[Senate Hearing 116-272]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 116-272

 
          OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  RECEIVING UPDATES FROM THE CHAIRMAN OF THE SECURITIES AND EXCHANGE 
           COMMISSION REGARDING THE AGENCY'S WORK AND AGENDA

                               __________

                           DECEMBER 10, 2019

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
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                      ______                       


             U.S. GOVERNMENT PUBLISHING OFFICE 
 41-432PDF           WASHINGTON : 2022               
                
                
                


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director

                Laura Swanson, Democratic Staff Director

                  Jen Desi, Professional Staff Member

                 Elisha Tuku, Democratic Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       TUESDAY, DECEMBER 10, 2019

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    30

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
        Prepared statement.......................................    31

                               WITNESSES

Jay Clayton, Chairman, Securities and Exchange Commission........     4
    Prepared statement...........................................    33
    Responses to written questions of:
        Senator Brown............................................    67
        Senator Scott............................................    68
        Senator Cotton...........................................    69
        Senator Tillis...........................................    70
        Senator Kennedy..........................................    71
        Senator Moran............................................    72
        Senator Menendez.........................................    72
        Senator Warner...........................................    73
        Senator Warren...........................................    76
        Senator Cortez Masto.....................................    80
        Senator Sinema...........................................    82

              Additional Material Supplied for the Record

Statement of Better Markets, submitted by Senator Brown..........    83
Statement of Bon Secours Mercy Health, submitted by Senator Brown    89
Ceres, ICCR, and US SIF paper (2017), submitted by Senator Brown.    90
Statement of Gabelli Funds, submitted by Chairman Crapo and 
  Senator Brown..................................................   106
November 2018 letter to Chairman Jay Clayton from the Interfaith 
  Center on Corporate Responsibility, submitted by Senator Brown.   112
Statement of the Ohio Public Employees Retirement System, 
  submitted by Senator Brown.....................................   116
Statement of Publish What You Pay, submitted by Senator Brown....   119
Statement of Trinity Health/Mount Carmel Health System, submitted 
  by Senator Brown...............................................   123

                                 (iii)


          OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION

                              ----------                              


                       TUESDAY, DECEMBER 10, 2019

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:12 a.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. Today we will receive testimony from the 
Securities and Exchange Commission Chairman Jay Clayton 
regarding the work and agenda of the SEC.
    I thank you for your willingness to appear before the 
Committee today, Mr. Clayton. Your willingness to testify is 
essential to our oversight of the SEC.
    The mission of the SEC is to protect investors; maintain 
fair, orderly, and efficient markets; and facilitate capital 
formation.
    It plays a critical role in ensuring that our Nation has 
capital markets that the public can have confidence and trust 
in.
    It provides information to investors so that as Americans 
prepare for their futures, they not only have a wide variety of 
financial opportunities, but they also have the information 
necessary to make informed investment decisions.
    Chairman Clayton, you came before this Committee a year ago 
and assured us that you would continue to take steps to ensure 
that the U.S. capital markets remain the deepest, most dynamic, 
and liquid in the world.
    I commend you and the SEC staff for your actions taken over 
the past year.
    Actions worth mentioning include the SEC's final rule 
package on Regulation Best Interest, which strikes the 
appropriate balance of increasing transparency in investors' 
relationships, while preserving access to advice relationships 
and investment products.
    The SEC also proposed modifying the accelerated filer 
definition to reduce the number of registrants subject to the 
auditor attestation requirement. I encourage the Commission to 
move forward quickly in a way that provides relief to all 
smaller reporting companies.
    And this summer, the SEC issued a concept release seeking 
public comment on ways to harmonize the private securities 
offering exemption.
    Regarding the concept release, I encourage the SEC to 
revise Regulation D to allow for general solicitation and 
advertising by sponsors, such as angel investor groups; the SEC 
should consider expanding the ability for small businesses to 
crowdfund; the definition of an accredited investor should be 
expanded and modernized to account for qualifying expertise, 
not simply a monetary threshold; and it is important the SEC 
update the definition of a family office to allow family 
offices and their clients who meet certain thresholds to be 
considered ``accredited investors.''
    This Committee has held a number of hearings during my 
chairmanship discussing the need for assessing the scope and 
appropriateness of the proxy voting process and other aspects 
of corporate governance.
    I commend the Commission for its actions related to the 
proxy process.
    In August, the SEC issued guidance to assist investment 
advisers in fulfilling their responsibilities when voting 
proxies on behalf of clients and clarified that proxy voting 
advice provided by proxy firms generally constitutes a 
solicitation.
    In November, after numerous roundtables and thoughtful 
efforts led by Commissioner Roisman, the SEC proposed two 
amendments to improve the accuracy and transparency of proxy 
voting advice and to modernize shareholder proposals.
    I encourage the SEC to continue moving forward with these 
efforts expeditiously following the comment period.
    This Committee recently held an oversight hearing on the 
Consolidated Audit Trail, or CAT. I have continued to express 
concerns regarding the personally identifiable information that 
is going to be collected in this consolidated database and how 
it will be protected.
    On October 16, 2019, the CAT plan participants wrote to the 
SEC to request to use a CAT Customer ID instead of receiving 
and storing Social Security numbers in the CAT and asked to 
store only year of birth and firm IDs instead of full dates of 
birth and individual account numbers.
    Chairman Clayton, you have previously expressed concerns 
about the information to be collected and stored in the CAT and 
stated that you believe the regulatory objectives of the CAT 
can be achieved without the most sensitive pieces of investor 
information. I encourage you to quickly process the request to 
use alternative approaches.
    Finally, the SEC has made modernization a focus this year, 
and I look forward to hearing about your Strategic Hub for 
Innovation and Financial Technology and how the SEC has been 
engaging with initial coin offerings and other cryptocurrency-
related matters.
    I look forward to receiving updates on these and other SEC 
initiatives, including your views on when we can expect final 
rules in these areas.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, and welcome, Chair 
Clayton. Nice to see you again.
    Over the past few years in this Committee, we have seen the 
Trump administration dismantle--we get a front-row view of 
this--many of the protections that Congress put in place after 
the last financial crisis, putting our financial system and 
hardworking families around the country at risk.
    The SEC has flown under the radar, but often the agenda has 
been the same--taking Wall Street's side over and over, instead 
of standing with investors saving for retirement or college or 
a down payment.
    Taken together, the SEC's latest actions are making it 
harder to hold corporate executives accountable to investors 
and hardworking Americans.
    While I appreciate the Enforcement Division's initiatives, 
including those to protect teachers and military servicemembers 
from fraud and misconduct in financial advice, you have done so 
much damage by adopting what you call ``Regulation Best 
Interest.'' Under that rule, brokerage firms can merely 
disclose, but do not have to eliminate, firm-level conflicts.
    It should be simple. Investment firms need to work for the 
people whom they serve. Americans need to have confidence that 
the professionals that they are trusting with their hard-earned 
money are working for them, not scamming them to line the 
firm's own pockets. You could have simply followed Congress' 
guidance in Dodd-Frank to create a uniform fiduciary standard 
for brokers and advisers, which would be the best way to give 
investors confidence that their interests come first. But you 
did not do that.
    That is not the only part of Dodd-Frank you are working to 
undermine. Look at the SEC's proposal to amend the 
whistleblower program, one of the most successful programs 
created under Dodd-Frank. We need brave workers to stand up to 
corruption and abuse when they see in their workplace financial 
companies scamming people or engaging in other illegal 
activity.
    The only way individual workers are ever able to stand up 
to powerful Wall Street firms is if we give them protection.
    We have already seen a chilling effect from your proposal.
    Each year since inception of the program, the number of 
tips has increased, in some years by more than 10 percent. But 
after your rule proposal in 2018 introduced a cap on 
whistleblower awards, the number of tips declined for the first 
time in 2019.
    The proposed cap on awards raised so many alarm bells that 
you had to put out a statement to clarify. I know that 
``whistleblower'' is a dirty word nowadays to some in this 
town. It always is to serial law breakers.
    I do not see how you can make significant changes to a 
successful program like this without understanding that the 
decline in tips is a result of your actions and the environment 
this Administration has created in its talk about 
whistleblowers, attacking rather than protecting those who 
speak out against abuse of power.
    As the SEC continues to take fewer actions that hold the 
largest financial institutions accountable, we must encourage 
whistleblowers to identify misconduct wherever it exists and to 
help uncover complex frauds.
    The SEC's recent proposed rules on proxy advisers and 
shareholder proposals are also clear examples of the 
Administration taking the side of corporate interests over 
Americans struggling to save and invest for their future.
    Both proposals make it more difficult for shareholders to 
hold corporate executives accountable.
    The proposal on proxy advisers could make it harder for 
institutional investors to have timely access to independent 
research and analysis from the proxy advisory firms that they 
hire. The proposed rule would give corporations access to 
investors' research before the public retirement systems, 
investment fund managers, and foundations who manage Americans' 
money.
    The SEC says the changes are necessary because of errors 
and inaccuracies, but you have provided scant evidence of those 
errors. Instead, the new rules would give companies a new tool 
to intimidate proxy advisers and threaten their independence.
    The overhaul of the shareholder proposal rule would make it 
easier for corporate management to silence shareholders and to 
avoid dealing with important issues critical to investors.
    The amendments could stop proposals for votes on issues 
such as the disclosure of corporate political spending, 
separating the roles of board chair and CEO, and 
nondiscrimination policies.
    I am disappointed in the direction you have taken these 
rules that have for decades--for decades, through Presidents of 
both parties, and SEC Chairs of both parties--allowed investors 
to hold management accountable, all while executives are 
further entrenching themselves and ignoring workers and 
shareholders.
    Protecting workers' hard-earned savings should begin with a 
simple concept: putting their rights first. I hope the SEC will 
remember that.
    But over the last week and this week, we have had nearly 
all the financial regulators come before this Committee. We 
have had the Fed, we have had the FDIC, we had NCUA, today the 
SEC, all defending the same policies that amount to a wish list 
for Wall Street and corporate interests, all afflicted with the 
collective amnesia about what happened in the last decade or 
so. The President promised to look out for ordinary, 
hardworking people, but he and the people he has put in charge 
of these agencies betray those workers over and over and over 
again.
    Mr. Chair, I would like to offer for the record this letter 
from the Ohio Public Employees Retirement System raising 
concerns about the SEC's rulemaking on proxy advisory firms.
    Chairman Crapo. Without objection.
    Senator Brown. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Chairman Clayton, you may make your presentation.

  STATEMENT OF JAY CLAYTON, CHAIRMAN, SECURITIES AND EXCHANGE 
                           COMMISSION

    Mr. Clayton. Thank you, Chairman Crapo, Ranking Member 
Brown, Senators of the Committee. I appreciate the opportunity 
to testify today about the work of the Securities and Exchange 
Commission.
    I want to start by thanking you for your support for the 
Commission's mission and its people. The dedicated women and 
men of the Commission are our most important assets.
    With the resources Congress provided last year, we have 
been able to lift our hiring freeze and fill around 140 new 
positions with high-quality individuals who I believe will 
serve investors well.
    Since becoming Chairman, the interests of our long-term 
Main Street investors have been front of my mind. With that 
perspective, a perspective our staff has long held, I would 
like to highlight just a few aspects of our work over the past 
year.
    First, modernization has been a key avenue for advancing 
all three aspects of our mission. In June, the Commission 
adopted a package of rules and interpretations designed to 
enhance the quality and transparency of the relationship our 
Main Street investors have with their broker-dealer or 
investment adviser. These measures bring legal duties and 
mandated disclosures in line with what a reasonable investor 
would expect, while preserving access in terms of both choice 
and cost to a variety of investment services and products. I am 
so grateful to our experienced and dedicated staff for bringing 
long overdue regulatory rationality and clarity to this 
important area.
    We are also working to respond to the substantial changes 
that have taken place in our markets, including that more 
capital is raised in our private markets than our public 
markets, and many companies are staying private until they are 
very large or not going public at all.
    We have expanded key aspects of the JOBS Act to increase 
the attractiveness of our public markets for companies while 
maintaining or enhancing investor protections. Increasing the 
attractiveness of our public capital markets is just one side 
of the coin. We are also exploring whether, through fund 
structures or other measures, we can increase the type and 
quality of opportunities Main Street investors have in our 
private markets.
    I believe we should strive to ensure that an individual 
retirement portfolio can look like a well-managed pension fund 
with robust investor protection that reflects the individual 
nature of the account. This is a challenge, but we are making 
progress.
    In many other areas, modernization efforts are making a 
difference for our investors and our markets. These efforts not 
only include rulemakings but also the monitoring of market 
function and market risk.
    Turning to our inspections and enforcement efforts, I want 
to highlight our Teachers and Military Servicemembers 
Initiatives where we have focused additional enforcement and 
education resources. My message here is simple: If you are 
ripping off teachers, servicemembers, or veterans, we want to 
catch you, punish you, and get them their money back.
    Returning funds to harmed investors continues to be a 
priority, and this year we returned over $1.2 billion to harmed 
investors. I have previously testified about some of the legal 
impediments that we face in obtaining funds from bad actors in 
situations where a fraud is well concealed, such as a Ponzi 
scheme. I very much appreciate the bipartisan work in Congress 
to address these challenges and welcome the opportunity to 
continue working with you to ensure that defrauded investors 
can get their money back.
    Finally, I note that we have substantially increased our 
efforts to engage directly with investors, entrepreneurs, and 
an array of market participants. In particular, we have 
allocated additional resources to our retail investors and 
entrepreneurs that live between the coasts. I believe this type 
of broad, direct engagement is important.
    Thank you again for the opportunity to testify today, and I 
look forward to your questions.
    Chairman Crapo. Thank you very much.
    Chairman Clayton, as I highlighted in my opening remarks, 
the SEC has taken a number of critical steps to modernize the 
guidance and rules surrounding proxy advice, the proxy process, 
and shareholder proposals. This Committee has held multiple 
hearings and the SEC has conducted roundtables on these issues. 
These rules have not been reviewed by the Commission in 
decades, and I commend the SEC for taking these thoughtful 
actions based on the staff's expertise to address changes in 
the markets that have occurred.
    In your public remarks, you have mentioned that you expect 
the Commission will address proxy plumbing and universal proxy. 
When can we expect to see actions to modernize these aspects of 
the proxy process?
    Mr. Clayton. Chairman Crapo, we have taken an approach to 
our Regulatory Flexibility Agenda, which is if an item is on 
the near-term agenda, we intend to get it done within the year. 
Those items are on the agenda. Staff is working on them, and I 
would hope that we would be able to move them forward in the 
coming year.
    Chairman Crapo. Well, thank you. And, again, I appreciate 
the attention you have given it and encourage your strong focus 
on it to bring it to completion.
    Moving to a different issue, this year Facebook announced 
its plan to develop a new cryptocurrency called ``Libra.'' 
While the SEC is one of a number of regulators who would have 
jurisdiction over Libra, can you speak to how the Libra 
announcement has affected how the SEC and other regulators are 
working to be responsive to and innovative to market 
developments and trends like cryptocurrencies?
    Mr. Clayton. Sure, and I appreciate the question, and the 
question highlights what happened with that announcement. I am 
not going to speak about the particular product. It is not 
appropriate for me to do so. But the announcement was a focal 
point for regulators of different types to recognize the 
digitization of the plumbing and other aspects of our financial 
system, including payment transfers. It is coming. I will say 
just the natural economic forces that it unleashes, taking fat 
out of the system, for lack of a better term, it is happening.
    Now, we have to recognize that that is happening, recognize 
our mission--safety and soundness, investor protection, fair 
markets--and ensure that as that digitization takes place, we 
are being true to those principles. But we should not be 
fighting that digitization because, you know, if we fight it, 
it will go around us.
    Chairman Crapo. Well, thank you. That mirrors my feelings 
on it, and I assume when you say it is coming----
    Mr. Clayton. I am sorry, Senator. It is here.
    Chairman Crapo. This year.
    Mr. Clayton. It is here. It is here already.
    Chairman Crapo. I see. It is here. Yes, it is here. And as 
I have said many times, again, leaving aside the specific 
proposal of Libra, the issue is one which the United States and 
its allies and friends in the world community need to lead on 
and to set the rules of the road on rather than to let it come 
and develop on its own through other jurisdictions who are not 
as friendly to the United States, and, frankly, through other 
currencies than the U.S. dollar. And so I encourage you and the 
other regulators to focus on this carefully.
    One of the first decisions that the United States has to 
make is who among our regulators are those who regulate and how 
will we regulate, as well as what will be the specifics of how 
we set the rules of the road. So I would encourage you to pay 
very close and careful attention to this.
    Finally, the SEC concept release seeking public comment on 
ways to harmonize the private securities offering exemptions is 
a positive step and includes many key reforms. What are the 
next steps and timeline for the SEC to act?
    Mr. Clayton. Well, the next steps that are on our agenda, a 
proposal around the accredited investor definition. In your 
opening remarks, you highlighted one of the issues with the 
accredited investor definition, which is it is a binary 
definition based on wealth. I will say it simply: There are a 
number of people who have the sophisticated ability to assess 
investments who may not meet those wealth thresholds, and we 
should do a better job of identifying them.
    That said, the private markets have risks that are 
significant compared to the public markets, and we need to be 
cognizant of that.
    Chairman Crapo. Thank you.
    Senator Brown.
    Senator Brown. Thank you.
    Mr. Clayton, for a dozen years, Wells Fargo's management 
recommended voting against shareholder proposals, asking the 
company to separate the role of chairman and CEO, a corporate 
governance best practice. The amendments you have proposed to 
limit shareholders' ability to resubmit sensible proposals like 
this would have cutoff Wells Fargo investors after 4 years of 
doing that, even though in subsequent years it received support 
from 37 percent of shareholders. And we know separating the 
chairman and CEO is a sensible proposal because, after Wells 
Fargo found itself mired in scandal in abusing its employees, 
it decided to separate the positions and took a victory lap.
    How do you justify a proposal like you made that could 
limit shareholders from continuing to push for sensible 
governance reforms?
    Mr. Clayton. Senator Brown, the question that you are 
asking is, after a shareholder proposal has been put on the 
proxy and sent to all shareholders to vote on and garnered less 
than majority support, substantially less, how long does it 
stay on the proxy? Right now, the thresholds are--effectively, 
if you get more than 10 percent of the vote, you can keep it on 
the proxy indefinitely.
    That rule has not been changed since the late 1950s, early 
1960s at a time when communications and shareholder engagement 
were very different. Our proposal looks at increasing those 
thresholds. We have back-tested them, but, still, if you were 
able to garner more than one in four shareholders in favor of 
your proposal, the proposal would be able to stay on the proxy.
    Senator Brown. Well, you say that. That sounds good. But 
Commissioner Jackson's office studied data for over a decade 
now, from 2004 to 2018. They found the proposed rules would 
have excluded 35 percent of the proposals for an independent 
board chair, 50 percent of board diversity proposals, and 40 
percent of political spending disclosure proposals. These are 
all areas where corporations need to be doing better. 
Shareholders deserve it. I hope you will consider that as you 
think this through where we ought to go.
    Let me talk for a moment about whistleblowers. You recently 
tried to clarify your proposal to amend the whistleblower 
program and saying it would not create a cap on awards. Can you 
commit that the final rule will be consistent with statutory 
requirements and not create a cap?
    Mr. Clayton. Absolutely, and any characterization of our 
proposal as a cap is completely misguided, completely misreads 
what our rules are. The statutory mandate is for the Commission 
to decide between 10 and 30 percent of the award amount how 
much the whistleblower should be entitled to. I can tell you 
that what our proposal was intended to do was to make it clear 
how we make those decisions, particularly at the top end and 
bottom end of the spectrum. I believe in transparency in how 
those decisions are made, and I believe that Congress gave the 
Commission the discretion between those bands to make those 
decisions. And I want to say personally--I am not speaking for 
the rest of the members of the Commission--I think the program 
has been extremely beneficial to investors, and I support it.
    Senator Brown. Well, again, you say that you support it. I 
believe you that you do. But I have also seen that the proposal 
you made has had a chilling effect. We have seen the numbers 
change in the last year.
    Mr. Clayton. When people mischaracterize things and they 
have a chilling effect, I have to step in and clarify, which is 
what I did.
    Senator Brown. Well, so I guess you are arguing then that 
the chilling effect is gone because you clarified it.
    Mr. Clayton. I hope so. And you cited the 5,000 number, the 
5,000 whistleblower tip number, which was slightly down from 
last year after a long upturn. But, still, our tips, 
complaints, and referrals, which is people identifying issues 
for us, we had another 17,000 of those, and I think we 
investigate them--we try to target investigating them or at 
least initially within the first week that they are received.
    Now, let me just be clear. Anybody who sees a problem, let 
us know.
    Senator Brown. All right. Let me just close, Mr. Chairman, 
with a comment from Senator Grassley. He wrote a letter to the 
Commission. He said, ``In establishing the whistleblower award 
program, Congress was not concerned about a reward figure being 
too big. If anything, the legislative history shows that 
Congress was more concerned about potential whistleblower 
awards being too stingy.''
    Let me do one more--well, go ahead. I yield back.
    Mr. Clayton. Thank you.
    Chairman Crapo. Senator Cotton.
    Senator Cotton. Mr. Clayton, I want to talk today about the 
collapse of WeWork. That company just laid off 2,400 workers 
right at Christmas, 20 percent of its workforce, due almost 
entirely to the incompetence, greed, and possible frauds and 
crimes of WeWork's founder, Adam Neumann. Bloomberg reported in 
September that the SEC was investigating WeWork and Mr. Neumann 
for fraud and other securities violations.
    Is the SEC investigating Mr. Neumann?
    Mr. Clayton. We do not comment on whether we are 
investigating or not investigating.
    Senator Cotton. OK. I thought that might be your answer, so 
let me put it a different way. Hypothetically speaking, if a 
real estate company was going public and the CEO's wife and 
nephew had been given positions named ``chief brand and impact 
officer'' and ``head of wellness,'' which kind of sound like 
phony, made-up jobs to me, might that be something that the 
SEC's Enforcement Division would look into?
    Mr. Clayton. Let me----
    Senator Cotton. Hypothetically speaking.
    Mr. Clayton. I am going to take a step back and say that 
transactions between the principals of companies, family 
members, other interests, are something where transparency is 
essential.
    Senator Cotton. If the CEO of that same company sat on the 
compensation committee, in effect allowing him to determine his 
own salary, would that be considered something the SEC might 
want to look into?
    Mr. Clayton. We are very interested in--the types of issues 
you are identifying should be transparent to investors in all 
of our public companies.
    Senator Cotton. If the CEO had trademarked a common word 
like ``we'' and then sold it to his company for $6 million, is 
that something that would need to be disclosed and might be of 
concern to the SEC?
    Mr. Clayton. Those types of transactions are required to be 
disclosed.
    Senator Cotton. And one final hypothetical. If the CEO of 
that company had credibly been accused of transporting illegal 
drugs in a private jet across international boundaries and 
spending millions of dollars of his company's money on lavish 
parties with famous DJs and Don Julio tequila, would that be 
responsible governance?
    Mr. Clayton. Let me say this: Our disclosure requirements 
around the background and character and activities of directors 
and officers of public companies require disclosure that would 
enable people to make those types of judgments.
    Senator Cotton. So let me say this about the SEC's 
attorneys. I want to commend you for your work in the WeWork 
initial public offering. They filed a prospectus almost 9 
months with you for review before it went public, and your 
lawyers caught many discrepancies in it, like, for instance, 
that they claimed that they could assume a 100 percent 
occupancy rate of all their buildings or some financial metric 
known as ``contribution margin'' or ``community-
adjusted EBITDA,'' whatever that means. So it is good that the 
SEC caught this. It is unfortunate they caught it at the last 
minute. We need a system that can catch this kind of fraud 
earlier before so many workers are injured.
    All those things, though, are things that Adam Neumann 
either did as a matter of record or is credibly accused of 
having done, and at least one of them, transporting illegal 
drugs across international boundaries, I hope is currently 
under investigation by the Department of Justice for crimes, 
and I hope that the Enforcement Division at the SEC is 
investigating Adam Neumann, because today, despite all that, he 
is a billionaire. He received a $1.7 billion payday to walk 
away from the smoking rubble of his company--or, as he 
preferred to call it, not a company, a ``state of 
consciousness.'' He was able to extract that payout because the 
corporate governance structure gave him ten votes per share, a 
kind of super voting stock that enabled him to hold his company 
hostage until the other investors paid him just to go away and 
stop destroying its value. And he is even on a 4-year 
consulting contract at $185 million in case they need tips on 
DJs or other kinds of tequila. A billion dollars is a lot of 
money for any executive, but certainly it is a scandal for 
someone who presided over the ruin of his company.
    Leadership requires strong character and accountability, 
and that includes corporate leadership. That is what was absent 
in this case with Adam Neumann, and what he did to the workers 
at his company, aided and abetted, I would say, by some of Wall 
Street's biggest banks and biggest law firms. A lot of us often 
lament polls that show younger Americans have doubts about 
capitalism and are open to socialism, for good reason given the 
brutality and poverty that socialism inflicts on its people. 
But people like Adam Neumann and what he did to WeWork is the 
reason people in America are open to socialism.
    Chairman Crapo. Senator Reed.
    Senator Reed. I am tempted to ask you to respond to Senator 
Cotton's question.
    [Laughter.]
    Senator Reed. Mr. Chairman, as several of my colleagues 
have indicated, you have proposed two major rules--one with 
respect to proxy advisory firms and the other related to 
shareholder proposals. These are rather complicated rules, and 
I presume you are going to receive significant numbers of 
letters of comment that have to be clearly analyzed. And rather 
than expedition, I would urge deliberation, very careful 
deliberation.
    I think Senator Brown's comments have reflected some of the 
potential pitfalls in adopting these rules. I think also, too, 
just looking--and the Council of Institutional Investors has 
conducted a study that since 2016 the median number of days 
that an SEC rule has been promulgated, then adopted, is 416 
days. That is more than a year. And those are for some that 
were rather innocuous rules.
    So what I would ask is that you would commit to be very 
deliberate and very careful particularly in analyzing the 
comments that are coming in and do that in a way--excuse me. It 
is 413 days. I want to be correct--very, very careful in the 
review of these rules. The consequences will be significant. 
Can we get that commitment?
    Mr. Clayton. Yes, and the entity you mentioned, I believe I 
have on my calendar for tomorrow. We are open to engagement on 
this. I want to hear from people of all types.
    Senator Reed. Very good.
    Let me turn now to the issue of the status--both legal, 
institutional, and cultural--of some of the big accounting 
firms. Earlier this year, the SEC assessed a $50 million 
penalty to a major accounting firm for, in the words of the 
SEC, ``altering past audit work after receiving stolen 
information about inspections of the firm that would be 
conducted by the Public Company Accounting Oversight Board.'' 
The SEC audit finds that numerous audit professionals at that 
firm cheated on internal training exams by improperly sharing 
answers and manipulating test results. In addition to the 
finding against the firm, a principal in the firm, the second-
ranking individual, was convicted of wire fraud and other 
crimes. These disciplinary proceedings suggest that there may 
be problems, as I said--both legal, institutional, and 
cultural--within the accounting industry, particularly the big 
accounting industry.
    On top of that, the Financial Times last month did a very 
lengthy article about the behavior in these firms, which I 
think you are probably aware of--you have read it, I presume--
in which whistleblowers--the term arises again--came forward 
with experiences of harassment, bullying, and discrimination. 
It was a very toxic article and very unflattering to all of the 
industry.
    So, first, do you see these issues as significant? And I 
hope you do. And, second, what two or three specific actions do 
you anticipate taking this year with respect to the issues?
    Mr. Clayton. So, yes, Senator Reed, I do consider them very 
significant. High-quality financial reporting that people can 
rely on is the bedrock of our capital market system, and audit 
quality that people can count on is essential to that.
    With our Office of Chief Accountant, we are engaged on a 
regular basis with these firms on efforts to improve audit 
quality, and through the PCAOB. And I want to highlight--you 
mentioned the Financial Times article. It is not just a 
domestic issue. It is an international issue. We have asked our 
Chief Accountant to take on an additional role as head of the 
monitoring group, which is trying to ensure high-quality audit 
standards across the globe. U.S. investors should understand 
that audit quality is not uniform, and, in fact, I do not 
believe that it is as high quality in many places outside the 
United States as it is here. The only thing to do there is to 
try and lift it, and we are trying to do that.
    So I can tell you that we are engaged on a number of fronts 
on improving audit quality.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Reed.
    Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman.
    I want to talk to you about the Public Company Accounting 
Oversight Board. I think the acronym is PCAOB.
    Mr. Clayton. Yes.
    Senator Kennedy. What does that Board do?
    Mr. Clayton. Well, they oversee--the PCAOB really has three 
functions: standard setting, inspections, and enforcement.
    Senator Kennedy. Basically they review the audits of public 
companies. Is that right?
    Mr. Clayton. Yes, and broker-dealers, but essentially 
public companies.
    Senator Kennedy. To make sure that the audits are accurate 
and fair and honest.
    Mr. Clayton. Yes.
    Senator Kennedy. We have about 156 companies from our 
friends in China on U.S. exchanges, as I appreciate it, big 
market cap, about $1.2 trillion. How many of those companies, 
if you know, are owned by the Chinese Government?
    Mr. Clayton. Trying to come up with a precise number to 
that question would be a fool's errand.
    Senator Kennedy. Sure. I am not trying to----
    Mr. Clayton. But I will say I am certain that the Chinese 
Government has a significant interest in many of those 
companies, directly or indirectly.
    Senator Kennedy. The state-owned companies under President 
Xi Jinping are becoming more and more prominent than privately 
owned companies. How many of those Chinese companies are 
complying with the work of--how many of the audits of those 
Chinese companies are working with the PCAOB to let the PCAOB 
review their audits?
    Mr. Clayton. The PCAOB requests work papers from the 
companies that it audits, and with respect to those companies, 
access to those work papers has generally not been available.
    Senator Kennedy. Right. So, basically, our friends in China 
are listing companies on American exchanges. They have 
companies audit their companies. But our PCAOB is not able to 
review the audits because the companies say no. Is that right?
    Mr. Clayton. That is correct, and it is a problem.
    Senator Kennedy. What are we doing about it?
    Mr. Clayton. Well, we are trying to remedy that directly. 
Recently, because remedying that directly has taken, in my 
view, too long, the Chairman of the PCAOB and I sat down with 
the heads of our big four audit firms who are generally 
involved through affiliates in those audits to ask what they 
are doing to ensure and give us comfort that the audit work 
they are doing is of the same quality as the audit work in 
other jurisdictions.
    Senator Kennedy. Has that helped?
    Mr. Clayton. I do not know yet. But that is not a one-time 
dialogue.
    Senator Kennedy. Right.
    Mr. Clayton. I expect to engage with them again, and I 
wanted to make sure that they understood how important this is, 
so we are engaging at the level of my office and the head of 
the PCAOB.
    Senator Kennedy. Well, I mean, we want to encourage 
companies from all over the world, including but not limited to 
China, to raise capital in the United States because our 
markets are very efficient. But there is a reason that God made 
the SEC and the PCAOB, and that is to make sure that these 
companies, these foreign companies, when they are audited, use 
auditing companies that are telling the American people and 
other investors the truth. And the Chinese companies do not 
seem to be cooperating, and it does not seem to be getting 
better. So a lot of investors, including but not limited to 
American investors, are basically flying blind, and, of course, 
we have had trouble in the past with auditing companies that do 
not really do a proper audit.
    I have got a bill that I would like you to take a look at 
called the ``Holding Foreign Companies Accountable Act.'' It 
basically says that a company has 3 years to cooperate with our 
PCAOB, and after 3 years, if they do not allow us to review the 
audits and answer our questions, they are de-listed. Do you 
think that would be effective?
    Mr. Clayton. So there is one issue, and I will look at it, 
but just because a company is de-listed does not mean U.S. 
investors will not continue to invest in it.
    Senator Kennedy. That is true, but let me put it another 
way. It will get the attention of the foreign companies, will 
it not?
    Mr. Clayton. It will. It will get the attention of 
investors. I think both of those things are valuable.
    Senator Kennedy. And not all of them, but many of them will 
be born again and start complying. Isn't that correct?
    Mr. Clayton. I hope so.
    Senator Kennedy. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Clayton, I am increasingly concerned about the 
ability of foreign actors to manipulate U.S. companies through 
their investments, particularly in the media and technology 
sectors. In 2017, the U.S.-China Economic and Security Review 
Commission highlighted this issue when it recommended that 
Congress modify FCC regulations to require greater transparency 
regarding Chinese Government ownership of media outlets and the 
clear labeling of media content sponsored by the Chinese 
Government. And I offered a provision in the Foreign Investment 
Risk Review Modernization Act to make sure CFIUS is requiring 
foreign state-owned companies to disclose their attempts to 
purchase U.S. companies.
    But the SEC also has a role to play. Section 13(d) of the 
Securities Exchange Act of 1934 requires investors who become 
the beneficial owners of more than 5 percent of an issuer's 
equity securities to report certain identifying information to 
the SEC. But if undisclosed or disclosed without sufficient 
information, such ownership stakes could undermine the free 
flow of information to the American people.
    So my question is: How does the SEC monitor equity markets 
to ensure that foreign investors are not accumulating 
significant shares in public companies, especially in the media 
and technology sectors, without filing the requisite 
disclosures?
    Mr. Clayton. Senator Menendez, your question is a really 
good one.
    Senator Menendez. Those are the only ones I ever ask here.
    [Laughter.]
    Senator Menendez. I am just kidding. We have got to have 
fun here. We occasionally have got to have fun.
    Mr. Clayton. Control over a public company is something our 
markets and investors need to know about. The 13(d) and (g) 
rules that essentially trigger over 5 percent ownership--not 
just for an individual holder but concerted efforts by others--
I think are extremely important to our investors. We do try to 
monitor and look for violations of those rules. But I want you 
to know--and I am not going to get into too much detail. Our 
ability to track U.S. citizens who are owning companies is very 
robust. Sometimes when investments occur through overseas 
accounts, it is not as robust.
    Senator Menendez. And that is what I am concerned about, so 
I appreciate your acknowledgment of that. Would it be fair to 
say that you really do not have the ability to independently 
verify the information in a 13(d) filing, or, more importantly, 
to verify whether a foreign entity should have filed a 13(d) 
filing but failed to comply with the law?
    Mr. Clayton. I am not going to go so far as to say we do 
not have the ability. I am looking for ways to enhance our 
ability.
    Senator Menendez. And so let me ask you about that. Given 
the need for the American public to know if their media is 
being funded by foreign investors, would you agree that the SEC 
should monitor how wrongdoing is concentrated by sector?
    Mr. Clayton. I am not sure I follow you.
    Senator Menendez. By looking where you find wrongdoing, 
wouldn't it be of value to know which sectors those violations 
are taking place?
    Mr. Clayton. Oh, sure. People in our Enforcement Division, 
they are very good at noticing sector-specific----
    Senator Menendez. Let me ask you this: When you do find a 
suspected 13(d) violation, how does the SEC enforce it? And 
what penalties are assessed against persons or entities found 
to have broken the law?
    Mr. Clayton. I can think of some episodic ones off the top 
of my head, but to give you a general answer right now is 
difficult. I can get back to you on that. But, you know, we 
have seen violations in different contexts. In the takeover 
context, it is different from others.
    Senator Menendez. So let me give you an example. I am aware 
from public filings of a large radio station in the country 
that ultimately found that, in fact, foreign ownership because 
of litigation--they did not know who these creditors were, but 
ultimately through litigation found that foreign ownership 
exceeded the cap. They brought that to the attention of the FCC 
under their due diligence. Then there should have been a 13(d) 
filing by this entity, but there was not.
    And so the question is: In circumstances like that--now 
here you have a foreign entity, a group of creditors abroad who 
are now owning in excess of the percentage permitted under the 
FCC who did not make a 13(d) filing, which is the only way a 
company would know whether or not they have that foreign 
ownership existing in their publicly traded stocks. So then the 
question is: What happens to that entity? If we are to have 
teeth at the end of the day through this 13(d) and to try to 
protect ourselves against foreign ownership that exceeds the 
allowable entity under the law, we need to have some teeth in 
the 13(d) process. And I really hope that as Chair you will 
look at that because it comes to the essence of information 
that we are all making decisions on based on public information 
of our medias. But when it is controlled by a foreign entity, 
you have to wonder whether or not it is just an investment or 
whether it is an attempt to ultimately make influences.
    Mr. Clayton. Understood.
    Senator Menendez. Thank you.
    Chairman Crapo. Senator Tillis.
    Senator Tillis. Thank you, Mr. Chair. Mr. Clayton, thank 
you for being here. I think you and your team are doing a great 
job.
    I did want to touch on something you and I have had a 
decision a couple of times over, and that is some of the proxy 
adviser firm rules. I know that you all have put out 
amendments, I think on November the 5th, and I appreciate that 
you are taking this seriously and moving forward with guidance 
and now these potential amendments.
    I am particularly just interested in making sure that the 
proposed rules give impacted companies an opportunity to 
consult with proxy advisers and address any potential errors or 
conflicts of interest. But as you are looking forward, how do 
you think the proposed rule actually can help ensure that the 
proxy firms continue to play an important role in the 
marketplace, but also balance that against some of the issues 
that you and I have talked about in terms of errors and 
conflicts of interest?
    Mr. Clayton. Let me be clear on this. Proxy advisory firms, 
service firms like this, they do play an important role. It is 
very efficient to crunch the data on a collective basis and 
provide that information. They can provide other services. What 
the proposals are looking at is really three things.
    One is to make it clear that the solicitation anti-fraud 
rules apply. Materially misleading statements is something I 
think we should address.
    Conflict disclosure. If you have conflicts, to the extent 
that they would be material to the investor, you should 
disclose them.
    And then the last one--and, frankly, a more tricky one--is 
trying to improve the accuracy and completeness of the 
information investors from all areas have on which to make a 
decision.
    I think all of those can be accomplished in our framework. 
We do it in many other areas, ensuring that we have 
transparency around conflicts, ensuring that the anti-fraud 
rules apply to people who have significant influence in our 
marketplace, and trying to improve accuracy. That is what we 
are striving for, and we welcome comments.
    Senator Tillis. Thank you. Are you looking beyond the rules 
that you all proposed on November 5th? Are you looking at other 
areas of rulemaking moving forward, automatic voting, any other 
priorities?
    Mr. Clayton. Senator, I cannot say that beyond that any 
specifics in the area of voting other than what I mentioned, 
which is trying to improve plumbing. Our plumbing is fairly 
archaic in the proxy area--and also universal proxy. I think 
that there has been enough debate about that where we can now 
move forward with the proposal.
    Senator Tillis. Just one other thing, because I have heard 
some concerns over litigation and how it may increase in this 
space. Have you looked at this? Do you have any things that you 
would be looking at at the SEC?
    Mr. Clayton. I am happy to hear from people who have a 
concern about an increase in litigation. To be clear, the 
proposal makes it clear that there is no new right of action or 
private right of action created by the proposal.
    Senator Tillis. Another area I want to touch on, because I 
know in here we have had some of our members and I think some 
of the folks on the Commission have expressed some concern 
about buybacks, stock buybacks, and potentially placing limits 
on that. I for one think that it is a business trying to figure 
out the best way to deploy its capital. Would any kind of 
restrictions or additional restrictions on buybacks, what would 
the consequences be to mom-and-pop shops--or I should say mom-
and-pop investors, over time if we limit that optimization of 
deployment of capital, what negative impact could it have on 
the average investor?
    Mr. Clayton. It is difficult to say with any degree of 
precision. I agree with the premise of your question, which is 
capital allocation decisions--whether to buy a company, whether 
to invest in a new line, whether to pay a dividend or whether 
to buy back stock--those are board of director decisions, 
understanding the idiosyncracies of the company and what they 
believe is best for the long-term interests of the company.
    To put a point on it, I am not qualified to make that 
decision for them.
    Senator Tillis. I agree. Thank you. Not that you would not 
be in the board room, but in your current capacity, I do not 
think it is an appropriate role in your current capacity. Thank 
you very much.
    Chairman Crapo. Senator Smith.
    Senator Smith. Thank you, Chair Crapo. And hello again. 
Nice to see you again, Mr. Clayton.
    I would like to follow up on the line of questioning that 
Senator Brown and Senator Reed started around these shareholder 
proposal rules. Last month, the SEC voted on party lines to 
adopt these two rules that I think will make it harder for 
investors to seek votes on shareholder proposals, so I am 
concerned about this. And I wanted to ask you about something 
specific to this.
    In your statement when the Commission approved these 
restrictions, you cited several public comment letters, and you 
said something to the effect of how these letters struck you 
the most because they came from long-term Main Street 
investors, including an army veteran, a marine veteran, a 
police officer, a retired teacher, and a public servant and a 
mom. And this is all great, except, of course, it turns out 
that there is some question about the validity of these 
comments.
    According to Bloomberg News, several of the letters that 
you cited were not actually Main Street investors at all, and 
they did their investigation, which found out that the retired 
teacher said she never wrote the letter, and the military vets, 
it turned out that they were the brother and the cousin of the 
chairman of this Virginia advocacy group that was paid for by 
the corporate supporters of this SEC initiative. And Bloomberg 
went on to say that one of the retirees said that he did not 
write the letter bearing his name, and the public servant cited 
said that she had just allowed a public affairs firm to use her 
name without even knowing what it was about.
    So I wanted to just ask you a little bit about this. Given 
that you cited these letters, has this had any effect on your 
thinking about whether this is a good idea?
    Mr. Clayton. Well, a couple of things. One is we are having 
an investigation done of this issue. I am just going to leave 
the specifics of that.
    I am very interested in hearing directly from individual 
investors, in particular directly, not filtered by groups. One 
of the reasons that we have conducted a large number of town 
halls and did so in connection with our standards of conduct 
rulemaking is that when you interact directly with investors, 
you get a lot of good information.
    Senator Smith. I would agree with that.
    Mr. Clayton. So during this comment period, I encourage as 
many individual investors as they can to share their thoughts 
with us, and we will be doing town halls where they will have 
the opportunity to speak directly to me.
    Senator Smith. So you are investigating these sham letters 
from the public to try to understand what happened here and how 
they got included?
    Mr. Clayton. I am not, but we were in contact as soon as 
the Bloomberg--I should not say ``as soon as''--but very 
shortly after the Bloomberg article came out, we contacted our 
General Counsel and the Office of Inspector General.
    Senator Smith. Do you think it should be illegal to submit 
comments under a false identity, as happened here?
    Mr. Clayton. You know what? I am not going to get into that 
here. I think the comment process is an open process. To the 
extent things happen, I do not think that--well, I am just 
going to leave it at that for now.
    Senator Smith. OK.
    Mr. Clayton. Let us see what happens with the 
investigation.
    Senator Smith. I am certainly glad to know that you are 
investigating this. I think that that is really important. And 
if you are basing decisions about what to do on comments and 
public interactions that end up to be fueled by, you know, 
corporate advocacy groups, that I think is a problem.
    Mr. Clayton. That is why we have an open APA process and 
comment period.
    Senator Smith. OK. Let me ask you another question. I also 
serve on the Agriculture Committee, and so this question 
relates to that to a certain extent. In August, the Commodity 
Futures Trading Commission agreed to settle allegations that 
the food giant Kraft had manipulated the wheat market. And the 
settlement agreement they approved was unique because it 
included no factual findings or conclusions of law and 
prevented the Commission from making any public statements 
about the settlement. And this is very concerning to me because 
I think that U.S. citizens should have the right to know what 
Federal agencies are doing when they are settling cases.
    So my question to you is: How common is this practice? Is 
it happening at all that you are aware of at the SEC?
    Mr. Clayton. You are asking a very open-ended question. I 
am not aware of any situation of the type that you describe. I 
want to make sure I carve out any kind of national security or 
intelligence area from what I am saying. That is appropriate in 
these types of circumstances. But as far as ordinary commercial 
actors, I am not aware of any. I will leave it at that.
    Senator Smith. OK. That is a great concern to me as well, 
so thank you.
    Thank you, Mr. Chair.
    Chairman Crapo. Thank you.
    Senator Moran.
    Senator Moran. Chairman, thank you. Thank you, Ranking 
Member.
    Mr. Chairman, thank you for joining us. I will start by 
commending you for your leadership at the SEC. I appreciate the 
agenda you have helped accelerate over the last year. I also 
appreciate the openness of your comments today, your responses 
to questions and the conversations we have had in the office 
and as members of this Committee.
    I do want to raise a concern about what I believe is 
occurring, an increased use of enforcement initiatives, often 
referred to as ``regulation by enforcement'' At least one 
Commissioner recently asserted that when the Commission sees a 
widespread problem affecting investors, it should ``issue its 
own guidance or promulgate a rule and put an end to the problem 
before it hurts investors'' under the belief that it is better 
for investors than a large enforcement initiative and provides 
regulated industries with appropriate notice of what the SEC 
expects from them.
    Do you agree with that or have a comment as to what was 
being conveyed there?
    Mr. Clayton. So, Senator, your question highlights one of 
the challenges of regulating a broad market. If you see 
widespread conduct that is clearly problematic, there is no 
reason to provide guidance. You just go out and deal with it. 
If you see widespread conduct that is a new area and people 
reasonably could conclude one way or the other, my view is that 
guidance, and loud guidance, is the best way to deal with that. 
Life is complicated. A lot of things fall somewhere in between.
    I think one of the things you and I have talked about is 
the Share Class Initiative. I think that where we were was much 
closer, if not all the way at the end of the spectrum. People 
have different views, but I appreciate that spectrum, and I 
think our Enforcement Division and our Inspections Division 
understand that. Part of my job is to make sure they understand 
that and make the appropriate selection how to pursue conduct 
that needs to improve.
    Senator Moran. Mr. Chairman, in that regard, you have said 
before that staff statements and guidance do not create 
enforceable legal obligations. Yet I think we often see the SEC 
point to risk alerts and enforcement proceedings brought 
against other industry participants as justification for 
appropriate notice.
    I will use the February 2018 Share Class Selection 
Disclosure Initiative regarding disclosures for conflicts of 
interest from certain fee arrangements as an example. SEC staff 
pointed to a 2016 risk alert as evidence that the industry was 
given sufficient notice about what the SEC expects from 
regulated firms in disclosures, such as the use of ``may'' 
versus ``will.'' However, I understand that the initiative has 
penalized firms for activity dating back to 2014 and beyond--in 
other words, previous to the notice that you are claiming 
occurred.
    Is there something here that I should be worried about?
    Mr. Clayton. I do not think there is something here in 
particular that you should be worried about, but I do think 
that the principles you articulate are something that we should 
always be concerned about. We should not be in the business of 
``gotcha,'' but we do need to be in the business of making sure 
that we enforce our laws. And if the Commission feels some way 
about it, we, the Commission, should articulate it. We should 
not be relying on staff guidance. If there is to be a change in 
the law, that should come from the Commission, or change in the 
regulation.
    Senator Moran. I fully support the initiative's objectives 
to provide important protections for our retail investors. That 
is not really the issue. I do not know exactly what due process 
means in today's world, but notice has always been something 
that is included in due process, and in order to--one, I would 
hope that those that you have the ability to regulate, if they 
knew what the position of the SEC was, they would comply 
voluntarily. That is a positive in and of itself. And, second, 
for there to occur something in which there seemingly was no 
notice denies them the ability to voluntarily comply and 
eliminates the opportunity for them to have due process.
    Mr. Clayton. Understood.
    Senator Moran. Chairman, thank you.
    Mr. Clayton. Thank you.
    Chairman Crapo. Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Chairman Clayton, thank 
you for appearing today. We appreciate it.
    I want to talk to you a little bit about my concern and 
what can be done and what you are doing to prohibit bequests 
from clients, so let me give you an example. I sent a letter 
along with some of my colleagues to FINRA to limit the ability 
of broker-dealers and other financial advisers to inherit money 
from their clients. A big concern. I know as a former Attorney 
General there is fraud oftentimes associated with that.
    Now, granted, I understand that some family members, there 
could be exceptions for certain relationships, but most 
importantly, I am concerned about the fraud that is associated 
with it.
    So I guess my question to you is twofold. Do you think that 
regulators should prohibit financial advisers to receive 
bequests from their clients? And what are you doing to address 
that issue?
    Mr. Clayton. So on the specific question, I am going to 
have to--on the contours of it, I am not going to comment, but 
on the area of our elderly, many of whom are in a position 
where they may have diminished capacity or not have support, we 
are very concerned about that.
    Let me just say that the fact pattern that you posit of a 
trusted adviser receiving an inheritance, that is something 
that strikes me as very difficult to understand how that could 
happen and worries me.
    What specifically we are doing about it? We are doing a lot 
at the SEC to recognize that many of our investors are getting 
older, and we need to deal with that fact, including 
implementing the Senior Safe Act, which allows broker-dealers 
to hold off on distributing funds if they think that something 
inappropriate is going on. But I am happy to engage with you 
further on this issue.
    Senator Cortez Masto. I would appreciate that because I 
think it is an issue that needs to be addressed, and I look 
forward to seeing what you are doing to address the issue.
    I also appreciate your attention to preventing retail 
investors from falling victim to fraud. FINRA has proposed a 
rule to make it more difficult for dishonest brokers and their 
firms to operate. Again, last month, along with my colleagues, 
we sent a letter to FINRA asking them to strength its proposed 
Rule 4111 to expel firms and brokers with a history of fraud. I 
know FINRA is finalizing this rule now. My understanding is it 
is going to be passed to the SEC for you to take a look at.
    I guess my question is just will you ensure that Rule 4111 
is clear that unscrupulous financial professionals cannot 
continue to operate. And then, second, when will the SEC 
approve--or when do you anticipate taking a look at that rule 
and approving it or having a comment with respect to 4111?
    Mr. Clayton. Let me say generally our view is it is a 
privilege to work in our securities markets. It is a privilege 
that you can lose and should lose if you misbehave. I want to 
be careful not to prejudge. I have not seen the text of the 
rule. But I will say I have long been supportive of the 
concepts that are in that rule, including that--let me put it 
this way: If you are going to hire somebody who has a history, 
the registration and other requirements that FINRA imposes 
should reflect that you are taking more risk than someone who 
does not.
    Senator Cortez Masto. Thank you. And then, also, I 
appreciate the concern around digital currency. This is an area 
that I think, along with the Chairman, I am paying very close 
attention to, and I know your comment. You said it is here, we 
should not go around it. I absolutely agree. And I am hopeful 
that as we move forward that you are putting resources to 
addressing and taking a look at this and what can be done, but 
also at the same time coming back to Congress and talking to us 
about what we can do working with you to really be prepared for 
the future of digital currency, because it is coming. I think 
we need to be prepared for it. So thank you.
    But I do have one final question with respect to the 
enforcement. I was glad to see that the SEC had taken action 
against cryptocurrency firms that failed to comply with 
requirements for raising funds from investors. However, 
according to a recent article in the Wall Street Journal, three 
of the companies missed their deadline to repay people who 
bought their token.
    What is the SEC doing about cryptocurrency companies that 
fail to comply with the SEC settlements, one? And then, two, do 
you have enough resources within the Enforcement Division to 
address these issues?
    Mr. Clayton. OK. Let me try and summarize what can happen 
with settlements sometimes. We try to structure settlements in 
a way that tries to get the most money back to investors over 
time. Sometimes that means allowing payments over time, the 
enterprise to continue and to try to get the money back. And 
sometimes they just fail because they were not good companies 
to start with. I think some of that paradigm applies to the 
situations that you identified, or at least some of them.
    In terms of resources, I think we can do our job. When I 
first took this job, I did not know what I would do with 
significant additional resources. Now I feel better to the 
extent we can have additional resources, particularly in some 
of these emerging areas. We can put them to good use, but we 
can do our job. That is how I feel about it.
    Senator Cortez Masto. Thank you.
    Chairman, thank you.
    Chairman Crapo. Thank you.
    Senator Cramer.
    Senator Cramer. Thank you, Chairman Crapo. Thank you, 
Chairman Clayton, for being with us and for your candor.
    I want to drill down a little bit on the Consolidated Audit 
Trail, the CAT issue, which is, of course, designed to collect 
a lot of personal sensitive financial information--in fact, 
information on every retail brokerage client in our country, as 
I understand it, which should amount to, by my calculations, 
over 100 million clients. In and of itself, you know, that much 
data, that much sensitive information compiled in one place has 
its challenges. But in addition to that, the SROs, as I 
understand it, with some 3,000 people and 24 organizations, 
will have the ability not only to access it but then to be able 
to bulk it downward into their systems.
    I did not used to be paranoid, but I have come to a point 
where the ability for institutions to secure that much data, 
especially sort of this broad application of it, concerns me. 
And I would love for you to help me feel more comfortable with 
what the SEC is doing to protect against attacks and cyber 
challenges with that kind of a risk.
    Mr. Clayton. The CAT is a good example of, I think, how we 
should look at a lot of large data projects. I agree with your 
concern, and the question is, the fundamental question is not 
what data would we like to have, but what data do we need to do 
the job? You know, we are going through a process with the SROs 
and others. I think we can significantly limit--I have said, 
just speaking for myself, phone book information from 
individuals should enable us to do our job and have the CAT 
function in the way it was envisioned to function. So that 
reduces the risk because the data is not as sensitive. And 
then, of course, the other side of the coin is what type of 
security protections do you put in place, and how do you ensure 
that those security protections can evolve as the threats 
evolve?
    That is kind of a general summary, but we are working on 
reducing the sensitive data and ensuring that folks have 
insight into that, and we continue to improve the security 
protections.
    Senator Cramer. To just drill down a little further, my 
understanding is that the firms are required to sign this CAT 
Reporter or agreement, which in essence shields the SROs from 
liability. And anytime we start shielding institutions or 
individuals from liability, I always ask why. Why is that 
necessary? If the safeguards are in place--you know, it only 
adds to my insecurity, if you will, Mr. Chairman.
    So from my point of view, this is highly risky, and I 
believe a breach will eventually happen, but I hope the SEC can 
prevent that, obviously.
    Mr. Clayton. I am aware of the issue around the allocation 
of potential liability, and I am actually meeting tomorrow with 
representatives of the SRO community and what I will call the 
``dealer community'' to discuss the issue.
    Senator Cramer. I appreciate that. Thank you.
    Mr. Clayton. A busy day tomorrow.
    Senator Cramer. Sounds like it.
    Chairman Crapo. Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Chairman Clayton, 
thank you for being here.
    I want to ask you about the Commission's engagement on the 
work of the task force for climate-related financial 
disclosure. How are you working with the task force?
    Mr. Clayton. So we are working--there are international 
bodies. There is FSB, IOSCO, and I will also just put the EU 
there. We are working with all of them on this issue because 
market disclosure issues of this type are global issues. They 
are not just domestic issues. And I would say on medium, light, 
heavy, we are fairly heavily engaged on this as compared to 
some other issues.
    Senator Schatz. And, specifically, what are you doing with 
them?
    Mr. Clayton. Well, me specifically?
    Senator Schatz. I mean the Commission.
    Mr. Clayton. Working on the reports, working on proposals, 
but it is not just that. I think it goes beyond that. I 
personally have recently met with Valdis Dombrovskis from the 
EU, spoken with Mark Carney, working through Randy Quarles, 
trying to bring some what I would say is--I am going to use 
Mark's words; I think it is very good--``decision-useful 
information'' to the marketplace in this regard. I think that 
is a good way to look at it.
    Senator Schatz. And you think that we are not quite there 
yet?
    Mr. Clayton. It is hard. I think we are not quite--yeah, I 
think it is hard.
    Senator Schatz. Are you actively enforcing your 2010 
guidance on climate disclosure?
    Mr. Clayton. If what you mean by ``actively enforcing'' it 
is are we actively monitoring companies to see if they are 
following it, and to the extent they are not, addressing that, 
I think the answer is a clear yes.
    Senator Schatz. I think one way you could more actively 
enforce it would be to put issuers on notice that this is 
something that Division of Corporation Finance will be 
examining.
    Mr. Clayton. Let me say we examine for this when we examine 
filings.
    Senator Schatz. Thank you. I think people listen more 
carefully if you say, ``We examine for this.''
    Mr. Clayton. To be clear, we examine for this and have been 
examining for it. And I would encourage people to look at the 
comment letters that eventually become available publicly.
    Senator Schatz. I divide this problem into a number of 
categories. The first is sort of politics, and I think we are 
mostly--in terms of your Commission, we are mostly through that 
part of the problem, but there are a couple of other problems. 
One is that we have to develop instruments and processes that 
kind of work across platforms and across the planet so that 
when you are doing disclosures, you are comparing apples to 
apples. But the other part of this is whether or not you as an 
agency are leading versus sort of waiting for TCFD and others 
and seeing how things play out. So in the ecosystem that is 
working on this, would you consider the SEC a leader or a 
follower or a participant? Where do you put yourself in this?
    Mr. Clayton. Definitely a participant, and I would say a 
leader through that decision-useful lens, including trying to 
articulate ways that we can use the information that is being 
generated to further what I would say is our monitoring 
oversight.
    Senator Schatz. There are a bunch of voluntary disclosure 
regimes, as you know, TCFD and the Carbon Disclosure Project, 
and some organizations that come under your jurisdiction are 
making voluntary disclosures under TCFD and others, and then 
they make a separate sort of less informative disclosure as it 
relates to climate risk to you. Do you consider it appropriate 
for the Commission to then look at those voluntary disclosures 
and incorporate into your risk analysis?
    Mr. Clayton. Do we examine for this? Not just in this area, 
but in many areas, we look at a company's public disclosure, 
the required statutory disclosure in their annual report, 10-K 
or what-not, and compare it to what they are saying other 
places, and often ask companies, ``Please make sure that you 
reconcile these for us,'' to the extent they do not look 
consistent and tell us why there are any inconsistencies. That 
is something that we do.
    Senator Schatz. And you think you can be useful--in terms 
of being decision-useful, there are a number of ways to look at 
that, but one of the problems is you have just got different 
ways to disclose climate-related risk. Do you think the SEC can 
lead or at least assist in developing a more consistent, 
comparable, thorough disclosure for climate risks?
    Mr. Clayton. Let me say this: I think we have a great deal 
of expertise in assisting registrants in disclosing risks in a 
way that investors can use it, and we are trying to bring that 
to bear in all areas of what we do, including this.
    Senator Schatz. Thank you.
    Chairman Crapo. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman. Mr. Chairman, good 
morning.
    I want to follow up a little bit on the issue of the 
Consolidated Audit Trail. It seems to me that you have 
suggested that there will be modifications or at least we could 
expect modifications based upon the amount of data that might 
be collected. I am concerned because clearly there is a very 
high probability that there would be breaches. Just as an 
example, having an employee take home a notepad with data on 
it, any type of a process in which employees can gain access, 
and then simply lose it, if nothing else. These all seem to be 
ways in which data could be lost. We are talking about the 
consolidation of data from a lot of different entities into one 
location, which seems to be making for a prime opportunity for 
nefarious activities.
    My question is, number one, when we start talking about the 
limitation of liability, as Senator Cramer has suggested, it 
bears to mind that somebody still has that loss, and the 
question then is: Do you believe that the rules as they are 
currently being laid out or at least the guidelines as we are 
currently seeing them, where there are limitations for some, 
are these fair the way that they are set up to limit the 
liability? And are you going to go so far as to maybe review 
that process, the limitations that are currently being put in 
place today?
    Mr. Clayton. You know, the short answer is yes. Do you want 
the longer answer?
    Senator Rounds. Yes, I do.
    Mr. Clayton. The longer answer is your premise is right in 
that when you allocate responsibility, you generally try to 
allocate it to the people who can best address the risk, who 
are responsible for it, and that is something that is in my 
mind as I look at these things.
    Senator Rounds. OK. Well, I just want to bring attention. I 
really do think this is a serious issue, and it does not mean 
that you do not need a Consolidated Audit Trail, but if you are 
going to go that route, then it has got to be something in 
which data has to be kept in some kind of a secure entity. And 
if you cannot do that--and I am not sure that you can--then 
perhaps we should be looking at a more limited amount of data, 
and it sounds to me like you are looking at that, but then 
along that line, making certain that where the possibility of 
risk is at, the blame does not leave that location. So there is 
a responsibility and an authority which are combined for the 
protection of that risk.
    Mr. Clayton. Understood.
    Senator Rounds. OK. I want to go back a little bit. I 
listened with interest, and I want to just give you an 
opportunity, should I say, to perhaps clarify the suggestion 
that Libra might be ridiculous. And I want to go into this with 
the following: I know that there have been a number of folks 
that have wondered whether or not Libra, which I think was an 
attempt to do something different--if we simply walk away from 
that thing and simply say that is ridiculous or the product is 
ridiculous, which is the way that I heard it, I think we pick 
winners and losers.
    Mr. Clayton. I am not passing judgment on any--if my 
comments were that Libra or any product is ridiculous or not 
ridiculous, I can tell you what. I do not know. What I do know 
is there is a great deal of, how do I say it, friction in the 
marketplace that digitization can reduce. We need to make sure 
that, to the extent that happens, we are still being true to 
our statutory missions across the Federal financial regulatory 
community, and investor protection, efficient markets, for the 
banking regulators--I do not want to speak for them, but safety 
and soundness, et cetera. We cannot lose sight of those things 
because of a new technology. But we also cannot rely on old 
technology to ensure that we do those things.
    Senator Rounds. That is right. And, you know, you are 
looking at definitions right now that come from a 90-year-old 
law. Let me just maybe cut to the chase on it. Do you 
delineate, do you see a difference between and do you see it as 
a separation between a cryptocurrency and perhaps a digital 
currency? Do you see this as being the separating issue where 
you literally have a digital currency today in some respects 
backed by a sovereign versus a crypto which may not be backed 
that way? Is that what you are--you have an obligation, I 
guess, in this case as a regulator to where you may be looking 
at both.
    Mr. Clayton. Let me say this: I think there is a lot going 
on there. It is complicated. We already have a great deal of 
digitization in our financial system. I do believe there is a 
difference between a sovereign-backed medium of exchange and a 
private medium of exchange.
    Senator Rounds. I agree with you, and I just want to make 
sure you have got the tools necessary to look at both, if that 
is your charge.
    Mr. Clayton. Yeah, I want to say to you and this Committee 
I have heard you, and I appreciate that, to the extent we need 
something, we should be engaged with you. And I thank you for 
that.
    Senator Rounds. Thank you. Thank you, Mr. Chairman. Thank 
you, sir.
    Chairman Crapo. Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. Welcome, Mr. 
Chairman. A couple things.
    First, I want to associate myself with Senator Kennedy's 
remarks about our legislation require that Chinese companies 
listed on our exchanges meet the same audit requirements we 
require of everybody else. It seems to be common sense.
    Second, on a number of occasions when we have had hearings, 
I have raised with you the issue of the strong correlation 
between the timing of insider share selling and stock buybacks. 
Since we last discussed that, Commissioner Jackson and others 
have presented even more evidence that the timing is not a 
coincidence, that executives may be manipulating the timing to 
fatten their returns at the expense of their shareholders. And 
I am disappointed that you and the Commission have not moved 
forward more rapidly to investigate this. And I am disappointed 
that instead you are focused on strengthening the hand of 
already very strong CEOs and corporations at the expense of 
their shareholders in many cases with the proxy advisory 
regulation you have proposed. And this seems to be an answer in 
search of the problem.
    There are some issues. We all know what you describe as 
sort of the plumbing and trying to figure it out. I also agree 
with the conflict of interest provisions. But what you are 
doing is saying that if I go out and hire somebody, an 
independent proxy adviser, to make recommendations to me about 
how I should vote with my shares, that proxy adviser then has 
to go to the company and the CEOs and get them to essentially 
comment on them and they get to have a number of reviews.
    You know, I really do not need a nanny to advise me. If I 
do not want to hire a proxy adviser, I do not have to. But what 
troubled me even more was you did try to present this as sort 
of a concern of Main Street investors. When you rolled this 
out, you attempted to create the impression that this was 
something a lot of Main Street investors care about. I can tell 
you--I sit on the Committee, I have served in the House, I have 
been in the Senate--I have not had a Main Street investor ever 
come up to me and say this is a concern of theirs.
    Now, if there are, I look forward to it. But you got duped 
when you rolled out that statement. Senator Smith asked you 
about that, but the reality is, in addition to the fake letters 
that she mentioned, a teacher who you cited who apparently says 
now she did not write the letter, there were a number of 
letters you cited that were clearly orchestrated by a group 
called ``60 Plus.''
    Now, for those of us who have been around here for a little 
while, we know what 60 Plus is. It is a dark-money front group 
that corporations use for messaging. They do not have to 
disclose their donors. It sounds great. They make it sound like 
they are taking care of seniors. But we have found out some of 
their donors include corporations like Chevron and Exxon, and 
so it turns out that a number of the letters you cited were 
from relatives of the head of 60 Plus. Are you aware of that 
now?
    Mr. Clayton. I have now heard this--I was not familiar with 
the group 60 Plus.
    Senator Van Hollen. So were you aware that the retired 
couple you cited are the mother- and father-in-law of the head 
of the 60 Plus association? Are you aware of that now?
    Mr. Clayton. Only because you just told me.
    Senator Van Hollen. Are you aware they told the reporter 
they had no connection themselves with the letter?
    Mr. Clayton. No.
    Senator Van Hollen. Are you aware that the military 
veterans that you cited are the brother and cousin of the 
chairman of the 60 Plus association?
    Mr. Clayton. If you say so.
    Senator Van Hollen. Mr. Chairman, look, if a company had 
done this, we could go after them for deceptive practices, for 
misleading statements. I know you did not intend to do that, 
but you became the vehicle for that, and you became the vehicle 
for that as you tried to roll out this provision with the 
patina that it was looking out for Main Street investors. 
Wasn't that your intent?
    Mr. Clayton. Regardless of this colloquy, I still believe 
we are looking out for Main Street investors.
    Senator Van Hollen. It does not appear to me to do that. 
This is the top priority--this in and of itself does not make 
it bad, but it does mean you should be cautious before you say 
it is the top priority of Main Street investors. This is the 
top priority of a lot of corporate CEOs who do not want to be 
second-guessed by proxy advisers. Isn't that true?
    Mr. Clayton. So, look, let us see what we agree on. 
Disclosure conflicts.
    Senator Van Hollen. Yeah, so I said in my remarks that is 
fine. That is number one. There are two and three where you 
require everybody----
    Mr. Clayton. OK, we will get to three.
    Senator Van Hollen. OK.
    Mr. Clayton. Disclosure conflicts. Take commensurate 
responsibility for what you are saying. The anti-fraud rules 
should apply. OK?
    The last one, I will tell you I am open for discussion on 
all of them, the last one on how we ensure better accuracy, I 
am very open. If people think that what we are proposing is too 
onerous but we can get to improved accuracy in another way, I 
am open.
    Senator Van Hollen. As you know, there is an ongoing 
lawsuit right now on this issue because the basis for your 
rulemaking is that the proxy solicitation--that proxy advice is 
the same as a proxy solicitation.
    Mr. Clayton. Well, it depends on how----
    Senator Van Hollen. My understanding is it was 3-2 vote. 
So----
    Mr. Clayton. There are different levels, but----
    Senator Van Hollen. So there is an ongoing lawsuit, and 
that goes to the heart of the question of your authority. So my 
question is: Are you willing to delay the rulemaking process 
pending the outcome of this lawsuit?
    Mr. Clayton. I am not going to commit to that today.
    Senator Van Hollen. What if you go through this process and 
then the lawsuit says there was no authority to do it?
    Mr. Clayton. Unfortunately, that is a risk that we run. The 
advice we have gotten is that we should be very comfortable 
with where we are.
    Senator Van Hollen. So just in closing, Mr. Chairman, my 
biggest concern right now is the way you tried to present this 
when you rolled it out. And you did get duped----
    Mr. Clayton. I am not--I am not backing away from the fact 
that we want to do what is in the best interest of our long-
term----
    Senator Van Hollen. That is a great goal, but, Mr. 
Chairman, the letters you cited were orchestrated by a dark-
money group that is funded by many of the corporations that 
stand to benefit from your proposal. They are advocating for 
that. They are using this group to funnel their money through, 
and you became their mouthpiece.
    So I do think it is important for you to retract those 
statements, to let the public know that you were duped--I am 
not--you did not intentionally deceive anybody, but the letters 
that you used to make the case that this was for Main Street 
investors were, in fact, orchestrated by a group that is funded 
by some of the very big corporations that are pushing hard for 
the rule, and that is a deceit on the public, not from you but 
you became the vehicle for that. And I hope you will make it 
very clear that you find that outrageous, that the people who 
hope that you are going to do this--these are people who are 
pushing hard for this to happen. And you became the vehicle for 
their fraudulent attempts to make it sound like this was all 
about Main Street investors.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you. And Senator Brown would like to 
ask another question.
    Senator Brown. First, a comment on--I thank Senator Van 
Hollen for his comments and his back-and-forth with the 
Chairman. We hear always in this Committee, particularly from 
that side of the aisle, about mom-and-pop investors, and all 
the Trump nominees want to take care of the little guy and the 
mom-and-pop investors. And I think Senator Van Hollen's 
investigation and comments show that oftentimes the mom-and-pop 
investors have some front to not be conspiratorial in this town 
and in these days, but that it is pretty clear that has been 
what is happening for years with so many of these dark-money 
groups.
    Let me take a slightly different place, and I will ask one 
question, Mr. Chairman. Earlier in my opening statement, I 
think I mentioned that--I asked for inclusion of a letter from 
the Ohio Public Employees Retirement System, and I appreciate 
that the Chairman graciously did that. They weighed in last 
year at the SEC roundtable on proxy voting issues. They raised 
concerns that changes to the rules would make proxy advice more 
expensive, less independent, less timely, and could hurt public 
pension participants. The proposal you issued last month would 
do all of those things under the pretense of improving conflict 
disclosure, eliminating errors, but the rule would go far 
beyond that by giving companies two bites at the apple to 
review proxy research before it gets to investors that are 
paying for it.
    How do those sweeping changes that institutions did not ask 
for and that could compromise the research they are paying for, 
how does that benefit investors?
    Mr. Clayton. Well, Senator, I do think that robust conflict 
disclosure, when it is material, does benefit investors. They 
should know what incentives people have when they are making 
statements. I do believe that if you are making statements in 
an attempt to influence or solicit votes, general anti-fraud 
principles should apply.
    On the last one, how to increase accuracy, like I said to 
Senator Van Hollen, I remain open to ways to deal with that. 
But let us just be clear what we are trying to achieve here. We 
are trying to achieve that the investor has a robust mix of 
information on which to make an investment decision. And if 
that comes from a proxy advisory firm in combination with the 
company, so much the better.
    Senator Brown. Thank you for that. It looks to a lot of us 
that we, again, tip the power too far in favor of companies and 
management needs to be more accountable, not less, and 
shareholders need more tools, not fewer. And the direction that 
you seem to be going is not that.
    Mr. Clayton. Let us also be clear, we are not--say on pay, 
other engagement mechanisms, this is--what I want to achieve 
here is that people who are making the investment decision, the 
voting decision, have as good a mix and as accurate a mix of 
information as they can have. That is what I want to achieve.
    Chairman Crapo. Thank you.
    That concludes the questioning today, and, again, I want to 
thank you, Chairman Clayton, for being here today and also for 
your strong leadership at the SEC. I appreciate it.
    For Senators who wish to submit questions for the record, 
those questions are due on Tuesday, December 17th, and I 
encourage you, Chairman, to please respond as promptly as you 
can to them.
    This is our last hearing for this Congress--unless we 
schedule another one--and we have had a lot of productive 
hearings. I think that we should--I want to thank all of our 
Senators for making that happen and also our witnesses and 
those who have come before us. And it has laid the foundation 
for what I expect to be a significant amount of productive 
effort.
    With that, this hearing is adjourned.
    Mr. Clayton. Thank you.
    [Whereupon, at 11:44 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Today we will receive testimony from Securities and Exchange 
Commission Chairman Jay Clayton regarding the work and agenda of the 
SEC.
    I thank you for your willingness to appear before the Committee 
today. Your willingness to testify is essential to our oversight of the 
SEC.
    The mission of the SEC is to protect investors; maintain fair, 
orderly and efficient markets; and facilitate capital formation.
    It plays a critical role in ensuring that our Nation has capital 
markets that the public can have confidence and trust in.
    It provides information to investors so that as Americans prepare 
for their futures, they not only have a wide array of financial 
opportunities, but they also have the information necessary to make 
informed investment decisions.
    Chairman Clayton, you came before this Committee a year ago and 
assured us that you would continue to take steps to ensure that the 
U.S. capital markets remain the deepest, most dynamic and liquid in the 
world.
    I commend you and the SEC staff for the actions that have been 
taken over the past year.
    Actions worth mentioning include the SEC's final rule package on 
Regulation Best Interest, which strikes the appropriate balance of 
increasing transparency in investors' relationships, while preserving 
access to advice relationships and investment products.
    The SEC also proposed modifying the accelerated filer definition to 
reduce the number of registrants subject to the auditor attestation 
requirement. I encourage the Commission to move forward quickly in a 
way that provides relief to all smaller reporting companies.
    And, this summer the SEC issued a concept release seeking public 
comment on ways to harmonize the private securities offering exemption.
    Regarding the concept release: I encourage the SEC to revise 
Regulation D to allow for general solicitation and advertising by 
sponsors, such as angel investor groups; the SEC should consider 
expanding the ability for small businesses to crowdfund; the definition 
of an accredited investor should be expanded and modernized to account 
for qualifying expertise, not simply a monetary threshold; and it is 
important the SEC update the definition of a family office to allow 
family offices and their clients who meet certain thresholds to be 
considered ``accredited investors.''
    This Committee has held a number of hearings during my chairmanship 
discussing the need for assessing the scope and appropriateness of the 
proxy voting process and other aspects of corporate governance.
    I commend the Commission for its actions related to the proxy 
process.
    In August, the SEC issued guidance to assist investment advisers in 
fulfilling their responsibilities when voting proxies on behalf of 
clients and clarified that proxy voting advice provided by proxy firms 
generally constitutes a solicitation.
    In November, after numerous roundtables and thoughtful efforts led 
by Commissioner Roisman, the SEC proposed two amendments to improve the 
accuracy and transparency of proxy voting advice and to modernize 
shareholder proposals.
    I encourage the SEC to continue moving forward with these efforts 
expeditiously following the comment period.
    This Committee recently held an oversight hearing on the 
Consolidated Audit Trail, or CAT. I have continued to express concerns 
regarding the personally identifiable information that is going to be 
collected in this consolidated database and how it will be protected.
    On October 16, 2019, the CAT plan participants wrote to the SEC to 
request to use a CAT Customer ID instead of receiving and storing 
Social Security Numbers in the CAT, and asked to store only year of 
birth and firm IDs instead of full dates of birth and individual 
account numbers.
    Chairman Clayton, you have previously expressed concerns about the 
information to be collected and stored in the CAT and stated that you 
believe the regulatory objectives of the CAT can be achieved without 
the most sensitive pieces of investor information. I encourage you to 
quickly process the request to use alternative approaches.
    Finally, the SEC has made modernization a focus this year, and I 
look forward to hearing about your Strategic Hub for Innovation and 
Financial Technology and how the SEC has been engaging with initial 
coin offerings and other cryptocurrency-related matters.
    I look forward to receiving updates on these and other SEC 
initiatives, including your views on when we can expect final rules in 
these areas.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you Chairman Crapo, and welcome Chair Clayton.
    Over the past few years, in this Committee, we have seen the Trump 
administration dismantle many of the protections we put in place after 
the last financial crisis, putting our financial system and hardworking 
families around the country at risk.
    The SEC has flown under the radar, but often the agenda has been 
the same--taking Wall Street's side over and over, instead of standing 
with investors saving for retirement or college or a down payment.
    Taken together, the SEC's latest actions are making it harder to 
hold corporate executives accountable to investors and hardworking 
Americans.
    While I appreciate the Enforcement Division's initiatives, 
including those to protect teachers and military service members from 
fraud and misconduct in financial advice, you've done so much damage by 
adopting what you call ``Regulation Best Interest.'' Under that rule, 
brokerage firms can merely disclose, but don't have to eliminate, firm-
level conflicts.
    It should be simple--investment firms need to work for the people 
they serve. Americans need to have confidence the professionals that 
they're trusting with their hard earned money are working for them, not 
scamming them to line the firm's own pockets. You could have simply 
followed Congress's guidance in the Dodd-Frank Act to create a uniform 
fiduciary standard for brokers and advisors, which would be the best 
way to give investors confidence that their interests come first. But 
you didn't.
    And that's not the only part of Dodd-Frank you are working to 
undermine. Look at the SEC's proposal to amend the whistleblower 
program, which is one of the most successful programs created under 
Dodd-Frank. We need brave workers to stand up to corruption and abuse 
when they see financial companies scamming people or engaging in other 
illegal behavior.
    The only way individual workers are ever going to able to stand up 
to powerful Wall Street firms is if we give them protection.
    We've already seen a chilling effect from your proposal.
    Each year since inception of the program, the number of tips has 
increased, in some years by more than 10 percent. But after your rule 
proposal in 2018 introduced a cap on whistleblower awards, the number 
of tips declined for the first time in 2019.
    The proposed cap on awards raised so many alarm bells that you had 
to put out a statement to clarify. I know ``whistleblower'' is a dirty 
word nowadays to some in this town. It always is to serial lawbreakers.
    I don't see how you can make significant changes to a successful 
program like this without understanding that the decline in tips is a 
result of your actions, and the environment this Administration has 
created, attacking rather than protecting those who speak out against 
abuse of power.
    As the SEC continues to take fewer actions that hold the largest 
financial institutions accountable, we must encourage whistleblowers to 
identify misconduct wherever it exists and help uncover complex frauds.
    The SEC's recent proposed rules on proxy advisors and shareholder 
proposals are also clear examples of the Administration taking the side 
of corporate interests over Americans saving and investing for their 
future.
    Both proposals make it more difficult for shareholders to hold 
corporate executives accountable.
    The proposal on proxy advisors could make it harder for 
institutional investors to have timely access to independent research 
and analysis from the proxy advisory firms that they hire. The proposed 
rule would give corporations access to investors' research before the 
public retirement systems, investment fund managers, and foundations 
who manage hardworking Americans' money.
    The SEC says the changes are necessary because of errors and 
inaccuracies, but it provided scant evidence of errors. Instead, the 
new rule would give companies a new tool to intimidate proxy advisers 
and threaten their independence.
    The overhaul of the shareholder proposal rule would make it easier 
for corporate management to silence shareholders and avoid dealing with 
important issues critical to investors.
    The amendments could stop proposals for votes on issues such as 
disclosure of corporate political spending, separating the roles of 
Board Chair and CEO, and nondiscrimination policies.
    I am disappointed in the direction you've taken these rules that 
have for decades allowed investors to hold management accountable, all 
while executives are further entrenching themselves and ignoring 
workers and shareholders.
    Protecting workers' hard-earned savings should begin with a simple 
concept: putting their rights first.
    Mr. Chair, I hope that the SEC will remember that.
    But over the last week we have had nearly all the financial 
regulators before the Committee--the Fed, the FDIC, the NCUA, and today 
the SEC--all defending the same policies that amount to a wish list for 
Wall Street and corporate interests. The President promised to look out 
for ordinary, hardworking people, but he and the people he has put in 
charge of these agencies betray those workers over and over and over.
    Mr. Chairman, I'd like to offer for the record this letter from the 
Ohio Public Employees Retirement System, raising concerns about the 
SEC's rulemaking on proxy advisory firms.
    Thank you, Chairman Crapo.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
        

   RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JAY 
                            CLAYTON

Updating the Rule on Stock Buybacks
Q.1. Chair Clayton, in some of your recent rule proposals you 
noted that changes were needed because the rules had not been 
revised in 20 some years. The rule on stock buybacks was issued 
in 1982 and has not been meaningfully updated since then.
    Do you intend to review Rule 10b-18 given the increase in 
stock buybacks since 1982, in particular considering the 
significant amount spent on stock repurchases in the past 2 
years? If not, why not?

A.1. Response not received in time for publication.
Executive Stock Buybacks
Q.2. At a Senate hearing last year ago, you said that research 
that your colleague Commissioner Jackson had issued 
demonstrating a correlation between the timing of insider share 
selling and stock buybacks might be a coincidence. Commissioner 
Jackson subsequently published further research reinforcing his 
initial findings that executives do often time the sale of 
their personal equity to take advantage of the price increase 
created by repurchases and their announcement.
    Another study in a working paper for the Roosevelt 
Institute found a significant relationship between heightened 
stock buyback activity and insiders selling their own shares. 
And there are a number of studies showing that stock buybacks 
are also more likely when a CEO's bonus is directly linked to 
earnings per share (Lin 2016; Almeida Fos and Kronlund 2016).
    Given this research, would you agree that the evidence 
suggests a finding that this is not merely coincidence? With 
this growing body of evidence supporting a finding that there 
may be market manipulation, would you support additional 
regulations to close the regulatory loophole that makes this 
legal?

A.2. Response not received in time for publication.
Private Offerings
Q.3. You've stated that you would like to provide Main Street 
investors with more opportunities to invest in private 
placements.
    In a briefing with Senate staff, the Director of the 
Division of Corporation Finance said, ``Investors are well 
protected when they invest in public companies.'' 
Unfortunately, the implication is that they are not well 
protected when investing in private companies or offerings. 
Yet, you proposed rule changes on Dec. 18 that would open 
private offerings to more Main Street investors without 
considering investor protection.
    Private market investments can be opaque, complex, and 
risky compared to publicly traded securities. Earlier this 
year, we saw how WeWork owner We Company canceled its initial 
public offering after it disclosed significant conflicts and 
questionable governance practices that raised significant 
concerns with public market investors. Sophisticated investors 
that participated in earlier private offerings by the company 
soon realized they had not been told the whole story. Over 
subsequent weeks, the company's valuation was slashed and it 
cut 20 percent of its employees.
    Do you think Main Street investors will be able to 
sufficiently evaluate private offerings and determine when they 
are not being provided with adequate information, when we have 
seen billion dollar fund managers taken for a ride?

A.3. Response not received in time for publication.
Proxy Advisor Rules
Q.4. Was it the SEC's intent to make proxy voting advice 
subject to private actions under Rule 14a-9? If so, would the 
rule create the threat that issuers and others who disagree 
with a proxy advisory firm's advice and recommendations may 
pursue litigation against proxy advisors?

A.4. Response not received in time for publication.

Q.5. Has, or will, the SEC take any steps to verify the data in 
Table 2: Registrant Concerns Identified in Additional 
Definitive Proxy Materials on page 96 of the Proxy Rules 
proposal?

A.5. Response not received in time for publication.
Shareholder Proposal Revisions
Q.6. The SEC's recent proposal to raise the shareholder vote 
requirement for shareholder proposal resubmissions not only 
increases each of the applicable thresholds, but also contains 
a Momentum Requirement, as explained in the rule proposal.
    What is the purpose of the Momentum Requirement, which 
would allow companies to exclude proposals that have been 
submitted three or more times in the preceding 5 years if they 
received more than 25 percent, but less than 50 percent, of the 
vote and support declined by more than 10 percent from the 
immediately preceding vote? Would a proposal that receives a 49 
percent vote 1 year, but the next year receives a 44 percent 
vote (a 10 percent decline) be excluded in subsequent years? 
What do you believe the Momentum Requirement measures and why 
is it not arbitrary?

A.6. Response not received in time for publication.
                                ------                                


   RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JAY 
                            CLAYTON

Q.1. I would like to start out by first applauding the SEC, 
specifically the office of Minority and Women Inclusion. The 
report from March of this year detailed plans and initiatives 
in advancing minority and women candidates within the SEC's 
workforce.
    I want to focus on one part of the report which is the 
issue of developing a pipeline of diverse talent from which the 
agency can pull from for future talent and employment.
    Of note to me was that the word ``apprenticeships'' was 
entirely absent from that report. I have long believed that 
education, and by extent, apprenticeships provide a critical 
opportunity for individuals to develop the right skills for a 
job and for an organization to create a pipeline for success.
    Please answer the following with specificity:

   LDo you agree that education and apprenticeships can 
        be useful to the SEC in attracting and maintaining 
        talent within the agency that you oversee?

A.1. Response not received in time for publication.

Q.2. The number of black and Hispanic students earning college 
degrees is growing. This is a good thing. But agencies should 
be actively seeking these individuals in order to place them in 
the pipeline that I was referring to before.
    Currently, roughly 9 percent of all African American 
college students attend HBCUs. Many of these schools have begun 
engaging in partnerships with government agencies to create 
that pipeline at an early stage.
    My bill, the HBCU Partners Act, which passed the Senate in 
February, would codify the President's 2017 Executive order on 
HBCU's and ask several Federal agencies to strengthen 
partnerships with HBCUs by leveraging resources and 
strengthening HBCU capacity and participation.
    This is a great way for agencies to recruit and develop the 
talent and skills of minority candidates.
    Please answer the following with specificity:

   LWhile the SEC was not specifically named in the 
        Executive order or the bill, would the agency be open 
        to a developing a program like this for HBCUs?

   LHas the agency previously ever taken a look at 
        HBCUs and the potential of students that attend those 
        schools and how they could be beneficial to the SEC?

   LOutside of the current outreach initiatives that 
        the SEC is engaging in, what steps are you taking to 
        increase the agency's outreach to minority candidates 
        in disadvantaged communities?

A.2. Response not received in time for publication.
                                ------                                


   RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON FROM JAY 
                            CLAYTON

Q.1. As you know, the SROs responsible with access to the CAT 
database are for-profit entities, and competitors to many of 
the firms inputting data. As currently designed, they will have 
access to ALL transaction data reported into the CAT, not just 
their own.

   LHow is the SEC ensuring that the SROs do not use 
        CAT data for commercial gain?

   LHas the SEC considered limiting access to the 
        transaction data so that SROs could only access data 
        from their own exchanges?

   LAlong those lines, will the Commission prohibit the 
        SROs from accessing the customer database?

A.1. Response not received in time for publication.

Q.2. The SROs plan to engage in bulk downloading of CAT data 
into their own systems, contrary to earlier reporting that a 
secure analytics environment would be developed to allow the 
SROs to access the data without bulk downloading. When firms 
waive claims of liability against the CAT processor, they will 
effectively also be waiving claims of liability against the 
SROs that will bulk download their clients' data into their own 
systems. While the CAT has robust security protocols, there is 
little to no transparency into the security of the SROs that 
will have access.

   LHow is the SEC evaluating the risks associated with 
        the SROs access to the CAT database?

   LWill the SEC consider changing this bulk download 
        policy to prohibit the SROs from bulk downloading data?

A.2. Response not received in time for publication.
                                ------                                


   RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JAY 
                            CLAYTON

Q.1. A tax on financial transactions hinders all investors, 
especially everyday Americans. Mr. Chairman, do you agree that 
an FTT would negatively impact everyday savers, increasing 
costs and lowering returns? Are there also market and liquidity 
risks we should keep in mind?

A.1. Response not received in time for publication.

Q.2. It is my understanding that audit quality is improving and 
a key indicator is the fact that the number of restatements to 
public company financial statements has significantly declined 
since the passage of Sarbanes Oxley. Currently the number of 
restatements is at an 18-year low, and not only has the number 
dropped but the magnitude has also declined. Would you agree 
that audit quality continues to improve since the passage of 
Sarbanes-Oxley?

A.2. Response not received in time for publication.

Q.3. Companies don't choose stock buybacks over reinvesting in 
the company. I believe businesses make the most productive 
decisions they can based on the capital they have. In fact, S&P 
500 firms have increased their R&D and capital expenditures as 
a percentage of revenue over recent years, and R&D spending is 
at a record high. There is a common misperception out there 
that stock buybacks exclusively benefit company executives and 
the wealthy. I believe they benefit everyday Americans and 
retirement account holders. Opponents of buybacks and this 
free-flow of capital that has created the greatest economy in 
the world have suggested repealing the Commission's Rule 10b-
18. What would be the impact on companies' ability to buy their 
stock of repealing Rule 10b-18? What would be the impact on 
capital formation and business investment? Is the repeal of 
Rule 10b-18 something you or others at the Commission are 
currently considering?

A.3. Response not received in time for publication.

Q.4. Chairman Clayton, I appreciate your work to encourage more 
U.S. public companies. One area I hope you can review as part 
of your larger efforts is the current definition of venture 
capital fund for purposes of fund registration. My State of 
North Carolina is home to a significant number of biotechnology 
startups who often go public before their product is 
commercialized. After going public, these companies may need to 
go back to their major investors, such as venture capital 
funds, for additional capital infusions to fund clinical trials 
and other needs. Unfortunately, because the current definition 
of venture capital fund considers any investment in a company 
once it goes public to be nonqualifying, it makes it more 
difficult for VC funds to participate in these critical 
financings, though they are the most likely pools of capital to 
meet these needs. This creates a potential penalty to going 
public, and while unintentional is nonetheless impactful. Can 
you commit to reviewing this issue and provide me an update on 
whether the SEC would be willing to remove this barrier?

A.4. Response not received in time for publication.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM JAY 
                            CLAYTON

Q.1. How much will the CAT cost to set up? How much has been 
spent to date?

A.1. Response not received in time for publication.

Q.2. How much will the CAT cost to maintain annually?

A.2. Response not received in time for publication.

Q.3. How will the CAT prevent the next flash crash?

A.3. Response not received in time for publication.

Q.4. How will the CAT prevent market manipulation?

A.4. Response not received in time for publication.

Q.5. What will the CAT provide that the current blue sheets 
process does not?

A.5. Response not received in time for publication.

Q.6. Has the agency considered an expedited blue sheets process 
in lieu of the CAT? Please explain.

A.6. Response not received in time for publication.

Q.7. Is response time the greatest concern when investigating 
concerning trends or behavior?
A.7. Response not received in time for publication.

Q.8. The SROs plan to engage in bulk downloading of CAT data 
into their own systems, contrary to earlier reporting that a 
secure analytics environment would be developed to allow the 
SROs to access the data without bulk downloading. When firms 
waive claims of liability against the CAT processor, they will 
effectively also be waiving claims of liability against the 
SROs that will bulk download their clients' data into their own 
systems. While the CAT has robust security protocols, there is 
little to no transparency into the security of the SROs that 
will have access. Several of my colleagues and I wrote you a 
letter on the subject.
    How is the SEC evaluating the risks associated with the 
SROs access to the CAT database?

A.8. Response not received in time for publication.

Q.9. Will the SEC consider changing this bulk download policy 
to prohibit the SROs from bulk downloading data?
    At the Senate Banking Committee's October 22 hearing on 
Oversight of the Status of the Consolidated Audit Trail, 
Michael Simon stated, ``It would be great from a customer 
protection and confidence and integrity standpoint to be able 
to integrate the U.S. futures markets into the consolidated 
audit trail as well, and potentially at some point, the non-
U.S. markets since we are in a global market, both in respect 
to products and with respect to geography.''

A.9. Response not received in time for publication.

Q.10. Has the agency discussed internally or have there been 
any interagency conversations on expanding the scope of the CAT 
to additional U.S. markets?

A.10. Response not received in time for publication.

Q.11. Has there been any discussions with any international 
counterparts to expand the scope of the CAT to the global 
market?

A.11. Response not received in time for publication.
                                ------                                


   RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM JAY 
                            CLAYTON

Q.1. The U.S. capital markets have a strong and multi-layered 
system for surveillance and regulation. The SEC is obviously 
key and FINRA plays a role--although some exchanges are 
scaling-back their use of FINRA. Is this correct?

A.1. Response not received in time for publication.

Q.2. It is often overlooked that the actual equities and 
options exchanges bring considerable expertise, technology and 
understanding to the regulatory role. They are the closest 
``cop on the beat'' to the trading activity on each of their 
respective markets. No matter their relationship with FINRA, 
the exchanges still retain the full obligation for regulating 
their markets. Our exchanges have among the best technological 
regulatory systems in the world and are a full partner to the 
SEC. Do you agree?

A.2. Response not received in time for publication.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JAY 
                            CLAYTON

Q.1. Commissioner Clayton, when I asked you about the SEC's 
ability to independently verify the information in Section 13D 
filing, or to verify whether a foreign entity should have filed 
a 13D, but failed to comply with the law, you said you were 
looking for ways to enhance the SEC's ability to do so.

   LCan you please share what steps you have taken to 
        enhance the SEC's ability to investigate and enforce 
        Section 13D violations?

   LWhat further steps do you plan on taking to enhance 
        the SEC's ability in this area?

   LAre there any statutory impediments hampering the 
        SEC from investigating or enforcing 13D violations?

   LYou also suggested that the SEC's enforcement 
        division monitors Section 13D violations by sector. 
        Could you share with the Committee the sectors that the 
        SEC has found to have the most frequent 13D violations?

   LWhen you do find a suspected 13D violation, how 
        does the SEC enforce the law and what penalties are 
        assessed against persons or entities found to have 
        broken the law?

A.1. Response not received in time for publication.

Q.2. While appropriate short selling can support stable, liquid 
markets, the current lack of transparency around short 
positions deprives investors, companies, and the market of 
valuable information. It may also enable trading behaviors that 
unfairly harm small, growing companies and their investors.

   LWhat are your thoughts on the current lack of 
        transparency with regard to short positions?

   LHow do you believe the SEC can act to ensure an 
        equitable disclosure regime for short and long 
        investors?

A.2. Response not received in time for publication.

Q.3. Earlier this year, Comptroller Otting said that the OCC 
was taking the lead on writing a rule to rein in risky 
incentive-based compensation practices at large financial 
institutions that reward senior bank executives for 
irresponsible risk-taking. Additionally, at a House Financial 
Services Committee hearing in May, Otting said that he shared 
his proposal with the SEC.

   LHas Comptroller Otting shared the OCC's proposal 
        with the SEC? If so, please provide details of the 
        proposal and a timeline of when Congress can expect see 
        a notice of proposed rulemaking posted.

   LSection 956 of Dodd-Frank requires the OCC, the 
        Federal Reserve, FDIC, NCUA, FHFA, and the SEC to 
        jointly propose an executive compensation rule to 
        prohibit unsafe and unsound compensation plans. Have 
        all six regulators sat down together to discuss this 
        rulemaking? If so, have all six regulators decided to 
        move forward with the proposed rule?

   LSection 956(b) mandates that regulators ``prohibit 
        any types of incentive-based payment arrangement, or 
        any feature of any such arrangement, that the 
        regulators determine encourages inappropriate risks.'' 
        Can you commit to me the final rule will live up to the 
        intent of Congress?

A.3. Response not received in time for publication.
                                ------                                


   RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM JAY 
                            CLAYTON

Data Security
    By many accounts, one of the top risks to companies and 
organizations today is data security. One way to mitigate 
against such risks is to only collect information that the SEC 
needs and to have policies in place that seek to protect it.

Q.1. Does the SEC have agency-wide existing policies, 
specifically for highly sensitive and proprietary information 
like investment strategies, trade secrets, and related 
intellectual property, that govern when this information can be 
requested, where and who at the agency can review it, and how 
it is stored or returned?

A.1. Response not received in time for publication.

Q.2. What steps can be taken to ensure that Commission staff 
today or in the future request highly sensitive and proprietary 
information, like trade secrets and related intellectual 
property, from registrants only when it is necessary?

A.2. Response not received in time for publication.
Pricing Tiers
    Chairman Clayton, on May 21, 2019, the Commission staff 
released SRO Fee Guidance, which, inter alia, reiterates the 
Commission staff's obligations to ensure that fees charged by 
exchanges are ``reasonable,'' ``equitably allocated,'' not 
undue burdens on competition, and not discriminatory. That 
guidance applies to both market data-related fees and 
transaction fees. While I have seen a lot of Commission 
scrutiny and actions on market data fees, and I was encouraged 
when the Commission announced the transaction fee pilot in 
2018, I was disappointed that the pilot was put on hold, and 
since then I have not seen the Commission scrutinize or take 
any actions related to transaction fees and rebates. It is my 
understanding that there are now hundreds of different 
transaction prices offered by various market centers, and that 
exchanges may file for pricing tier changes that seem so 
specific that they are likely to be privately negotiated with 
and apply to a single market participant.

Q.3. Are you worried about the disparate competitive impact of 
these transaction pricing tiers on brokers and other market 
participants?

A.3. Response not received in time for publication.

Q.4. I understand that there's a lot of water under the bridge 
on past transaction fees and rebates, but will you commit to 
ensuring that exchange pricing tiers going forward are not 
discriminatory, not undue burdens on competition, reasonable, 
and equitably allocated?

A.4. Response not received in time for publication.

Q.5. Institutional investors don't usually know the different 
pricing tiers their brokers receive. So they may not know that 
their broker might get a 20 percent larger rebate for an order 
to one exchange as opposed to another. And yet that financial 
difference for the broker may have a profound impact on where 
the broker routes that investor's order. Will the broker route 
to the exchange that makes the broker more money, or where it 
is best for the investor? Will you commit to expanding 
transparency into the number and impact of pricing tiers 
offered by exchanges and how many participants hit each tier?

A.5. Response not received in time for publication.
Competition and Consolidation
    The top 10 global asset managers now control about \1/3\ of 
the managed assets in the world. The banking industry is also 
increasingly concentrated at the top. The biggest firms are 
getting bigger, and I'm worried we're losing competition in our 
industry. We need a deep bench of diverse managers and brokers 
out there. The rules and guidance you adopt at the Commission 
have profound impacts on that competition between firms. For 
example, by permitting exchange transaction fees that 
discriminate against smaller players, the SEC is expressly 
granting a massive competitive trading advantage to larger 
players. Similarly, by taking the approach it has with MiFID 
II, smaller advisers may be squeezed to pay for investment 
research directly, leading to even further consolidation for 
both advisers and brokers.
    Last month, you gave a speech in which you said that you 
would ``defer to [Assistant Attorney General for the Antitrust 
Division Makan Delrahim and FTC Chairman Joe Simons] on 
antitrust policy and enforcement.'' But, as Commissioner 
Jackson has recently highlighted, the Federal securities laws 
that the SEC is tasked with overseeing clearly put 
``competition'' as one of your responsibilities. I am worried 
that the crucial issues of competition and antitrust in the 
context of the securities markets do not fall in an 
administrative black hole.

Q.6. Will you commit to retaining experts to advise you on the 
impacts of Commission action or inaction on competition between 
market participants, with a particular focus on disparate 
impacts on smaller firms?

A.6. Response not received in time for publication.
Market Data
    We live in a world where technology has brought down the 
cost of nearly everything we buy, yet the distribution of data, 
which is inherently a technology powered service continues to 
rise.

Q.7. Will you commit to examining and reporting to Congress on 
the costs to the exchanges of producing market data and 
offering connectivity services?

A.7. Response not received in time for publication.
Immediately Effective Filings
    Section 916 of the Dodd-Frank Act permits exchanges to file 
changes to their market data and transaction fees, and then 
immediately begin charging market participants the new rates. 
While well intentioned, this change has also created some 
notable abuses.

Q.8. I understand that at least one exchange has repeatedly 
charged customers for fees that have been stopped by the 
Commission staff and even the Commission itself. Can you please 
detail how you will ensure that market participants are not 
subjected to market data or transaction fees that are 
inconsistent with the Exchange Act or Commission Rules?

A.8. Response not received in time for publication.

Q.9. Transaction fees paid by customers are now quite often 
changed literally overnight. That means market participants all 
over the industry may have to (1) identify, (2) understand, and 
(3) implement the changes without any prior notice. This 
challenges the industry's ability to route orders in a manner 
consistent with best execution if they cannot be confident they 
have a current understanding of costs. What can you do to make 
sure that all market participants have adequate notice of these 
types of changes?

A.9. Response not received in time for publication.
                                ------                                


   RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JAY 
                            CLAYTON

Leveraged Lending
Q.1. In November 2018, I sent a letter to you, Treasury 
Secretary Steven Mnuchin, Federal Reserve Chairman Jerome 
Powell, Comptroller of the Currency Joseph Otting, and Federal 
Deposit Insurance Corporation Chairman Jelena McWilliams 
expressing concern about the rapid growth of leveraged 
corporate lending, or lending to companies that are already 
highly indebted.\1\
---------------------------------------------------------------------------
    \1\ Letter from Senator Warren to Treasury Secretary Steven 
Mnuchin, Federal Reserve Chairman Jerome Powell, Comptroller of the 
Currency Joseph Otting, Securities and Exchange Commission Chairman Jay 
Clayton, and Federal Deposit Insurance Corporation Chairman Jelena 
McWilliams, November 14, 2018, https://www.warren.senate.gov/imo/media/
doc/2018.11.14
%20Letter%20to%20Regulators%20on%20Leveraged%20Lending.pdf.
---------------------------------------------------------------------------
    In a section addressed to you, I stated that the Volker 
Rule is intended to restrict bank involvement with external 
funds and that trade associations have asked you to 
significantly loosen Volcker Rule controls. The SEC completed 
its rollbacks of the Volcker Rule in September.\2\ In response 
to the rollback of the Volcker Rule, SEC Commissioner Robert J. 
Jackson, Jr., stated, ``as I said at the proposal stage, 
`[r]olling back the Volcker Rule while failing to address pay 
practices that allow bankers to profit from proprietary trading 
puts American investors, taxpayers, and markets at risk.' ''\3\
---------------------------------------------------------------------------
    \2\ U.S. Securities and Exchange Commission, ``Statement on Volcker 
Rule Amendments,'' Public Statement by Commissioner Robert J. Jackson 
Jr., September 19, 2019, https://www.sec.gov/news/public-statement/
statement-jackson-091919.
    \3\ Id.

   LYour January response provided a procedural, but 
        not a substantive, explanation of the status of SEC's 
        proposed amendments to the Volcker Rule. Please explain 
        the SEC's rationale for removing protections against 
---------------------------------------------------------------------------
        excessive risks under the Volcker Rule.

   LCommissioner Jackson also stated, ``The Commission 
        has justified the rollback of the significant investor- 
        and taxpayer-protections in the Volcker Rule in the 
        name of needed improvements in `liquidity and capital 
        formation.' Because the facts and our own Staff's 
        analysis offer no meaningful evidence that the Volcker 
        Rule has affected either, I respectfully dissent.''\4\ 
        Please describe any evidence that the amendments 
        rolling back the Volcker Rule are beneficial to the 
        safety and security of securities markets.
---------------------------------------------------------------------------
    \4\ Id.

A.1. Response not received in time for publication.
Inflated Bond Ratings
Q.2. In September, I wrote you a letter regarding troubling 
reports of inflated bond ratings and the perverse incentives 
within the bond rating industry and urged the SEC to take 
immediate action to protect the economy from risky lending 
propped up by conflicts of interest between bond issuers and 
rating agencies.
    My letter described the flows in the incentive structures 
of bond-ratings firms' through the ``issuer-pays'' model used 
by major firms like S&P and Moody's. Under the issuer-pays 
model, bond issuers pay the agencies for their assessments of 
the products they hope to sell, ultimately giving the rating 
firms an incentive to give better ratings, regardless of the 
risk, since bond issuers might otherwise go to their 
competitors.\5\ In your November response, you stated that you 
share my concerns about conflicts of interest in rating agency 
compensation models and said that you are awaiting 
recommendations or advice from various advisory committees.\6\
---------------------------------------------------------------------------
    \5\ Council on Foreign Relations, ``The Credit Rating 
Controversy,'' CFR Staff, February 19, 2015, https://www.cfr.org/
backgrounder/credit-rating-controversy.
    \6\ Letter from Securities and Exchange Commission Chairman Jay 
Clayton to Senator Warren, November 21, 2019.

   LHave you instructed the advisory committees that 
        the SEC is consulting for recommendations or advice on 
        the role and activities of bond rating agencies to 
        produce any work products by a certain date or 
        timeline? If so, please explain your instructions and 
        any requested deadlines. Additionally, please explain 
---------------------------------------------------------------------------
        if these recommendations or advice will be made public.

   LPlease describe any updates from the advisory 
        committees that the SEC is consulting for 
        recommendations or advice regarding the role and 
        activities of bond rating agencies. Please describe any 
        communications you, or other senior SEC staff, have had 
        with these advisory committees regarding any 
        anticipated timelines or deadlines for their 
        conclusions.

   LYour response also referenced some work that the 
        SEC has done to respond to the conflicts of interest in 
        the issuer-pays model.\7\ An August Wall Street Journal 
        report, however, stated that ``Inflated bond ratings 
        were one cause of the financial crisis. A decade later, 
        there is evidence they persist. In the hottest parts of 
        the booming bond market, S&P and its competitors are 
        giving increasingly optimistic ratings as they fight 
        for market share.''\8\ Please explain why the SEC's 
        efforts to respond to the conflicts of interest have 
        failed to prevent bond rating agencies from 
        artificially inflating bond ratings.
---------------------------------------------------------------------------
    \7\ Id.
    \8\ Wall Street Journal, ``Inflated Bond Ratings Helped Spur the 
Financial Crisis. They're Back,'' Cezary Podkul and Gunjan Banerji, 
August 7, 2019, https://www.wsj.com/articles/inflated-bond-ratings-
helped-spur-the-financial-crisis-theyre-back-11565194951.

   LYour November response also stated, ``I expect to 
        continue to discuss issues related to the 
        [collateralized loan obligations], other credit funds 
        and conditions in the credit markets more generally in 
        the near term with my national and international 
        regulatory colleagues, including through the [Financial 
        Stability Oversight Council] and the [Financial 
        Stability Board]. I will also request our staff in [the 
        SEC Office of Credit Ratings], as well as staff in the 
        Division of Investment Management and Division of 
        Trading and Markets, to keep the issues you raised in 
        your letter in mind as they carry out their examination 
        and other responsibilities.''\9\
---------------------------------------------------------------------------
    \9\ Letter from Securities and Exchange Commission Chairman Jay 
Clayton to Senator Warren, November 21, 2019.

     LPlease describe your near-term discussions with 
        national and international regulatory colleagues, as 
---------------------------------------------------------------------------
        referenced in your response.

     LPlease describe your communications, including 
        all directives, with SEC staff regarding the issues 
        raised in my letter, as referenced in your response.

A.2. Response not received in time for publication.
Regulation Best Interest (Reg BI)
Q.3. In June 2019, SEC approved Reg BI, which despite 
Congress's instruction in sections 913(f) and 913(g) of Dodd-
Frank establishes neither a uniform standard for broker-dealers 
and investment advisers, nor a fiduciary standard for broker-
dealers.\10\ SEC Commissioner Robert J. Jackson, Jr., described 
the rule as ``a muddled standard that exposes millions of 
Americans to the costs of conflicted advice.''\11\
---------------------------------------------------------------------------
    \10\ U.S. Securities and Exchange Commission, ``SEC Adopts Rules 
and Interpretations to Enhance Protections and Preserve Choice for 
Retail Investors in Their Relationships With Financial Professionals,'' 
press release, June 5, 2019, https://www.sec.gov/news/press-release/
2019-89.
    \11\ U.S. Securities and Exchange Commission, ``Statement on Final 
Rules Governing Investment Advice,'' Public Statement by Commissioner 
Robert J. Jackson Jr., June 5, 2018, https://www.sec.gov/news/public-
statement/statement-jackson-060519-iabd.
---------------------------------------------------------------------------
Q.3.a. Reg BI includes no obligation to eliminate conflicts of 
interest--the SEC clearly stated, ``we are not requiring 
broker-dealers to develop policies and procedures to disclose 
and mitigate all conflicts of interest.''\12\ Instead, Reg BI 
imposes a limited requirement to disclose conflicts.
---------------------------------------------------------------------------
    \12\ U.S. Securities and Exchange Commission, Federal Register 
Final Rule, ``Regulation Best Interest: The Broker-Dealer Standard of 
Conduct,'' July 12, 2019, pp. 33388, https://www.govinfo.gov/content/
pkg/FR-2019-07-12/pdf/2019-12164.pdf.
---------------------------------------------------------------------------
    Following the SEC's adoption of Reg BI, Commissioner 
Jackson stated, ``in analysis released by my Office today, we 
show that advisers who use the language in today's release are 
much more likely to offer conflicted advice. And a well-known 
study shows that conflicted advice is the kind that leads to 
fraud that can hurt investors.''\13\
---------------------------------------------------------------------------
    \13\ U.S. Securities and Exchange Commission, ``Statement on Final 
Rules Governing Investment Advice,'' Public Statement by Commissioner 
Robert J. Jackson Jr., June 5, 2018, https://www.sec.gov/news/public-
statement/statement-jackson-060519-iabd.

     LConsumers and investors are drowning in 
        disclosures that are hard to understand. What evidence 
        does that SEC have that limited the disclosures 
        required by the rule in practice would not reduce both 
---------------------------------------------------------------------------
        conflicts of interest fraud.

     LPlease explain why the SEC did not provide a 
        definition of the term ``best interest,'' which is the 
        central concept that defines the duty imposed on 
        broker-dealers.

A.3.a. Response not received in time for publication.

Q.3.b. The Department of Labor is considering a replacement of 
its Fiduciary Rule with standards of conduct that would allow 
advisers providing advice regarding retirement investments to 
engage in conflicts of interest that harm working families 
saving for retirement. I am concerned that the Labor Department 
will simply adopt, or largely base its new rules on, Reg BI, as 
then-Secretary Alex Acosta stated that the department was 
``communicating with [the SEC], and based on our collaborative 
work we will be issuing new rules in this area.''\14\
---------------------------------------------------------------------------
    \14\ House Committee on Education and Labor, ``Examining the 
Policies and Priorities of the U.S. Department of Labor,'' May 1, 2019, 
https://edlabor.house.gov/hearings/04/24/2019/examining-the-policies-
and-priorities-of-the-us-department-of-labor.

   LPlease describe any communications or guidance that 
        you, or other senior SEC leadership, have had with 
        then-Secretary Acosta, Secretary Scalia, or other Labor 
        Department officials, regarding the Labor Department's 
---------------------------------------------------------------------------
        Fiduciary Rule or the SEC's Reg BI.

A.3.b. Response not received in time for publication.
Climate Risk Disclosure
Q.4. In July, Representative Sean Casten (D-IL-06) and I 
introduced H.R. 3623/S. 2017, the Climate Risk Disclosure Act 
of 2019.\15\ Our bill would address the fact that investors 
currently lack access to basic information about the potential 
impact of the climate crisis on American companies, which 
creates significant environmental and financial risks. The 
Climate Risk Disclosure Act of 2019 would require public 
companies to include uniform information about their exposure 
to climate-related risks, which will help investors 
appropriately assess those risks, among other benefits, in 
their disclosures to the SEC.
---------------------------------------------------------------------------
    \15\ Office of Senator Warren, ``Senator Warren, Representative 
Casten Lead Colleagues Introducing a Bill to Require Every Public 
Company to Disclose Climate-Related Risks,'' press release, July 10, 
2019, https://www.warren.senate.gov/newsroom/press-releases/senator-
warren-representative-casten-lead-colleagues-introducing-a-bill-to-
require-every-public-company-to-disclose-climate-related-risks.

Q.4.a. The most recent volume of the National Climate 
Assessment, a scientific report issued by 13 Federal agencies 
in November 2018, stated that climate change may cause losses 
of up to 10 percent of the U.S. economy by 2100.\16\ 
Additionally, a 2015 report from The Economist Intelligence 
Unit wrote that, of the world's current stock of manageable 
assets, the expected losses due to climate change are valued at 
$4.2 trillion by the end of the century.\17\
---------------------------------------------------------------------------
    \16\ Office of Senator Warren, ``Senator Warren, Representative 
Casten Lead Colleagues Introducing a Bill to Require Every Public 
Company to Disclose Climate-Related Risks,'' press release, July 10, 
2019, https://www.warren.senate.gov/newsroom/press-releases/senator-
warren-representative-casten-lead-colleagues-introducing-a-bill-to-
require-every-public-company-to-disclose-climate-related-risks.
    \17\ Office of Senator Warren, ``Senator Warren, Representative 
Casten Lead Colleagues Introducing a Bill to Require Every Public 
Company to Disclose Climate-Related Risks,'' press release, July 10, 
2019, https://www.warren.senate.gov/newsroom/press-releases/senator-
warren-representative-casten-lead-colleagues-introducing-a-bill-to-
require-every-public-company-to-disclose-climate-related-risks.

   LDo you believe that understanding which assets of 
        public companies may be materially affected by climate 
        change may help investors make more informed decisions 
---------------------------------------------------------------------------
        about the risk of their investments?

   LDo you believe it would be useful for investors to 
        understand public companies' contributions to 
        greenhouse gas emissions and their exposure in the 
        event of a Government- or market-mandated transition 
        toward a lower-carbon economy?

A.4.a. Response not received in time for publication.

Q.4.b. A Government Accountability Office (GAO) report from 
February 2018 states, ``[Securities and Exchange Commission 
(SEC)] reviewers may not have access to the detailed 
information that companies use to arrive at their determination 
of whether risks, including climate-related risks, must be 
disclosed in their SEC filings.''\18\ While the SEC has issued 
guidance for considering effects of climate change, the SEC has 
not mandated disclosures for how climate risk materially 
affects returns.
---------------------------------------------------------------------------
    \18\ Office of Senator Warren, ``Senator Warren, Representative 
Casten Lead Colleagues Introducing a Bill to Require Every Public 
Company to Disclose Climate-Related Risks,'' press release, July 10, 
2019, https://www.warren.senate.gov/newsroom/press-releases/senator-
warren-representative-casten-lead-colleagues-introducing-a-bill-to-
require-every-public-company-to-disclose-climate-related-risks.

   LIf Federal regulators do not have the information 
        needed to fully understand public companies' climate-
        related risks under current law, do investors have the 
        adequate information needed to make informed decisions 
---------------------------------------------------------------------------
        about companies' risks?

A.4.b. Response not received in time for publication.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JAY 
                            CLAYTON

Q.1. Over the summer, the SEC held a day-long review to 
consider proxy advisor issues. The consensus position was that 
voting participation by shareholders was too low. Additionally, 
there were problems with inaccurate voting.

   LWhat is the SEC doing to increase voting 
        participation by shareholders?

   LHow is the SEC ensuring votes are accurately 
        tabulated?

   LWhen a teachers' pension fund or investment firm 
        hires a proxy advisory firm to advise the pension fund 
        on shareholder proposals regarding issues such as 
        selecting board members, voting on CEO pay, and 
        considering environmental and governance issues, why 
        should the corporation get to review the report before 
        the firm that paid for it even sees it?

   LWhy should the proxy advisory firm be required to 
        include statements from corporations that they did not 
        write or request?

A.1. Response not received in time for publication.

Q.2. I am very skeptical of some of the letters that were 
submitted to the SEC in support of the proxy advisors rule. It 
seems that dozens of these letters are fraudulent. Before 
moving ahead on this rule, I recommend you investigate the 
validity of the letters.

   LWill you wait until after the report of the 
        Inspector General on the validity of the comment 
        letters before proposing a rule?

   LHow will you ensure that those who hire proxy 
        advisory firms are clearly heard?

   LDo you believe that some of these letters do not 
        accurately reflect the views of the signators? If so, 
        what percentage do you think were not accurately 
        submitted? How do you think these inaccurate letters 
        were drafted and submitted?

A.2. Response not received in time for publication.

Q.3. Shareholder proposals are an important element of our 
capital markets. Shareholder democracy creates long-run value 
for ordinary American investors and holds executives 
accountable. Commissioner Jackson's research found that your 
proposed rule on shareholder proposals would remove key CEO 
accountability matters from the ballot. His research found that 
proxy-access proposals--initiatives to allow significant 
shareholders to put their own candidates up for election to the 
board--would remove 40 percent of these proposals after three 
tries. He also found that the proposed rule would remove more 
than half of shareholder proposals that limit CEOs from selling 
stock they receive as compensation at certain times.

   LWhy is the SEC considering both raising the 
        thresholds and imposing a tax on anti-management advice 
        at the same time?

   LHow will you understand the impact if you are 
        overturning decades of proxy advisor practices?

   LWhat percentage of shareholder proposals would have 
        been excluded in recent history--3 years for example--
        under these proposed rules?

A.3. Response not received in time for publication.

Q.4. The SEC's disclosure rules have not kept up with the pace 
of today's markets. Corporate insiders often trade during the 
``gap'' between key business events and when the SEC rules 
require that event to be revealed to the public.

   LWhat can the SEC do to prevent insiders from 
        selling stock and cashing out during buybacks?

   LCan the SEC close that gap on its own or is 
        legislation needed?

A.4. Response not received in time for publication.

Q.5. What is your timeline for any proposed changes to the 
definition of ``accredited investors?''

A.5. Response not received in time for publication.

Q.6. In September 2019, attorneys general of seven States and 
the District of Columbia and XY Planning Network, a coalition 
of fee-only financial planners, each sued the SEC for creating 
an unfair competitive advantage for broker-dealers with 
Regulation Best Interest. The States' complaint asserts that 
Regulation Best Interest ``undermines critical consumer 
protections for retail investors.'' They say that Regulation 
Best Interest increases confusion about the standards of 
conduct that apply when investors receive recommendations and 
advice from broker-dealers or investment advisers.
    How many broker-dealers registered as investment advisers 
because of this rule change?

A.6. Response not received in time for publication.

Q.7. The Supreme Court's June 2017 decision in Kokesh v. SEC 
limited the SEC's ability to make firms repay ill-gotten gains 
from certain long-running frauds.

   LPlease explain why the Supreme Court's decision 
        preventing the SEC from obtaining disgorgement cost the 
        agency $900 million in fiscal year 2018 alone and what 
        it will mean going forward.

   LSome fraud takes place over years and may takes 
        years to uncover. Should we have any restrictions on 
        how long ago the fraud occurred or was discovered in 
        order to compensate victims?

   LFINRA and the SEC can detect possible suspicious 
        trading almost the moment that it takes place. They 
        have well-monitored public markets that allow such 
        oversight allowing insider trading and market 
        manipulation to be prosecuted significantly more 
        quickly. Should regulators take types of fraud into 
        account with determining the statute of limitations on 
        disgorgement?

A.7. Response not received in time for publication.

Q.8. What is your timeframe for responding to FINRA's proposed 
rule 4111?

A.8. Response not received in time for publication.

Q.9. There have been concerns about publicly traded companies 
fixing accounting errors without restating earnings on a ``Big 
R'' restatement form. Does allowing companies to reissue 
financial statements with significant changes under ``Little 
r'' harm investors by allowing firms to hide material errors? 
How important are ``clawbacks'' in allowing executives to avoid 
having their compensation recouped by filing a Little r instead 
of a Big R?

A.9. Response not received in time for publication.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM JAY CLAYTON

Q.1. What measures are the SEC taking to ensure Regulation Best 
Interest adequately protects Arizonans' retirement security as 
industry moves toward a June 2020 compliance deadline?

A.1. Response not received in time for publication.

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