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


 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2019

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                         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.
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    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.]