[Senate Hearing 115-191]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2018
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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.
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\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.
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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.
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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.]