[Senate Hearing 116-]
[From the U.S. Government Publishing Office]




 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2020

                              ----------                              


                         WEDNESDAY, MAY 8, 2019

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

    The subcommittee met at 11:30 a.m., in room SD-124, Dirksen 
Senate Office Building, Hon. John Kennedy (Chairman) presiding.
    Present: Senators Kennedy, Coons, and Van Hollen.
    

                 SECURITIES AND EXCHANGE COMMISSION AND

                  COMMODITY FUTURES TRADING COMMISSION

               OPENING STATEMENT OF SENATOR JOHN KENNEDY

    Senator Kennedy. I am going to call the subcommittee 
meeting to order. I want to apologize to everyone for our 
tardiness but as you know, we had votes on the Senate floor. 
Today, we have the Chairman of the Securities and Exchange 
Commission, the Honorable Jay Clayton. We also have the 
Chairman of the Commodity Futures Trading Commission, the 
Honorable Christopher Giancarlo. Thank you both for being here 
today. I am going to skip my opening statement in the interest 
of time, our objective today being to try and get through this 
by 1:00 p.m. given that we all have other commitments, 
including and especially our two Chairmen.
    Before turning to Senator Coons though, I do want to thank 
Chairman Giancarlo for being here today, this will be your last 
hearing. I want to thank you for your service. I want to thank 
you for your hard work. I want to thank you for giving so much 
to the American people. And I know all of my colleagues join 
with me in that sentiment. Five years is a long time to give up 
your life, and I know it is not a job, it is sort of a 
lifestyle that you take on as Chairman, both of you. You know 
what I am talking about, and we are just very, very grateful, 
Mr. Chairman.
    Senator Coons.

               STATEMENT OF SENATOR CHRISTOPHER A. COONS

    Senator Coons. Thank you, Chairman Kennedy. I too will be 
brief. Thank you to our key witnesses today, Chairman Jay 
Clayton and Chairman Chris Giancarlo. And to your wife Regina, 
if I might just would like to express our gratitude for your 
support for his service. And I will join with the Chairman in 
our thanks to you both for the time you have dedicated to our 
Nation in your role as chairmen of the SEC and CFTC.
    I will be interested in hearing about how cryptocurrencies 
are challenging your oversight and your regulatory role. How 
cybersecurity is and remains a challenge both for the agencies 
you are responsible for and for financial markets more broadly. 
How you have invested the modest, but I think very responsible 
increased investments we have made, and then where you are in 
terms of the request you are making this year and how we could 
improve our service to the general public. By that, I will 
follow the Chairman's lead and conclude my opening remarks and 
say, let's get going with this hearing. Thank you, Mr. 
Chairman.
    Senator Kennedy. Thank you, Senator Coons. Let us start 
with opening statements. Chairman Clayton, who has been our 
chairman since May of 2017. He was previously a partner at the 
very prestigious law firm of Sullivan & Cromwell LLP. I will 
recognize him for his testimony.
STATEMENT OF HON. JAY CLAYTON, CHAIRMAN, SECURITIES AND 
            EXCHANGE COMMISSION
    Chairman Clayton. Thank you, Chairman Kennedy and Ranking 
Member Coons. It is nice to have the opportunity to testify 
before you today. I am pleased to be joined by Chairman 
Giancarlo. We have worked very closely together over the past 2 
years and I echo your comments. He is a great public servant.
    I am going to focus on a few high-level matters as my 
written testimony provides a detailed review of the 
Commission's work over the past year, as well as a discussion 
of how we will leverage the resources that you provide us to 
further the interests of our Main Street investors.
    First, on behalf of my fellow Commissioners and the 4,500 
women and men of the SEC, I want to thank you for your past 
support. Your funding has enabled us to make targeted hires in 
much-needed areas, including cybersecurity, enforcement, our 
examination program, market oversight, and small business 
capital formation. It has allowed us to lift our hiring freeze, 
make significant investments to modernize our information 
technology infrastructure, improve our cybersecurity, and more 
generally, continue to execute on our 2018-2022 Strategic Plan.
    Turning to our fiscal year 2020 budget request, we are 
requesting $1.746 billion dollars, an approximately 4 percent 
increase over current levels. I will start with two points on 
that:
    First the SEC budget request relies on the SEC having 
continued access to the Reserve Fund to invest in information 
technology improvements, including those related to 
cybersecurity. Second, and I want to emphasize this, the 
funding is deficit-neutral, and any amount appropriated to the 
agency will be offset by transaction fees.
    Our operational funding has three principal components. The 
first is our people--our human capital. This funding, including 
compensation and benefits, is the largest portion of our 
budget, approximately 68 percent, and also our most important. 
My written testimony lays out a number of initiatives we have 
undertaken on behalf of our Main Street investors, and each of 
these was attained only through the hard work and 
professionalism of the SEC staff. Continued investment in our 
human capital is critical to our ability to recruit, retain, 
and develop top talent that is needed to effectively pursue our 
mission.
    The second component, information technology, including 
again cybersecurity, makes up a significant and in recent past, 
increasing portion of our overall budget, approximately 14 
percent. We have made meaningful progress in the past 2 years 
in upgrading our technical and staff capabilities in these 
areas with the resources provided by Congress. As we become 
more data dependent and cyber threats to the industry, 
investors, and governments continue to evolve, I expect 
investments in our information technology and cybersecurity 
capabilities to stay front of mind for the agency.
    Finally, the third component is leasing. The SEC is engaged 
with the GSA currently for procurement process for both our 
Headquarters and our New York Regional Office. We expect GSA to 
announce contract awards for these leases in fiscal year 2019 
and 2020 respectively.
    In closing, I would like to again thank the subcommittee 
for its continued support of the SEC, its mission, and its 
people.
    I look forward to working with each of you on our fiscal 
year 2020 request, and I am prepared to answer any questions 
you may have. Thank you very much.
    [The statement follows:]
                 Prepared Statement of Hon. Jay Clayton
    Chairman Kennedy, Ranking Member Coons and Senators of the 
subcommittee, thank you for the opportunity to testify today on the 
President's fiscal year 2020 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 other 
Commissioner.
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    It is an honor to appear before this subcommittee again with my 
colleague, U.S. Commodity Futures Trading Commission (CFTC) Chairman 
Christopher Giancarlo. This is the fourth time we have testified 
together before Congress, and since he is planning on leaving the 
agency soon, I want to express my deep appreciation for his work on 
behalf of our markets, our investors and, importantly, our country. 
Over the past year, we and the staff of our respective agencies have 
collaborated on a number of issues to strengthen our markets, including 
developing and improving regulations for our swaps and security-based 
swap markets, preparing for the effects of Brexit and addressing issues 
raised by cryptocurrencies, initial coin offerings (ICOs) and similar 
products and technologies. In these and other matters on which we have 
worked together, Chairman Giancarlo has always had the interests of our 
country front of mind.
    As a threshold matter, I would like to thank the members of this 
Committee for your support of the Commission's mission and its people. 
The funding Congress provided for the agency for fiscal year 2019 
positions the SEC to maintain effective oversight of our changing 
securities markets and to continue to pursue policies to benefit long-
term Main Street investors, American businesses and our markets. The 
fiscal year 2019 funding is allowing us to lift our hiring freeze, and 
we are in the process of improving our human capital, including through 
the targeted hiring discussed in our fiscal year 2019 budget request. 
Additionally, the fiscal year 2019 funding provides necessary resources 
to maintain and upgrade our information technology systems and enhance 
the agency's cybersecurity and risk management. I am committed to being 
a responsible and prudent steward of these resources and look forward 
to working with each of you on the agency's fiscal year 2020 request 
during the congressional appropriations process.
                    fiscal year 2020 budget request
    To begin, I want to make it clear that our people--our human 
capital--are our most important resource. Over the past several years, 
they have moved the Commission forward in the face of ever-changing 
markets as well as well-known and emerging risks. A key principle of 
mine is to continue to invest in and upgrade our human capital. Staff 
compensation is the largest portion of our budget, and the most 
critical in order for the SEC to stay competitive in retaining and 
recruiting top talent whose skills and expertise provide them with many 
employment choices.
    The SEC's workforce of about 4,500 staff, located in Washington and 
across our 11 regional offices, permits the SEC to oversee, among other 
things: (1) over $97 trillion in securities trading annually on U.S. 
equity markets; (2) the disclosures of approximately 4,400 exchange-
listed public companies with an approximate aggregate market 
capitalization of $34 trillion; and (3) the activities of over 27,000 
registered entities and self-regulatory organizations. These registered 
entities and registrants include, among others, investment advisers, 
broker-dealers, transfer agents, securities exchanges, clearing 
agencies, mutual funds and exchange-traded funds (ETFs), and employ 
almost one million people in the United States.
    For fiscal year 2020, our request of $1.746 billion, a 4.2 percent 
increase over the fiscal year 2019 enacted levels, will allow the 
agency to carry out our mission to protect investors, maintain fair, 
orderly and efficient markets and facilitate capital formation. This 
funding level would support 4,694 positions, including 34 new 
positions. Along with the funding provided for 100 additional positions 
in fiscal year 2019, the fiscal year 2020 request will enable the SEC 
to fill approximately one-third of the approximately 400 positions lost 
due to the hiring freeze. The fiscal year 2020 request also includes 
additional funding for information technology and cybersecurity 
upgrades to build on the agency's recent work to improve our systems 
and expertise. Finally, the fiscal year 2020 budget request relies on 
the SEC having continued access to the Commission's Reserve Fund to 
fund multi-year information technology improvements, including those 
related to cybersecurity.
    It is important to note that the SEC's funding is deficit-neutral. 
Any amount appropriated to the agency will be offset by private sector 
transaction fees. The current transaction fee rate is just over two 
cents for every $1,000 in covered securities sales. In addition, the 
SEC 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, while the remaining funds will be deposited in the 
general fund of the U.S. Treasury.
    For fiscal year 2020, the requested funding will enable the SEC to 
execute initiatives in our new 2018-2022 Strategic Plan, including 
continuing to invest in our human capital, modernizing key information 
technology systems and further strengthening our cybersecurity and 
enterprise risk management consistent with our multi-year information 
technology strategic roadmap. Our Strategic Plan for 2018-2022 outlines 
three goals that will guide the work of the SEC moving forward.\2\ We 
have already made meaningful progress on each of these goals, and 
importantly, our fiscal year 2020 request is calibrated to further 
these initiatives in the coming year.
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    \2\ See U.S. Sec. and Exch. Comm'n Strategic Plan: fiscal years 
2018-2022 (Oct. 2018), available at https://www.sec.gov/strategic-plan.
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    Our first goal, which has been a priority of mine since I became 
Chairman, is focusing on the interests of our long-term Main Street 
investors. The past year has presented many opportunities for me, my 
fellow Commissioners and SEC staff to interact directly with investors 
from across the country. Those discussions allowed us to better answer 
the question we ask ourselves every day: how does our work benefit the 
Main Street investor? Each proposal or action we take is guided by that 
principle.
    Our second goal--to be innovative and responsive--reflects the 
changing nature of our markets. As technological advancements and 
commercial developments have changed how our securities markets 
operate, the SEC's ability to remain an effective regulator requires 
that we continually monitor the market environment and adapt our rules, 
regulations and oversight. This maxim applies to nearly every facet of 
what we do at the SEC. For example, since I arrived at the SEC, these 
principles have driven the establishment of a Cyber Unit in the 
Division of Enforcement (Enforcement or Division), a Fixed Income 
Market Structure Advisory Committee (FIMSAC), and more recently, our 
new Strategic Hub for Innovation and Financial Technology (FinHub).
    Our third goal--elevating the agency's performance through 
technology, data analytics and human capital--embodies our commitment 
to maintaining an effective and efficient operation. Maintaining a high 
level of staff engagement, performance and morale is critical to our 
ability to execute the SEC's mission on behalf of Main Street 
investors. Our staff represents top talent in our field, and when we 
recruit, we look for candidates who can match this high standard for 
professional qualification and experience. We also are using 
technology, analyzing data and promoting information-sharing and 
collaboration across the agency to strengthen our cybersecurity and 
enterprise risk profiles, while also maintaining the work environment 
that has resulted in consistent high levels of employee satisfaction. 
With the support of the Committee, we are committed to continued 
investment in both new technology and human capital.
                        fiscal year 2018 review
    Before I discuss our fiscal year 2020 budget request in more 
detail, I would like to briefly provide an overview of our 
accomplishments over the prior fiscal year (fiscal year 2018). Last 
year, I noted that the near-term Regulatory Flexibility Act agenda 
would be streamlined to increase transparency and accountability to the 
public and Congress, as well as to provide greater clarity to our 
staff, by including initiatives the agency could reasonably expect to 
complete over the next 12 months. During fiscal year 2018, the 
Commission advanced 23 of the 26 rules on the near-term agenda, a good 
result on both a percentage basis (88 percent) and an absolute 
basis.\3\
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    \3\ Over the past 10 years, the Commission completed, on average, 
approximately one-third of the rules listed on the near-term agenda.
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    In addition, the Commission responded to major events and changes 
in the broader regulatory landscape by advancing several other 
initiatives not in the original agenda. For example, we issued guidance 
to public companies about disclosures of cybersecurity risks and 
incidents.\4\ During fiscal year 2018, the Commission also responded to 
a new congressional mandate from the Economic Growth, Regulatory 
Relief, and Consumer Protection Act by expanding a key registration 
exemption used by non-reporting companies to issue securities pursuant 
to compensatory arrangements \5\ and provided proactive relief for 
those investors and companies affected by Hurricane Florence.\6\ In 
addition, to facilitate more accurate, clear and timely communications 
between issuers and shareholders, the staff released guidance on how to 
approach near-term financial reporting questions resulting from tax law 
changes on the same day the bill was signed by the President.\7\
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    \4\ See Press Release 2018-22, SEC Adopts Statement and 
Interpretive Guidance on Public Company Cybersecurity Disclosures (Feb. 
21, 2018), available at https://www.sec.gov/news/press-
release/2018-22.
    \5\ See Press Release 2018-135, SEC Adopts Final Rules and Solicits 
Public Comment on Ways to Modernize Offerings Pursuant to Compensatory 
Arrangements (Jul. 18, 2018), available at https://www.sec.gov/news/
press-release/2018-135.
    \6\ See Press Release 2018-202, SEC Provides Regulatory Relief and 
Assistance for Hurricane Victims (Sept. 19, 2018), available at https:/
/www.sec.gov/news/press-release/2018-202.
    \7\ See Press Release 2017-237, Commission Staff Provides 
Regulatory Guidance for Accounting Impacts of the Tax Cuts and Jobs Act 
(Dec. 22, 2017), available at https://www.sec.gov/news/press-release/
2017-237.
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    To be sure, statistics--such as an 88 percent completion rate--
often fail to tell more than a narrow story. Main Street investors--the 
market participants we have at the forefront of our minds--will not 
assess our work by the number or percentage of rules and initiatives we 
complete, but rather will be looking at what our efforts substantively 
do for them.
    While each of these regulatory initiatives is a key component of 
our agenda, I would be remiss if I did not note that a vast majority of 
the work of the SEC staff goes unheralded but is critical to the 
efficient functioning of our capital markets. From (1) reviewing tens 
of thousands of issuer filings and disclosures to (2) providing 
assistance, informal guidance and responding to daily questions from 
investors, issuers and other market participants to (3) collaborating 
with domestic and international counterparts to address issues related 
to events such as Brexit \8\ and the pending phase out of LIBOR to (4) 
the daily, dogged efforts of our investigative, litigation and 
examination teams, much of the SEC's staff work is unseen by many but 
nonetheless a principal component to the success of America's capital 
markets.
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    \8\ In addition to collaborating with domestic and international 
counterparts on Brexit-related issues, I directed the SEC staff to 
focus on the disclosures companies make about Brexit. We have seen a 
wide range of disclosures, even within the same industry. Some 
companies have fairly detailed disclosures about how Brexit may impact 
them, while others simply state that Brexit presents a risk. While many 
companies' disclosures improved in their most recent annual filing, I 
would like to see more companies providing robust disclosure about how 
management is considering Brexit, and the impact it may have on the 
company and its operations, particularly the impact of a so-called 
``hard Brexit.'' See also William Hinman, Applying a Principles-Based 
Approach to Disclosing Complex, Uncertain and Evolving Risks (Mar. 15, 
2019), 
available at https://www.sec.gov/news/speech/hinman-applying-
principles-based-approach-
disclosure-031519
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    With that in mind, and using the goals in our Strategic Plan as 
guideposts, I would like to provide additional detail on a few of our 
recent initiatives and how our fiscal year 2020 budget request will 
enable the SEC and its people to further the interests of our long-term 
Main Street investors.
Focusing on the Interests of Long-term Main Street Investors
    I have noted that my touchstone when considering issues before the 
Commission is the interests of long-term Main Street investors. The 
importance of well-functioning capital markets to Main Street 
investors' financial goals--whether saving for retirement, a home, 
college or other endeavors--cannot be overstated. And perhaps more 
importantly, Main Street investors' continued participation provides 
the lifeblood for our capital markets, as at least 52 percent of U.S. 
households are invested directly or indirectly in the capital 
markets.\9\ This represents tens of millions of Americans who are 
invested in our capital markets and make personal investment 
decisions--both direct investment decisions such as which stocks, 
bonds, mutual funds, ETFs and other securities to purchase or sell and 
indirect investment decisions such as whether to hire a broker-dealer 
or investment adviser. Many other Americans are also invested in or 
exposed to our markets through pension funds, insurance products and 
other intermediaries.
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    \9\ Data Source: 2016 Survey of Consumer Finances (SCF). The SCF is 
a triennial interview survey of U.S. families sponsored by the Board of 
Governors of the Federal Reserve System with the cooperation of the 
U.S. Department of the Treasury. See https://www.Federalreserve.gov/
econres/scfindex.htm.
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    This level of retail investor participation stands out against 
other large industrialized countries. Other countries want to replicate 
it because such broad investor participation in our capital markets is 
a significant competitive advantage for our economy, and participation 
in our capital markets has made many Americans' lives better and their 
retirements more secure. But this level of investor participation--
which has been a decades-long endeavor among investors, issuers, the 
SEC and other market participants--should not be taken for granted.
            Standards of Conduct for Broker-Dealers and Investment 
                    Advisers
    One of the more important ways in which we can further the 
interests of our long-term Main Street investors is by enhancing and 
clarifying the standards of conduct and mandated disclosures for our 
two principal types of financial professionals--broker-dealers and 
investment advisers. My view is these standards should reflect what 
retail investors would reasonably expect of these financial 
professionals, while preserving access and choice for investors who 
prefer the ``pay as you go'' model for advice from a broker-dealer or a 
fee-based model from an investment adviser (or a combination of both 
types of arrangements), as well as preserving retail customer choice of 
the level and types of advice provided and the products available. Our 
standards of conduct rulemaking is years--perhaps decades--overdue, and 
of significant importance to a vast number of retail investors.
    In April 2018, the Commission proposed for public comment a 
significant set of rulemakings and interpretations designed to serve 
Main Street investors that would: (1) require broker-dealers to act in 
the best interest of their retail customers; (2) reaffirm, and in some 
cases clarify, the fiduciary duty owed by investment advisers to their 
clients; and (3) require both broker-dealers and investment advisers to 
state clearly key facts about their relationship, including their 
financial incentives.\10\ This set of initiatives is intended to 
enhance investor protection by bringing the legal requirements and 
mandated disclosures of financial professionals in line with reasonable 
investor expectations.
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    \10\ See Press Release 2018-68, SEC Proposes to Enhance Protections 
and Preserve Choice for Retail Investors in Their Relationships with 
Investment Professionals (Apr. 18, 2018), available at https://
www.sec.gov/news/press-release/2018-68.
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    Specifically, proposed Regulation Best Interest would enhance 
broker-dealer standards of conduct by establishing an overarching 
obligation requiring broker-dealers to act in the best interest of the 
retail customer when making recommendations of any securities 
transaction or investment strategy involving securities. Simply put, 
under proposed Regulation Best Interest, a broker-dealer cannot put her 
or his interests ahead of the retail customer's interests when making a 
recommendation. The proposal incorporates that key fiduciary principle 
and goes beyond and enhances the current suitability obligations 
applicable to broker-dealers under the Federal securities laws. To meet 
this new requirement, the broker-dealer would have to satisfy specific 
disclosure, care and conflict of interest obligations, including a 
requirement to adopt policies and procedures reasonably designed to 
identify and disclose and mitigate, or eliminate, certain conflicts of 
interest arising from financial incentives.
    Proposed Regulation Best Interest and its ``best interest'' 
standard draw upon fiduciary principles applicable in other well-known 
contexts, including those underlying an investment adviser's fiduciary 
duty, recognizing that, while their client relationship models differ, 
both broker-dealers and investment advisers provide recommendations and 
advice in similar contexts and in the face of conflicts of interest. In 
another part of our reform efforts, we proposed an interpretation 
reaffirming--and, in some cases, clarifying--the fiduciary duty that 
investment advisers owe to their clients. This proposed interpretation 
is designed to provide advisers and their clients with a reference 
point for understanding the obligations of investment advisers to their 
clients and, specifically, reaffirms that an investment adviser also 
must act in the best interest of her or his client.
    While proposed Regulation Best Interest draws on fiduciary 
principles, the obligations of a broker-dealer under Regulation Best 
Interest and the obligations of an investment adviser pursuant to its 
fiduciary duty under the Advisers Act would differ in certain respects, 
reflecting the differing scope of the services, payment forms and other 
relationship terms offered by broker-dealers and investment advisers, 
respectively. For instance, aspects of the obligations applicable to 
broker-dealers under proposed Regulation Best Interest are more 
specific than those applicable to investment advisers and reflect the 
characteristics of the generally applicable broker-dealer model--
transaction-specific recommendations and compensation.\11\
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    \11\ In these specific areas, the obligations of broker-dealers 
under proposed Regulation Best Interest are more prescriptive, 
consistent with the generally rules-based regulatory regime that 
applies to broker-dealers.
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    While the generally applicable investment adviser model--ongoing, 
regular advice and services provided in the context of broad investment 
management with compensation based on the value of assets under 
management, a fixed fee or other arrangement--differs from the 
generally applicable broker-dealer model, in my view the key elements 
of the standard of conduct that would apply to broker-dealers under 
proposed Regulation Best Interest at the time that a recommendation is 
made would be substantially similar to key elements of the standard of 
conduct that applies to investment advisers pursuant to their fiduciary 
duty under the Advisers Act. It is my intention that, regardless of 
whether the retail customer chooses a broker-dealer or an investment 
adviser, the retail customer will receive recommendations (from a 
broker-dealer) or advice (from an investment adviser) that are in the 
best interest of the retail customer, and that do not place the 
financial professional's interests ahead of the interests of the retail 
customer.
    Finally, under our proposed rulemaking package, firms would be 
required to provide retail investors with a new, succinct disclosure 
form referred to as the ``relationship summary'' or ``Form CRS.'' As 
proposed, the relationship summary would highlight key aspects of 
broker-dealers and investment adviser relationships, including: (1) the 
principal types of services offered; (2) the legal standards of conduct 
that apply to each; (3) the fees the customer would pay; and (4) 
certain conflicts of interest that may exist. It also would include key 
questions for retail investors to ask their financial professional. I 
believe that the relationship summary will result not only in more 
informed retail investors, but also will drive competition by 
facilitating transparency and comparability of these key features of a 
relationship with a financial professional.
    In order to hear first-hand from retail investors who will be 
directly impacted by our various rulemaking efforts, the SEC staff 
organized seven roundtables across the country to provide Main Street 
investors the opportunity to speak directly with me, my fellow 
Commissioners and senior SEC staff to tell us about their experiences 
and views on what they expect from their financial professionals. I had 
the opportunity to lead five of these discussions--in Houston, Atlanta, 
Miami, Denver and Baltimore--and attend another in Washington, D.C. 
These candid, experience-based conversations were incredibly valuable 
and are informing our work moving forward. The transcripts from these 
roundtables are included in our public comment file. We also invited 
investors to view samples of the proposed relationship summary to share 
their insights and feedback with the Commission by going to https://
www.sec.gov/tell-us. In addition, our Office of the Investor Advocate 
engaged RAND Corporation to perform investor testing of the proposed 
relationship summary. The results of the investor testing were made 
available on the SEC's website in order to allow the public to consider 
and comment on this supplemental information.\12\
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    \12\ See Press Release 2018-257, Investor Testing of the Proposed 
Relationship Summary for Investment Advisers and Broker-Dealers (Nov. 
7, 2018), available at https://www.sec.gov/news/press-release/2018-257.
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    The staff of the Division of Trading and Markets (Trading and 
Markets) and the Division of Investment Management (Investment 
Management) are reviewing all of this information, and the more than 
6,000 comment letters,\13\ as they work diligently together to develop 
final rule recommendations.
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    \13\ See Comments on Proposed Rule: Regulation Best Interest, 
available at https://www.sec.gov/comments/s7-07-18/s70718.htm. Of the 
more than 6,000 comment letters, approximately 3,000 were unique 
letters.
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            Facilitating Capital Formation
    Focusing on the interests of long-term Main Street investors also 
requires encouraging capital formation for emerging companies seeking 
to enter our public capital markets while maintaining, and in many 
cases enhancing, investor protections. Doing so provides greater 
investment opportunities for Main Street investors, as it is generally 
difficult and expensive for them to invest in private companies. As a 
result, Main Street investors may not have the opportunity to 
participate in the growth phase of these companies if the companies 
choose not to enter our public markets or do so only later in their 
life cycle. Additionally, it is my experience that companies that go 
through the SEC public registration and offering process often come out 
as better companies, providing net benefits to the company, investors 
and our capital markets.
    Since 2017, the Division of Corporation Finance (Corporation 
Finance) has led a number of regulatory actions to benefit public 
company capital formation.\14\ For example, Corporation Finance now 
accepts voluntary draft registration statement submissions for many 
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, building on the successful confidential submission 
process established by the Jumpstart Our Business Startups (JOBS) 
Act.\15\ Additionally, earlier this year the Commission issued a 
proposal to expand the ability of companies that are contemplating 
raising capital to ``test-the-waters'' by engaging in communications 
with certain potential investors prior to or following the filing of a 
registration statement for an IPO.\16\ I have seen firsthand how this 
has benefitted emerging growth companies considering an IPO, as they 
are able to engage investors earlier to explain their business and 
obtain feedback in advance of a public offering. This also benefits 
investors and shareholders as companies are better able to determine 
the appropriate time for an offering and to more effectively size and 
price the offering.
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    \14\ See Remarks on Capital Formation at the Nashville 36|86 
Entrepreneurship Festival (Aug. 29, 2018), available at https://
www.sec.gov/news/speech/speech-clayton-082918; see also Press Release 
2019-38, SEC Adopts Rules to Implement FAST Act Mandate to Modernize 
and Simplify Disclosure (Mar. 20, 2019), available at https://
www.sec.gov/news/press-release/2019-38.
    \15\ See Press Release 2017-121, SEC's Division of Corporation 
Finance Expands Popular JOBS Act Benefit to All Companies (June 29, 
2017), available at https://www.sec.gov/news/press-
release/2017-121.
    \16\ See Press Release 2019-14, SEC Proposes to Expand ``Test-the-
Waters'' Modernization Reform to All Issuers (Feb. 19, 2019), available 
at https://www.sec.gov/news/press-release/2019-14.
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    Corporation Finance has several proposals on the horizon designed 
to encourage capital formation for emerging companies seeking to enter 
our public capital markets. These include amending the definition of 
``accelerated filer'' that triggers Section 404(b) of the Sarbanes-
Oxley Act of 2002, which requires registrants to provide an auditor 
attestation report on internal control over financial reporting. This 
proposal, which also builds on the success of the JOBS Act, should 
reduce the number of smaller companies that are required to provide the 
auditor attestation report while maintaining appropriate incentives and 
safeguards to ensure that such companies have appropriate controls over 
financial reporting.
    Beyond our public markets, I expect the Commission to take a fresh 
look at the exempt offering framework to consider whether changes 
should be made to harmonize and streamline what can be fairly described 
as a patchwork approach. While Congress and the SEC have taken a number 
of steps to expand the options that small businesses have to raise 
capital, most notably in the bipartisan JOBS Act, there has not been a 
comprehensive review of our exemptive framework to ensure that the 
system, as a whole, is rational, accessible and effective. The staff is 
working on a concept release that I expect will bring to the forefront 
these and other topics on how we can better harmonize exempt 
offerings.\17\ Receiving input from investors, startups, entrepreneurs 
and other market participants who have firsthand experience with 
investing, raising capital and our regulatory framework is extremely 
important to make sure we get it right.
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    \17\ As we embark on this project, I believe there are several 
things we should consider. We should evaluate the level of complexity 
of our current exemptive framework for issuers and investors alike and 
consider whether changes should be made to rationalize and streamline 
the framework. For example, do we have overlapping exemptions that 
create confusion for companies trying to navigate the most efficient 
path to raise capital? Are there gaps in our framework that impact the 
ability of small businesses to raise capital at key stages of their 
business cycle? We also should consider whether current rules that 
limit who can invest in certain offerings should be expanded to focus 
on the sophistication of the investor, the amount of the investment, or 
other criteria rather than just the wealth of the investor. And we 
should take a look at whether more can be done to allow issuers to 
transition from one exemption to another and, ultimately, to a 
registered IPO, without undue friction.
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    Another significant initiative for Corporation Finance and 
Investment Management is improving the proxy process. In November 2018, 
the SEC staff held a proxy roundtable to discuss: (1) the proxy 
solicitation and voting process; (2) shareholder engagement through the 
shareholder proposal process; and (3) the role of proxy advisory 
firms.\18\ I was pleased with this largely solutions-oriented event, 
which included a diverse group of panelists representing the views of 
investors, companies and other market participants. While we heard a 
wide range of views, we saw more agreement than disagreement, and I 
believe that we should act to improve each of these areas with an 
initial focus on the matters where there was broad agreement action is 
appropriate. The staff is looking at a number of issues that were 
discussed at the roundtable and submitted for public comment, and I 
have asked them to formulate recommendations for the Commission's 
consideration. On timing, it is clear to me that these issues will not 
improve on their own with time, and I intend to move forward with the 
staff recommendations, prioritizing those initiatives that are most 
likely to improve the proxy process and our markets for our long-term 
Main Street investors.
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    \18\ See November 15, 2018: Roundtable on the Proxy Process, 
available at https://www.sec.gov/proxy-roundtable-2018.
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    Each of these initiatives is designed to ensure that American 
businesses continue to have the ability to effectively raise capital, 
while maintaining, and in some ways enhancing, investor protections. 
Our fiscal year 2020 request would provide resources to Corporation 
Finance to continue their efforts, including by adding a new position 
to Corporation Finance to assist with new capital formation policy and 
rulemaking initiatives. This would include the continuation of efforts 
to consider a scaled disclosure framework for smaller companies, 
disclosure modernization and simplification and anticipated 
recommendations arising out of our upcoming concept release on the 
exempt offering regulatory framework.
    Beyond our policymaking divisions, the Commission recently acquired 
a powerful voice for small businesses and their investors--our first 
Advocate for Small Business Capital Formation, Martha Miller.\19\ 
Martha brings a wealth of experience and passion to the role and will 
be a proponent for American businesses and their investors. Martha has 
hit the ground running in building the office and engaging with many 
small businesses and their investors, including participating in 
several panels on entrepreneurship and hosting her first public town 
hall in Kansas City, Missouri in April. She also released a business 
plan providing insight into her office's roadmap for serving small 
businesses, including traveling to areas that traditionally have 
received less attention from investors.\20\
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    \19\ See Press Release 2018-304, Martha Miller Named Advocate for 
Small Business Capital Formation (Dec. 21, 2018), available at https://
www.sec.gov/news/press-release/2018-304.
    \20\ See Office of the Advocate for Small Business Capital 
Formation Foundational Business Plan (Apr. 2019), available at https://
www.sec.gov/files/2019%20OASB%20Business%20Plan.pdf
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    Our fiscal year 2020 request will allow the SEC to expand the 
Office of the Advocate for Small Business Capital Formation (OASB), 
bringing its total staffing to nine positions so that it can pursue its 
mission and provide outreach, offer assistance, identify problems and 
unique challenges to raising capital for small businesses, including 
minority- and women-owned small businesses and small businesses 
affected by natural disasters, and give a stronger voice at the 
Commission to small businesses and small business investors. The 
request would also assist OASB in supporting the Advisory Committee on 
Small Business Capital Formation, which is designed to solicit ideas 
from a diverse group of professionals about ways to better facilitate 
small business capital formation. In this regard, I am very pleased to 
say that my fellow Commissioners and I recently announced the formation 
of that Committee, including its inaugural members, all highly 
accomplished individuals who are committed to entrepreneurship and 
growth and who, collectively, provide a wide range of expertise, 
experience and perspective.\21\
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    \21\ See Press Release 2019-61, SEC Announces Members of Small 
Business Capital Formation Advisory Committee (Apr. 25, 2019), 
available at https://www.sec.gov/news/press-release/2019-61.
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            Enforcing the Federal Securities Laws
    The interests of long-term Main Street investors require capital 
markets that are vigorously policed for fraud and other misconduct. The 
ongoing efforts by Enforcement to deter misconduct and punish 
securities law violators are critical to safeguarding millions of 
investors and instilling confidence in the integrity of our markets. 
The nature and quality of the SEC's enforcement actions during the last 
year speak volumes to the hard work of the women and men of the agency 
as they have made our capital markets a safer place for investors to 
put their hard-earned money to work.
    As noted by Enforcement's Co-Directors, Stephanie Avakian and 
Steven Peikin, in the Division's Annual Report, our success is best 
judged both quantitatively and qualitatively and over various periods 
of time.\22\ Based on such an evaluation--and in my opinion by any 
measure--Enforcement has been successful over the past year. I can 
assure you that the Division will continue its vigorous enforcement of 
the Federal securities laws and hold bad actors accountable, whether on 
Main Street or Wall Street.
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    \22\ Relevant qualitative factors include, among other things, 
asking whether we are: bringing meaningful actions that target the most 
serious violations, pursuing individual sanctions in appropriate cases, 
obtaining punishments that deter unlawful conduct and returning money 
to harmed investors. See U.S. Sec. & Exch. Comm'n, Div. of Enforcement, 
Annual Report: A Look Back at fiscal year 2018 (Nov. 2, 2018), 
available at https://www.sec.gov/files/enforcement-
annual-report-2018.pdf.
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    To further our enforcement efforts on behalf of Main Street 
investors, in September 2017, the SEC announced the formation of a 
Retail Strategy Task Force (Task Force), which has two primary 
objectives: (1) to develop data-driven, analytical strategies for 
identifying practices in the securities markets that harm retail 
investors and generating enforcement matters in these areas; and (2) to 
collaborate within and beyond the SEC on retail investor advocacy and 
outreach.\23\ Each of these objectives directly impacts the lives of 
Main Street investors and involves collaboration among many divisions 
and offices. We anticipate that new data-driven approaches will yield 
significant efficiencies in case generation and resource allocation by 
targeting enforcement efforts where the risks to Main Street investors 
are the most significant. Although it has been operative for less than 
2 years, the Task Force has already undertaken a number of lead-
generation initiatives built on the use of data analytics.
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    \23\ See Press Release 2017-176, SEC Announces Enforcement 
Initiatives to Combat Cyber-Based Threats and Protect Retail Investors 
(Sept. 25, 2017), available at https://www.sec.gov/news/press-release/
2017-176.
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    Additionally, in my view, protecting retail investors means, 
whenever possible, putting money back in their pockets when they are 
harmed by violations of the Federal securities laws. In fiscal year 
2017 and fiscal year 2018, the Commission returned $1.07 billion and 
$794 million to harmed investors, respectively. Here, I will call out 
for commendation the Division's approach to the too-widespread practice 
of investment advisers placing retail investors in higher cost share 
classes of mutual funds when the same funds were available to those 
investors at lower or no cost, without adequately disclosing the 
practice or with disclosure that was inconsistent with the advisers' 
actual practices. In a little over a year, the Division's approach--
which centered on self-reporting and cooperation--will result in the 
return of over $125 million to retail investors.\24\ Importantly, the 
resulting savings to retail investors from moving to the lower cost 
share classes will continue for years to come. We remain committed to 
this important Main Street investor-focused part of our work, and we 
will continue our efforts to return funds to harmed investors as 
promptly as practicable.
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    \24\ See Press Release 2019-28, SEC Share Class Initiative 
Returning More Than $125 Million to Investors (Mar. 11, 2019), 
available at https://www.sec.gov/news/press-release/2019-28.
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    The fiscal year 2020 request will provide critical resources to 
Enforcement, allowing the Division to add six positions to expand our 
capability to investigate and prosecute alleged misconduct involving 
actions that affect Main Street investors. These positions will bolster 
our Task Force and also provide further support to Enforcement 
investigators and litigators.
            Examining SEC-Registered Entities
    Our examination program, executed by the Office of Compliance 
Inspections and Examinations (OCIE), is another key area where our work 
directly protects the interests of Main Street investors. In December 
2018, OCIE published its 2019 Examination Priorities, which reflect a 
continued focus on the SEC's commitment to protecting retail investors, 
including seniors and those saving for retirement.\25\ In particular, 
OCIE has looked closely at products and services offered to retail 
investors, the disclosures they receive about those products and 
services and the financial services professionals who serve them. OCIE 
has also focused its attention on several other areas that present 
heightened risks, including: (1) compliance and risks in critical 
market infrastructure, such as exchanges and clearing agencies; (2) 
digital assets, including cryptocurrencies, coins and tokens; (3) 
cybersecurity; and (4) anti-money laundering programs.
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    \25\ U.S. Sec. & Exch. Comm'n, Off. of Compliance Inspections and 
Examinations, 2019 Nat'l Exam Program Examination Priorities (Dec. 20, 
2018), available at https://www.sec.gov/files/
OCIE%202019%20Priorities.pdf.
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    OCIE conducts risk-based examinations of SEC-registered entities, 
including broker-dealers, investment advisers, investment companies, 
municipal advisors, national securities exchanges, clearing agencies, 
transfer agents and the Financial Industry Regulatory Authority 
(FINRA), among others.\26\ During fiscal year 2018, OCIE conducted over 
3,150 examinations, an overall increase of 11 percent from fiscal year 
2017. This includes a 17 percent coverage ratio for SEC-registered 
investment advisers--which increased 13 percent from fiscal year 2017, 
even as the number of registered investment advisers increased by 
approximately 5 percent.\27\ While OCIE will face challenges in 
sustaining this trajectory in fiscal year 2019, OCIE will continue to 
leverage data analysis to identify potentially problematic activities 
and firms as well as to determine how best to scope the examinations of 
those activities and firms.
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    \26\ In conjunction with OCIE's examination activities, OCIE 
published a number of risk alerts to inform SEC-registered firms and 
investors of common compliance issues OCIE observed. Over the last 
year, OCIE risk alerts addressed topics ranging from transfer agent 
safeguarding of funds and securities to fee and expense compliance 
issues for investment advisers. These alerts provide OCIE's views on 
ways to sharpen the identification and correction of potentially 
deficient practices, maximize the impact of our examination program and 
better protect the interests of Main Street investors.
    \27\ The number of investment advisers has increased from 
approximately 9,000 in 2005 to over 13,000 in 2018. In addition, in 
response to the Department of Labor Fiduciary Rule adopted on April 8, 
2016 (vacated by the Fifth Circuit Court of Appeals in March 2018) it 
was reported that the broker-dealer industry, among other things, 
reduced service and advice to small retirement accounts and encouraged 
retail customers to move towards self-directed accounts and advisory 
accounts, including robo-advisors. The SEC will continue to monitor the 
effects of this trend on investor protection and market integrity more 
generally.
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    The fiscal year 2020 request would allow us to restore five 
positions to OCIE, enabling it to bring on additional expertise of SEC-
registered entities and continue its risk-based efforts to protect Main 
Street investors.
            Investor Outreach and Education
    The SEC promotes informed investment decisionmaking through 
education initiatives aimed at providing Main Street investors with a 
better understanding of our capital markets and the opportunities and 
risks associated with the array of investment choices presented to 
them. The Office of Investor Education and Advocacy (OIEA) spearheads 
these efforts and participation extends throughout our divisions and 
offices. In fiscal year 2018, the SEC conducted over 150 in-person 
investor education events focused on various segments of the investing 
population, including senior citizens, military personnel, younger 
investors and affinity groups. In addition to in-person education 
events, OIEA developed informative, innovative and accessible 
educational initiatives.
    We use a variety of channels to deliver information to investors. 
For example, we created a website to educate the public about frauds 
involving ICOs and just how easy it is for bad actors to engineer this 
type of fraud--our HoweyCoins.com mock website promoted a fictional 
ICO.\28\ The website was created in-house, very quickly and with few 
resources. It attracted over 100,000 people within its first week. We 
also published a variety of investor alerts and bulletins to warn Main 
Street investors about other possible schemes and risks for fraud, 
including certain investment schemes that use celebrity endorsements, 
self-directed individual retirement accounts, the risks in using credit 
cards to purchase an investment and the potential harm resulting from 
sharing their personal contact information with online investment 
promoters.
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    \28\ See Press Release 2018-88, The SEC Has an Opportunity You 
Won't Want to Miss: Act Now! (May 16, 2018), available at https://
www.sec.gov/news/press-release/2018-88.
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    We also continued to promote our national public service campaign, 
``Before You Invest, Investor.gov,'' which encourages investors to 
research the background of their financial professional. Our experience 
demonstrates that working with unlicensed promoters who have a history 
of misconduct greatly increases the risk of fraud and losses. In May 
2018, we supplemented this information service with a new online search 
tool, the SEC Action Lookup for Individuals, or SALI.\29\ This tool 
enables investors to find out if the individual he or she is dealing 
with has been sanctioned as a result of SEC action, for both registered 
and unregistered individuals. SALI continues to be updated on an 
ongoing basis, making it an ever better resource for Main Street 
investors. We are encouraged by the fact that unique page views on 
Investor.gov increased by 45 percent compared to fiscal year 2017.
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    \29\ 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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    Additionally, SEC regional offices engage in investor initiatives 
in their local communities. For example, the San Francisco Regional 
Office has conducted extensive outreach to California teachers through 
its Teacher Investment Outreach Initiative. This project seeks to help 
teachers make informed decisions on investment portfolio options, fees 
and risk. Regional staff, many of whom have personal connections to the 
teaching community, created this initiative in response to learning 
about the limitations of the investment options (and related high fees 
and costs) offered to public school teachers under the defined 
contribution portion of their retirement plans.
    More recently, as part of National Financial Capability Month, I 
released several videos in a new series, ``Notes from the Chairman.'' 
\30\ These videos are based on my experiences traveling the country and 
meeting with Main Street investors. In these meetings, two common and 
related themes emerged, regardless of demographics and geography. 
Investors wished they (1) started investing in our markets earlier and 
(2) had known more about investing and financial affairs more generally 
earlier. These views were universal and deeply held and, while not 
entirely within the purview of the Commission to address, will continue 
to resonate with me--and I will continue to work to address them--
during my tenure at the Commission.\31\
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    \30\ See Tips for Main Street Investors from Chairman Jay Clayton 
(Apr. 2019), available at https://www.sec.gov/page/investment-tips-
chairman-jay-clayton.
    \31\ See CNBC, SEC chair Jay Clayton weighs in on America's 
retirement crisis (Apr. 26, 2019), available at https://www.cnbc.com/
video/2019/04/26/sec-chair-jay-clayton-weighs-in-on-the-
americas-retirement-crisis.html (last visited Apr. 29, 2019).
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    The fiscal year 2020 request would permit expanded outreach to Main 
Street investors through the work of OIEA and the Office of the 
Investor Advocate, and to small business owners and investors through 
OASB. Further, SEC staff plans to conduct additional research to gain 
deeper insight into how different types of investors participate in our 
capital markets to benefit both our policymaking and investor education 
efforts.
Recognize Significant Developments and Trends in Our Evolving Capital 
        Markets and Adjust Our Efforts to Ensure We Are Effectively 
        Allocating Our Resources
            Overseeing the Capital Markets
    As our markets continue to evolve through technological 
advancements and other developments, the SEC staff must stay abreast of 
these changes to ensure that all investors, including our Main Street 
investors, have access to fair and efficient capital markets. Many of 
our trading markets have become data and algorithm driven and are 
populated by firms with extensive resources and expertise. Transparency 
is a bedrock of healthy and vibrant markets. It enhances monitoring and 
can energize competitive forces to benefit investors. Transparency is a 
key part of our efforts to ensure fair and efficient markets, 
particularly those with significant Main Street investor participation. 
We have taken significant steps over the past year to make our markets 
more transparent.
    For example, in July 2018, the Commission adopted amendments to 
Regulation ATS that enhance the transparency requirements governing 
alternative trading systems, commonly known as ``ATSs.'' \32\ These 
amendments provide investors, brokers and other market participants--as 
well as the Commission--with increased visibility into the operations 
of these important markets for equity trading. Additionally, in 
November 2018, the Commission adopted amendments to Regulation NMS to 
provide investors with greater transparency concerning how brokers 
handle and execute customer orders.\33\ Both of these sets of 
amendments will provide investors with significantly enhanced 
disclosures that will impact their ability to ensure best execution for 
their orders to buy and sell securities.
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    \32\ See Press Release 2018-136, SEC Adopts Rules to Enhance 
Transparency and Oversight of Alternative Trading Systems (July 18, 
2018), available at https://www.sec.gov/news/press-release/2018-136.
    \33\ See Press Release 2018-253, SEC Adopts Rules That Increase 
Information Brokers Must Provide to Investors on Order Handling (Nov. 
2, 2018), available at https://www.sec.gov/news/press-release/2018-253.
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    Further, in December 2018, the Commission adopted a transaction fee 
pilot for NMS stocks, which will provide the Commission with data to 
help us analyze the effects of exchange fees and rebates on order 
routing behavior, execution quality and our market structure 
generally.\34\ In my view, this pilot will lead to a more thorough 
understanding of these issues, which will help the Commission make more 
informed and effective policy decisions in the future.
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    \34\ See Press Release 2018-298, SEC Adopts Transaction Fee Pilot 
for NMS Stocks (Dec. 19, 2018), available at https://www.sec.gov/news/
press-release/2018-298.
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    Our fixed income markets are also critical to our economy and Main 
Street investors, though, historically, less attention has been focused 
on these relative to the equity markets. With large numbers of 
Americans retiring every month and needing investment options, fixed 
income products attract more and more Main Street investors. Yet, many 
of those investors may not appreciate that fixed income products are 
part of markets that differ significantly from the equity markets. In 
November 2017, the Commission established the FIMSAC to provide diverse 
perspectives on the structure and operations of the U.S. fixed income 
markets, as well as advice and recommendations on fixed income market 
structure. The Committee has held five public meetings and dozens of 
subcommittee meetings and has provided the Commission with six 
thoughtful recommendations on ways to improve our fixed income 
markets.\35\
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    \35\ See Fixed Income Market Structure Advisory Committee, 
available at https://www.sec.gov/spotlight/fixed-income-advisory-
committee. FIMSAC's recommendations include the following: (1) the 
development of a pilot program to delay public dissemination for 48 
hours of trades in any investment grade corporate bond above $10 
million and any high-yield corporate bond above $5 million (requires 
FINRA rulemaking); (2) the formation of a joint SEC, FINRA and MSRB 
working group to review the regulatory framework for electronic trading 
platforms in corporate and municipal bonds; (3) the adoption of a 
comprehensive classification scheme for exchange traded products; (4) 
for the SEC to encourage the formation of an industry group to promote 
investor education and work towards the establishment of a centralized 
and widely accessible database of key ETF data; (5) that the SEC, in 
conjunction with FINRA, establish a new issue reference data service 
for corporate bonds that would be widely accessible on commercially 
reasonable terms; and (6) to permit principal trading with advisory 
clients in negotiated municipal securities offerings.
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    Turning back to the principle of transparency, in May 2018, new 
FINRA and Municipal Securities Rulemaking Board (MSRB) requirements 
regarding the disclosure of mark-ups and mark-downs on certain 
corporate and municipal bond trades with retail investors went into 
effect, and I am pleased that investors now have substantially greater 
transparency into the costs of participating in those markets. I 
believe this transparency will increase competition and reduce trading 
costs, all to the benefit of investors, including our Main Street 
investors who directly or indirectly hold approximately two-thirds of 
this market.
    With respect to our security-based swap regime, the Commission has 
finalized many, but not all, of the security-based swap rules mandated 
by Title VII of the Dodd-Frank Act. The Commission has continued our 
efforts to lay out a coherent package of rules to finalize our 
statutory security-based swap rulemaking obligations, and I anticipate 
making significant progress in completing this work in 2019. As part of 
this effort, our staff has been actively engaged with our counterparts 
at the CFTC to explore ways to further harmonize our respective 
security-based swap rules with the swap rules developed by the CFTC to 
increase effectiveness and reduce complexity and costs. An important 
milestone of this work occurred in June 2018 when CFTC Chairman 
Giancarlo and I executed a memorandum of understanding (MOU) between 
our two agencies.\36\ The MOU explicitly acknowledges where we have 
shared regulatory interests, including but not limited to Title VII, 
and reconfirms our commitment to work together to facilitate efficient 
markets for the benefit of all market participants.
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    \36\ See Press Release 2018-114, SEC and CFTC Announce Approval of 
New MOU (June 28, 2018), available at https://www.sec.gov/news/press-
release/2018-114.
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    Staying current with market trends and developments is essential to 
the SEC's ability to remain an effective regulator of our capital 
markets. The fiscal year 2020 request would add four additional 
positions to Trading and Markets, which regulates the major securities 
market participants such as broker-dealers, transfer agents, securities 
information processors, securities exchanges and clearing agencies and 
oversees self-regulatory organizations such as FINRA. In particular, 
these positions would enable Trading and Markets to expand its 
expertise relating to fixed-income markets, Treasury markets, digital 
asset markets and other asset classes, as well as provide additional 
insight into trading firm operations. The request also includes one 
position for the Office of Municipal Securities to address municipal 
market transparency, including recommendations provided by the FIMSAC.
    Finally, one of my most significant responsibilities is to 
participate in the Financial Stability Oversight Council (FSOC), which 
is tasked with identifying risks to the U.S. financial system. The 
Commission and its leadership also participate in the Financial 
Stability Board (FSB) and other international bodies. We rely 
significantly on SEC staff in these efforts, and in fiscal years 2019 
and 2020 I intend to add additional structure to our efforts in these 
areas so that the expertise of the Commission, across our various 
divisions and offices, is more effectively brought to bear in these 
fora, particularly in the areas of market risk, market fragmentation, 
disclosure effectiveness, audit quality and enforcement.
            Improving the Investor Experience and Modernizing Our 
                    Framework
    Main Street investors have significant holdings in mutual funds and 
other investment companies. In 2018, over 100 million individuals 
representing over 57 million households, or almost 45 percent of U.S. 
households, owned funds (generally ETFs or open ended mutual 
funds).\37\ Fund disclosures are especially important to these millions 
of Americans who invest in funds to help them reach personal financial 
goals, such as saving for retirement and their children's educations. 
Investment Management is leading a long-term project to explore 
modernization of the design, delivery and content of fund disclosures 
and other information for the benefit of investors. These initiatives 
are an important part of how the Commission can serve investors in the 
21st century.
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    \37\ See ICI Research Perspective (Nov. 2018), available at https:/
/www.ici.org/pdf/per24-08.pdf.
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    In June 2018, the Commission issued a request for comment on 
enhancing disclosures by mutual funds, ETFs and other types of 
investment companies to improve the investor experience and to help 
investors make more informed investment decisions (Fund Disclosure 
RFC).\38\ The Fund Disclosure RFC seeks input from retail investors and 
others on how they use fund disclosures and how they believe funds can 
improve disclosures to aid investment decision-making. In order to 
facilitate retail investor engagement and comment on improving fund 
disclosure, the Commission has provided a short Feedback Flier on 
Improving Fund Disclosure, which can be viewed and submitted at 
www.sec.gov/tell-us.
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    \38\ See Press Release 2018-103, SEC Modernizes the Delivery of 
Fund Reports and Seeks Public Feedback on Improving Fund Disclosure 
(June 5, 2018), available at https://www.sec.gov/news/press-release/
2018-103.
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    Investment Management also led work on the Commission's recent 
proposal on offering reforms for business development companies and 
registered closed-end funds.\39\ The proposed rule amendments would 
implement certain provisions of the Small Business Credit Availability 
Act and the Economic Growth, Regulatory Relief, and Consumer Protection 
Act. By making available to these funds the communications and 
prospectus delivery rules currently available to operating companies, 
the proposal would improve access to capital and facilitate investor 
communications by these funds.
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    \39\ See Press Release 2019-39, SEC Proposes Offering Reforms for 
Business Development Companies and Registered Closed-End Funds (Mar. 
20, 2019), available at https://www.sec.gov/news/press-release/2019-39.
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    The fiscal year 2020 request would allow Investment Management to 
build on these initiatives, including by providing four additional 
positions to bolster their expertise and oversight of products that 
receive significant investments from Main Street investors such as 
mutual funds, variable insurance products and ETFs, among other 
products.
            Economic Analysis and Retrospective Review of Commission 
                    Rules
    None of the efforts by our policymaking divisions and offices 
discussed above, including our work with the FSOC and the FSB, would be 
possible without the efforts of the economists in the Division of 
Economic and Risk Analysis (DERA). I have noted that the SEC is 
committed to performing rigorous economic analysis of our rules and has 
done so in each of the rulemaking initiatives I have described in this 
testimony and for each other major rule enacted in fiscal year 2018. 
However, effective rulemaking does not end with rule adoption. Our 
Strategic Plan calls for reviewing Commission rules retrospectively to 
identify outdated rules that might not be functioning as intended in 
modern markets.
    Our fiscal year 2020 request would provide resources to hire two 
additional positions in DERA to enable further robust economic analysis 
and retrospective review of Commission rulemaking and allow DERA to 
fully support other divisions and offices in their regulatory and 
oversight responsibilities.
Evaluate the SEC's Performance by Enhancing Our Analytical Capabilities 
        and Human Capital Development
            Cybersecurity and Information Technology
    Cybersecurity and minimizing cyber risks at the SEC continue to be 
top priorities, and the additional resources Congress provided in 
fiscal year 2018 enabled us to upgrade our information technology 
infrastructure and strengthen our cybersecurity risk profile. The SEC 
and other agencies are frequent targets of attempts by threat actors 
who seek to penetrate our systems, and some of those actors may be 
backed by substantial resources. Recognizing the twin realities that 
electronic data systems are essential to our mission and that no system 
can ever be entirely safe from a cyber intrusion, it is incumbent upon 
us to continue to devote substantial resources and attention to 
cybersecurity, including the protection of personally identifiable 
information (PII). Over the past year, we have been focused on a number 
of areas for improvement, including with respect to information 
technology governance and oversight, security controls, risk awareness 
related to sensitive data, incident response and reliance on legacy 
systems--and much work remains to be done.
    A key principle as a part of our review of our cybersecurity and 
enterprise risk profiles is to evaluate the data we take in, assess our 
regulatory and enforcement responsibilities, and limit the scope of 
that information to what is necessary to achieve those 
responsibilities. In particular, we are closely scrutinizing how we can 
reduce any potential exposure of PII contained in SEC systems, 
including EDGAR. In this regard, in April 2018, the Commission acted to 
eliminate the collection of social security numbers and dates of birth 
on a number of EDGAR forms where we concluded that the information was 
not necessary to our mission.\40\ Moreover, return copies of test 
filings are no longer stored within the EDGAR system. Additionally, the 
Commission recently implemented modified submission deadlines for 
filing non-public reports for registered investment companies that will 
allow the agency to receive and analyze the data while meaningfully 
reducing the sensitivity of that data at the time it is 
transmitted.\41\
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    \40\ Amendments to Forms and Schedules To Remove Provision of 
Certain Personally Identifiable Information, Rel. Nos. 33-10486, 34-
83097, IC-33077 (Apr. 24, 2018), available at https://www.sec.gov/
rules/final/2018/33-10486.pdf.
    \41\ See Press Release 2019-23, SEC Modifies Timing for Filing Non-
Public Form N-PORT Data to Align with Its Approach to Data Management 
and Cybersecurity (Feb. 27, 2019), available at https://www.sec.gov/
news/press-release/2019-23.
---------------------------------------------------------------------------
    The agency has also focused closely on its cybersecurity risk 
governance structure. We recently hired a Chief Risk Officer, Gabriel 
Benincasa, who will help coordinate our enterprise risk management 
efforts across the agency.\42\ We have worked to promote a culture that 
emphasizes the importance of data security and operational resilience 
throughout our divisions and offices. The staff has also been engaging 
with outside experts to assess and improve our security controls. For 
example, on a technical level, these efforts include the deployment of 
enhanced security capabilities, additional penetration testing and code 
reviews, investment in new technologies and experienced cybersecurity 
personnel and acceleration of the transition of certain legacy 
information technology systems to modern platforms. We will be taking 
additional actions in fiscal year 2020 to further strengthen our 
cybersecurity posture. We will also continue to coordinate and partner 
with other Federal agencies to identify and mitigate risks to our 
information technology environment and assets.
---------------------------------------------------------------------------
    \42\ See Press Release 2019-24, SEC Names Gabriel Benincasa as Its 
First Chief Risk Officer (Feb. 28, 2019), available at https://
www.sec.gov/news/press-release/2019-24.
---------------------------------------------------------------------------
    To date, the additional information technology and cybersecurity 
resources Congress has provided have allowed the SEC to make 
significant strides in our cybersecurity expertise and defenses. But 
these challenges are continuing to evolve, as the threat actors find 
new, innovative ways to carry out their attacks. As such, fiscal year 
2020 will be a critical year for the agency to follow through on 
strategic technology priorities, including a number of multi-year 
initiatives. The fiscal year 2020 request seeks funding for information 
technology and cybersecurity, including funding to hire three 
additional staff positions to the Office of Information Technology to 
strengthen its expertise in new technologies and expand our security 
efforts against attacks by threat actors. The funding, including use of 
the Reserve Fund, will also enable the SEC to continue investments to 
strengthen the security of our systems and data, retire outdated legacy 
systems and develop new information technology systems and analytic 
tools to increase our effectiveness.
            Human Capital
    Returning to where I started, a critical part of our Strategic 
Plan, and inherent in our fiscal year 2020 request, is investing in our 
current workforce and ensuring that the SEC can continue to build 
expertise in the areas most important to Main Street investors. The 
quality and character of the women and men who serve American investors 
in our headquarters and our 11 regional offices are the reason I am 
confident that the resources Congress has provided to the SEC are well 
spent. They have faced new challenges head-on with professionalism and 
commitment to our shared cause. I often say that our people are our 
greatest assets--this is not simply a cliche but a recognition that 
without our skilled, dedicated staff, the SEC could not advance our 
tripartite mission to the benefit of our Main Street investors. I 
believe our fiscal year 2020 request will ensure that the SEC continues 
to have a workforce known for its expertise and motivation to work for 
the benefit of Main Street investors and our markets.
            Leasing
    One final, important component of our fiscal year 2020 budget 
request is support for the leasing of office space. The SEC is 
currently participating in the General Services Administration's (GSA) 
competitive procurement process for a successor lease for the SEC's New 
York Regional Office (NYRO) and our Washington, DC headquarters. 
Currently, the GSA expects to announce a contract award for the 
headquarters lease by the end of fiscal year 2019, and an announcement 
for the NYRO lease award is expected in fiscal year 2020. Working 
through GSA, the SEC extended the terms of the current headquarters 
leases to align with the anticipated fiscal year 2024 start of the new 
headquarters lease. Additionally, as the outcome of GSA's competitive 
acquisition for NYRO may require moving to a new space, the fiscal year 
2020 request includes funding for the planning and execution of the 
movement of files, equipment and personnel from NYRO. None of these 
funds would be used for the operations of the SEC, and we have proposed 
appropriations language that provides a mechanism whereby any unused 
portion of these funds would be refunded to fee payers, or the Treasury 
general fund, depending on the source.
                               conclusion
    Thank you again for the opportunity to testify today on our fiscal 
year 2020 budget request. I greatly appreciate this Committee's support 
of the SEC and stand ready to work with each of you this year to ensure 
that the SEC has the resources necessary to fulfill our mission to 
protect investors, maintain fair, orderly and efficient markets and 
facilitate capital formation. I look forward to answering any of your 
questions.

    Senator Kenney. Thank you, Mr. Chairman. Chairman 
Giancarlo.
STATEMENT OF J. CHRISTOPHER GIANCARLO, CHAIRMAN, 
            COMMODITY FUTURES TRADING COMMISSION
    Mr. Giancarlo. Thank you, Chairman Kennedy, and Ranking 
Member Coons, and Members of this subcommittee. Thank you for 
your kind words as well.
    There is indeed a strong partnership today between the SEC 
and the CFTC. Early on, Chairman Clayton and I committed our 
agencies to work more closely together, and it set a tone from 
the top. And you can see that cooperation today in matters of 
regulatory enforcement, crypto asset regulation, Dodd-Frank 
rule harmonization, Clearing House oversight, disaster recovery 
testing and planning, and so much more.
    In fact, it is a privilege, a pleasure, and honor for the 
CFTC to work alongside the dedicated professionals of the SEC. 
And thank you my friend for our close cooperation and our work 
on behalf of American markets. And I want to thank this 
committee, the subcommittee, for its fiscal year 2019 budget 
increase that you provided and for your constant support for 
our agency. You know, when people think of the SEC, they think 
of American markets for capital formation and investment 
trends, they think of markets where investors with capital find 
investors with new ideas and new products that together produce 
prosperity and create jobs.
    Well when people think of the CFTC, they think of futures, 
options, and swaps markets known as derivatives. These are the 
markets not for capital formation and capital transfer, but for 
risk mitigation. They enable the transfer of business risks of 
variable prices such as commodities, energy, foreign currency, 
and interest rates, from those who cannot bear that risk to 
those who can. And they serve the social good of moderating 
price, supply, and other commercial risks that then free up 
capital for job creation and economic growth. Now most 
Americans do not trade in these markets, yet these markets are 
the reason why consumers enjoy stable prices, not only in the 
supermarkets, but in all manner of consumer finance from auto 
loans to household purchases. Derivative markets are where the 
price of heating in American homes is found, energy used in 
factories, interest rates that borrowers pay on home mortgages, 
and the returns that workers earn on their retirement savings.
    American derivative markets are the world's largest, most 
developed, and most influential, and they are relatively 
unmatched in their depth and breadth, providing deep pools of 
trading liquidity, low transaction costs, and participation by 
a diverse array of global counter-parties. And while American 
markets are some of the world's oldest, they are also some of 
the world's fastest growing and most technologically 
innovative. American markets are known to be the world's best 
regulated, and the United States is the only major country in 
the Organization for Economic Cooperation and Development to 
have a regulatory agency specifically dedicated to derivatives 
market regulation. And I believe there is a connection between 
having the world's largest and most competitive derivative 
markets and independent Federal regulation.
    For over 40 years, the CFTC has been recognized for its 
principles-based regulatory framework, and econometric-driven 
analysis, and it is recognized around the world for its depth 
of expertise and depth of capabilities. And I truly believe 
that America's well regulated, independently regulated 
derivative markets are a national advantage in global economic 
competition. But to remain 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 are the envy of the world.
    Turning to our budget, the Commission requests a total of 
$315 million for fiscal year 2020. This consists of two 
separate requests, the annual Commission operational funding of 
$284 million, and a new request to support the relocation of 
three regional offices of $31 million. The annual operational 
request of $284 million will provide 707 FTEs in fiscal year 
2020. And it is a $2.5 million amount above the fiscal year 
2019 President's budget request and reflects an inflation rate 
adjustment of less than 1 percent. This request seeks an annual 
increase of $35 million above the fiscal year 2019 continuing 
resolution funding level and is in line with fiscal year 2019 
President's budget. The budget request of $284 million is the 
level of funding necessary, I am certain, to fulfill our 
statutory mission.
    In closing, I am grateful for your consideration of this 
budget request that we will discuss today. As it is likely my 
last appearance before you, I want to say that it really has 
been a pleasure and privilege to have served under this 
subcommittee, and it is an honor to have been of service to the 
American people and to have led the extraordinary men and women 
of the U.S. Commodity Futures Trading Commission. Thank you.
    [The statement follows:]
          Prepared Statement of Hon. J. Christopher Giancarlo
                              introduction
    Thank you, Chairman Kennedy, 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 Exchange 
Commission (SEC), Chairman Jay Clayton.
    I want to start by saying thank you to all the members of this 
subcommittee for supporting the work of the Commodity Futures Trading 
Commission (CFTC), and for the budget increase you provided with the 
enactment of the fiscal year 2019 budget.\1\
---------------------------------------------------------------------------
    \1\ Consolidated Appropriations Act, 2019, PL 116-6 at https://
www.congress.gov/bill/116th-
congress/house-joint-resolution/31
---------------------------------------------------------------------------
    I would also like to acknowledge the strong working relationship 
that exists today between the SEC and CFTC. From the outset Chairman 
Clayton and I recognized the need for our agencies to work more closely 
together. We are doing that today in the areas of regulatory 
enforcement, cyrptoasset regulation, Dodd-Frank rule harmonization, 
clearinghouse oversight, disaster recovery testing and resolution 
planning and so much more. It has been a privilege, a pleasure and an 
honor to work alongside him and the fine men and women of the SEC. I 
thank Chairman Clayton for being a good partner and trusted colleague 
in the challenging roles that we serve.
    As you know, the CFTC oversees the futures, options and swaps 
markets. While most Americans do not actively participate in these 
markets, businesses of all sizes use the derivatives markets to manage 
commercial and market risk. These markets are one 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.
    Today, American derivatives markets are the world's largest, most 
developed, and most influential. They are relatively unmatched in their 
depth and breadth, providing deep pools of trading liquidity, low 
transaction costs and friction and participation by a diverse array of 
global counterparties. They are also some of the world's fastest 
growing and technologically innovative.
    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 CFTC. 
There is a connection between having the world's most competitive 
derivatives markets and independent Federal regulation. For over 40 
years, the CFTC has been recognized for its principles-based regulatory 
framework and econometrically-driven analysis. The CFTC is respected 
around the world for its depth of expertise and breadth of capability.
    The combination of regulatory expertise and competency is one of 
the reasons why derivatives markets continue to serve the global need 
to hedge price and supply risk safely and efficiently. It is why well-
regulated U.S. derivatives markets, by allowing low-cost and effective 
hedging, are of great benefit to American producers and consumers and 
to the rest of the world.
    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.
    It was 5 years ago this month that I first testified before the 
Senate Agriculture Committee concerning my nomination to serve on the 
Commission. I knew that if confirmed, I would bridge the last years of 
the Obama administration and the early years of the new administration. 
In 2017, as Chairman of the Commission, I set out my agenda for moving 
the Agency forward. I pledged to make sure that our derivatives markets 
performed their essential role moderating price, supply and other 
commercial risks--shifting risk to those who can best bear it from 
those who cannot. I said that our markets should be neither the least 
nor the most prescriptively regulated--but the BEST regulated--
balancing market oversight, health and vitality. To do that, we would 
follow a three-part agenda: completing unfinished business of the past, 
improving current operations, and preparing for the future, what I call 
becoming a 21st Century digital regulator.
    I believe the budget request for fiscal year 2020 supports this 
agenda.
                             budget request
    The Commission is requesting a total of $315.0 million for fiscal 
year 2020. This budget request consists of two separate requests, the 
annual Commission operational funding of $284.0 million and a new 
request to support the relocation of three regional offices of $31.0 
million. The annual operational request of $284.0 million will provide 
707 FTE in fiscal year 2020; this request is $2.5 million above the 
fiscal year 2019 President's Budget Request \2\ and represents an 
inflationary adjustment of less than 1 percent. This request seeks an 
annual increase of $35.0 million above the fiscal year 2019 Continuing 
Resolution funding level and is in line with the fiscal year 2019 
President's Budget.
---------------------------------------------------------------------------
    \2\ Commodity Futures Trading Commission, fiscal year 2019 
President's Budget, February 2018, at: https://www.cftc.gov/About/
CFTCReports/cftcreports_historical.html
---------------------------------------------------------------------------
    The budget request of $284 million is the level of funding 
necessary to fulfill the CFTC's statutory mission.
                         21st century regulator
    I have frequently talked about transforming the CFTC into a 21st 
Century regulator amidst today's increasingly digital and algorithmic 
markets. I recently identified several factors that are challenging the 
work of regulators: the extraordinary pace of exponential technological 
change, the disintermediation of traditional actors and business 
models, and the need for technological literacy and big data 
capability.
    I said that the CFTC's response to rapidly changing markets and 
technological developments, including blockchain technology and 
cryptocurrencies, is built upon the following four cornerstones:

  --Adopting an ``exponential growth mindset'' that anticipates the 
        rapid pace of technological innovation and the need for 
        appropriate regulatory response;
  --Becoming a ``quantitative regulator'' able to conduct independent 
        market data analysis across different data sources, including 
        decentralized blockchains and networks, without being reliant 
        on self-regulatory organizations and market intermediaries;
  --Embracing ``market-based solutions'' to determine the value of 
        technological innovations, as we witnessed with the launch of 
        crypto-asset-based futures products; and
  --Establishing an internal FinTech Stakeholder to address the 
        opportunities and challenges that FinTech presents and manage 
        the ever-present tension between innovation and regulation.

    For us, that stakeholder is LabCFTC, which was launched almost 2 
years ago. In that time, it has had over 250 separate interactions with 
innovators big and small. It has offices in New York City. It conducts 
``lab hours'' in places where innovators work: from Silicon Valley, 
California to Silicon Hills, Texas and from the South Bank of London to 
Singapore Center. LabCFTC is not a ``sandbox.'' It does not try to pick 
winners from losers, nor does it exempt firms from CFTC rules.
    Instead, LabCFTC provides us both an internal and external 
technological focus. Internally, it means explaining technology 
innovation to agency staff and other regulators and advocating for 
technology adoption. Externally, that means reaching out and learning 
about technological change and market evolution, while providing a 
dedicated liaison to innovators. It has entered into FinTech 
cooperation agreements with regulators in London, Singapore and 
Australia. It has published well-regarded technology primers and 
requests for comments. I am proud to say that LabCFTC has become a 
category leader. Every U.S. Federal financial regulator has either 
created or is creating a program similar to LabCFTC.
             economic modeling and econometric capabilities
    The fiscal year 2020 budget request will continue to allow the 
agency to expand its core economic expertise in order to conduct in-
depth analytical and empirical studies of issues affecting all areas of 
Commission and regulatory interest. It will allow the Commission to 
address the large volumes of data collected as a result of the Dodd-
Frank Act. The resulting work will further enhance the Commission's 
understanding of market risk or systemic risk and derivatives market 
structure and participants, including end users, intermediaries, and 
traders, and connections between futures, cleared swaps, and uncleared 
swaps.
    Improved economic and econometric analysis will improve the 
analytical and empirical foundations of the Commission's policies and 
rules and better inform its cost-benefit considerations. Furthermore, 
this request will enable the Commission to provide more of its analysis 
to the public in the form of white papers on topics of current 
interest, as well as recurring reports on aggregate market trends, 
trading activity, and positions, and high-quality research papers on 
fundamental properties of relevant markets and sectors of market 
participants.
                             cyber security
    As market leaders and regulators, we must continue to take every 
step possible to thwart cyber-attacks that have become a continuous 
threat to U.S. financial markets. With the fiscal year 2020 budget 
request, the Commission plans to strength cybersecurity and network 
defenses, support the LabCFTC 2.0 initiative, and invest in the 
agency's multi-year cloud strategy.
    The Commission seeks new IT security resources to continue progress 
towards achieving compliance with Federal Information Security 
Management Act (FISMA) and related Office of Management and Budget 
(OMB) security mandates and ensuring the protection of sensitive market 
participant data.
    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.
                   agency reform and the kiss project
    Two years ago, I announced the launch of Project KISS. It stands 
for ``Keep It Simple Stupid.'' It is an agency-wide review of CFTC 
rules, regulations and practices to make them simpler, less burdensome 
and less costly. It has resulted in a range of rule and process 
improvements that are reducing regulatory costs and burdens.\3\ Many 
KISS initiatives were recommended by market participants, but many were 
also initiated by our own agency staff that saw ways to reduce undue 
obligations on registrants and market participants. There are still 
more Project KISS initiatives in the pipeline. It is my belief that 
this effort should continue upon my departure and be a regular part of 
the agency's mission.
---------------------------------------------------------------------------
    \3\ 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.
---------------------------------------------------------------------------
                         dodd frank rulemaking
    The Commission has made progress on completion of its critical 
Dodd-Frank Act rule making. On November 5, 2018 a five-Member 
Commission voted unanimously on the threshold for swap dealer de 
minimis to provide the market with certainty that the threshold will 
not fall from $8 billion to $3 billion.\4\
---------------------------------------------------------------------------
    \4\ ``Commission Approves a Final Rule on Swap Dealer De Minimis 
Exception'', November 5, 2018, at: https://www.cftc.gov/PressRoom/
Events/opaeventstaffmeeting110518.
---------------------------------------------------------------------------
    In addition, all five Commissioners have committed to Congress to 
move forward with a final position limits rule. I believe the final 
rule must be responsive to the public comments and ensure that 
regulatory barriers do not stand in the way of long standing hedging 
practices of American farmers, ranchers, producers and manufacturers, 
who depend on our markets. I intend to put forth such a position limits 
rule proposal before I leave the Commission.
                              sef reforms
    The CFTC's implementation of its swaps trading rules has long been 
a concern of mine. I believe the current framework is inconsistent with 
the Dodd-Frank Act by being too prescriptive, too burdensome and too 
modeled on futures markets. The framework is also highly subjective and 
overly reliant on a series of no-action letters, staff interpretations 
and temporary regulatory forbearance that may change at any time.
    That is why, last November, the Commission issued a proposed rule 
to amend the SEF regulations and the trade execution requirement and a 
request for comment on the practice of ``post-trade name give-up.'' \5\ 
I believe there are two crucial reasons to improve the SEF rules: risk 
and opportunity. The impermanence of the current SEF rule framework 
poses risk for market participants. At any time staff may well change 
or withdraw the numerous interpretations, guidance and compliance 
expectations that underpin the current framework. Moreover, the current 
restrictions on methods of execution may turn out to be, by themselves, 
a source of trading risk during a liquidity crisis--when swaps 
counterparties need to be found through less prescriptive and more 
flexible means of execution.
---------------------------------------------------------------------------
    \5\ Federal Register, November 30, 2018, at: https://
www.Federalregister.gov/documents/2018/11/30/2018-24643/posttrade-name-
give-up-on-swap-execution-facilities.
---------------------------------------------------------------------------
    On the other hand, improving the SEF rules presents opportunity--
opportunity for service innovation by existing and new market entrants 
that has waned under the current framework. It is the opportunity to 
boldly create a regulatory framework that actually fosters innovation, 
entrepreneurship, competition and increased market vibrancy rather than 
stifle it. Improving the SEF rules also increases the chance that the 
SEC will draw on the new framework in whole or in part for their 
security-based SEF regime. It would create a common U.S. regulatory 
approach for all swaps products, reducing operational and compliance 
costs and risks.
    I do not support merely tinkering with the current SEF rules to fix 
their most glaring shortcomings or perpetuating the many no action 
letters and staff guidance on which they rely. Such a step would be 
unworthy of the regulator of the world's most vital derivatives 
markets. Instead, the agency must not be afraid to build a better and 
more durable regulatory framework for swaps execution that encourages 
the return of innovation and new service offerings and supports vibrant 
markets and broad-based prosperity for a generation or more.
                increased examinations of clearinghouses
    Fully funding the CFTC at the fiscal year 2020 levels will support 
the agency's oversight of clearinghouses. The agency's work to conduct 
regular examinations, in concert with the Commission's surveillance and 
other functions, is a highly effective method to maintain market 
integrity so that American businesses can rely on these markets. The 
Commission leverages resources by conducting joint examinations across 
Commission divisions, and through coordinated examinations with the 
Federal Reserve and the Securities and Exchange Commission, where 
possible. This effort allows the Commission to be more efficient with 
its limited resources and at the same time, reduce burdens for dual 
registrants.
    In addition, examinations of DCOs help the Commission identify 
issues that may affect a clearinghouse's ability to control and monitor 
its risks. These are among the most important examinations that the 
Commission conducts, as clearinghouses have become critical single 
points of risk in the global financial system. Furthermore, the number 
of clearinghouses, the scope and complexity of the examination issues 
and the importance of these examinations to overall financial stability 
are all increasing.
    In addition to U.S. clearinghouses, the Commission regulates six 
registered non-U.S. clearinghouses, and has limited oversight of four 
non-U.S. clearinghouses exempt from registration. The Commission 
anticipates new applications for DCO registration resulting from the 
explosion of interest in crypto currencies; an area in which protection 
of the crypto currencies will be one of the highest risks.
    The Commission has an active, data-driven daily risk surveillance 
function, and expects to continue investing additional resources on 
human capital, data, and technology to improve our current analytical 
capabilities to keep up with growth in both the scale and complexity of 
risk transmission in the derivatives markets.
    Given the emphasis of G-20 and Dodd Frank reform efforts on central 
clearing as a critical tool to help mitigate systemic risk in the 
global financial markets, the Commission expects to grow our stress 
testing program to help ensure that the clearing eco-system continues 
to be resilient to absorb both market and systemic shocks.
                   effective international engagement
    Recently, the CFTC along with the Bank of England and the Financial 
Conduct Authority (FCA), with support from Her Majesty's Treasury, 
issued a joint statement providing assurances to market participants on 
the continuity of derivatives trading and clearing activities between 
the UK and U.S. regardless of the outcome of the UK's withdrawal from 
the EU.\6\ Together, the four authorities are taking measures to avoid 
regulatory uncertainty about the continuation of derivatives market 
activity between the UK and U.S. These measures should give confidence 
to market participants about their ability to trade and manage risk 
across the Atlantic. It is a great credit to the decades-long 
cooperation between the CFTC and the Bank of England, FCA, and HM 
Treasury, that we are able to work together to take these steps.
---------------------------------------------------------------------------
    \6\ ``Joint Statement by UK and US Authorities on Continuity of 
Derivatives Trading and Clearing Post-Brexit'', February 25, 2019, at 
https://www.cftc.gov/PressRoom/PressReleases/7876-19.
---------------------------------------------------------------------------
    It is critical that the CFTC continues to work positively with its 
overseas regulatory counterparts, not just in the UK, but in all 
financial centers. I am a firm believer that by working together with 
my regulatory counterparts across the globe, in a cooperative spirit, 
we can strengthen our economies while keeping our financial system 
resilient and stable. That is why the afternoon after the CFTC-UK 
announcement; I traveled to Brussels to meet with European Commission 
Vice President Valdis Dombrovskis and Director-General Olivier Guersent 
to discuss how to broaden cooperation between the CFTC and the EC.
    In addition, I am proud to report that we achieved a significant 
milestone on March 13, 2019 as the CFTC and the Monetary Authority of 
Singapore announced the mutual recognition of swaps trading venues in 
our respective jurisdictions.\7\ In this regard, the CFTC exempted 
certain Singapore trading venues from the SEF registration 
requirements. This exemption reduces the burdens associated with 
duplicative and overlapping regulations, mitigates market 
fragmentation, enables U.S. market participants to access Singaporean 
markets to manage risks effectively, and enhances cross-border business 
opportunities for both U.S. and Singaporean firms.
---------------------------------------------------------------------------
    \7\ ``Joint Statement of the CFTC and the Monetary Authority of 
Singapore Regarding the Mutual Recognition of Certain Derivatives 
Trading Venues in the United States and Singapore, March 13, 2019, at: 
https://www.cftc.gov/PressRoom/PressReleases/7887-19.
---------------------------------------------------------------------------
    Recently, EU co-legislators reached a political agreement on the 
new amendments to the European Market Infrastructure Regulation (EMIR 
2.2) pertaining to the regulation and supervision of central 
counterparties (CCPs). To mark this occasion, I issued two statements: 
a joint statement with Valdis Dombrovskis (Dombrovskis), the Vice-
President of the European Commission (EC), and a separate statement as 
Chair of the CFTC. The statements publically affirm that the CFTC's 
concerns regarding the potential adverse impact EMIR 2.2 on U.S. CCPs 
and the broader U.S. financial markets remain a significant issue for 
the U.S. and it is our expectation, that EU authorities will address 
our concerns during the EMIR 2.2 legislative process.
    The joint statement with Dombrovskis asserts that the CFTC will 
continue to engage with EU authorities on EMIR 2.2 through the next 
phase of the legislative process, the drafting of the implementation 
regulations (the Level 2 process), and that the EC will consider the 
CFTC's concerns during this Level 2 process. It also states that it is 
the expectation of the EC and the CFTC that the implementation of EMIR 
2.2, along with the CFTC's on-going review of its cross-border regime, 
will result in a future transatlantic relationship between the EU and 
the CFTC, which will be based on greater deference than there is now.
    In my separate statement, I reaffirm my understanding that although 
the application of EMIR 2.2 to U.S. CCPs is not likely to occur until 
2020 or beyond, EU authorities, including the EC and the European 
Securities and Markets Authority (ESMA), will work with the CFTC to 
address U.S. concerns during the legislative process. Further, I state 
that the starting point for any future recognition assessment of U.S. 
CCPs must be the current 2016 Equivalence Decision.
    These statements taken together are meant to provide market 
participants who transact in both U.S. and EU markets assures that the 
CFTC and the EC will continue to work through our differences to 
mitigate the impact of unnecessary regulatory and supervisory burdens, 
and to foster economic growth and stability for our global CCPs.
    Six months ago, I released a White Paper on cross-border swaps 
regulation that proposed updating the agency's current cross-border 
application of its swaps regime with a rule-based framework based on 
regulatory deference to third-country regulatory jurisdictions that 
have adopted the G-20 swaps reforms.\8\ As our regulatory counterparts 
continue to implement swaps reforms in their markets, it is critical 
that we make sure our rules do not conflict and fragment the global 
marketplace. That is why I believe the CFTC should move to a flexible, 
outcomes-based approach for cross-border equivalence and substituted 
compliance and operate on the basis of comity, not uniformity, with 
overseas regulators.
---------------------------------------------------------------------------
    \8\ ``Chairman Giancarlo Releases Cross-Border White Paper'', 
October 1, 2018 at: https://www.cftc.gov/PressRoom/PressReleases/7817-
18.
---------------------------------------------------------------------------
    Before I leave the Commission, I intend to put forward a rule 
proposal to address the registration of non-U.S. CCPs clearing swaps 
for U.S. persons. I also intend to put forth a rule proposal addressing 
the registration and regulation of non-U.S. swap dealers and major swap 
participants. In particular, the proposal will address the risk that 
non-U.S. swap dealing activity poses to the United States, but do so in 
a way that does not apply the swap dealer rules extraterritorially 
without sufficient consideration of whether the activity truly poses a 
``direct and significant'' risk to the U.S. financial system, as 
Congress intended.
                              enforcement
    The fiscal year 2020 budget request will allow the Commission to 
continue its strong record on enforcement and oversight of the 
derivatives markets to ensure they operate free of fraud, manipulation, 
and other trading abuses.
    Two years ago, I issued a warning to those who may seek to cheat or 
manipulate our markets that they would face aggressive and assertive 
enforcement action by the CFTC. I pledged there would be no pause, let 
up or reduction in our enforcement of the law and punishment of 
wrongdoing.
    During my watch, the CFTC has been resolute in holding market 
participants to the highest standards of behavior. In fact, by any 
measure, enforcement has been among the most vigorous in the history of 
the CFTC, including more enforcement actions, more penalties, more 
large-scale matters, more accountability, more partnering with criminal 
law enforcement and more whistleblower awards than in prior 
years.highest standards of behavior. In fact, by any measure, 
enforcement has been among the most vigorous in the history of the 
CFTC, including more enforcement actions, more penalties, more large-
scale matters, more accountability, more partnering with criminal law 
enforcement and more whistleblower awards than in prior years.highest 
standards of behavior. In fact, by any measure, enforcement has been 
among the most vigorous in the history of the CFTC, including more 
enforcement actions, more penalties, more large-scale matters, more 
accountability, more partnering with criminal law enforcement and more 
whistleblower awards than in prior years.\9\
---------------------------------------------------------------------------
    \9\ See, generally, ``Regulatory Enforcement & Healthy Markets: 
Perfect Together!'', Remarks of Chairman J. Christopher Giancarlo at 
Economic Club of Minnesota, October 2, 2018, Minneapolis, Minnesota, 
at: https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo56.
---------------------------------------------------------------------------
    The Commission has strengthened its rules and procedures to better 
protect whistleblowers, brought new impactful enforcement cases, and 
successfully resolved other important enforcement cases. In addition, 
enforcement resources have been enhanced through the internal 
realignment of the Market Surveillance Branch in 2017 to report 
directly to the Director of Enforcement. This is one of several actions 
the Commission has taken to better utilize resources across the 
Commission.
    At the same time, I have strived to make sure CFTC enforcement 
staff is committed to providing incentives for companies and 
individuals to engage in ethical corporate behavior--to develop a true 
culture of compliance, to do the right thing. The cooperation and self-
reporting policies issued by the Division make clear that companies and 
individuals could receive a recommendation for a Commission reduction 
in penalty if they fully cooperate with enforcement investigations, 
timely remediate, and, most importantly, self-report misconduct before 
the Commission learns about it.
    To better encourage compliance, the Division recently issued an 
advisory on cooperation and self-reporting concerning foreign corrupt 
practices. As noted in remarks accompanying the advisory, James 
McDonald, the Commission's enforcement director, made clear that if a 
company or individual not registered (or required to be registered) 
with the CFTC timely self-reports a violation of the CEA involving 
foreign corrupt practices, fully cooperates, and appropriately 
remediates, the Division will apply a presumption, absent aggravating 
circumstances, that it will not recommend a civil monetary penalty.\10\
---------------------------------------------------------------------------
    \10\ ``Speech of James McDonald, Director of the Division of 
Enforcement Commodity Futures Trading Commission Regarding Perspectives 
on Enforcement: Self-Reporting and Cooperation at the CFTC'', September 
25, 2017 at: https://www.cftc.gov/PressRoom/SpeechesTestimony/
opamcdonald092517
---------------------------------------------------------------------------
    Before I entered government service, I spent a decade and a half 
working on Wall Street. My commitment to transparent examination 
practices and robust regulatory enforcement derives from that 
experience. It is the duty of government generally and the particular 
mission of the CFTC to fairly enforce market regulation and prosecute 
bad actors. We fulfill that mission so that America's financial markets 
are places for good people to fulfill their dreams, grow the economy 
and increase prosperity.
                     agricultural commodity futures
    Under my leadership at the Commission, we have refocused our 
attention on agricultural commodity futures, the agency's traditional 
foundation.
    During almost 5 years on the Commission, I have travelled the 
country and visited agriculture producers in over two dozen States from 
Montana, Texas, Arkansas, Louisiana and Iowa to Minnesota, Missouri, 
New York, Georgia, Mississippi and Oklahoma. I have walked in wheat 
fields and harvested soybeans, tramped through rice farms and beneath 
pecan groves, milked dairy cows and toured feedlots, visited grain 
elevators and viewed cotton gins. I have also met with our energy 
producers, going 900 feet underground in a Kentucky coal mine and 90 
feet in the air on a North Dakota oil rig. Throughout, I have been 
moved by the diverse beauty of this country. I have come to love its 
hard-working families producing food and energy from this abundant 
land. These visits have been a great privilege for me.
    This year in Kansas, we held the CFTC's second annual agricultural 
futures conference along with Kansas State University.\11\ Panelists 
discussed current macro-economic trends and issues affecting our 
markets, such as market speculation, algorithmic trading, trade data 
transparency, novel hedging practices and market manipulation. Our 
common purpose was to hear from end users who use our markets to hedge 
risk and consider and address issues of emerging market structure and 
trading practices.
---------------------------------------------------------------------------
    \11\ 2nd Annual Agriculture Commodity Futures Conference, April 11-
12, 2019, at: https://www.k-state.edu/riskmanagement/conference1.html.
---------------------------------------------------------------------------
    We also hosted a CFTC Agricultural Advisory Committee meeting in 
Kansas where panelists discussed the future of Futures Commission 
Merchants (FCM) and cash market innovations, as well as the evolution 
of electronic trading in agricultural markets, both very timely and 
important topics. I believe this was the first ever CFTC advisory 
committee meeting held outside of Washington with all five 
Commissioners in attendance.
                               conclusion
    Looking to the past, I will be pleased that I have furthered and 
confirmed much of the Dodd-Frank mandate for swaps. Where I have 
identified flaws in implementation, I have proposed comprehensive 
solutions. In my view, now is the time to create better frameworks that 
are more flexible, more durable and more supportive of deep and liquid 
markets, in good times and in bad.
    As for the present, I have tried to do what my parents taught me--
to leave any place I visit in a better condition than I found it: 
better run, better funded, more transparent, more accountable and more 
efficient in its vital mission overseeing American markets.
    As for the future, I will be satisfied that I have raised the 
profile and reputation of the CFTC and set it on a course for the 
digital Twenty-First Century. So much is changing, and changing rapidly 
in our commodity derivatives markets. As market regulators, we are 
ready to listen, and we are working to understand. And, we will be 
dogged. The greater the pace of change, the greater must be our 
capacity to keep pace, understand and harness it.
    The CFTC is well along the course of that new direction set 2 years 
ago--a course that is sustainable and true.
    Thank you for a privilege to speak to you today. It has been my 
honor to serve you, our dynamic markets and the American people.

    Senator Kennedy. Thank you, Mr. Chairman. Let me begin with 
a request to each of you. I think you have to talk to your 
colleagues about this and put together the information, but I 
am interested in knowing, and I am going to ask this of all of 
the agencies and departments that we fund, if you have any 
vendors with which or with whom you do business who have an 
unpaid final judgement against them for taxes. Could you check 
that for me? I am not saying we have a problem at your 
agencies, but we seem to have a problem across the Federal 
Government in that regard and I would like to look into it.
    [The information follows:]

    All of our payments to vendors are checked against a list 
maintained by Treasury of any company or vendor that owes the 
government funds, and if there is one, the amount paid to the vendor 
from CFTC funds is reduced by their liability to the Federal 
Government.

    Let me start with Jay, Chairman Clayton. As you know, Mr. 
Chairman, Senator Warner and I have a bill that would allow the 
SEC to seek disgorgement as a remedy and create a new authority 
for restitution for violations of Securities laws. Tell me 
about the issue with respect to disgorgement and your ability 
to enforce the law.
    Chairman Clayton. So, there was a recent Supreme Court case 
where the Supreme Court said that our current authority with 
regard to disgorgement was subject to a 5-year statute of 
limitations. Now, in a number of instances, that is probably 
correct. You know, statutes of limitations have value but there 
are some instances, in particular Ponzi schemes, well-concealed 
frauds where that type of statute of limitations, and we have 
the numbers that show this, impact our ability to get people 
their money back.
    A cut-off of 5 years, you could say in some way, rewards a 
well-concealed fraud. I do not like that, and I very much would 
like us to have the power to get people their money back. In 
many cases, like one that we have talked about, the Stanford 
Ponzi scheme--these are ordinary people who need our help to 
get their money back.
    Senator Kennedy. Okay. So, you would be supportive of the 
legislation by Senator Warner and me?
    Chairman Clayton. Let me be direct, yes.
    Senator Kennedy. Okay. Alright. Thank you for that. Let us 
talk about Stanford for a second. Last month we marked the 10th 
year anniversary of the Stanford Ponzi scheme, the second 
largest, unfortunately, that we have sustained. Most of the 
investors, as you know Mr. Chairman, were Mom-and-Pop investors 
that could not afford to lose the money. I know you have 
emphasized main street investors and protection of them in your 
work at the SEC. What role, if any, does the SEC have in 
overseeing the fees charged by the receiver? The fees are up to 
$224 million, and I do not want to begrudge anybody of a living 
wage, but they haven't recovered as much as I had hoped.
    Chairman Clayton. Let me say this. We have a role here that 
I think is pretty broad. There are a lot of other cooks in the 
kitchen and responsible people including the court that is 
overseeing the receivership and how this takes place, but 
again, in the interest of being clear and perhaps too blunt, 
the outcome here is unacceptable. And you know, you have 
situations where people clearly take risks. I mentioned and 
maybe we will talk about ICOs. You use your credit card to buy 
some offshore ICO outside the United States on the back an 
Internet empty promise. Hopefully you know you are taking the 
risk.
    The Stanford victims were not at all in that situation. 
There were all the indications of a well-thought-out, 
legitimate, secure investment, including lots of large 
institutions and government agencies in the mix, yet their 
recovery is anemic. We should learn from that at the very 
least.
    Senator Kennedy. Well, I know the SEC has been very 
supportive. We had hoped that the SPSC would cover these 
losses. I know the SEC filed a suit to try to get a judgment to 
that effect. You lost, we lost. I don't want to imply that the 
SEC has not been very cooperative. You have, but I will be 
having some conversations with you about what we can do to 
review some of the fees being charged and to help us recover as 
much of this money as we can. I did not mean to imply by my 
question that the SEC had not been with us all the way because 
I know we have talked about it and you have been very 
supportive.
    Senator Coons.
    Senator Coons. Thank you, Chairman Kennedy. Let me ask a 
couple of questions about some broader issues, if I might. 
Chairman Clayton, FASB, the Financial Accounting Standards 
Board, has issued a new accounting standard for calculating 
expected losses, commonly referred to as the CECL (Current 
Expected Credit Loss) standard. Has the SEC analyzed the 
potential impact of the standard more broadly on the financial 
sector and then more specifically for small businesses and 
consumers? And if not, do you think you have the relevant 
expertise and jurisdiction to conduct an informative study 
about the potential impact of the CECL standard?
    Chairman Clayton. So the CECL standard has been 
particularly a recent subject of a fair amount of debate and I 
have met with a number of people who have concerns. I think the 
principal concerns of the standard are the potential economic 
and other impacts of it and the cost of implementing it. To our 
larger banks, I think that cost is not material given the way 
they already run their systems and the like. For our less 
large, and mid-sized, and smaller banks that is an issue.
    The second issue is whether implementing CECL, an 
accounting standard, is going to increase capital requirements 
which is often a bank's regulatory standard and whether that 
will have an impact on the ability of banks to lend and 
otherwise affect their balance. And the third is a dynamic 
effect, and that, is given that this is an adjustment you do 
about expected losses, as economic conditions worsen you 
generally want people to continue to lend. And will this type 
of accounting treatment cause people to actually pull back from 
lending at the very time when we might want them to lend?
    So, we have analyzed that, but I should say that, unlike 
some of the other self-regulatory organizations, our oversight 
of FASB does not include reviewing and approving their rules. 
But what I will say is I have encouraged the FASB and I have 
encouraged the participants to continue to engage in those type 
of topics that I just outlined, and to think about ways that we 
can make sure that larger banks, mid-sized banks, smaller 
banks, we are taking into account those size considerations as 
we implement and analyze the rule. And continued engagement 
around this is important.
    Senator Coons. Thank you, Mr. Chairman. I think sharing 
that analysis, the points, some of the SEC's significant 
analytical capabilities around the implementation of this will 
be important because I think there is a lot of concern about 
exactly the impacts you discussed. Let me turn if I could to 
Chairman Giancarlo about cryptocurrencies, and you may both 
want to speak to this. But your budget request includes $4.2 
million for the Division of Clearing and Risk to expand 
examination, specifically into virtual currencies. Could you 
talk about the unique challenges of regulating an emerging 
market like virtual currencies, and the potential risks CFTC 
will be working to mitigate?

                      VIRTUAL CURRENCY REGULATION

    Mr. Giancarlo. Let me clarify that amount. Our Division of 
Clearing and Risk goes beyond just--they monitor all clearing 
houses. So, clearing house supervision is an important part of 
putting the swaps market into a cleared infrastructure under 
the Dodd-Frank Act. The demands on us as a derivatives clearing 
house regulator have grown, and so we are looking for resources 
to make sure that our capabilities, what I call our preventive 
approach, which is to make sure that if there is a problem in a 
clearing house, we see it before it becomes a market-based 
problem, is an important component there and in all areas.
    The challenge of cryptos is that for the cash-end of that 
market--it is the wrong word to use cash, right--the spot-end 
of that market, we do not have jurisdiction over that except 
for fraud and manipulation. So, our standards by which 
derivatives clearing houses must operate, the reporting 
requirements, the oversight, and the very thing you mentioned, 
the examinations, we do not get to do in these spot crypto 
exchanges, only if there is fraud and manipulation that results 
an impact to the derivatives market, of which as you know there 
is now a Bitcoin future. And so, for those exchanges, their 
price point determines the future's price point. We watch that 
very closely for fraud and manipulation, but neither the CFTC 
nor the SEC for non ICOs have actual exchange authority.
    And so, as Chairman Clayton noted, it is very much a buyer 
beware situation, and we work very hard individually and 
collectively. In fact, our two agencies 10 days ago issued a 
joint warning to investors to beware of the siren song of spot 
exchanges for cryptos and promises so that we make market 
participants aware because we are not there managing them and 
setting our regulations around how those exchange, those spot 
exchanges operate.
    Senator Coons. Chairman Clayton, do you want to add 
anything to the question of cryptocurrency regulation?
    Chairman Clayton. If you don't mind because I never miss an 
opportunity to say this, if you are looking at the quotes of 
stocks on one of our major exchanges and then you are looking 
at the quotes of a cryptocurrency on an offshore exchange, if 
you think those two are anything similar, you are wrong. We 
have all sorts of protections on trading. We have all sorts of 
abilities to audit and look into forensic analysis about 
whether somebody was manipulating or not and they have to have 
capital, they have to have--over there, nothing. Those trades 
could be fictitious. We would not know, and we can't do 
anything about it.
    Senator Coons. Thank you. Mr. Chairman.
    Senator Kennedy. Chairman Giancarlo, you are going to be 
you are asking for $31 million for relocation costs. You are 
moving some of your regional offices. Tell me about that.

                             LEASING ISSUE

    Mr. Giancarlo. Yes. So, we have to relocate our offices in 
Kansas City, Chicago, and New York. Those offices, their term 
lease, is coming to an end, but they were also opened, several 
chairmen ago by the CFTC acting unilaterally and not through 
the GSA. And subsequent to that was a determination that that 
was a violation and that we must work through the GSA. I have 
decided to embrace that new relationship, which we have with 
the GSA and work very closely with them.
    In fact, I have instructed my team, we are not only going 
to work well with the GSA, we are going to be their number one 
client. And we have been, and it is working very well. We have 
now identified space in New York and in Chicago, which are in 
the GSA buildings, within a short distance of our existing 
offices. First-class, A level space. And the $31 million is to 
do interior design work, fittings, relocation costs, all of the 
prep work we need to have in place so that in 2021 and 2022, 
when we make those office moves, we will be well positioned to 
do it.
    Senator Kennedy. You are reducing your square footage?
    Mr. Giancarlo. Right now, we have excess capacity on a 
blended basis where we are four offices. We have about 82 
percent occupancy, 18 percent unused space, and with the budget 
we put forward, our headcount is not going to be raised 
significantly in any way to make-up that lost space. We have 
worked hard to try to return some of that. We were able to 
sublet some of our space in Kansas City and we have been 
working with a landlord in New York to try to do that. But with 
our leases coming to an end, it is very hard and unlikely that 
we will be successful, at least in the next 2 years.
    But in our new space, we will be much closer to full 
occupancy with a little bit of swing space. But I think our 
leasing costs, or at least our square footage will go down. 
Rents go up, but I think net, we are going to save some money 
all the way around for the U.S. taxpayer.
    Senator Kennedy. Well good for you. Good for you. We 
appreciate that. I want to ask you about your fee proposal. You 
are the only Federal financial regulator that relies 
exclusively on appropriated funding. Do you think that ought to 
change?

                                  FEES

    Mr. Giancarlo. Well it has been the position of, I think, 
four of the five last Presidents that the CFTC should have some 
sort of market participation in fees. Ultimately that is a 
decision for Congress to make, not a decision for us to make.
    Senator Kennedy. Right. Okay. Fair enough. Chairman 
Clayton, let me ask you a couple of other questions here. I 
want to talk to you about the Consolidated Audit Trail, I think 
you call CAT. CAT is going to compile information on every 
Securities trade known to humankind. So, a lot of data. 
Obviously, you are looking for fraud and securities violation.
    The concern is I am not suggesting that you should not, but 
with algorithms and artificial intelligence, there is a lot of 
potential there to help you and your people do an even better 
job. But, tell me about the data security issues and what you 
have done. I know you are not going to collect social security 
numbers but how are you going to make sure that data stays 
secure?
    Chairman Clayton. Yes. So, let me say this, I think we, 
broadly speaking, we need the CAT for what I would say is those 
kind of enforcement, surveillance issues but also to understand 
our market structure and understand the, you mentioned, 
electronic trading, speed of trading, to understand the 
vulnerabilities that may exist as a result of the changing 
market structure. We had a flash crash a number of years ago 
and it took us a long time to unpack and find out what 
happened. So, we need----
    Senator Kennedy. With EDGAR (Electronic Data Gathering, 
Analysis, and Retrieval system)?
    Chairman Clayton. No, this is when stocks dropped----
    Senator Kennedy. Oh, okay. No, I know what you are talking 
about now.
    Chairman Clayton [continuing]. Why did that happen?
    Senator Kennedy. Yes.
    Chairman Clayton. Why all of a sudden did liquidity dry up. 
We need to understand that. But your concerns are concerns of 
mine. Are we collecting two types of data. One is proprietary 
data of people who participate in our market that they have a 
right to keep secure and then the personally identifiable 
information of what I call our Main Street investors. Both of 
those need to be addressed in any final CAT plan.
    I would like to say that the discussions around that when I 
first got to the SEC, I was unsatisfied with. They had a lot of 
things that were, we cannot do that, we cannot do this, but not 
really constructive. I feel better about where we are now. We 
are actually talking about not taking social security numbers, 
only using CAT specific IDs. Thus, limiting the fields that 
would have any kind of personal information, so it is difficult 
to use the information for any kind of nefarious purpose, and 
then of course, protecting that data by segregating trading 
data and trader data in different databases and those types of 
things.
    All that said, my message is we are not taking information 
unless we need it, and particular, in the area of personally 
identifiable information, unless we reasonably believe we can 
protect it. And that is how we are proceeding. This is a multi-
staged--it is not like you flip the switch and the CAT goes on. 
It has got about, you know, almost enumerate milestones, but as 
we work through those, that is going to be in my mind.
    Senator Kennedy. Okay. Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. Thanks both of 
you for being here and for your service. Chairman Clayton, I 
always have an opportunity also to talk about issues with you 
on the Banking Committee and I want to follow up on a couple of 
those issues, but first though relates to the mandatory 
arbitration question, because as I think you know, 21 Senators 
sent a letter to you urging you to continue to allow investors 
to have their day in court and that is supported by a Supreme 
Court decision way back in the day. There has been some talk 
that the SEC would try to eliminate those provisions and 
require mandatory arbitrations.
    So, can you just talk a little bit about where you see the 
SEC heading on this question.
    Chairman Clayton. So, I think I was first asked this 
question in the Banking Committee maybe as many as 2 years ago, 
and I am in the same position today that I was then. I have 
given some lengthy feedback on this and that is, if this issue 
were to be presented to the Commission, I would do everything I 
reasonably could to ensure that it was analyzed, discussed, and 
decided in an open way where the public and people who have 
different views, have an ability to weigh in. All that said, 
you know, there is the law and we are not the only, as recent 
developments have shown, we are not the only cook in this 
kitchen.
    Senator Van Hollen. Right. Do you have--are you personally 
in the position where you are still listening to arguments or 
have you reached any conclusions of your own on this issue?
    Chairman Clayton. I am in the same place I was 2 years ago 
which is I am not anxious to see--you know, this is not an 
issue that I want to use up the commission's bandwidth dealing 
with----
    Senator Van Hollen. Got it.
    Chairman Clayton [continuing]. But if I have to, I will.
    Senator Van Hollen. Got it. On the stock buyback issue and 
we have had a number of conversations there as well. We have 
Commissioner Jackson's findings. There are also questions about 
whether or not stock buybacks are being used for compensation 
purposes for, you know, executives of different companies. What 
is your sense of whether or not we should move ahead? As you 
know, I think this is something that warrants a deeper dive and 
a more formal study. What is your latest thinking on this?
    Chairman Clayton. So, to be clear, we do not regulate stock 
buybacks. Companies don't come to us and say, ``can I buy back 
a hundred shares or thousand shares?'' What we do regulate is 
if a company decides to buy back stocks as a means of returning 
capital, whether they are doing so in compliance with our anti-
manipulation and our insider trading laws. And we also require 
them to report, on a quarterly basis, how much stock they do 
buy back, and we require executives to report within a very 
brief time, two days, if they are making any sales for 
purchases generally, including during a buyback.
    You and I have had discussions on this, and there is an 
issue here that has been--I could say that this issue has been 
on my mind for many years, and that is, when a company decides 
to do a stock buyback, they are not just deciding in the 
abstract. There are other things going on including equity-
based compensations and the holdings of their executives. We do 
require disclosure of their sales, but it has always concerned 
me that the Compensation Committee of the Board of Directors, 
the Board of Directors generally, is looking at that 
compensation structure and analyzing whether the buyback is 
consistent with being appropriate stewards and setting 
appropriate compensation levels. But we have discussed that.
    Senator Van Hollen. Right, and I look forward to continuing 
that conversation. I mean, I know you do not, you know, tell 
companies can and cannot do buybacks, but as you know, we put 
in place, not you personally, but many years ago the Safe 
Harbor rule which is what has allowed companies to engage in 
stock buyback activity.
    So, it seems to me we should be very vigilant about whether 
or not they are doing it in the interests of their stockholders 
as opposed to just fattening the wallets of returns for the 
executives. So, we will continue that conversation, but you 
know it goes to what is prioritized as the SEC, right. You know 
as the Chairman, I mean you have got a lot of discretion and so 
I think you know, you send signals based on what you decide to 
focus on. Yes. Do I have a----
    Senator Kennedy. Sure.
    Senator Van Hollen. Thank you, Mr. Chairman. So, Mr. 
Giancarlo, good to see you. As part of your budget request the 
administration requested that $65 million of the $284 million 
be raised through an enacted user fee, which is not unlike what 
the SEC does for at least part of its budget. So, I am assuming 
that is something that you and the administration are 
advocating for. This is actually one of the things in the 
President's budget I will say, one of the few things, not that 
I think maybe it is a good idea because I think it is important 
that we generate additional resources for your work. Have you 
made an effort to encourage, you know, members of the 
Appropriations Committee to support the provision in the 
budget?
    Mr. Giancarlo. So, this President's budget, like many other 
President's budgets before, has a proposal for some sort of fee 
arrangement, whether it is transaction-based, which I have been 
frankly as a markets person not supportive of but some sort of 
fee structure. As I said to the chairman a few moments ago, I 
really believe that at the end of the day it for Congress to 
determine how this agency is funded, what its level of funding 
is. And, I have always felt as a public servant it is not for 
me to tell Congress what to do but for Congress to determine 
how we should be funded and then set the priorities as to how 
we do it. So, I would say that if it is Congress' determination 
that some part of our budget should come from the marketplace 
in some form, then obviously the agency would act on that.
    Senator Van Hollen. Well, I appreciate the deference to 
Congress. We appreciate the fact that, you know, you recognize 
the power of the purse here. I will say that this is a hearing 
of course to get the Administration's budget request and I 
think it is worth noting Mr. Chairman that part of that request 
is to apply this fee, which is a similar idea to what we have 
in place with the SEC. The FDA has a fee as well, a user fee. 
So, I know you have been interested in looking for ways to, you 
know, find additional resources without putting the obligations 
on the taxpayer. I hope we can have a conversation about moving 
ahead in this direction. Thank you.
    Senator Kennedy. Senator Coons.
    Senator Coons. Thank you, Chairman Kennedy. Chairman 
Clayton, I have got a couple of questions for you if I might. 
First, your headcount I think in your written testimony you 
note this budget supplement, this budget request would allow 
you to back fill. You would complete backfilling 134 positions 
of the 400 that you lost through the hiring freeze. Is that 
sufficient? Is it realistic? You would still be operating with 
nearly 300, 276 fewer positions than you had at the SEC before 
the hiring freeze. I think that is about a 5 percent total 
decrease. What are you not doing that you could be doing if 
more fully staffed? Do you feel these 134 position add is 
enough and will remain level? Talk to me about your staffing 
request and requirements.
    Chairman Clayton. So, I think we have been able to fulfill 
our mission. A lot of it really comes down to the dedication of 
the people we have in place. The 100 new positions that we are 
now in the process of hiring, I think that is money very well 
spent. These hires are mostly in the area of enforcement, 
inspections, and then market, some of the issues that I have 
just spoken to Senator Kennedy about, getting our market 
knowledge up-to-speed, and then cybersecurity, and support of 
course. The 34 are largely in some of those same places.
    We are also now able to, in addition to the 134 hires, when 
someone leaves or retires, we are able to back fill their 
position. I feel good about that. You know, if you ask me 8 to 
18 months or 2 years ago, you know, if you said, hey, here is 
another 50 FTEs, I might not have known where I could use 
those. At this point in the job and the relationship I have 
with my direct reports, I am sure I could put additional people 
to work on that kind of marginal basis. I think you should be 
able--you should have that in your mind if you are running an 
agency.
    Senator Coons. I just think across both agencies, you know, 
the increasing complexities of the markets, new areas of 
regulatory responsibility, the Dodd-Frank, gave you new 
mandates and responsibilities. So, the opening statements you 
both made, it is critical that we have the best regulated 
financial markets in the world, and I want to make sure we are 
not being penny-wise and pound-foolish. Let me move to 
cybersecurity.
    Last year we talked about the EDGAR system breach. Do you 
believe your budget request will give you all the resources you 
need to protect that database and other information held by the 
SEC, and can you talk at all whether that breach resulted in 
the perpetrators using the information to their market 
advantage? Is that something that--it would be relevant to help 
update us on.
    Chairman Clayton. Yes. We believe that the breach did give 
them an advantage in the marketplace and we brought cases 
accordingly. And the money that you have appropriated in the 
past, and the money that we are requesting now, has enabled us 
to lift the security of EDGAR.
    We have also reduced the amount of sensitive information 
coming into EDGAR. It is a very important system that is a 
legacy system. You know, it is somewhat of a kind of, maybe 
this is too negative, but imagine a cell phone that you 
purchased in the mid-90s, continuing to use it today, enhancing 
it and enhancing it. You know, if we were building the system 
from scratch, it would not look like this--but that is not 
where we are. So, I feel good about what our team has been able 
to do to lift it. We have had outside consultants come in and 
review our work, both Government consultants and private sector 
consultants, have done penetration testing. So, I feel a lot 
better, but we are going to continue to need to invest, 
investigate, and test as we go forward.
    Senator Coons. Yes, I think for both of you, IT and 
cybersecurity are going to be ongoing, critical questions. Let 
me ask you one last question about it. A proposal that 
generates a fair amount of controversy, and I am just interest 
in your view on where we are going. You are currently in the 
rule-making process to require a new standard of care for 
financial professionals. Broker dealers would act in the best 
interest of their client but would not require the same 
fiduciary standard that applies to investment advisors.
    As I am sure you are all well aware, the previous 
Administration moved forward a different approach. Your written 
testimony says the obligations of an investment advisor differ 
from that of a broker dealer. The DOL, regulation under the 
previous Administration, made them the same. Talk about the 
justification for the different standards in these two roles, 
its impact, and where you see this process going forward.
    Chairman Clayton. Sure. So, one of the important things in 
our marketplace for retail investor services is competition and 
choice. It is important to me and my colleagues at the SEC--the 
career people at the SEC believe this as well--that you have a 
choice between a fee-for-service model like a broker model, I 
come to and kind of pay as I go, or a, fee per account model 
and that is an advisor model where I pay a fee either an annual 
fixed fee or based on assets under management.
    There are many types of relationships for which the fee for 
the service model is cheaper than the fee for the account 
model, like the investment advisor model. That is important for 
competition. Now, there are many people for whom an investment 
advisor ongoing service monitoring discretionary investment is 
the better way to go but we need to keep that competition and 
choice. Then, you know what, the complaints that on the 
brokerage side there was too much activity that people said was 
``lawful'' but made you sick, we need to fix that. We also need 
to fix, do I know who I am dealing with, how are they getting 
paid, and what their incentives are, right.
    So, preserve that choice, preserve the competition, and 
raise the level of conduct required on the broker side. I can 
talk in detail about that, about what we are going to do, but 
that is what we are doing.
    Senator Coons. I appreciate that broad overview. I see I am 
well past my time, Mr. Chairman.
    Senator Kennedy. That is okay. Thank you, Senator. I have 
got two more questions, and just let me say to both of you, 
what I admire about both of you is you thought deeply about 
issues at the macro level. And I really appreciate that. 
Chairman tell me about your swaps reform.

                             SWAPS REFORMS

    Mr. Giancarlo. So, I was a supporter of the court reforms 
that became Title VII of the Dodd-Frank Act, and somewhat 
uniquely, perhaps coming from my side of the aisle but I 
believe that actually Congress got Title VII right because it 
adopted actual emerging practices in the marketplace 
themselves. Moving swaps to clearing was already starting to 
increase in the marketplace, and while clearing is not a 
panacea for risk, it provides superior risk management, 
mutualization, and diversification.
    I was a supporter of the swaps reporting requirements and 
have been a supporter of continuing that at the Commission. In 
terms of the swaps execution position, I think Dodd-Frank got 
that right, but I think in a number of areas, the CFTC erred in 
how it implemented that. Now, I think the errors were natural 
because what the CFTC did is it took what it knew, which was 
the futures market, and used that model for the unlisted, over-
the-counter swaps market. And I think the result of that was to 
make our market much less competitive on a global basis than it 
should be. In 5 years, under the current approach, we have had 
no new innovation in the market. We have had no new entrants 
into the market offering services. We have not had new platform 
development, and so what I have proposed, and we put this 
forward on a four to one vote on the Commission in the fall, 
was a more flexible approach, which does two things.
    I think it is actually more true to what Congress said 
because Congress did not dictate the mode of execution for 
transactions, but also I think it is truly more American. It is 
much more flexible. It is much more innovative, and I think it 
will lead to an explosion of innovation in our markets. In 
fact, one analyst said that it will lead to dozens of new 
market participants coming into the marketplace, and what could 
be more American than competition in the marketplace. It brings 
down fees. It brings down costs. Allows new entrance and 
participation in the market.
    I am very proud of the proposal we have forwarded to the 
Commission. I am sorry that I probably will not have the time 
to see it through during my term, but I encourage the future 
Chairman and the Commissioners there to take it up. I think it 
will be good for American competitiveness and for American 
market robustness and market activity.
    Senator Kennedy. Chairman Clayton, I want to talk to you 
for a second, this will be my last question, about the 
Municipal Securities Rulemaking Board (MSRB), and I have got a 
bill, I am not going to ask if you are supporting it. That 
would not be fair. Let me just say that municipal securities, 
rule-making board, there is some really good men and women on 
it, have some good leadership, their past members really fine 
past members, but as you know, we have talked about, I have 
some concerns about it.
    I think the structure of it in terms of who gets to be on 
it is incestuous, as I have explained to you. My bill would 
reduce the board from 21 to 15, 15 people. I think that will be 
more manageable. As you know, the board has private 
representatives, folks who represent the private-sector, and 
people who represent the public sector. The problem in my mind 
is that many of the public members used to be in the private 
sector. That is okay. They garnered a great deal of experience, 
but my bill would provide that there needs to be 5 years 
between their work say as a broker-dealer, and then putting on 
the hat of representing the consumer, if you will. It would 
require members of the MSRB to be confirmed by the SEC. You 
know, you are kind of responsible for them. You know, you did 
not father the child, but you have got to raise it, so I 
figured give you some parental control.
    The other thing has to do with salary-cap. Now, I know this 
is not public money, but it also didn't fall from heaven. There 
is not a money tree. I am not saying that they are not good 
people over there, but we have got folks over there making $1.4 
million, you know, that is just a lot of money from somebody 
who is running a Government organization and I think we need to 
take a look at it. It is not personal. Give me your thoughts in 
general about the MSRB.
    Chairman Clayton. Okay. So, let me say, I will go to the 
governance, structional issues in a second. On a substantive 
issue, I have enjoyed my engagement with the MSRB.
    Senator Kennedy. As have I.
    Chairman Clayton. Yes. And I think we are doing better. I 
have made a few issues----
    Senator Kennedy. We are since you have been there.
    Chairman Clayton. But there are few things that I really 
care about including that investors know how old the financial 
disclosure is that they are getting about municipalities. The 
way municipal securities transactions are executed and reported 
so that buyers know what the all-in cost of getting in and out 
a muni bond is. Those things are important, and they have 
worked well with us in, I would say, elevating those standards 
and can continue that.
    In terms of governance of the Self-Regulatory Organizations 
(SROs), people who perform a function--look, I think we should 
always be examining whether our governance gets the job. I 
mean, governance is not an end in itself, it is a means to an 
end, but accountability does drive pretty good ends. And as a 
general matter I favor accountability, like, you know, I did 
not wake up this morning, I can't wait to go answer your 
questions, but I think it is a good idea.
    Senator Kennedy. Well you operate off of fees in the 
private sector. Do you make a million bucks?
    Chairman Clayton. No.
    Senator Kennedy. Okay. Just checking. Chris, do you have 
anything else?
    Senator Coons. Two quick questions if I could. Just this is 
more satisfying my own curiosity than anything else. Impact of 
Brexit potentially, Chairman Giancarlo, and then the Fed just 
came out with a report historically high corporate debt. I 
would be interested in your thoughts on whether the increase in 
debt owned by U.S. businesses poses unacceptably high risks to 
our economic stability.

                          BREXIT, CYBER, DEBT

    Mr. Giancarlo. If I could also add, after I discuss Brexit, 
if I could just add a word about cyber from the CFTC's point of 
view. I know Chairman Clayton addressed it and I agree with 
what he said, but I do want to talk about it for just a moment. 
On Brexit, we have two particular concerns at the CFTC. One is 
simply the impact on not just the European economy with a 
British exit, the entire European economy, but the global 
economy of what a sudden and unexpected Brexit exit could have 
brought. I think it now seems to be on a much slower burn. I 
think a lot of that is priced somewhat into the market and so 
if there is no sudden moves, I think we are a little less 
concerned about a short term market disruption.
    We still remain concerned long-term about more impact, but 
there is something that is very particular to derivatives that 
is unique about London. London has emerged over the last 
several decades, in fact the last decade in particular, as the 
global servicing center for the global derivative market 
because of a combination of special utilities like the London 
Clearing House where most of the interest rates swaps are now 
cleared, as well as the use of English law in contracts and 
accounting, and other settlement services. London is really the 
epicenter of that marketplace.
    There is really no continental European locale that has the 
readiness to take that on and some of the proposals out of 
Europe were to break up that set of clearing that takes place 
in London. If London were to be displaced and disrupted as the 
global center for swaps and markets, that could have a real 
strong impact on the markets that we at the CFTC are in a 
unique role to oversee. So, we have taken the lead on alerting 
market participants, speaking to our friends in Brussels and 
London, as well as with our own Financial Stability Oversight 
Council, of these concerns and have been very active in the 
area.
    We continue to monitor it closely. We view the U.S. dollar 
as a global reserve currency so we do not have a territorial 
view as to where the dollar denominated assets must clear 
provided it is stable, provided it is done properly. If London 
were to be displaced, then we would have some concerns as to 
the future of the market.
    A quick word on cyber. Chairman Clayton and I have spent a 
lot of time talking on this. I think we share the view that 
cyber is the number one risk to our markets and in some ways, 
number one risk to our own agency operations because the amount 
of data. The amount of data that we take in every day at the 
CFTC has gone from 10 million per day to over a 100 million in 
just the last several years. We are increasingly becoming a 
database regulator, but we are very concerned about cyber 
activities. We see close to 200,000 separate cyber-attacks on 
our agency per month and that amount is going up all the time.
    Senator Kennedy. How many?
    Mr. Giancarlo. 200,000 per month. And they are coming from 
all over the world. Now just to give you an idea, before I took 
over as Chairman our budget for cyber-defense was about $5 
million a year and even though our budget has not gone up until 
recently, we have been able to increase our cyber spending to 
close to $7 million. We will devote close to $7 million this 
year. But in our budget is a request for close to $10 million.
    Of all the things we need, we really, really need that. You 
know, it is not a question of if an agency or institution or 
enterprise will be cyber hacked, it is only a question of when. 
We have been fortunate the last few years of not having 
suffered that to the extent we know, because sometimes you do 
not know till long afterwards, but we do need to, and I am not 
saying we have weaknesses now. I think our position is very 
strong, but we do have--there are some facilities we would like 
to move to, and it is just simply a matter of resources. And 
so, if I can ask amongst all our requests, if that one you 
could give special attention to because we really do that. 
Thank you.
    Senator Coons. Chairman Clayton, anything on risky levels 
of corporate debt?
    Chairman Clayton. Yes. Corporate debt has increased in 
absolute and relative terms. We should not be surprised by 
this. We have a credit financed economy. Dodd-Frank, other 
measures, we have relatively shrunk the size of the bank 
lending sector, so someone has got to fill in the credit. The 
corporate credit side has done that. Other factors, low 
interest rates. Low interest rates make actually increasing the 
amount of debt you are willing to take on more attractive if 
you are a person looking to structure your balance sheet in the 
appropriate way.
    Okay, change. We ought to recognize that and ask ourselves 
has this created new risks and how are we monitoring them? And 
I am pleased to say that Chairman Giancarlo, Chairman Powell, 
Vice-Chair Quarles, Chair McWilliams, Comptroller Otting, we 
have all met on this. Not only said, okay, it has changed, 
let's get more granular, what sectors has it changed in. 
Importantly, are people who are buying this debt are they 
buying it for liquidity or trading, which in any kind of 
exogenous thing would lead to greater shocks, or are they 
buying it for a long term investment? Are they buying it as 
asset-liability management say an insurance company versus 
liquidity in a mutual fund? Those are two very different 
buyers. Where is this corporate debt coming to rest and what 
kind of risk does that present?
    So, I commend my people because they have been looking at 
this now for a while. I feel smarter about it today than I did 
before. Sharing that with our colleagues both inside and 
outside the United States, and the answer to your question is, 
the short answer is, yes, this is where we should be looking. 
We should be understanding it. And, is there anything that 
keeps me up at night about that market at the moment? No, but 
if we had a--let me give you an example of what would keep me 
up, a very large mutual fund having significant holdings in 
leveraged loans where people expected immediate liquidity. 
Would that create maybe a systemic risk? Probably not, but is 
that a risk to those investors that maybe they do not know what 
they are facing? Yes. This is a subject on which I can talk for 
way longer than the time you have but, the short answer is we 
are looking at it.
    Mr. Giancarlo. If I could just say, a real quick note to 
that, we started project in our Office of Chief Economist to 
look at how banks that are in the leverage loan marketplace are 
then using different techniques to mitigate their exposure to 
the market by trading in and out of some of those. A lot of 
those loans the banks will then trade out of or will use other 
techniques to reduce either their exposure to the interest rate 
exposure or even the credit exposure. And so, we have got a 
study going on this and we will make that public once we have 
it, but we think there is a fair amount of risk mitigation 
going on.
    So, when you see figures from let us say, there is $1 
trillion of these loans and $300 billion are on the balance 
sheets of banks, in fact that $300 billion is an absolute 
number. It may be a lot less in terms of risk to the market 
because of hedging practices that are used by those banking 
institutions. But it is an area that we are looking into and we 
will have a report for that when it is done.
    Senator Coons. Could you ask your helpers to send me a 
copy? I would like to see it.
    Mr. Giancarlo. Yes.
    [The information follows:]

    A draft of the paper on the interest-rate risk of banks, including 
their use of derivatives, will be ready in a couple of months to the 
end of summer. We will share when it is completed. A different paper on 
bank credit risk management and the use of CDS, is in a much more 
preliminary stage.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Kennedy. Alright, gentlemen. Thanks. The hearing 
record is going to remain open until next Wednesday for any 
statements or questions.
    [The following questions were not asked at the hearing, but 
were submitted to the Commissions for response subsequent to 
the hearing:]
           Questions Submitted to Hon. Christopher Giancarlo
               Questions Submitted by Senator Jerry Moran
    First off, I want to express my great appreciation for your work to 
return the CFTC to its Ag roots. I hope the valuable partnership 
between the CFTC and the Kansas State University for the Agricultural 
Commodity Futures Conference continues under your eventual successor.
    In February, you and your fellow Commissioners--Republican and 
Democratic Commissioners alike--submitted a unified comment letter to 
the prudential regulators raising concerns about a proposed rulemaking 
related to bank capital rules.
    These concerns surround the calculation of the supplementary 
leverage ratio (SLR) related to derivatives transactions. As you know, 
the SLR currently fails to recognize the risk-reducing nature of 
segregated client margin in these transactions. This has led to rising 
costs and less competition in the derivatives markets for commodity 
producers seeking to hedge risks in the markets.

   a.  How will the change you and your fellow commissioners propose 
contribute to the health of the cleared derivatives market--in 
particular for the farmers and ranchers back in Kansas?

    Answer. On June 20, 2019, the Basel Committee on Banking 
Supervision announced an agreement on a targeted and limited revision 
of the leverage ratio to allow margin received from a client to offset 
the exposure amounts of client-cleared derivatives. I was pleased to 
see that the Basel Committee recommended the exclusion of initial 
margin from the leverage ratio. I have consistently raised the concern 
of whether the amount of capital that bank regulators have caused 
financial institutions to take out of trading markets is at all 
calibrated to the amount of capital needed to be kept in global markets 
to support their overall health and durability. Studies have shown that 
end users and others, risk losing access to cleared derivatives markets 
as the leverage ratio disincentivizes the provision of clearing serves.
    The suggested revision will significantly reduce capital costs for 
clearing members. As I have said in the past, if these savings are 
fully passed on to their customers, these reductions could translate 
into an increase in trading activity, especially hedge positions that 
are carried overnight. A reduction in cost to a service that is 
important to managing systemic risk in swaps supports the critical FCM 
link in the mandatory clearing model. I believe that the financial 
system will be safer and more stable for it.

   b.  Are you and your staff at the CFTC continuing to engage with the 
prudential regulators on this topic as they move forward with the 
rulemaking process?

    Answer. Once the Basel Committee publishes its standards, I would 
urge the relevant bank regulatory agencies in the US and elsewhere to 
move quickly to implement these amended standards in their respective 
rules. This will help mitigate a key systemic risk present in our 
derivatives markets.

   c.  Do you think they will make this change to the SLR calculation?

    Answer. Yes, I believe they will.

   d.  If not, does Congress need to step in with a legislative fix?

    Answer. It is my hope that this change will be done through 
rulemaking by the relevant agencies.

    I urge you to continue engaging with your fellow regulators. The ag 
community in my State needs access to affordable risk management tools. 
I'd hate to miss an opportunity that could help them in this key area, 
particularly when there is bipartisan support from your fellow 
Commissioners on this topic.
    Thank you for your continued service to our country until your 
eventual successor's confirmation and it has truly been a pleasure 
working with you.
                                 ______
                                 
                Questions Submitted to Hon. Jay Clayton
               Questions Submitted by Senator Jerry Moran
1.  In light of the effective collaboration under Chairman Giancarlo's 
and your leadership, what can the SEC do to alleviate the ills of 
calculating the exposure amount of derivatives contracts and ensure 
bank capital rules are adequately risk-sensitive?

    Answer. We understand that market participants have expressed 
concerns to the U.S. Federal banking agencies and to the Basel 
Committee on Banking Supervision (BCBS) regarding the impact of the 
Basel III leverage ratio (referred to in the United States as the 
supplementary leverage ratio) on central clearing. More specifically, 
they have raised concerns about the treatment of cash collateral posted 
to a clearing agency as initial margin (cash that is received by a 
clearing member from its client and that is generally passed to the 
clearing house).
    We understand that BCBS met on June 19 and 20 of this year in Basel 
and, at its meeting, agreed on a targeted and limited revision of the 
leverage ratio to allow margin received from a client to offset the 
exposure amounts of client-cleared derivatives. While we are not a 
member of the BCBS and do not oversee the prudential regulation of 
banks, we are committed to continuing our productive collaboration with 
the CFTC and prudential regulators to examine areas of common concern 
in regulating derivatives markets, including issues that may impact 
central clearing.

2.  I know the Consolidated Audit Trail (CAT) project was dropped in 
your lap and you are making the best of a tough situation to get this 
surveillance mechanism to improve investor confidence in our markets up 
and running.

      While I appreciate that and support your efforts, I am deeply 
concerned about one thing: that the CAT still plans to collect the 
personally identifiable information (PII) of America's retail 
investors.

      The CAT can work without PII and the cost of subjecting the 
personal information of Americans across the country to cyber risk and 
identity theft outweighs any benefit of collecting this information.

   2a.  We both care deeply about investor protection. Can you give me 
a public assurance today that the CAT will not collect and retain 
retail investors' PII in a single centralized database?

      I strongly urge you to continue exploring an expedited request 
mechanism that more closely reflects the current blue sheet process 
instead of creating such a high-value target at significant 
cybersecurity risk.

    Answer. I know there are concerns about the protection of 
investors' PII that would be stored in the CAT. I share many of these 
same concerns and continue to make the security and confidentiality of 
CAT data, particularly any form of PII, a threshold issue.
    The CAT is intended to enable regulators to oversee our securities 
markets on a consolidated basis--and in so doing, better protect these 
markets and investors. The CAT Plan developed by the national 
securities exchanges and national securities associations 
(collectively, the SROs) includes specific security requirements 
designed to mitigate the risk of a breach of the CAT and the 
possibility of misuse of data reported to the CAT. The security 
features required by the Plan include, among other things: (1) the 
encryption of PII and all other CAT data, as well as a comprehensive 
System Security Plan that must cover all components of the CAT System 
such as physical assets and personnel; (2) adherence to the NIST 800-53 
security standards, which are a set of security and privacy controls 
for Federal information systems and organizations; (3) incorporation of 
tools that will enable logging, auditing and access controls for all 
components of the CAT system; (4) secure methods of connectivity; and 
(5) development of a Cyber Incident Response Plan.
    While these and other features are designed to ensure that the CAT 
provides appropriate protection for proprietary data and reflect a 
current assessment of the key measures necessary to achieve an 
effective data security environment, it is also important that we 
continually assess whether the CAT's approach to PII is appropriate and 
effective or can be improved. I am aware that the SROs are moving 
forward with a plan to eliminate the need to maintain social security 
numbers in the CAT database. I support this effort and will continue to 
monitor the SROs' progress in this area. More specifically, as the SROs 
continue to make progress in the development, implementation and 
operation of the CAT, I believe that the Commission, the SROs and the 
plan processor must continuously evaluate their approach to the 
collection, retention and protection of PII and other sensitive data. 
In addition, as I have stated on several occasions, the SEC will not 
retrieve sensitive PII information from the CAT unless there is a 
regulatory need for the information, and we are confident that there 
are appropriate protections in place to safeguard the information.
    I look forward to working with you and other members of Congress as 
the implementation of the CAT moves forward.

3.  You have undoubtedly heard the unrest surrounding the January, 2020 
implementation of the current expected credit loss (CECL, ``see-sull'') 
accounting standard developed by an unaccountable standard-setting 
body.

   3a.  What are you and your staff at the SEC doing to address the 
meaningful concerns regarding the negative impact CECL will have on the 
U.S. economy, banks, and access to credit nationwide?

      At a House subcommittee hearing in December, Joe Stieven--an 
investor who was co-chair of FASB's investor advisory committee--was 
very clearly opposed to CECL and said he knew of no bank investors who 
supported it. We've also heard of other large bank investors who do not 
support CECL.

   3b.  What kind of outreach has the SEC done to understand these 
concerns and what will the SEC be doing in response?

      We are hearing that banks are being bombarded by software vendors 
and auditors to help them comply with CECL. In fact, a cottage industry 
for CECL implementation has developed and banks are on the wrong end of 
it.

   3c.  In the end, who is benefitting? The investors or the auditing 
firms? Given the potential disruptions and costs involved, don't you 
think we should put on the brakes, study, and figure out how to move 
forward in a more responsible manner?

    Answer. I am and continue to be supportive of all parties engaging 
in productive dialogue regarding the new accounting standard to further 
our shared goal of maintaining high-quality financial reporting for the 
benefit of investors in the U.S. capital market and addressing 
unintended negative consequences of a change in accounting standards. 
The SEC's role is not to endorse standards adopted by the FASB. The 
Sarbanes-Oxley Act grants the SEC authority to designate an independent 
private sector standard setter, but it does not create a mechanism for 
the SEC to approve or endorse the FASB's standards. But this does not 
mean that accounting standards are, or should be, developed in 
isolation.
    The SEC staff monitors the FASB's standard-setting activities and 
process as a part of the SEC's oversight, and the SEC staff has 
participated as an official observer in the FASB's public meetings of 
its Transition Resource Group for Credit Losses. Transition Resource 
Group members include companies, investors, auditors, regulators, and 
FASB members and staff. In addition, the SEC Chief Accountant has 
participated as an official observer to the FASB's transition resource 
group.
    The SEC staff also regularly engages with market participants to 
listen to stakeholder concerns, understand emerging issues and risks, 
answer questions and share staff views on current financial reporting 
matters, including CECL. In these discussions, stakeholders have shared 
their views with SEC staff, and some stakeholders have offered public 
studies and data, the results of which are mixed and incorporate 
broader public policy objectives than the topic of accounting 
standards. Implementation of CECL involves complexities and potential 
unintended consequences, including because the affected institutions 
vary significantly in size as well as type and scope of operations. 
Many of the concerns expressed also appear to me to be the result of 
the interaction of the new accounting standard with existing regulatory 
capital requirements. I understand the Federal banking regulators are 
currently reviewing whether CECL should have a direct impact on bank 
capital requirements and stress-testing rules. I support the work of 
these agencies and encourage them to understand the anticipated effects 
of CECL on regulatory capital requirements and the effect of those 
regulatory capital requirements (after an institution's adoption of 
CECL) on the U.S. economy. SEC staff will continue to engage with the 
prudential regulators on this issue and provide any assistance they 
require as they undertake their process for reviewing their standards.
    This week, at the July 17, 2019 meeting, the FASB voted to propose 
a delay to the effective date of the standard for certain entities, 
including SEC filers that are smaller reporting companies and private 
companies. We are monitoring this development.
    The SEC expects the FASB to continue to engage with relevant 
stakeholders throughout the implementation process, and I support all 
parties engaging in productive dialogue regarding the new accounting 
standard to further our shared goal of maintaining high-quality 
financial reporting for the benefit of investors in the U.S. capital 
markets and addressing unintended negative consequences.
                                 ______
                                 
            Questions Submitted by Senator Joe Manchin, III
                   1. foreign purchase of securities
  --I'm concerned with the many illegal actions that foreign companies 
        take to undercut our economic successes--stealing trade 
        secrets, personal identifying information, or patents.
  --Especially attempts from foreign companies to make investments and 
        gain control of certain American technologies and industries. 
        We know than many of these foreign companies, especially in the 
        case of China, are ultimately controlled by their government.
  --As such, I'm extremely supportive of the Committee on Foreign 
        Investment's (CFIUS) efforts.
  --While I recognize CFIUS falls under the Treasury Department I know 
        it engages many other departments and agencies as needed.

    Question 1a. Can the SEC effectively identify and punish public 
companies that do not accurately disclose violations of CFIUS or other 
export laws?

    Answer. The Division of Corporation Finance (Corporation Finance) 
conducts reviews of filings made under the Federal securities laws with 
respect to public reporting companies. Staff in Corporation Finance 
issues comments to companies where it appears that they could enhance 
their compliance with applicable disclosure requirements, which may 
include providing additional disclosure about material government 
regulations, including those relating to CFIUS or other export laws, 
and about material risks relating to conducting business in certain 
countries in light of ownership restrictions and the foreign legal and 
regulatory environment. When warranted, Corporation Finance refers 
potential violations to the Division of Enforcement.
    A significant portion of the SEC's enforcement program involves 
identifying (including through internal referrals, such as those from 
Corporation Finance) and charging public companies that make material 
misstatements or omit to state material facts necessary to make the 
statements not misleading. A fact is material if there is a substantial 
likelihood that a reasonable investor would consider it important in 
making an investment decision. If public companies do not accurately 
disclose required material information to investors, which may include 
information relating to violations of CFIUS or other export laws, then 
the SEC has jurisdiction to investigate and, where appropriate, bring 
civil actions for violations of the Federal securities laws.

    Question 1b. Are there other resources or authorities that can help 
the agency identify these violations?

    Answer. The SEC staff frequently coordinates with other agencies at 
the Federal, State, and local level to, among other things, assist in 
the identification of potential violations of the Federal securities 
laws. These agencies include those more directly implicated by CFIUS 
and other export laws, such as the Treasury Department. While the SEC 
currently does not expect to need additional authorities or resources, 
beyond those identified by our fiscal year 2020 budget request, we will 
keep Congress informed should we identify statutory or resource 
impediments.

    Question 1c. From the SEC's perspective, what is the greatest 
threat, either domestically or internationally, to our financial 
markets?

    Answer. Your question addresses a topic--threats and risks to our 
markets and investors--that is front of mind for me and my colleagues 
at the SEC. The U.S. and international financial markets of today are 
substantially different from those of the past, including the markets 
of the early 2000s. As markets evolve, market risks change, and new 
risks emerge.
    In my view, there is not one single threat that stands apart from 
other threats as presenting the greatest risks to our financial 
markets. Our markets are subject to a constantly evolving framework of 
threats and risks, and therefore, we must continuously keep abreast of 
developments in the capital markets, as well as other areas that affect 
these markets. This includes, for example, monitoring relevant 
macroeconomic factors, as well as events and trends in other markets 
that affect the securities markets, directly or indirectly. It also 
includes ensuring we have the resources in terms of human capital 
expertise and technology to keep pace with these market changes.
    There are, however, a number of significant risks to the securities 
markets we are currently monitoring closely, including: (1) 
cybersecurity--from the perspectives of market oversight and integrity, 
issuer disclosure, and our own agency's cybersecurity risk profile; (2) 
the transition away from LIBOR as a reference rate for financial 
contracts; (3) Brexit--and its potential effects on U.S. investors and 
securities markets and on our global financial markets more broadly; 
and (4) issues related to market structure, including market 
fragmentation and participant concentration.\1\
---------------------------------------------------------------------------
    \1\ See SEC Rulemaking Over the Past Year, the Road Ahead and 
Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks 
(Dec. 6, 2018), available at https://www.sec.gov/news/speech/speech-
clayton-120618.
---------------------------------------------------------------------------
    Regarding the first risk, cybersecurity, the SEC is looking at this 
risk from a number of perspectives. From the issuer disclosure 
perspective, it is important that investors are sufficiently informed 
about the material cybersecurity risks and incidents affecting the 
companies in which they invest. From a market oversight and integrity 
perspective, we continue to prioritize cybersecurity in our 
examinations of market participants. The SEC is also focused on 
assessing and improving our own cybersecurity risk profile. We now have 
a Chief Risk Officer to help coordinate our risk management efforts 
across the agency. We have worked to promote a culture that emphasizes 
the importance of data security throughout our divisions and offices 
and have been engaging with outside experts to assess and improve our 
security controls.
    The second risk that I identified relates to the transition away 
from LIBOR as a benchmark reference for short-term interest rates. 
LIBOR is used extensively in the United States and globally as a 
benchmark for various commercial and financial contracts, including 
interest rate swaps and other derivatives, as well as floating rate 
mortgages and corporate debt. It is likely, though, that the banks 
currently reporting information used to set LIBOR will stop doing so 
after 2021, when their commitment to reporting information ends. The 
expected discontinuation of LIBOR could have a significant impact on 
the financial markets and may present a material risk for certain 
market participants, including public companies, investment advisers, 
investment companies, and broker-dealers. It is important that market 
participants plan and act appropriately. The SEC staff is actively 
monitoring the extent to which market participants are identifying and 
addressing these risks and recently issued a statement that contains 
guidance to help participants respond to risks associated with the 
discontinuation of LIBOR.\2\
---------------------------------------------------------------------------
    \2\ See Press Release 2019-129, SEC Staff Publishes Statement 
Highlighting Risks for Market Participants to Consider as They 
Transition Away from LIBOR (July 12, 2019), available at https://
www.sec.gov/news/press-release/2019-129.
---------------------------------------------------------------------------
    The third identified risk is Brexit. Even though exit has been 
delayed, Brexit and its potential effects on U.S. investors and 
securities markets, and on our global financial markets more broadly, 
remains a risk. I have directed the staff to focus on the disclosures 
companies make about Brexit and the functioning of our market utilities 
and other infrastructure. With regard to market utilities and 
infrastructure, following the 2016 Brexit vote, SEC staff commenced 
discussions with other U.S. financial authorities, with our U.K. and 
E.U. counterparts, and with market participants, all with an eye toward 
identifying and planning for potential Brexit-related impacts on U.S. 
investors and markets. These discussions are ongoing, and I expect 
their pace to increase.
    Finally, we and many of our regulatory colleagues are examining 
market structure issues from various perspectives to identify potential 
systemic and other material risks. Issues we are focused on include 
risks related to market fragmentation and participant concentration.
    These are just a few of the risks to the domestic and international 
financial markets. My approach to identifying, monitoring and 
responding to risks takes into account the ever-changing risk 
environment and the related need to draw on information and resources 
from across the SEC and other bodies, including through the President's 
Working Group on Financial Markets, the Financial Stability Oversight 
Council (FSOC), the Financial Stability Board (FSB) and other 
organizations.
    In recognition of the SEC's critical role in this area, earlier 
this year I created a new position focused on market and activities-
based risk. This senior officer position is responsible for managing 
and coordinating the agency's efforts in this area. The bulk of our 
agency's work identifying, monitoring and responding to market risks is 
performed on a daily basis by the SEC's various operating divisions and 
offices, particularly the Division of Trading and Markets, the Division 
of Economic and Risk Analysis, the Division of Investment Management, 
and the Office of Compliance Inspections and Examinations.
    In addition, the SEC plays an active role and contributes to and 
benefits from our participation in various domestic and international 
organizations that focus on market and systemic risks. As for 
engagement with FSOC, I serve as one of the 10 voting members on the 
Council. In addition to voting on proposed FSOC actions, I, along with 
the SEC staff, also actively contribute to FSOC deliberations and the 
development of FSOC's priorities, agenda and annual report. The SEC 
staff also actively participates in FSOC's staff-led committees, 
including: (1) Systemic Risk Committee, which serves as a forum for 
FSOC member agency staff to identify and analyze potential market 
risks; (2) Regulation and Resolution Committee, which supports FSOC in 
its duties to identify potential gaps in regulation that could pose 
risks to U.S. financial stability; and (3) FMU Committee, which 
supports FSOC's work in monitoring and evaluating risks relating to 
FMUs and their activities. In addition to engagement with FSOC and 
other formal organizations, we also directly coordinate with and share 
information and observations on almost a daily basis with our 
regulatory counterparts at the Treasury Department, the Commodity 
Futures Trading Commission (CFTC), and the Federal Reserve, among 
others.
            2. cryptocurrencies and online sales of opioids
For Chairman Clayton and Chairman Giancarlo
  --I have long had concerns related to the implications of financial 
        technology, such as cryptocurrencies especially the lack of 
        clear regulating authority and ability to protect the safety 
        and security of our citizens.
  --During this ambiguous time, I'm concerned with how cryptocurrencies 
        are being used. Specifically, in connection to the sale of 
        opioids.
  --West Virginia has had to deal with the devastating consequences of 
        the opioid epidemic longer and more directly than nearly any 
        other State.
  --I'm eager to understand if and how opioids are being sold using 
        cryptocurrencies.

    Question 2a. Can you elaborate on what the SEC and CFTC are doing 
or plans to do in regards to the regulation of cryptocurrencies?

    Answer. The SEC works closely with other financial regulatory and 
law enforcement partners, including the CFTC, to make sure we are 
coordinated appropriately in our approach to digital assets. An 
individual determination by one agency that certain conduct involving a 
particular digital asset falls under its regulatory jurisdiction does 
not negate the possibility that conduct involving the same digital 
asset may also be regulated by another agency. A number of agencies may 
have concurrent jurisdiction over different aspects of conduct 
involving a digital asset. We work closely with other regulators, 
including through interagency working groups, to coordinate our 
activities to the extent possible and appropriate under the 
circumstances.
    To determine whether an activity involving a digital asset falls 
under the SEC's statutory and regulatory authority and mission, we look 
at the facts and circumstances, including the economic substance and 
structure of an activity to determine whether the digital asset itself, 
manner of offer or sale, parties to a transaction or documentation and 
disclosures concerning an activity, among other things, are subject to 
the SEC's jurisdiction.
    If a particular digital asset is considered a security for purposes 
of the Federal securities laws, that status triggers a number of 
important obligations under the Federal securities laws, many of which 
focus on investor protection, including SEC registration and reporting 
obligations for the offering and sale of securities. To determine 
whether a digital asset is a security, generally speaking we look at 
whether the digital asset fits the definition of a security set forth 
in the Federal securities statutes and regulations. We also apply tests 
developed through decades of case law--including the U.S. Supreme 
Court's ruling in SEC v. W.J. Howey Co., 328 U.S. 293 (1946)--to 
determine whether, for example, a particular digital asset is an 
``investment contract.'' The crux of that test ``is the presence of an 
investment in a common venture premised on a reasonable expectation of 
profits to be derived from the entrepreneurial or managerial efforts of 
others.''
    The definition of security is broad, but one thing to emphasize is 
that the approach we take when evaluating a digital asset is really no 
different than what the SEC has been doing for years when evaluating 
all kinds of novel instruments.
    In an effort to further coordinate the SEC's work on digital 
assets, in October 2018, the SEC announced the Strategic Hub for 
Innovation and Financial Technology (FinHub) staffed by representatives 
across the agency to serve as a public resource for fintech-related 
issues and serve as a portal for public engagement. On April 3, 2019, 
though staff-level guidance, FinHub published a framework to aid market 
participants in analyzing whether a digital asset is an investment 
contract, and therefore a security. On that same day, the Division of 
Corporation Finance issued a staff no-action letter to a market 
participant in connection with a proposed offer and sale of a digital 
asset. Additionally, SEC staff, along with FINRA, recently issued 
guidance related to broker-dealer custody of digital assets. To the 
extent market participants continue to have questions regarding whether 
a particular digital asset is a security, SEC staff is encouraging 
market participants to reach out through the FinHub webpage.
    Unfortunately, while some market participants have engaged with the 
SEC constructively and in good faith, others have sought to prey on 
investors' excitement about cryptocurrencies and Initial Coin Offerings 
(ICOs) to commit fraud or other violations of the Federal securities 
laws. The SEC, through the Division of Enforcement, has brought 
numerous enforcement actions for violations involving digital assets 
that meet the Supreme Court's definition of ``investment contracts.'' 
These matters have included actions for fraud violations, failures to 
register offerings with the SEC and violations by gatekeepers.\3\ For 
example, the SEC obtained an emergency court order against a company 
and its founder, halting pre-ICO sales and an upcoming ICO, alleging 
that the company falsely claimed, among other things, that it would be 
the first U.S. licensed and regulated tokenized cryptocurrency exchange 
and index fund and that the ICO was registered with and approved by the 
SEC.\4\ Similarly, the SEC charged three individuals with fraud in 
connection with an ICO that raised $32 million, alleging that the 
defendants targeted retail investors, falsely stated that they had a 
partnership with Visa and MasterCard, and created fictitious executives 
with impressive backgrounds.\5\
---------------------------------------------------------------------------
    \3\ See U.S. Sec. and Exch. Comm'n, Cyber Enforcement Actions, 
available at https://www.sec.gov/spotlight/cybersecurity-enforcement-
actions.
    \4\ SEC v. Blockvest LLC, et al., Litig. Rel. No. 24400 (Feb. 14 
2019).
    \5\ SEC v. Sharma, et al., Litig. Rel. No. 24117 (Apr. 20, 2018).
---------------------------------------------------------------------------
    The SEC has acted swiftly to crack down on allegedly fraudulent 
activity in this space, particularly where the misconduct has targeted 
Main Street investors. Regardless of the promise of this technology, 
those who invest their hard-earned money in opportunities that fall 
within the scope of the Federal securities laws deserve the full 
protections afforded under those laws.

    Question. 2b Are either of your agencies tracking if 
cryptocurrencies have been used in the sale of opioids? What resources 
would you need to be able to do this?

    Answer. The SEC's jurisdiction includes the enforcement of the 
Federal securities laws and regulations, including with respect to 
digital assets that meet the definition of a security. The SEC's 
jurisdiction does not, however, extend to the criminal enforcement of 
laws and regulations, including those related to the illegal drug 
trade. To the extent the SEC identifies digital assets within our 
jurisdiction that involve potential violations of the Federal 
securities laws, we investigate such matters and bring appropriate 
charges if warranted. To the extent the SEC, during the course of those 
investigations, uncovers evidence or information about potential 
violations of other laws, including those related to the illegal drug 
trade, it is our practice to refer those to the appropriate agencies, 
including the Department of Justice, as appropriate.
    We understand that, with regard to cryptocurrencies, money 
transmission businesses that operate in the United States generally 
must register with FinCEN and applicable state regulators. Many of the 
cryptocurrency trading platforms have registered as payment services 
that are not subject to direct oversight by the SEC or the CFTC. To the 
extent these platforms are complying with applicable Bank Secrecy Act 
(BSA) obligations, it is possible that the filing of reports under the 
BSA could provide some evidence of such conduct.
                            3. volcker rule
For Chairman Clayton and Chairman Giancarlo
  --With 5 regulators--including the SEC and CFTC--involved in the 
        implementation and enforcement of Section 619 of the Dodd-Frank 
        Act, commonly known as the Volcker Rule, it has made the 
        implementation complex for both banks and the agencies. This 
        view has been confirmed by a number of current and former 
        regulators including past Fed Chair Janet Yellen.
  --In December of last year, I signed onto a letter expressing support 
        for your efforts to clarify and improve various aspects of the 
        Volcker Rule, and I appreciate both of your written responses 
        acknowledging my letter.
  --I want to be clear, I believe the Volcker Rule is a critical 
        component of the post-crisis regulatory framework and I 
        strongly support its purpose.

    Question 3a. Can you provide an update on your efforts to revise 
the Volcker Rule?

    Answer. The SEC, together with the other four agencies responsible 
for implementing the Volcker Rule, proposed amendments last year that 
were intended to make the rule work in a more efficient manner, while 
maintaining and enhancing inspection and enforcement capabilities 
consistent with the objectives and requirements of the statute. Those 
underlying objectives include placing limits on proprietary risk-taking 
by banking entities and promoting the safety and soundness of the U.S. 
financial system.
    In preparing the proposal, the SEC and its staff worked closely 
with the staffs of the four other agencies, and each agency brought its 
own perspective and expertise to the proposal. Adoption of amendments 
to the Volcker Rule is on the SEC's near-term Regulatory Flexibility 
agenda, and I believe they are important to complete. Although I cannot 
say definitively when we will complete our work, I can state that both 
the staffs and the principals of each of the five agencies responsible 
for implementing the Volcker Rule remain engaged in regular and ongoing 
dialogue with each other. We also continue to review and analyze 
carefully the comments received on the proposal, both with respect to 
the specific requests for comment in the release and additional 
suggestions from commenters. Any final rules adopted by the five 
agencies will take into account all relevant comments.

    Question 3b. What are some of the other reforms that can be made 
that prohibit the dangerous trading that led to the 2008-2009 financial 
crisis?

    Answer. I believe that improving the operation of the Volcker Rule 
should go a long way towards furthering the goal set forth in your 
question. As you know, the Volcker Rule generally prohibits U.S. 
banking entities from engaging in proprietary trading because of the 
perceived risks of those activities to U.S. banking entities and the 
U.S. economy. To that end, in the course of preparing the 2018 
proposal, the five agencies responsible for implementing the Volcker 
Rule asked a number of questions aimed at soliciting information about 
potential changes that could improve the rule. We continue to review 
and analyze carefully the comments received on the proposal.
    It also is important to note that the SEC and its staff endeavor to 
ensure that firms can comply with all of the rules the SEC adopts, 
including the Volcker Rule, in as streamlined and efficient a manner as 
possible, while at the same time furthering the objectives of the 
underlying statute. In that respect, the proposed amendments to the 
Volcker Rule were designed to provide banking entities with greater 
clarity and certainty about what activities are prohibited, to reduce 
compliance obligations for small and mid-size banking entities relative 
to their trading activity, and to improve the effective allocation of 
compliance resources where possible.
                     4. sec best interest standard
  --As you are well aware, the Dodd-Frank Act required that the SEC 
        conduct a study on various aspects of standards of client care 
        for retail investors. Released in 2011, the SEC recommended a 
        uniform fiduciary standard for the retail advice given by all 
        types of financial professionals, including broker-dealers.
  --The fiduciary standard for financial professionals was originally 
        under the purview of the Department of Labor, but the DOL 
        Fiduciary Rule was vacated.
  --In April of 2018, you (the SEC) proposed a package of proposals 
        including the Regulation Best Interest (Reg BI) which would 
        require a broker-dealer ``to act in the best interest of a 
        retail customer when making a recommendation of any securities 
        transaction or investment strategy involving securities''.
  --This standard has been praised by industry and criticized by 
        consumer groups.

    Question 4a. Why do you feel the Reg BI will effectively allow for 
financial professionals to act in the best interest of the customers?

    Answer. Regulation Best Interest, or Reg. BI, substantially 
enhances the standard of conduct for broker-dealers. Importantly, it 
does so in a manner that establishes a standard of care for 
transaction-based advice that draws upon principles underlying the 
investment adviser fiduciary duty, and is workable for broker-dealers. 
As a result, (1) whether a retail investor chooses a broker-dealer or 
an investment adviser (or both), the recommendation or advice is 
required to be in the best interest of the retail investor and cannot 
place the interests of the firm or the financial professional ahead of 
the interests of the retail investor, and (2) the ability to choose 
between a broker-dealer transaction-based model and an investment 
adviser portfolio-based model--and choose among the various iterations 
and combinations of each--will be preserved.
    Below are a few (of the many) key features of Reg. BI that enhance 
the standard of conduct:

    1.  Reg. BI applies to account recommendations, including 
recommendations to roll over or transfer assets in a workplace 
retirement plan account to an IRA, as well as recommendations to take a 
plan distribution. These recommendations are often provided at critical 
moments (such as at retirement), may be irrevocable (or very costly to 
reverse), can involve a substantial portion of a retail investors net 
worth, and can have significant long-term impacts on the retail 
investor. Accordingly, this is a critical enhancement over both 
existing broker-dealer obligations and our proposal.

    2.  Reg. BI affirmatively requires broker-dealers to act in the 
best interest of their retail customers and not place their own 
interests ahead of the customer's interests. The broker-dealer must 
comply with the four component obligations. The specific component 
obligations of Regulation Best Interest are mandatory, and failure to 
comply with any of the components will violate Regulation Best 
Interest.

     -- The Disclosure Obligation, which requires full and fair 
        disclosure of all material facts about the scope and terms of 
        its relationship with the customer, including material facts 
        relating to conflicts of interest associated with its 
        recommendations.
     -- The Care Obligation, which requires brokers to exercise 
        reasonable diligence, care, and skill, to understand the 
        potential risks, rewards, and costs associated with the 
        recommendation, and to consider those risks, rewards, and costs 
        in light of the customer's investment profile in order to make 
        a recommendation that is in the best interest of the retail 
        customer and does not place the broker-dealer's interest ahead 
        of the retail customer's interest.
     -- The Conflict of Interest Obligation, which requires firms to 
        implement policies and procedures to mitigate (and in some 
        cases, eliminate) certain identified conflicts of interest that 
        create incentives to make recommendations that are not in the 
        retail customer's best interest.
     -- The Compliance Obligation, which requires firms to implement 
        policies and procedures reasonably designed to achieve 
        compliance with Reg. BI as a whole.

    3.  The Care Obligation will apply to a series of recommended 
transactions (currently referred to as ``quantitative suitability'') 
irrespective of whether a broker-dealer exercises actual or de facto 
control over a customer's account. This enhancement will allow us to 
bring enforcement actions against broker-dealers engaging in misconduct 
over the course of a relationship more efficiently and thereby return 
money to harmed retail investors more quickly.

    Whether a broker-dealer has acted in the retail customer's best 
interest will turn on an objective assessment of the facts and 
circumstances of how the specific components of the rule are satisfied. 
This principles-based approach is a common and effective approach to 
addressing issues of duty under law, particularly where the facts and 
circumstances of individual relationships can vary widely and change 
over time, including as a result of innovation. This approach to 
determining what is in the ``best interest'' of a retail customer is 
similar to an investment adviser's fiduciary duty, which has worked 
well for advisers' retail clients and our markets.
                             5. sec budget
  --The mission of the SEC is to protect investors, maintain fair, 
        orderly, and efficient markets, and facilitate capital 
        formation.
  --Your (the SEC) budget request seeks $1.746 billion, a $71 million 
        increase from fiscal year 2019 enacted amount, including 34 new 
        positions.
  --Last year we provided the SEC with the funding for 100 additional 
        positions in fiscal year 2019.

    Question 5a. Given that roughly 130 positions have been or will be 
added over fiscal year 19 and fiscal year 20, is this sufficient to 
address priorities of the agency?
    Question 5b. Can you explain how these new 34 positions would help 
the SEC achieve its mission?

    Answer. Yes, I believe the additional positions will be sufficient 
to address the key priorities of the agency. With the enactment of the 
fiscal year 2019 appropriation, the SEC is adding new positions in 
critical areas to enhance our expertise in areas with emerging issues 
and challenges. These include additional staff in the cybersecurity and 
risk management functions, staffing the newly-created Office of the 
Advocate for Small Business Capital Formation, expanding our 
enforcement and examination programs with a focus on Main Street 
investors and enhancing our oversight of the changing markets--
especially in areas experiencing rapid technological advancements.
    Our fiscal year 2020 request builds on our fiscal year 2019 request 
by adding new positions in areas where they will contribute 
significantly to achieving the objectives of the SEC's Strategic Plan 
for fiscal years 2018-2022 and addressing staff shortages in mission-
critical areas. The request would enable us to invest in staff with the 
skills and expertise in vital areas such as cybersecurity and market 
oversight, shift or expand our focus in certain key areas for the 
benefit of our Main Street investors and companies, and to adapt our 
regulatory oversight to keep pace with changes in the markets we 
oversee.

                          SUBCOMMITTEE RECESS

    Senator Kennedy. If you are here from CFTC or SEC raise 
your hand, please ma'am and sir. Thank you for your good work, 
and I mean that. And thank you for the leadership. Chairman 
Giancarlo, we are going to miss you. I mean that. You have done 
an extraordinary job.
    Mr. Giancarlo. I think I thought I would never say this, 
but I am going to miss you too.
    [Laughter.]
    Senator Kennedy. Well, your sentence is up, okay. Five 
years is a long time.
    [Laughter.]
    Mr. Giancarlo. Thank you.
    Senator Kennedy. Godspeed. Thank you all. Meeting is 
adjourned.
    [Whereupon, at 12:30 p.m., Wednesday, May 8, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]