[Senate Hearing 116-358]
[From the U.S. Government Publishing Office]
S. Hrg. 116-358
NOMINATIONS OF HESTER PEIRCE, CAROLINE
CRENSHAW, AND KYLE HAUPTMAN
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
NOMINATIONS OF:
HESTER PEIRCE, OF OHIO, TO BE A MEMBER OF THE SECURITIES AND EXCHANGE
COMMISSION
__________
CAROLINE CRENSHAW, OF THE DISTRICT OF COLUMBIA, TO BE A MEMBER OF THE
SECURITIES AND EXCHANGE COMMISSION
__________
KYLE HAUPTMAN, OF MAINE, TO BE A MEMBER OF THE NATIONAL CREDIT UNION
ADMINISTRATION BOARD
__________
JULY 21, 2020
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
42-472 PDF WASHINGTON : 2021
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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 Deci, Professional Staff Member
Sarah Brown, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Corey Frayer, Democratic Professional Staff Member
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, JULY 21, 2020
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 31
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 31
NOMINEES
Hester Peirce, of Ohio, to be a Member of the Securities and
Exchange Commission............................................ 5
Prepared statement........................................... 33
Biographical sketch of nominee............................... 35
Responses to written questions of:
Senator Warren........................................... 86
Senator Cortez Masto..................................... 94
Caroline Crenshaw, of the District of Columbia, to be a Member of
the Securities and Exchange Commission......................... 7
Prepared statement........................................... 66
Biographical sketch of nominee............................... 67
Responses to written questions of:
Senator Menendez......................................... 103
Senator Warren........................................... 106
Senator Cortez Masto..................................... 113
Kyle Hauptman, of Maine, to be a Member of the National Credit
Union Administration Board..................................... 8
Prepared statement........................................... 74
Biographical sketch of nominee............................... 76
Responses to written questions of:
Senator Brown............................................ 117
Senator Warren........................................... 122
Senator Cortez Masto..................................... 123
Additional Material Supplied for the Record
Letter suppporting nominee Hester Peirce......................... 127
Letter suppporting nominee Kyle Hauptman......................... 129
(iii)
NOMINATIONS OF HESTER PEIRCE, CAROLINE CRENSHAW, AND KYLE HAUPTMAN
----------
TUESDAY, JULY 21, 2020
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., remotely, via WebEx, Hon.
Mike Crapo, Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order. This
hearing is another remote hearing by video, and again a few
videoconferencing reminders you should all have memorized by
heart, by now. Once you start speaking there will be slight
delay before you are displayed on the screen. To minimize
background noise, please click the Mute button until it is your
turn to speak or ask questions. If there is a technology issue
we will move to the next Senator until that is resolved.
I remind everybody again, and the witnesses, that the 5-
minute clock still applies and there should be a 5-minute clock
in one of the boxes on your screen. Please pay attention to it,
and I will try to remember to do that 30-second tapping just
before your time runs out so that you can recognize the need to
look at that clock and wrap up.
To simplify the speaking order, Senator Brown and I have
agreed to go by seniority for this hearing.
This morning we will hear testimony on the nominations of
the Honorable Hester Peirce, of Ohio, to be a member of the
Securities and Exchange Commission; Ms. Caroline Crenshaw, of
the District of Columbia, to be a member of the Securities and
Exchange Commission; and Mr. Kyle Hauptman, of Maine, to be a
member of the National Credit Union Administration Board.
Welcome and congratulations on your nominations to each of you.
Commissioner Peirce and Ms. Crenshaw both have been
nominated to serve as SEC Commissioners. The SEC is charged
with an important mission to protect investors, maintain fair,
orderly, and efficient markets, facilitate capital formation,
and enforce securities laws. I commend Commissioner Peirce and
her colleagues at the SEC for their quick and decisive response
to the current COVID-19 pandemic. The SEC has successfully
balanced the emergency response to COVID-19 while continuing to
maintain fundamental operations, such as rulemaking
initiatives, conducting risk-based inspections, bringing
enforcement actions, and reviewing issuer and fund filings. I
encourage the SEC to continue these efforts, including
advancing important rulemaking efforts related to capital
formation and corporate governance.
Commissioner Peirce is highly qualified for her position,
previously serving as a Senior Counsel at this Committee and
currently serving as an SEC Commissioner since January of 2018.
Next we have Ms. Caroline Crenshaw. Ms. Crenshaw has worked
at the SEC since 2013, working in the Office of Compliance,
Inspections, and Examinations, the Division of Investment
Management, and as Counsel to Commissioners Kara Stein and
Robert Jackson. In addition to her work at the SEC she is a
captain in the U.S. Army Reserve Judge Advocate General's
Corps. Ms. Crenshaw, we thank you for your service.
Turning to Kyle Hauptman, who has been nominated to the
Board of the National Credit Union Administration. The NCUA
plays a critical role in overseeing and ensuring a major
segment of our Nation's community financial institutions,
federally insured credit unions. Mr. Hauptman is well prepared
to join the NCUA board thanks to his prior Government and
private sector experience. Mr. Hauptman has served as the
Economic Policy Advisor to Senator Tom Cotton since 2017. He
also did work on S. 2155, the Economic Growth Regulatory Relief
and Consumer Protection Act, which contains several important
provisions that provided regulatory flexibility and relief for
credit unions.
Before his Government service, Mr. Hauptman had a career in
the financial services industry, where he developed expertise
managing liquidity and credit and interest rate risk in fixed
income portfolios. In the coming months, both the SEC and NCUA
will be on the front lines helping consumers, retail investors,
and businesses of all sizes recover from the economic impacts
of the COVID-19 emergency.
If confirmed, I look forward to working with each of these
nominees on many important issues within their respective
policy areas. Congratulations again on your nominations, and I
again thank you and your families for your willingness to
serve.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Crapo, for holding
today's hearing. First I want to take a brief moment to
remember my friend and colleague, Congressman John Lewis. Let
us honor his legacy by following his example of leadership and
courage and his unrelenting fight for justice.
I welcome today's nominees. Congratulations to the three of
you and to your families. The Committee will consider two
nominees, as the Chairman said, to the Securities and Exchange
Commission, Commissioner Hester Peirce for a second term and
Ms. Caroline Crenshaw; and Mr. Kyle Hauptman as a nominee to be
a board member of the National Credit Union Administration.
Today also marks, federally, today, the 10-year anniversary
of the passage of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. We passed Wall Street reform to
prevent another financial crisis. Right now we face an even
greater, more complex public health and economic crisis and a
looming housing crisis. Families are making impossible
decisions about how to pay their rent and put food on the
table, or are grieving the loss of a mother or a father or a
child. And we know one of this pandemic's greatest tragedies is
that people die alone. It is black and brown Americans
disproportionally affected, working on the front lines to get
us through this and helping to save lives while themselves too
often grieving lost ones.
Wall Street reform was meant to prevent catastrophe in our
financial system. We need to aim higher than that today, yet
Wall Street has spent years trying to dismantle the basic
important protections put in place through Dodd-Frank.
Republicans and the Trump administration have been all too
happy to oblige Wall Street. It did not take long for Wall
Street to recover from this crisis. They were making record
profits. They were refusing, at the same time, to pay their
workers a living wage. This only caused the wealth gap to grow
even further.
The current coronavirus crisis is showing us what happens
when we do not protect working people. We cannot leave them
behind again. And leadership matters. We see that every day--
140,000 Americans dead on the President's watch. We are just 5
percent of the world's population yet we account for almost 30
percent of the world's deaths. It is not because we do not have
good doctors and smart scientists and hard workers. It is
because of leadership, or precisely lack of leadership. And
those who this body confirms to leadership posts today, and
other days, also matter.
All of the nominees, if confirmed, can support policies
that protect these working families, families who are consumers
and investors and credit union members. You can encourage
companies and credit unions to offer fair products to Americans
left out of our financial system and make sure our markets and
economy work for everyone.
The question facing us today is will you show that
leadership and make those kinds of choices? If confirmed, Ms.
Peirce would continue her work as a Commissioner for 5 more
years. She brings the experience of working for the last two
Democratic Commissioners--excuse me. Ms. Crenshaw brings the
experience of working for the last two Democratic
Commissioners, fighting for investors. Her continuing service
in the military allows her to bring a very different
perspective to this job. If confirmed, she would be the first
Commissioner in modern times to be in the active Reserve,
joining a handful of Commissioners over the history of the SEC
who have served in the Armed Forces.
Commissioner Peirce and Ms. Crenshaw, you will be called
upon to tackle market swings and investment scams related to
the pandemic. You must also keep your eyes on existing problems
that, as is so much during the pandemic that are getting worse.
As the biggest companies and banks, in particular, have
grown and become more powerful, we have seen corporate
executives pay themselves with stock buybacks while, at the
same time, laying off workers, cutting their pay, and
underinvesting in their communities, all while avoiding any
accountability. The SEC has a role in addressing each of these
issues. Executives must be responsible to stakeholders,
including workers and communities. That means the SEC should
not be changing its rules since it will take away smaller
investors' ability to hold management accountable and raise
important issues to other shareholders. Shareholder democracy
is not just for the big guys.
The COVID pandemic has also shown how important essential
workers are to our economy and how little information companies
disclose about their workers. The public needs more information
about how a company engages with its workers, because that
helps investors understand how that company will deal with a
crisis. And soon enough, corporate executives will want to
reward themselves and their biggest investors again with stock
buybacks. The safe harbor for stock buybacks has barely been
touched in four decades, but it seems investor and market
protections are chipped away at year after year after year.
When we have seen companies spend as much as literally 100
percent of their profits on their own stock instead of capital
investment or workers' wages, it is clear that stock buybacks
rules need an overhaul.
The COVID pandemic has also shown us how important it is to
have local financial institutions that serve their communities.
We have seen credit unions, like the ones in my home State of
Ohio, work with their members to get through this crisis. The
NCUA is key to making sure that our credit unions are resilient
in good times and bad times.
Yet the NCUA, under the Trump administration, has been
chipping away at the very protections we put in place after the
last financial crisis, rules that protect homeowners and that
set strong capital and loan reserve standards, allow credit
unions to lend in their communities during a downturn, much
like the one we face now.
Mr. Hauptman was a trader at Lehman Brothers when it
failed, accelerating the financial crisis. You would think he
would understand what a financial crisis can mean, yet he has
spent his career railing against the Dodd-Frank Act. Credit
unions were created when other financial institutions were not
serving all their customers. We have often seen them help those
that big banks have left behind, including workers, including
people of color. Now is the time to implement even stronger
protections and safeguard consumers and our financial system.
If confirmed, Mr. Hauptman will need to make sure that the
credit union system continues to serve these communities, which
means doing more to protect credit union members, not rolling
back regulation.
Mr. Hauptman has no credit union experience. He says he
wants this job because people who love their financial
institutions are usually credit union members. But being glad
that credit union members serve their customers is not a reason
he is qualified to be one of the top three credit union
regulators. It means he should be a credit union customer.
Later today, this Committee will mark up the nomination of
Judy Shelton to be a member of the Federal Reserve Board. Even
before the pandemic, my colleagues and I, many on both sides of
the aisle, were concerned about her qualifications and
commitment to helping working families, and her independence
from the President. She has advocated for failed Depression-era
policies, like a return to the gold standard and the removal of
deposit insurance. At her nomination hearing she failed to
explain how she would handle an economic crisis. That
hypothetical economic crisis is now a reality, and we have no
idea how Dr. Shelton would respond. That is why it is so
important to carefully evaluate nominees based on their record,
their experience, their service to this country. That is whom
you ultimately serve, the American people.
A regulator's job is not to do favors for Wall Street firms
and corporate interest groups or lobbyists or revive debunked
economic theories. We entrust regulators to make sure that all
Americans can prosper in a safe financial system and a fair
economy. Today we need to hear from each of you how you will
help and protect the American people that make our economy
work.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown.
We will now administer the oaths. As we have discussed with
each of you before, but individually, but I will ask each of
you to stand and raise your right hands. And then I will go to
each of you individually.
Commissioner Peirce, do you swear or affirm that the
testimony that you are about to give is the truth, the whole
truth, and nothing but the truth, so help you God?
Ms. Peirce. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted committee of the Senate?
Ms. Peirce. I do.
Chairman Crapo. Thank you. And next, Ms. Crenshaw. Do you
swear or affirm that the testimony that you are about to give
is the truth, the whole truth, and nothing but the truth, so
help you God?
Ms. Crenshaw. I do.
Chairman Crapo. Thank you. And do you agree to appear and
testify before any duly constituted committee of the Senate?
Ms. Crenshaw. I do.
Chairman Crapo. Thank you. And now Mr. Hauptman. Do you
swear or affirm that the testimony that you are about to give
is the truth, the whole truth, and nothing but the truth, so
help you God?
Mr. Hauptman. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted committee of the Senate?
Mr. Hauptman. I do.
Chairman Crapo. Thank you. You may all take your seats.
Your written statements will be made a part of the record
in its entirety, and as you know, we have allocated you 5
minutes each for an opening statement. We will have you make
those statements in the order that I swore you in, so
Commissioner Peirce, you may begin.
STATEMENT OF HESTER PEIRCE, OF OHIO, TO BE A MEMBER OF THE
SECURITIES AND EXCHANGE COMMISSION
Ms. Peirce. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, thank you for considering my
nomination to be a member of the Securities and Exchange
Commission. Having served as a Commissioner for 2\1/2\ years, I
am honored that the President has nominated me to serve another
term. If confirmed, I look forward to using the next 5 years,
alongside the dedicated, experienced SEC staff, to unleash the
power of our securities markets in order to brighten more
children's futures, build more Americans' retirement nest eggs,
transform more communities across the Nation, and rebuild an
economy weakened by COVID. I am delighted about the possibility
of serving with Caroline Crenshaw, whose experience at the
Commission, in the military, and in private practice would
enrich our deliberations as a Commission.
I have spent the last 20 years working on financial
regulation. Part of that time was spent working for Senator
Shelby on this Committee, and more than half of that time has
been at the SEC. The agency has been extremely productive under
the effective leadership of Chairman Jay Clayton, and I have
enjoyed helping to carry out his regulatory, compliance, and
enforcement agenda.
On the regulatory front, we have enhanced retail investor
protection by, among other things, codifying a regulatory
framework for exchange-traded funds, adopting a best interest
standard for retail brokers, and streamlining variable product
disclosures. We also have applied a benefit-cost lens to public
company regulatory obligations, initiated changes to equity
market structure so that it can serve investors and companies
of all sizes, and scaled regulatory requirements for small
entities. We have worked, with urging from me, the ever-vocal
Midwesterner, to streamline the capital raising process for
small companies and entrepreneurs all across the country, not
just on the coasts. We also have provided temporary relief for
firms adjusting to the work-from-home environment and to small
businesses trying to raise funds to survive the COVID crisis.
An integral complement to our regulatory work is the
Commission's compliance function, which includes inspecting
firms and engaging with them as they seek to apply the rules to
their unique facts and circumstances. I have supported
cooperation with other regulators and compliance personnel at
regulated entities to maximize our collective coverage and
effectiveness. I also have advocated taking advantage of new
technologies in overseeing the markets, with due consideration
for legitimate concerns about data protection and over-
surveillance.
On the enforcement side, we have brought charges against
entities, large and small, and individuals, for a wide range of
securities violations. Most recently, we have gone after
securities violators hiding behind purported COVID-19 cures.
Human nature being what it is, there is no dearth of bad
conduct, so I have worked to focus our enforcement resources
where they can make the most difference for investors and our
markets.
Collaboration with domestic and international colleagues
runs through everything the Commission does. I had the
opportunity to work with Commissioner Brian Quintenz of the
CFTC as we stood up our Dodd-Frank security-based swap
regulatory regime. On that same issue, I cooperated with
international counterparts to minimize market disruption and
conserve regulatory resources. As the Commission's
representative on one of the FSB's committees, I have supported
sharing information and conducting joint analyses, but also
have emphasized that decisions about how to regulate the U.S.
markets need to be made here at home.
One concern I had going into the job was the difficulty
that regulatory agencies have dealing appropriately with
innovation in and disruption of the industries they regulate.
This problem is an institutional problem. Large bureaucratic
organizations, whether public or private, do not handle change
particularly well. I know, however, that the Commission can do
better. If confirmed, in addition to continuing my work on
strengthening the regulatory framework, I will redouble my
efforts to create a more welcoming environment for innovation
and new entrants. If the Commission takes up that challenge
with the necessary seriousness and alacrity, our capital
markets will remain dynamic, vibrant, and preeminent.
Thank you for considering my nomination, and I would be
happy to take any questions you might have.
Chairman Crapo. Thank you, Commissioner Peirce. Ms.
Crenshaw.
STATEMENT OF CAROLINE CRENSHAW, OF THE DISTRICT OF COLUMBIA, TO
BE A MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION
Ms. Crenshaw. First and foremost, thank you, Commissioner
Peirce, for those kinds words, and if confirmed I would be
honored to work with you as well.
Chairman Crapo, Ranking Member Brown, and distinguished
Senators of the Committee, thank you for the opportunity to
appear here today. It is an honor to testify before you
regarding my nomination to be a Commissioner of the Securities
and Exchange Commission, where I have worked for the past 7
years, and in whose mission I deeply believe.
I want to thank all those who have encouraged and supported
me through this process: family, friends, colleagues, Members
of Congress and their talented staff, and many others whom I
did not know prior to my nomination. It has been an educational
and memorable journey.
America's capital markets have powered the largest, most
vibrant economy in the world. But our economy is facing
unprecedented challenges and now, more than ever, I believe we
must do all we can to keep our markets transparent,
competitive, and safe. All Americans must have the confidence
to invest their hard-earned savings in their futures.
That is the critical mission of the SEC, and it is the
reason why I chose to transition my career from private
practice to public service. I began my time at the SEC as a
career staff attorney, helping oversee the institutions that
manage millions of Americans' savings. More recently, I served
as Counsel to two dedicated public servants, Commissioners Kara
Stein and Robert Jackson, focusing on strengthening investor
protections in our increasingly complex markets. It has been my
great privilege to support the SEC's mission for the better
part of a decade and see up close how our securities laws are
built case-by-case and rule-by-rule.
But it is not just that experience that brings me before
you today. I also carry with me the stories of soldiers,
family, and friends who give the SEC's mission real meaning. As
a captain in the United States Army Reserve, that mission means
making sure my fellow soldiers have a fighting chance to secure
the financial futures they deserve.
As a sister of an entrepreneur, it means making sure our
markets unite job-creating capital with individuals like my
brother, who recently started a small business. And as a new
mother, it means promoting the level playing field that will
allow my family, and millions of other American families, to
fund the rising costs of education by safely and confidently
investing in our markets.
If confirmed, I intend to bring all of these experiences,
from sister to staffer to soldier, to bear on the SEC's
mission. You can count on me to be a tireless advocate for the
ordinary American families who are the backbone of our economy.
One of the biggest challenges for those families, and for
the Commission, is the retirement crisis facing the country.
The Nation's shift from defined benefit pension plans, which my
parents, and their parents before them, relied upon, to defined
contribution plans, moved the responsibility of lifelong saving
from employers to the individuals. That has left too many hard-
working Americans without sufficient resources for retirement.
With investment decisions now largely in the hands of these
individual Americans, the Commission should do all it can to
ensure everyone gets a fair deal. It should provide clear,
plain English information and access to high-quality investment
advice that allow individuals to distinguish between financial
advisors, on one hand, and fraudsters on the other, and to fund
their retirements in safe and sustainable ways. Additionally,
the Commission should keep a close watch over the large
institutions increasingly entrusted with the growth and
safekeeping of Americans' savings.
As a Washington, D.C., native who grew up just blocks away,
on Capitol Hill, I have had the great benefit of being
surrounded by dedicated public servants of all political
stripes. If I have the honor of being confirmed, I will bring
with me that commitment to public service and appreciation for
diverse views as the Commission considers how best to help
Americans grapple with the economic challenges before us.
Thank you for your time, and I would be delighted to answer
any questions you might have.
Chairman Crapo. Thank you, Ms. Crenshaw. Mr. Hauptman.
STATEMENT OF KYLE HAUPTMAN, OF MAINE, TO BE A MEMBER OF THE
NATIONAL CREDIT UNION ADMINISTRATION BOARD
Mr. Hauptman. Thank you Chairman, Ranking Member Brown, and
Members of the Committee. It is an honor to be here. I would
like to thank the President and his team, plus the NCUA staff
that have been so helpful. I want to especially thank Senator
Cotton for his support throughout this process.
I would like to say hello to those watching online,
especially my wife, Kelly, who is pregnant with our first
child, my brother, Gabe, and his husband, Geoff, my siblings-
in-law, Katie and Marcus, and my parents-in-law, Sue and Mike.
When offered this nomination, I accepted immediately. It is
a chance to help over 120 million credit union members achieve
their financial goals. And if you encounter someone who
actually loves their financial institution, there is a good
chance you are speaking to a credit union member.
These last few months have demonstrated the cooperative
nature of credit unions, as they have waived fees and adjusted
loans without anyone in D.C. telling them to do so. Many of us
also recall the last Government shutdown when credit unions
gained members by offering interest-free loans to furloughed
workers. But this reputation depends on proper oversight from
NCUA.
Before the Senate I worked on regulatory policy, including
serving on a bipartisan SEC Advisory Committee. Prior to that I
was in the financial sector, focused on the same money markets
where credit unions obtain financing. Twelve years ago, I was a
mid-level employee working in Asia for Lehman Brothers, and
wound up losing my job, my savings, and my work visa, all due
to management that did not fully understand the risks they were
taking. That experience showed me first-hand the risks
associated with liquidity, interest rates, and balance sheet
management. This perspective should be both valuable and
somewhat unique on the NCUA Board.
One of the best parts of serving in the Senate has been
working with Arkansas credit unions and their companions in the
Cornerstone Credit League in Texas and Oklahoma. I am confident
that if you speak to them, they will tell you I have been
knowledgeable and attentive regarding their concerns. And while
I value those relationships, you can be sure I will be an
independent regulator who works only for credit union members
and the taxpayers who ultimately back NCUA insurance.
In addition to my interest in financial policy, I have a
passion for public service, due to my upbringing. My father
worked in the National Park Service for 32 years.
Unfortunately, in the last 3 years both he and my mother passed
away, but I think they would be proud to see me here. I should
mention that both were lifetime Democrats, my mother a Bernie
Sanders supporter.
On a related note, my Senate colleagues will tell you I
work in a bipartisan fashion. I have worked on legislation with
the majority of Committee Democrats, including with Ranking
Member Brown's staff on reforming our anti- money-laundering
laws. I have been impressed with the character and acumen of
the Democratic staff, and in fact several have been to my home.
Credit unions help people achieve the same American dream
that my dad experienced, born in Brooklyn to parents with 4th-
grade educations. His dad, my grandfather, worked in the New
York City subway, putting up advertising. That man's grandson
is now before the U.S. Senate, a testament to American
opportunity, and at NCUA my overarching goal will be extending
that kind of opportunity to as many people as possible.
I will have three priorities at NCUA:
Priority one is the same as America's--managing the fallout
from the current pandemic and economic downturn. I am aware
that over 50 million people have filed for unemployment since
March. And while the 2008 crisis began in the financial sector
and then spread to Main Street, the current crisis may be the
reverse. Credit unions were chartered to serve those of modest
means, and I plan to work with them, the Board, and Congress on
solutions for those facing financial stress.
My second priority is technology. This pandemic created a
test case on how many things, such as this hearing, can be done
remotely. I would like to expand technology's role in reaching
the underserved.
If we recall the litigation years ago about Blockbuster
Video's late fees and market dominance, the ultimate solution
was Netflix and similar American innovations. While this
analogy does not perfectly align with credit unions, I am
convinced innovation can provide more inclusive financial
services.
And last, aligning incentives. As we know from the last
crisis, we get what we incentivize. One excellent policy that
serves as a model here is the less-frequent exam cycle for
credit unions that get the highest marks on their NCUA exams
for safety and stability. This policy lets regulators focus on
the more problematic credit unions, while the well-run credit
unions strive to keep earning that benefit. This is policy
where safety and soundness are well-aligned with serving
members. If we do this correctly, we will combat poor-quality,
high-priced products with better, lower-priced ones.
Thank you again for this opportunity, and I look forward to
your questions.
Chairman Crapo. Thank you, Mr. Hauptman. I will begin my
questions with Commissioner Peirce.
Commissioner Peirce, you mentioned in your opening
statement that you would like to continue to serve in your role
as Commissioner because there is more work to be done. Could
you elaborate a little more on what you mean by that? And I am
particularly interested in the Commission's work on capital
formation, corporate governance, and cryptocurrency.
Ms. Peirce. Thank you, Mr. Chairman. There is a lot of work
to be done, and I feel that the work that I came to the
Commission to do is not yet done. So first of all, we have to
deal with the current crisis, the COVID crisis, and so part of
my work will be trying to help the economy come out of that
crisis.
And I think tied to that is capital formation, which you
mentioned. So that is something that I have been working on,
and specifically trying to focus on making sure that the
entities that are not readily--they do not know lots of venture
capitalists, they do not have wealthy friends and family--that
those kinds of entities are able to get capital if they merit
capital. And so that means looking at our exemptions to make
sure that those exemptions make sense, and potentially adding
some new exemptions such as, perhaps a micro-offering
exemption.
And then also just seeing whether things like crowdfunding,
have they lived up to their potential or are there things that
we could do to make them work better?
And then another priority is to, as I mentioned in my
opening statement, to try to work on the Commission's attitude
toward innovation, which has been, I think, highlighted when we
consider crypto. Crypto is clearly going to be here to stay,
and I would like us to set up a regulatory framework that works
well for crypto. And I think that we have some of the structure
in place to do that, but we have a lot more work to do, and I
would like to work on that.
Chairman Crapo. Thank you, and I encourage you to continue
your focus on those priorities.
Ms. Crenshaw, could you briefly discuss, in a little
greater detail, your priorities, what you would like to focus
on, if confirmed?
Ms. Crenshaw. Senator, first and foremost, I think market
stability is crucial in the current market turmoil. We need to
make sure that investors are protected and that companies are
getting the financial relief they deserve. So we need to
conduct appropriate oversight to make sure that our market
structure is working appropriately, for example, that our
circuit breakers are working as they were designed to.
We need to make sure that we are providing relief as
necessary to companies such as the crowdfunding release the
Commission passed a few weeks ago, and make sure that investors
are getting the information they need about companies and what
companies are doing during this turmoil with their workers and
with their jobs and with funds they are taking, to make sure
that investors can appropriately allocate their money as we
move forward.
I also think retail investor protection is another
priority. I want to make sure that our enforcement program is
deterring fraud as effectively as possible and that we are
holding individuals to account, and on the rulemaking side,
that retail investors are getting the high-quality investment
advice that they deserve.
And finally, Senator, one of my priorities--again, these
were just three, but one of my priorities would be to make sure
that we are finalizing the Dodd-Frank rules, particularly the
executive compensation rules.
Chairman Crapo. Thank you. And Mr. Hauptman, the same
question. Can you discuss--you went through your priorities,
but could you just discuss, in a little more detail, what you
would like to accomplish?
Mr. Hauptman. Sure. Thank you, Chairman. Obviously the
pandemic is priority one. That means both the health and safety
of NCUA employees and how America's 5,200 credit unions can
serve their members. This includes how to keep their lobbies
open safely but also making sure they have all the tools to
restructure debts, do the things credit unions have always
done.
I would like to first say that this is exactly why capital
is probably the holy grail of regulation. The credit union
system was well capitalized going into this, but it is times
like this when capital is the most important.
Second, technology, meaning we have had a nationwide
experiment on how to do things remotely. Some of these lessons
we may be able to continue with after the pandemic ends,
especially useful for the underserved or those in rural areas.
Remote access or online can be very useful to them.
And I think I am well prepared for this after over 20 years
working in finance or finance policy. Credit unions are unique
animals, as nonprofit collaboratives. But many of the basic of
finance are similar in the industry, meaning mismanagement,
corporate structure, structure meaning the debt you issue, et
cetera. So having the right capital.
And I will mention this, last. There are three States in
the Cornerstone Credit League that represent Arkansas credit
unions--Texas, Oklahoma, and Arkansas--and only one of those
Senators is on a Banking Committee. I have been the go-to
person during my years here for all of them, and I think they
would speak well of my abilities.
Chairman Crapo. Thank you. Senator Brown.
Senator Brown. Thank you for your opening statements,
especially about the staff of this incredible Banking Housing
Committee. Thank you.
We know many credit unions are doing what they can every
day to help their members and communities, but today, at a time
when we have record unemployment, families struggle to pay rent
and put food on the table, we are hearing that some credit
unions are garnishing members' COVID-19 stimulus checks to pay
off outstanding debts, debt, in many cases, from these high
fees they charge.
Over the years, we have heard reports of credit unions
charging high fees and interest rates to their members while
executives and management get sweetheart mortgages and other
loans. These are issues that NCUA Board Member Harper is
concerned about as well.
If confirmed, and this yes or no if you would, if confirmed
will you commit to crack down on high fees?
Mr. Hauptman. Yes, Senator. Everything possible. We would
have better products at lower prices and low fees.
Senator Brown. Thank you for that.
Ms. Crenshaw, you responded--I would like a little more
detail on your response to the Chairman. Today, as I mentioned,
it is the 10th anniversary of Dodd-Frank. The SEC has failed--
has yet to finish the number of required rules, including ones
that you mentioned to the Chairman, about compensation.
Talk about the importance of these requirements for
transparency and accountability to the American public, as
investors?
Ms. Crenshaw. Thank you, Senator. I think these are key to
accountability and transparency. As you mentioned, these are
required by the law. But it is not just that these rules are
mandated. It is absolutely critical that we are holding
executives to account and making sure investors have the
information they need to make the appropriate investment
decisions. And I think claw backs, for example, is an area that
we could do that extremely well. We want to make sure that we
are holding executives to account, and we want to make sure
these executives do not get to keep money that they did not
earn.
So I would commit to you, Senator, that I would work to do
all I can, if confirmed, to make sure that we get these rules
passed.
Senator Brown. Thank you, Ms. Crenshaw. Last month I sent a
letter to Chair Clayton asking him to make sure that regulation
best interest is enforced to maximize investor protection,
including providing separate enforcement data. Are there ways
to get the most out of the rule to better protect Americans'
saving than investing for the future, Ms. Crenshaw?
Ms. Crenshaw. I think it is critical that the SEC work with
the Office of Compliance, Inspections, and Examinations and
FINRA to drive successful compliance of this rule. That means
working with the firms to make sure Form CRS is actually
providing information that is useful to investors and that it
is information that they can understand. And it is also working
with firms to make sure that their policies and procedures are
appropriate to mitigate conflicts of interest. And to the
degree they are not, we have to be willing to hold those firms
accountable when they are not appropriately mitigating
conflicts of interest.
And so we need to make sure, over time, that rules are
actually changing the status quo for investors, and I would
look forward to, if confirmed, working with staff to make sure
that that is accomplished.
Senator Brown. Thank you, Ms. Crenshaw.
Ms. Peirce, I am concerned about your reluctance to vote
for monetary penalties and enforcement actions. Earlier this
year, you did not approve the SEC's fine against Wells Fargo
for misleading investors for years while management profited
and promoted a culture that this Committee is very familiar
with, that led to the opening of millions of fake accounts. It
was a known fraud, furthered by management, with criminal and
civil settlements. But you did not think a fine made sense.
Help me understand your thinking.
Ms. Peirce. So when I approach an enforcement action that
involves a corporation I think about who ultimately is going to
pay that fine, and if it is going to be shareholders of the
company who have already been harmed by the fraud, then I am
very reluctant to vote in favor of a penalty that will come out
of their pockets. So that is one of the things that drives my
decisions with respect to corporate penalties.
But I would emphasize that in virtually the entire
enforcement calendar the Commission is unified in voting for
the enforcement recommendations. But that is one area where I
am concerned that shareholders are getting hit twice.
Senator Brown. There is a difference, Ms. Peirce, between
shareholders and executives. You have raised, in the past, the
importance of individual accountability, and yet at your last
hearing I hear a lot about personal responsibility for people
in this room. It seems that personal responsibility is always
about low-income people and people of color, never about the
CEOs and corporation that take advantage of them. You have had
the chance to join other Commissioners and hold those bad
actors responsible when they commit fraud or cover it up. You
have chosen not to. That is my great concern.
As for Wells Fargo, just last week there were news reports
that the bank falsely told bankruptcy courts that borrowers
requested forbearance on their mortgages due to COVID-19. Those
requests were made without the borrowers' knowledge and could
lead to confusion and risk of foreclosures for borrowers and
bankruptcy proceedings. There we go again with Wells Fargo. I
do not know what it will take for their management to stop
abusing the customers, but voting against penalties for their
management certainly is not it.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you. Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman, and
congratulations to all three of you on your nomination today.
But, of course, I want to congratulate, in particular, my
indispensable advisor, Kyle Hauptman. I think most Senators can
relate to how I feel about this development. On the one hand,
Kyle will be a terrible loss to my office, the work that we
have done on behalf of our Kansans and all Americans over the
last 3 years. But on the other hand our loss will be the NCUA's
gains and the gains of everyone who does business with or is
affected by credit unions in their communities. And I am very
confident that our credit unions will benefit having Kyle's
judgment and knowledge on the board.
I have to say, I know my staff is sad to be losing Kyle
this year as well. Here is an email from my Deputy State
Director who leads all of our casework, earlier this year, when
she heard the news that Kyle had been nominated. The subject
line is ``You can't go!'' And then in the body, ``I won't have
it!!! Seriously, we are going to miss you. The whole State
staff is bummed because no one can ever take your place at
keeping us informed,'' which I think is a testament to how well
Kyle has worked not just with my staff but with all of your
staffs and with the Committee staff as well.
Likewise, I would like to enter into the record, Mr.
Chairman, a letter from the head of the Arkansas Credit Union
Association. I will also quote from that letter here. ``On
behalf of the Arkansas Credit Union Association I will say that
we probably feel the same way you do, that he will be difficult
to replace, yet the NCUA is lucky to have him.
``I have gone to Washington for a couple of decades now on
behalf of Arkansas credit unions, most of which are very small,
rural institutions. Our largest credit union has just over $1
billion in assets, which would be considered small even by
community bank standards. The rest are even smaller, where you
can count on one hand the number of ATMs they have.
``While advocating for these community-based lenders, I
have encountered a lot of congressional staffers. He may be the
best I have dealt with. Given his background at large
international finance firms, you might think Kyle would not
understand the needs of our members who are mostly low- or
moderate-income families. Yet it is quite the opposite. He has
gone above and beyond to listen, respond quickly, and empathize
with their concerns. His knowledge of financial markets is an
asset, not a liability.''
I am aware that the NCUA board members are not like Senate
staffers, meaning I will no longer be a constituent but rather
someone working for the institutions Kyle will be regulating,
but I think you will agree that he will continue to be fair,
professional, and serious about his work.
Kyle is also indisputably bipartisan, working well with
others. Like all the Senators on this Committee, I sometimes
get in the occasional political scrap, but Kyle, nevertheless,
approaches his job like a diplomat, working with all of our
staff, working with the Committee staff, to keep dialogue open,
to keep the people's business going forward. He has worked on
innumerable bipartisan bills and letters, including on issues
related to credit unions, plus bills on taxes and retirement
policy, as well as other economic policies.
He also serves as the Staff Director for the Economic
Policy Subcommittee that I chair, leading the hearings that we
have conducted during this Congress, and the hearing that we
will be conducting tomorrow, which I encourage all Senators to
join us.
I often hear praise from constituents for Kyle, and the two
most common refrains are he is easy to work, and few staffers
have his in-depth knowledge and experience in all matters
financial.
I trust this hearing will go well today, not just for Kyle
but Ms. Peirce and Ms. Crenshaw, and I hope that we can move
all three nominees forward promptly, perhaps on simply a voice
vote.
So I will now close not with a question but simply to urge
all of my fellow Senator to support Kyle's nomination. I can
assure you he will be an excellent pick to serve on the NCUA.
Thank you.
Chairman Crapo. Thank you, Senator Cotton. Senator Tester.
Senator Tester. Thank you, Mr. Chairman and Ranking Member
Brown. This is for the SEC noms. I do not need to tell you that
it is important that the SEC considers small and mid-sized
businesses along with businesses in rural communities and those
outside of big cities. So the question is, how will you ensure
that efforts to address the impacts of the pandemic and
economic crisis are directed toward businesses across a range
of sizes and geographies?
You can go first, Hester, Ms. Peirce.
Ms. Peirce. Thank you, Senator. That is a very important
issue and close to my heart as well. And so one positive change
that we have had in recent years is we now have a small
business advocate at the SEC, and we have a Small Business
Capital Formation Advisory Committee, which has representatives
from all across the country on it. And so together with them I
plan to work on issues that will further their interests.
So for example, a month or so ago we adopted some temporary
relief related to crowdfunding, which was intended to help
businesses that have been in existence for some time and may be
struggling to make it through this period. You can imagine that
there are lots of people in the local community who know these
businesses well and would like to support them with funding.
And so that is something that we worked on in direct response
to things that I heard from people on that committee, and I
will continue to do that.
Senator Tester. Ms. Crenshaw.
Ms. Crenshaw. Thank you, Senator. I think it is key that we
continue our appropriate oversight of markets during this time.
We need to make sure that the markets are functioning properly
for businesses of all sizes. We also need to make sure we are
giving investors information about companies so that they can
appropriately allocate their decisions to the best ideas out
there.
And I, too, would like to work with the small business
advocate. I have had the pleasure of working with Martha Miller
over the past few years, and working with her to think through
ideas to make sure that the capital is going to the best ideas
out there. And I think one of the ways that we can do that is
think through whether our regulations are, while providing
appropriate investor protections, also clear and
straightforward so that everybody can understand them and
everybody can follow the rules of the road without necessarily
having a close proximity to a lawyer or a large compliance
program.
So I would look forward, if confirmed, to working with her
to make sure--and her office--that all businesses are getting
the capital that they need and getting the protections they
need during this market turmoil.
Senator Tester. Another question for both Ms. Crenshaw and
Commissioner Peirce. Could you just give me, very briefly, what
you have been focused on over the last 6 months or a year as a
staff or commissioner?
Ms. Peirce. So the Commission has been quite busy over the
past 6 months, but among the things that we have been focusing
on is expanding the ability of the private markets to work to
serve companies of all sizes. We have also been working on
trying to strengthen the regulatory framework as it relates to
equity market structure, and we have also been working on--I
personally have been spending some time thinking about
innovation, as I mentioned in my opening statement, trying to
think about how we can develop a framework for digital assets
that will give people the certainty they need to conduct
innovation in the United States.
Ms. Crenshaw. Over the past few months, when I wrapped up
my time with Commissioner Jackson, we were working on the
buybacks issue as well as the market structure issue, such as
the transaction fee pilot. And then when Commissioner Jackson
returned to New York I returned to the Office of Compliance and
Examinations, and for the past several months have been working
with the team there on a variety of inspections that are
hopefully going to help make markets safer for investors.
Senator Tester. OK. Ms. Crenshaw and Commissioner Peirce,
you both have been critical of legislation from this Committee
that has been signed into law. How will you work to implement
regulations, including those that you may have been about
outspoken about, but carry a congressional mandate?
Ms. Peirce. So when I worked on the Committee, 10 years
ago, to the day, as Senator Brown mentioned, Dodd-Frank was
passed, and I had a lot of concerns about Dodd-Frank. One piece
of that law was security-based swap regulation, and that was
something that fell within the purview of the SEC. When I got
to the SEC, Chairman Clayton asked me to take the lead on
getting that over the finish line. It was something that we
were not done with and I thought it was important to implement
the statute. And so I worked on that. It took a lot of my time
and my staff's time, and I remain committed to listening to
Congress. Having worked on the staff there I understand the
importance of congressional mandates, regardless of whether
they would be my optimal design or not.
Senator Tester. OK. Ms. Crenshaw.
Ms. Crenshaw. As Commissioner Peirce mentioned earlier in
the testimony, most of the votes at the Commission are actually
done on a bipartisan or even unanimous basis. So I would want
to make sure that I am approaching every rule, if confirmed,
and every enforcement case with that approach in mind. I would
like to make sure that they are bipartisan and unanimous, if
possible. And I would want to make sure that I am working with
staff, even if it is something that I may not be agreeing with
them on. But I want to reach that result, if possible.
Senator Tester. Thank you, Mr. Chairman.
Chairman Crapo. Thank you. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman. First of all, I
want to thank all of our nominees for your willingness to
serve.
Ms. Peirce, I would like to start by asking you a question
about market structure. When it comes to market structure, I
understand one reform that you would like to consider in the
future would be to reform the circuit breakers that require
stock exchanges to halt trading when prices move past a certain
point. Can you tell us a little bit more about what your
thinking is in this particular area?
Ms. Peirce. Sure. So the circuit breakers were put in place
in anticipation of events, such as we saw this spring, and I
think that they actually--the markets have worked remarkably
well in a period of intense volatility and volume. And so I
have been very pleased with that. And the circuit breakers have
generally worked quite well, but I think that we might be able
to make some tweaks so that they would work even better should
another situation like the one that we experienced over the
last several months occurs.
Now it would take time for us to figure out what to do, but
one thing that may be a possibility is to try to work on the
circuit breakers so that they do not trigger so quickly after
opening in the morning. Because the purpose of a circuit
breaker is to give the market a chance to think and sort
through uncertainty, and if they have had that time to do that
overnight, perhaps we do not need to have those circuit
breakers triggered so early in the morning.
Senator Rounds. Thank you. Ms. Crenshaw, one concern I had
early on the COVID-19 pandemic was whether or not our exchanges
would be able to operate in New York, Chicago, and other cities
in the event that widespread lockdown measures were put in
place. Thankfully, our exchanges have operated remarkably well
during the pandemic.
Looking back over the past few months, are there any
important lessons learned from continuity of operations
standpoint?
Ms. Crenshaw. I think one of the things we need to make
sure, from an Office of Compliance, Inspections, and
Examinations perspective, is that the processes and procedures
are in place so that these exchanges are ready to go. We have a
group that oversees the exchanges and one of the things they
look at is making sure that they have continuity, processes and
procedures, and I think we need to continue to look at those
with all possible crises in mind, making sure that they are
able to telework, making sure that they have backup systems.
And I would look forward to working with them to make sure that
all of those processes and procedures are designed
appropriately.
Senator Rounds. Thank you. Mr. Hauptman, I have concerns
from some credit unions about the burden that capital rules
like CECL and other regulatory standards pose. To that end,
Chairman Hood said that CECL will do more harm than good, from
a broad perspective. How do you view the capital structure for
America's credit unions, and are there areas that the NCUA or
Congress need to revisit?
Mr. Hauptman. Yes, Senator. Thank you for that. I will say
three things. One, my priority is capital, capital, capital,
capital is the Holy Grail of regulation. Pulling in to this
crisis the credit union system, as a whole, was well
capitalized. They were significantly above what they are
statutorily required to have, and that is good. And it is times
like this when capital matters most. This is why we have it.
When it comes CECL, I am aware that there is a delay. The
number one thing a regulator can do, because obviously the rule
itself is up to Congress to change, or FASB, the number one
thing they can do is if CECL goes into effect and they have to
take write-downs on their assets, make sure that the regulators
understand that their capital levels did not really just go
down. They have to go out and raise a lot. If it goes into
effect on January 1, 2022, let's say, their balance sheet on
January 1 is not any worse than it was on December 31st. But
things like CECL can make it appear it is worse.
So that is one concern I heard from the Arkansas credit
unions and the others in the Cornerstone Credit League in Texas
and Oklahoma, is even if we have to go forward with CECL,
please understand and communicate to us that you get that our
capital levels are not necessarily worse and our balance sheets
are not worse off, just because they may look worse off when
you take these expected credit losses.
And obviously what they say is the notion that a loan may
not be repaid has been going on since the dawn of banking. But
as a regulator you want to make sure you are communicating that
you understand the changes they may have to make.
Senator Rounds. Thank you. Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Rounds. Senator
Menendez, are you with us?
[No response.]
Chairman Crapo. I think Senator Menendez may be joining us
soon. Senator Warner, are you with us?
[No response.]
Chairman Crapo. I am going to go through the list here.
Senator Warren.
[No response.]
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. I am here.
Chairman Crapo. You may go ahead.
Senator Cortez Masto. For some reason I am having
difficult--oh, there it is.
Thank you so much. Let me just say congratulations on all
of your nominations. Thank you for your willingness to serve,
and I am excited for you and excited for all of your families.
But let me start with both Commissioner Peirce and Ms.
Crenshaw on cryptocurrencies. I know the SEC has taken a
position that direct regulation of bitcoin is not within its
purview. However, the SEC has chosen to regulate certain
cryptocurrency-related digital assets. For example, last week,
former lobbyist and convicted felon, Jack Abramoff, pleaded
guilty to misleading investors with a new cryptocurrency.
So my question both of you is, what are your concerns about
potential fraud with cryptocurrencies, and where do you think
the SEC's role is when it comes to addressing that fraud? And
Commissioner Peirce, let me start with you.
Ms. Peirce. Thank you, Senator. I do think that we have
seen a lot of fraud with a crypto label on it. Now some of it
is just run-of-the-mill fraud where someone has no intention to
create a crypto project. They just have an intention to steal
people's money. And often those are cast in a way that fits
clearly within our mandate, because it is an offering--they are
essentially raising money for what they say is a common
enterprise, and they are making this representation. So it is
clearly within our mandate.
I think one thing that we could do to improve the landscape
is to set out clear guardrails and clear guidance about when
something is a securities offering, or, as I have suggested,
create some kind of a safe harbor that allows these initial
coin offerings to happen, but allows them to happen with
certain disclosures attendant and certain--people would have to
identify themselves. And I think that would be a good way of
separating the wheat from the chaff.
So I think enforcement is important but it is also
important for us to put out clearer guidance.
Senator Cortez Masto. And Ms. Crenshaw.
Ms. Crenshaw. I think the cryptomarket is a young market,
and with a young market there is necessarily a lot of risk. And
so I think it is important to the degree that these are
securities, which the Chairman, I think, has made an assessment
on in certain cases, so to the degree they are securities, I
think it is important that we are protecting investors and
making sure we are holding folks accountable when they are
fraudulent in this market. It is important to provide these
protections so that the market is trusted and that it can grow
and innovate over time. And I think the Chairman has done a
good job in this area, in making sure that we are providing
appropriate protections while letting the market innovate.
And to the degree that they are either currencies or
commodities, I think we need to work with other agencies to
make sure we are still providing those appropriate protections.
Senator Cortez Masto. Thank you. Mr. Hauptman, I know you
have an interest in digital currencies and blockchain
technology. Do you have any specific goals related to
distributed ledgers or digital currencies, if you are confirmed
to the NCUA board of directors?
Mr. Hauptman. I appreciate the question, Senator. First I
do want to mention it has been a pleasure to work with your
staff on the Subcommittee, as well, on anti- money-laundering
reform.
When we had 88 million checks that were going to go out,
paper checks, through the mail, with the stimulus payments,
that would have been a great opportunity if we had, for
example, a digital dollar. NCUA does not have a ton of
oversight over that. But when we saw all those people
desperately in need of that money--people with rent coming up,
people with bills to pay--had we had digital currency it is
possible that we could have a blockchain-based digital dollar
and we could have gotten money to those people immediately and
securely, with limits on fraud, much the same way if there is a
disaster in another country we can deliver money to those folks
much more quickly and in a much safer manner.
Senator Cortez Masto. Thank you. I appreciate that. Let me
jump back to Ms. Peirce. Last year I wrote a letter, with
Senator Rounds, Van Hollen, and Smith, asking FINRA to limit
the ability of broker-dealers and other financial professionals
to inherit money from their clients. In response, FINRA
proposed a rule banning such potential abuse, and that rule was
recently sent to the SEC, which is seeking comments on the
proposed rule.
To the extent you can now, do you believe regulators should
prohibit financial advisors from receiving requests from
clients? So to the extent that you can now answer that
question, or at least posit about it?
Ms. Peirce. Well, I cannot really comment because the rule
is under review, but I will say that this is an area where it
is so important for us to pay close attention, because so many
seniors, especially, are very vulnerable. And I think anyone is
going to be suspicious when a financial professional is
inheriting money from a client. And so I think it is an area we
need to work on. We have got excellent people at the Commission
working on those kinds of things, and FINRA is committed to it
as well. So I commit to working with you on that issue.
Senator Cortez Masto. Thank you very much. Mr. Chairman,
thank you. Thank you all.
Chairman Crapo. Thank you. Senator Kennedy.
Senator Kennedy. Mr. Chairman?
Chairman Crapo. Yes. I can hear you. Cannot see you.
Senator Kennedy. Well, let me see if I can fix that. Can
you see me now?
Chairman Crapo. Yeah, we can now.
Senator Kennedy. Great. If you would gavel loudly, Mr.
Chairman, when I am done or close to being done with my time,
because I cannot really see the clock that well.
Chairman Crapo. I promise I will do it.
Senator Kennedy. I thank you for that.
Captain Crenshaw--it is captain, is that right?
Ms. Crenshaw. That is correct, Senator.
Senator Kennedy. Captain, have you ever bought stock?
Ms. Crenshaw. I have, Senator.
Senator Kennedy. How long ago was that?
Ms. Crenshaw. A fairly long time ago, Senator.
Senator Kennedy. OK. What did you do before you bought that
stock? Did you research it?
Ms. Crenshaw. Probably not thoroughly, Senator.
Senator Kennedy. OK. Did you read the prospectus?
Ms. Crenshaw. Probably not.
Senator Kennedy. OK. Do you have any idea how much it costs
to put together a prospectus?
Ms. Crenshaw. I know with the printing costs it is not an
inexpensive process.
Senator Kennedy. What about the legal fees?
Ms. Crenshaw. Given the law firm rates around here I
imagine it is fairly expensive as well.
Senator Kennedy. I am not arguing against the idea of a
prospectus. I just do not think most retail investors read a
prospectus. They, in doing their due diligence, may download
it. But it is long. It is tedious reading. If we really wanted
to inform retail investors, and some institutional investors,
would we not require a prospectus to be drafted in such a way
that it is more accessible to retail purchasers of equities?
Ms. Crenshaw. Can you hear me?
Senator Kennedy. Can you hear me?
Ms. Crenshaw. Yes. I can hear you.
Senator Kennedy. Did you hear my question?
Ms. Crenshaw. I did. Yes.
Ms. Peirce. Can you hear me?
Senator Kennedy. I can hear you. Yes, ma'am.
Ms. Crenshaw. I know the Division of Investment Management
is undertaking a project to address just that question, called
the Retail Investor Experience, and they are working with
investors to make sure that the disclosures, while appropriate
for all levels of investors and providing the information that
is critical to anyone who may want it, they are working to make
sure that these disclosures are less daunting and much more
accessible.
Senator Kennedy. When do you think they will have that
ready?
Ms. Crenshaw. I do not know the timing of that, Senator.
You would have to ask the Chairman that. But I know that they
are working on that project and I would look forward to working
on that with them, if confirmed.
Senator Kennedy. Well, I am not suggesting that we do not
need full disclosure. Quite the contrary. I think that
separates our markets from a lot of markets in the world. I
just do not think that retail investors benefit as much as they
could if we figured out a way to make it more accessible, not
physically accessible but accessible in terms of the knowledge
that our law requires to be conveyed.
Member Peirce--am I saying that right?
Ms. Peirce. You are.
Senator Kennedy. Commissioner, do you think equities that
are owned by foreign companies, whether or not they are
subsidized by their foreign Governments, should be allowed to
flaunt our audit laws?
Ms. Peirce. If they are listed in the United States I think
it is really important that they be subject to the same
requirements. It is an area that we have been working on with
the PCAOB for quite a long time now, and it has been one of
the----
Senator Kennedy. I do not have much time left. And look, I
am a big Jay Clayton fan, but why haven't we done more about
it?
Ms. Peirce. Well, I think that it is--there are a couple of
things to do. One is to make sure that the disclosure is there
about the risks of investing abroad, in foreign companies.
Senator Kennedy. Right. But why--look, I only have 20
seconds. The Senate has passed a bill that says if you are a
foreign company you have to comply with the same audit
requirements as everybody else. And it has passed the Senate.
Wall Street has unleashed hell, lobbying against it in the
House, and that makes no sense to me. And why hasn't the
Commission stepped up in a more vocal manner?
Ms. Peirce. Well, just a couple of weeks ago we had an
emerging markets roundtable at which this was the very
discussion, and I think some productive suggestions came out of
that. And so it is something that certainly is on our minds,
and we have been quite clear about the inability for us to
audit--to oversee the work of auditors in certain
jurisdictions.
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Crapo. Thank you. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Commissioner
Peirce and Ms. Crenshaw, I want to start with an issue I raised
with Chair Clayton last time he was before the Committee. I
have been increasingly concerned about the ability of foreign
actors to manipulate U.S. companies through their investments,
particularly in the media and technology sectors. And given the
stress in today's economic environment they are even more
vulnerable to predatory practices and behavior by foreign
investors looking to gain a foothold in the U.S. media industry
while skirting our transparency requirements.
Section 13(d) of the Securities and Exchange Act of 1934
requires investors who become the beneficial owners of more
than 5 percent of an issuers 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 public.
How do each of you believe the SEC should 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?
Ms. Peirce. That is an issue that we deal with both through
our enforcement and our Division of Corporation Finance and its
review of issuers. That said, it can be a very difficult thing
to track, and I agree with you that it is really important that
we have transparency. That is why those rules are in place. So
we have brought some enforcement actions, and I think it is an
area where whistleblowers also could be valuable in pointing us
to potential violations.
Senator Menendez. Ms. Crenshaw.
Ms. Crenshaw. Thank you, Senator. I agree with your concern
and I agree, generally, with what Commissioner Peirce said. I
do think this is a rule that we have not looked at in a very
long time, and to the degree it is a rule that is not operating
appropriately I would be open to working with your office, if
confirmed, and the staff to think through ways that we can
address those concerns a little bit better.
Senator Menendez. Well, I appreciate both of your answers,
and Commissioner, I appreciate your forthrightness in terms of
saying it is a difficult area. I know, for example, of one
large Hispanic media broadcasting system that had a series of
foreign investors that, unbeknownst to the company, they did
not disclose to the SEC. And, of course, then you have the FCC
obligations to disclose, but you cannot disclose it if you do
not know, from the SEC filings, that someone has made, you
know, investments beyond, I think it is the 5 percent
requirement.
And so, therefore, you find the ability of a foreign entity
to try to take over, and media companies in the United States
with then the ability to try to influence the results of what
they are broadcasting. And so I think we need to find a way to
beef up the abilities to do this.
Commissioner Peirce, in your experience do you think that
the Commission has the ability to independently verify the
information in a Section 13(d) filing, or to verify whether a
foreign entity should have filed a 13(d) disclosure?
Ms. Peirce. Realistically, we have a lot of issuers, and
so--and there are lots of filings. So, realistically, we cannot
verify everything that is in every filing. As Ms. Crenshaw
said, I would be happy to work with your office and think
through ways that we could have better information. I also hope
that you would convey the information about the one that you
are aware of to me or others at the SEC, and I would happy to
work with you on that.
Senator Menendez. Well, thank you. We will follow up. We
will follow up with you.
Let me ask you, Commissioner Peirce. Recent reports from
the New York Stock Exchange and the CBOE show that off-exchange
trading rose to a record 42 percent of all volume during the
COVID pandemic. During this crisis, when the markets need
greater transparency and price discovery, we have never, in
history, had less trading taking place on exchanges. Dark
markets are less regulated and provide little transparency.
So Commissioner, are you concerned with this trend in off-
exchange trading, and what is the SEC doing to address it?
Ms. Peirce. Our exchanges are very important for
transparency of our equity markets. We have taken seriously the
concerns that have been raised about off-exchange trading, and
we passed--we adopted a rule, regulation, that deals with
alternative trading systems and disclosures and transparency
around them. And I am certainly open to thinking about other
ways that we can increase transparency and make sure that our
equity markets are able to operate as efficiently as possible.
Senator Menendez. Mr. Chairman, may I have your indulgence
for one question to Mr. Hauptman?
Chairman Crapo. Yes, you may.
Senator Menendez. Thank you very much. Mr. Hauptman, credit
unions have a broad and diverse membership, and the NCUA counts
diversity and inclusion among the agency's core values. But
still not a day goes by when we do not see a story about a
person of color being discriminated against by a financial
institution, whether that is being unfairly denied a mortgage
or having the police called on them by bank employees on the
unfound suspicion that they are trying to cash a fake check.
So share with me and the members of the Committee what
personal or professional experiences do you bring to NCUA that
will enable you to advance diversity, inclusion, and
nondiscrimination within the credit union system.
Mr. Hauptman. Thank you, Senator. Obviously an
extraordinarily important topic.
First of all, you have to enforce the laws on the books,
and we will do that vigorously--Fair Housing Act, Equal Credit
Opportunity Act, Fair Credit Reporting Act--and, where
appropriate, take appropriate action.
If I could just step back a second, big-picture my view on
this, is no entity like NCUA or a credit union or this country
can fully succeed unless we make use of all of the talent
around us. We are not going to be as prosperous, as safe, and a
more fair society unless we use all of the talent, not just
some of it. That is fair for those who do not have the proper
opportunity today, but it is also better for the rest of us.
So that is the mentality I am taking into it, including
looking at ways to start more credit unions. There were only
two last year. One was a minority deposit institution, and that
was good to see. But I want to do a top-to-bottom review of
what are the pain points. Why did it take so long to start
credit unions, and possibly get more minority depository
institutions.
Last, I would like to expand, if it works well, the Second
Chance Initiative they have done at NCUA. People with minor
criminal convictions years ago having the chance. That is an
example right there, and I have seen it with friends and, you
know, people from my high school. That has changed their entire
trajectory, one minor conviction when they were 19. So we would
like to see how that works out and expand that. That is an
example of an untapped pool of talent this country would be
better off using.
Senator Menendez. Thank you. Thank you, Mr. Chairman, for
your courtesy.
Chairman Crapo. Thank you. We have four Senators who have
checked in but I do not see. I am going to go through and see
if any of them are online with us.
Senator Warner.
[No response.]
Chairman Crapo. Senator Warren.
[No response.]
Chairman Crapo. Senator Van Hollen.
[No response.]
Chairman Crapo. Senator Jones.
[No response.]
Chairman Crapo. I think they may have all had to go to
other hearings or other business.
So that concludes the questioning. Senator Brown, did you
want to make a statement?
Senator Warren. Mr. Chairman.
Chairman Crapo. Oh wait. Senator Warren. Yes, go ahead.
Senator Warren. Thank you, Mr. Chairman.
Chairman Crapo. I am seeing more show up too. Go ahead now.
Senator Warren. OK. I will go ahead and go. Thank you.
So later today Republicans on this Committee plan to
confirm an unqualified nominee to the Federal Reserve. They
will do so 10 years to the day after President Obama signed
Dodd-Frank into law to protect our financial system. Confirming
Judy Shelton to the Federal Reserve is a mistake, and it will
endanger our economy, and I will be voting against her
confirmation, and I urge my colleagues to do the same.
President Trump's total failure to protect this country
from a public health crisis has now caused a devastating
economic crisis. But while workers and tenants and small
businesses are still struggling, private equity companies are
making big money and are raking in profits by taking over
nursing homes, department stores, newspapers, grocery stores.
They bleed these companies dry, they put workers out of a job,
and they put our economy at risk while they do it.
The SEC is supposed to protect our economy from these
risks, and I want to understand how both of you think about the
threats that private equity industry poses to workers and to
the economy.
So Ms. Crenshaw, I would like to start with you. When
private equity firms gobble up other businesses they used
highly leveraged loans to do it, and that means they are
loading up the companies they control with debt. During an
economic downturn, what are the risks to the financial system
if these companies start to fail?
Ms. Crenshaw. Senator, I share your concern in this area,
and one of the things that concerns me, and I think poses the
greatest risk, is what we do not necessarily know. We do not
have the data to know between funds, insurance companies, or
banks who holds what in these products. And I think it is
absolutely crucial that we understand that data so we can
assess the market and appropriately determine how to
appropriately protect investors from the spillover effects.
Senator Warren. All right. So thank you very much. You
know, Dodd-Frank directed the SEC to write rules to address
these risks, and in 2014, the SEC proposed requiring private
equity firms to keep some skin in the game when they make risky
bets. Unfortunately, the courts overturned these rules, but my
Stop Wall Street Looting Act would put risk retention
requirements back in place.
OK, but that is about another bill. Let's talk about
something the SEC could do right now to address this problem,
without any new legislation. Currently, private equity disclose
the amount of debt that their companies have taken on, the fees
they charge, and the performance of their investments, but all
that terrific information is kept secret. That means that
investors and the broader public are left in the dark about
risks in this industry.
So Ms. Crenshaw, do you believe that requiring private
equity funds to disclose more information about their
investments would help protect both the economy and the
workers, and help make the market more efficient?
Ms. Crenshaw. I think the SEC has long said that only
through full and fair disclosures can investors appropriately
assess the markets and adequately invest their capital and
allocate their capital. And so I think disclosure would be
important to investors.
Senator Warren. Good. Well, I am glad to hear it. You know,
last month the SEC itself acknowledged that there are
widespread problems even in the limited private equity
disclosures that do exist.
Commissioner Peirce, what about you? Do you agree that
private equity companies should have to disclose basic
information about the risks of their investments, the fees they
charge, and how well those investments are performing?
Ms. Peirce. The investors in private equity funds, to the
extent that they share the concerns that you have, have a fair
amount of leverage in terms of trying to get the disclosure
they want. And so given the way the market is structured, I
think it is less important for us to focus on private equity
disclosures and more important to focus on the disclosures that
are reaching typical retail investors.
Senator Warren. And I have to say, Commissioner Peirce, I
am not surprised to hear that you are not interested in
requiring more disclosure from the private equity industry.
Nothing in your record suggests that you are willing to take on
powerful interests to protect either investors or workers. That
is why I think it would be a mistake to confirm you for another
term.
The SEC's job is to protect investors, to maintain fair,
orderly, and efficient markets, and to facilitate capital
formation. That is a direct quote. And that means a Commission
that will not let private equity funds loot American
businesses. It means a Commission that is actually committed to
transparency. It means an SEC that has the courage to stand up
to private equity. That is what we need.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. I appreciate you
having this hearing.
Let me start by saying that I agree with Senator Warren,
Senator Brown, and a number of my Democratic colleagues on the
nominee, Judy Shelton, that we will vote on this afternoon. I
found her--personally, and enjoyed meeting her, but I do feel
her views at this moment in time are not right for the
independence of the Fed.
I want to move to Ms. Shelton--I am sorry, Ms. Crenshaw. I
had some earlier discussions with Ms. Crenshaw. As you probably
recall, I talked about a GAO report that I had requested about
ESG measurements. Now the report found that 12 of the 14
institutional investors that were interviewed use ESG metrics,
but there is an extraordinarily wide variety of information
that is provided.
As a matter of fact, we have seen enormous numbers of both
funds and companies say they are interested in ESG standards,
metrics, value this kind of disclosure. But as the GAO report
pointed out, even when it came to something as basic as
measurement of carbon dioxide emissions, there was a whole
series of different standards used. And now my colleagues may
not believe that carbon emissions are contributing to climate
change or not, but it would seem to me if investors want this
information there ought to be some ability to standardize what
these metrics look like.
We also know that the Investor Advisory Subcommittee at the
SEC said that there are a lot of business risks and decisions
and strategies that stand upon ESG factors, and I know you are
not going to want to prejudge something that may come before
the Commission, but when we are looking at something that the
investor community says this is important, don't you think we
need some level of standardization on these kinds of standards,
rather than the patchwork that we have right now?
Ms. Crenshaw, would you address that issue?
Ms. Crenshaw. Senator, yes, and I agree with you and I
think investors are looking for ESG metrics. The largest asset
managers in the world are incorporating ESG factors into their
comprehensive risk programs, and I think we need to think this
through. We have not looked at this area in a while, and I
think we at the SEC need to think through how best to provide
the information that investors are looking for, and that is
information that is comparable and that is accessible to
investors. And I think we need to do that through a roundtable
or think through additional guidance, and I would look forward,
if confirmed, to working with your office and the staff on the
best way to do that.
Senator Warner. And I would simply like to say, since I
would argue you would need to move somewhat aggressively. You
know, the Europeans are moving to formalize these standards. If
we did nothing this would be one more example of why I think
America is giving its long-term leadership.
So I would hope you would consider even advocating for a
formal task force. I do not think we would want a roundtable.
Do you want to add any other comments? I have got one or two
more questions.
Let me also--Mr. Chairman, I do not see my timeline. How
much time do I have left?
Chairman Crapo. You have 1 minute and 20 seconds.
Senator Warner. All right. One of the areas that I
particularly also focused on is human capital, disclosure of
human capital management. I think the pandemic has pointed out
the need for that public company reporting on human capital. I
know the SEC has moved from this area already. Ms. Crenshaw,
would you very briefly tell me your thoughts on human capital
disclosures?
Ms. Crenshaw. Yes, Senator, being careful not to prejudge a
rule that I might be asked to vote on, if confirmed. I do
think, generally, that human capital disclosures are
information that investors need and want. This is information
that goes to the long-term financial growth of companies. And
again, I think this is an area where we need to make sure that
we are providing investors with information that is both
accessible and comparable, and to the extent we can use
quantitative factors here, I think that would be appropriate.
Senator Warner. Thank you. I know my time is about to
expire. I will put my questions in for the record. Before I
yield, though, I do want to comment Mr. Kyle Hauptman for his
work with our office and a number of others on, I think, very
significant legislation, the anti- money-laundering
legislation, that you, Mr. Chairman, and Ranking Member Brown
have been such great leaders on. And I just want to say to
Kyle, thank you for your good work in working with our office,
and if you are confirmed I hope you will bring that same spirit
of collaboration and bipartisanship to the NCUA.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman and Ranking
Member Brown, and to the witnesses today. Let me start with Mr.
Hauptman, and I have a question on setting caps on interest
rates to prevent predatory lending. As you know, credit unions
have traditionally served as safe institutions for their
members to borrow at reasonable rates. Some time ago, the
Congress enacted legislation to protect military families,
active duty military and their families from predatory rates
and interest rate gouging. We established a 36 percent annual
cap on loans to active duty service members.
Senator Brown and others and I have introduced legislation
to extend those protections to other Americans, one for the
long haul but also one during this pandemic, when we see lots
of predatory lending abuses. Would you support the idea of
establishing a 36 percent interest rate cap during this
pandemic to prevent predatory lending abuses?
Mr. Hauptman. Thank you, Senator. Obviously an important
topic for anyone that has been in a cash crunch. And I am aware
of the situation where just outside many military bases you see
payday loan places and pawn shops, et cetera.
At NCUA, the only ability we will have is working to make
sure there are better options. The interest rates are set by
statute and then they have their payday alternative product,
which is 10 points higher at 28. I think the regulatory policy
I bring to the table here is a better deal. In the case of
extraordinarily high interest loans, the main thing is to
provide better options, fight fire with fire, when somebody has
an extraordinarily high interest loan and their credit union
can give them one to refinance that and get out of that.
So the ability I would have at NCUA is to make sure that,
number one, there are better alternatives. They have to be
significantly better or no one will use them. They have to
better products at lower prices. And second of all----
Senator Van Hollen. Mr. Hauptman, my time is limited.
Mr. Hauptman. Sure.
Senator Van Hollen. Do you support the law that was passed
by Congress to protect military families?
Mr. Hauptman. Matters before Congress are probably best
left to Congress, but at NCUA you can be sure that all those
military members, and there are many in credit unions, will
have better options than the type of loan----
Senator Van Hollen. I know, but you have an advocacy role
as well, it seems to me, to, you know, protect your members.
Mr. Hauptman. Sure.
Senator Van Hollen. And, you know, one way to protect your
members is to make sure credit unions are offering reasonable
rates. The other is to make sure that there are not others out
there that are charging outrageous, excessive rates. So it is a
pretty simple question. Would you support our proposal to
extend to others around the country the protections that we, as
a country, currently extend to military families when it comes
to excessive interest rates?
Mr. Hauptman. Yeah. I should not comment on Congress, but
you can count on me to make sure there are much better options
and lower price options than what you are talking about. That
includes financial literacy and lower fees across the board, so
they do not get in this cash crunch to start with.
Senator Van Hollen. Right. Well, one way to do it is to
make it--one way to do it is to make sure that those outrageous
practices are banned.
Let me ask Commissioner Peirce a question with respect to
the proposed advisory rule, and I am not going to ask you the
substance of it because I know it is a pending matter. But when
we had the Chairman before the Committee, Chairman Clayton, I
asked him about comments he had made about how the proposed
rule was supported by what he described as Main Street
investors. And it turned out that his comments were based on
letters that he had received from people claiming to be Main
Street investors but, in fact, they all were manufactured by a
front group called 60 Plus. This is a dark money group, a
secret money group, and it turned out that it was entirely
fabricated.
So my question to you is, do you have in the record before
you comments from genuine Main Street investors, the mom-and-
pops, because I can tell you, when it comes to this proxy rule,
I have not heard from any sort of mom-and-pop investors about
why the proposed rule is something that would be helpful to
them. Have you?
Ms. Peirce. Well, we have got a record that is chock full
of comments representing a wide variety of viewpoints. I think
one problem with this particular rule, with this particular
area, is that you have a few extremely large shareholders who
often operate to the disadvantage of mom-and-pop shareholders,
the kind that you are----
Senator Van Hollen. Yeah, so Commissioner Peirce, with
respect, my question was pretty simple, right, because Chairman
Clayton used what turned out to be fabricated letters from Main
Street to argue that he was proposing to protect Main Street
investors. I have a simple question. In your record before you,
can you identify for us today any comments from genuine Main
Street investors about this rule?
Ms. Peirce. I am happy to get back to you on identifying
particular letters, if that is something that you would like me
to do. Obviously, the integrity of our comment process is very
important, and so that is something that we rely on commenters
to communicate their views with us. And we get comments from a
wide variety of perspectives. I am happy to get back to you on
this particular rulemaking if you would like.
Senator Van Hollen. I would appreciate that, because I
think the reason the Chairman had to settle on what turned out
to be manufactured comments was there were not any authentic
ones. But I appreciate that. Thank you.
Chairman Crapo. Thank you. That concludes the Senators. I
understand, Senator Brown, you would like to ask one more
question?
Senator Brown. On that I want to thank Senator Van Hollen.
I think his question was really important, and we will all be
awaiting your response, Ms. Peirce, your response in writing to
what Senator Van Hollen asked. So thank you.
I had a real quick question, Mr. Hauptman. You talked about
technology. Give me an example of what you have in mind.
Mr. Hauptman. Well, you know, it has been a nationwide,
almost a worldwide experiment in how we do things during a
pandemic. For example, this hearing is online, and prior to
March we had never done that before. They have done exams
virtually. It is possible that could save all parties a little
bit of money, or do some of it virtually, so that is an option.
But I would mention 3 years ago they passed a bill, I think
it was Senator Scott's, the MOBILE Act, to be able to open an
account online, be able to upload your identification
information. That was very helpful during the pandemic, when a
lot of people did not want to physically go to a bank or the
lobby may have been closed.
So things like that. Again, the only maybe silver lining
from this pandemic is we have done a lot of experiments and
some of these things, like perhaps a virtual examination or
opening an account online or e-signatures and verifications,
some of these things may be useful post pandemic.
Senator Brown. OK. Well, thank you. It raises some
concerns, and I appreciate your response. But so often
technology is used for predatory behavior with technology
companies and new innovative products just exploiting workers,
especially low-wage workers, when we know that financial
services does not really work very hard to reach the
underserved. So I am very concerned about your thoughts there.
Last comment, Mr. Chairman, and I thank all three witnesses
today. I hope our nominees state carefully about how these
agencies enforce the law, the two agencies to which you are
nominated, and hold bad actors, including management,
accountable. It is not enough to talk about strong enforcement
and individual accountability only when you are in front of the
Banking and Housing Committee. Not only is there an important
deterrent--not only is it a very important deterrent--it
signals that the abuse of customers, the abuse of workers, the
abuse of other stakeholders will not be tolerated. I hope that
you all remember that, especially after you are confirmed.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown, and that
concludes the questioning for the hearing today. To our
witnesses--well, actually, to our Senators, any questions for
the record are due this Thursday, and I asking our witnesses to
please respond to those questions by Monday so that we can move
quickly.
With that, again, thank you very much for attending this
hearing and for your willingness to serve, and this hearing is
adjourned.
[Whereupon, at 11:35 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of nominees,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
This morning, we will hear testimony on the nominations of The
Honorable Hester Peirce, of Ohio, to be a Member of the Securities and
Exchange Commission; Ms. Caroline Crenshaw, of the District of
Columbia, to be a Member of the Securities and Exchange Commission; and
Mr. Kyle Hauptman, of Maine, to be a Member of the National Credit
Union Administration Board.
Welcome and congratulations on your nominations to these important
positions.
Commissioner Peirce and Ms. Crenshaw have both been nominated to
serve as SEC Commissioners.
The SEC is charged with an important mission to protect investors;
maintain fair, orderly, and efficient markets; facilitate capital
formation; and enforce securities laws.
I commend Commissioner Peirce and her colleagues at the SEC for
their quick and decisive response to the current COVID-19 pandemic.
The SEC has successfully balanced the emergency response to COVID-
19 while continuing to maintain fundamental operations, such as
rulemaking initiatives, conducting risk-based inspections, bringing
enforcement actions, and reviewing issuer and fund filings.
I encourage the SEC to continue these efforts, including advancing
important rulemaking efforts related to capital formation and corporate
governance.
Commissioner Peirce is highly qualified for the position,
previously serving as a Senior Counsel at this Committee and currently
serving as an SEC Commissioner since January 2018.
Next, we have Ms. Caroline Crenshaw.
Ms. Crenshaw has worked at the SEC since 2013, working in the
Office of Compliance Inspections and Examinations, the Division of
Investment Management, and as Counsel to Commissioners Kara Stein and
Robert Jackson.
In addition to her work at the SEC, she is a captain in the U.S.
Army Reserve Judge Advocate General's Corps.
Ms. Crenshaw, we thank you for your service.
Turning to Mr. Kyle Hauptman, who has been nominated to the Board
of the National Credit Union Administration.
The NCUA plays a critical role in overseeing and insuring a major
segment of our Nation's community financial institutions: federally
insured credit unions.
Mr. Hauptman is well prepared to join the NCUA Board thanks to his
prior Government and private sector experience.
Mr. Hauptman has served as the Economic Policy Advisor to Senator
Tom Cotton since 2017.
Mr. Hauptman also worked on S. 2155, the Economic Growth,
Regulatory Relief, and Consumer Protection Act, which contained several
important provisions that provided regulatory flexibility and relief
for credit unions.
Before his Government service, Mr. Hauptman had a career in the
financial services industry, where he developed expertise managing
liquidity and credit- and interest-rate risk in fixed-income
portfolios.
In the coming months, both the SEC and NCUA will be on the front
lines helping consumers, retail investors, and businesses of all sizes
recover from the economic impacts of the COVID-19 emergency.
If confirmed, I look forward to working with each of these nominees
on many important issues within their respective policy areas.
Congratulations again on your nominations, and I thank you and your
families for your willingness to serve.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Chairman Crapo, for holding today's nomination hearing.
First, I want to take a brief moment to remember my friend and
colleague, Representative John Lewis. Let us honor his legacy by
following his example of leadership, courage, and unrelenting fight for
justice.
Welcome to today's nominees. Congratulations to the three of you
and your families. The Committee will consider two nominees to the
Securities and Exchange Commission--Commissioner Hester Peirce for a
second term, and Ms. Caroline Crenshaw, and Mr. Kyle Hauptman as a
nominee to be a Board Member of the National Credit Union
Administration.
Today also marks the 10-year anniversary of the passage of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. We passed
Wall Street reform to prevent another financial crisis.
Right now, we face an even greater, more complex public health and
economic crisis. Families are making impossible decisions about how to
pay their rent and put food on the kitchen table, or are grieving the
loss of a mother or a father or a child. And we know one of this
pandemic's tragedies is people dying alone.
It's black and brown Americans disproportionately affected--working
on the front lines to get us through this and helping to save lives,
while grieving lost ones.
Wall Street reform was meant to prevent catastrophe in our
financial system. We need to aim higher than that today--yet Wall
Street has spent years trying to dismantle the basic, important
protections put in place through Dodd-Frank.
And Republicans and the Trump administration have been all too
happy to oblige. It didn't take long for Wall Street to recover from
the crisis. They were making record profits while refusing to pay their
workers a living wage. This ultimately caused the wealth gap to grow
further.
The current coronavirus crisis is showing us what happens when we
don't protect working Americans. We can't leave them behind again.
And leadership matters. We see that every day--over 140,000
Americans dead on the President's watch. We're just 5 percent of the
world's population, yet we have 30 percent of the deaths. That's not
because we don't have good doctors and smart scientists and hard
workers. It's because of leadership.
And those who this body confirms to leadership posts also matter.
All of the nominees, if confirmed, can support and forward policies
that protect these working families--families who are consumers and
investors and credit union members. You can encourage companies and
credit unions to offer fair products to Americans left out of our
financial system and make sure our markets and economy work for
everyone.
The question facing us today is: will you show that leadership and
make those choices?
If confirmed, Ms. Peirce would continue her work as a Commissioner
for 5 more years and further her commitment to public service. Ms.
Crenshaw brings the experience of working for the last two Democratic
Commissioners, fighting for investors. Her continued service in the
military allows her to bring a very different perspective to the table.
If confirmed, she would be the first Commissioner in modern times to be
in the active reserve--joining a handful of Commissioners over the
history of the SEC who have served in the Armed Forces.
Commissioner Peirce and Ms. Crenshaw, you will be called upon to
tackle market swings and investment scams related to the pandemic, and
you must also keep your eyes on existing problems that are getting
worse.
As the biggest companies, and banks in particular, have grown and
become more powerful, we've seen corporate executives pay themselves
with stock buybacks while laying off workers, cutting their pay, and
underinvesting in their communities--all while avoiding any
accountability.
The SEC has a role in addressing each of these issues.
Executives must be responsible to stakeholders, including workers
and communities. That means the SEC shouldn't be changing its rules if
it will take away smaller investors' ability to hold management
accountable and raise important issues to other shareholders.
Shareholder democracy isn't just for the big guys.
The COVID pandemic has also shown how important essential workers
are to our economy and how little information companies disclose about
their workers. The public needs more information about how a company
engages with its workers, because that helps investors understand how
that company will deal with a crisis.
And soon enough, corporate executives will want to reward
themselves and their biggest investors again with stock buybacks. The
safe harbor for stock buybacks has barely been touched in 40 years, but
it seems investor and market protections are chipped away at year after
year.
When we've seen companies spend as much as 100 percent of their
profits on their own stock, instead of capital investments or workers'
wages, it's clear that stock buyback rules need an overhaul.
The COVID pandemic has also shown us how important it is to have
local financial institutions that serve their communities. We've seen
credit unions--like the ones in my home State of Ohio--work with their
members to get through this crisis.
The NCUA is key to making sure that our credit unions are resilient
in good times and bad.
Yet the NCUA under the Trump administration has been chipping away
at the very protections we put in place after the last financial
crisis--rules that protect homeowners and that set strong capital and
loan reserve standards that allow credit unions to lend in their
communities during a downturn, much like the one we are facing right
now.
Mr. Hauptman was a trader at Lehman Brothers when it failed,
accelerating the financial crisis. You'd think he'd understand what a
financial crisis can mean, yet he has spent his career railing against
the Dodd-Frank Act.
Credit unions were created when other financial institutions
weren't serving all their customers, and we've often seen them help
those that big banks leave behind, including workers, including black
and brown communities. Now is the time to implement even stronger
protections that safeguard consumers and our financial system. If
confirmed to the NCUA Board, Mr. Hauptman will need to make sure that
the credit union system continues to serve these communities, which
means doing more to protect credit union members, not rolling back
regulations.
Mr. Hauptman has no credit union experience. He says he wants this
job because people who love their financial institution are usually
credit union members. But being glad that credit unions serve their
customers isn't a reason that he is qualified to be one of the three
top credit union regulators, it means he should be a credit union
customer.
Later today, this Committee will mark up the nomination of Judy
Shelton to be a member of the Federal Reserve Board. Even before the
pandemic, my colleagues and I were concerned about Dr. Shelton's
qualifications and commitment to helping working families, and her
independence from the President.
She has advocated for failed Depression-era policies like a return
to the gold standard and the removal of deposit insurance. And, at her
nomination hearing, she failed to explain how she would handle an
economic crisis.
That hypothetical economic crisis is now a reality, but we have no
idea how Dr. Shelton would respond.
This is why it is so important to carefully evaluate nominees--
based on their record, experience, and service to the American people--
that is who you all ultimately serve.
A regulator's job is not to do favors for Wall Street firms and
corporate interest groups or revive debunked economic theories. We
entrust regulators to make sure that all Americans can prosper in a
safe financial system and a fair economy. Today we need to hear from
you how you will help and protect the people that make our economy
work.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF HESTER PEIRCE
To Be a Member of the Securities and Exchange Commission
July 21, 2020
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for considering my nomination to be a member of the
Securities and Exchange Commission. Having served as a Commissioner for
2\1/2\ years, I am honored that the President has nominated me to serve
another term. If confirmed, I look forward to using the next 5 years--
alongside the dedicated, experienced SEC staff--to unleash the power of
our securities markets in order to brighten more children's futures,
build more Americans' retirement nest eggs, transform more communities
across the Nation, and rebuild an economy weakened by COVID. I am
delighted about the possibility of serving with Caroline Crenshaw,
whose experience at the Commission, in the military, and in private
practice would enrich our deliberations as a Commission.
I have spent the last 20 years working on financial regulation.
Part of that time was spent working for Senator Shelby on this
Committee, and more than half of that time has been at the SEC. The
agency has been extremely productive under the effective leadership of
Chairman Jay Clayton. I have enjoyed helping to carry out his
regulatory, compliance, and enforcement agenda.
On the regulatory front, we have enhanced retail investor
protection by, among other things, codifying a regulatory framework for
exchange-traded funds, adopting a best interest standard for retail
brokers, and streamlining variable product disclosures. We also have
applied a benefit-cost lens to public company regulatory obligations,
initiated changes to equity market structure so it can serve investors
and companies of all sizes, and scaled regulatory requirements for
small entities. We have worked--with urging from me, the ever vocal
Midwesterner--to streamline the capital raising process for small
companies and entrepreneurs all across the country, not just on the
coasts. We also have provided temporary relief for firms adjusting to
the work-from-home environment and to small businesses trying to raise
funds to survive the COVID crisis.
An integral complement to our regulatory work is the Commission's
compliance function--which includes inspecting firms and engaging with
them as they seek to apply the rules to their unique facts and
circumstances. I have supported cooperation with other regulators and
compliance personnel at registered entities to maximize our collective
coverage and effectiveness. I also have advocated taking advantage of
new technologies in overseeing the markets, with due consideration for
legitimate concerns about data protection and over-surveillance.
On the enforcement side, we have brought charges against entities,
large and small, and individuals for a wide range of securities
violations. Most recently, we have gone after securities violators
hiding behind purported COVID-19 cures. Human nature being what it is,
there is no dearth of bad conduct. Consequently, I have worked to focus
our enforcement resources where they can make the most difference for
investors and our markets.
Collaboration with domestic and international colleagues runs
through everything the Commission does. I had the opportunity to work
with Commissioner Brian Quintenz of the Commodity Futures Trading
Commission as we stood up our Dodd-Frank security-based swap regulatory
regime. On the same issue, I cooperated with international counterparts
to minimize market disruption and conserve regulatory resources. As the
Commission's representative on one of the Financial Stability Board's
Standing Committees, I have supported sharing information and
conducting joint analyses, but also have emphasized that decisions
about how to regulate the U.S. markets need to be made here at home.
One concern I had going into the job was the difficulty regulatory
agencies have dealing appropriately with innovation in and disruption
of the industries they regulate. This problem is an institutional one--
large bureaucratic organizations, whether public or private, do not
handle change particularly well. I know, however, that the Commission
can do better. If confirmed, in addition to continuing my work on
strengthening the regulatory framework, I will redouble my efforts to
create a more welcoming environment for innovation and new entrants. If
the Commission takes up that challenge with the necessary seriousness
and alacrity, our capital markets will remain dynamic, vibrant, and
preeminent.
Thank you for considering my nomination, and I would be happy to
answer your questions.
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PREPARED STATEMENT OF CAROLINE CRENSHAW
To Be a Member of the Securities and Exchange Commission
July 21, 2020
Chairman Crapo, Ranking Member Brown, and distinguished Senators of
the Committee: Thank you for the opportunity to appear here today. It
is an honor to testify before you regarding my nomination to be a
Commissioner of the Securities and Exchange Commission, where I have
worked for the past 7 years, and in whose mission I deeply believe.
To begin, I want to thank all those who have encouraged and
supported me through this process: family, friends, colleagues, members
of Congress and their talented staff, and many others whom I did not
know prior to my nomination. It has been an educational and memorable
journey.
America's capital markets have powered the largest, most vibrant
economy in the world. But our economy is facing unprecedented
challenges and, now more than ever, I believe we must do all we can to
keep our markets transparent, competitive, and safe. All Americans must
have the confidence to invest their hard-earned savings in their
futures.
That is the critical mission of the SEC, and it is the reason why I
chose to transition my career from private practice to public service.
I began my time at the SEC as a career staff attorney in the Office of
Compliance Inspections and Examinations, helping oversee the
institutions that manage millions of Americans' savings. More recently,
I served as Counsel to two dedicated public servants, Commissioners
Kara Stein and Robert Jackson, focusing on strengthening investor
protections in our increasingly complex markets. It has been my great
privilege to support the SEC's mission for the better part of a decade
and see up close how our securities laws are built--case-by-case and
rule-by-rule.
But it's not just that experience that brings me before you today.
I also carry with me the stories of soldiers, family, and friends who
give the SEC's mission real meaning. As a Captain in the United States
Army Reserve, Judge Advocate General's Corps, that mission means making
sure my fellow Soldiers have a fighting chance to secure the financial
futures they deserve.
As a sister of an entrepreneur, it means making sure our markets
unite job-creating capital with individuals like my brother, who
recently started a small business developing 3D printing technology for
military uses. And, as a new mother, it means promoting the level
playing field that will allow my family, and millions of other American
families, to fund the rising costs of education by safely and
confidently investing in our markets.
If confirmed, I intend to bring all of these experiences--from
sister to staffer to Soldier--to bear on the SEC's mission.
That's why, if I have the honor of joining the Commission, you can
count on me to be a tireless advocate for the ordinary American
families who are the backbone of our economy. One of the biggest
challenges for those families--and for the Commission--is the
retirement crisis facing the country. The Nation's shift from defined
benefit pension plans--which my parents, and their parents, relied upon
for their futures--to defined contribution plans, moved the
responsibility of lifelong saving from employers to individuals. That
has left too many hard-working Americans without sufficient resources
for retirement.
With investment decisions now largely in the hands of individual
Americans, the Commission should do all it can to ensure everyone gets
a fair deal. The Commission should provide tools that allow individuals
to distinguish between financial advisers and fraudsters and to fund
their retirements in safe and sustainable ways. These tools include
clear, plain-English information and access to high-quality investment
advice. Moreover, if confirmed, I would draw on my experience to make
sure the Commission keeps a close watch over the large institutions
increasingly entrusted with the growth and safekeeping of Americans'
savings.
As a Washington, D.C., native who grew up just blocks away on
Capitol Hill, I have had the great benefit of being surrounded by
dedicated public servants of all political stripes for my entire life.
If I have the honor of being confirmed, I will bring with me that
commitment to public service and appreciation for diverse views as the
Commission considers how best to help Americans grapple with the
economic challenges before us.
Thank you for your time. I would be delighted to answer any
questions you might have.
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PREPARED STATEMENT OF KYLE HAUPTMAN
To Be a Member of the National Credit Union Administration Board
July 21, 2020
Thank you Chairman, Ranking Member Brown, and Members of the
Committee. It's an honor to be here. I'd like to thank the President
and his team, plus the NCUA staff that have been so helpful. I want to
especially thank Senator Cotton for his support throughout this
process.
I'd like to say hello to those watching online, especially my wife
Kelly, who is pregnant with our first child, my brother Gabe and his
husband Geoff, my siblings-in-law Katie and Marcus, and my parents-in-
law Sue and Mike.
When offered this nomination, I accepted immediately. It's a chance
to help over 120 million credit union members achieve their financial
goals. And if you encounter someone who actually loves their financial
institution, there's a good chance you're speaking to a credit union
member.
These last few months have demonstrated the cooperative nature of
credit unions, as they've waived fees and adjusted loans without before
anyone in D.C. told them to do so. Many of us also recall the last
Government shutdown when credit unions gained members by offering
interest-free loans to furloughed workers. But this reputation depends
on proper oversight from NCUA.
Before the Senate I worked on regulatory policy, including serving
on a bipartisan SEC Advisory Committee. Prior to that I was in the
financial sector, focused on the same money markets where credit unions
obtain financing. Twelve years ago, I was a mid-level employee working
in Asia for Lehman Brothers, and wound up losing my job, my savings and
my work visa all due to management that didn't fully understand the
risks they were taking. That experience showed me first-hand the risks
associated with liquidity, interest-rates and balance-sheet management.
This perspective should be both valuable and somewhat unique on the
NCUA Board.
One of the best parts of serving in the Senate has been working
with Arkansas credit unions and their companions in the Cornerstone
Credit League in Texas and Oklahoma. I'm confident that if you speak to
them, they'll tell you I've been knowledgeable and attentive regarding
their concerns. And while I value those relationships, you can be sure
I'll be an independent regulator who works only for credit union
members and the taxpayers who back NCUA insurance.
In addition to my passion for financial policy, I have an interest
in public service due to my upbringing. My father worked in the
National Park Service for 32 years. Unfortunately, in the last 3 years
both he and my mother passed away, but I think they'd be proud to see
me here. I should mention that both were lifetime Democrats, my mother
a Bernie Sanders supporter.
On a related note, my Senate colleagues will tell you I work in a
bipartisan fashion. I've worked on legislation with the majority of
Committee Democrats, including with Ranking Member Brown's staff on
reforming anti- money-laundering laws. I've been impressed with the
character and acumen of the Democratic staff, and in fact several have
been to my home.
Credit unions help people achieve the same American dream that my
dad experienced, born in Brooklyn to parents with 4th-grade educations.
His dad, my grandfather, worked in the NYC subway putting up
advertising. That man's grandson is now before the U.S. Senate, a
testament to American opportunity, and at NCUA my overarching goal will
be extending that kind of opportunity to as many people as possible.
I'll have three priorities at NCUA: Priority number one is the same
as America's: managing the fallout from the current pandemic and
economic downturn. Over 50 million people have filed for unemployment
since March. While the 2008 crisis began in the financial sector and
then hit Main Street, our current crisis may be the reverse. Credit
unions were chartered to serve those of modest means, and I plan to
work with them, the Board and Congress on solutions for those facing
financial stress.
My second priority is technology. The pandemic created a test case
on how many things, such as this hearing, can be done remotely or
online. I'd like to expand technology's role in reaching the
underserved. If we recall the litigation years ago about Blockbuster
Video's late fees and market dominance, the ultimate solution was
American startups like Netflix. While this analogy doesn't perfectly
align with credit unions, I'm convinced innovation can provide more
inclusive financial services.
And last: Aligning incentives. As we know from the last crisis, we
get what we incentivize. One excellent policy that serves as a model
here is the less-frequent exam cycle for credit unions that get the
highest marks on their NCUA exams for safety and stability. This policy
lets regulators focus on more problematic credit unions, while the
well-run credit unions strive to keep earning that benefit. This is
policy where safety and soundness are well-aligned with serving
members. Do this correctly, and we'll combat poor-quality high-priced
products with better, lower-priced ones.
Thank you again for this opportunity, and I look forward to your
questions.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM HESTER PEIRCE
Q.1. Last year, I introduced S. 2155, the Stop Wall Street
Looting Act of 2019, to reform the private equity industry and
end abusive leveraged buyouts. \1\
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\1\ Office of Senator Warren, ``Warren, Baldwin, Brown, Pocan,
Jayapal, Colleagues Unveil Bold Legislation to Fundamentally Reform the
Private Equity Industry'', July 18, 2019, https://
www.warren.senate.gov/newsroom/press-releases/warren-baldwin-brown-
pocan-jayapal-colleagues-unveil-bold-legislation-to-fundamentally-
reform-the-private-equity-industry.
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Private equity transactions are fueled by risky loans that
are immediately securitized and sold. \2\ A provision in my
bill would help protect the economy from risks stemming from
excessive debt imposed on private equity firms' target
companies. It would require arrangers of corporate loan
securitizations to retain risk by clarifying that managers of
collateralized debt obligations are subject to risk retention
requirements established in the Dodd-Frank Wall Street Reform
and Consumer Protection Act. \3\
---------------------------------------------------------------------------
\2\ Washington Post, ``The Shadow Banks Are Back With Another Big
Bad Credit Bubble'', Steven Pearlstein, May 31, 2019, https://
www.washingtonpost.com/business/economy/the-shadow-banks-are-back-with-
another-big-bad-credit-bubble/2019/05/31/a05184de-817a-11e9-95a9-
e2c830afe24f-story.html.
\3\ Securities and Exchange Commission, ``Asset-Backed
Securities'', October 23, 2014, https://www.sec.gov/spotlight/dodd-
frank/assetbackedsecurities.shtml.
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Do you believe that arrangers of corporate loan
securitizations should retain risk to prevent dangerous loans
that are immediately passed onto unknowing investors?
A.1. Dodd-Frank's risk retention provisions seek to align the
interests of originators of loans with the investors in loan
securitizations. Investors might benefit from--and could
demand--similar alignment from non-originating managers of
securitizations, but that alignment could be more costly to
achieve than it would be for an originating manager, and these
costs would be passed on to the investors. Alignment of
interests through other means, such as performance-based
compensation agreements, might be cheaper and have proved
effective in the past. In 2018, the United States Court of
Appeals for the District of Columbia held that Dodd-Frank's
risk retention provisions do not reach non-originating managers
of collateralized loan obligation securitizations. \4\ That
said, if Congress directs the SEC and other regulators to apply
the risk retention rules to all arrangers of corporate loan
securitizations, I will work to put that mandate in place.
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\4\ Loan Syndications & Trading Ass'n, 882 F.3d 220 (D.C. Cir.
2018).
Q.2. If not, how, if at all, you would you mitigate risky
corporate lending and the ability of lenders to spread private
equity debt across financial institutions? How would you ensure
that regulators have the appropriate information to assess the
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exposure of financial markets to leveraged loans?
A.2. From the SEC's vantage point as a securities regulator,
the SEC has several points of interaction with the
Collateralized Loan Obligation (CLO) marketplace. First, we
have brought actions against private equity advisers for
violating the securities laws. Second, sales of asset-backed
securities, including those backed by loans, are subject to the
securities laws. Third, we oversee the agencies that rate CLOs.
Finally, the SEC has been working to understand better the CLO
markets, including which entities hold the different tranches
of CLOs. In our work in this area, we have benefited from the
work of our Investor Advisory Committee and collaboration with
other regulators, here and abroad.
Q.3. Leveraged Lending--In November 2018, I sent a letter to
SEC Chairman Clayton, Treasury Secretary Steven Mnuchin,
Federal Reserve Chairman Jerome Powell, then-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. \5\
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\5\ 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%20Regulatorhttps://www.sec.gov/spotlight/
dodd-frank/assetbackedsecurities.shtmls%20on%20Leveraged%20Lending.pdf.
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In a section addressed to Chairman Clayton, I stated that
the Volcker Rule is intended to restrict bank involvement with
external funds and that trade associations have asked the SEC
to significantly loosen Volcker Rule controls. The SEC
completed its rollbacks of the Volcker Rule in September 2019,
which you strongly supported. \6\ 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.' '' \7\
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\6\ 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; U.S. Securities and Exchange
Commission, ``SEC Adopts New Rules and Amendments under Title VII of
Dodd-Frank'', press release, September 19, 2019, https://www.sec.gov/
news/press-release/2019-182.
\7\ 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.
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Chairman Clayton's January response provided a procedural,
but not a substantive, explanation of the status of SEC's
proposed amendments to the Volcker Rule. \8\
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\8\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, January 31, 2019.
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Do you view leveraged lending as a risk? If so, what
actions should the SEC take to mitigate the risks associated
with leveraged lending?
A.3. Leveraged lending merits watching. As noted above, it is
an area that the SEC and other regulators are actively
monitoring. Among other things, we monitor our regulated
entities' exposure to leveraged loans, particularly loans with
lower credit quality.
Q.4. Please explain the SEC's rationale for removing
protections against excessive risks under the Volcker Rule.
A.4. The SEC joined with other financial regulators to revisit
the Volcker Rule. The changes came in response to concerns that
the rule was inhibiting beneficial activity by banking
entities. Working with our fellow regulators, we determined
that there were ways to achieve the Volcker Rule's objectives
in a less costly manner. Among other concerns, I was worried
that the rule was preventing banking entities from engaging in
traditional lending and market making activities. The
amendments simplify, clarify, and tailor the rule without
undermining its objective.
Q.5. Commissioner 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.'' \9\
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\9\ Id.
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Please describe any evidence that the amendments rolling
back the Volcker Rule are beneficial to the safety and security
of securities markets.
A.5. In connection with each of the Volcker rulemakings, we
engaged in economic analysis. While there are limitations on
this forward-looking analysis, it helped us to identify areas
where a change in the implementing regulations could enable
banking entities to engage in activities that are beneficial to
market liquidity and consistent with the Volcker Rule. I had
particular concerns that the Volcker Rule was adversely
affecting market making, which is essential to well-functioning
markets. \10\ Simplifying rules, which is what the Volcker
amendments sought to accomplish, removes legal uncertainty and
therefore gives market participants confidence to participate
in markets. Strained liquidity in fixed income markets over the
last 6 months suggests that it is very important for us to
continue examining the Volcker Rule to ensure that it is
properly calibrated to achieve its important objectives without
impairing market function.
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\10\ See, e.g., Meraj Allahrakah, et al., ``The Effects of the
Volcker Rule on Corporate Bond Trading: Evidence From the Underwriting
Exemption'', OFR Working Paper (Aug. 6, 2019), available at https://
www.financialresearch.gov/working-papers/2019/08/06/the-effects-of-the-
volcker-rule-on-corporate-bond-trading/; Jack Bao et al., ``The Volcker
Rule and Market Making in Times of Stress'', Federal Reserve Working
Paper (Sept. 2016), available at https://www.federalreserve.gov/
econresdata/feds/2016/files/2016102pap.pdf.
Q.6. Inflated Bond Ratings--In September, I wrote Chairman
Clayton 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. \11\ In his November response, Chairman Clayton
stated that he shared my concerns about conflicts of interest
in rating agency compensation models and said that he is
awaiting recommendations or advice from various advisory
committees. \12\
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\11\ Council on Foreign Relations, ``The Credit Rating
Controversy'', CFR Staff, February 19, 2015, https://www.cfr.org/
backgrounder/credit-rating-controversy.
\12\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, November 21, 2019.
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Have senior officials the SEC 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?
A.6. Since your exchange of letters with Chairman Clayton, the
Fixed Income Advisory Committee provided us recommendations
with respect to credit rating agencies. Specifically, in June
2020, the Committee recommended that the SEC: (1) increase
disclosure by Nationally Recognized Statistical Rating
Organizations (NRSROs), (2) enhance issuer (corporate and
securitized) disclosures, and (3) create a mechanism for
bondholders to vote on the issuer-selected NRSROs. \13\ In May
2020, the SEC's Investor Advisory Committee held a panel
discussion regarding credit rating agencies. \14\
---------------------------------------------------------------------------
\13\ Fixed Income Market Structure Advisory Committee,
``Recommendations Regarding Ways To Mitigate Conflicts of Interest in
Credit Ratings'' (June 1, 2020), available at https://www.sec.gov/
spotlight/fixed-income-advisory-committee/fimsac-recommendations-
credit-ratings-subcommittee.pdf.
\14\ Investor Advisory Committee (May 21, 2020), agenda available
at https://www.sec.gov/spotlight/investor-advisory-committee-2012/
iac052120-agenda.htm, and webcast available at https://www.sec.gov/
video/webcast-archive-player.shtml?document-id=iac052120.
Q.7. If so, please explain the SEC's instructions and any
requested deadlines. Additionally, please explain if these
---------------------------------------------------------------------------
recommendations or advice will be made public.
A.7. The Fixed Income Advisory Committee's recommendations are
publicly available. \15\ The Investor Advisory Committee might
submit a recommendation in the future, but the Commission does
not dictate their agenda or work schedule. If the IAC does make
a recommendation, it will be publicly available on the SEC's
website. \16\
---------------------------------------------------------------------------
\15\ Ways to Mitigate Conflicts of Interest in Credit Ratings
(June 1, 2020), available at https://www.sec.gov/spotlight/fixed-
income-advisory-committee/fimsac-recommendations-credit-ratings-
subcommittee.pdf.
\16\ Spotlight on the Investor Advisory Committee, https://
www.sec.gov/spotlight/investor-advisory-committee.shtml
(recommendations are at the bottom of the page).
Q.8. Please 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 senior SEC staff,
have had with these advisory committees regarding any
---------------------------------------------------------------------------
anticipated timelines or deadlines for their conclusions.
A.8. In June 2020, the Fixed Income Advisory Committee
recommended that the SEC: (1) increase disclosure by Nationally
Recognized Statistical Rating Organizations (NRSROs), (2)
enhance issuer (corporate and securitized) disclosures, and (3)
create a mechanism for bondholders to vote on the issuer-
selected NRSROs. \17\ In May 2020, the SEC's Investor Advisory
Committee held a panel discussion regarding credit rating
agencies. \18\ I have not communicated with the advisory
committees regarding anticipated timelines or deadlines and am
not aware of any specific communications on those matters by
others at the Commission.
---------------------------------------------------------------------------
\17\ Fixed Income Market Structure Advisory Committee,
``Recommendations Regarding Ways To Mitigate Conflicts of Interest in
Credit Ratings'' (June 1, 2020), available at https://www.sec.gov/
spotlight/fixed-income-advisory-committee/fimsac-recommendations-
credit-ratings-subcommittee.pdf.
\18\ Investor Advisory Committee (May 21, 2020), agenda available
at https://www.sec.gov/spotlight/investor-advisory-committee-2012/
iac052120-agenda.htm, and webcast available at https://www.sec.gov/
video/webcast-archive-player.shtml?document-id=iac052120.
Q.9. Chairman Clayton's response also referenced some work that
the SEC has done to respond to the conflicts of interest in the
issuer-pays model. \19\ 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.'' \20\
---------------------------------------------------------------------------
\19\ Id.
\20\ 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.
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In your view, why has the SEC's efforts to respond to the
conflicts of interest have failed to prevent bond rating
agencies from artificially inflating bond ratings?
A.9. The SEC has a robust and detailed regulatory framework
governing NRSROs. The rules require NRSROs among other things,
to implement internal controls, manage their conflicts of
interest, have a compliance function, and make certain
disclosures. The SEC's Office of Credit Ratings conducts annual
examinations of the NRSROs. We also have brought enforcement
actions against NRSROs. \21\ While our rules governing NRSROs
are robust, we are statutorily prohibited from prescribing the
substance of credit ratings or the methodologies by which they
are produced. \22\ We continue to review our regulatory
framework to ensure that it appropriately addresses conflicts
of interest and allows new entrants to come into the industry.
---------------------------------------------------------------------------
\21\ See, e.g., ``SEC Orders Credit Rating Agency To Pay $3.5
Million for Conflicts of Interest Violations'' (May 15, 2020), https://
www.sec.gov/news/press-release/2020-112.
\22\ See Section 15E(c)(2) of the Securities Exchange Act of 1934,
15 U.S.C. 78o-7(c)(2).
Q.10. Chairman Clayton's 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.'' \23\
---------------------------------------------------------------------------
\23\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, November 21, 2019.
---------------------------------------------------------------------------
Please describe any near-term discussions you have had with
national and international regulatory colleagues on this topic.
A.10. As the SEC's representative on the Financial Stability
Board's Standing Committee on Assessment of Vulnerabilities
(SCAV), I have had the opportunity to discuss issues related to
credit ratings and the use of credit ratings by market
participants, particularly during the economic stress we are
now experiencing. The SCAV is seeking to coordinate its work in
this area with the work of other international organizations,
such as the International Organization of Securities
Commissions.
Q.11. Please describe any communications you have had with SEC
staff regarding these issues.
A.11. I receive regular updates from the Office of Credit
Ratings on their oversight of NRSROs and on major credit rating
actions the NRSROs take. I consult with the staff from time to
time about issues related to conflicts of interest at NRSROs.
Q.12. Climate Risk Disclosure--In July, Representative Sean
Casten (D-IL-06) and I introduced H.R. 3623/S. 2017, the
Climate Risk Disclosure Act of 2019. \24\ 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.
---------------------------------------------------------------------------
\24\ 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.
---------------------------------------------------------------------------
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. \25\ 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. \26\
---------------------------------------------------------------------------
\25\ New York Times, ``U.S. Climate Report Warns of Damaged
Environment and Shrinking Economy'', Coral Davenport and Kendra Pierre-
Louis, November, 23, 2018, https://www.nytimes.com/2018/11/23/climate/
us-climate-report.html.
\26\ The Economist Intelligence Unit, ``The Cost of Inaction'',
2015, p. 41, https://eiuperspectives.economist.com/sites/default/files/
The%20cost%20of%20inaction-0.pdf.
---------------------------------------------------------------------------
Do 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?
A.12. Yes, this disclosure could be useful to investors if it
is material. Our principles-based disclosure approach is
designed to elicit from public companies material information
about risks to the long-term value of the company arising from
events, including climate-related events.
Q.13. Do 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 towards a lower-carbon economy?
A.13. The principles-based disclosure framework is intended to
elicit company-specific disclosure about material risks to the
long-term financial value of the company, including risks from
Government regulation. Regulation that limits greenhouse gas
emissions could trigger disclosure obligations related to
greenhouse gas emissions for some companies under existing
regulation. \27\
---------------------------------------------------------------------------
\27\ See, e.g., ``Commission Guidance Regarding Disclosure Related
to Climate Change'' (Feb. 2, 2010), available at https://www.sec.gov/
rules/interp/2010/33-9106.pdf.
Q.14. 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.'' \28\ 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.
---------------------------------------------------------------------------
\28\ Government Accountability Office, ``Climate-related Risks'',
February 2018, pp. 17-18, https://www.gao.gov/assets/700/690197.pdf.
---------------------------------------------------------------------------
If 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.14. The SEC's Division of Corporation Finance has a filing
review process whereby the staff selectively reviews filings
both to monitor and to enhance compliance with disclosure and
accounting requirements under the securities laws. With respect
to climate change and other issues about which disclosure might
be required, Corporation Finance staff does not have subpoena
power and does not require companies to provide the SEC with
information to engage in an independent assessment of the
adequacy of the companies' disclosure. Nevertheless, there is a
robust iterative process between SEC staff reviewing filings
and counsel for the companies whose disclosure is being
reviewed. Importantly, companies face legal liability for
disclosure that is materially false or misleading.
Q.15. Regulation Best Interest (Reg BI)--In June 2019, SEC
approved Reg BI, which despite Congress' instruction in
sections 913(f) and 913(g) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act establishes neither a uniform
standard for broker-dealers and investment advisers, nor a
fiduciary standard for broker-dealers. \29\ Then-Commissioner
Robert J. Jackson, Jr., described the rule as ``a muddled
standard that exposes millions of Americans to the costs of
conflicted advice.'' \30\ 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.'' \31\ Instead, Reg BI imposes a limited requirement
to disclose conflicts.
---------------------------------------------------------------------------
\29\ 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.
\30\ 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.
\31\ 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.
---------------------------------------------------------------------------
The SEC rule left ``best interest,'' the key term that
describes the standard of conduct for broker-dealers,
undefined. \32\
---------------------------------------------------------------------------
\32\ U.S. Securities and Exchange Commission, Federal Register
Notice, ``Regulation Best Interest: The Broker-Dealer Standard of
Conduct'', July 12, 2019, https://www.federalregister.gov/documents/
2019/07/12/2019-12164/regulation-best-interest-the-broker-dealer-
standard-of-conduct.
---------------------------------------------------------------------------
Do you believe the standard should have defined ``best
interest,'' as several commenters on the rule discussed? \33\
---------------------------------------------------------------------------
\33\ Id.
A.15. No. A more principles-based approach is better suited to
reach the wide array of facts and circumstances that arise in
---------------------------------------------------------------------------
interactions between retail investors and broker-dealers.
Q.16. Why did the SEC decline to define ``best interest?''
A.16. Speaking for myself, I was concerned that defining best
interest could inadvertently limit the standard's
effectiveness. Because the relationships between retail
customers and their broker-dealers are not uniform, it is
important to have a standard that can cover a wide range of
interactions. Moreover, it is important that broker-dealers
understand that this standard is not a check-the-box standard;
it is a standard they need to internalize so that it governs
all their dealings with and actions on behalf of customers.
Q.17. Reg BI states if ``a broker-dealer cannot fully and
fairly disclose a conflict of interest,'' a broker-dealer
``should eliminate the conflict or adequately mitigate the
conflict,'' but it does not define what adequate mitigation
looks like. \34\
---------------------------------------------------------------------------
\34\ U.S. Securities and Exchange Commission, Federal Register
Notice, ``Regulation Best Interest: The Broker-Dealer Standard of
Conduct'', July 12, 2019, https://www.federalregister.gov/documents/
2019/07/12/2019-12164/regulation-best-interest-the-broker-dealer-
standard-of-conduct.
---------------------------------------------------------------------------
Why did the SEC decline to define adequate mitigation in
Reg BI?
A.17. I can only speak for myself. Mitigation is not a one-
size-fits-all tool. Rather, a broker-dealer needs to assess its
conflicts and determine whether eliminating them is necessary
or mitigation is possible. I wanted broker-dealers to have the
flexibility to develop and tailor reasonably designed
mitigation measures based on their circumstances, including
size, the nature of their retail customer base, and the
complexity of the recommended security or investment strategy.
I also wanted broker-dealers to know that they cannot ``set it
and forget it,'' but must review mitigation measures, in light
of experience, to make sure they are still working.
Q.18. How do you define adequate mitigation?
A.18. In general, adequate mitigation means that the conflict
of interest is reduced to ensure that the customer is
protected, but what that means precisely differs along with the
facts and circumstances. The adequacy of the mitigation depends
on, for example, the size, retail customer base, nature and
significance of the conflict, and complexity of the product.
What is adequate in a small firm with a sophisticated retail
investor base, for example, may not be adequate for a large
firm with a wider range of retail customers. Some conflicts in
some situations can be mitigated by disclosure, while in other
situations additional measures--such as a surveillance program
to monitor sales activity near compensation thresholds--might
be necessary. Other measures that might adequately mitigate a
conflict include (but are not limited to) minimizing
compensation incentives that favor one product over another,
avoiding compensation schemes in which an incremental increase
in sales can disproportionately increase compensation, and
tying compensation to appropriate management of conflicts of
interest.
Q.19. In your view, what if any distinction exists between the
``best interest'' standard of conduct set forth in the SEC rule
and the ``suitability'' standard established by the Financial
Industry Regulatory Authority that predated it? \35\
---------------------------------------------------------------------------
\35\ Financial Industry Regulatory Authority, ``Suitability'',
Accessed July 23, 2020, https://www.finra.org/rules-guidance/key-
topics/suitability.
A.19. Although the best interest standard contains elements of
the suitability standard, it is a broader, more holistic
standard. FINRA's suitability standard required broker-dealers,
in making a recommendation, to ``have a reasonable basis to
believe that a recommended transaction or investment strategy
involving a security or securities is suitable for the
customer, based on the information obtained through the
reasonable diligence of the broker-dealer or associated person
to ascertain the customer's investment profile.'' \36\ The best
interest standard applies more broadly and imposes an
overarching obligation for broker-dealers to act in the best
interest of their retail customers and not place their own
interest ahead of the retail customer's interest. Under the
best interest standard, a broker-dealer must comply with four
obligations--Disclosure, Care, Conflict of Interest, and
Compliance--each of which has specific regulatory components.
---------------------------------------------------------------------------
\36\ FINRA Rule 2111(a).
Q.20. In response to the SEC's proposal for Reg BI, a
bipartisan group of 11 former SEC senior economists wrote in a
comment, ``[w]e find it worrisome that the proposals' economic
analysis does not fully consider some potentially important
dimensions of the retail client-adviser relationship.'' \37\
---------------------------------------------------------------------------
\37\ Carnegie Mellon University, ``Professor Chester Spatt
Criticizes Proposed SEC Regulation'', press release, February 25, 2019,
https://www.cmu.edu/tepper/news/stories/2019/february/chester-spatt-
sec-regulation.html.
---------------------------------------------------------------------------
Do you believe the cost-benefit analysis that supports Reg
BI was sufficient?
A.20. The economic analysis supporting the adoption of Reg BI
was extensive. The Commission drew on comments received in
response to the proposal to develop a more robust economic
analysis in connection with the adoption of the rule. That
analysis discusses more fully the potential problems associated
with broker-dealers' provision of recommendations to retail
customers, the economic literature on financial advice, and the
effectiveness of the disclosure requirements of Regulation Best
Interest. That said, any economic analysis of a prospective
rule involves assumptions, uncertainties, and data gaps. Now
that the rule has taken effect, we will have the opportunity to
assess whether it is working as intended.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM HESTER PEIRCE
Q.1. What are the personal and professional costs to
whistleblowers that concern you? How can the SEC mitigate those
concerns?
A.1. Whistleblowers have proven to be valuable contributors to
our enforcement program. In order to come forward to us, a
whistleblower may face personal and professional repercussions.
Consequences for a whistleblower can include losing a job;
reputational damage in the industry, which can make finding a
new job difficult; suffering rejection by friends and
colleagues; and threats or harassment. These consequences of
whistleblowing concern me.
Through our whistleblower program, we seek to both
adequately reward meritorious whistleblowers and sufficiently
incentivize future whistleblowers. Since the program started,
the SEC had awarded approximately $505 million to 87
whistleblowers. \1\ Whistleblower awards cannot compensate for
all of these adverse consequences, but can make up for lost
income--past and future. In addition, we provide a means for
whistleblowers to come to us anonymously, which can reduce
adverse consequences. The SEC can take legal action against
employers who have retaliated against whistleblowers by
discharging, demoting, suspending, harassing, or in any way
discriminating against an employee who reported conduct that
the employee reasonably believed violated the Federal
securities laws. Our rules also prohibit actions taken to
impede a whistleblower.
---------------------------------------------------------------------------
\1\ SEC Issues $3.8 Million Whistleblower Award, SEC Press Release
No. 2020-155 (July 14, 2020), available at https://www.sec.gov/news/
press-release/2020-155.
Q.2. How will including deferred prosecution agreements and
nonprosecution agreements as ``actions'' ensure whistleblowers
are not penalized as a result of the Government's decision to
---------------------------------------------------------------------------
pursue a particular litigation strategy?
A.2. In a 2018 proposal to amend the whistleblower rules, the
Commission proposed explicitly to include deferred prosecution
agreements and nonprosecution agreements as actions to ensure
that whistleblowers are not disadvantaged because of the
particular form of action selected by the Commission, the
Department of Justice, or a State attorney general. \2\ Under
the proposed amendment, the Commission would be able to make
award payments to whistleblowers based on money collected as a
result of such DPAs and NPAs, as well as under settlement
agreements entered into by the Commission outside of the
context of a judicial or administrative proceeding to address
violations of the securities laws. Explicitly including these
actions could enhance our ability to compensate whistleblowers
adequately for coming forward in situations when the Government
does not proceed with a formal judicial or administrative
proceeding.
---------------------------------------------------------------------------
\2\ Amendments to the Commission's Whistleblower Program Rules,
Exchange Act Release No. 83557 (June 29, 2018) [83 FR 34702, 34705
(July 20, 2018)].
Q.3. Should the SEC ensure that legitimate and honest reports
---------------------------------------------------------------------------
do not lead to retaliation for a whistleblower?
A.3. Yes, antiretaliation provisions are a central component of
our whistleblower program. We protect whistleblowers from
discharge, demotion, suspension, threats, harassment, and
discrimination in the terms or conditions of employment. We
have brought enforcement actions based on retaliatory conduct
and based on actions taken to impede reporting. \3\
---------------------------------------------------------------------------
\3\ See, e.g., Office of the Whistleblower, https://www.sec.gov/
whistleblower/retaliation#enforcement-actions.
Q.4. Will you ensure that whistleblower awards are paid out at
the highest amount possible so that it matches or exceeds the
---------------------------------------------------------------------------
overall costs to whistleblowing?
A.4. I have been very supportive of the whistleblower program
and will continue to seek to ensure, consistent with the
statutory authorization, that whistleblowers receive awards
that adequately compensate them. Section 21F of the Exchange
Act authorizes the SEC to make monetary awards to eligible
individuals who voluntarily provide original information that
leads to successful SEC enforcement actions resulting in
monetary sanctions over $1 million and successful related
actions. Awards must be made in an amount equal to 10 to 30
percent of the monetary sanctions collected. In voting on
awards within these ranges, I take into account the criteria
set forth in the statute and our rules, including the unique
hardships the whistleblower endured as a result of being a
whistleblower.
Q.5. What is the SEC doing to increase shareholder voting and
participation? How is the SEC ensuring votes are accurately
tabulated?
A.5. The SEC is undertaking a broad review of the proxy voting
process in order to ensure that shareholders are able to engage
with corporations, vote, and have confidence that their votes
are counted. These efforts began with a 2010 concept release on
the proxy system \4\ and a roundtable in 2018. \5\ Because many
retail investors hold their shares through funds or otherwise
delegate their voting authority, the SEC issued guidance to
remind investment advisers that, when they exercise voting
authority on behalf of a client, they have a fiduciary duty to
vote the shares consistent with the client's objectives. \6\ In
addition, last week, the SEC adopted rule changes to ensure
that investors and others who vote on their behalf receive more
transparent, accurate, and complete proxy voting advice. \7\
Following the proxy roundtable, staff in the SEC's Division of
Corporation Finance have been working with participants in the
proxy voting process to generate ideas about improving the
voting process and ensuring that it accurately captures
shareholders' votes. New technologies, including blockchain,
might be helpful in this regard. Rulemakings regarding proxy
plumbing, modernization of the shareholder proposal process,
and universal proxy are on our short-term agenda. \8\ Finally,
our Office of Investor Advocate and Office of Investor
Education and Advocacy engage with investors across the country
on issues regarding voting. \9\
---------------------------------------------------------------------------
\4\ Concept Release on the U.S. Proxy System, Release No. 34-62495
(Jul. 14, 2010) [75 FR 42982 (July 22, 2010)].
\5\ Roundtable on the Proxy Process (Nov. 15, 2018), available at
https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf.
\6\ ``Commission Guidance Regarding Proxy Voting Responsibilities
of Investment Advisers'', Release No. IA5325 (Aug. 21, 2019), [84 FR
47420 (Sept. 10, 2019)].
\7\ Exemptions from Proxy Rules for Proxy Voting Advice, Release
No. 34-89372 (July 22, 2020), available at https://www.sec.gov/rules/
final/2020/34-89372.pdf.
\8\ See https://www.reginfo.gov/public/do/
eAgendaViewRule?pubId=202004&RIN=3235-AM16, https://www.reginfo.gov/
public/do/eAgendaViewRule?pubId=202004&RIN=3235-AL84, and https://
www.reginfo.gov/public/do/eAgendaViewRule?pubId=202004&RIN=3235-AM49.
\9\ See, e.g., SEC, ``What Are the Mechanics of Voting Either in
Person or by Proxy?'', https://www.investor.gov/what-are-mechanics-
voting-either-person-or-proxy.
Q.6. How will you ensure that entities you oversee consider the
impact of increasingly severe storms, floods, and fires on
their firms? How will you ensure corporations are adequately
planning and accounting for widespread and potentially costly
damage to property serving as collateral for loans or to assets
---------------------------------------------------------------------------
underpinning other investments?
A.6. The entities we regulate, such as broker-dealers,
investment advisers, stock exchanges, and clearing agencies,
have business continuity plans in place to deal with natural
disasters. These business continuity plans are one thing our
Office of Compliance Inspections and Examinations looks at in
its exams. \10\ Registrants' business continuity plans have
been tested recently in events like Hurricane Sandy and the
ongoing COVID-19 crisis. While we lack authority to require
issuers of securities to mitigate risks that they may face from
severe weather or other events, we do require them to assess
and disclose to investors material information, including the
risks they face, including risks to their property and other
assets. Indeed, the Commission provided guidance on this topic
in 2010 to remind registrants that are vulnerable to severe
weather events to consider the need to disclose material risks
of or consequences from such events in their publicly filed
disclosure documents. \11\
---------------------------------------------------------------------------
\10\ ``SEC Examinations of Business Continuity Plans of Certain
Advisers Following Operational Disruptions Caused by Weather-Related
Events Last Year'' (Aug. 27, 2013), available at https://www.sec.gov/
about/offices/ocie/business-continuity-plans-risk-alert.pdf.
\11\ See, e.g., ``Commission Guidance Regarding Disclosure Related
to Climate Change'' (Feb. 2, 2010), available at https://www.sec.gov/
rules/interp/2010/33-9106.pdf.
Q.7. Do you think corporate disclosure of climate change risks
is adequate to inform investors of the economic and corporate
---------------------------------------------------------------------------
resilience to climate change?
A.7. Our principles-based disclosure regime is generally
effective at producing disclosure that is material to
investors. Climate change risks are not uniform across
companies, and assessments of those risks are based on
assumptions and models that are not static. Thus, corporate
disclosure is likely to change and improve over time as
underlying assumptions, scientific understanding, and modeling
techniques improve. As with many other risks companies face,
our principles-based disclosure regime is intended to
facilitate dynamic, company-specific disclosure that reflects
management's analysis of risks.
Q.8. What are the environmental transition risks for
corporations? What costs can they be expected to incur as the
world works to reduce its carbon footprint to mitigate global
warming?
A.8. Transition risks differ vastly across industries, and over
time these risks may change. For example, energy companies face
risks and opportunities from Government policy that favors or
disfavors certain types of energy. Other companies may see
their energy, travel, and building costs rise in response to
Government regulation of carbon emissions. Still other
companies may find that regulation prevents them from
conducting or funding research and development on the most
promising innovations. Our principles-based disclosure regime
is designed to elicit disclosure from companies that reflects
management's understanding of the unique risks and
opportunities they face based on their unique facts and
circumstances, including the regulatory frameworks within which
they operate.
Q.9. How can the SEC promote a long-term focus among publicly
traded companies?
A.9. The SEC can best achieve the objective of ensuring that
public companies focus on long-term value maximization by
resisting efforts to dilute the fiduciary obligations of
corporate managers and directors. Corporate governance, which
plays an important role in determining whether companies have a
long-term focus, is primarily a matter of State law.
Nevertheless, the SEC's disclosure mandates, when designed to
meet the needs of constituencies other than investors, can have
the effect of diverting management and board attention from
long-term value creation. The SEC can avoid this problem by
focusing on getting investors information that is material to
them. The SEC also is considering whether changes to its
quarterly reporting regime would help to mitigate concerns
about a short-term focus by public companies. \12\ This effort
follows a roundtable the SEC's Division of Corporation Finance
hosted last year on the topic of ``Short-Term/Long-Term
Management of Public Companies.'' \13\
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\12\ See, ``Request for Comment on Earnings Releases and Quarterly
Reports'', https://www.sec.gov/rules/other/2018/33-10588.pdf (Dec. 18,
2018) (``Some have suggested that the practice of providing quarterly
forward-looking earnings guidance creates an undue focus on short-term
financial results and thereby negatively affects the ability of
companies to focus on long-term results. Is this the case and, if so,
are there changes we could make to our rules that would discourage this
practice or address this concern?''). See also https://www.reginfo.gov/
public/do/eAgendaViewRule?pubId=202004&RIN=3235-AM40.
\13\ Roundtable on Short-Term/Long-Term Management of Public
Companies (July 18, 2019), available at https://www.sec.gov/video/
webcast-archive-player.shtml?document-id=roundtable-short-long-term-
071819.
Q.10. Please explain why you did not approve monetary penalties
or industry bans for individuals who were subject to an
---------------------------------------------------------------------------
enforcement action in the first 6 months of 2020?
A.10. The following table sets forth votes made public in the
first six months of 2020 in which I did not vote in support of
a monetary penalty or industry bar against an individual.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM CAROLINE CRENSHAW
Q.1. In its postmortem of the financial crisis, the Financial
Crisis Inquiry Commission concluded that ``compensation
structures were skewed all along the mortgage securitization
chain, from people who originated mortgages to people on Wall
Street who packaged them into securities.''
What is your view on the impact of incentive-based
compensation structures in the years leading up to the
financial crisis?
A.1. There is little doubt that banker-pay practices encouraged
excessive risk taking that contributed to the financial crisis.
Bonuses allowed bankers to capture the upsides of excessive
risk-taking but shielded them from the downside, incentivizing
executives to take on more risk than was optimal for the
companies or the economy. In particular, research has shown
that bankers sold billions of dollars in stock awards during
good times, leaving ordinary investors and taxpayers holding
the bag when their firms collapsed. See Lucian A. Bebchuk, Alma
Cohen, and Holger Spamann, ``The Wages of Failure: Executive
Compensation at Bear Stearns and Lehman 2000-2008, Yale J. on
Reg., at 257 (2010).
Q.2. If confirmed as Commissioner, would you push the SEC to
finish the incentive-based compensation rule required by Dodd-
Frank?
A.2. Yes. As I indicated during the hearing, one of my
priorities would be to complete the Dodd-Frank executive
compensation rules, and rules reining in banker-bonus practices
that put our financial system at risk should be a high
priority. If confirmed, I would make every effort to move this
rule forward.
Q.3. If so, what you think this rule should look like?
A.3. I want to be careful to avoid prejudging any matters that
might come before me if confirmed. With that in mind, I think
rules related to banker bonuses should address at least three
issues.
First, these rules should prohibit bonus structures that
encourage excessive risk-taking, and in particular should
address payment of significant cash bonuses on the basis of
short-term performance measures for activities related to long-
term risk taking. One way to address this would be to require
deferral periods during which bankers cannot cash out their
bonuses until the long-run consequences of their decisions can
be better understood by the banks and their regulators.
Second, the rule should require firms to claw back bonuses
that executives did not earn in light of long-run performance
measures. Regulators and firms must be able to assess bankers'
performance over the long run--and require the return of any
compensation executives did not truly earn--if we are to avoid
excessive short-term risk taking.
Third, these rules should address pay practices not just
for top executives, but for any bankers whose activities could
put America's financial stability at risk. The crisis showed
that even nonexecutives at our largest financial institutions
can take risks with disastrous consequences for ordinary
Americans. Any rules in this area should prohibit those
bankers, too, from being paid for short-run performance while
leaving taxpayers holding the bag for the long-run consequences
of those choices. If confirmed, I will urge the Commission and
other regulators to ensure that these rules are adopted--and
change the banker pay practices that put our financial
stability at risk.
Q.4. Since the start of the COVID pandemic, there has been a
sharp increase in scams linked to the coronavirus pandemic. The
number of claims relating to treatments, therapies and
equipment that promise big investor returns, has already led
the SEC to temporarily halt trading in the shares of more than
30 companies in an effort to protect investors.
In addition to stopping trading in shares of more than 30
companies and establishing a coronavirus steering committee,
what other steps do you believe the SEC needs to take to
protect investors from scams?
A.4. While I have been impressed with the Commission's response
to the issues COVID presents to the health and integrity of the
markets, there is more to do.
First, the Commission should aggressively educate retail
investors, particularly on solicitations for fraudulent
investment products offered through social media platforms.
Second, the Commission should devote significant effort and
resources to penalizing those who prey on individuals during a
pandemic when people are particularly vulnerable. And, as
necessary, the Commission should work with Congress to assess
whether the penalties for these frauds are calibrated optimally
to deter them.
Third, the Commission must work hand in glove with law
enforcement to ensure that any criminal conduct is fully
prosecuted. As always, the staff within the Division of
Enforcement have been doing excellent work under the current
conditions, and, if confirmed, I would look forward to
supporting their work.
Q.5. Are Main Street investors, investors whose savings are
their investment capital, more vulnerable to COVID related
scams? If so, what measures does the SEC specifically need to
take to protect the Main Street investor?
A.5. Every investor--from the most sophisticated institutional
investor to the young family building its nest egg--is entitled
to the protections provided by the Commission. However, certain
groups are more vulnerable than others. For example, members of
the military and the elderly are often the targets of Ponzi
schemes and other frauds that have become endemic during this
crisis.
It is imperative the Commission devote resources to
protecting those who are most vulnerable. To prevent fraud, the
Commission should prioritize investor education and advocacy--
give investors the tools to stop the fraud before it starts. To
deter fraud, the Commission should quickly and decisively
penalize perpetrators. Also, as noted above, the Commission
should work with Congress to assess whether the penalties for
these frauds are calibrated optimally. Finally, it is critical
that the Commission partner with FINRA, other Federal agencies,
and State regulators to ensure comprehensive oversight and
enforcement.
Q.6. As national protests continue in the wake of the deaths of
George Floyd and Breonna Taylor, Americans continue to demand
justice and reforms to address systemic racism in all facets of
our country, including in Corporate America. I was originally
hopeful that the SEC would help address the corporate diversity
problem through its 2009 diversity disclosure rule.
Unfortunately, the 2009 rule failed to even define
``diversity'' and it gives companies far too much discretion on
what they report.
Ms. Crenshaw, can investors have a full understanding of
corporate diversity if only 3.2 percent of Fortune 500
companies release complete data on race and gender of their
employees?
A.6. No. Existing disclosures are insufficient to give
investors an accurate picture of board and workforce diversity.
If confirmed, I would urge the Commission to consider the
following policy initiatives.
First, the Commission should revise the 2009 diversity
disclosure rule. See Securities and Exchange Commission, Proxy
Disclosure Enhancements (Feb. 28, 2009). The reason it should
do this is simple: the evidence suggests that companies are not
providing investors with the information they need. See, e.g.,
Anne Simpson, California Public Employees Retirement System et
al., ``Petition for Amendment of Proxy Rule Regarding Board
Nominee Disclosure-Chart/Matrix Approach'', (Mar. 31, 2015).
Though Commission staff have taken steps to encourage
companies to provide details on diversity when making board
composition decisions, this is not enough. See Securities and
Exchange Commission, Regulation S-K Compliance & Disclosure
Interpretations 116.11 and 133.13 (updated Feb. 6, 2019).
Moving forward, the Commission should undertake a comprehensive
review that can and should engage corporate constituents and
investors from a variety of backgrounds to define ``diversity''
and include the definition in a more effective diversity
disclosure rule.
Second, the Commission should work with fellow regulators
to reconsider the Final Interagency Policy Statement
Establishing Joint Standards for Assessing the Diversity
Policies and Practices of the Entities Regulated by the
Agencies. See Securities and Exchange Commission, et al., Final
Interagency Policy Statement Establishing Joint Standards for
Assessing the Diversity Policies and Practices of the Entities
Regulated by the Agencies (Jun. 10, 2015). This Policy
Statement set forth standards that an entity could voluntarily
use to assess diversity policies and practices. The Commission
should work to ensure that, across the board, companies and
registered entities are disclosing the information necessary
for investors and customers to make informed decisions about
diversity practices.
Third, without prejudging a rule that may come before me if
I am confirmed, I generally support the disclosure of workforce
diversity data, including data on race and gender, in human
capital disclosures. As comment letters have indicated, such
disclosures need not be financially burdensome and can provide
investors with information that enhances insights into the
long-term financial performance of a company. See, e.g., Human
Capital Management Coalition, Comment Letter on Proposed Rule
Modernization of Regulation S-K Items 101, 103, and 105 (Aug.
8, 2019).
Q.7. Does enhanced transparency lead to greater diversity among
corporate board members and senior management?
A.7. It is critical to give investors the information they need
in order to make a fully informed decision and appropriately
allocate their capital. Investors have made clear that data on
board and management diversity is important to their decisions.
Armed with accessible, comparable, and straightforward
disclosures, investors can choose to stay put, advocate change,
or exit a company and allocate their capital elsewhere. While
enhanced transparency is certainly necessary to increase
diversity among corporate board members and senior management,
it is not sufficient.
The Commission should therefore be thinking about other
avenues to encourage diversity. One example is to increase the
budget and staff of the Commission's Office of Minority and
Women Inclusion and Office of Investor Education and Advocacy
so the excellent staff in those offices can effectively educate
investors and students of all ages to increase financial
literacy, promote a diverse talent pipeline, and solicit public
comment on diversity and inclusion best practices. The
Commission should also think through ways it can encourage
companies to identify and change entrenched organizational
structures and work practices that, even if inadvertently,
operate to discourage diversity.
It is crucial for both the Commission and companies to
recognize and promote the benefits of having diverse and
inclusive boards, management, and workforces. The Commission
should lead by example and, if confirmed, I will invest my time
and resources to ensure the agency is setting the appropriate
tone.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM CAROLINE CRENSHAW
Q.1. Private Equity--Last year, I introduced S. 2155, the Stop
Wall Street Looting Act of 2019, to reform the private equity
industry and end abusive leveraged buyouts. \1\
---------------------------------------------------------------------------
\1\ Office of Senator Warren, ``Warren, Baldwin, Brown, Pocan,
Jayapal, Colleagues Unveil Bold Legislation to Fundamentally Reform the
Private Equity Industry'', July 18, 2019, https://
www.warren.senate.gov/newsroom/press-releases/warren-baldwin-brown-
pocan-jayapal-colleagues-unveil-bold-legislation-to-fundamentally-
reform-the-private-equity-industry.
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Private equity transactions are fueled by risky loans that
are immediately securitized and sold. \2\ A provision in my
bill would help protect the economy from risks stemming from
excessive debt imposed on private equity firms' target
companies. It would require arrangers of corporate loan
securitizations to retain risk by clarifying that managers of
collateralized debt obligations are subject to risk retention
requirements established in the Dodd-Frank Wall Street Reform
and Consumer Protection Act. \3\
---------------------------------------------------------------------------
\2\ Washington Post, ``The Shadow Banks Are Back With Another Big
Bad Credit Bubble'', Steven Pearlstein, May 31, 2019, https://
www.washingtonpost.com/business/economy/the-shadow-banks-are-back-with-
another-big-bad-credit-bubble/2019/05/31/a05184de-817a-11e9-95a9-
e2c830afe24f_story.html.
\3\ Securities and Exchange Commission, ``Asset-Backed
Securities'', October 23, 2014, https://www.sec.gov/spotlight/dodd-
frank/assetbackedsecurities.shtml.
---------------------------------------------------------------------------
Do you believe that arrangers of corporate loan
securitizations should retain risk to prevent dangerous loans
that are immediately passed onto unknowing investors?
A.1. Yes. It is critical that the Commission consider measures
that would better align the incentives of the loan arrangers
with those of investors. Ensuring that arrangers of corporate
loan securitizations retain risk would be an important step
toward aligning those incentives.
Traditional standards that have long provided investors
protections in this market have deteriorated. Specifically,
lending standards, underwriting diligence, and contractual
covenants--key protective measures related to debt
instruments--have been diminished. Meanwhile, in the current
low-interest rate environment, investors seek yield with less
focus on lending standards.
As a result, the arrangers of corporate loan
securitizations may be incentivized to shift riskier debt
instruments to other investors, who are often less
sophisticated and have fewer avenues for recourse. This could
increase market instability and leave retail investors holding
the bag.
Q.2. Leveraged Lending--In November 2018, I sent a letter to
SEC Chairman Clayton, Treasury Secretary Steven Mnuchin,
Federal Reserve Chairman Jerome Powell, then-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. \4\
---------------------------------------------------------------------------
\4\ 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%20Regulatorhttps://www.sec.gov/spotlight/
dodd-frank/assetbackedsecurities.shtmls%20on%20Leveraged%20Lending.pdf.
---------------------------------------------------------------------------
In a section addressed to Chairman Clayton, I stated that
the Volcker Rule is intended to restrict bank involvement with
external funds and that trade associations have asked the SEC
to significantly loosen Volcker Rule controls. The SEC
completed its rollbacks of the Volcker Rule in September 2019.
\5\ 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.' '' \6\
---------------------------------------------------------------------------
\5\ 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.
\6\ 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.
---------------------------------------------------------------------------
Chairman Clayton's January response provided a procedural,
but not a substantive, explanation of the status of SEC's
proposed amendments to the Volcker Rule. \7\ How do you view
the SEC's rationale for removing protections against excessive
risks under the Volcker Rule?
---------------------------------------------------------------------------
\7\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, January 31, 2019.
A.2. The Commission needs to do all that it can to safeguard
the financial system. Like Commissioner Jackson, I am
unconvinced that eliminating key investor protections was
appropriately justified by the analysis in the September 2019
revisions to the Volcker rule. The release based its changes on
the supposed decline of ``liquidity and capital formation.''
Yet, the Commission's Division of Economic and Risk Analysis
did not find that the Volcker rule reduced the liquidity of the
primary or secondary markets. See Sec. & Exch. Comm'n, Div. of
Econ. & Risk Analysis, ``Report to Congress on Access to
Capital and Market Liquidity'' (2017). Accordingly, I too worry
that we are putting American investors, taxpayers, and markets
---------------------------------------------------------------------------
at risk.
Q.3. Inflated Bond Ratings--In September, I wrote Chairman
Clayton 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. \8\ In his November response, Chairman Clayton
stated that he shared my concerns about conflicts of interest
in rating agency compensation models and said that he is
awaiting recommendations or advice from various advisory
committees. \9\
---------------------------------------------------------------------------
\8\ Council on Foreign Relations, ``The Credit Rating
Controversy'', CFR Staff, February 19, 2015, https://www.cfr.org/
backgrounder/credit-rating-controversy.
\9\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, November 21, 2019.
---------------------------------------------------------------------------
To your knowledge, has the SEC 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?
A.3. I do not know whether the Commission has instructed the
advisory committees to provide recommendations or advice on the
role and activities of bond rating agencies within any certain
date or timeline. However, if confirmed, I would strongly
support encouraging those committees to turn their attention to
this important issue.
Q.4. If so, please explain the SEC's instructions and any
requested deadlines. Additionally, please explain if these
recommendations or advice will be made public.
A.4. I do not know whether any instructions were given to the
advisory committees regarding a specific timeline. However, I
do know that formal recommendations, once they have been
approved by the committee, are made public on the Commission's
website. The Fixed Income Market Structure Advisory Committee
released a recommendation on June 1, 2020, on ways to mitigate
conflicts of interest in credit ratings. See, Sec. & Exch.
Comm'n, ``Fixed Income Market Structure Advisory Comm.,
Recommendation Regarding Ways To Mitigate Conflicts of Interest
in Credit Ratings'' (2020).
Q.5. If not, if you are confirmed, how will you work to ensure
that the SEC instructs these advisory committees to complete
their work products by a certain deadline and how will you
ensure that these recommendations or advice are made public?
A.5. It is important for the Commission's advisory committees
to work in a timely and transparent way. If confirmed, I would
work with staff and fellow Commissioners to make sure they do
just that.
Q.6. Chairman Clayton's response also referenced some work that
the SEC has done to respond to the conflicts of interest in the
issuer-pays model. \10\ 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.'' \11\
---------------------------------------------------------------------------
\10\ Id.
\11\ 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.
---------------------------------------------------------------------------
In your view, why has the SEC's efforts to respond to the
conflicts of interest have failed to prevent bond rating
agencies from artificially inflating bond ratings?
A.6. The issuer-pays model continues to create perverse
incentives to inflate ratings. Current Commission protections,
such as the segregation of marketing and sales personnel from
the credit rating determination process, are not effectively
addressing this inherent conflict of interest. If confirmed, I
would support a fundamental rethinking of the issuer-pay model.
Q.7. Climate Risk Disclosure--In July, Representative Sean
Casten (D-IL-06) and I introduced H.R. 3623/S. 2017, the
Climate Risk Disclosure Act of 2019. \12\ 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.
---------------------------------------------------------------------------
\12\ 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.
---------------------------------------------------------------------------
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. \13\ 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. \14\
---------------------------------------------------------------------------
\13\ New York Times, ``U.S. Climate Report Warns of Damaged
Environment and Shrinking Economy'', Coral Davenport and Kendra Pierre-
Louis, November, 23, 2018, https://www.nytimes.com/2018/11/23/climate/
us-climate-report.html.
\14\ The Economist Intelligence Unit, ``The Cost of Inaction'',
2015, p. 41, https://eiuperspectives.economist.com/sites/default/files/
The%20cost%20of%20inaction_0.pdf.
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Do 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?
A.7. Yes. Climate change will impact every part of the American
economy, and it is critical that we understand how public
companies will be affected by these changes. A wealth of
evidence suggests that climate-related factors are financially
material. See, e.g., Vanguard, Investment Stewardship Annual
Report (2017) (``[O]ur position on climate risk is anchored in
long-term economic value--not ideology.''); California State
Teachers' Retirement System, Comment Letter on Concept Release
Business and Financial Disclosure Required by Regulation S-K
(July 21, 2016) (citing data that ``strongly supports the need
for internal investment staff and our external managers to
consider ESG risks of a portfolio company in its evaluation and
allocation of capital'').
The Commission can and should do more in this area,
particularly on measuring companies' sustainability profiles.
If confirmed, I would urge the Commission to ensure that
investors have the highest-quality information about how
America's public companies may be affected by climate change
risks.
Q.8. Do 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 towards a lower-carbon economy?
A.8. Yes. In recent years we have witnessed investors of all
stripes demanding climate-risk disclosures--including
companies' contributions and exposures to climate change risks.
For example, over the past several years shareholders
representing trillions of dollars have submitted requests to
the Commission for enhanced disclosure of climate-related
risks. See Jill E. Fisch et al., ``Comments on Request for
Rulemaking on Environmental, Social, and Governance (ESG)
Disclosure'', (Oct. 1, 2018) (``In recent years, there have
been a number of significant petitions and other investor
proposals seeking expanded disclosure of ESG information.'').
This proxy season, climate risk was, again, the most common
shareholder proposal and received historic levels of support.
It is an essential part of the Commission's mission to make
sure that its rules evolve so that investors have the
information they need in order to evaluate the companies that
they own. If confirmed, I would urge the Commission to ensure
that the Commission's disclosure rules in this area keep pace
with investors' needs.
Q.9. If so, if you are confirmed, how will you work to ensure
that the SEC ensures that investors have the information they
need to consider climate-related risks?
A.9. The Commission last visited disclosure in this area a
decade ago. See Securities and Exchange Commission, ``Guidance
Regarding Disclosure Related to Climate Change'' (Feb. 8,
2010). The risks from climate change to our markets have only
intensified since then--and will continue to do so. Yet, the
Commission's rules have not kept up with these changes.
If confirmed, I would urge the Commission first and
foremost to update our guidance in this area. Second, I would
work to ensure that investors have high-quality information on
how money managers vote their shares on proposals relating to
climate risks. Finally, I would want to make sure that our
rules help investors get what they bargain for when they select
a fund with a sustainability strategy and that those funds are
appropriately classified and their strategies clearly
disclosed. If confirmed, I look forward to working with my
fellow Commissioners and the staff to ensure that Commission's
rules across the board--and especially when it comes to the
environmental crisis we are facing--keep pace with investors'
needs.
Q.10. 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.'' \15\ 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.
---------------------------------------------------------------------------
\15\ Government Accountability Office, ``Climate-related Risks'',
February 2018, pp. 17-18, https://www.gao.gov/assets/700/690197.pdf.
---------------------------------------------------------------------------
If 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.10. No. As you noted, the Commission has long required the
disclosure of material environmental risks and in 2010, set
forth guidance regarding climate change. See Securities and
Exchange Commission, ``Guidance Regarding Disclosure Related to
Climate Change'' (Feb. 8, 2010). The result has been
disclosures that are inconsistent, unduly complex, and lacking
in comparability and quantification--undermining investors'
ability to evaluate climate-related risks. Accordingly, I share
your concern that existing rules and guidance on this issue
have proved inadequate. This is the type of information
asymmetry that our securities regulatory regime was designed to
remedy. If confirmed, I would urge the Commission to ensure
that its disclosure rules are giving investors sufficient
information to evaluate companies' climate-related risks.
Q.11. Regulation Best Interest (Reg BI)--In June 2019, SEC
approved Reg BI, which despite Congress's instruction in
sections 913(f) and 913(g) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act establishes neither a uniform
standard for broker-dealers and investment advisers, nor a
fiduciary standard for broker-dealers. \16\ Then-Commissioner
Robert J. Jackson, Jr., described the rule as ``a muddled
standard that exposes millions of Americans to the costs of
conflicted advice.'' \17\ 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.'' \18\ Instead, Reg BI imposes a limited requirement
to disclose conflicts.
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\16\ 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.
\17\ 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.
\18\ 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.
---------------------------------------------------------------------------
In response to Senator Brown's question regarding Reg BI
enforcement, you stated, ``I think it is critical that the SEC
work [to] drive successful compliance of this rule. That means.
working with firms to make sure that their policies and
procedures are appropriate to mitigate conflicts of interest,
and to the degree they're not, we have to be willing to hold
those firms accountable when they are not appropriately
mitigating conflicts of interest.'' \19\ You also stated, ``we
need to make sure over time that rules are actually changing
the status quo for investors.'' \20\
---------------------------------------------------------------------------
\19\ Senate Committee on Banking, Housing, and Urban Affairs,
``Nomination Hearing'', July 21, 2020, https://www.banking.senate.gov/
hearings/07/10/2020/nomination-hearing.
\20\ Id.
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Reg BI states if ``a broker-dealer cannot fully and fairly
disclose a conflict of interest,'' a broker-dealer ``should
eliminate the conflict or adequately mitigate the conflict,''
but it does not define what adequate mitigation looks like.
\21\
---------------------------------------------------------------------------
\21\ U.S. Securities and Exchange Commission, Federal Register
Notice, ``Regulation Best Interest: The Broker-Dealer Standard of
Conduct'', July 12, 2019, https://www.federalregister.gov/documents/
2019/07/12/2019-12164/regulation-best-interest-the-broker-dealer-
standard-of-conduct.
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If confirmed, how will you define adequate mitigation?
A.11. Those advising American families how to prepare for their
financial futures should not get paid to give bad advice. Thus,
at a minimum, adequate mitigation must ensure that financial
professionals' incentives are aligned with those of the
investors they purport to serve. As currently drafted,
Regulation Best Interest does not provide sufficient clarity in
this regard. If confirmed, I would work with my fellow
Commissioners and staff to ensure that the mitigation
requirement has real teeth.
Q.12. The SEC rule left ``best interest,'' the key term that
describes the standard of conduct for broker-dealers,
undefined. \22\
---------------------------------------------------------------------------
\22\ U.S. Securities and Exchange Commission, Federal Register
Notice, ``Regulation Best Interest: The Broker-Dealer Standard of
Conduct'', July 12, 2019, https://www.federalregister.gov/documents/
2019/07/12/2019-12164/regulation-best-interest-the-broker-dealer-
standard-of-conduct.
---------------------------------------------------------------------------
Do you believe the standard should have defined ``best
interest,'' as several commenters on the rule discussed? \23\
---------------------------------------------------------------------------
\23\ Id.
A.12. Yes. It is critical, for both industry and investors,
that the Commission provide clear and firm rules. It is unclear
how Regulation Best Interest provides protections beyond the
status quo because it failed to define ``best interest'' and
does not provide sufficient guidance on what activities are
---------------------------------------------------------------------------
prohibited under the standard.
Q.13. In your view, what if any distinction exists between the
``best interest'' standard of conduct set forth in the SEC rule
and the ``suitability'' standard established by the Financial
Industry Regulatory Authority that predated it? \24\
---------------------------------------------------------------------------
\24\ Financial Industry Regulatory Authority, ``Suitability'',
Accessed July 23, 2020, https://www.finra.org/rules-guidance/key-
topics/suitability.
A.13. I am concerned that there are not meaningful differences
between the two frameworks. I am particularly troubled that
there are elements of Regulation Best Interest that mirror
FINRA suitability rules, guidance, and precedent. Given this
lack of clarity, it is important for the Commission, through
both compliance and enforcement, to ensure that investors
---------------------------------------------------------------------------
receive the protections they have been promised.
Q.14. In response to the SEC's proposal for Reg BI, a
bipartisan group of 11 former SEC senior economists wrote in a
comment, ``[w]e find it worrisome that the proposals' economic
analysis does not fully consider some potentially important
dimensions of the retail client-adviser relationship.'' \25\
---------------------------------------------------------------------------
\25\ Carnegie Mellon University, ``Professor Chester Spatt
Criticizes Proposed SEC Regulation'', press release, February 25, 2019,
https://www.cmu.edu/tepper/news/stories/2019/february/chester-spatt-
sec-regulation.html.
---------------------------------------------------------------------------
Do you believe the cost-benefit analysis that supports Reg
BI was sufficient?
A.14. No. The cost-benefit analysis supporting Regulation Best
Interest was insufficient. Unfortunately, a deficient economic
analysis produced a deficient rule. However, given that
Regulation Best Interest is current law, it is critical that we
implement it in a robust manner and continuously review whether
it is fulfilling its stated goals. Ongoing oversight will be
crucial to ensuring that the rule meaningfully enhances
protections for investors. Such oversight includes regular
assessments of Regulation Best Interest's impact, as well as
working with the Commission's Office of the Investor Advocate
to test the effectiveness of Form CRS. To the extent Regulation
Best Interest and Form CRS do not enable informed decision
making, the Commission will need to reconsider its regulatory
approach.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM CAROLINE CRENSHAW
Q.1. What are the personal and professional costs to
whistleblowers that concern you? How can the SEC mitigate those
concerns?
A.1. Whistleblowers who come forward to reveal wrongdoing face
many professional and personal costs, including retaliation,
loss of employability, and loss of income. The final outcome of
an investigation initiated by a whistleblower complaint often
takes years, which can lead to a long period of doubt and
emotional distress. Each one of these costs discourages
whistleblowers from speaking up, and risks harming investors
while illegal conduct continues.
The Commission should do at least three things to minimize
these costs. First, it needs to investigate whistleblower cases
as expeditiously as possible. Second, the Dodd-Frank Act grants
the Commission authority to hold accountable companies that
engage in retaliation against internal whistleblowers--and we
should use it, acting quickly and decisively to hold
responsible anyone who impedes a whistleblower through
retaliation or other means. Finally, the process for
determining whistleblower awards must be as transparent and
predictable as possible--so that those putting their careers at
risk know that they will be rewarded for taking the difficult
step of coming forward.
Q.2. How will including deferred prosecution agreements and
nonprosecution agreements as ``actions'' ensure whistleblowers
are not penalized as a result of the Government's decision to
pursue a particular litigation strategy?
A.2. Without commenting on a matter that may come before me if
I am confirmed, as a general policy matter, the Commission
should do what it can to encourage whistleblowers to come
forward. To the degree deferred prosecution agreements and
nonprosecution agreements lead to a whistleblower receiving a
lesser award, or no award, the Commission should do all it can
to assure whistleblowers that they will be appropriately
compensated under the law.
Q.3. Should the SEC ensure that legitimate and honest reports
do not lead to retaliation for a whistleblower?
A.3. Yes. As mentioned above, pursuant to authority granted by
the Dodd-Frank Act, the Commission can take action against
employers for retaliating against whistleblowers. Additionally,
Commission Rule 21F-17(a) prohibits taking action to prevent an
individual from contacting the Commission to report a possible
securities violation. The Commission has brought a number of
actions based on both retaliatory conduct as well as behavior
meant to impede reporting. See SEC v. Collector's Coffee, Inc.
(d/b/a Collectors Cafe), and Mykalai Kontilai, 19-cv-04355
(November 4, 2019). The Commission should continue to
vigorously pursue such cases in order to assure whistleblowers
that there are meaningful protections in place for those who
speak up against violations of the law.
Q.4. Will you ensure that whistleblower awards are paid out at
the highest amount possible so that it matches or exceeds the
overall costs to whistleblowing?
A.4. Without commenting on a matter that may come before me if
I am confirmed, I can say that it is critical to the integrity
of the program that whistleblowers who put their livelihoods at
risk to help the Commission enforce the law are fully
compensated for doing that crucial work.
Q.5. What should the SEC do to increase shareholder voting and
participation? How is the SEC ensuring votes are accurately
tabulated?
A.5. Shareholder voting is a critical mechanism for holding
corporate insiders accountable for the decisions they make with
American investors' money. To facilitate shareholder democracy,
the Commission should promptly review at least three areas of
its current rules.
First, the Commission has recently taken several regulatory
steps that may impede shareholders' ability to vote. Without
judging any particular matter that may come before me, if
confirmed, I would urge my colleagues to consider the effects
of these steps on shareholders' voting rights.
Second, the Commission should immediately turn its
attention to the broken system for counting shareholder votes,
sometimes referred to as proxy plumbing. There has been broad
agreement throughout the market for years that the Commission
should enhance the transparency, efficiency, cost-
effectiveness, and, most importantly, accuracy of that process,
including by ensuring that all votes are counted through end-
to-end vote confirmation.
Third, and again without judging any matter that may come
before me if I am confirmed, the Commission should consider
moving forward with a universal proxy rule that would make it
easier for investors to vote for their preferred director
nominees.
If confirmed, I will urge the Commission to move these
initiatives forward.
Q.6. How will you ensure that entities you oversee consider the
impact of increasingly severe storms, floods, and fires on
their firms? How will you ensure corporations are adequately
planning and accounting for widespread and potentially costly
damage to property serving as collateral for loans or to assets
underpinning other investments?
A.6. Increasingly frequent and severe weather events resulting
from climate change will impose major costs on our markets. If
confirmed, I would urge the Commission to take the following
actions to help address these concerns.
First, the Commission should require comprehensive issuer
disclosure of climate-related risks to ensure, among other
things, that investors have transparency into companies'
business continuity planning in light of these risks.
Second, the Commission should work with the Public Company
Accounting Oversight Board (PCAOB) to make sure audit firms are
appropriately integrating assessment of climate risks in public
company audits and working to ensure those companies develop
meaningful, comparable measures for disclosing those risks.
Finally, I would urge my colleagues in the Office of
Compliance Inspections and Examinations to regularly examine
the business continuity plans of registrants to ensure they are
taking into account the risks from climate change and severe
weather events.
Q.7. Do you think corporate disclosure of climate change risks
is adequate to inform investors of the economic and corporate
resilience to climate change?
A.7. No. It has been over a decade since the Commission
released its ``Guidance Regarding Disclosure Related to Climate
Change''. See, Securities and Exchange Commission, ``Guidance
Regarding Disclosure Related to Climate Change'' (Feb. 8,
2010). During the last decade, investor interest in this
subject has reached record levels, with major market
participants and ordinary investors alike calling for companies
to disclose the effects of their activities on the environment.
See Bruce Goldfarb, ``Companies Need To Engage on ESG Issues
Now or Risk a Bruising 2021'', Forbes, July 17, 2020. Yet, the
Commission has done little to ensure that such disclosure is
clear, comparable, and accessible for investors. And some
recent Commission proposals risk taking environmental issues
off the corporate ballot--at a time when investors are
clamoring for more transparency on this subject, not less.
If confirmed, I would urge the Commission to do more on
this subject, starting with immediately convening a taskforce
to study and report to the Commission on climate risk impacts
on the securities markets. I would also urge the Commission to
work with the PCAOB to ensure audit firms are appropriately
integrating assessment of climate risk.
Corporate disclosure of climate risk is one critical step
forward and the Commission needs to ensure that investors have
the information they need to make informed investment
decisions.
Q.8. What are the environmental transition risks for
corporations? What costs can they be expected to incur as the
world works to reduce its carbon footprint to mitigate global
warming?
A.8. Companies and financial institutions face a number of
major physical and transition-related risks associated with
climate change. Weather-induced impairment of real property and
assets can spill over to create instabilities in financial
markets and the economy more broadly. Rapid changes in
Government or market-mandated policies, consumer sentiment, or
technological changes, for example, could cause unplanned
losses to high-carbon industry sectors. The longer markets and
Governments wait to address these risks, the worse they will
get. That is why, if confirmed, I will urge the Commission to
do all it can to mitigate climate-related impacts on our
markets.
Q.9. How can the SEC promote a long-term focus among publicly
traded companies?
A.9. The Commission should do all it can to ensure that
American companies and their leadership pursue long-term value
creation rather than short-term stock-price increases. There
are at least three steps the Commission should consider that
would encourage corporate executives to pursue sustainable,
long-term growth.
First, the Commission should examine executives' incentives
to pursue stock buybacks. The Commission has not revisited its
rules related to stock buybacks in two decades, and there is
now significant evidence that executives use buybacks to boost
their bonuses rather than build long-term value. It is time for
the Commission to revisit these rules to ensure that corporate
management is more focused on building jobs and communities
rather than engaging in short-term trading in their company's
own shares. See Robert J. Jackson, Jr., Letter on Stock
Buybacks and Insiders' Cashouts, Harvard Law School Forum on
Corporate Governance, Mar. 8, 2019.
Second, decades of paying corporate executives in stock has
given management incentives to boost short-term stock prices
rather than long-run value. The Dodd-Frank Act included an
important provision that gives the Commission authority to
require detailed disclosure on the relationship between
executive pay and performance. Yet those rules have still not
been finalized, and too many companies continue to use short-
run stock prices as the sole arbiter of performance. The
Commission should make sure that investors get the information
they need to evaluate whether, and how, executive pay packages
prioritize short-run stock prices over long-term value
creation.
Third, the Commission should evaluate the potential role of
activist investors in pressuring companies to maximize short-
term stock prices at the expense of American workers and
communities. These investors play a critical role in holding
corporate management accountable, but the evidence shows that
some activists favor strategies that can harm workers. The
Commission's rules in this area have not been examined for
decades despite significant changes in the law and marketplace.
Studying those changes, and updating the rules to make sure
that activists are pursuing sustainable, long-run strategies
rather than profiting at the expense of workers and
communities, should be among the Commission's priorities.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM KYLE HAUPTMAN
Q.1. The NCUA Board is an independent agency that must ensure
the safety and soundness of the credit union system without
regard to politics. You've served in a number of political and
campaign positions, including on the Trump transition team.
What is your relationship with the White House? Are you able to
serve in this position objectively, without being influenced by
the Executive branch? Will you commit to refuse to take any
action based on requests from the White House?
A.1. If confirmed, I would seek to maintain the highest level
of ethical standards. Because this Board seat's term ends in
2025, I will serve alongside at least one additional
presidential Administration. I pledge to ensure the NCUA's
independence regardless of who serves as President.
Additionally, if confirmed, I would collaborate with the NCUA's
Chief Ethics Counsel and the Office of Government Ethics to
design an appropriate plan for maintaining the highest ethical
standards.
Q.2. Can credit unions and regulators do more to help the
underserved? What specifically?
A.2. During the pandemic, the NCUA and the country as a whole
have experimented with new ways to operate. For example, my
nomination hearing was online, and prior to March 2020, the
Senate Banking Committee had never held online hearings. The
NCUA has been conducting virtual exams for credit unions
throughout the COVID-19 pandemic. In the future, virtual
examinations could save all parties time and money, and the
NCUA Board should carefully consider making different parts of
the examination process virtual.
Two years ago, Congress approved the MOBILE Act, which
permitted individuals to open online accounts by uploading
their identification information. This has been very helpful,
especially during the pandemic, when many people do not want to
physically enter credit unions, or the lobby may be closed.
This pandemic forced financial institutions to explore new
online options, like opening an account online, utilizing
shared branch networks, or using e-signatures and
verifications. Some of these practices may be useful
postpandemic.
This is especially important when it comes to reaching the
underserved in rural areas. Where I grew up in Maine, we were
26 miles from the nearest McDonald's and even further from the
nearest bank. Remote access and online transactions can be very
useful in reaching citizens who reside in rural areas. If
confirmed, I will explore diverse ways credit unions can serve
members who are currently geographically distant from their
credit unions.
Q.3. In your testimony, you highlighted three broad priorities
if confirmed to the NCUA Board. Please elaborate on what
specific proposals you would advocate. How do you plan to
achieve these goals?
A.3. The first priority I mentioned was managing the fallout
from the current pandemic and economic downturn. This includes
ensuring that credit unions are able to work with their members
who are experiencing financial difficulties. As not-for-profit,
member-owned financial cooperatives, credit unions do this
organically and have reportedly been doing excellent work on
this effort. However, I believe it is the responsibility of
NCUA Board Members to talk to examiners, credit union members,
credit union managers and staff, and other stakeholders to
ensure credit unions continue their work and that the NCUA
removes obstacles that prevent the necessary assistance from
being offered.
The second priority I discussed is technology. The pandemic
created a test case for how many things can be done remotely. I
would like to expand technology's role in reaching the
underserved. Given that the NCUA is a safety and soundness
regulator, I would seek to ensure these technologies are tested
fully in pilot programs before allowing widespread adoption.
Finally, I want to align incentives. As we know from the
last financial crisis, we get what we incentivize. We should
use incentives to create positive outcomes. For example, using
the powers Congress granted it, the NCUA currently incentivizes
credit unions to serve more low-income individuals by tying the
low-income credit union designation to the removal of the cap
on member business lending, access to grants, and the ability
to access secondary capital. If one looks at the number of low-
income credit unions over the last 10 years, they have grown
from a quarter to almost half of all credit unions. Currently,
there are limited incentives for credit unions to be designated
as minority depository institutions (MDIs). The NCUA has
recently created a pilot program that develops mentoring
relationships among MDIs. However, I believe the NCUA should
create significant incentives for credit unions to be
designated as MDIs and to help create new ones.
Q.4. During the hearing, you committed to me that you would
crack down on credit unions that charge their members high
fees. Would you support a prohibition on credit unions imposing
overdraft fees on their members?
A.4. If confirmed to the NCUA Board, I commit to reviewing
credit unions' fees and working to prevent the collection of
fees that are incompatible with the credit union system's
mission of providing affordable financial services to working
families. While I understand that certain fees are a necessary
part of credit union operations, I pledge to ensure that any
collected fees are consistent with the credit union mission.
Set by credit union boards, fees should not needlessly penalize
the underserved and those of lesser means. The main goal should
always be ``a better deal,'' in that any fees charged by a
credit union should be a superior alternative to other options,
such as late fees charged by Government or utilities.
Q.5. You said in your testimony that credit unions were
chartered to serve those of modest means, and you plan to work
toward solutions for those facing financial stress because of
the pandemic and economic downturn. Recently, the NCUA issued
an Interim Final Rule on Overdrafts, which allows credit unions
to charge overdrafts after 60 days and still allows the right
to offset. Would you support efforts to amend this IFR to
protect credit union members from all overdrafts and offsets?
If not, how is this consistent with your stated priorities?
A.5. In May, the NCUA Board considered an interim final rule
(IFR) that would have modified the requirement that a Federal
credit union's written overdraft policy establish a time limit,
not to exceed 45 calendar days, for a member to either deposit
funds or obtain an approved loan from the Federal credit union
to cover each overdraft. The old policy would have been
replaced with a requirement that the written policy must
establish a specific time limit that is both reasonable and
applicable to all members for a member to deposit funds or
obtain an approved loan from the credit union to cover each
overdraft. Under the IFR, consistent with U.S. generally
accepted accounting principles (GAAP), overdraft balances
should have generally been charged off when considered
uncollectible. The IFR was not approved and, thus, may be
considered by the NCUA Board at a future date.
As I stated during my confirmation hearing, credit unions
were chartered to serve those of modest means. If confirmed, I
plan to work with credit unions, the Board, and Congress on
solutions for those credit union members facing financial
stress. Consistent with that goal, I will review this proposed
IFR afresh to ensure that it provides relief to credit union
members in a manner consistent with the NCUA's responsibility
to maintain the safety and soundness of the credit union
system. From that perspective, if the IFR is brought up again,
I will vote to approve it only if consumers and the safety and
soundness of the credit union system are protected.
Q.6. Credit unions are playing an important role in helping to
mitigate the economic stress of their members during the COVID-
19 pandemic. What do you think NCUA should be doing to ensure
credit unions are able to serve their members and plan for
potential defaults on member business loans and consumer loan
products?
A.6. The NCUA is, and I believe correctly, encouraging credit
unions to work with impacted borrowers and not criticizing a
credit union's efforts to provide prudent relief for borrowers
when such efforts are conducted in a reasonable manner with
proper controls and management oversight. The NCUA has publicly
stated that such efforts can ease financial pressure on
borrowers and reduce a credit union's credit risk exposure.
Credit unions should be encouraged to consider a variety of
loan modifications. Of course, the proper mix of solutions will
vary depending on the risk tolerance and financial strength of
each institution and its membership base. The NCUA should be
doing all it can to advise and support credit unions as they
serve their members during this difficult time.
The economic stress experienced by credit unions and their
members during this pandemic reflects the financial issues
affecting families and businesses across the financial
spectrum. As a result, if confirmed, I would encourage the NCUA
to work closely with Congress and the other financial
regulators to provide holistic solutions to this overarching
health and financial crisis.
Q.7. Last year, the New York Times reported that predatory taxi
medallion loans trapped working taxi drivers with debt while
creating huge profits and compensation for credit unions and
their executives. Eventually, the financial condition of these
credit unions deteriorated because of heavy losses on the
loans, which were poorly underwritten, exceeded regulatory
lending limits, and lacked board and management oversight.
According to an Office of Inspector General (OIG) Material Loss
Review, NCUA was aware of the risks, but failed to take timely
action. \1\ NCUA recently sold most of the Taxi Medallion Loans
in their portfolio to a third party asset manager. What
consumer protections and oversight duties do you think NCUA
should prioritize as taxi drivers and their families work with
the third party to make payments or restructure their taxi
medallion loans?
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\1\ NCUA Office of Inspector General, Material Loss Review of
Melrose Credit Union, LOMTO Federal Credit Union, and Bay Ridge Federal
Credit Union, March 29, 2019, https://www.ncua.gov/files/audit-reports/
oig-material-loss-review-march-2019.pdf.
A.7. Much of the information about the sale of these member
business loans is confidential and supervisory. As a nominee, I
do not have access to this information. However, if I am
confirmed by the Senate, I commit to reviewing this situation
closely to determine if this was, in fact, in the best
interests of the medallion holders and the National Credit
Union Share Insurance Fund. I will also work to ensure proper
steps are taken to protect members on any similar sales of
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member business loans.
Q.8. Housing is the backbone of wealth accumulation for
millions of families. During the COVID-19 pandemic thousands of
families are experiencing economic stress and are having a hard
time making mortgage and rental payments. Should rental and
mortgage assistance be provided to these families?
A.8. The NCUA does not have jurisdiction to establish national
rental and mortgage assistance plans for all renters and
homeowners experiencing economic stress. Should Congress decide
to authorize such programs in statute, I would ensure that
credit unions follow any applicable laws.
Q.9. You said in your testimony you've worked closely with
credit unions in Arkansas, Texas, and Oklahoma. How will you
interact with the credit industry if confirmed to the NCUA
Board? Will you commit to regulating credit unions for safety
and soundness and consumer protection, consistent with the NCUA
mission, instead of being a cheerleader for industry demands?
A.9. If confirmed, I will work first and foremost for the
credit union members and the taxpayers who are ultimately on
the line for an insurance fund that has the full faith and
credit of the United States. I pledge to listen to different
stakeholders and work on areas of agreement. However, I will
not take any actions that would compromise the safety and
soundness of the cooperative credit union system.
Q.10. In your testimony, you indicated your support of a less
frequent exam cycle for highly rated credit unions. Right now,
we are in a severe economic downturn, and we know from the last
crisis that even highly rated financial institutions can
deteriorate quickly. Is it prudent for regulators to be pulling
back on examinations and supervision during an economic crisis?
How can the NCUA prevent credit union failures without a robust
examination program?
A.10. In my testimony, I spoke about aligning incentives.
Specifically, I want to use the incentive structures available
to create a more robust credit union system. For credit unions
receiving the highest marks on their NCUA exams for safety and
stability, the NCUA offers a less frequent exam cycle, thereby
encouraging credit unions to be safer. This also allows the
NCUA to focus its resources on those who may pose a larger
danger to the credit union system.
Provided the NCUA continues to employ a robust and
continuous supervision model, I believe this can continue to
work during the pandemic. Maintaining a focus on credit unions
with lower CAMEL scores is a way to manage risk at a difficult
time. Although credit unions with the highest CAMEL scores
would be eligible for less frequent examinations during a
stressful time such as the pandemic, examiners must closely
review Call Reports to identify adverse trends and adjust
supervision where necessary. This is especially important for
the largest credit unions as they potentially pose the greatest
risk to the National Credit Union Share Insurance Fund. I
believe new technology can assist with this effort. If
confirmed, I would work to ensure these options are fully
explored.
Q.11. Recently, the Supreme Court denied an appeal from the
American Bankers Association to review the NCUA's field of
membership rules. What is your position on the NCUA's field of
membership authority?
A.11. Congress created the field of membership construct for
the credit union system, and the courts have affirmed its
validity. It is, therefore, the Board's responsibility to
employ this statutorily granted authority. The Federal Credit
Union Act authorizes the NCUA to grant Federal credit union
charters based on single common bond (occupational and
associational), multiple common bond (more than one group, each
of which has a common bond), and community (a well-defined
local community, neighborhood, or rural district) criteria. The
Supreme Court's denial of the American Bankers Association's
petition ends nearly 4 years of uncertainty, and it allows the
NCUA to focus on its mission and expand access to affordable
financial services to the underserved and people of modest
means.
Q.12. Some believe that the NCUA should increase its budget for
consumer examination and enforcement of credit unions,
particularly for large, complex credit unions. If confirmed,
would you support increasing the NCUA's consumer protection
budget so that there is a stronger, dedicated consumer
compliance examination program?
A.12. During the consideration of the 2020 NCUA Budget, there
was a debate on the number of consumer compliance examiners at
the agency. If confirmed, I pledge to explore the needs of the
NCUA's consumer compliance program to gain a better
understanding of their challenges and resource requirements. If
confirmed, I will work to ensure that the NCUA enforces all
consumer protection laws and protects credit union member-
owners.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM KYLE HAUPTMAN
Q.1. What are the most effective steps NCUA can take to protect
the Share Insurance Fund in light of the economic impact of
COVID-19?
A.1. If confirmed, I intend to ensure the NCUA is taking proper
action to protect the Share Insurance Fund.
Fortunately, the credit union industry was highly
capitalized entering the crisis, with a healthy aggregate net
worth of 11.37 percent as of December 2019. It is premature to
determine the extent of the financial impact on credit unions
in terms of return on assets, loan losses, and deposit growth.
While credit unions navigate the uncertain economic
climate, the NCUA is providing them with increased
flexibilities through temporary and permanent regulatory
reforms. I believe such efforts should continue. Different
credit unions serve different types of members who are in
different financial situations. We must recognize there is
likely no one-size-fits-all solution to many of the challenges
that credit unions face currently.
Q.2. Do you believe it was a wise decision for the NCUA to
delay the implementation of the risk-based capital rule to
2022?
A.2. Because I do not have access to the confidential
supervisory information that informed their decision, I am
hesitant to criticize the actions of the current NCUA Board.
Further, it is important to note that the NCUA currently has
risk weightings in place. The new rule would update the NCUA's
rule, and have new risk weights.
If confirmed by the Senate, my priority is capital, which
is the holy grail of regulation. Entering into this crisis, the
credit union system as a whole was well capitalized,
significantly above statutory requirements, and that is good.
Indeed, in times like these, capital matters most. That is why
we have it.
Q.3. Please describe your views on the effectiveness of NCUA's
current process for examining credit union compliance with
consumer financial protection laws. Do you believe that the
current approach is sufficient to mitigate consumer abuses from
credit unions with less than $10 billion in assets? If not,
what changes do you believe should be made?
A.3. Every decision the NCUA makes should ultimately protect
the credit union system--and by extension, its members. If
confirmed by the Senate, I will ensure that credit unions have
the tools they need to safely help their borrowers, especially
during this difficult time.
As noted in your question, the NCUA has the primary
authority to monitor consumer compliance at credit unions with
less than $10 billion in assets. For these credit unions, the
NCUA takes a similar risk-focused approach to consumer
compliance regulation and supervision as the FDIC, Federal
Reserve, OCC, and CFPB. I support the risk-focused approach
because it provides flexibility to regulators to respond to
areas of higher risk or need. I also understand that the NCUA
examines consumer complaints to determine whether credit unions
are deficient in a specific area.
While it appears to me that the NCUA's consumer protection
program has been effective, if confirmed by the Senate, I
pledge to work with NCUA's Office of Consumer Financial
Protection to gain a better understanding of the challenges
involved in their work. I commit to ensuring the NCUA enforces
consumer protection laws and properly protects credit union
member-owners. I also commit to ensuring that the consumer
compliance staff has the resources necessary to accomplish the
agency's mission.
Q.4. Separate from the economic impact of COVID-19, what do you
view as the greatest risks to NCUA's Share Insurance Fund? For
each area of risk you identify, please describe how you believe
NCUA should be monitoring and addressing those risks.
A.4. Often the greatest risk is the one you do not see coming.
In the last 50 years, each of the financial crises came from
areas not previously identified as a key risk to the financial
system. A year ago, few would have cited a pandemic as a
significant risk. While it is essential to understand the risks
involved in the system, it is also important to look for risks
that people are not watching.
If confirmed by the Senate, I want to spend significant
time working with agency experts to understand the risks they
are monitoring. I will then talk to outside people who are
involved in providing financial services to the same industries
to better understand the risks they see in the industry. I
think it is important that a new NCUA Board Member ask the hard
questions and not rely on the assurances of others.
Q.5. What steps should NCUA take to support Minority Depository
Institutions (MDIs)?
A.5. If confirmed by the Senate, I want to do a top-to-bottom
review of what pain points exist for the chartering of new MDI
credit unions. Last year, there were only two new charters
granted--one of these was for an MDI. I want to ask the hard
question of why it took so long to start that MDI credit union.
My goal will be to create more MDIs.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM KYLE HAUPTMAN
Q.1. What risk does climate change pose to credit unions?
A.1. The two largest components of credit union lending
portfolios are home mortgage loans and automotive loans. Both
of these portfolios are subject to the negative effects of
natural disasters. The risk of natural disasters is often more
pronounced for coastal areas, and credit unions must use their
best judgment and follow best practices when making these
loans. If I am confirmed to the NCUA Board, I will ask the
difficult questions to ensure that proper risk-management
practices are followed for all possible risks to the National
Credit Union Share Insurance Fund (Share Insurance Fund).
Q.2. How will you ensure NCUA considers those risks?
A.2. All risks to the Share Insurance Fund must be given full
and careful consideration. Any credit union with substantial,
concentrated risk in its portfolio due to future natural
disasters should have sufficient capital and follow best
practices for risk mitigation. If confirmed by the Senate, I
will thoroughly review the possible risks to the Share
Insurance Fund and ensure best practices are followed.
Q.3. If you were confirmed to the board of the NCUA, what steps
would you take to ensure that credit unions are able to work
with Fannie Mae, Freddie Mac, USDA, VA, or FHA to provide loans
to families who are able to finance a home with a downpayment
below 5 percent of the value of the home?
A.3. Credit unions currently play a critical role in
facilitating affordable home ownership. In many cases, mortgage
rates for credit union loans are significantly below the rates
charged by other financial institutions. In terms of
sustainability, I would stress that credit union mortgages
traditionally have had significantly lower default rates than
other loans. The NCUA should always remain vigilant in ensuring
that underwriting standards are safe and sound. The strong
historical loan performance for credit union mortgages
indicates that mortgage sustainability has been a critical
industry value.
Fannie Mae, Freddie Mac, USDA, VA, and FHA have programs
that help credit unions manage the risks to their lending
portfolios. If confirmed, I will work to understand the reasons
credit unions may avoid providing these mortgages. I will also
seek to find ways that will enable more credit union members to
leverage the benefits of these programs.
Q.4. What are some specific ways you will work to increase
access to the financial sector and wealth building
opportunities such as mortgages and small business loans for
black, Latino and Native Americans?
A.4. As I noted during the hearing, the NCUA must enforce the
existing laws on the books, including the Fair Housing Act, the
Equal Credit Opportunity Act, and the Fair Credit Reporting
Act. If I am confirmed, I will work to ensure the NCUA does
this vigorously. No entity--whether it is the NCUA, a credit
union, or this country--can fully succeed unless we allow all
individuals to have access to wealth-building opportunities.
If confirmed, I hope to work with Congress to expand the
ability of credit unions to serve underserved areas and to
evaluate ways to start more credit unions. Only two new credit
unions were chartered last year--one was a minority depository
institution (MDI).
If confirmed, I want to do a top-to-bottom review of the
pain points in starting new credit unions. For example, we must
examine why it took so long to start that MDI credit union. My
goal is to eliminate unnecessary pain points and create more
credit unions, particularly MDIs. I would also like to expand
the NCUA's Second Chance Initiative, which enables people who
had minor criminal convictions years ago to be employed in the
credit union system. I have seen friends and people from my
high school who have changed their entire trajectory after
having one minor conviction when they were 19 years old. This
is an untapped pool of talent for our country.
Studies have shown that automatic savings programs can be
very helpful for wealth building for low-income individuals. If
confirmed, I want to encourage innovative products and
publicize best practices to help to promote wealth building for
all Americans.
Q.5. What is your understanding of the role NCUA plays as
insurer for State-chartered, federally insured credit unions?
A.5. State-chartered credit unions are primarily regulated by
their State's respective department of financial services. For
federally insured, State-chartered credit unions, the NCUA's
role is to ensure the safety and soundness of these
institutions to safeguard the National Credit Union Share
Insurance Fund, which the NCUA administers for the benefit of
all federally insured credit unions.
Q.6. How do you think the transition to LIBOR will affect
credit unions? What effect will you think a delay in
transitioning away from LIBOR will have on credit unions?
A.6. While LIBOR is often viewed as a reference rate used by
larger financial institutions, it is also important to smaller
financial institutions, including community banks, savings
institutions, and credit unions.
An estimated $200 trillion in financial contracts reference
USD LIBOR. LIBOR is used in contracts governing financial
derivative transactions, such as interest rate swaps and
interest rate caps. Some qualifying credit unions use these
tools to hedge interest rate risk. Thus, discontinuing LIBOR
poses a significant risk for the financial system as a whole.
Multiple options exist for a LIBOR replacement. For
example, some credit unions may find an unsecured rate more
accurately tracks their cost of funding than a secured rate
does. I believe credit unions should find the measurement that
works best for them. While the transition poses risks, delaying
the transition will also create a lot of uncertainty for banks
and credit unions. The best policy is one that will create more
certainty and confidence in the market.
Q.7. What are your top 3 priorities that you would like the
NCUA to focus on during your tenure?
A.7. As I noted in my oral testimony, I will have three
priorities at the NCUA:
Priority number one is the same as America's: managing the
fallout from the current pandemic and economic downturn. Over
50 million people have filed for unemployment since March.
While the 2008 crisis began in the financial sector and then
hit Main Street, our current crisis may be the reverse. Credit
unions were chartered to serve those of modest means, and I
plan to work with them, the Board, and Congress on solutions
for those facing financial stress.
My second priority is technology. The pandemic created a
test case for how many things can be done virtually. I would
like to expand technology's role in reaching the underserved.
If we recall the litigation years ago about Blockbuster Video's
late fees and market dominance, the ultimate solution was
American startups like Netflix. While this analogy does not
perfectly align with credit unions, I am convinced innovation
can provide more inclusive financial services.
Last: Aligning incentives. As we learned from the previous
crisis, we get what we incentivize. An excellent policy that
serves as a model here is the less-frequent exam cycle for
credit unions receiving the highest marks on their NCUA exams
for safety and stability. This policy enables regulators to
focus on problematic credit unions, while the well-run credit
unions strive to keep earning that benefit. Through this
policy, safety and soundness are well aligned with serving
members. Do this correctly, and we will combat poor-quality,
high-priced products with better, lower-priced ones.
Q.8. What is your view on virtualization of the examination
process? More broadly, what are your general thoughts on how to
effectively and efficiently examine credit unions to ensure
safety and soundness of the system?
A.8. The NCUA has already been working on virtual examinations;
indeed, it has been a nationwide, almost worldwide, experiment
in how things are done virtually or remotely during a pandemic.
My July 21, 2020, nomination hearing was also conducted
virtually, and before March, the Senate Banking Committee had
never conducted virtual hearings.
The MOBILE Act allowed potential credit union members to
open an account online by uploading their identification
information. This has been very helpful, especially during the
pandemic, when many people do not want to physically enter a
financial institution or the lobby may be closed. The pandemic
has forced us to experiment with doing things virtually, and
some of these, such as utilizing virtual examinations, helping
people open accounts online, and using e-signatures and
verifications, may be useful postpandemic.
Q.9. What benefits do you think the Dodd-Frank Wall Street
Reform and Consumer Protection Act provides to banking
customers, credit unions and the overall economy?
A.9. The Dodd-Frank Wall Street Reform and Consumer Protection
Act has been significantly changed by the Economic Growth,
Regulatory Relief, and Consumer Protection Act (or S. 2155).
Today, we are talking about a revised Dodd-Frank 2.0. The Dodd-
Frank provisions I support include critical corrections to the
mortgage process, including underwriting and appraisals. I
believe that the provisions for the still-unused resolution
authority that created an orderly liquidation process for
financial firms was an appropriate development.
Additional Material Supplied for the Record
LETTER SUPPORTORTING NOMINEE HESTER PEIRCE
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
LETTER SUPPORTORTING NOMINEE KYLE HAUPTMAN
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
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