employees are covered by a 
whole host of important conflict of interest and ethical rules. The 
differing standards for SEC contractors and employees leave a gaping 
hole in the SEC's ethical regime. We are pleased that there have been 
some indications that Chairman Clayton does not plan on increasing the 
number of contractors.
    The 11 SEC field offices serve a very important role in discovering 
fraud and deceit in local communities across the Nation. NTEU is 
disturbed by a provision in H.R. 10 that could close some of these 
field offices. NTEU found that the evidence is SEC would actually 
benefit from an increased number of field offices, specifically in the 
Midwest, southwest, northwest and mid-Atlantic areas. Not only could 
this be economical due to more moderate office space costs in these 
places, but NTEU members at SEC strongly believe that geographical 
proximity of SEC staff to situations of fraud and wrongdoing has a 
strong impact on enforcement and discovery. SEC should give serious 
consideration to the opening of new field offices in parts of the 
country that are underserved or suffer from investment fraud above the 
norm. We would welcome language in the appropriations bill that would 
prevent closure of any of the eleven field offices.
    The core of SEC's work is in enforcement and examination. This is 
where the bad actors are caught and punished and the innocent 
protected. NTEU would support an additional 131 FTEs in the Division of 
Enforcement. No less than this should be funded.
    Limitations on employee investigatory travel budgets also harm the 
ability of SEC front line employees to do their job in an effective and 
professional manner. Employees at the SEC believe the importance of 
this work will become increasingly critical in the near future. For 
example, because of low returns in the bond market in which many people 
have their post retirement savings concentrated, retirees are 
increasingly looking for new investments promising higher returns. 
While some senior citizens may find the higher yielding investments 
they are seeking, others will become victims of fraud and Ponzi 
schemes. Without proper SEC staff in numbers, quality, training and 
mobility, we will see an increasing number of seniors at risk of being 
cheated out of their retirement savings and investments. Seniors should 
not lose their retirement savings to unscrupulous advisors because of 
an understaffed or weak SEC.
    Like the CFTC, even with NTEU's recommended funding, SEC will still 
not fully have the resources it needs to perform its mission. Again, we 
believe that this amount can be workable along with certain 
flexibilities and initiatives. Congress should not impose any funding 
inflexibilities on SEC and management should implement cost saving 
workplace efficiencies such as a more robust telework program, which 
increase morale and saves on leasing costs.
    NTEU appreciates the opportunity to present our views to the 
subcommittee and hopes to continue to work with the Chair and the 
Members of the subcommittee on funding for these two agencies as well 
as other matters under the subcommittee's jurisdiction. Thank you.

               RESPONSIVENESS TO INQUIRIES FROM DEMOCRATS

    Senator Coons. If I might, to both witnesses first. There 
is concern that the administration is choosing to not respond 
to requests from Democrats which counters a longstanding 
bipartisan tradition upheld by both parties. Will you commit to 
responding to questions and requests for information from both 
majority and minority?
    Mr. Giancarlo. Certainly.
    Mr. Clayton. Yes, Senator.
    Senator Coons. Thank you both.
    If I might, first, Chairman Giancarlo about the CFTC. The 
funding has remained flat for three fiscal years and your 
testimony today and your justification materials describe the 
$31.5 million increase you are seeking after a thorough bottom-
up budgetary review to support three key priorities as you 
articulated in econometric and cost-benefit analysis, continued 
advances in market intelligence, and helping financial 
technology innovators navigate regulatory compliance. You also 
proposed to devote a portion to sustaining current IT 
investments.

                          2018 FUNDING LEVELS

    What particular setbacks would the CFTC experience if your 
request to increase does not get provided by this subcommittee 
and if your budget authority is frozen at $250 million as 
proposed by the President? How would you address those needs? 
Would you abandon your proposed enhancement in FinTech, market 
intelligence, cost-benefit analysis, or would you consider 
reducing spending in other areas?
    Mr. Giancarlo. Thank you for that question. I said in my 
testimony that our markets are changing dramatically before our 
eyes. When people think of CFTC, they often think of a scene 
from a funny movie from the 1980s called Trading Places with 
trading pits. Well, those trading pits are all closed. That 
world is gone. Our markets are virtual. They are online. They 
are electronic. They are algorhythm driven. They are not pit 
trading anymore. And yet our rule set is very much still 
written for that old world.
    We have to dramatically move to the future. A great hockey 
player, Wayne Gretzky, said that the reason he was successful 
is because he did not skate to where the puck was, but he 
skated to where the puck is going. Our budget that I have put 
forward enables us to skate to where the puck is going. Those 
economists will help us understand the rapidly changing nature 
of the markets.
    When I travel and meet with farmers and ranchers and others 
that use our markets, they are very concerned about development 
such as high frequency trading and the virtual nature of 
trading in markets. And unfortunately, we just do not have all 
the answers for them because we do not really have the capacity 
to look into that future direction. We need to build up that 
econometric unit. We need the separate LabCFTCs. We can start 
understanding some of these new technologies like block chain, 
like machine learning, like big data computing that firms are 
using to trade in our markets.
    Mr. Clayton mentioned that one firm alone has devoted, I 
think the number was $9 billion, just to technology. We are 
proposing a $57 million technology budget. We really need this 
budget that we have put forward.
    Senator Coons. Well, thank you. I appreciate that. And 
given the history of our having had a crash that in no small 
part was contributed to by a misunderstanding or failure to 
effectively and transparently regulate a burgeoning derivatives 
and swaps market, your request strikes me as wise.
    Mr. Clayton, I might just ask you as well. The budget 
request for SEC of $1.602 billion is $3 million below a freeze. 
Last year's request was $180 million more. Your request appears 
to shave about 2 percent from each of the operating divisions 
except for the Inspector General. I am concerned that that 
might be going in the wrong direction in terms of protecting 
investors. How do you believe a freeze will help the SEC police 
highly sophisticated markets and increase oversight of 
investments advisors when we have such a robust market? You are 
making admirable progress in terms of inspections and overview, 
but why not continue to invest?
    And then last, the administration proposed eliminating the 
SEC Reserve Fund. I would be interested in your view on the 
wisdom of doing so.
    Mr. Clayton. Okay. Let me--we are essentially flat, maybe 
down actually less than, you know, $3 million and we have 
probably a percent cut due to attrition. We have Senator no 
reduction in force or anything like that. I am comfortable that 
we can continue to fulfill our mission in the same way we have 
in the past at this funding level. It also gives me an 
opportunity, a new person in this seat, to assess where we may 
need funding going forward.
    Again, I agree with Chairman Giancarlo. Our markets are 
changing and the pace of change is increasing. And I am--I will 
tell you one thing I am certain of. There will be areas that, 
this time next year, I would want more funding that I do not 
know about today.
    Just to give you the analysis I went through when getting 
in the seat, and I want to thank the staff for really getting 
me up to speed quickly on the needs of the Commission. At our 
current funding level, I am comfortable. You know, if you took 
a percent, I would be pretty bummed out. It would hurt. And I 
think if, you know, I had a few more dollars, could I spend 
them wisely, but I would not know where to spend a whole lot 
more right at this time. So I am very comfortable.
    And the SEC Reserve Fund, I am seeking to continue to have 
the SEC Reserve Fund at $50 million. This has been dedicated to 
technology in the past. Technology spend is more than an annual 
event. Sometimes 2, 3, 4 years for implementation design 
testing. And it is very helpful to have a dedicated source of 
funds for technology.
    Senator Coons. Thank you. I think we can all agree broadly 
that Federal agencies have not historically done a great job of 
IT procurement and I think having a reserve fund and the 
ability to prepare for it and procure it on a long-term basis 
makes great sense, particularly in an area where staying ahead 
of the IT curve is so important.
    Thank you, Madam Chairwoman.
    Senator Capito. Senator Moran.
    Senator Moran. Chairwoman, thank you very much. Chairman 
Clayton, Chairman Giancarlo, thank you very much for your 
public service. Welcome to the capacity of the positions you 
now hold and look forward to working with you.

                      SWAP DEALER DE MINIMIS LEVEL

    Let me start with the CFTC. Chairman, as you know, the swap 
dealer de minimis level is set to drop to $3 billion by the end 
of the year. I am concerned this will negatively impact farmers 
and ranchers, folks in Kansas who utilize that risk management 
tool. They would find themselves suddenly with fewer options 
for potential counterparties to help them meet their risk 
management. Are you able to provide any assurance that this 
risk management tool will remain at a level of $8 billion or 
higher provided the CFTC does not receive data showing that it 
should be lower?
    Mr. Giancarlo. Thank you, Senator. And may I just say for 
the record, in regard to a question from the Chairwoman, I 
meant to say the GSA and not the GAO in response to a question. 
I would like to just correct the record. Thank you very much.
    The question you raised, Senator Moran, is a very important 
one about getting this de minimis level right. And the question 
is if by falling to $3 billion do we serve the purpose of 
capturing more swap dealers, or do we in fact have market 
making activity leave the marketplace, the type of market 
making activity that actually serves our smaller market 
participants and therefore defeat our very efforts of capturing 
more in our regulatory grasp by forcing them to part the 
markets.
    When these levels, the current $8 billion and the proposal 
to drop to $3 billion were set 5 years ago by the CFTC, it was 
in complete absence of the type of data necessary to be able to 
answer the question: What is the right balance? A year ago 
under Chairman Massad's direction, our Division of Intermediary 
and Swaps Oversight took up that question and delivered a 
report. The report contained no recommendations and at the time 
I was very concerned about the data analysis that was done in 
that report.
    What I have done this year is to ask that division to do an 
analysis using our most recent data, and to try to address the 
question as to whether in seeking to lower it will we in fact 
be successful in capturing more swap dealers that should be 
regulated by us. We have 140 under our existing framework. Or, 
will we simply drive those who are making liquidity in the 
market out of the market and hurt the very ones who rely on 
those non-financial firms, those non-big Wall Street firms to 
provide them with trading liquidity in the market, the very 
ones you are talking about, our farmers and our ranchers and 
our other agricultural producers.
    So once I get that data, and I hope to have it, then we 
will address that question fresh as to what is the right level, 
whether it is $8 billion, whether it is $3 billion, whether it 
is $15 billion. I do not know what the answer is, but I am 
hoping to be guided by a pure data analysis and I come to it 
with a very open mind to get to the right outcome.
    Senator Moran. I appreciate that answer. And you think you 
would have a conclusion in time to make a difference before the 
drop occurs?
    Mr. Giancarlo. Yes.
    Senator Moran. Thank you.
    Mr. Clayton or Chairman Clayton, I have raised this topic 
numerous times with your predecessor. It still remains an 
issue, and that is regarding the fiduciary duty rule. I am 
worried there is a lack of regulatory harmonization occurring 
between the SEC and the Department of Labor. I wanted to see if 
you had any updates for this subcommittee regarding the SEC's 
actions to sort of catch up with the Department of Labor when 
it comes to the fiduciary duty rule.
    Mr. Clayton. Thank you, Senator, and yes. Several weeks ago 
I put out a request for information to the public in light of 
the Department of Labor moving forward with the fiduciary rule, 
at least the first phase of it. And, look, it is not separate. 
What is happening at the Department of Labor is going to affect 
the markets we regulate and vice versa. And it is my intent as 
chairman to try and move forward and effectively deal with that 
in a way that is coordinated so that our main street investors 
have access to investment advice and access to investment 
products.
    I do not want to see any of these actions that we would 
take reduce the access to investment advice or the access to 
investment products, at the same time very much fulfilling our 
investor protection mission.
    Senator Moran. The SEC, is there a level of cooperation 
with the Department of Labor that, at least in my opinion, did 
not exist in the past?
    Mr. Clayton. I am confident that we are going to have 
cooperation in this regard. It is a very complicated issue. I 
do not think it would have been here this long if it were not 
complex, but I am confident that we are going to cooperate.
    Senator Moran. Since the Chairman used time to correct his 
answer to your question, my third answer, Madam Chairwoman----
    Senator Capito. All two seconds.
    Senator Moran. I wanted to raise this issue about EU 
financial market overhaul referred as Mifid II. Understanding 
this is an EU initiative, I wanted to check with you to see 
where the SEC might be in its stance on how the SEC intends to 
respond. My interest in this issue stems from entrepreneurs and 
small companies. If financial research becomes too difficult or 
too expensive to access, I think that is very damaging to our 
economic growth. Mr. Chairman.
    Mr. Clayton. You identified the potential issue, which is--
or I would say the largest potential issue, which is a 
reduction in research availability. This is a situation where 
an action taken by another regulator has an impact on firms. 
They have to change their behavior. That change in behavior 
impacts the way they are regulated here. And as a result, they 
may reduce or otherwise adjust the amount of research they 
provide. We are looking at this. We are engaged with our 
colleagues in Europe. And we are also looking at other ways to 
deal with it and the potential adverse impacts.
    Senator Moran. I know Senator Tillis raised this topic with 
you. I wanted to raise this as well to make sure that you had--
so that you could know you had support in trying to resolve 
this issue in a positive way for entrepreneurship and small 
businesses. Thank you.
    Mr. Clayton. Thank you. Thank you very much.
    Senator Capito. Senator Daines.
    Senator Daines. Thank you, Chairwoman Capito, Ranking 
Member Coons. Chairman Clayton, Acting Chairman Giancarlo, 
thank you for testifying on behalf of your agencies' fiscal 
year 2018 budget proposals.
    I want to thank you, Chairman Clayton, for addressing the 
specific issue we spoke about just last month. I appreciate the 
quick response--sometimes unusual in Washington, DC. So thank 
you for being a contrarian and being responsive. And I want to 
thank Acting Chairman Giancarlo for speaking in Great Falls, 
Montana, not Great Falls out in this part of the world, at our 
Ag Summit, for visiting our farmers and ranchers there in the 
heart of the Golden Triangle earlier this month. We just need 
now to get Chairman Clayton out that way and we will be two for 
two.

                      FUTURES COMMISSION MERCHANTS

    It is important that we get the SEC and CFTC's budgets 
right so you can continue to safeguard the investors, police 
the markets, and encourage capital formation. Mr. Giancarlo, 
there is a Brookings Institution report which shows that since 
March of 2017 the number of futures commission merchants has 
dramatically fallen from 171 in March of 2007 to just 64 in 
March of this year. That is over 62 percent consolidation in 
the market. My question is what are the practical impacts of 
this reduction?
    Mr. Giancarlo. Thank you for that question. This is a very 
important issue, one that I have been very concerned about at 
the CFTC. There are a number of factors in this. Fraud and 
mismanagement by some of these firms, firms like Revco and MF 
Global have caused the loss of some of these firms. The 
prolonged period of low interest rates has also been a factor 
in the reduction of FCMs. But there is no question that some 
misdesigned regulation and overregulation, in a number of 
cases, has been the case.

                      SUPPLEMENTARY LEVERAGE RATIO

    And one of the areas that I have been particularly 
concerned about is something called a supplementary leverage 
ratio that puts a cost on firms providing clearing services to 
our farmers, our ranchers, our grain elevators, and not just 
that, smaller manufacturers that use smaller FCMs for their 
services. The costs that the supplementary leverage ratio 
places on them has reduced the availability of these services.
    We have seen a number of famous names like BAYSCH, which 
was a futures commission merchant in this space for over 100 
years, go out of business and in so doing let these smaller 
accounts go as they transferred their larger accounts in a fire 
sale to some of the bigger Wall Street firms. So increasingly 
smaller market participants are having to go to Wall Street if 
they are even able to access an account to help them trade in 
our markets. We have lost that sort of more retail level tier 
of FCM services because of, I think, misidentified--and the 
biggest flaw in the leverage ratio, it goes against one of our 
core reg reform efforts to bring more clearing activity in the 
swaps markets.
    Senator Daines. So is there something that you would 
recommend Congress should consider, an action perhaps we should 
take, to reverse this trend?
    Mr. Giancarlo. Well, Secretary Mnuchin and the Treasury 
just put forward a report that calls for two adjustments. Not 
to do away, not to eliminate the leverage ratio, but to make 
two adjustments in it that would actually allow for a greater 
provision of services. So I am not sure it requires 
congressional action. It requires the relevant agencies, not 
just ourselves and the SEC, but also FDIC and a number of the 
market regulators and banking regulators to make these two 
adjustments in the leverage ratio that Chairman Mnuchin in his 
report is recommending. I think if we do that we could do it 
without congressional action in this area.
    Senator Daines. Well, I am happy to kind of work with you 
as well as Mr. Mnuchin to solve this problem.

                            CFTC GOVERNANCE

    I want to shift gears here and talk about CFTC governance. 
Earlier this week Commissioner Sharon Bowen announced her 
intention to retire early in the coming months, although her 
term does not expire until April 2018. The question, could you 
share your thoughts on the practical impacts of not filling all 
five commissioner slots?
    Mr. Giancarlo. You know, I think whoever came up with the 
idea of commissions with five members was a wise person because 
I think there is a logic to a five member commission structure. 
It allows for a range of views to be brought to bear in setting 
policy. It also allows for a balancing of efforts. I have spent 
the last 3 years, almost 3 years, as the only Republican on a 
commission, which at various times had two or three Democrats 
on it. It currently has one Democrat.
    And when you are in that environment, it makes it very hard 
to really reach a broad consensus and have the type of give and 
take. So I think it is vitally important that we get back to a 
five member commission. I think we are a better commission with 
five members than we are without.
    Now, having said that, we continue to work very well at the 
commission. Commissioner Bowen and I work very well, and so 
work is getting done. But I think we are better for it when we 
have a full commission.
    Senator Daines. And given your perspective and experience 
in working with other commissioners, what traits do you believe 
are most important for us to consider to ensure the CFTC 
functions properly to ensure market integrity and price 
stability?
    Mr. Giancarlo. Certainly in the markets that the CFTC 
regulates I think it is vitally important that commissioners be 
willing to get out of Washington, frankly, and meet with the 
users of these markets and understand their concerns. Meet with 
farmers and ranchers such as we had the opportunity to----
    Senator Daines. And thank you for modeling that by coming 
to Great Falls earlier this month.
    Mr. Giancarlo. Well, it was a pleasure, and I must say it 
is one of the most beautiful parts of the world. From someone 
who grew up in Northern New Jersey, I love our State, but I 
have to say Montana is spectacular.
    Senator Daines. I do concur with your remarks. Thank you.
    Senator Capito. Senator Boozman.
    Senator Boozman. Thank you, Madam Chair.
    Chairman Clayton, Senator Moran also raised this issue and 
I am also concerned with the negative impact of the EU's Mifid 
II, the impact that it could have on the ability of U.S. firms 
to produce investment research and inform capital formation. I 
understand the SEC is looking into this. I hope that you can at 
least provide some short-term relief while we work on it toward 
a permanent solution. So short-term relief, working for a 
permanent solution. Is there any limitation hindering your 
ability to provide relief?
    Mr. Clayton. I cannot--let me say this. I am not certain 
that the power that we have will be able to facilitate all 
relief that people might want, but this is something that the 
staff is very much looking into. The amount of relief that may 
be necessary may depend on the amount of cooperation we receive 
from our European counterparts. So there is kind of a 
multivariable assessment going on here, but I want to assure 
you that this is an issue that I am aware of, that the staff is 
aware of, and we are looking to ensure that the fear that 
people have that research becomes restricted does not occur.
    Senator Boozman. All right. So you are--it is good to be 
aware, but we do need to move forward----
    Mr. Clayton. Yes.
    Senator Boozman [continuing]. And make that awareness, turn 
into action.
    Mr. Clayton. Yes. No. There is a fixed timeline that I am 
working against.
    Senator Boozman. No. I understand.
    Mr. Clayton. Yes.

                  GLOBAL HARMONIZATION OF REGULATIONS

    Senator Boozman. Very much. Chairman Giancarlo, as you 
pointed out, the derivatives market are global and this allows 
U.S. companies to manage their risk wherever they do business 
around the world. This also means that coordination among 
authorities in various jurisdictions overseeing these markets 
has never been more important. We often hear that the breadth 
of the CFTC's application of Dodd-Frank to entities and 
transactions outside the U.S. has actually encumbered 
coordination and led to overlapping and at time conflicting 
rules applying to the same entities and transactions. This not 
only puts U.S. market participants at a disadvantage, but it 
encourages non-U.S. companies from doing business in the U.S. 
or with U.S. companies. Is this something you intend to review, 
and if so, what do you think needs to be changed?
    Mr. Giancarlo. Thank you for that. This is, I think, one of 
the most challenging issues in the post-financial crisis era. 
The Pittsburg Accords in 2009 addressed the issue of global 
swaps market reform and called for coordination in the 
implementation of reforms, but to do so in a way that was not 
protectionist or marketplaces did not seek to advance their own 
interests.
    Unfortunately, I think since then some of the effort has 
been to try to create rule sets with identicality as opposed to 
coordination. I have called for an approach that like--that I 
refer to as comity. What we need to do is recognize the goals 
of financial market reform that we are all pledged to and that 
I personally support, which are the reforms of Title 7, which 
affects the global swaps market. But I think we need to do so 
in a way that recognizes that different jurisdictions are going 
to have different details of implementation. And it is not 
necessary for one jurisdiction to have identical rules to 
another, but that they adopt all of the core reforms in a way 
that is suitable for their own jurisdiction.
    Senator Boozman. Thank you. Mr. Clayton, recently there was 
a report that was released that had to do with the Financial 
Accounting Standards Board (FASB). What plans do you have in 
mind to comply with the Treasury's report recommendations of 
that? And further, what ways can the SEC work with the FASB to 
ensure that financial products and services are not 
significantly altered due to the CCL standard?
    Mr. Clayton. This new standard which is going to be 
implemented over the next several years on currently expected 
credit losses, there have been questions raised by the industry 
and including by the U.S. Department of the Treasury whether an 
accounting will actually have operational effect and cause, 
worst case, a restriction in lending.
    We are looking at this. We have met with people in the 
industry, continuing to monitor it. Again, it is a bit of a 
multivariable problem because what does this say about bank 
capital requirements? Well, bank capital requirements adjust as 
a result of this accounting rule, but it is something we are 
engaged with both the industry and with our banking regulatory 
counterparts to make sure that it does not have an adverse 
impact.
    Senator Boozman. Okay. Thank you very much. Thank you, 
Madam Chair.
    Senator Capito. Thank you. Well, we finished the first 
round of questions and I have just two quick questions, so we 
will begin a second round that should not take all that long.
    But, Secretary Clayton, when--I keep calling you Secretary. 
Chairman Clayton, I am sorry. I was on the Financial Services 
Committee in the House and on the conference committee for the 
Dodd-Frank bill. Much of the discussion during that time was 
around the dark spaces or the lack of transparency in terms of 
trading, in terms of the platforms, in terms of the 
interconnectedness of where the platforms are and who is 
controlling those. And that is about as technical as I can get 
on that. Can you tell me where you see 9 years later the 
transparency factor has been improved and how it differs from 
where it was during those times?
    Mr. Clayton. That is a broad question.
    Senator Capito. Yes, it is.
    Mr. Clayton. I do believe that the reforms and bringing 
certain trading within clearinghouses has significantly 
increased transparency. As I have discussed with you and with 
others and as Chairman Giancarlo noted, our markets are 
constantly evolving, so some of the transparency issues that we 
may have identified 9 years ago or 8 years ago have been 
addressed. I think the question we keep asking ourselves is 
where are today's transparency issues and risk issues as a 
result of regulatory developments and changes. And we have 
discussed this. That is very much part of I see my job, the job 
of the other commissioners, and the staff at the Commission is 
to continue to look forward.
    We are looking at things like the fixed income market. 
There have been developments in investment products that we are 
looking at. If we sat here and talked about ETFs, there would 
not be very many people who knew what we were talking about 7 
years ago and now it is a fundamental product in the 
marketplace. And we are trying to anticipate whether there are 
areas where greater transparency would assist our mission and 
is necessary on virtually a continuous basis.
    Senator Capito. And I think that is key element to the core 
of your mission and I am going to just ask a quick question. 
The budget that you have before us, you are satisfied, and I 
think you have stated this before, that the aim of transparency 
can be met for this year with the staffing levels and the 
budget level that you have requested.
    Mr. Clayton. Yes, for this year. And I may be in a 
different position next year, but that is where I am this year.
    Senator Capito. Yes. Thank you. The last question I had for 
you was it kind of piqued my interest. At the end you said that 
if the relocation dollars, if $245 million were decided to not 
be unused that you would not be using those for other purposes 
and that you have mechanisms in place to be refunded to the fee 
payers. Is that unusual in your budget, that you would refund 
money back to the fee payers for certain aspects of a budget?
    Mr. Clayton. I believe--this is the only circumstance where 
I know where that would be the case, but I think it is a result 
of the procurement process itself and how you have to set aside 
the funds now to go through the process.
    Senator Capito. Right.
    Mr. Clayton. And that is driving that result.
    Senator Capito. Okay. Thank you. Thank you both.

                             CYBERSECURITY

    Senator Coons. Thank you, Madam Chair.
    If I might just follow up, the Chair just asked about 
transparency. I want to ask about cyber security and I think 
they are related. Both of your predecessors talked about the 
critical role of further investments in cyber security. Your 
Inspector General in both cases have made it one of the top 
priorities for your agencies. So, Chairman Clayton and Chairman 
Giancarlo, you have undertaken efforts in previous years to 
strengthen the cyber defenses, both of market participants, and 
to improve your agencies' abilities to detect, contain, respond 
to, and recover from cyber attacks.
    Do you share those concerns as articulated by your 
Inspectors General and your predecessors? Is it a clear 
necessity? What are your approaches to investing in cyber 
security? And what resources are you devoting to that now? Does 
that play some central role in your request for additional 
funding? And how would you continue to invest in these ongoing 
and important concerns with flat funding, if you would in 
order? Thank you.
    Mr. Giancarlo. Thank you for that question. Cyber is 
absolutely priority number one. I had the honor of giving a 
guest lecture at Harvard Law School 2 years ago to identify 
what were the major megatrends that we are seeing in our 
markets. And I identified cyber as the number one and most 
important. It is an enormously challenging threat because it is 
a threat that comes from so many different directions. 
Everything from rogue individuals all the way up increasingly 
to nation states using cyber as a threat tactic.
    And so, therefore, our response must be as multifaceted as 
well. It comes down to--it ranges from individual firm defenses 
all the way up to public and private defenses. And Government 
certainly has a role to play in making our markets resilient 
and indeed durable in the face of an ongoing attack.
    Since I have come into the CFTC, I have redoubled efforts 
in a number of areas. I now do a monthly meeting with our head 
cyber officer to walk me through the attacks we have seen in 
our space, not just on our own agency, but what we are seeing 
in the marketplace. We have resources built into our budget 
request and if we are not able to achieve that, we will still 
prioritize cyber in this new world. It will come at the expense 
of other things, but it is absolutely essential that it remain 
our first priority at the agency.
    Senator Coons. Thank you, Mr. Chairman.
    Chairman Clayton.
    Mr. Clayton. Let me say I agree with Chairman Giancarlo on 
the importance of this issue. And I will incorporate and then 
supplement.
    On supplementing, I do think it is a priority for me at the 
Commission to educate our investing community, particularly our 
main street investors on the risks, cyber risks and what they 
mean to them at an individual company across the market system 
and otherwise.
    Turning to our own house at the SEC, we have some what I 
will call very important, perhaps critical functionality for 
the marketplace that we administer, our EDGAR system. It is 
important to me that that continues to function on a daily 
basis. I think I mentioned it gets 50 million downloads a day. 
Keeping that up and running in the face of the threats is very 
important. And more generally at the Commission, this is an 
area of intense focus because we recognize the consequences if 
the risks come to bear.
    Senator Coons. I will just say both to you that, you know, 
we are best understood and defined as a democratic society also 
committed to capitalism. Given that a very capable state actor 
intentionally interfered in our last Presidential election, I 
just hope we are appropriately investing in cyber security for 
what are, in some ways, our most important regulatory oversight 
entities that keep our capital markets liquid and stable and 
secure.
    If I could briefly, Chairman Clayton, just what 
reassurances can you give me that you will continue to enforce 
and uphold the conflict minerals statute and rule? It is an 
area of great interest and work for me and over a long period 
of time it has helped reduce conflict in the Democrat Republic 
of the Congo.
    Mr. Clayton. So the conflict minerals rule, as you know, 
Senator, has been subject to court challenge and other, 
including a First Amendment holding. Where it stands today, it 
is on the books. I will try and summarize. There are three 
steps to it. Do you have conflict minerals in your products? If 
you have covered conflicts minerals do they come from covered 
countries? Those steps are enforced today based on staff 
guidance. The third step is the one that we are looking at as 
to whether the court action restricts it, and if so, to what 
extent, which is the audit function around conflict minerals 
disclosure. So that is where we stand.

                         WHISTLEBLOWER PROGRAMS

    Senator Coons. Thank you. I have a last question if I might 
about whistleblowers. Both of you have programs that have 
demonstrated important benefits for taxpayers and the investing 
public. What have been the most important benefits of the 
enforcement work your agencies are doing of having well 
functioning whistleblower programs? And what additional steps 
have you taken to protect whistleblowers? And are there any 
other statutory or administrative impediments that prevent your 
agencies from doing more to combat fraud through 
whistleblowers?
    Mr. Giancarlo. We view whistleblowers as an important 
referral source for enforcement action. We have taken, under my 
leadership, steps just recently to enhance anti-retaliation 
protections for whistleblowers. We also abide by Federal 
statutes within our own agencies to protect whistleblowers. So 
we view whistle blowing protections as important. We view the 
process as important to our work.
    Senator Coons. Thank you.
    Mr. Clayton. I agree with Chairman Giancarlo. Actually, 
just yesterday, we have a matter that is going to the Supreme 
Court. I will not comment on that, but around whistleblower 
protection. And this is an area that is evolving and we are 
going to continue to pay attention to it to get the most out of 
it.
    Senator Coons. It has generated thousands of tips, tens of 
millions of dollars of recovery, and I just commend you both 
for being attentive to that important tool.
    Senator Capito. Thank you.
    Senator Moran.

                        CFTC KANSAS CITY OFFICE

    Senator Moran. Chairman Giancarlo, first of all, I would 
complement you on your zero-based budgeting, whatever the 
rights words are for that process. I did not want your comments 
to go unresponded to. I think that that has merit and we ought 
to be all pursuing that to start and justify, not just to add 
to what we have.
    Secondly, I just wanted to follow up on your comments about 
leased space. What is the status of the CFTC in Kansas City? 
With the merger that has occurred what presence does the CFTC 
now have and the same amount of space as you had before the 
merger?
    Mr. Giancarlo. It is, but I am so glad you asked about that 
because when I stepped into the role of acting chairman I took 
a look at our offices. And it was very clear to me, of course, 
why we are in Washington. It was very clear to me why we are in 
New York because the swaps market is centered in New York. It 
is clear to me why we are in Chicago because the futures market 
was centered in Chicago.
    And I thought I would find the same logical connection in 
Kansas City because of our work in the agricultural area. And 
yet, our Kansas City office, at least in the last few years, 
has really become an important office where we conduct 
enforcement action across the country. It is really not a 
center of our work in agriculture. And I must say I think in 
the post-financial crisis area we have been so focused on the 
swaps area, to some degree we have forgotten about our core 
role, making sure that our commodity futures markets are there 
for our core users in agriculture, in manufacturing, and in 
other areas. Perfect timing for my talk about how important 
agriculture is to our mission.
    Senator Moran. Only my wife has that number, but this said 
Jamaica, so.
    Senator Capito. That was last week with the FCC we had 
that, remember?
    Mr. Giancarlo. So we intend to reposition our Kansas City 
office as a real foothold in our mission to make sure that our 
markets serve and serve well our agriculture producers, our 
manufacturers are really the end users of our marketplace. And 
we have got a number of initiatives under way, some of which I 
look forward to announcing in the next few months, about how we 
are going to reposition Kansas City for our outreach into those 
communities.
    Senator Moran. We very much appreciate your presence in 
Kansas City and I am glad to hear that you as the chairman have 
discovered value. We would not want an office just for the sake 
of having an office, but appreciate the opportunity that Kansas 
City, Missourians, and Kansans may have to not only benefit as 
consumers, but provide employment to the CFTC and the mission 
that you have.
    Thank you very much. I would look forward to working with 
you and hearing what your plans are.
    Mr. Giancarlo. Thank you, Senator.
    Senator Capito. Senator Boozman.

                  INTER AFFILIATE MARGIN REQUIREMENTS

    Senator Boozman. Thank you, Madam Chair, and thank both of 
you all for being here and again for your hard work.
    I just have one other thing, Chairman Giancarlo. As you 
know, requiring margin for the over the counter derivatives was 
a key G20 reform aimed at reducing risk in the financial 
system. The authority to require margin is split in Dodd-Frank 
between the CFTC and the Prudential regulators, including the 
Fed, FDIC, OCC, et cetera. In the CFTC's final margin rules, 
the Agency took what I believe is a sound approach in 
distinguishing derivatives traded with external parties from 
those internal risk management transactions that occur between 
affiliates within the same corporate group.
    You did not subject them to a much higher margin 
requirement. Unfortunately, the Prudential regulators did not 
follow suit with an initial margin exemption in their final 
rule. This is not only locking out billions of dollars of 
capital unnecessarily, but is also creating an unlevel playing 
field, and I think very importantly for U.S. companies is that 
both European and Asian regulators have, like the CFTC, 
provided for such exemptions. We have got kind of a common 
theme with a lot of this stuff dealing with our international 
partners, which you simply have to get it worked out.
    Do you support a legislative exemption from initial margin 
for inter affiliate swaps to level the playing field for U.S. 
companies both in the U.S. and globally and do you think such 
an approach would be good for the markets overall?
    Mr. Giancarlo. Thank you for that question.
    Some of this can get a little bit complicated in terms of 
how those margin rules work, but at its heart, the issue is 
whether American firms can enter global swaps markets on the 
same level playing field as some of their foreign competitors. 
And I believe that some of the banking regulators approaches to 
inter affiliate margin, which was not at issue in the financial 
crisis, has been an effort to solve for bankruptcy insolvency 
risk of financial firms at the expense of American firms access 
to global capital and the ability to act in global markets. And 
as a market regulator, we are sensitive to that concern in a 
way that I think sometimes the banking regulators have not 
been.
    So this is something that, working with Treasury Secretary 
Mnuchin, I will look to try to make banking regulators a little 
more sensitive to regarding the concerns of our American firms 
that at the end of the day are trying to access global capital 
and global risk catching markets and this inter affiliate 
margin area in some of its application, not all of it, has been 
preventative of that. And I think we need to take another look 
at that.
    Senator Boozman. Okay. Thank you, Madam Chair. And again, 
thank both of you so much. Yes, sir. Thank you so much for 
being here. We appreciate all you do.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Capito. Thank you. I want to again thank the 
witnesses for testifying today. If there are further questions, 
the hearing record will remain open until Wednesday, July 5, 
2017, at noon for subcommittee Members to submit any statements 
or questions to the witnesses on the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Commissions for response subsequent to 
the hearing:]
                Questions Submitted to Hon. Jay Clayton
          Questions Submitted by Senator Christopher A. Coons
                 regulatory review and executive order
    Question. On February 3, President Trump issued an Executive Order 
on Core Principles for Regulating the U.S. Financial System. In 
response to that issuance, CFTC Acting Chair Giancarlo announced 
Project KISS--Keep It Simple, Stupid, as an agency-wide internal review 
focused on simplifying and modernizing CFTC rules, regulations and 
practices to ease regulatory burdens in the spirit of job creation and 
economic growth. It is reported that Project KISS's primary focus is on 
streamlining the implementation of existing regulations and practices, 
rather than on re-writing or repealing those rules and regulations.
  --Chairman Clayton, to what extent is the SEC exploring a similar 
        initiative to conduct a review of its body of regulations and 
        practices?
    Answer. In a speech before the Economic Club of New York on July 
12, 2017, I outlined eight principles that will guide my SEC 
Chairmanship. Several of the principles that I articulated focus 
specifically on our rulemaking process. I emphasized that the 
Commission must write rules clearly so that those subject to them can 
ascertain how to comply and how to demonstrate that compliance. This 
principle of effective rulemaking should, in my view, not end with rule 
adoption but also should include retrospective reviews of Commission 
rules based on input from investors and others about where the rules 
are, or are not, functioning as intended and can be made more 
effective.
    In addition to these principles, the Commission and its staff have 
formal and informal processes for identifying existing rules for review 
and for conducting those reviews to assess the rules' continued utility 
and effectiveness in light of the evolution of the securities markets 
and changes in the securities laws and regulatory priorities. For 
example, in accordance with current statutory requirements, we conduct 
10-year retrospective rule reviews under the Regulatory Flexibility Act 
(RFA) on an annual basis. In addition, an agenda of anticipated 
rulemaking actions pursuant to section 602(a) of the RFA is published 
semi-annually. The agenda includes both potential changes to existing 
rules and new rulemaking actions. Along with these formal processes, 
the Commission and its staff frequently receive and consider 
suggestions to review existing rules through various types of 
communications from a wide variety of constituencies. Likewise, the 
Commission and staff frequently discuss the need to revisit existing 
rules through formal and informal public engagement, including advisory 
committees, roundtables, town hall meetings, speeches, conferences and 
other meetings.
      organizational challenges: internal communication shortfalls
    Question. The Dodd-Frank Act requires that the GAO report 
triennially on SEC's personnel management. GAO's first report in 2013 
identified a number of challenges and included seven recommendations. 
In the most recent report published in late December 2016, GAO found 
that employee views on the SEC's organizational culture have generally 
improved since 2013, particularly citing higher levels of morale and 
trust and that the SEC was less hierarchical and risk-averse. However, 
GAO's survey reflected that the SEC still operates in a 
compartmentalized way with little communication and collaboration 
between divisions and has not set expectations for staff to collaborate 
across divisions as needed or adopted best practices to break down 
existing silos. SEC staff still report that divisions operate in 
isolation. GAO noted that other organizations rely on their Chief 
Operating Officer to make such changes. Because SEC's COO lacks such 
authority, GAO contends that the agency will likely continue to face 
challenges.
  --Recently, the GAO determined that the SEC has made little progress 
        to address earlier recommendations related to improving cross-
        divisional collaboration. GAO found that the SEC operates in a 
        compartmentalized way with little communication and 
        collaboration among divisions. SEC officials disagreed with 
        GAO's recommendation that enhancing the role of the Chief 
        Operating Officer would be the optimal means to help improve 
        cross-divisional communication and collaboration.
  --Chairman Clayton, what are your plans for addressing the 
        recommendations of GAO? Are you willing to reassess the SEC's 
        prior disagreement with GAO's recommendation about enhancing 
        the Chief Operating Officer's role?
    Answer. The GAO report, Securities and Exchange Commission: Actions 
Needed to Address Limited Progress in Resolving Long Standing Personnel 
Management Challenges (GAO-17-65), contained a number of 
recommendations for the agency to help strengthen personnel management. 
We appreciated GAO's acknowledgment of the agency's significant 
progress in improving employee morale and organizational culture. As 
the report states, the SEC was named in December by the Partnership for 
Public Service as the Most Improved Mid-Sized Federal Agency in the 
2016 Federal Employee Viewpoint Survey, and currently ranks sixth 
overall in that category.
    However, the response noted disagreement with certain aspects of 
the report. For example, it discusses that the amount of interoffice 
communication and collaboration is much greater than portrayed in the 
GAO report. This has long been a key focus area for the agency, and the 
response pointed to a number of factors indicating there has been 
significant progress. There is extensive, productive interaction among 
division and offices for nearly every significant action the SEC 
undertakes, including rulemakings, enforcement actions, and other 
policy initiatives. The response also pointed to numerous formal and 
informal mechanisms for cross-agency coordination, such as intra-agency 
governance committees and working groups related to operational issues, 
identification of key risks, technology and data, and more. To help 
promote communications and collaboration at the staff level, under the 
SEC's performance management system every employee in the agency is 
evaluated on ``Teamwork and Collaboration,'' and the SEC has continued 
to train its staff on team effectiveness and collaboration-related 
topics.
    My predecessor, Chair White, disagreed with the report's 
recommendation to have all divisions and offices report to the agency's 
Chief Operating Officer (COO). She contended that this proposal would 
not fit with the legal and management structure of the SEC, and 
neglects the important role that the Office of the Chairman plays in 
overseeing and coordinating the various SEC programs. I have a great 
regard for Chair White's judgment and knowledge of our agency, and her 
opinion on these matters carries great weight with me. While I and my 
staff have devoted considerable time in my first few months at the SEC 
to operational issues and ensuring greater cross-divisional 
collaboration, I have not yet reached my own conclusion on whether 
significant organizational changes, such as expanding the COO role and 
materially changing lines of reporting and responsibility, would be, on 
balance, beneficial over the long term to the agency.
    I believe that the SEC should always be exploring ways it can 
promote effective communication and collaboration across the agency. 
The agency is currently working on several additional initiatives to 
further these goals. I intend to continue to be focused on identifying 
operational improvements that will facilitate communication and 
collaboration, optimize our organizational structure, and generate 
efficiencies and cost savings.
  responsiveness to tips, complaints, and referrals--securities fraud 
                               prevention
    Question. The Madoff fraud scandal nearly a decade ago exposed 
disturbing ineptitude in the government's ability to promptly detect 
and prevent large-scale fraud on investors in the financial markets. In 
the wake of Madoff, the SEC addressed serious deficiencies in the 
agency's internal communication and coordination of incoming tips, 
complaints, and referrals (TCRs). Prior to reforms, the SEC had no 
centralized repository or searchable data management system to compile, 
interface, and manage the TCRs submitted to the agency about potential 
violations of securities laws. According to the SEC, it receives an 
average of 15,000 TCRs each year from multiple sources.
    In March 2011, the SEC deployed the current system for receiving, 
recording, tracking, and acting on TCRs. Although the current TCR 
system is operational, SEC stakeholders determined that a more robust, 
flexible, and scalable system was needed to better support the SEC's 
evolving needs, mission, and policies. In September 2013, the SEC 
awarded a contract to elicit requirements, design, and deploy a 
redesigned TCR system.
    Chairman Clayton, the SEC's Inspector General recently issued a 
management report about repeated delays and contract extensions related 
to the SEC's effort begun in 2013 to deploy a redesigned Tips, 
Complaints, and Referrals (``TCR'') system. According to the IG, 
various factors, including unacceptable contractor performance and a 
lack of adequate contractor and Government resources to timely address 
concerns, have led to schedule delays and cost increases. The May 31, 
2017 IG report says the TCR system will not ``go live'' until October 
2, 2017 more than 3 years behind schedule and $12.2 million dollars 
(170 percent) over budget.
  --Can you please share your insights about the issues surrounding the 
        redesigned TCR system and your plans to prioritize its 
        deployment?
  --What additional resources are required to further strengthen the 
        SEC's capacity to acquire and manage an effective and 
        functional automated tips, complaints, and referrals system?
    Answer. It is important to me that the agency has a tips, 
complaints, and referrals (TCR) system in place that supports our 
investor protection efforts, and that there are sufficient resources 
for the system.
    In 2009, the SEC began development of a comprehensive TCR system to 
allow agency staff to receive, triage, take action on, and search for 
TCRs quickly and accurately. The first iteration of the TCR system was 
deployed in March 2011 and has managed an increasing number of TCRs 
each year. Based on my discussions with the staff, I understand that by 
2013, the SEC concluded that improvements were needed to make the 
initial TCR system more stable, flexible and efficient to maintain, 
among other things, and the agency began work to revise the system. I 
understand that the new TCR 3.0 system is designed to address the 
stability, flexibility, and efficiency issues in the initial system, 
while enhancing the usability of the underlying TCR data and improving 
security, workflow, search capabilities, and other important 
functionality.
    However, as you point out, the TCR modernization effort has 
experienced delays as we have worked through technical issues and 
attempted to improve usability and functionality prior to going live. 
The staff has assured me that they have taken seriously the findings of 
the Inspector General and worked to implement improvements in the 
project. I and the staff will be mindful of this experience as we 
pursue similar projects in the future. With regard to the current 
status of the TCR system, the staff is currently conducting testing, 
staff training, and other final checks of the modernized system.
      sec rulemaking relating to corporate executive compensation
    Question. In August 2015 the SEC finalized a rule to implement 
Section 953(b) of Dodd-Frank that requires enhanced disclosure of 
executive compensation by public companies. The ``Pay Ratio 
Disclosure'' rule requires that public companies disclose the ratio of 
the CEO's total compensation to the total median compensation of all 
other employees. The first disclosure is expected for fiscal year 2017 
and will first be reflected in in proxy statements filed in 2018.
    In February of this year, SEC Commissioner Michael Piwowar, who was 
at that time serving temporarily as Acting Chairman, issued a statement 
suggesting that some issuers may be encountering unanticipated 
compliance difficulties that may hinder them in meeting the reporting 
deadline.
    Commissioner Piwowar's statement solicited public input on any 
unexpected challenges and asked for comments within 45 days. It also 
directed SEC staff to reconsider the implementation of the rule based 
on any comments submitted and to determine as promptly as possible 
whether additional guidance or relief may be appropriate.
  --What is the present status of SEC's work on the Pay Ratio 
        Disclosure rule and guidance?
  --Is there any basis upon which the SEC would reverse course or delay 
        the effective date of public company compliance with this 
        critical disclosure requirement?
  --What outreach and education is the SEC making available to ensure 
        corporate compliance with this requirement?
  --What additional resources will be required to monitor adherence to 
        this new mandate?
    Answer. I believe that the SEC is required to implement rulemakings 
mandated by statute in accordance with applicable law. The SEC adopted 
the pay ratio disclosure rule on August 5, 2015, pursuant to the Dodd-
Frank Wall Street Reform and Consumer Protection Act.
    At this time, the current rule remains in effect. As such, the 
disclosures provided in response to the new pay ratio disclosure rule 
would be subject to review by staff of the Division of Corporation 
Finance, which reviews filings made under the Securities Act of 1933 
and the Securities Exchange Act of 1934 to evaluate compliance with the 
applicable disclosure requirements. With respect to outreach and 
education, the Division of Corporation Finance has published 
``Compliance and Disclosure Interpretations'' on the SEC's website to 
assist companies and their advisers in the preparation of pay ratio 
disclosures.
    In response to Acting Chairman Piwowar's request, the Commission 
received over 180 unique comment letters and over 13,700 form letters. 
The staff is reviewing all of the comment letters and will consider 
them in any recommendations that it may provide to the Commission 
regarding the pay ratio disclosure rule in the future.
               emerging trends in high-frequency trading
    Question. High-frequency trading generally refers to trading in 
financial instruments, such as securities and derivatives, transacted 
through supercomputers executing trades within microseconds or 
milliseconds. By most accounts, high frequency trading has grown 
substantially over the past decade. The SEC has taken steps to bring 
some high-frequency trading under closer scrutiny, through recent 
regulatory proposals and enforcement actions such as a proposal to 
require certain high-frequency trading broker-dealers to register with 
the Financial Industry Regulatory Authority (FINRA), which oversees 
broker-dealers.
  --How has the SEC adapted to the growth in high frequency trading?
  --What are your current and planned initiatives in this area?
  --Do you have adequate in-house expertise and resources to 
        effectively monitor this trading?
    Answer. The SEC has taken a series of steps in recent years to help 
assure that its regulatory program appropriately takes into account 
evolutions in our markets, including in respect of algorithmic trading. 
High frequency trading is one type of the computer-driven, algorithmic 
trading that is now prevalent in the U.S. equity markets, as well as in 
other active financial markets around the world. The technologies 
deployed by algorithmic traders are capable of generating a large 
volume of orders and trades in short timeframes. The SEC adopted Rule 
15c3-5, the Market Access Rule, which requires broker-dealers that 
provide access to trading venues to implement procedures that 
reasonably address the risks of access, such as the risk of 
malfunctioning algorithms. With respect to trading venues, in turn, the 
SEC has adopted Regulation Systems Compliance and Integrity, which 
requires, among other things, that significant trading venues implement 
procedures reasonably designed to assure that their systems have the 
capacity, integrity, resiliency, availability and security adequate to 
maintain their operational capability.
    Another important SEC initiative is the Consolidated Audit Trail 
(CAT), which is intended to enhance the ability of the Commission and 
other regulators to access the data needed to surveil trading and 
enforce rules in today's high-speed, high-volume markets. The design of 
the CAT system is being led by the self-regulatory organizations with 
Commission oversight. Additionally, the self-regulatory organizations 
have implemented a plan to address the risk of extraordinary volatility 
potentially raised by high-speed trading by establishing limits when 
prices move too far too fast.
    We also are aware of industry initiatives that would deemphasize 
speed as an element of trading, and we are conscious of the need for 
such initiatives to be consistent with statutory requirements. A 
variety of other initiatives relating to algorithmic trading have been 
considered by the SEC and SEC staff in recent years, including the 
proposal relating to FINRA membership for broker-dealers active in the 
off-exchange market. I intend to continue to review these initiatives 
with staff as we assess the appropriateness of further action.
    In addition to rulemaking initiatives, the SEC has expanded its 
quantitative capabilities throughout the agency, both by deploying new 
quantitative tools and hiring personnel with the quantitative expertise 
to use the new tools. I anticipate this trend will continue in the 
future to help assure that SEC capabilities remain up to the task of 
effectively monitoring high frequency and other types of algorithmic 
trading.
                                 ______
                                 
             Questions Submitted by Senator James Lankford
    Question. The SEC is seeking public comment on standards of conduct 
for investment advisors and brokers and this regulatory initiative is 
running parallel to the Department of Labor's request for additional 
public input on the Definition of the Term ``Fiduciary''; Conflict of 
Interest Rule--Retirement Investment Advice regulation published by DOL 
in the Federal Register on April 8, 2016 (81 Fed. Reg. 20946 et seq.).
    Can you elaborate on how the SEC will evaluate and define 
``Fiduciary'' standards?
    Answer. The SEC has been reviewing this area for some time, which 
is an illustration of both the complexity of these issues and the fast-
changing nature of our markets, including the evolving manner in which 
investment advice is provided. Much has happened since the SEC last 
solicited information on this issue 4 years ago. In recognition of 
this, on June 1, 2017, I issued a statement (June Statement) seeking 
public input on standards of conduct for investment advisers and 
broker-dealers. I believe that robust public comment can help us 
evaluate potential regulatory actions in light of the current market 
for investment advice and risks to investors, and am encouraging the 
public to send us feedback and any data that may be helpful to us. We 
are beginning to receive and review public input on the various issues 
raised in my June Statement, including what future action, if any, the 
SEC should take in this area. I am looking forward to continuing to 
work with my fellow Commissioners and the SEC staff, as well as the 
Department of Labor and the self-regulatory organizations, as we 
evaluate our next steps, with the goal of making sure that main street 
investors are appropriately protected and continue to have access to 
affordable investment advice and products.
    Question. Is there a timeline for this initiative?
    Answer. I and the staff are focused on addressing this important 
issue. As noted, there have been significant developments in the 
industry since the SEC in 2013 issued a public request for data and 
other information related to the current standards of conduct for 
broker-dealers and investment advisers, including financial 
innovations, changes to investment adviser and broker-dealer business 
models, and regulatory developments--including the issuance and pending 
applicability of the Department of Labor's fiduciary rule. We continue 
to receive public comments and information in response to the June 
Statement, and we are hopeful that these comments will provide us with 
important input into understanding the current market and analyzing how 
any potential regulatory action could affect it. These are complex 
issues, however, and there is a lot of work to do, including 
coordinating with the self-regulatory organizations and other agencies. 
Any action should be carefully constructed, so that it provides clear, 
appropriate and meaningful protections but does not result in retail 
investors being deprived of affordable investment advice or products, 
or a multiplicity of standards that could cause confusion or otherwise 
weaken investor protection.
    Question. Will you be coordinating with the Department of Labor as 
you evaluate and define these standards?
    Answer. Any actions taken by the SEC or the Department of Labor in 
this space are going to have an effect on the areas overseen by the 
other agency, and it is my intent that we continue to coordinate with 
our colleagues at the Department of Labor.
    Question. Do you foresee the SEC and DOL reaching a definition that 
will be a unified industry standard?
    Answer. At this stage, the range of potential actions suggested to 
the SEC is broad. We are still evaluating potential options in this 
area and have not yet reached a particular conclusion. I am hopeful 
that the public comments submitted in response to the June Statement 
can help us evaluate potential regulatory actions in light of current 
market activities and risks. As I stated in the June Statement, clarity 
and consistency--and, in areas overseen by more than one regulatory 
body, coordination--are, in my view, of vital importance.
                                 ______
                                 
            Questions Submitted by Senator Richard J. Durbin
    Question. On May 12, 2015, the Securities and Exchange Commission 
filed suit against ITT Educational Services, Inc., Kevin Modany, and 
Daniel Fitzpatrick for securities fraud. In 2016, the company collapsed 
under the weight of its own misconduct and subsequently filed 
bankruptcy. While ITT students were left with tens of thousands of 
dollars in student loan debt, company executives, including Mr. Modany 
and Mr. Fitzpatrick, absconded with millions of dollars in compensation 
and bonuses despite orchestrating one of the largest frauds in U.S. 
higher education history.
  --Please provide an update on what steps the SEC is taking to hold 
        ITT executives accountable.
  --How many attorneys are currently assigned to the ITT matter?
  --Has the SEC determined whether or not a criminal referral is 
        appropriate in this matter?
  --Is the SEC working with the Department of Justice and State 
        Attorneys General to share investigative information to 
        determine whether additional charges are warranted?
    Answer. The SEC is committed to rooting out fraud and shady 
practices in our markets wherever they exist and to holding wrongdoers 
accountable where appropriate. The SEC's case against ITT Educational 
Services, Inc.'s (ITT's) CEO, Kevin Modany, and its CFO, Daniel 
Fitzpatrick, is ongoing. As a general matter, the SEC does not comment 
on ongoing litigation, so the information provided below is based on 
publicly filed documents in the SEC's litigation against ITT, Modany 
and Fitzpatrick.
    The SEC filed its Complaint against ITT, Modany, and Fitzpatrick in 
the U.S. District Court for the Southern District of Indiana on May 12, 
2015.\1\ The Complaint alleged that ITT, Modany and Fitzpatrick engaged 
in a fraudulent scheme and made false and misleading statements to hide 
the magnitude of ITT's obligations related to two student loan programs 
from ITT's investors.\2\ The Complaint included claims for violations 
of the anti-fraud, books and records, and reporting provisions of the 
Federal securities laws. The parties actively litigated the case and 
engaged in extensive discovery in the litigation, including taking 
dozens of fact and expert witness depositions. On September 12, 2016, 
ITT filed for bankruptcy under Chapter 7 of the bankruptcy code in the 
U.S. Bankruptcy Court for the Southern District of Indiana. On October 
10, 2016, the bankruptcy trustee filed an adversary complaint in the 
Bankruptcy Court which sought to, among other things, stay the SEC's 
litigation against ITT. The SEC entered an appearance in the bankruptcy 
proceedings, and the SEC and ITT ultimately reached a settlement that 
was approved by the Bankruptcy Court and the District Court. As a 
result of the settlement, on June 30, 2017 the District Court entered a 
Final Judgment against ITT permanently enjoining it from violating the 
anti-fraud, books and records, and reporting provisions of the Federal 
securities laws charged in the Complaint.
---------------------------------------------------------------------------
    \1\ See Press Release 2015-86, SEC Announces Fraud Charges Against 
ITT Education Services (May 12, 2015), available at https://
www.sec.gov/news/pressrelease/2015-86.html.
    \2\ A copy of the SEC's Complaint is available at https://
www.sec.gov/litigation/complaints/2015/comp-pr2015-86.pdf.
---------------------------------------------------------------------------
    While the settlement with ITT was being negotiated and approved, 
the SEC continued to litigate its case against Modany and Fitzpatrick. 
During a court-ordered settlement conference, Modany and Fitzpatrick 
made settlement offers in the case filed against them. If approved by 
the Commission, the settlements will be submitted to the District Court 
for approval and entry of final judgments against Modany and 
Fitzpatrick.
    The SEC conducts investigations on a confidential basis and does 
not disclose whether or not it is working with other authorities or has 
made a criminal referral in a specific case. However, as a general 
matter, the SEC staff often works closely with other law enforcement 
authorities and agencies in our investigations and may refer matters to 
the criminal authorities in appropriate circumstances. This is an area 
in which I have taken a particular interest, as I am hopeful that 
working with criminal authorities can help keep bad actors, 
particularly recidivists, away from our markets and investors who rely 
on the integrity of our markets.
    Question. In May 2016, Bridgepoint Education reported that it had 
received a second subpoena from the SEC, regarding the Company's 
scholarship and student loan programs, among other topics. Like the 
now-defunct ITT, Bridgepoint has been the subject of multiple Federal 
and State investigations and lawsuits for its student loan practices. 
In September 2016, the Consumer Financial Protection Bureau required 
Bridgepoint to pay more than $30 million in student refunds and civil 
penalties for its predatory private student lending practices. To the 
extent that the facts revealed by the investigation allow, the SEC's 
pursuit of executive accountability is critical to preventing further 
abuses across the for-profit college industry.
  --As part of its investigation, has the SEC interviewed or examined 
        Mr. Robert Eitel, a former top compliance executive at 
        Bridgepoint, who now serves in senior leadership at the U.S. 
        Department of Education?
  --Has Mr. Eitel communicated with any Commissioner or the SEC staff 
        on behalf of himself or Bridgepoint since the SEC began its 
        investigation?
  --What mechanisms are in place to ensure that Mr. Eitel does not use 
        his current government position to influence the SEC's 
        investigation of his former employer?
  --Is the SEC sharing information through a formal agreement with the 
        U.S. Department of Education with respect to this 
        investigation? Is the U.S. Department of Education providing 
        any assistance to the SEC?
  --When does the SEC expect to conclude its investigation and make a 
        determination on whether to pursue charges?
    Answer. As a matter of policy, the Commission conducts 
investigations on a confidential basis and generally does not 
acknowledge the existence or non-existence of any investigation unless 
or until charges are filed. We do so in order to protect the integrity 
of our investigations, safeguard the privacy of witnesses, and avoid 
damaging the reputation of persons who may not be charged. Similarly, 
as explained above, the SEC generally does not disclose whether or not 
it is working with other authorities or has made a criminal referral in 
a specific case. Accordingly, I cannot comment specifically on the 
matter raised in the question.
    Question. Please provide a list of all publicly-traded for-profit 
institutions of higher education that are currently under investigation 
or facing current litigation by the SEC.
    Answer. As explained above, the Commission conducts investigations 
on a confidential basis and does not acknowledge the existence or non-
existence of any investigation unless or until charges are filed. 
Accordingly, I cannot comment on the existence of any SEC 
investigations related to publicly-traded for-profit institutions of 
higher education.
                                 ______
                                 
          Questions Submitted to Hon. J. Christopher Giancarlo
          Questions Submitted by Senator Christopher A. Coons
              regulatory review and trump executive order
    Question. On February 3, 2017, President Trump issued an Executive 
Order on Core Principles for Regulating the U.S. Financial System. In 
response to that issuance, you announced Project KISS--Keep It Simple, 
Stupid, as an agency-wide internal review focused on simplifying and 
modernizing CFTC rules, regulations and practices to ease regulatory 
burdens in the spirit of job creation and economic growth. It is 
reported that Project KISS's primary focus is on streamlining the 
implementation of existing regulations and practices, rather than on 
re-writing or repealing those rules and regulations.
    Chairman Giancarlo, what has been the CFTC's experience so far in 
conducting the internal regulatory review you have dubbed Project KISS?
    Answer. Project KISS evolved out of an observation by Commissioner 
Giancarlo, while serving as the minority commissioner, that various 
existing agency rules were not up to date, inconsistent or required 
needlessly difficult compliance. Commissioner Giancarlo sought ways to 
make such rules simpler, less burdensome and easier to implement. After 
the election, Acting Chairman Giancarlo expanded the process to become 
Project KISS.
    On February 24, 2017, President Trump issued an Executive Order on 
``Enforcing the Regulatory Reform Agenda.'' Although the CFTC as an 
independent agency is not strictly bound by President Trump's Executive 
Order, we believe the KISS effort is in line with the President's 
objectives.
    Question. How are you soliciting public input in the process? What 
is your timetable for completing the assessment?
    Answer. Through a Commission vote, the agency has requested public 
comments, outside the rulemaking process, for ways in which the CFTC 
can improve, streamline, or modernize our work. We have also launched 
on the CFTC's website a KISS portal through which interested parties 
may submit proposals. We will treat submissions to KISS like we treat 
other correspondence that we receive. Submission of a suggestion may 
not result in Commission action. The ideas received are kept on a 
separate page from our rulemaking comments page of the website. It is 
our hope that the Commission will receive submissions from a diversity 
of parties--market participants, scholars, economists, current and 
former regulators, and all members of the public who feel they have 
something of value to contribute to this rule review.
               emerging trends in high-frequency trading
    Question. High-frequency trading generally refers to trading in 
financial instruments, such as securities and derivatives, transacted 
through supercomputers executing trades within microseconds or 
milliseconds. By most accounts, high frequency trading has grown 
substantially over the past decade. The CFTC has taken steps to bring 
some high-frequency trading under closer scrutiny, through recent 
regulatory proposals and enforcement actions. In a number of 
enforcement actions involving algorithmic trading, the CFTC has cracked 
down on spoofing, the illegal practice of bidding or offering with 
intent to cancel before execution, using the anti-spoofing authority 
granted under Dodd-Frank.
    How has the CFTC adapted to the growth in high frequency trading?
    Answer. For many markets, automated trading brings trading 
liquidity, broader market access, enhanced transparency and greater 
competition. At the same time, automated trading presents a host of 
potential new challenges. How markets and market regulators adjust to 
this change from human to automated trading is extremely important. It 
requires delicate balancing. To ensure vibrant, accessible and durable 
markets, we must cultivate and embrace new technologies without harming 
innovation. Without a doubt, there must be effective safeguards of 
market integrity and credibility, but those safeguards should not bar 
promising innovation and continuous market development.
    In November of 2015, the CFTC published a proposed rule to tackle 
some of the challenges of automated trading and a year later issued a 
supplemental proposal. While I believe it is time to formulate and 
establish well-considered policy responses to the digitization of 
contemporary markets, I have publically expressed concerns that the 
proposal is often times an analog solution to a digital problem. 
However, I maintain an open mind to a number of their elements and I 
look forward to reviewing the public's comments on the proposal and 
working with a full Commission to establish a final rule.
    Question. What are your current and planned initiatives in this 
area?
    Answer. The Commission recently undertook an effort to review 
certain portions of its organizational structure and concluded that it 
could create efficiencies and at the same time enhance its capabilities 
if some of its resources were reorganized internally. Specifically, 
elements of the market surveillance branch housed in the Division of 
Market Oversight (DMO) moved to the Division of Enforcement (DOE). This 
realignment will strengthen our mission to identify and prosecute 
violations of law and regulation, such as spoofing, manipulation and 
fraud. It will foster increased efficiencies through knowledge-sharing 
and cross-training under unified leadership; thus benefitting the 
Commission's surveillance mission and enforcement responsibilities.
    In addition, we established a new Market Intelligence Branch within 
the Division of Market Oversight, the function of which is to 
understand, analyze and communicate current and emerging derivatives 
market dynamics, developments and trends--such as the impact of new 
technologies and trading methodologies, including high frequency 
trading.
    By separating the two units--surveillance within DOE and market 
intelligence within DMO--we will sharpen our surveillance capability 
while increasing our knowledge of evolving market structures and 
practices to promote efficient and sound markets. The overall goal is 
to make the CFTC more adept in each of the two disciplines.
    Question. Do you have adequate in-house expertise and resources to 
effectively monitor this trading? If not, please explain.
    Answer. The pace of investment in new and innovative technologies, 
such as algorithmic trading, and in FinTech more broadly, has 
accelerated in recent years. The costs of launching new ventures and 
applying new technologies have dropped enormously, while the speed and 
scalability with which they can be brought to market have increased 
dramatically.
    In order for the CFTC to remain an effective regulator, it must 
keep pace with these changes or our regulations will become outdated 
and ineffective. The CFTC's fiscal year 2018 budget request of $281.5 
million will allow us to continue to fulfill our mission and make the 
investments necessary to keep pace with 21st century digital markets.

                          SUBCOMMITTEE RECESS

    The subcommittee hearing is hereby adjourned. Thank you 
both.
    [Whereupon, at 11:12 a.m., Tuesday, June 27, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]