    [Senate Hearing 115-571]
    [From the U.S. Government Publishing Office]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2019

                                  ----------

                             TUESDAY, JUNE 5, 2018

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.

        The subcommittee met at 3:33 p.m., in Room SD-138, Dirksen
    Senate Office Building, Hon. James Lankford (Chairman)
    presiding.
        Present: Senators Lankford, Boozman, Kennedy, and Van
    Hollen.

                       SECURITIES AND EXCHANGE COMMISSION

    STATEMENT OF HON. JAY CLAYTON, CHAIRMAN

                  OPENING STATEMENT OF SENATOR JAMES LANKFORD

        Senator Lankford. Good afternoon, everyone. The
    subcommittee will come to order.
        Welcome to today's hearing on the fiscal year 2019 budget
    request for the Securities and Exchange Commission (SEC) and
    the Commodity Futures Trading Commission (CFTC). Today we have
    SEC Chairman Jay Clayton, CFTC Chairman Christopher Giancarlo.
    Thank you both for being here today, by the way, and for the
    extensive preparation that you did.
        SEC's mission is to protect investors, maintain fair,
    orderly and efficient markets, and facilitate capital
    formation. To accomplish these objectives, SEC requests $1.658
    billion for fiscal year 2019, a $6 million increase over the
    fiscal year 2018 enacted amount. SEC's funding is derived from
    fees paid by national securities exchanges and associations and
    results in no direct appropriations. However, these fees are
    ultimately passed on to U.S. investors, retirement savers,
    market participants, and the subcommittee has the
    responsibility to ensure that they are all spent wisely.
        Chairman Clayton, your leadership of the SEC coincides with
    the rapidly changing environment for investors. The Commission
    is formulating responses to new threats, including
    cybersecurity, misconduct affecting retail investors, as well
    as new opportunities including innovative platforms and
    promoting investor access to information.
        This hearing is timely as I continue working with my
    colleagues on additional reforms to facilitate capital
    formation. I look forward to working with you and hearing your
    thoughts on legislative changes that would be most helpful to
    small and mid-sized businesses.
        CFTC's mission is to foster open, transparent, competitive,
    and financially sound markets. To facilitate oversight of the
    Nation's swaps futures and options markets, CFTC requests
    $281.5 million for fiscal year 2019, a $32.5 million increase
    over the fiscal year 2018 enacted amount.
        Chairman Giancarlo is at the helm with global reform
    efforts towards swaps data reporting and significant
    developments in financial technology.
        SEC and CFTC as Federal market regulators are charged with
    establishing a regulatory environment for investors and market
    participants that fosters innovation, market integrity, and
    ultimately confidence. And that is not simple to do all three
    of those. So I appreciate your trying to keep the balance.
        We are interested in hearing more about your efforts to
    defend against cyber threats to investors and financial market
    infrastructure, as well as to ease regulatory burdens. Your
    jobs have become even more challenging in the rise of automated
    trading, constant technological innovation, including areas
    such as financial technology, or fintech, and the need to
    operate in markets undergoing digital transformation.
        I appreciate both of you being here and your preparation.
        Mr. Clayton, your written statement was slightly shorter
    than ``War and Peace,'' but not much shorter than that. You
    gave us a tremendous amount of information, and I appreciate
    you laying all of that out. It was very, very helpful.
        Mr. Giancarlo, yours read more like a fiction novel. You
    had so many great illustrations and ideas in it.
        So I appreciate the two pieces of fine literature in your
    written statements and look forward to the oral testimony in
    the moments ahead. I thank you both for doing this.
        I would turn to my colleague, Senator Van Hollen, for his
    opening remarks.

                     STATEMENT OF SENATOR CHRIS VAN HOLLEN

        Senator Van Hollen. Thank you, Mr. Chairman, and thank you
    for your leadership, Chairman Lankford.
        As you can see, our Ranking Member, Senator Coons, was
    unable to make it today, but he wanted to extend his best
    wishes to both of you and his thanks to both of you.
        And I share lots of the concerns about issues that were
    raised by the Chairman.
        I thank both of you for being here, look forward to hearing
    more about your budgets. Both of you have very important
    responsibilities in your different oversight capacities, and we
    want to make sure we have the resources available for you both
    to do your jobs. And so I will have some questions related to
    your oversight responsibilities, but in terms of an opening
    statement, just welcome and I look forward to hearing from both
    of you.
        Senator Lankford. Thank you.
        I was going to mention actually Ranking Member Coons on
    this as well is under the weather, and I can assure you he
    would much rather be here than where he is, as far as feeling
    miserable right now. But thank you both for being here and we
    will follow up. He will have questions for the record. Then we
    will do some follow-up on it in the moments ahead.
        Mr. Clayton, why do you not go ahead and begin first with
    your testimony? We will be glad to be able to receive your
    testimony now.

                     SUMMARY STATEMENT OF HON. JAY CLAYTON

        Mr. Clayton. Thank you, and I will try and give the
    abridged version.
        Chairman Lankford, Senator Van Hollen, Senator Kennedy,
    thank you for the opportunity to testify before you today about
    the President's fiscal year 2019 budget request for the SEC.
        I am also pleased to be joined by my colleague, CFTC
    Chairman Giancarlo. We have worked closely together over the
    past year on a number of issues to improve and strengthen our
    markets.
        On behalf of my fellow commissioners and the 4,500 women
    and men at the SEC, I would like to thank this subcommittee for
    its support. Congress' recent fiscal year 2018 funding for the
    agency will enable the SEC to make significant investments in
    furtherance of our efforts to modernize our information
    technology infrastructure and improve our cybersecurity risk
    profile. I recognize the vote of confidence that you have shown
    in the SEC, as does our staff. I am committed to ensuring that
    the agency is a prudent steward of this appropriation.
        In my interactions with our staff, it is always clear that
    they recognize and are motivated by the fact that tens of
    millions of Americans are invested in our securities markets.
    The daily touchstone for the SEC staff is the long-term
    interests of these Americans. In turn, we believe serving these
    interests furthers America's interests.
        Our fiscal year 2019 request of $1.658 billion for SEC
    operations will enable the SEC to continue its work in a number
    of areas with a focus on five important components that I will
    highlight in a moment.
        I will start with a few threshold matters.
        First, the request will enable us to start lifting our
    hiring freeze and support approximately 100 new hires to
    address current priorities.
        Second, the budget request relies on the SEC having
    continued access to the reserve fund to invest in information
    technology.
        Third, the SEC's funding is deficit neutral, and any
    amounts appropriated to the agency will be offset by
    transaction fees.
        Let me focus on the five components.
        First, information technology (IT) and cybersecurity. With
    regard to technology and cybersecurity, Congress' enacted
    fiscal year 2018 appropriation, and our fiscal year 2019
    request, will allow the SEC to make improvements to modernize
    our information technology infrastructure and improve our
    cybersecurity risk profile. In short, we will use the fiscal
    year 2018 and fiscal year 2019 funding to advance the
    implementation of our multiyear IT strategic road map.
        Second, capital formation. In facilitating capital
    formation, we have made progress, but I believe the SEC can and
    should do more to enhance capital formation in our public and
    private capital markets and particularly for mid-sized, small,
    and emerging companies. Please be assured that as we develop
    initiatives aimed at promoting access to capital markets, we
    will also seek to maintain and enhance investor protection. The
    request will also provide additional resources for staffing of
    the new Office of the Advocate for Small Business Capital
    Formation.
        Third, protecting Main Street investors. Protecting Main
    Street investors and preserving their access to investments and
    opportunities is at the heart of the work of numerous divisions
    and offices at the Commission. In April, the Commission voted
    to issue for public comment a comprehensive package of rule
    making and interpretation designed to address retail investor
    confusion and improve their relationships with investment
    professionals. Our rulemaking package would significantly
    enhance retail investor protection by preserving access in
    terms of both availability and cost to a variety of types of
    investment services and investment products. Our rulemaking is
    designed to serve our Main Street investors, and I hope that we
    will hear from them during the comment process.
        Just yesterday, I had the opportunity to speak with Main
    Street investors in Houston, Texas, and gained additional
    valuable insight into what they expect from their relationships
    with investment professionals. These interactions, along with
    our experience applying and enforcing our securities laws, are
    essential to crafting a final rule that, one, aligns investor
    expectations with legal standards and, two, provides Main
    Street investors with access to a variety of investment
    services at a reasonable cost.
        Fourth, enforcement, compliance, and inspections. Over 50
    percent of our workforce is devoted to enforcement, compliance,
    and inspections, and our 11 regional offices are primarily
    devoted to these areas. Our Enforcement Division is committed
    to protecting our markets and investors, especially from fraud
    that impacts the most vulnerable. Our budget request will allow
    for critical investments in our ability to protect investors by
    supporting key enforcement priorities, including expanding the
    work of our new Cyber Unit and our new Retail Strategy Task
    Force. The budget request will also allow for further advances
    in our examinations of market participants, including
    investment advisors. We increased our examination of investment
    advisors by more than 40 percent in fiscal year 2017 to
    approximately 15 percent of all SEC-registered investment
    advisors. But we are always seeking improvements in this area.
        Fifth and finally, trading and markets. Our trading markets
    are constantly evolving, expanding, and demanding continuous
    effort to identify emerging issues and risks. And we strive to
    ensure that as technology changes, our regulations drive
    efficiency, integrity, and resilience. Our request will allow
    our Division of Trading and Markets to expand the agency's
    depth of expertise in vital areas such as equity and fixed
    income market surveillance, analysis, clearing agency
    oversight, broker-dealer operations, cybersecurity, and
    electronic trading.
        Finally, our request supports our participation in the
    GSA's competitive procurement process for a successor lease for
    our New York regional office.
        In closing, I would like to again thank the subcommittee
    for its continued support of the SEC, its mission, and its
    staff.
        I look forward to answering any questions you may have.
        [The statement follows:]
                     Prepared Statement of Hon. Jay Clayton
        Chairman Lankford, Ranking Member Coons and Senators of the
    subcommittee, thank you for the opportunity to testify today on the
    President's fiscal year 2019 budget request for the U.S. Securities and
    Exchange Commission (SEC).\1\
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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.
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        It is an honor to appear before this Committee again with my
    colleague, Commodity Futures Trading Commission (CFTC) Chairman
    Christopher Giancarlo. Over the past year, we and the staff of our
    agencies have collaborated on a number of issues to strengthen our
    markets, including improving our swaps and security-based swap markets.
    We also are coordinating our efforts to address issues raised by
    cryptocurrencies, initial coin offerings and related products.\2\
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        \2\ See Jay Clayton and J. Christopher Giancarlo, Regulators are
    Looking at Cryptocurrency, Wall St. J. (Jan. 24, 2018), available at
    https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency-
    1516836363?mod=searchresults&page=1&pos=2.
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        To begin, I would like to thank the Members of this Committee for
    your support of the SEC, its personnel and its mission to protect
    investors, maintain fair, orderly and efficient markets and facilitate
    capital formation. Congress's recent funding for the agency, with
    additional funds for information technology, will provide the SEC with
    the ability to make significant investments in fiscal year 2018 in
    furtherance of our efforts to modernize our information technology
    infrastructure and improve our cybersecurity risk profile. This funding
    also will allow us to make advances in each part of our tripartite
    mission.
        I recognize the vote of confidence that you have shown in the SEC
    as does our staff. We all appreciate it. I am committed to ensuring
    that the agency is a prudent steward of this appropriation.
        I also look forward to working with each of you on the agency's
    fiscal year 2019 request during the congressional appropriations
    process.
    our mission, our perspective and the importance of our capital markets
                                   to america
        Since joining the SEC last May, I have been increasingly impressed
    by the SEC staff's professionalism and dedication to serving American
    investors, issuers and other market participants. I would also like to
    thank my fellow Commissioners--Kara Stein, Michael Piwowar, Robert
    Jackson, Jr. and Hester Peirce--for their commitment to the Commission
    and for working to address a host of issues for the benefit of U.S.
    investors and our capital markets.
        With a workforce of over 4,500 staff in Washington and across our
    11 regional offices, the SEC oversees, among other things (1)
    approximately $82 trillion in securities trading annually on U.S.
    equity markets; (2) the disclosures of approximately 4,300 exchange-
    listed public companies with an approximate aggregate market
    capitalization of $30 trillion; and (3) the activities of over 26,000
    registered entities and self-regulatory organizations. These registered
    entities include, among others, investment advisers, broker-dealers,
    transfer agents, securities exchanges, clearing agencies, mutual funds
    and exchange-traded funds (ETFs) and employ over one million people in
    the United States.
        These statistics are significant on their face. They are even more
    significant when viewed in comparison to world markets and demonstrate
    the importance of our capital markets to America and the American
    people. Of the world's 100 largest publicly traded companies, 53 are
    U.S. companies, representing 62 percent of the total market
    capitalization of those top 100 companies. The U.S. population is
    approximately 4.4 percent of global population. Our relative
    contribution to global economy is a remarkable, long-term achievement
    that has been driven, to a significant extent, by our capital markets.
    More importantly, at least 51 percent of U.S. households are invested
    directly or indirectly in our capital markets.\3\ This level of retail
    investor participation stands out against other large industrialized
    countries. They want to replicate it because such broad investor
    participation in our capital markets is a significant competitive
    advantage for our economy, and our capital markets have made many
    Americans' lives better. But this level of investor participation
    should not be taken for granted and has been a decades- long endeavor
    between the SEC and market participants.
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        \3\ See Jesse Bricker et al (2017), ``Changes in U.S. Family
    Finances from 2013 to 2016: Evidence from the Survey of Consumer
    Finances,'' Federal Reserve Bulletin, vol. 103 (September), available
    at https://www.Federalreserve.gov/publications/files/scf17.pdf; see
    also Rel. No. 34-83063, Form CRS Relationship Summary; Amendments to
    Form ADV; Required Disclosures in Retail Communications and
    Restrictions on the use of Certain Names or Titles (Apr. 18, 2018) (for
    statistics except the mutual fund data); 2017 Investment Company Fact
    Book (ICI, 57th ed. 2017) (mutual fund statistics).
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        Our staff recognizes, and is motivated by, the fact that tens of
    millions of Americans are invested in our securities markets and have
    to make personal investment decisions--both direct decisions such as
    which stocks, bonds, mutual funds, ETFs and other securities to
    purchase and indirect investment decisions such as which broker-dealer
    or investment adviser to hire. Many other Americans are also invested
    in our markets through pension funds and other intermediaries. The
    touchstone for the SEC staff is the long term interests of these
    Americans. They benefit from investment opportunities, fair and
    efficient markets and, importantly, investor protection. In turn, we
    believe serving these interests furthers America's interests.
        Over the course of my first year at the Commission, I have held
    town halls at each of our 11 regional offices and with each one of our
    divisions and offices. These sessions have demonstrated unequivocally
    that the women and men of the SEC place the long term interests of our
    Main Street investors first.
        Earlier this year, the President designated April as National
    Financial Capability Month, ``affirm[ing] the importance of financial
    literacy and highlight[ing] the need for all Americans to plan for
    their futures.'' \4\ The designation reiterates the importance of
    financial literacy and retirement planning--a message that rings
    especially true at the SEC because educating investors is a vital part
    of our core mission. We engage and interact with the investing public
    on an ongoing basis through a number of channels, including through our
    investor education programs and through the publication of alerts on
    our Investor.gov website. Our Office of Investor Education and Advocacy
    provides information and resources to investors, stressing the
    importance of saving and investing, researching their investment
    professionals and being aware of the potential indicators of fraud.\5\
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        \4\ Presidential Message on National Financial Capability Month
    (Mar. 30, 2018), available at https://www.whitehouse.gov/briefings-
    statements/presidential-message-national-financial-
    capability-month/.
        \5\ See Press Release 2018-88, The SEC Has an Opportunity You Won't
    Want to Miss: Act Now! (May 16, 2018), available at https://
    www.sec.gov/news/press-release/2018-88.
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        Recently, we launched a new tool designed to enable investors to
    research whether their financial professional or others offering them
    investments have a judgment or order entered against them in an
    enforcement action.\6\ The SEC Action Lookup for Individuals--or SALI--
    provides Main Street investors with additional information they can use
    to protect themselves from being victims of fraud and other misconduct.
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        \6\ See Press Release 2018-78, SEC Launches Additional Investor
    Protection Search Tool (May 2, 2018), available at https://www.sec.gov/
    news/press-release/2018-78.
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        My fellow Commissioners and I also participate in investor
    education and outreach efforts with military servicewomen and men,
    seniors and other retail investors. Next week, all five of us, along
    with staff from across the agency, will be in Atlanta for an investor
    town hall where Main Street investors can hear directly from, and share
    feedback with, the Commission on issues important to them.\7\
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        \7\ See Investing in America: The SEC Comes to You, available at
    https://www.sec.gov/investing-america.
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        In charting the course of the SEC, I have noted several guiding
    principles that have been borne out by my interactions with the men and
    women of the Commission staff and America's Main Street investors.\8\
    These principles are embodied in the day-to-day efforts of all
    divisions and offices, particularly, and worthy of continued emphasis,
    with regard to focusing on the long term interests of Main Street
    investors. I have followed these principles in developing a streamlined
    Regulatory Flexibility Act rulemaking agenda. While the number of items
    on the short term portion of the agenda is lower than in years past, it
    does not mean that work at the Commission is slowing down. Rather, this
    change is rooted in a commitment to increased transparency and
    accountability regarding rulemaking priorities in an endeavor to be
    direct with Congress, investors, issuers and other interested parties
    about what rules the agency intends to pursue and the Commission has a
    reasonable expectation of completing in the coming year.\9\
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        \8\ See Remarks at the Economic Club of New York (July 12, 2017),
    available at https://www.sec.gov/news/speech/remarks-economic-club-new-
    york; The principles are (1) the SEC's tripartite mission--protect
    investors, maintain fair, orderly and efficient markets and facilitate
    capital formation--is its touchstone; (2) our analysis starts and ends
    with the long-term interests of the Main Street investor; (3) the SEC's
    historic approach to regulation is sound; (4) regulatory actions drive
    change, and change can have lasting effects; (5) as markets evolve, so
    must the SEC; (6) effective rulemaking does not end with rule adoption;
    (7) the costs of a new rule now often include the cost of demonstrating
    compliance; and (8) coordination is key.
        \9\ Over the past 10 years, the Commission has completed, on
    average, only a third of the rules listed on the near-term agenda. As
    examples, 18 rules were listed as to-be-adopted in 2008, and 32 rules
    were listed in the same category for 2016; in each case, about 27
    percent of the rules were adopted in each year.
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                      our fiscal year 2019 budget request
        Our fiscal year 2019 budget will allow the agency to build on its
    recent efforts in overseeing the U.S. markets and its market
    participants, protecting American investors, further promoting economic
    growth and being better prepared to tackle unanticipated issues that
    arise. Our request of $1.658 billion for SEC operations represents a
    modest increase above fiscal year 2018's enacted level of $1.652
    billion. This level will enable the SEC to continue its work in a
    number of areas, with a focus on several important components that I
    will highlight further below, including: (1) leveraging technology and
    enhancing cybersecurity and risk management; (2) facilitating capital
    formation across our markets; (3) protecting Main Street investors
    through multiple channels, including focusing on our most vulnerable
    investors, markets that are fertile ground for fraud and market
    integrity efforts such as combating insider trading, market
    manipulation and accounting fraud; (4) maintaining effective oversight
    of changing markets; and (5) supporting our leasing efforts.
        The SEC's request for fiscal year 2019 would enable us to start
    lifting the hiring freeze that has been in place since late in fiscal
    year 2016. Our budget request would support restoring 100 positions,
    approximately one-quarter of the positions that became vacant during
    our hiring freeze, to address current critical priority areas and
    enhance the agency's expertise in key areas, including the Division of
    Enforcement (17), the Office of Compliance Inspections and Examinations
    (24), the Division of Trading and Markets (16), the Division of
    Investment Management (7), the Division of Economic and Risk Analysis
    (4), the Office of Information Technology (16) and the Advocate for
    Small Business Capital Formation (5), among others. These 100 positions
    would result in SEC staffing at approximately the same level as in
    fiscal year 2014. The fiscal year 2019 budget request also relies on
    the SEC having continued access to the Commission's Reserve Fund to
    fund information technology improvements, including those related to
    cybersecurity.
        The SEC's funding is deficit-neutral. Any amount appropriated to
    the agency will be offset by transaction fees. The current transaction
    fee rate is just over one cent for every $1,000 in covered securities
    sales. The SEC also has been a net contributor to the U.S. Treasury in
    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 2019, the fee rate will be set at a level
    sufficient to collect $660 million. A portion of these collections will
    be put into the Reserve Fund, which the agency devotes to information
    technology improvements, while the remaining funds will be deposited in
    the general fund of the U.S. Treasury.
            leveraging technology, cybersecurity and risk management
        Congress's enacted fiscal year 2018 appropriation and our fiscal
    year 2019 request will allow the SEC to make investments to modernize
    our information technology infrastructure and improve our cybersecurity
    risk profile. The agency plans to use its fiscal year 2018 and fiscal
    year 2019 resources to advance the implementation of our Office of
    Information Technology's multi-year IT strategic roadmap to further our
    mission through advanced data analytics, digital workflows and other
    tools to maximize efficiency, effectiveness and security. Key IT
    priorities for fiscal year 2018 and fiscal year 2019 include:

        1.  Investing in information security to improve monitoring,
    protect against advanced persistent threats and strengthen risk
    management;
        2.  Retiring antiquated ``legacy'' IT systems to improve our
    cybersecurity posture while also saving agency funds;
        3.  Expanding data analytics tools to facilitate earlier detection
    of potential fraud or suspicious behavior and better identify high-risk
    registrant activities deserving examination; and
        4.  Modernizing the EDGAR electronic filing system to make it more
    secure, more useful for investors and less burdensome for filers.

        In particular, cybersecurity at the Commission itself continues to
    be a priority area. No organization can guarantee that it will be able
    to withstand all cyberattacks, particularly in an environment where
    threat actors may be backed by substantial resources. Nevertheless, we
    must continuously work to remain on top of evolving threats when it
    comes to securing our own networks and systems against intrusion. This
    is especially true when protecting mission critical systems as well as
    systems dealing with sensitive market and other data involving
    personally identifiable information. This means regularly evaluating
    progress, pursuing improvements and making it a priority to invest
    sufficient resources so our systems keep up with the ever-changing
    threat environment. This also means regularly exploring alternatives
    that will allow us to further our mission while reducing the
    sensitivity of the data we collect. This may include, for example,
    taking in market-sensitive data on a delayed basis where feasible.
        Because of the increasing importance of these issues, shortly after
    joining the Commission, I initiated an assessment of the SEC's overall
    cybersecurity risk profile and preparedness. This initiative is ongoing
    and includes an assessment and uplift of the agency's cybersecurity
    risk profile, including the identification and review of all systems,
    current and planned, that hold sensitive market data or personally
    identifiable information. As part of this process, we have engaged
    outside experts that are in the process of reviewing our systems and
    data. More broadly, the agency is evaluating its cybersecurity risk
    governance structure. This has resulted in the establishment of a
    senior-level cybersecurity working group, a review of our incident
    response procedures and additional planned enhancements to promote the
    management and oversight of cybersecurity across the Commission's
    divisions and offices. We have also established internal incident
    response exercises and have continued to interact on cybersecurity
    efforts with other government agencies and committees, including the
    Department of Homeland Security, the Government Accountability Office
    and the Financial and Banking Information Infrastructure Committee.
        Another important step to strengthen our cybersecurity and risk
    management efforts is my announcement of a new position, the Chief Risk
    Officer, to coordinate the SEC's efforts to identify, monitor and
    mitigate risks across our divisions and offices. Last week, we
    announced an Acting Chief Risk Officer as part of our efforts to
    maintain a robust program for identifying and addressing risks to the
    agency's mission while we continue our search to fill this new position
    on a permanent basis.\10\ I also have authorized the hiring of
    additional staff and outside technology consultants to aid in our
    efforts to protect the security of our network, systems and data.
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        \10\ See Press Release 2018-98, SEC Names Julie A. Erhardt Acting
    Chief Risk Officer (May 31, 2018), available at https://www.sec.gov/
    news/press-release/2018-98.
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        Beyond our overall assessment of the SEC's cybersecurity risk
    profile, last September I disclosed a prior intrusion of the SEC's
    EDGAR system. We have ongoing investigations--conducted by our Office
    of the General Counsel, Office of Inspector General and Division of
    Enforcement--aimed at helping us understand what transpired, including
    with respect to the scope of the incident. I am focused on getting to
    the bottom of the matter and, importantly, using the information gained
    from the investigations to strengthen our cybersecurity efforts moving
    forward. I am committed to keeping the Committee informed of the
    ultimate findings and conclusions of our internal review into the EDGAR
    intrusion.
        While our investigations are not complete, we have taken various
    steps to reinforce the security of our EDGAR system, including
    conducting a detailed penetration test of the EDGAR environment, a
    security review of EDGAR's code to proactively identify and remediate
    vulnerabilities and additional security enhancements to the
    architecture of the EDGAR system.
        Further, I directed staff to conduct a review of the sensitive
    personally identifiable information we gather through SEC forms in an
    effort to make sure we do not take in more of such information than we
    need to carry out our mission. With the support of my fellow
    Commissioners, one recent result of this effort has been to eliminate
    the requirement for filers of certain forms to continue to provide us
    with their social security numbers, foreign identity numbers or date or
    place of birth. With respect to these forms, the Commission's action
    reflected a conclusion that we would be able to achieve our regulatory
    objectives without taking in this sensitive personally identifiable
    information. These are the types of analyses and questions we will
    continue to consider as we think about data collection use and security
    at the agency.
        Uplifting the agency's cybersecurity program will remain a top
    priority during fiscal year 2019. Our request would support investment
    in tools, technologies and services to protect the security of the
    agency's network, systems and sensitive data. It would also enable
    funding of multi-year investments to transition legacy information
    technology systems to modern platforms with improved embedded security
    features. The fiscal year 2019 request would provide additional staff
    positions to enable the SEC to expand its cybersecurity protections,
    particularly with regard to incident management and response, advanced
    threat intelligence monitoring and enhanced database and system
    security, and to focus on the security of specific systems. The fiscal
    year 2019 request also would permit the SEC to hire additional staff
    positions under the Chief Risk Officer to strengthen and advance the
    agency's risk management capabilities.
                         facilitating capital formation
        The U.S. capital markets have long been the deepest, most dynamic
    and most liquid in the world. They provide businesses with the
    opportunity to grow, create jobs and furnish diverse investment
    opportunities for investors, including retail investors, pension funds
    and other retirement accounts. Our markets have provided the U.S.
    economy with a competitive advantage and American Main Street investors
    with better investment opportunities than comparable investors in other
    jurisdictions. We should strive to maintain and enhance these
    complementary positions, including by being mindful of emerging trends
    and related risks.
        In executing the SEC's tripartite mission, we have sought to
    promote an environment conducive to capital formation while ensuring
    that our markets and our investors remain well protected. Over the past
    year, our Division of Corporation Finance (Corporation Finance) has
    carried out several key initiatives, with a particular emphasis on
    capital-raising opportunities.
        Corporation Finance announced that it would accept voluntary draft
    registration statement submissions for certain securities offerings,
    including for initial public offerings (IPOs) and offerings within 1
    year of an IPO, for review by the staff on a non-public basis. This
    expanded policy builds on the confidential submission process
    established by the Jumpstart Our Business Startups (JOBS) Act. We
    believe this approach provides a meaningful benefit to companies and
    investors without in any way diminishing investor protection, and a
    number of companies have already pursued this path.
        The Commission also proposed amendments, as required by the Fixing
    America's Surface Transportation (FAST) Act, to modernize and simplify
    certain disclosure requirements in Regulation S-K and related rules and
    forms in a manner that reduces the costs and burdens on registrants
    while continuing to provide all material information to investors.
    Corporation Finance also is developing recommendations for the
    Commission on amendments to the ``smaller reporting company''
    definition, which would expand the number of issuers eligible to
    provide scaled disclosures.
        While progress has been made, I believe the SEC can and should do
    more to enhance capital formation in our public and private capital
    markets and, particularly, for small and emerging companies. Fewer
    emerging 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. There has been much debate about the
    causes and policy implications of this trend, but from my perspective,
    having a broader portfolio of public companies, especially those at the
    earlier stage of their growth cycle, ultimately will have positive
    impacts for our Main Street investors. Because it is difficult and
    costly for Main Street investors to invest in private companies, they
    will miss out on the growth phase of these companies to the extent they
    go public less frequently and later in their life cycle. Additionally,
    companies going through the SEC public registration and offering
    process often come out better companies on the other side of an IPO,
    providing net benefits to the company and our capital markets. While
    there is not a silver bullet to counter the negative trend in the
    number of U.S. public companies, we will continue working to enhance
    capital formation opportunities without sacrificing the important
    investor protections our public company disclosure system has provided
    for over 80 years.
        Our fiscal year 2019 budget request will further 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 continuing to foster important investor protections. The
    resources provided by the fiscal year 2019 request also would enable
    Corporation Finance to further assist companies that seek to raise
    capital through IPOs, follow-on or exempt offerings and to implement
    other important capital formation initiatives.
        Additionally, the fiscal year 2019 request will provide additional
    resources for staffing of the Office of the Advocate for Small Business
    Capital Formation (Advocate). We are in the advanced stages of our
    efforts to hire the Advocate, whose mission is to be a resource and
    voice for small businesses and their investors by providing assistance,
    conducting outreach to better understand their concerns and making
    recommendations to the Commission and Congress regarding potential
    improvements to the regulatory environment. I look forward to the
    benefits that the Advocate will provide to the Commission, issuers and
    investors.
                protecting main street investors and our markets
        In early 2017, as I moved through the confirmation process, it
    became apparent that a wide range of market participants, including
    retail investors and various Members of Congress, believed that
    standards of conduct for investment professionals (e.g., investment
    advisers and broker-dealers) was a matter where Commission action,
    including coordination with our fellow regulators, would be both
    appropriate and timely. In June 2017, I issued a request for
    information, seeking input from the public on a range of potential
    issues. Since then, I have also had scores of meetings with investors,
    consumer groups, industry participants and others across the full
    spectrum of these issues.
        In particular, the candid comments of retail investors we met with
    in Missouri, Montana, Illinois and California, as well as those who
    travelled to New York for a roundtable, on what they expect, and do not
    expect, from investment professionals resonated with me in considering
    the appropriate course of action. These interactions, including
    consultations with my fellow Commissioners and staff, led me to the
    conclusion that the Commission should lead--but not dictate--in this
    area in order to (1) address investor confusion regarding the roles of,
    and the differences between, broker-dealers and investment advisers,
    (2) establish standards of conduct that meet reasonable investor
    expectations and adequately address conflicts of interest, and (3)
    minimize the effects of regulatory complexity, both more generally and
    as a result of the Department of Labor's application of the fiduciary
    rule to a portion of the market.
        In April, the Commission voted to issue for public comment a
    comprehensive package designed to address retail investor confusion and
    potential harm in their relationships with investment professionals.
    Our rulemaking package would enhance retail investor protection while
    preserving access, in terms of both availability and cost, to a variety
    of types of investment services and investment products.
        I have included my overview of the rulemaking package as an
    appendix to my testimony but will provide a brief synopsis.\11\ First,
    to meet reasonable investor expectations and address conflicts of
    interest, we are enhancing the standard of conduct for broker-dealers.
    We are also reaffirming--and in some cases clarifying--the standard for
    investment advisers. Under proposed Regulation Best Interest, a broker-
    dealer, when making a recommendation of a securities transaction or
    investment strategy to a retail customer, will be required to act in
    the best interest of that customer at the time the recommendation is
    made, including the broker-dealer being prohibited from placing their
    financial or other interest ahead of the interest of the retail
    customer. To add clarity for all participants, the proposal provides
    that the best interest duty is discharged if the broker-dealer complies
    with a disclosure obligation, a care obligation and two conflict of
    interest obligations. Under current standards, by contrast, broker-
    dealers are permitted to recommend to their retail customer a product
    that is suitable but worse for the customer than another product that
    the broker-dealer offers--because the first product makes the broker-
    dealer more money. Let me be clear: our proposed Regulation Best
    Interest would address this concern.
    ---------------------------------------------------------------------------
        \11\ See also The Evolving Market for Retail Investment Services
    and Forward-Looking Regulation--Adding Clarity and Investor Protection
    while Ensuring Access and Choice (May 2, 2018), available at https://
    www.sec.gov/news/speech/speech-clayton-2018-05-02.
    ---------------------------------------------------------------------------
        How would this new duty be discharged? First, broker-dealers would
    need to disclose material facts relating to their relationship with the
    customer. Second, broker-dealers would need to enhance their current
    compliance framework to meet the demands of a more rigorous best
    interest standard. Third, and most important, broker-dealers would need
    to eliminate, or mitigate and disclose, material conflicts of interest
    related to financial incentives. Disclosure alone would not suffice.
        The new broker-dealer best interest obligation draws from the
    principles applicable to an investment adviser's fiduciary duty. The
    close relationship is made clear when the proposed Regulation Best
    Interest is reviewed against the standards applicable to investment
    advisers. To address confusion regarding the standards applicable to
    investment advisers, we issued a proposed interpretation reaffirming--
    and in some cases clarifying--that duty as part of the rulemaking
    package. With respect to an investment adviser's fiduciary duty, let me
    be clear, because I believe there is substantial confusion in the
    marketplace. An investment adviser must seek to avoid conflicts of
    interest and at a minimum make full and fair disclosure of material
    conflicts. But it misstates the law and could mislead investors to
    suggest that investors currently have a legal right to conflict-free
    advice from an investment adviser.
        Second, the rulemaking package would address concerns that retail
    investors are confused about their relationship with an investment
    professional. For example, they may mistakenly engage the services of a
    broker-dealer when, if they were to make a fully informed choice, their
    preferences would better match those of an investment adviser. Our
    proposal (1) would require broker-dealers and investment advisers to
    clearly state what they are, (2) would prohibit stand-alone broker-
    dealers and their financial professionals from using the terms
    ``adviser'' or ``advisor'' as part of their names or titles, and (3)
    introduce a new short-form disclosure, no more than four pages, to help
    people identify the services that their financial professional
    provides, certain conflicts of interest to which they are subject, the
    fees the investor will pay, and the legal standards of conduct that
    apply when dealing with their clients or customers. Put bluntly, we
    want investors to understand who they are dealing with (e.g., what
    category their investment professional falls into) and, then, what that
    means and why it matters (e.g., how their investment professional is
    compensated).
        We have been thinking about these issues for over 20 years and
    about this rulemaking for nearly a year. I urge commenters to review
    the rule thoroughly, and then engage with us on it during the 90 day
    comment period. In order to provide as much opportunity for that
    engagement as possible, I also announced several investor roundtables,
    including in Atlanta, Houston, Denver, and Miami, to hear directly from
    those the rule is designed to serve--Main Street investors.\12\
    ---------------------------------------------------------------------------
        \12\ See Statement on Public Engagement Regarding Standards of
    Conduct for Investment Professionals Rulemaking (Apr. 24, 2018),
    available at https://www.sec.gov/news/public-statement/public-
    engagement-standards-conduct-investment-professionals-rulemaking.
    ---------------------------------------------------------------------------
        The fiscal year 2019 request would restore seven staff positions
    within the Division of Investment Management (Investment Management),
    which plays a critical role in protecting retail investors through its
    regulation of investment advisers, mutual funds, variable insurance
    products and ETFs, among other products. The resources would be used to
    enhance Investment Management's monitoring and disclosure programs, as
    well as advance key investor-focused rule-writing priorities, such as
    standards of conduct for investment professionals.
        Additionally, a vigorous enforcement program is at the heart of the
    Commission's work to protect investors and maintain the integrity of
    the securities markets. Our Division of Enforcement (Enforcement) has
    the frontline responsibility of safeguarding our capital markets and
    American investors, and their dedication and expertise is focused on
    detecting and pursuing fraud and other misconduct where they may occur.
    Enforcement is focused on protecting all investors--without favor for
    account size, geography or other measures of priority--in its efforts
    to investigate and bring charges against violators of the Federal
    securities laws. Successful enforcement actions impose meaningful
    sanctions on securities law violators, deter wrongdoing and, most
    important, have the maximum impact of returning dollars to harmed
    investors, especially Main Street investors, as well as preventing harm
    to those investors in the first instance.
        During the past year, Enforcement has continued to focus on key
    areas where misconduct can harm investors, undermine confidence and
    impair market integrity. This includes such critical areas as retail
    investor fraud and investment professional misconduct, insider trading,
    market manipulation and accounting fraud. In furtherance of these
    initiatives, Enforcement enhanced its focus and expertise through the
    establishment of a Retail Strategy Task Force and a new specialized
    unit, the Cyber Unit.\13\ The Retail Strategy Task Force's charge is to
    develop effective strategies and techniques to identify, punish and
    deter misconduct that most affects everyday investors. The Cyber Unit
    centralizes, leverages and builds upon the considerable expertise that
    the Commission has developed in several rapidly developing areas. The
    Cyber Unit focuses its efforts on the following key areas: (1) hacking
    to obtain material, nonpublic information and trading on that
    information; (2) market manipulation schemes involving false
    information spread through electronic and social media; (3) violations
    involving distributed ledger technology and initial coin offerings
    (ICOs); (4) misconduct perpetrated using the dark web; (5) intrusions
    into online retail brokerage accounts; and (6) cyber-related threats to
    trading platforms and other critical market infrastructure.
    ---------------------------------------------------------------------------
        \13\ Press Release 2017-176, SEC Announces Enforcement Initiatives
    to Combat Cyber-Based Threats and Protect Retail Investors (Sept. 25,
    2017), available at https://www.sec.gov/news/press-release/2017-176.
    ---------------------------------------------------------------------------
        Our fiscal year 2019 request would allow for critical investments
    in our ability to protect investors by restoring 17 positions for
    Enforcement to support key enforcement priorities, including expanding
    the work of the Cyber Unit and the Retail Strategy Task Force.
        Another critical tool for the SEC to carry out its mission is our
    National Examination Program (NEP), led by our Office of Compliance
    Inspections and Examinations (OCIE). The SEC conducts risk-based
    examinations of registered entities, including broker-dealers,
    investment advisers, investment companies, municipal advisors, national
    securities exchanges, clearing agencies, transfer agents and FINRA,
    among others. Our examination program is one of many areas where we
    have focused on doing more with our available resources. Recently,
    through the reallocation of resources, advancements in OCIE's use of
    technology and other efficiencies, OCIE increased its examination of
    investment advisers by more than 40 percent in fiscal year 2017 over
    fiscal year 2016--to approximately 15 percent of all SEC-registered
    investment advisers.
        Although this has been a very positive step, more needs to be done
    to continue to increase investment adviser examination coverage levels,
    while at the same time being careful to avoid decreasing examination
    quality. To that end, our fiscal year 2019 request would restore 24
    positions within the SEC's NEP, including six additional staff for its
    Technology Controls Program, which monitors critical securities market
    infrastructure for significant cyber events and outages. I believe this
    area will continue to warrant close attention, and I have shared these
    views with other regulators, particularly in areas where we have
    overlapping responsibilities and oversight.
        We will also continue to explore additional efficiencies and
    improvements to our risk-based examination program. One way to help us
    achieve our goals is through the continued use of data analytics. We
    have developed tools that can scan arrays of data fields to help us
    analyze and identify potentially problematic activities and firms,
    allowing us to make better decisions concerning which registered
    entities to examine and appropriately scope those examinations, among
    other things.
                  effective oversight of our changing markets
        One of the few certainties of trading markets is that they
    continually evolve and expand, while at the same time becoming more
    interrelated. Over the last decade, technological advancements and
    other developments have significantly altered the operations of our
    securities markets. These dramatic changes in our markets demand the
    Commission's continuous effort to identify emerging issues and risks in
    our markets and to strive to ensure that, as technology changes, our
    regulations continue to drive efficiency, integrity and resilience. The
    Division of Trading and Markets (Trading and Markets) serves as the
    SEC's first line in advancing our mission of maintaining markets that
    are fair, orderly and efficient through its work to regulate the major
    securities market participants and infrastructure.
        While much attention is paid to activity in our equity markets and
    the $82 trillion in securities traded annually there, it is possible
    that even more dramatic market changes are occurring in our fixed
    income markets. These markets are massive--and growing. For example:

      --The U.S. corporate bond market has experienced significant growth
            since the early 2000s. Issuance in the corporate bond market
            has hit record highs 5 years running.\14\ In 2016, there were
            nearly 1,400 issues, amounting to $1.5 trillion, of corporate
            bonds, and there was over $8.5 trillion of corporate bonds
            outstanding.\15\ By comparison, in 2006 there was over $4.8
            trillion of corporate bonds outstanding.\16\
    ---------------------------------------------------------------------------
        \14\ See A Financial System That Creates Economic Opportunities:
    Capital Markets, Report to President Donald J. Trump, U.S. Department
    of the Treasury (Oct. 2017) at 85, available at https://
    www.treasury.gov/press-center/press-releases/Documents/A-Financial-
    System-Capital-Markets-FINAL-FINAL.pdf.
        \15\ See 2017 SIFMA Fact Book at 23-24, 31, available at https://
    www.sifma.org/wp-content/uploads/2016/10/US-Fact-Book-2017-SIFMA.pdf.
        \16\ See id. at 31.
    ---------------------------------------------------------------------------
      --Growth in the U.S. corporate bond market has also outpaced growth
            in U.S. equities: between 2006 and 2016 the value of corporate
            bonds outstanding rose by about 76 percent, while equity market
            cap rose by 40 percent.\17\
    ---------------------------------------------------------------------------
        \17\ See id. at 58.
    ---------------------------------------------------------------------------
      --The municipal bond market is large and vital and has experienced
            significant growth in recent years. By the end of 2016,
            municipal bond issuers had approximately $3.8 trillion bonds
            outstanding, up 17 percent from the end of 2006.\18\
    ---------------------------------------------------------------------------
        \18\ See id. at 31.

        The fixed income markets are critical to our economy and,
    increasingly, Main Street investors, yet over the years less attention
    has been paid to their efficiency, transparency and effectiveness
    relative to the equity markets. To address these issues, the Commission
    recently broadened its review of market structure to include increased
    attention our fixed income markets. We established a new Fixed Income
    Market Structure Advisory Committee (FIMSAC), which has already had two
    public meetings and recently provided a recommendation for a pilot
    program to study the market implications of changing the reporting
    regime for block-size trades in corporate bonds.
        Over the last year, we also have continued to engage on issues
    related to our equity markets. The Commission recently proposed a pilot
    program based on a recommendation from the Equity Market Structure
    Advisory Committee (EMSAC) to study the effects that transaction-based
    fees and rebates may have on--and the effects that changes to those
    fees and rebates may have on--order routing behavior, execution quality
    as well as market quality more generally. I believe the data generated
    by a pilot program of this type would help inform the Commission, as
    well as market participants and the public, about any such effects and
    thereby facilitate a data-driven evaluation of the need for regulatory
    action in this area.
        While the EMSAC's charter expired in January 2018, the staff is
    organizing targeted roundtables among market participants on discrete
    equity market structure issues, which will feature experts
    representative of a broad diversity of viewpoints. These meetings will
    provide further opportunities for discussions about critical issues
    affecting our equity markets. In April, we held our first roundtable
    focused on market structure issues for thinly-traded exchange-listed
    securities--an important issue as smaller companies, the securities of
    which are often relatively illiquid, play an essential role in our
    economy and may be the larger companies of tomorrow. We should continue
    to examine whether the current equity market structure--which is
    uniform for all companies, large and small, liquid and illiquid--meets
    the needs of all types of companies.
        Our fiscal year 2019 request would allow Trading and Markets to
    recruit 16 additional professionals to expand the agency's depth of
    expertise in vital areas such as equity and fixed income market insight
    and analysis, clearing agency oversight, broker-dealer operations,
    cybersecurity and electronic trading. The request would also provide
    resources to continue the staff's work with the FIMSAC and its
    important work to evaluate, and for the Commission to take, appropriate
    measures to enhance the efficiency, transparency and effectiveness of
    fixed income markets.
                                    leasing
        One final, important component of the SEC's funding needs for
    fiscal years 2018 and 2019 is to support the leasing of office space.
    In addition to the funds requested to support our operations, the SEC
    is requesting funds in fiscal year 2019 necessary to participate in the
    General Services Administration's (GSA's) competitive procurement
    process for a successor lease for the SEC's New York Regional Office.
    As with the SEC's headquarters lease procurement that Congress funded
    in fiscal year 2018, in accordance with its standard process, GSA has
    requested that the SEC set aside the funds that might become necessary
    to cover construction and related costs should the SEC need to move
    from its current building. None of these funds would be used for the
    operations of the SEC, and the agency has proposed appropriation
    language that provides a mechanism whereby any unused portion of these
    funds would be refunded to fee payers.
                                   conclusion
        Thank you again for the opportunity to present the President's
    fiscal year 2019 budget request and for your support of the Commission.
    I appreciate the opportunity to work with the Committee to ensure that
    the SEC has the resources needed to fulfill our important mission to
    protect investors, maintain fair, orderly and efficient markets and
    facilitate capital formation. I look forward to answering any of your
    questions.
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Senator Lankford. Thank you.
        Mr. Giancarlo.
                                  ----------

                      COMMODITY FUTURES TRADING COMMISSION

    STATEMENT OF HON. J. CHRISTOPHER GIANCARLO, CHAIRMAN
        Mr. Giancarlo. Thank you, Chairman Lankford, Senator Van
    Hollen, Senator Kennedy, and Members of the subcommittee. I
    appreciate the opportunity to appear today along with SEC
    Chairman Jay Clayton who has become an important regulatory
    counterpart to us at the CFTC.
        For more than a century, Americans have relied on U.S.
    derivative markets to stabilize the cost of living. These
    markets allow farmers and ranchers to hedge production costs
    and delivery prices. They are the reason shoppers enjoy stable
    prices not only in the supermarket but in all matter of
    consumer finance from auto loans to household purchases.
    Derivative markets influence and set the price of availability
    of heating in homes, energy used in factories, interest rates
    borrowers pay on home mortgages, and returns workers earn on
    retirement savings.
        And not just consumers. More than 90 percent of Fortune 500
    companies use derivatives to manage commercial or market risk
    in their worldwide business operations. Derivatives allow the
    risks of variable production costs such as the price of raw
    materials, energy, foreign currency, and interest rates to be
    transferred from those who cannot afford them to those who can.
        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.
    While often derided in the tabloid press as risky, derivatives,
    when used properly, are tools for efficient price discovery and
    risk transfer and risk reduction. It has been estimated that
    the use of commercial derivatives added 1.1 percent to the size
    of the U.S. economy between 2003 and 2012.
        American derivative markets are the world's largest, most
    developed, and most influential. Many key agricultural,
    mineral, and energy commodities are priced in U.S. derivative
    markets. So are key financial products like interest rates and
    foreign exchange that take friction out of the global economy's
    system of floating exchange rates.
        The United States is the only major economy to have a
    regulatory agency specifically dedicated to derivative market
    regulation, and that is the CFTC. And the agency is recognized
    around the world for its depth of expertise and breadth of
    capability.
        This regulatory competency is one of the reasons why U.S.
    derivative markets continue to serve the needs of participants
    all around the globe. Well regulated U.S. derivative markets
    give the American economy a competitive advantage, and that is
    dollar pricing of the most important global commodities. And
    these markets underpin the U.S. dollar as the world's primary
    reserve currency.
        Now, this advantage is well recognized by competing
    economies around the world. Earlier this year, the Shanghai
    International Energy Exchange allowed non-Chinese market
    participants to trade its yuan-denominated crude oil contract
    for the first time. A few weeks later, China opened its yuan-
    denominated iron ore contract to international traders, and
    there is also talk about allowing international market
    participants to trade Chinese futures contracts in fuel oil,
    copper, and even soybeans.
        The opening of Chinese futures markets to international
    participation is part of a long-term strategy to expand China's
    influence over the pricing of key industrial, agricultural, and
    other commodities. This has competitive implications for the
    United States. We can be complacent no longer about the
    historical primacy of our derivative markets. We must make sure
    that U.S. markets are unrivaled in their openness, orderliness,
    and liquidity.
        And to do so, they must continue to be well regulated by an
    adequately funded U.S. regulator. Good regulation is our
    competitive advantage. The CFTC must have suitable resources to
    continue to supervise the world's most open, transparent,
    competitive, innovative, and financially sound derivative
    markets in the world. Full funding of the CFTC's budget request
    will support its mission to serve this vital national interest.
        Our fiscal year 2019 budget, which I promise you, Chairman,
    is not fiction, reflects the true needs of a policy-setting and
    civil law enforcement agency. It is bare bones, no waste,
    fiscally conservative, and mindful of taxpayer dollars. It is
    based on a rigorous review of the agency's functions and
    expenditures. It broadly assesses key areas of market
    innovation and financial technology, cybersecurity,
    cryptocurrencies and assets, econometric capability,
    clearinghouse supervision, monitoring of systemic risk, and
    vigorous enforcement.
        I humbly ask, Senators, for the tools to do our job to
    oversee the markets that Americans rely on each day. With the
    proper balance of sound policy, regulatory oversight, and hard
    work, America's deep, liquid, and sensibly regulated derivative
    markets will continue to meet the challenges of increased
    global competition in a new digital world to ensure a healthy
    U.S. economy where our citizens can flourish.
        Thank you.
        [The statement follows:]
              Prepared Statement of Hon. J. Christopher Giancarlo
                                  introduction
        Thank you, Chairman Lankford, Ranking Member Coons, and Members of
    the subcommittee. I appreciate the opportunity to appear before you
    today, along with my fellow colleague from the Securities and Exchange
    Commission (SEC), Chairman Jay Clayton.
        For more than a century, Americans have relied on U.S. derivatives
    markets to stabilize the cost of living. These markets allow farmers
    and ranchers to hedge production costs and delivery prices so that
    consumers can always find plenty of food on grocery store shelves. They
    are the reason why American consumers enjoy stable prices, not only in
    the supermarket, but in all manner of consumer finance from auto loans
    to household purchases. Derivatives markets 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.
        And not just consumers. More than 90 percent of Fortune 500
    companies use derivatives to manage commercial or market risk in their
    worldwide business operations.\1\ These markets allow the risks of
    variable production costs, such as the price of raw materials, energy,
    foreign currency, and interest rates, to be transferred from those who
    cannot afford them to those who can.
    ---------------------------------------------------------------------------
        \1\ See International Swaps and Derivatives Association, 2009 ISDA
    Derivatives Usage Survey, ISDA Research Notes, No. 2 (Spring 2009), at
    1-5, available at https://www.isda.org/a/SSiDE/isda-research-
    notes2.pdf.
    ---------------------------------------------------------------------------
        Even Americans not actively participating in commodity derivatives
    markets are affected by the prices generated by them. Commodity
    derivatives markets provide a critical source of information about
    future harvest prices. For example, a grain elevator uses the futures
    market as the basis for the price it offers local farmers at harvest.
    In return, farmers look to exchange prices to determine for themselves
    whether they are getting fair value for their crop. The U.S. Department
    of Agriculture (USDA) uses that same information to make price
    projections, determine volatility measures, and make payouts on crop
    insurance.\2\
    ---------------------------------------------------------------------------
        \2\ E.g., USDA, Informational Memorandum: PM-17-012, 2017 Crop Year
    (CY) Common Crop Insurance Policy and Area Risk Protection Insurance
    Projected Prices and Volatility Factors; Malting Barley Endorsement
    Projected Price Component and Volatility Factor; and Hybrid Seed Price
    Endorsement--Hybrid Seed Corn Prices (Mar. 1, 2017), available at
    https://www.rma.usda.gov/bulletins/pm/2017/17-012.pdf.
    ---------------------------------------------------------------------------
        In short, derivatives serve the needs of American society to help
    moderate price, supply and other commercial risks to free up capital
    for economic growth, job creation and prosperity. While often derided
    in the tabloid press as ``risky,'' derivatives--when used properly--are
    tools for efficient risk transfer and mitigation. It has been estimated
    that the use of commercial derivatives added 1.1 percent to the size of
    the U.S. economy between 2003 and 2012.\3\
    ---------------------------------------------------------------------------
        \3\ The Milken Institute found the following economic benefits to
    the U.S. economy from derivatives: ``[b]anks' use of derivatives, by
    permitting greater extension of credit to the private sector, increased
    U.S. quarterly real GDP by about $2.7 billion each quarter from Q1 2003
    to Q3 2012; [d]erivatives use by non-financial firms increased U.S.
    quarterly real GDP by about $1 billion during the same period by
    improving their ability to undertake capital investments; [c]ombined,
    derivatives expanded U.S. real GDP by about $3.7 billion each quarter;
    [t]he total increase in economic activity was 1.1 percent ($149.5
    billion) between 2003 and 2012; [b]y the end of 2012, employment had
    been boosted by 530,400 (0.6 percent) and industrial production 2.1
    percent.'' See Apanard Prabha et al., Deriving the Economic Impact of
    Derivatives, Milken Institute, at 1 (Mar. 2014), available at http://
    assets1b.milkeninstitute.org/assets/Publication/ResearchReport/PDF/
    Derivatives-Report.pdf.
    ---------------------------------------------------------------------------
        American derivatives markets are the world's largest, most
    developed, and most influential. Many of the world's most important
    agricultural, mineral, and energy commodities are priced in U.S.
    dollars in the U.S. derivatives markets. Dollar pricing of the world's
    commodities provides a tremendous advantage to American producers in
    global commerce, an advantage well recognized by competing economies
    abroad.
        American derivatives markets are also the world's best regulated.
    The United States is the only major country in the Organization for
    Economic Co-operation and Development to have a regulatory agency
    specifically dedicated to derivatives market regulation: the Commodity
    Futures Trading Commission (CFTC). The CFTC has overseen the U.S.
    exchange-traded derivatives markets for over 40 years. The agency is
    recognized for its principles-based regulatory framework and
    econometrically-driven analysis. The CFTC is recognized around the
    world for its depth of expertise and breadth of capability.
        This combination of regulatory expertise and competency is one of
    the reasons why U.S. derivatives markets continue to serve the needs of
    participants around the globe to hedge price and supply risk safely and
    efficiently. It is why well-regulated U.S. derivatives markets continue
    to serve a vital national interest--Dollar pricing of important global
    commodities.
        In short, America's well-regulated derivatives markets are a
    national advantage in global economic competition. However, we must not
    take this advantage for granted. In order for U.S. derivatives markets
    to remain the world's best, U.S. markets must remain the world's best
    regulated. To be the best regulated, U.S. derivatives markets must have
    an adequately funded regulator. The CFTC must have adequate resources
    to continue to serve its mission to foster open, transparent,
    competitive, and financially sound U.S. derivatives markets that remain
    the envy of the world.
        Today, I look forward to discussing the CFTC's resource
    requirements.
                                 budget request
        The fiscal year 2019 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
    and the public is protected from harm. As the workload of the CFTC has
    increased dramatically--exponentially--and globally--over the last 4
    years, we have been flat-lined in our budget--at $250 million in three
    of those years--and actually experienced a budget reduction of $1
    million this year. Even with the cuts to our budget, it is still
    incumbent upon us to evolve into a 21st century regulator because the
    demands on our agency from the markets don't stop as a result of budget
    cuts. In fact, those demands constantly increase.
        In order for the CFTC to fulfill its duty to oversee these vital
    derivatives markets in fiscal year 2019, the Commission is requesting
    $281.5 million and 716 full-time equivalents (FTE). This is an increase
    of $32.5 million and 46 FTE over the resources provided in the fiscal
    year 2018 enacted budget \4\ and is the same level of funding that the
    Commission requested in fiscal year 2018.
    ---------------------------------------------------------------------------
        \4\ Consolidated Appropriations Act, 2018, Public Law 115-141.
    ---------------------------------------------------------------------------
        The Commission's budget request for fiscal year 2019 reflects and
    builds on the efforts commenced in 2018. The budget request of $281.5
    million is the level of funding necessary to fulfill the CFTC's
    statutory mission.
        The CFTC budget request is bare-bones, no waste, fiscally
    conservative, and mindful of taxpayer dollars. It is based on a
    rigorous analysis of each of the agency's functions and expenditures.
    As with fiscal year 2018, we built the 2019 budget based upon the real
    needs of the Commission. Each dollar of this budget serves a specific
    purpose in pursuit of the agency's mission.
        During the budgeting process, we identified ways that the agency
    could be more efficient. Today, we are implementing changes necessary
    to realize those efficiencies. Departments are being reorganized and
    streamlined to increase productivity and provide long-term cost
    savings. We have also successfully negotiated the return of an entire
    floor of vacant office space in Kansas City back to our landlord. It
    will result in significant savings over the remaining life of the
    Kansas City lease. Going forward, we are committed to working with the
    General Services Administration in connection with all of the CFTC's
    regional office leases upon their expiration.
        In all matters of agency budgeting and expenditure, we seek to
    carry out the mission to foster open, transparent, competitive and
    financially sound markets, free from fraud and manipulation, in a way
    that best fosters broad-based economic growth and prosperity while
    respecting the American taxpayer through careful management of our
    agency resources.
        There are areas where the modest increase in the agency's budget
    that has been requested is necessary to fulfill the CFTC's statutory
    mission.
                         21st century financial markets
        Today, we meet at a tipping point. The future is devouring the
    past, forging a new agenda, and threatening to move ahead of
    regulators, financial institutions, and government. That is why we need
    21st century regulation for a 21st century world.
        Technology is leading us into a world that is much different than
    the world we knew 5 or 10 years ago, much less when the Commission was
    created in 1975. Much of our world today--from information to
    journalism to music to manufacturing to transportation to commerce to
    agriculture, even legal services--is undergoing a digital
    transformation. It therefore should be no surprise then that our
    financial markets are going through the same digital revolution.
        Technology is impacting trading, markets, and the entire financial
    landscape with far-ranging implications for capital formation and risk
    transfer. These technologies include machine learning and artificial
    intelligence, algorithm-based trading, data analytics, ``smart''
    contracts valuing themselves and calculating payments in real-time and
    distributed ledger technologies, which over time may come to challenge
    traditional market infrastructure.
        It is no surprise that these technologies are having an equally
    transformative impact on U.S. derivatives markets. One thing is
    certain: ignoring these changes in the market would be profoundly
    imprudent. They will not go away. Rather, the rate of change will
    accelerate.\5\ Nor is ignorance a responsible regulatory strategy. We
    cannot respond in a reactive way--chasing to catch up with technology.
    We must be proactive with a regulatory and statutory framework that is
    ahead of the curve, gives clarity and coherence to this often complex
    technology, and anticipates its evolution. The same technology can give
    us advantages in market regulation.
    ---------------------------------------------------------------------------
        \5\ See, e.g., Tyler Wells Lynch, Moore's Law and the Future of
    Information Technology,
    Reviewed, Sept. 3, 2013 (Moore's Law claims that the number of
    transistors that can fit into a single microchip, or integrated
    circuit, doubles roughly every 18 months), available at http://
    www.reviewed.com/features/moore-s-law-and-the-future-of-information-
    technology.
    ---------------------------------------------------------------------------
        Our task, as market regulators, is to set and enforce rules that
    foster innovation while promoting market integrity and confidence. To
    do so, we must have the resources and tools to keep pace with rapid
    evolution of the markets we oversee. Our budget request provides those
    resources and tools.
        Among other things, our requested budget will also allow us to
    address market-enhancing innovation and financial technology (FinTech).
    LabCFTC is the focal point of the CFTC's efforts to engage with FinTech
    innovation for the benefit of the American public. It helps us keep
    pace with changes in our markets, and proactively identify emerging
    regulatory opportunities, challenges and risks. We have situated
    LabCFTC within the CFTC's Office of the General Counsel. This allows
    LabCFTC to leverage the expertise of the CFTC's legal team to manage
    the interface between technological innovation, regulatory
    modernization, and existing rules and regulations.
        LabCFTC has hosted innovators across the Nation, ranging from
    startups to established financial institutions to leading technology
    companies. These outreach efforts are designed to make the CFTC more
    accessible to FinTech innovators, and to serve as a platform for
    informing the Commission's understanding of emerging technologies. The
    information gathered in these meetings also provides important insights
    to CFTC staff on market innovations that may influence policy
    development.
        In fact, through its engagement with--and study of--innovative
    technologies, LabCFTC was recently able to recommend new virtual
    currency surveillance tools to our Enforcement division. Our
    Enforcement team has been able to avail itself of this new technology
    and is now able to enhance certain surveillance and enforcement
    activities. This important development helps underscore the value of
    LabCFTC, and its effort to ensure that we are prepared to be a 21st
    century digital regulator.
        In addition to LabCFTC's domestic activities, the Commission
    continues to proactively work with international regulators on FinTech
    applications to coordinate approaches and to share best practices. In
    February of this year the CFTC and the UK's Financial Conduct Authority
    (FCA) entered into an arrangement to collaborate and support innovative
    firms through each other's FinTech initiatives--LabCFTC and FCA
    Innovate. This is the first FinTech innovation arrangement for the CFTC
    with a non-U.S. counterpart. We believe that by collaborating with the
    best-in-class FCA FinTech team, the CFTC can contribute to the growing
    awareness of the critical role of regulators in 21st century digital
    markets.
                                 cyber security
        Cyber security is critically important to protecting infrastructure
    and financial markets around the world. In fact, it may well be the
    most important single issue facing our markets today in terms of market
    integrity and financial stability.
        As market leaders and regulators, we must take every step possible
    to thwart cyber-attacks that have become a continuous threat to U.S.
    financial markets. Responding to this threat must take priority
    requiring more of our resources in fiscal year 2019. Our understanding
    of the cyber threat must develop in pace with the constant evolution of
    the threat itself. As we learn, we must engage in discussions with the
    DCOs about their cyber defenses and threat resiliency and recovery. It
    is through the oversight and examination of systems safeguards that the
    Commission helps to ensure that DCOs are prioritizing cyber security
    activities. With this budget request, the CFTC will be able to better
    undertake its duties to oversee cyber defense capabilities in the
    markets we regulate.
        The same vulnerabilities hold true in the case of futures
    commission merchants where customer accounts hold records and
    information that requires protection. We as an agency will work hard to
    ensure that regulated entities live up to their responsibility to
    ensure their IT systems are adequately protected from attacks and
    customers are protected.
        As an agency, the Commission is faced with growing pressure to
    protect terabytes of data and maintain compliance with the Federal
    Information Security Modernization Act and Office of Management and
    Budget mandates. Protecting our information comes with a price. Some of
    the requested funding will enable us to enhance our internal cyber
    security including implementing additional cyber attack sensors and
    defenses to further protect the market data we collect.
                        oversight of virtual currencies
        In fiscal year 2018, certain exchanges self-certified several new
    contracts for futures products for virtual currencies. These
    innovations impact the regulatory landscape and with this budget
    request, the Commission will invest more in new technologies and tools
    that support important surveillance and enforcement efforts.
        Under the CEA, Commission regulations, and related guidance,
    exchanges have the responsibility to ensure that their Bitcoin futures
    products and their cash-settlement process are not readily susceptible
    to manipulation, and DCOs have the responsibility of risk management to
    ensure that the products are sufficiently margined. The CFTC has the
    authority to ensure compliance with both. In addition, the CFTC has
    legal authority over virtual currency derivatives in support of anti-
    fraud and manipulation including enforcement authority in the
    underlying markets.
        Recently, CFTC staff issued an advisory \6\ giving registered
    exchanges and clearinghouses guidance for listing virtual currency
    derivative products. The guidance will help ensure that market
    participants follow appropriate governance processes with respect to
    the launch of these products. It clarifies CFTC staff's priorities and
    expectations in its review of new virtual currency derivatives to be
    listed on a designated contract market or swap execution facility, or
    to be cleared by a DCO. The advisory should help exchanges and
    clearinghouses effectively and efficiently discharge their statutory
    and self-regulatory responsibilities, while keeping pace with the
    unique challenges of emerging virtual currency derivatives.
    ---------------------------------------------------------------------------
        \6\ CFTC Staff Issues Advisory for Virtual Currency Products, May
    21, 2018.
    ---------------------------------------------------------------------------
        The CFTC has been in close communication with the SEC with respect
    to policy and jurisdictional considerations, and in connection with our
    recent enforcement cases. We have also been working with the U.S.
    Treasury and the Financial Stability Oversight Council. In addition, we
    have been in communication with our foreign counterparts through
    bilateral discussions and through international bodies like the
    International Organization of Securities Commissions.
                 economic modeling and econometric capabilities
        The budget request, if met, would boost the CFTC's ability to
    monitor systemic risk in the derivatives markets by increasing both its
    analytical expertise and its capacity to process and study the
    voluminous data provided by market participants since the passage of
    the Dodd-Frank Act. These investments will allow for the expansion of
    sophisticated quantitative and econometric analyses that are necessary
    for risk modeling, stress tests, and other stability-related
    evaluations, especially with respect to central counterparty
    clearinghouses. These analyses will, in addition, enhance the quality
    of CFTC policy development, rulemaking and cost-benefit considerations.
                       agency reform and the kiss project
        Since becoming Chairman, I have made efforts to normalize
    operations and practices, and found opportunities to reinvest and
    maximize current resources. That means a return to greater care and
    precision in rule drafting; more thorough econometric analysis; and a
    reduced docket of new rules and regulations to be absorbed by market
    participants.
        The KISS initiative launched last March included a review of rules
    and processes, and the invitation for public comment to collect ideas
    on how the CFTC can be a more effective regulator. The effort has
    produced a tiered list of significant actions that will lessen
    regulatory burdens.\7\ Recently, the agency unanimously approved an
    amendment replacing the complex and confusing lettering for defined
    terms with a simple alphabetical list.\8\ The replacement will remove
    unnecessary complexity from our rules and should help make regulatory
    compliance less burdensome.
    ---------------------------------------------------------------------------
        \7\ Michael Gill, Chief of Staff, U.S. Comm. Fut. Trading Comm'n,
    Remarks at the National Press Club, CFTC KISS Policy Forum, Washington,
    D.C. (Feb. 12, 2018), available at https://www.cftc.gov/PressRoom/
    SpeechesTestimony/opagill2.
        \8\ J. Christopher Giancarlo, Chairman, U.S. Comm. Fut. Trading
    Comm'n, We're Making Government Function More Efficiently for Taxpayers
    and Market Participants (Feb. 15, 2018), available at https://
    www.cftc.gov/PressRoom/PressReleases/pr7696-18.
    ---------------------------------------------------------------------------
        Internally, we have embraced the administration's Reform Plan
    concept and have implemented in-depth organizational reviews to ensure
    that the agency is staffed to provide the most effective services to
    the American taxpayer. This ongoing effort has already borne results.
    We are now leveraging knowledge gained from enforcement actions and
    surveillance efforts to enable the provision of more efficient and
    timely consumer education materials to the public. The Primer on
    Virtual Currency, Bitcoin webpage, and podcasts are just a few of the
    initiatives resulting from these efforts.
                                  swaps reform
        We now have more than 4 years of U.S. experience with the current
    CFTC regulatory framework for swaps and have learned from its varied
    strengths and shortcomings. Four years provides a significant sample
    size to evaluate the effects of these reforms and their implementation.
    Based on a careful analysis of that data and experience, we are in
    position to address flaws, recalibrate imprecision and optimize
    measures in the CFTC's initial implementation of swaps market reform.
        At the end of April, I released a White Paper on swaps reform
    called ``Swaps Regulation Version 2.0.'' The White Paper was co-
    authored with Bruce Tuckman, the CFTC's Chief Economist. This White
    Paper analyzes the range of academic research, market activity, and
    regulatory experience with the CFTC's current implementation of swaps
    reform. It explores and considers a range of improvements to the
    current reform implementation that is pro-reform, aligned to
    legislative intent, and better balances systemic risk mitigation with
    healthy swaps market activity in support of broad-based economic
    growth.
                    increased examinations of clearinghouses
        The Commission expects the number of derivatives clearing
    organizations (DCOs) to continue to increase in fiscal year 2019, with
    many expanding their business to other products and other jurisdictions
    around the world. As the number of DCOs increase, the complexity of the
    oversight program will increase. It is imperative that the Commission
    strengthen its examination capability to enable it to keep pace with
    the growth in the amount of swaps cleared by DCOs pursuant to global
    regulatory reform implementation. As the size and scope of DCOs have
    increased, so too has the complexity of DCO's risk management programs
    and liquidity risk management procedures. In addition, increased
    funding will enable the Commission to enhance its financial analysis
    tools used to aggregate data and evaluate risk across all DCOs.
                                  enforcement
        The day after the White House announced its intention to nominate
    me as CFTC Chairman, I spoke to hundreds of industry executives at the
    annual Futures Industry Association Conference. I issued a warning to
    those who may seek to cheat or manipulate America's derivatives
    markets. I said, ``[t]here will be no pause, let up or reduction in our
    duty to enforce the law and punish wrongdoing in our derivatives
    markets. The American people are counting on us.'' \9\ Through robust
    enforcement of our laws and regulation, we will continue to send a
    clear signal to the marketplace about our seriousness in punishing bad
    behavior and compensating victims.
    ---------------------------------------------------------------------------
        \9\ J. Christopher Giancarlo, Chairman, U.S. Comm. Fut. Trading
    Comm'n, CFTC: A New Direction Forward, Remarks of Acting Chairman J.
    Christopher Giancarlo before the 42nd Annual International Futures
    Industry Conference in Boca Raton, Florida (Mar. 15, 2017), available
    at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20.
    ---------------------------------------------------------------------------
        In the past several months the CFTC has filed a series of civil
    enforcement actions against perpetrators of fraud and market abuse
    involving virtual currency. These actions and others to follow confirm
    that the CFTC, working closely with the SEC and other fellow financial
    enforcement agencies, as well as with criminal enforcement agencies,
    will aggressively prosecute those who engage in fraud and manipulation
    of U.S. markets for virtual currency.
        In the fiscal year that ended September 30, 2017, the CFTC brought
    numerous significant actions to root out manipulation and spoofing and
    to protect retail investors from fraud. The CFTC also pursued
    significant and complex litigation, including cases charging
    manipulation, spoofing, and unlawful use of customer funds.
        As of this morning, the Commission has filed 13 manipulative
    conduct cases in 2018--the most manipulation cases the CFTC has ever
    filed in a single year, which was last year (12 cases).
        But it is not just about the numbers; it is about making our
    markets safer and removing bad actors from the marketplace. We believe
    that to adequately deter future misconduct, we must prosecute not just
    the companies responsible, but also the individuals involved in the
    wrongdoing. We also believe that, to maximize deterrence, we must work
    with our criminal law enforcement partners to ensure that wrongdoers
    face not just civil liability, but also the prospect of criminal
    prosecution and time in jail.
        In January 2018, the CFTC filed manipulation and spoofing cases
    against six individuals in coordination with the Department of Justice
    (DOJ) and the Federal Bureau of Investigation, which brought criminal
    charges against the same individuals. This constitutes the largest
    coordinated prosecution with the criminal authorities in the history of
    the CFTC. These prosecutions were equally significant for DOJ: in a
    press statement, the Assistant Attorney General characterized it as
    ``the largest futures market criminal enforcement action in Department
    history.'' \10\
    ---------------------------------------------------------------------------
        \10\ Acting Assistant Attorney General John P. Cronan Announces
    Futures Markets Spoofing Takedown (Jan. 29, 2018), available at https:/
    /www.justice.gov/opa/speech/acting-assistant-
    attorney-general-john-p-cronan-announces-futures-markets-spoofing.
    ---------------------------------------------------------------------------
        I also pledged last year that the agency would look to benefit from
    cooperation with civil and criminal capabilities of other Federal and
    State regulators and enforcement agencies. We have been making good on
    that pledge. Two weeks ago, I signed an important agreement, marking a
    milestone in the area of U.S. Federal and State financial fraud
    detection and prosecution. That was a memorandum of understanding (MOU)
    between the CFTC and individual State securities commissions will focus
    our collective resources to better uphold the law.\11\
    ---------------------------------------------------------------------------
        \11\ CFTC, NASAA Sign Agreement for Greater Information Sharing
    Between Federal Commodities Regulator and State Securities Regulators.
    ---------------------------------------------------------------------------
        This MOU establishes protocols and procedures, for the access, use,
    and confidentiality of information and treatment of non-public
    information in the course of law enforcement. It creates a framework
    for cooperation that will result in:

      --Leveraging State and Federal resources to support enforcement
            actions;
      --Enhancing the impact of enforcement efforts and their deterrent
            effect;
      --Encouraging the development of consistent and clear governmental
            responses to violations of the Commodity Exchange Act;
      --Preventing the duplication of efforts by multiple authorities; and
      --Facilitating vital exchanges of information and communications
            between the Commission and State Securities Administrators.

        Complementing its enforcement efforts, the CFTC has also
    strengthened its Whistleblower Program, and provided whistleblowers
    additional incentives to report wrongdoing to the CFTC. In May 2017, to
    further protect whistleblowers, the CFTC added protections prohibiting
    employers from retaliating against whistleblowers and from taking steps
    that would impede would-be whistleblowers from communicating with the
    CFTC about possible misconduct. In the near future, the CFTC also
    anticipates issuing its largest ever whistleblower awards. These
    incentives are working. In fiscal year 2017, the Commission received a
    record number of whistleblower reports--nearly twice as many as in any
    other year, and fiscal year 2018 is on track to receive nearly twice as
    many as in fiscal year 2017.
        The Commission takes its enforcement efforts very seriously and
    prides itself on being a premier Federal civil enforcement agency
    dedicated to deterring and preventing manipulation and other
    disruptions of market integrity.
        Full funding of our budget request will allow us to continue to
    carry out our mission in the area of enforcement.
                               rule harmonization
        Soon after Chairman Clayton was sworn in as SEC Chairman, we began
    discussing ways to ensure that our respective agencies are working
    together in areas where our regulatory interests are complimentary or
    overlapping. Now, almost 8 years after the Dodd-Frank Act officially
    required the CFTC and SEC to ``consult and coordinate . . . for the
    purposes of assuring regulatory consistency,'' \12\ I am pleased to say
    that both agencies are undertaking an active and cooperative review of
    our Dodd-Frank regulations. With the helpful assistance of Commissioner
    Quintenz, CFTC staff has been actively engaging with our SEC
    counterparts--and jointly with outside stakeholders--to identify areas
    ripe for further alignment. Our agencies are also working to finalize
    an updated information-sharing agreement that will help us further our
    collaborative efforts in the swaps and FinTech age. I believe that
    Congress and the American people expect regulators to communicate and
    coordinate closely on issues where our regulatory interests are
    complementary or overlapping. I am optimistic this review process will
    lead to regulatory changes that will enhance our oversight efforts
    while reducing unnecessary complexities and lessening costs for both
    regulators and our shared market participants.
    ---------------------------------------------------------------------------
        \12\ Section 712(a) of the Dodd-Frank Wall Street Reform and
    Consumer Protection Act, Public Law 111-203 (July 21, 2010).
    ---------------------------------------------------------------------------
                              foreign competition
        As you may know, in the first quarter of this year, the Shanghai
    International Energy Exchange launched a yuan-denominated crude oil
    contract allowing non-Chinese market participants to trade for the
    first time in Chinese commodity markets. Early in the second quarter,
    China opened a yuan-denominated iron ore contract to international
    traders. There is also talk of China allowing international market
    participants to trade Chinese futures contracts in fuel oil, copper and
    even soybeans.
        China is the world's largest consumer of oil and fuel and a major
    global purchaser of iron ore for its world leading steel production.
    The opening up of China's domestic futures markets to international
    participation is part of a long term strategy by the Chinese government
    to expand China's influence over the pricing of key industrial
    commodities.
        The development of Chinese commodity futures markets as viable
    regional price benchmarks for key industrial commodities has
    competitive implications for the United States. We cannot be complacent
    about the historical primacy of our derivatives markets. Our best
    response for U.S. commodity market participants and, indeed, for global
    markets, is to ensure that derivatives markets in the United States are
    unrivaled in their openness, orderliness, and liquidity. This requires,
    of course, that the regulation of U.S. markets continue to be of the
    highest quality.
        To achieve this regulatory objective, U.S. derivatives markets must
    have an adequately funded regulator. The CFTC must have suitable
    resources to continue to serve its mission to foster open, transparent,
    competitive, and financially sound U.S. derivatives markets that remain
    the envy of the world. Full funding of the CFTC's budget request will
    allow it to fulfill its mission to serve this vital national interest.
                                   conclusion
        Members of the subcommittee, we meet one day after the anniversary
    of the ``miracle at Dunkirk,'' the rescue of the British and French
    forces trapped and then improbably evacuated in 1940. That may be the
    single most important event of the Second World War, enabling Europe to
    hold on until America entered the war.
        Like many of you, I was struck by the recent movie about Winston
    Churchill, ``Darkest Hour.'' Faced with the threat of catastrophe,
    Churchill told the nation, ``We shall not fail or falter; we shall not
    weaken or tire . . . Give us the tools, and we will finish the job.''
    When those tools came (and they did come), they were American tools
    that got the job done.
        We need the tools to do our job of protecting the markets that
    Americans rely on each day. With the proper balance of sound policy,
    regulatory oversight, and hard work, America's deep, liquid, and
    sensibly regulated derivatives markets will allow us to meet the
    challenges of the future and ensure a healthy U.S. economy where our
    citizens can flourish.
        Thank you.

        Senator Lankford. Thank you both very much on this.
        I am going to defer my questions to the end to give time
    for other Members to be able to step in earlier on this. So,
    Senator Van Hollen.
        Senator Van Hollen. Thank you, Mr. Chairman.
        Again, welcome to both of you.
        Mr. Commissioner Clayton--Chairman Clayton, I have got a
    question related to conduct and appropriate conduct by members
    of the SEC because there were some recent alarming reports with
    respect to an exchange between one of the commissioners,
    Commissioner Piwowar, and Citibank.
        And my first question to you is, would you agree that it
    would be inappropriate for a member of the SEC to suggest that
    the way a regulated entity was treated depended on the position
    that entity took on a business decision outside the purview of
    the SEC?
        Mr. Clayton. Senator, we interact with a number of market
    participants. What I can tell you is how I approach those
    interactions and that is in a very open, fair, and transparent
    way.
        Senator Van Hollen. I am not suggesting otherwise, Mr.
    Chairman, with respect to any conduct.
        I will cut right to the chase. There were reports. Senator
    Kennedy and I are both in the Banking Committee. As you know,
    Citigroup as a matter of policy said to its retailers that they
    should not be using Citigroup services to sell weapons that had
    not gone through a criminal background check, where the buyer
    was under 21. And it has been reported--I assume you have read
    the reports--that one of the commissioners, Commissioner
    Piwowar, met with Citigroup at their request on a derivatives
    regulation issue, and in the course of that conversation,
    Commissioner Piwowar chewed them out for the position Citigroup
    had taken on this issue outside the purview of the SEC.
        And so my question to you is, are you aware of those
    reports? Do they concern you? And have you asked the Inspector
    General to determine whether or not that was a violation of SEC
    conduct and rules?
        Mr. Clayton. Senator, I am aware of those reports. I have
    not asked the Inspector General to investigate those reports,
    and I do not think that this is the appropriate forum to get
    into that. But I understand your comments and your concerns.
        Senator Van Hollen. I appreciate that. My concerns are
    shared by a number of our colleagues, and I think you will be
    receiving a letter in your capacity as chairman. But we are
    also going to be asking the IG to take a look at this because
    regulatory bodies should not be using their authority to try to
    assert the personal opinions of the members. And I think we
    share that view. I just want to give you a heads-up on that
    issue. This has nothing to do with anything you did or said in
    your personal capacity, but I just wanted to raise it with you
    because the integrity of the process, whether it is CFTC, SEC,
    any regulatory commission, is that they should not be using the
    power they have over regulated entities on issues outside their
    jurisdiction. We may all disagree with the policy position
    Citigroup took, but I do not think we should disagree on using
    that leverage.

                                 CYBERSECURITY

        Let me ask you a question on cybersecurity. And we have had
    this exchange in the Banking Committee. I know you are
    concerned about the issue of timely disclosure by entities
    under the jurisdiction of the SEC that have been hacked. We
    have talked about Equifax in the Banking Committee.
        As I am sure you are aware, a report from the White House
    Council of Economic Advisors back in February actually
    identified concerns at the SEC specifically. I just want to
    read from their report. Quote: The effectiveness of the SEC's
    2011 guidance is frequently questioned. There are concerns that
    companies under-report events due to alternative
    interpretations of the definition of ``materiality.''
        This is a concern I share. I was somewhat disappointed to
    see the regulations coming out from the SEC I think in April
    after this February report that simply sort of adopted the 2011
    recommendations that were criticized in the SEC report. And I
    wonder if you would be willing to take another look at this
    with us because the Equifax example is one that I think shows
    that there is a problem when materiality can be so loosely
    defined that different folks under your regulatory purview have
    vastly different interpretations.
        Mr. Clayton. I understand everything you have said. It is a
    complex issue. Let me try and address a few things.
        First, you will note that we brought a very significant
    enforcement action in this regard against the company formerly
    known as Yahoo for their failure to disclose in this area. It
    was clear that the information that they had was material and
    should have been disclosed.
        Second, I think an issue that we have talked about in the
    past is trading during the period of time that a company
    identifies an issue, it is clearly important--let us use the
    word ``material'' for sake of argument--and then it is
    disclosed. I am very willing to work with you on that issue
    because, as I have testified in the past, I think it is good
    corporate hygiene that during that period, senior officers
    should not be trading in securities whether they themselves
    know or do not know of this event. In that area, I am willing
    to work with you.
        Senator Van Hollen. I appreciate that. Forgive me, Mr.
    Chairman. That is after the company itself has already
    determined materiality between that time and disclosure. But
    there is still a lot of ambiguity over what constitutes
    materiality.
        I would only point out that with respect to OMB, a Federal
    agency, there are clear guidelines for their timeline for
    reporting hacks, for example, into the Office of Personnel
    Management system that we saw a couple years ago.
        So I think we should have a little clearer definition of
    what constitutes materiality in the context of these cyber
    breaches.
        Senator Lankford. Great.
        Senator Kennedy.
        Senator Kennedy. Thank you, Mr. Chairman.
        Chairman, Chairman, welcome.
        Chairman Clayton, when an American corporation, including
    but not limited to a broker-dealer, violates the securities
    laws of another country, are we made aware of that? Do they
    have to report their violation to you?
        Mr. Clayton. Generally those other countries do not have
    statutes that would require their enforcement authorities to
    notify the Commission.
        Senator Kennedy. What about the American corporation that
    violated the foreign law? Do they have to tell you?
        Mr. Clayton. Is there an absolute obligation to tell us? I
    do not believe so. Are there disclosure obligations that they
    have that would trigger a requirement to make a disclosure?
    Yes. And as a matter of policy, do American public companies
    that have a foreign enforcement problem contact us to let us
    know? They generally do and they should.
        Senator Kennedy. Have you heard of a company called Real
    Gold Mining, Limited that was suspended from trading on the
    Hong Kong Stock Exchange? Does that ring a bell?
        Mr. Clayton. Senator, that company does not ring a bell,
    and I want to be careful not to talk about any pending
    enforcement actions.
        Senator Kennedy. Well, Hong Kong fined an American
    corporation, Citigroup, $7.26 million for misleading statements
    during the IPO of Real Gold Mining, Limited. And Real Gold
    Mining, Limited ended up being suspended from trading on the
    Hong Kong Stock Exchange. Do we know if any American investors
    were hurt?
        Mr. Clayton. Senator Kennedy, I do not know about that
    specific situation. But I can tell you that if there was fraud
    on a large foreign stock exchange, it is likely that directly
    or indirectly an American investor has been harmed.
        Senator Kennedy. Well, would you look into this? I mean,
    $7.26 million is quite a fine. And I do not know the facts of
    the case. I read about it in the ``Wall Street Journal.'' But I
    would be interested to know that if Citigroup or other
    corporations violate the securities laws of another country,
    how we go about determining in a global economy whether
    American investors were injured as well.
        Mr. Clayton. Your question, including as a policy matter,
    is a very good one. American investors, estimates vary, have at
    least $9 trillion invested outside the United States. One of
    the things that is important to me is what are we doing at the
    SEC to ensure that when that money goes outside the United
    States, investors are getting protections that are similar to
    what they expect at home. I can tell you that the SEC and the
    CFTC work closely together mostly through the International
    Organization of Securities Commissions (IOSCO) but also through
    the Financial Stability Board (FSB) with that in mind because
    American investors send a lot of money outside the United
    States.
        Senator Kennedy. Well, if your Inspector General goes to
    work on the issues that the distinguished Senator talked about,
    I would also like him to look into why, because of the greed of
    a handful of companies, in 2008 it caused the entire banking
    system and almost the world economy to crash. Not a single
    solitary member of senior management went to jail. You might
    ask him to take a look at that too.
        I would like the thoughts of both of you about the Volcker
    Rule. I will hush. We got 34 seconds. If you could just tell
    me--I know there are changes being made. We have not had a
    recession since 2008. Are we making changes too quickly? I am
    not saying we are. I am just asking your opinion. Mr. chairman.

                                  VOLCKER RULE

        Mr. Giancarlo. Thank you for the question. We monitor
    markets very, very carefully. Just last week, when Italian
    bonds went into a mini-crisis, we saw a real strain in those
    markets. In February, when the VIX, Volatility Index, when
    interest rates had the prospect of rising in that index, we saw
    a strain in the markets. And what we observe is not an
    abundance of high-level market-making. Banks have moved out of
    the market. And one of the reasons is the Volcker Rule. And one
    of the reasons is a presumption, not in the way it is written
    in the law, but the way it has been adopted by the agencies, a
    presumption that activity is proprietary trading unless proven
    to be market-making. And that is an odd presumption.
        The change that our agencies proposed are to remove some of
    the bias against market-making. I think that is healthy for
    markets. The core principle, however, remains.
        Senator Kennedy. Because there is a blurred line between
    proprietary trading and market-making.
        Mr. Giancarlo. Right.
        You know, I spoke to Paul Volcker about this a year and a
    half ago, and he admitted. He said, look, the Volcker Rule is
    an easy concept but it is hard to do in practice. In other
    words, let us separate proprietary trading, which banks should
    not do with depositors' money, from market-making, which is a
    legitimate function. But he admitted that getting the
    separation right is a challenge.
        What was done in the first crack here was to put in a
    presumption that things are impermissible proprietary trading.
    By removing the presumption, we are still keeping the
    prohibition on impermissible proprietary trading using
    depositors' funds. And I think that is the right thing.
        So it will be said that what has been proposed is a
    rollback and going back to the crisis days, but it is really
    not. It is really a very measured moderate response, and I take
    it as a good sign that Marty Gruenberg from the FDIC supports
    the proposal that was put forward by at least our agency
    yesterday.
        Senator Kennedy. Thank you, Mr. Chairman.
        Senator Lankford. Before I move to Senator Boozman,
    Chairman Clayton, would you respond on the Volcker Rule as
    well? Both of you have been asked about it. I know that will be
    a question. Then I am going to come straight to Senator
    Boozman.
        Mr. Clayton. Sure. Let me just supplement what Chairman
    Giancarlo said, which is this is a very complex area, important
    area, but an area with a great diversity of firms involved.
    What I am very happy with is that we are taking the small and
    medium-sized financial institutions which are--tell me if I
    have this right--less than 5 percent of trading activity, in
    fact, and we are taking a tiered approach instead of a one-
    size-fits-all approach. I think that is wholly appropriate in
    this area. I think that the compliance burden that fell on
    those institutions that are the small and mid-sized banks was
    greatly out of proportion with their trading activity. Other
    than that, I am fine with everything Chairman Giancarlo said.
        Senator Lankford. Thank you.
        Senator Boozman.
        Senator Boozman. Thank you, Mr. Chairman.
        And thank both of you all for being here. We really do
    appreciate your hard work and your guidance in these areas.

                                   RULE 30E-3

        Before I get into my questions, Chairman Clayton, I
    understand the SEC adopted the rule 30e-3 earlier this morning.
    I appreciate the Commission taking into account real concerns
    that my constituents and stakeholders not only in Arkansas but
    across the country had with the rule and your efforts to
    address some of the issues.
        However, I still have concerns that the 30e-3 rule that was
    approved today, an opt in rather than an opt out for paper
    reports, will have far-reaching consequences for many of my
    constituents that are elderly, many that do not have reliable
    access to broadband Internet or simply want hassle-free paper
    reports. I think that the technology is getting there, but as
    you travel through rural America, it is still a huge problem
    for some.
        Mr. Clayton. I recognize those concerns. Our staff
    recognized those concerns. And the rule that was approved is, I
    would say, a substantial departure from what had originally
    been proposed. We have a 2-year phase-in period. The earliest
    that a fund complex or company could switch to an opt in to
    paper is 2021, and that is only after they have provided
    extensive notice and opportunity for their investors to choose.
    This is also part of an overall assessment of investor
    experience that we are going through. So we think that this is
    the right move, but we do not think it is one that should be
    done hastily. And we think that we should be providing the very
    constituents that you mentioned every opportunity to continue
    to receive reports as they receive them today in paper.

                       WELL-REGULATED DERIVATIVES MARKETS

        Senator Boozman. Thank you very much.
        Mr. Giancarlo, in your testimony, you mentioned the
    Shanghai International Energy Exchange launched yuan-dominated
    crude oil and iron ore contracts allowing non-Chinese market
    participants to trade in Chinese commodity markets for the
    first time. Can you talk to us a little more about the
    importance for farmers and end users for the commodities that
    they trade to be priced in U.S. dollars and not other
    currencies?
        Mr. Giancarlo. Indeed. You know, I have spent a lot of my
    past 4 years on the Commission meeting with the farmers that
    use our products. And I will often point out to them. I say, do
    you understand that compared to farmers all over the world, you
    have one advantage that you probably do not think about, but it
    is an enormous advantage? And that is, most of your production
    is priced in U.S. dollars. When you compete against an
    Argentinean wheat grower or an Australian wheat grower, their
    production is priced in dollars, not in their native currency.
    That is a tremendous advantage.
        We are the world's largest food producer. We are becoming
    the world's largest energy producer. The largest consumer,
    however, is China, the largest consumer of energy products, the
    largest consumer of iron ore for purposes of their world-
    leading steel production, the largest consumer of soybeans. I
    understand China consumes 60 percent of the world's soybeans.
        So they are sitting there saying we are the largest
    consumer. Why are we paying in dollars for these core
    commodities? And so it is part of their grand strategy to
    become the world's leading economic power to see the transfer
    of the pricing mechanism of these core materials, these core
    commodities that they consume from dollars into their currency.
    Now, that may be decades away, but these steps that they are
    taking in the last few weeks are very much part of that
    strategy. We should no longer take for granted that for now and
    for all time, these commodities that we produce and lead the
    world in production will remain priced in dollars for all
    eternity. There is nothing in that.
        The one advantage we have, I believe, is not only being a
    large producer, we have the best regulated markets. The price
    mechanism that is set in Chicago and New York for these
    commodities is overseen by our agency. And I truly believe we
    are the world's best regulator at this. There are real
    deficiencies in the way other regimes go about regulation,
    including in China. And we saw, when there were problems in
    their market a year or so ago, their very heavy-handed approach
    to addressing those problems was not the approach we take. We
    take a much more well-informed and appropriate, principle-based
    approach. And I think that is one of the reasons why the
    pricing mechanism is here, one of the reason why the world
    looks to U.S. markets to price these core commodities.
        Senator Boozman. So in not taking this for granted, you
    mentioned the ability that we have to run a very orderly
    system. Are there other things that we need to be doing along
    that line?
        Mr. Giancarlo. Look, I do not think we can stop China from
    offering these products around the world. I do not think we can
    do anything to stop the amazing growth of their economy. It is
    their right to do that, and they are doing some brilliant
    things.
        What we can do is just what we do but even better. And I
    think one of those advantages--and I said in my opening
    testimony good regulation is a national competitive advantage.
    And I think that is why I humbly ask that our budget request be
    fulfilled so that we can continue to do what we do but do it
    even better.
        Senator Boozman. Very good. You make a good point. Thank
    you, sir.

                        FISCAL YEAR 2019 BUDGET REQUEST

        Senator Lankford. Thank you.
        Let me keep going with that theme of your budget request, a
    $32.5 million increase on it. Do you consider this bringing up
    to the level that you think it should be and is this
    sustainable? Is this a 1-year bump? Is this bringing it up to a
    new level? What are your expectations for the next several
    years on budgeting?
        Mr. Giancarlo. Thank you for that.
        As you know, Chairman, we have been flat-funded----
        Senator Lankford. You have for several years.
        Mr. Giancarlo [continuing]. For several years, and in fact,
    decreased last year.
        This increase of roughly 13-14 percent will bring us to a
    level that had we seen incremental increases during that time,
    we would be there. Should you see fit to fund our full request,
    I do not see similar requests of that magnitude going forward.
    I see incremental increases going forward. So our request is
    really to address some of the challenges we have had over the
    last few years and some of the cuts we have had to make in
    technology, in supervisors. We have some real, quite mission-
    critical shortfalls in cyber examiners, in technologists, areas
    where we really should not be falling behind, and where we have
    been. We are effectively in a hiring freeze and have been for
    several years, and as attrition works its way through the
    Agency, you know it is very uneven. In some critical areas, we
    have not been able to backfill, and we need to do that. So this
    funding will bump us up to where we need to be, and then I see
    incremental increases thereafter.
        Senator Lankford. Do you see the increased funding--let us
    just take the technology side of it--on equipment in technology
    or in personnel in technology?
        Mr. Giancarlo. Both. So technological skills are in short
    supply, and the people you need for cyber--the going bid for
    their services is enormous. So to fill those positions is
    critically important. It is a combination of skilled people and
    competent technology. Again, once we catch up, then our needs
    going forward should be incremental.
        Senator Lankford. For the SEC, the same issue on
    technology. What do you expect as far as modernization efforts?
        Mr. Clayton. Well, as I mentioned, I thank you for the
    additional funding that we needed to lift not only our
    cybersecurity game but effectively our advancement or, if you
    want to say it in the negative way, our retirement of legacy
    systems. Part of cybersecurity and good cyber hygiene is not
    only what is my cybersecurity protection, but it is also
    rolling off your legacy systems that were built with less
    protections and replacing them. And we are able to do that. I
    think we are in a good place, but I want to be clear. When I
    say we are in a good place, we are in a good place from funding
    because I know where to put the dollars. We are improving our
    cybersecurity risk profile, but we have work to do and I expect
    it to be a continuing journey.
        Senator Lankford. So one of the things that you and I have
    talked about is not just cybersecurity and the right software,
    right hardware, right personnel and process, but also how much
    information do you really need to be able to hold. That becomes
    the threat on it. Obviously, with the breach of the Edgar
    system before, it raises new questions.
        So where are you as far as what information you really need
    to have accessible at that point?
        Mr. Clayton. Let me put that into two categories.
        Senator Lankford. Sure.
        Mr. Clayton. Personally identifiable information, PII.
    Following the breach, we did a review of the PII that we take
    in, and we have eliminated taking it in in areas where we do
    not need it. And we continue to approach that issue, and I
    expect to continue to approach that issue in the same way. We
    are not going to take that kind of retail investor information
    in unless we need it to fulfill our mission.
        More general market information, the same approach. Like we
    discussed, why would the Commission create a risk unless we
    need it to fulfill our mission. So we are looking at the market
    information and the company information that we take in that is
    non-public. Does the Commission need it? Do we need it at the
    time we are taking it? Because over time, the value of that
    information to, for lack of a better term, ``bad guys''
    diminishes. So we are looking at those issues as well.
        Senator Lankford. Let us talk a little bit about staffing
    changes. You mentioned quite a bit as far as staffing changes
    in different key areas. Which area or office, as you look at
    the priorities of adding 100 different positions basically back
    in, becomes the top priority for you? So when you are talking
    about we have got a lot of priorities, this one goes first,
    where does that land for you?
        Mr. Clayton. Let me give you four, if you do not mind, four
    top priorities.
        First, we talked about IT. There are a few positions there
    that we want to fill.
        Let me go to the programmatic ones. Enforcement and
    inspections.
        In enforcement, we have probably had the most significant
    attrition. I know that we can add value there.
        Inspections, the number of investment advisers that are
    operating has increased. Therefore, our obligation to continue
    to inspect them has increased. The Commission is doing a lot
    with risk-based inspections, but we also need smart, competent
    people to do it.
        Lastly is in trading and markets. As I have talked about,
    our markets have evolved a great deal. I want to make sure that
    we have the people in place. I will give you an example. Fixed
    income is moving from what I will call human oral trading to a
    great deal more of electronic trading. I want to make sure that
    we have the people who can cover that transition. It is a
    transition that is akin to what has happened in the equity
    markets but it is not going to be the same. And we need some
    expertise in that area as well.
        Senator Lankford. So the challenges you have is the IG went
    back and evaluated, a very not-fun evaluation on human capital
    management and pressed on SEC. This was the quote. SEC lacks
    assurance that its hiring specialists have the necessary skills
    to hire and promote the most qualified applicants in accordance
    with key principles of an effective control system.
        I know you have seen that and this has already been a work
    in process. But with adding an additional 100 people,
    especially in high-end areas like that, how do you feel at this
    point about hiring specialists and those individuals that are
    managing human capital?
        Mr. Clayton. I am going to give you what may sound like a
    simplistic answer but it is one that I really believe in. Good
    people hire good people.
        Senator Lankford. I would agree. That is not overly
    simplistic. That is good common sense.
        Mr. Clayton. I think we have good people in place in those
    programmatic divisions that I mentioned.
        Senator Lankford. Is that a transition from what the IG was
    concerned about before?
        Mr. Clayton. Chairman, I do not know if that is a
    transition, but I have a great deal of confidence that the
    people who are now heading those divisions know how to identify
    talent, and I am going to leave them to do it.
        Senator Lankford. Fair enough.
        Let me if there are other Senators who have a second round
    of questions. Senator Kennedy? All right.
        I have got a stack of a second round here that I want to go
    ahead and jump into.

                                PERSONNEL NEEDS

        Mr. Giancarlo. Senator Lankford, may I just actually answer
    the question you asked my colleague, Jay Clayton, about
    personnel----
        Senator Lankford. Sure.
        Mr. Giancarlo [continuing]. Where we are looking for it?
        In our request, we request 46 FTEs, and I would just like
    to break those down for you to help you understand how we think
    about staffing.
        I put our needs into three buckets: a third, a third, a
    third.
        The first third are personnel for what I call prevention.
    Senator Kennedy talked about the last crisis. We think about
    what a future crisis might look like and think about how we can
    do something about prevention so it does not happen, not that
    we have a crystal ball. But when we think about prevention, we
    think about it in two areas. One is cyber and one is in our
    clearinghouses. You know, one of the effects of Dodd-Frank was
    to supersize our clearinghouses with swaps clearing. How do we
    get ahead in that? And it is vitally important we have the
    examiners to do the exams and to go into the detail. So maybe
    we find a problem before it becomes a crisis. In the areas of
    cyber, we desperately need to add additional personnel to do
    quality cyber exams of cyber defenses in our global
    clearinghouses and our futures exchanges and observe what their
    other defenses are as well.
        And then a second bucket is how do we be more forward-
    looking. And that is where we really need more technologists to
    understand the way our markets are going digital by the minute
    and economists to understand the dynamics of algo trading and
    other impacts on the marketplace.
        And then the last third is to just fill in gaps that have
    emerged over the last 4 years of flat funding and a hiring
    freeze. Just to give you an example, we have not had a full
    Commission for 4 years now, but we face the prospect very soon
    of having a full Commission, once two new commissioners arrive.
    Those commissioners will need to be staffed. Those staffs will
    come out of our budget. Just as our budget has gone down for
    fiscal year 2018, we may have two new commissioners arrive that
    we will need to staff up. So just filling in the gaps there,
    and there are other areas as well.
        So that is our 46 FTE budget proposal. Thank you for giving
    me the opportunity to explain it.
        Senator Lankford. No, no. Glad to. Thanks for the insight
    on that.

                          SWAPS REGULATION VERSION 2.0

        Help me understand a little bit. You put out a white paper
    on swaps regulation and swaps reforms that is pretty sweeping
    to be able to take a look at and say where could we go and what
    does this really mean in implementing issues and margins and
    all kinds of things. Walk us through that and what would be the
    financial needs as far as staffing around that as well?
        Mr. Giancarlo. Thank you for that.
        You know, I am maybe a bit of a rare breed. When Dodd-Frank
    was passed, I actually publicly stated I thought Title VII
    worked. I said Congress got that part right, the swaps reforms.
    And I said that after 14 years in the swaps industry. I knew
    firsthand the shortcomings in the market structure. I also knew
    how the market worked and I knew what worked well. And so I was
    a keen observer of how the CFTC and other Federal agencies
    implemented Title VII. And at the time, I wrote a white paper
    in 2015 laying out areas where I thought the agency got it
    right and areas where--and I thought now coming in as chairman,
    it was time to update that and reflect on what I have now seen.
    We have got 4 years of experience with our swaps reforms at the
    CFTC.
        Again, I still believe Congress got it right, and I think
    in some cases, the agency has been extraordinarily successful
    in its work. So the clearing mandate, implemented by my
    predecessor by two, Gary Gensler, has worked extraordinarily
    well. But that has led to second order impacts. We have
    supersized some of the world's clearinghouses. What are the
    impacts of supersizing those clearinghouses? How do we oversee
    them? How, in the event of a crisis, do we make sure they are
    able to recover, or if they are not able to recover, how are
    they then resolved and how are all their accounts put back into
    good order? So we address that in this white paper.
        The swaps reporting mandate, was I think actually the most
    important mandate to come out of Dodd-Frank, and yet 10 years
    after the crisis, 8 years after Dodd-Frank was passed, we still
    do not have a clear and composite picture of the counter-party
    credit risk of one financial institution to another because of
    its swaps book. How can we make that swaps reporting a reality
    so we can actually use it to signal whether risk is building up
    in the system? And I lay out ideas for that as well.
        In the area of swap dealer capital, one of the big problems
    I believe in the swaps reforms--they are actually biased
    against swaps. And part of the problem there is that we
    continue to rely on the notional amount of swaps, which is why
    when people talk about the swaps market, they talk about it in
    hundreds of trillions. We recently introduced some research
    through our Office of Chief Economist that says when you
    actually net that down, the swaps world looks a lot like other
    large markets like the U.S. Treasury market and not like some
    gargantuan marketplace. It actually falls into a logical
    proportion to other key global markets. And once it is put into
    proportion, maybe then we can have regulations that reflect its
    actual size and not fears about it overwhelming the global
    economy. So that is what we tried to do in this.
        It is very much a forward-looking work. It does not lay out
    things to be implemented next month or next week, but it lays a
    forward path to what I think is a balanced and healthy approach
    to swaps regulation, one that is not biased against derivatives
    which, as I explained in my opening remarks, are very important
    to the U.S. economy. I think our leadership in the global swaps
    market underpins the U.S. dollar as the world's reserve
    currency, and I think we need to maintain that edge, but we
    need to do it in a balanced, thoughtful, intelligent, and well
    regulated fashion.

                                   DE MINIMIS

        Senator Lankford. So you have also put out a recent
    conversation on registration as a swaps dealer to an $8 billion
    notional value rather than a $3 billion. Walk us through the
    why and the what and what do you think is the effect of that?
        Mr. Giancarlo. When this original rubric was set in place,
    the $8 billion, then falling to $3 billion, there was actually
    very little data. I would say it was an educated guess by the
    agency. Now we have years of data, and have done a very, very
    thorough analysis. And what we have found is that if the $8
    billion were to fall to $3 billion, we would only gather less
    than 1 percent more swap dealing activity. The fact of the
    matter is that we probably would not gather it because that
    dealing activity is done by small, local power utilities,
    agricultural co-ops, small regional banks. And in the last 4
    years, I have met with many of them, and they all tell me if
    that level drops down to $3 billion, they will drop their
    dealing activity from 7.9 to 2.9 because they cannot bear the
    cost of becoming a swap dealer. It was estimated recently that
    the cost of being a swap dealer is over $300 million per
    entity, and these small power utilities cannot do that. And so
    the cost-benefit analysis of capturing potentially another less
    than 1 percent and imposing those costs just did not make
    sense. All we would be doing is rewarding the large Wall Street
    banks that can afford that $300 million to be a swap dealer. We
    would be hurting these small, local liquidity providers and
    helping the large banks.
        Senator Lankford. So how often does that $8 billion amount
    need to be revisited?
        Mr. Giancarlo. So what we adopted yesterday on a two-to-one
    vote of the Commission is a proposed rule to keep the level at
    the $8 billion and not drop it down to $3 billion. And as I
    said yesterday, I believe that is right. I think it is right
    for the U.S. economy. I think it is the right level. We will
    still be registering the Wall Street banks, and at the end of
    the day, it was the Wall Street Reform Act. It was not the
    Small Business Reform Act.
        Senator Lankford. My question is if we do not revisit that
    on a regular cycle, then as time goes on, you are capturing
    more and more small businesses that do not need to be engaged
    in that.
        Mr. Giancarlo. We should, indeed, revisit that on a regular
    cycle using up-to-date data.
        Senator Lankford. Do you have a plan on how that should be
    or a recommendation on how often that should be revisited?
        Mr. Giancarlo. We did it after 4 years. I think that gave
    us a good outcome. Now, we have not set that as a regulatory
    objective, but I think something like that, maybe every 5
    years, might be the right time period.
        Senator Lankford. Thank you.

                                 CRYPTOCURRENCY

        Let me ask you something simple for both of you. What are
    we going to do on cryptocurrencies? This is not complicated at
    all. What is the plan? What is the direction? What is the
    staffing need that you have and the regulatory authority that
    is needed?
        Mr. Clayton. Let me divide it into two buckets:
    cryptocurrency as--or crypto-asset--we will call it a currency
    as a replacement or substitute for the dollar, the yen, and
    then what we call ICOs, initial coin offerings, a crypto-asset
    that is a security.
        The ones that are the substitutes--the SEC does not
    regulate. We regulate securities transactions and persons who
    issue and trade in securities. Both of us have mentioned that
    that space is a space where there is no direct regulation of
    those cryptocurrencies. And it makes sense that there is not
    because these were all sovereign-backed. Now we have a
    purported substitute for the sovereign-backed currencies. There
    is not a specific regulatory framework in place. There is anti-
    money laundering. There are a number of other statutes that
    would touch on this, but no comprehensive body of regulation.
    We need to watch this space for that and many other reasons.
        Mr. Giancarlo. I will tell you the last 18 months for
    Chairman Clayton and I in the area of cryptocurrencies has been
    what the Grateful Dead called a ``Long Strange Trip.'' We had
    to come up to speed awfully quick in this area that was
    developing very fast in Chairman Clayton's case, in the SEC's
    case, to make the world understand that unregistered ICOs would
    not be tolerated. And I think that message has been delivered
    loud and clear. In the case of the CFTC we will work within our
    unique statute which allows for self-certification by our self-
    regulatory organizations of cryptocurrency derivatives which
    have been launched. We have now put out recent guidance on the
    standards that we will look at when we review those self-
    certifications. We have had to get up to speed very quickly,
    but I do think as we sit here today, within the CFTC's area and
    its jurisdiction, within our jurisdiction, we now have our
    principles expressed and understood.
        But there is that area that Chairman Clayton mentions that
    I think is the area of concern and that is the cash exchanges.
    The cash exchanges for these cryptocurrencies is an area where
    we do not have direct regulatory oversight. And that is an area
    where there is a lot of talk right now as to what is the right
    way forward. There is potentially a Federal role. The States
    are exploring what their role is. Certainly some States like
    New York have developed a cryptocurrency license. Others are
    looking at this. And I think a general conversation should be
    had as to whether a 50-State approach or a Federal regulatory
    approach is the right way to go. But I think we do need to
    bring our best minds together around the issue of where and how
    do we go forward. As we see more and more of them. What do they
    look like, and what is the right role for regulation and at
    what level of our Federal and State regulatory regime.
        Senator Lankford. So what do you need from us? Because you
    all still have a connection on whether it is initial coin
    offerings or whether it is fraud or whether it is money
    laundering or any number of things that are in that space. What
    is it that you need at this point as far as legislatively?
        Mr. Giancarlo. We need our budget fulfilled, Senator.
        Senator Lankford. That would be helpful.
        Mr. Giancarlo. Part of our budget is for technologists, and
    one of the areas--when we are approached with a self-
    certification, the resources we devote to make sure we are
    ready when they are ready to launch is a real strain on our
    resources. And we do not have a choice. We cannot say to a
    self-certification this meets our requirements but we do not
    have the budget, therefore it cannot go forward. That is not a
    basis on which we can deny it. We have to do what we have to
    do. So the budget allocation is critically important for the
    CFTC.
        Senator Lankford. Okay.
        Chairman Clayton, anything you want to add?
        Mr. Clayton. I will just say--and thank you, Chairman
    Giancarlo--that in the securities space where we are talking
    about crypto-assets that are securities, ICOs, our laws are
    clear. You either conduct a good private placement following
    the private placement rules that are well established or you
    register with the SEC and conduct a public offering, including
    with financial statements and all the requirements of a public
    offering. We have allocated resources to ensuring that people
    do that, and we will enforce those laws. It is an area that I
    watch in terms of assets that we need. I think we are good for
    now, but I am watching that space.
        Senator Lankford. Fair enough.

                        INITIAL PUBLIC OFFERINGS (IPOS)

        Let me flip topics on you real quick as well, Chairman
    Clayton, and that is dealing with IPOs and trying to encourage
    more opportunities for more people to be able to get at the
    market. My concern that I watch is the smaller number of IPOs,
    let us say, in the last 10 years, the growth of the activist
    investor, and is that encouraging or discouraging public
    opportunities to be able to enter into the market, or does that
    continue to limit dollars in smaller and smaller hands because
    if you have activist investors and other complexity in the
    market, then it is easier to go get private capital than it is
    to go out in the public, which again centralizes wealth again?
        So the question really for you is where are we on some of
    the rules on dealing with activist investors, what power that
    they have, the percentages and the rules? Is there anything
    that you are starting to be able to examine to say is this the
    right model, the right look to be able to consider?
        Mr. Clayton. Chairman, I share your concern about the
    relative size of our public equity markets and therefore the
    relative size that our retail investors have to participate in.
    Are we reducing the opportunities for retail investment? And as
    you said, if all of the good investment opportunities--that is
    an exaggeration. If many of the good investment opportunities
    are in the private space, the people who have access to the
    private space are generally our most wealthy, not the middle
    class. That troubles me. I want to encourage the growth of our
    public capital markets.
        Your specific question around activists and governance. In
    the last decade, the governance dynamic of our public companies
    has changed significantly as a result of a number of factors.
    The result is--I am not saying it is a good thing or a bad
    thing--shareholders have more direct access and more immediate
    effect on the governance of public companies. Items that were
    reserved for the board of directors are now more greatly
    influenced by shareholders. That has effects.
        Senator Lankford. Is that based on just a new functioning
    of an older rule or a new rule?
        Mr. Clayton. New rules, new market dynamics, concentrations
    of holdings, as well as direct access to governance by
    shareholders, which has increased the ability of shareholders
    to affect decisionmaking. My view is we should recognize that,
    take a pause, and ask ourselves--things have changed--have they
    changed for the better? There are arguments on both sides, but
    we should recognize that things have changed.
        Senator Lankford. Right. And that is something that you are
    currently evaluating to be able to see, gather data to be able
    to help make a decision on our proposed rule.
        Mr. Clayton. Yes. That is our job.

               STANDARDS OF CONDUCT FOR INVESTMENT PROFESSIONALS

        Senator Lankford. Let me ask about another rule that is
    sitting out there, the Standards of Conduct for Investment
    Professionals, a nice little thousand pages that is out there,
    shorter than your written testimony, by the way.
        [Laughter.]
        Senator Lankford. That is a big piece of it.
        Mr. Clayton. And to think my mother could not get me to
    write a paper.
        [Laughter.]
        Senator Lankford. Listen, all of your folks--it was
    extremely not only well written but a lot of great information
    there.
        So this whole issue about trying to protect small savers
    and families that are trying to get started, this is a big
    issue because again it goes back to the middle class and people
    that are just starting out to try to invest. This is no simple
    rule because this affects how people will be able to save for
    their own retirement or try to invest when they are just
    getting started out, when they are setting aside $10 a month
    rather than people that are aside $10,000 a month on the other
    end of the spectrum. Give us a feel of where this goes right
    now from this proposed rule.
        Mr. Clayton. It is no simple rule. But what we are trying
    to do is for the type of person you talked about, make it
    simpler. There are two types of relationships with investment
    professionals we have in this country. There is an investment
    advisor type relationship, which is a portfolio-based I will
    say longer-term, more general relationship. Then there is a
    broker-dealer relationship which is a transaction-based, more
    episodic, in-the-moment relationship.
        We believe that in both cases the investment professional
    cannot put their interests ahead of the client. But that means
    different things in those contexts because we should recognize
    that, one, you are having a longer-term relationship over a
    greater aspect of someone's investment. In the other, it is
    shorter-term. Both of these models have served us well. They
    can be improved and they can be clarified. So we want to keep
    them, improve them, and clarify them, and that is what we are
    trying to do.
        Specifically, we want our retail investors to be able to
    have a candid conversation with their broker-dealer or their
    investment advisor about how they are getting paid, what their
    incentives are, and what that encourages them to do so that
    they can make more informed choices and they can be better
    protected. That is what we are trying to do.
        Senator Lankford. Give us a guess on the timing.
        Mr. Clayton. We have allowed for a 90-day comment period. I
    am sure we will take that full comment period. We are doing
    investor testing. We are doing investor town halls. Let me just
    take this opportunity to say we want to hear from investors as
    to what they want because my objective is to align the law and
    the practice with investor expectations. What does a reasonable
    investor expect, and let us see if we can align the law and
    practice with that. So we are going to take at least the 90
    days. But you know what? I am not going to take forever because
    this issue has been out there a long time, and I think it is
    time to bring a focal point for the many regulators in this
    space.
        Senator Lankford. Thank you.
        Mr. Giancarlo, any final comments, anything you want to
    add?

                                MARKET INTEGRITY

        Mr. Giancarlo. Well, we have a different area. But what I
    hear from Chairman Clayton is this focus on where the rubber
    meets the road of people's retirements and how they allocate
    money, how they speak to their professionals, what they expect
    in return in terms of their needs being put first. And in very
    many ways, our approach to markets, although again we do have
    different approaches historically in the approach of our
    agencies--our approach, though, is still the same thing, is
    what is the experience of America's producers when they are
    going to find--price discovery, to find out what their crop--
    what they should be getting for it at the elevator. Do they
    trust the price coming out of the Chicago Merc or NYMEX or
    others? Do they know that that price is going to be a fair
    price when it is reasonably settled? The reason why the world
    relies on prices coming out of our markets is because they
    believe they are deep, they are liquid, they are efficient. We
    must never take that for granted.
        Then the final thought is I hear Chairman Clayton talk
    about that marketplace that we took for granted for years of
    how enterprises were financed first through private equity and
    eventually into the public markets. It worked so well. It was
    the envy of the world. And it built the great companies like
    Apple and Sysco and others, all these great firms that dot the
    landscape that we rely on. They all came to fruition through
    that process. Did we take it for granted? Have we allowed it to
    be gummed up? Do we need to fix something?
        And I worry about taking for granted our own price
    discovery markets that set the world price for commodities. We
    must not take those for granted as well because other countries
    see them, and they want them for themselves. We must not take
    them for granted. We must do everything possible all the time
    to keep refreshing. What are we good at? How do we keep being
    good at that? Those are vital national interests. We need to
    retain them.
        Senator Lankford. I would agree.
        By the way, I did jokingly talk about your opening
    statement earlier. It is an inspiring piece of literature. You
    start out with a great American story and telling the story,
    and it ended with Dunkirk, if I recall correctly. And so the
    information that you provided and the inspiration was helpful.
        Mr. Giancarlo. As we celebrate the anniversary of World War
    II, a great uncle of mine, my mother's cousin, died at the
    Battle of Bastogne. And I think about that all the time. When
    people give their service to their country, they give the
    ultimate service. We in public service--we do not face that
    type of peril, but it is vitally important that we take it as
    seriously as they did and deliver for our fellow citizens, as
    they did as well.
        Senator Lankford. I would concur.
        Chairman Clayton, any final statements?
        Mr. Clayton. I want to thank Chairman Giancarlo and my
    other fellow Federal regulators, not just our coordination
    around the Volcker Rule but the coordination over the past year
    in trying to assess where markets are going, where the
    vulnerabilities are, and just make us better. I really
    appreciate the cooperation we have, and I appreciate the
    cooperation we have with the Federal Reserve, the Federal
    Deposit Insurance Corporation, and the Office of the
    Comptroller of the Currency. So thank you.
        Senator Lankford. I would tell you the American economy is
    benefiting from good leadership at this point as well. We have
    one of the lowest unemployment rates that we have had in
    decades now. So the job market is accelerating. The stories
    that we hear frequently right now from my home are trying to
    look for employees rather than employees looking for work. It
    is a very different story than where we were 10 years ago. And
    both of you have a tremendous responsibility within our
    economy, being able to keep a good, balanced, stable economy
    that continues to be able to provide jobs to people in the days
    ahead. So thank you for the continuing work. There is much
    still to be done in this process to make sure we have some
    regulatory certainty that maintains a growing, vibrant economy.
        If there are no further questions and comments from either
    of you gentlemen, the hearing record will remain open until
    next Tuesday, June 12, for the subcommittee Members to submit
    statements or questions for the record for either of the
    witnesses.

                             CONCLUSION OF HEARINGS

        Thank you both for being here.
        The subcommittee hearing is adjourned.
        [Whereupon, at 4:40 p.m., Tuesday, June 5, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]