    [Senate Hearing 116-456]
    [From the U.S. Government Publishing Office]

                                     ______

                                                            S. Hrg. 116-456

              OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION

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

                                    HEARING

                                   before the

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

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 SECOND SESSION

                                       ON

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

                                   __________

                               NOVEMBER 17, 2020

                                   __________

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

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                              ______

                 U.S. GOVERNMENT PUBLISHING OFFICE
     44-820          WASHINGTON : 2023

                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

                     Elisha Tuku, Democratic Chief Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                              Jim Crowell, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                           TUESDAY, NOVEMBER 17, 2020

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    31

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     3
            Prepared statement.......................................    32

                                    WITNESS

    Jay Clayton, Chairman, Securities and Exchange Commission........     6
        Prepared statement...........................................    34
        Responses to written questions of:
            Chairman Crapo...........................................    63
            Senator Brown............................................    64
            Senator Cotton...........................................    66
            Senator Tillis...........................................    69
            Senator Kennedy..........................................    71
            Senator Cramer...........................................    74
            Senator Warren...........................................    77
            Senator Cortez Masto.....................................    91
            Senator Sinema...........................................    97

                                     (iii)

              OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION

                                  ----------

                           TUESDAY, NOVEMBER 17, 2020

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10:01 a.m., via Webex, Hon. Mike
    Crapo, Chairman of the Committee, presiding.

                OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

        Chairman Crapo. Good morning. This hearing will come to
    order. This hearing is another remote hearing by video, and a
    few videoconferencing reminders again.
        Once you start speaking, there will be a delay on your
    screen, so do not be bothered by that, before you are displayed
    on your screen.
        To minimize the background noise, I again remind you to
    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 it is resolved. And I remind all Senators again
    that the 5-minute clock still applies. You should have a box on
    your screen labeled ``Clock'' that shows how much time is
    remaining. But we have had some trouble, and I have had
    Senators tell me they just cannot find that box or do not see
    it. And so, in fact, last hearing one of the Senators asked me
    to give a reminder. I am going to do that this time for
    everybody. So at 30 seconds left on your clock, there will be a
    tone, a bell ring, to remind Senators and the witnesses that
    the time has almost expired. And then at the end of the 5
    minutes, another bell will ring. That way we can all know how
    the clock is working, even though we do not find it on our
    screens.
        Today we will receive testimony from Securities and
    Exchange Commission Chairman Jay Clayton regarding the work and
    agenda of the SEC.
        I thank you, Chair Clayton, for your appearance before the
    Committee today, which is essential to our oversight of the
    SEC, and welcome.
        You last appeared before this Committee in December of last
    year.
        The COVID-19 pandemic hit the United States shortly after
    that hearing, and the SEC has taken many important steps to
    help limit the economic shock to our markets as Governments
    have attempted to confront this unprecedented event.
        The SEC used tools, such as the marketwide circuit
    breakers, for the first time since their adoption, when markets
    dropped 7 percent from the previous day's closing price of the
    S&P 500 Index.
        There were a number of uses of ``limit down'' circuit
    breaks when overnight stock futures hit their 5 percent limit,
    which resulted in halting of all further downward trades
        Despite the high levels of volatility, it is my
    understanding that the current mechanisms in place served their
    intended purposes of increasing market stability.
        Additionally, in order to comply with CDC guidance, you
    oversaw an unprecedented temporary closure of physical trading
    floors. This business continuity measure supported orderly
    trading, while ensuring the health and safety of market
    participants.
        The SEC has continuously pursued enforcement actions,
    including a number of actions against those seeking to take
    advantage of investors during this vulnerable time.
        Remarkably, all of this has been done while the SEC staff
    is working remotely.
        It is commendable that despite the COVID-19 disruptions,
    you have continued to advance the items on your regulatory
    agenda which are the result of many months, and sometimes
    years, of diligent staff work.
        The SEC finalized amendments to update and improve the
    definitions of ``accredited investor'' and ``qualified
    institutional buyer,'' which will now take into consideration
    education and expertise, ultimately increasing investor
    participation in private offerings and expanding access to
    capital markets.
        The SEC recently modernized the exempt offering framework,
    which will be a lifeline to small and medium-sized companies
    navigating the previously complex system.
        These clear and concise rules will allow smaller companies
    to focus on getting their businesses back on track while
    improving the consistency of investor protections.
        Commissioner Roisman engaged investors and market
    participants in crafting modernized shareholder proposal
    thresholds and proxy voting rules.
        These modernizations no longer permit a small number of
    individuals with limited stakes to consume corporate boardrooms
    and will allow companies to better focus their efforts on
    COVID-19 recovery.
        The SEC improved the readability and streamlined the
    information collected for Regulation S-K disclosures. It had
    been more than 30 years since these disclosures had been
    reviewed.
        Last year, the SEC finalized a package of rulemakings
    including Regulation Best Interest, Form CRS Relationship
    Summary, and two interpretations under the Advisers Act.
        Compliance with these rules began on June 30. Since June,
    the SEC has been reviewing firms' compliance efforts and
    identifying additional areas for compliance improvements
    through a staff roundtable and other stakeholder engagement.
        Another modernization effort underway at the SEC is the
    creation of the Strategic Hub for Innovation and Financial
    Technology. This important initiative is critical in the
    interagency
    coordination and dissemination of information to the public
    regarding initial coin offerings and other cryptocurrency
    matters.
        Clearly, the SEC has been busy, and I commend you for
    balancing emergency COVID-19 responses while advancing critical
    rulemaking initiatives, risk-based inspections, enforcement
    actions, and issuer and fund filings.
        I look forward to continuing to work with the SEC to ensure
    that U.S. markets come back from the COVID-19 disruptions
    stronger, more liquid, and more dynamic than ever before.
        In closing, I also thank Chairman Clayton for his service
    and wish him the best of luck in his future endeavors as he
    departs the Commission in the coming weeks.
        The will and drive you brought to this job allowed you to
    bring about many significant improvements that were long
    overdue, and I wish you the best of luck in your future
    endeavors and, again, thank you for your service.
        Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Mr. Chairman. Chairman Crapo, I
    believe this is your last hearing, I think, and if it is, thank
    you for the relationship we have had and our ability to work
    together and your cooperation even when we obviously had major
    disagreements, but thank you for that.
        Chair Clayton, thank you for your service to our country.
        In this election, voters rejected this Administration and
    its ``Wall Street first'' attitude. Across the country, it is
    clear that people want financial watchdogs who look out for
    them, not make life easier for American CEOs. It is time to
    turn the page on this failed Administration, by at least 5
    million votes, we know, and to work together to build an
    economy that actually works for everyone.
        That means an economy where all workers can save and invest
    their hard-earned money for a downpayment, to help send their
    kids to a community college, and to retire with dignity. That
    is how we grow the middle class, and it is time that everyone
    had the chance to join it.
        That means finally working in a real way to eliminate the
    racial wealth gap. It means we have to enlist everyone in our
    Government in this project, including the SEC.
        This year the dedicated public servants at the Commission
    have done important work in the middle of a public health
    crisis and an economic crisis--we thank you and all of them for
    that--monitoring for fraud and misconduct related to the
    pandemic while continuing their work to protect investors,
    maintaining orderly markets, and promoting capital formation.
        Those efforts help working families saving and investing
    today and build confidence in our markets for the future.
        But I believe we aim higher or should aim higher than
    simply making markets more stable. We can do better than just
    preventing crashes and outright fraud. We need to make markets
    actually work for working people.
        Over the years, I have raised concerns about how your
    leadership has left behind the people whose savings are at
    stake in our markets--denying them the ability to hold
    executives accountable and withholding critical information
    about how companies are run and how they affect the environment
    and their communities.
        You have tried to reduce transparency; you have tried to
    undermine the protections we do have--even in the face of
    strong opposition from large and small investors, from
    advocates, and from experts.
        From employees across the country scrimping and saving to
    put money in their retirement accounts to pension managers
    investing for a generation of workers, they are all in a worse
    place since you have been in office. That does not even include
    those who want to save for their family and their retirement,
    but just cannot because their paycheck is not enough. The
    wealthy get wealthier and the middle class shrinks.
        You pushed for what you call ``Regulation Best Interest''--
    your term--a new standard that applies when brokers give advice
    to clients, but it does not put mom-and-pop customers first. A
    few weeks ago, you discussed the SEC's initial reviews after
    the standard went into effect in June.
        Even though you said firms are making, again, your words,
    ``good-faith efforts'', your staff reported shortcomings in
    compliance and failures to fully disclose disciplinary history
    to clients. In fact, it does not seem like you have any way to
    tell if this rule will help at all. Not an especially
    auspicious beginning.
        The SEC's final rules on proxy advisers and shareholder
    proposals are really clear examples of the Administration
    taking the side every single time in this Committee--we talk
    about this every single time--we know this. Every single time
    people get in line to do this, the Administration taking the
    side of corporate interests over Americans saving and investing
    for the future.
        Over the years, shareholder engagement has forced important
    conversations to happen in boardrooms. We need to push
    companies to focus on improving diversity, implementing better
    governance, and addressing climate change risks. Yet your
    agenda has attempted to stifle these important conversations.
        I am not the only one who is worried about your agenda.
    Last week, the North American Securities Administrators
    Association wrote you because 30 of its members--State
    watchdogs, including from Ohio--are concerned about a recent,
    broad rule with few safeguards that, in their words, ``would
    facilitate unlicensed intermediaries in the private market.''
        That is a polite way of saying they are very concerned
    about rampant fraud.
        Not only are they worried that you are putting their
    constituents at risk; they are upset that they did not even get
    a heads-up.
        While you were advancing one bad rule after another, always
    tilted toward corporate interests, you did not take the
    opportunity to make sure public companies disclose the risks
    that climate change poses to their businesses. You did the
    opposite, watering down corporate financial disclosures.
        When you tried to improve corporate workforce disclosure,
    it still fell short, failing to address basic concepts like
    employee turnover or to identify the numbers of full-time
    workers compared to part-time workers.
        We are never going to be able to undo the corporate
    business model that treats workers as expendable if we cannot
    even get companies to put out accurate information on the
    workers who make their businesses successful.
        While the pandemic posed challenges for the Commission's
    enforcement work, it also revealed how applying additional
    resources to the whistleblower program delivers results. And
    congratulations on that. By reallocating staff to review
    whistleblower tips, you managed record results. I hope that my
    concerns about the uncertainty created by your recent changes
    to the rules do not undermine the obvious successes of that
    program.
        More broadly on enforcement, although the SEC has
    aggressively pursued COVID-related scams and frauds, the last
    year of enforcement shows more of the same--a few big cases
    create a big topline number, but looking under the hood, you
    see too many cases without individual accountability.
        Last week's announcement that the SEC charged Wells Fargo's
    former CEO and consumer bank head for deceiving investors as
    part of the fake account scandal that was uncovered in 2016 is
    a rare and long overdue case--again, 2016--where your agency
    has actually held someone accountable for breaking the law and
    ripping people off at a big bank or corporation.
        Back when you were a nominee, you assured us, your words
    again, that ``individual accountability drives behavior more
    than corporate accountability.'' Well, you do not get better
    behavior by taking years--years. We have been talking about the
    Wells Fargo scandal for almost half a decade--by taking years
    to hold top executives individually accountable for
    intentional--and God knows it was intentional--deception.
        American voters sent a clear message in this election,
    about 80 million of them: They are tired of an economy where
    big corporations and their wealthy CEOs play by a different set
    of rules than people who work for a living.
        With each rollback of important safeguards or each
    disenfranchisement of shareholders, you claimed to be
    reforming, modernizing, or updating the rules.
        People are tired of that political spin. When you say
    ``reform,'' it seems you mean make things a little easier for
    the biggest guys. When you say ``modernize,'' you seem to mean
    make it that much harder to actually hold powerful CEOs
    accountable. When you say ``update,'' you seem to mean further
    entrench the Wall Street business model that exploits workers.
    And we know they do.
        Eighty million Americans rejected your agenda in this
    election. I hope we can reverse it.
        As you prepare to leave the Commission, you have changed
    the rules so much, even you will need to relearn fundamental
    elements of securities law when you return to what I assume
    will be a lucrative private practice.
        I have said it before. Protecting workers' hard-earned
    savings should begin with a simple concept: putting their
    interests first.
        I am disappointed, Chair Clayton, you do not see it that
    way. A decisive majority of the country surely does.
        Thank you.
        Chairman Crapo. Thank you, Senator Brown.
        And now we will turn to you, Chairman Clayton. You may make
    your opening statement.

      STATEMENT OF JAY CLAYTON, CHAIRMAN, SECURITIES AND EXCHANGE
                               COMMISSION

        Mr. Clayton. Thank you, Chairman Crapo and Ranking Member
    Brown and Senators of the Committee. I appreciate the
    opportunity to testify today about the work of the women and
    men at the Securities and Exchange Commission over the past
    year, including our work to address the effects of the COVID-19
    pandemic.
        To begin, I want to thank you for the support and
    assistance that you have provided the SEC during my tenure. I
    have enjoyed the thoughtful and candid engagement, and,
    importantly, you have provided adequate and additional
    resources to help us expand and modernize our investor-oriented
    efforts.
        I do wish circumstances would have allowed us to get
    together in person, and I hope to reach out to all of you
    bilaterally in the time that I have left.
        Working alongside the dedicated women and men of the
    Commission has been the privilege of a lifetime. I am honored
    to call them colleagues and friends, and I could not be more
    proud of the work they have done each and every day on behalf
    of investors, especially this year in the face of incredible
    professional and personal challenges. Their dedication,
    combined with our strong, time-tested, and flexible regulatory
    framework, allowed the SEC to respond quickly to the health,
    economic, and other unexpected challenges we face this year. I
    am pleased to report that while the pandemic significantly
    impacted how we do our work, it did not negatively impact the
    work itself.
        With respect to COVID-19, the SEC responded quickly by,
    one, providing targeted regulatory relief to ensure the
    continued operation of our markets; two, dedicating significant
    resources to COVID-related enforcement and examination efforts;
    three, increasing investor-focused oversight and engagement in
    key areas of stress; and, four, working closely with our
    domestic and foreign regulatory counterparts to monitor and
    mitigate the impacts of COVID-19.
        Here I must thank the Treasury, the Federal Reserve, and
    Congress for their swift action to intervene in our markets and
    provide liquidity and provide support for our economy more
    generally through the CARES Act.
        In addition, our traditional mission-oriented work
    continued with vigor, rigor, and transparency. During my
    chairmanship, recognizing the value of our time-tested
    regulatory framework, the agency has focused on modernizing the
    rules and regulations that implement that framework, some of
    which had not been meaningfully updated in many, many decades.
    As just a few examples, this year the Commission moved forward
    on a number of initiatives to: one, improve the proxy voting
    and shareholder proposal process; two, facilitate access to
    capital in our public and private markets and, in particular,
    with respect to our small and medium-sized businesses; three,
    modernize the fund disclosure and regulatory framework with an
    investor-oriented approach; and, four, improve and modernize
    our equity market structure.
        Despite our mandatory telework environment, we have also
    continued our strong enforcement and examination programs,
    focusing on areas that are most impactful to Main Street
    investors, including through our teachers and military
    servicemembers initiatives and dedicating resources to address
    COVID-related frauds and other matters.
        In addition, by leveraging technology, we have continued
    our robust outreach, education, and engagement initiatives to
    investors, entrepreneurs, and an array of market participants.
    Finally, the importance of diversity, inclusion, and
    opportunity to the Commission, the financial industry, and our
    society more generally was brought into stark relief by the
    events of 2020. Building on a strong foundation provided by,
    among other things, our Office of Minority and Women Inclusion
    and our Diversity and Inclusion Strategic Plan, we have
    continued to advance initiatives to further our collective
    commitment to these principles and to each other here at the
    Commission.
        Thank you again for the opportunity to testify about the
    work of the Commission, the fantastic work of the women and men
    at the Commission, and I look forward to your questions.
        Chairman Crapo. Thank you, Chairman Clayton. And, again,
    thank you for the service that you have given as the Chairman
    of the SEC.
        As I remarked in my opening statement, I am impressed by
    the rules that you have been able to modernize and improve
    during your tenure as Chairman. Your regulatory agenda has been
    and continues to be ambitious. You mentioned in your remarks
    that there is much work left to be done. Are there areas where
    you think the SEC should continue to focus or areas where you
    think Congress should take a closer look at the statute?
        Mr. Clayton. Senator, let me tick off a few. First is
    corporate hygiene. I think in the pandemic and the stress, we
    have seen areas where corporate hygiene could be better. We
    need to remove any uncertainty that corporations are operating
    with transparency and rigorous governance. A few of those are
    10b5-1 plans, option pricing, and what I call the ``8-K
    information gap.'' I think that these are things that most--my
    views in this area are things that most good corporations
    follow. I have put this information out there, had discussions
    with Members of Congress. I think that is an area that we can
    learn from.
        We also can learn a lot from our mandatory telework
    environment and not only the efficiency but the importance of
    electronic communications. We need to move our regulatory
    framework forward for all investors to an electronic framework.
    If people had not had--if this had happened 10 years ago, we
    would have had a problem. We would have had a real problem
    communicating particularly with our retail investors.
        Not to take too much of your time, but I also think the
    proxy process needs improvement. Our 13(f) proposal revealed
    that companies do not have efficient access to their
    shareholder base. We need more efficient access to our
    shareholder base for companies. It benefits both companies and
    shareholders.
        And, finally, in the area of ESG, we need to be rigorous in
    our approach to this disclosure area. I welcome the report from
    GAO on these components. I have discussed this in detail and
    look forward to doing so in the future.
        Chairman Crapo. Well, thank you. I appreciate that summary
    of where you think the SEC should focus, some of the issues
    that need to be focused on, as well as what Congress needs to
    be paying attention to. I appreciate that.
        Along those same lines, the SEC was quick and decisive in
    taking action in response to the COVID pandemic and the tools
    that were used, such as the marketwide circuit breakers,
    oversight of the physical floors of the Nation's stock
    exchanges being closed in order to comply with CDC's guidance,
    undertaking swift enforcement actions to protect investors from
    fraud and illicit schemes and other misconduct, and providing
    temporary relief in a number of other areas.
        The question I have is: As you reflect on the actions the
    SEC has taken in response to the pandemic, how do they shape
    the way the SEC should move forward? Specifically, are there
    temporary relief actions that you believe the Commission should
    consider making permanent?
        Mr. Clayton. The short answer is, ``Yes, many.'' The shift
    to a mandatory telework environment across our critical market
    infrastructure again showed the importance of being able to
    conduct business electronically and remotely. We provided a
    host of relief. We are assessing whether that relief in any way
    degraded investor protection or market integrity, and where it
    has not--and I think in many cases it increased it. Where it
    has not, we should make it permanent. It is that simple.
        That said, I want to make a specific--there are people who
    do prefer paper at the end of the day, and I think that for
    those retail investors, we should continue to provide access to
    paper to the extent they want it. But investors are better off
    and the system is better off if we are all on a level
    electronic communication playing field.
        Chairman Crapo. All right. Thank you. And my last question
    is too long to get out and get an answer to in this, so I am
    going to ask you this question, but then you can please respond
    in writing. It has to do with the Uyghur Forced Labor
    Prevention Act, which passed the House by a vote of 406, and
    there is a similar bill, Senate bill 3471, that contains a
    number of restrictions intended to punish those responsible for
    the horrific human rights violations occurring in China's
    Xinjiang Uyghur Autonomous Region.
        My question to you, which, again, I would like you to
    answer in writing, is: This legislation creates essentially a
    new disclosure regime at the SEC to deal with this issue. I am
    concerned about whether that is the right approach rather than
    utilizing existing pressure channels available to the
    Departments of Treasury, Commerce, State, Defense, and others.
    Is it your view that the SEC should establish a new disclosure
    regime rather than focusing on our existing regimes for
    punishing this behavior?
        Again, I would ask you to answer that question in writing,
    but it is a very critical issue that I think Congress needs to
    get right, and I would like your advice on that.
        Mr. Clayton. I am happy to do so.
        Chairman Crapo. Thank you.
        Senator Brown.
        Senator Brown. Thanks, Mr. Chairman, and I echo the
    Senator's request on that question. That is an important
    question. Chair Clayton, thank you for the response that you
    will give.
        When a broker borrows stock from a customer's account,
    Chairman Clayton, it has to provide collateral under the
    Customer Protection Rule, correct?
        Mr. Clayton. That is correct.
        Senator Brown. OK. Last month, though, the SEC issued a no-
    action letter to FINRA acknowledging that certain brokers are
    failing to provide collateral as required, violating, we think,
    the SEC's Customer Protection Rule, and said it was OK as long
    as they fixed it within 6 months. Was that what that no-action
    letter said?
        Mr. Clayton. I think it is much more nuanced than that,
    Senator, but, look, for purposes of this discussion, that is a
    fair way to say it. We gave a 6-month period for people to
    adopt practices that were clearly in line with the Customer
    Protection Rule, and this was particularly motivated by
    ensuring that SIPC protection applied in this case.
        Senator Brown. So how widespread is this problem in your
    estimation? Or why do firms need 6 months to do this when in
    the past they had not?
        Mr. Clayton. It is not clear that they need 6 months to do
    it, but what is needed is a time for those types of
    transactions, stock out on loan and the like, to be unwound in
    what I would say is an orderly way so it will not adversely
    affect customers or the market itself.
        Our staff in the Division of Trading and Markets, in
    consultation with FINRA, made an assessment that this was not a
    particularly--a situation where people were particularly at
    risk, but that, to use my word, we needed better hygiene across
    the stock-borrowing, what I would say, ecosystem.
        Senator Brown. Well, I understand what you said. I think
    it, again, plays into the belief that the SEC and this
    Government is a deeper swamp than it was 4 years ago. People
    feel that--folks on Main Street feel like the odds are stacked
    against them.
        Let me switch here----
        Mr. Clayton. Well, look, I could just quickly respond to
    that in that as soon as I became aware of this, it was days
    when this action was taken.
        Senator Brown. OK. Thank you.
        Let me turn to stock buybacks, Chairman Clayton. The SEC
    recently brought a case against a company for doing stock
    buybacks while management had inside information about a
    merger, insider trading by most definitions. You called it a
    ``failure of internal controls,'' even though the Legal
    Department signed off on the buybacks. Congress has called on
    you to revisit the stock buybacks rules. Many in Congress have.
    Doesn't it make more sense to have clear standards for
    companies to follow and avoid abuses instead of expending
    resources on weak enforcement activities?
        Mr. Clayton. Yeah, let me say this about stock buybacks and
    10b5-1 plans. As I mentioned in my response to Chairman Crapo,
    I think additional hygiene in this area is appropriate,
    Senator. Buybacks provide a very efficient way from a company's
    standpoint to manage their capital allocation and balance
    sheet. But I think it should be applied with good corporate
    hygiene, including policies and procedures to ensure that when
    they are put in place or restarted, a company does not have
    material nonpublic information. And for executives, I am a
    proponent of a cooling-off period, and that is that when you
    put your 10b5-1 plan in place, say you do it in June, there are
    no purchases or sales--in most cases it is sales with an
    executive 10b5-1 program--for a period of time. Now, whether
    that period of time is 3 months or 6 months or whatever it is,
    that gives everybody comfort that timing was not planned ahead,
    you know, that fortuity was not intent, and I think that is
    something that we should all explore.
        Senator Brown. OK. Thank you. I have worked on
    legislation--it is a little late in this session and under your
    tenure--that would create guardrails and prevent these kinds of
    failures and abuses. I think your comments were appropriate
    that we allow companies to still do buybacks, but they would
    have to provide real transparency, which they do not always,
    and would have to reward workers, not just shareholders. That
    is what I think the real solution is.
        I will just close briefly with a bit of a statement. We saw
    earlier this year the pandemic crushing our families and
    hospitals and the economy, how the markets seized up. The SEC's
    recent report on interconnectedness in the market offers some
    insights but no real policy recommendations. I know that you
    and Vice Chair Quarles and Deputy Treasury Secretary Muzinich
    should have come and that the money market reforms from the
    last crisis were not good enough. But it is clear that your
    successor, the next banking regulators, the next FSOC Chair
    will need to reduce risks from interconnectedness and excessive
    leverage. The economy may in the future depend on it.
        Thank you, Chair Clayton. Thank you, Mr. Chairman.
        Chairman Crapo. Senator Toomey.
        Senator Toomey. Thank you, Mr. Chairman. And, Chairman
    Clayton, welcome back on what I gather is your final appearance
    before our Committee, and let me just take a moment to say I
    really appreciate the excellent work that you have done and the
    leadership you have provided at the SEC. In my mind, you have
    clearly advanced the mission that the SEC is responsible for,
    protecting investors and maintaining fair, orderly, and
    efficient markets, and facilitating capital formation. I
    particularly appreciate your efforts to expand investment
    opportunities for average investors. I appreciate the work you
    have done to create an environment where it is easier for
    companies to go public. And I also want to take a moment to tip
    my hat to you and your colleagues for the extraordinary, really
    extraordinary accomplishment of how we got through the
    unprecedented period where we shut down our economy; we sort of
    voluntarily closed our economy; we forbid people from going to
    work. And yet during that period of time, during the worst of
    that period of time, after a brief period where they completely
    froze up but then in response to our legislation, our capital
    markets reopened. They thrived. We actually set all-time
    records in debt issuances across the credit quality spectrum.
    We had no settlement problems. We had an amazingly efficient--
    in fact, we returned to being the world's deepest, most liquid,
    most efficient capital markets by far, and we did it with
    everyone working from home, the SEC working from home. And
    while there are a lot of people that deserve a lot of credit
    for it, I think you deserve your share as well, Mr. Chairman,
    so thanks for all that you have done for your service to the
    country.
        I have got two big questions for you, if I could, and the
    first is about companies going public. As we all know, there
    are fewer of them than there once was, right? Companies wait
    until longer--they delay going public as long as they can, it
    seems. It seems that IPOs now are more often a liquidity event
    than they are a capital-raising event. We have far fewer
    investment opportunities for investors because we have fewer
    publicly traded companies, and we have fewer options for
    capital raising on the part of companies that feel like that is
    not a viable option.
        So my question for you, Mr. Chairman, just a couple of
    brief thoughts if you have them: Is there more that we can be
    doing in Congress to create an environment where it is more
    attractive to go public earlier so that that is a viable option
    for growing businesses and it is a viable investment option for
    more investors? What else can we be doing to restore even more
    vibrancy to our public markets?
        Mr. Clayton. Well, thank you, and thank you for the really
    kind words about the work of the Commission. I think if the
    American people saw what the women and men here did in that
    month of stress, they would be extremely impressed.
        Your question is one that is kind of front of mind for me
    at all times. We have taken the JOBS Act, which was a terrific
    piece of legislation which did facilitate the move from being a
    private company to a public company, providing an on-ramp, and
    we have expanded access to the JOBS Act to companies, and I
    believe that has made a difference over time in the choice
    between staying private and becoming public.
        I am not going to take a victory lap yet, but, you know, we
    are up on IPOs. You know, that may be market driven. It may be
    a result of our efforts. It may be a result of a lot of
    different things. But I am hoping that that choice was a better
    one.
        I think that we have to recognize that one size does not
    fit all from a disclosure and regulatory perspective. I have no
    problem with many of what people would call ``burdens,''
    ``frictions,'' whatever you want, in our system for large
    public companies. You know, can they be adjusted here and there
    and are we doing that? Sure. But for medium-sized companies--
    and I am going to say this, companies $100 million to a couple
    of billion or more--the same rigor and life that applies to a
    company with a $500 billion market cap just does not make
    sense, and we need to recognize that.
        Senator Toomey. Well, thanks. I am going to run out of time
    here, Mr. Chairman, but, again----
        Mr. Clayton. Sorry.
        Senator Toomey. That is quite all right. I would suggest
    the JOBS Act has been remarkably successful. The vast majority
    of companies that go public actually use the emerging growth
    avenue that we created. I think we want to expand that avenue
    so that more companies can take advantage of it.
        I also think we want to be very careful about the extent to
    which activist groups are trying to use corporate governance as
    a way to advance a social and political agenda that really
    ought to be advanced through the accountable elected branches
    of Government. But thanks for your service. I look forward to
    continuing the discussion.
        Chairman Crapo. Thank you.
        Is Senator Menendez with us? I think he may have had to go
    off-line for a minute. All right. Then let us move on to
    Senator Warner.
        Senator Warner. Thank you, Mr. Chairman. I appreciate this
    hearing.
        And, Mr. Chairman, before I turn to questions, I also want
    to take a moment and thank the Chair for his service. Chairman
    Clayton has been someone that I have had a great working
    relationship with for 3\1/2\ years--can you hear me all right?
    Am I coming along, Mike?
        Chairman Crapo. Yeah.
        Senator Warner. OK. And while we have not always agreed by
    any means, I appreciate the partnership that we have worked on,
    on issues like improving the SEC enforcement tools, the Kokesh,
    which I want to get to at the end of my comments. But I really
    want to zero in on something that I first talked to you as you
    came into this job, and that is the question which I think is
    fundamental and will be one of your legacy items about human
    capital reporting.
        You know, I think we all know that we have seen, even
    prepandemic, a fundamental transformation in overall investment
    strategies. We have seen that companies are investing much less
    in tangible goods and much more in intangible goods, and
    oftentimes those intangible goods are human capital.
        We have talked about the need for potentially doing tax
    accounting, reporting transition. I may be a little further
    down the path than you on some of those issues, but I really
    appreciate the fact that you have taken this issue on with
    seriousness and rigor and really laid down the first step, and
    you did that by putting forward your revised Reg. S-K
    regulations that finally for the first time--and I would argue
    for the first time and we have more to go--requires some level
    of human capital metrics for companies to report when you talk
    about--every CEO I know talks about their assets being their
    workforce, yet there is no place that that is reflected on
    their balance sheet. There is no place that is reflected in
    their SEC filings. I think by these revised S-K rules, you are
    starting us down this path toward a more worker-centric
    management structure. And my hope is, while you have, I think,
    taken this on as a principles-based approach, that we will see
    both an increase in the quantity of this reporting as well as
    the quality, and I think it is terribly important that we
    ultimately get enough data in place where there is allowed to
    be a baseline that would allow some comparison between
    industries on this important topic, and I know we had to start
    someplace, and you have started that discussion.
        I say you have noted in your written testimony that you
    believe the principles-based approach will lead to quantitative
    disclosure by firms and deem the information to be material.
    Can you talk about how you see that occurring in practice and
    then how we make sure that this is just not nice to have but
    that more and more firms will actually believe this human
    capital component falls into the materiality category and that
    they will take it with the kind of seriousness that I know you
    do and that I hope we will see the whole business community
    move toward?
        Mr. Clayton. Yes, thank you, and I believe that the
    disclosure requirement that we put in place will facilitate
    both qualitative disclosure, how do we look at our workforce,
    and like you said, in a number of industries, it can be the
    entire company. It can be 30, 40 percent of the value on the
    balance sheet. Depending on the industry, I would expect
    turnover, turnover in particular areas, to be a metric that
    people might show. Now, in some industries that is not very
    relevant, but in others it is. What I would say with sector-
    specific within skill sets, engineers, how many engineers are
    people actually bringing onboard. How difficult is it to hire
    them? So there will be qualitative and quantitative disclosure.
        We should understand what management believes drives the
    value of the business from a human capital perspective, and
    that is the core requirement. And I think it is--look, it is
    the way I look at things at the SEC. What is our turnover? You
    know, and from a topic that is current today, from a diversity
    and inclusion standpoint, we are tracking those metrics at the
    SEC, and I have them front of mind. If I were a public company,
    I would expect to disclose them.
        Senator Warner. Well, one of the things--I appreciate that
    and, again, you had to be the guy to set the framework, to get
    this out of the discussion stage, to start having companies
    putting this reporting in place. You have heard and my
    colleagues on this Committee have heard I think we need to go
    further. I always point out the problem, you know, in terms of
    tax and accounting, you know, a company buys a robot, you get
    an R&D tax credit, that robot is an asset on your balance
    sheet. The accountants have recognized that. If the same
    company invests in two human beings being more efficient than
    the robot, they are not given the same tax treatment, and that
    investment is not viewed in a category on the balance sheet as
    an asset class. And I know you are coming down to your last
    meeting or say, and, Jay, I do not want to get you further out
    over your skis, but I told you I wanted to push you on this a
    little bit. You know, my hope would be that you would say you
    are at least open to ongoing engagement with FASB. I think the
    Commission has a role of overseeing FASB, that we ought to at
    least reopen the discussions or start discussions about
    accounting treatment of investment in human capital. I think we
    ought to look at tax treatment of investment in human capital.
    Do you think we are--you know, we have taken the first step by
    having at least de minimis reporting. I think the next step
    ought to be tax and accounting review, and I would love in my
    last minute or two for you to make a comment on that.
        Chairman Crapo. Actually, you are about 2 minutes over,
    Senator Warner.
        [Laughter.]
        Senator Warner. Where is your clock, Mike? I thought you
    were going to put a clock up here. I was trying to--I will let
    Chair Clayton, since we have had this discussion repeatedly,
    take that one for the record. But I would love to--you know, if
    you will let me help draft your answer so I can share it with
    Chairman Crapo and some of the others afterwards so I can nudge
    him on a going-forward basis. But let me just again say, Jay,
    thank you for your service, and I think you have done a great
    job and I look forward to continuing the discussion.
        Chairman Crapo. Thank you. And the tone that I told
    everybody we were going to play does not appear to be working.
        Senator Warner. I know. I was waiting for the exit music,
    Mike. I got nothing. I have got somebody in my ear saying,
    ``That is a great question, Warner. Keep''----
        [Laughter.]
        Chairman Crapo. I guess I will just have to try to remember
    to tap the clock or something, but please, folks, watch the
    clock. We are trying to solve this. Thanks, Mark.
        Senator Warner. Thank you.
        Chairman Crapo. Senator Scott.
        Senator Scott. Thank you, Mr. Chairman, for my 12 minutes
    that I have now.
        [Laughter.]
        Senator Scott. Thank you so much for my time. I will use
    every minute plus 15 on top of that. Thank you so much.
        Chair Clayton, thank you for your service to our country.
    Without any question, having had the opportunity to work with
    you, I know that your agency's focus has been on Mr. and Mrs.
    401(k). The average investor in our country through their
    retirement funds may not appreciate the way that you have
    really focused on simplifying some of the language and making
    it easier for the investor to engage. You know, Mr. and Mrs.
    401(k) or the Main Street investor may not be able to pinpoint
    exactly which amendment to the 1934 Act or the tweak to the
    1940 Act that allowed them to safely and affordably access the
    advice or products needed to meet their investment goals, but I
    am glad you and your team at the SEC have been so diligently
    focused on protecting these investors. That is a really big
    key, and you think about the fact that only half of U.S.
    households own stock at all and the average portfolio is about
    $40,000, that is a really important engagement when the average
    investor can understand and appreciate in a simplified manner
    what they are investing in and the rules of the road, so to
    speak. You take that number and you cut it down by 31 percent
    for minority investors, Hispanics and African Americans, that
    number drops precipitously.
        Fortunately, technology and innovation has recently
    improved the availability of simple, low-cost investment
    platforms that can be accessed by investors with a smartphone
    and as little as $20 now to see their dreams come true. A broad
    chunk of young and diverse Americans are now more engaged in
    the stock market, including many millions who are doing so for
    the very first time.
        Can you, Chairman Clayton, please discuss the benefits of
    the increased participation and if the Commission's regulations
    are keeping up with the pace of innovation?
        Mr. Clayton. Thank you, Senator Scott. I believe and I know
    the people here believe--and the pandemic demonstrated this--
    that being connected to our financial system, having a bank
    account, having an investment account is essential to
    participation in our society. We saw this in the CARES Act
    relief. You could get relief faster to people who were
    connected. We want to increase those connections, preserving
    investor protection, and as you mentioned, driving down costs.
        Look, we are hell-bent to get at fraud and prevent fraud,
    and we have, you know, a thousand people in the Enforcement
    Division, 1,300 there, actually a thousand of people in
    Inspections, that is their job. But if we can reduce costs for
    the average American by 25, 30, 50 basis points over the course
    of their retirement, the benefits to society are astronomical.
    And technology should be enabling us to do that. So get
    connected, get educated, and get the frictions down.
        Senator Scott. And, Chair Clayton, I will just end with
    this note, trying to respect my minute and 30 seconds that we
    have left. Access, as you just discussed, is so critical. It
    has never been more accessible than it is today. I was talking
    with my nephew, who is a resident, and his friends are now
    engaging in investments using multiple platforms in a way that
    was unimaginable and, frankly, cost-prohibitive 10 years ago,
    15 years ago. So we are moving to a place where the average
    family, the average person, will have access to the stock
    market, and the most important point with that increased access
    is having integrity in the system. So thank you for spending
    quality time insulating those smaller investors by making sure
    that there is lots of integrity and, in my opinion, a synonym
    to integrity in this case would be transparency, and
    digestible, making sure that the language is such that the
    average person that is investing--I heard the bell, so does
    that mean that Senator Warner just ignored the bell?
        [Laughter.]
        Senator Scott. But it is important to continue to work
    really hard at making sure that the average investor has
    confidence in the system. And I appreciate your office taking
    the average person's perspective on something that is very
    complicated and sometimes hard to understand.
        With that, I yield back my last 3 seconds.
        Chairman Crapo. Thank you, Senator Scott.
        Senator Menendez.
        Senator Menendez. Chair Clayton, thank you for your service
    and best of luck as you move forward. The last time you were
    here, we discussed how foreign actors could evade the
    beneficial ownership disclosure requirement under Section 13(d)
    and the negative effects that could have on publicly traded
    companies, particularly in the media and technology sectors,
    their investors in the U.S. national security overall.
        Given the ongoing pandemic and the ensuing economic crisis,
    we need to continue to be vigilant against any malign foreign
    actor that could be looking for an opportunity to purchase a
    significant stake of a distressed company without filing the
    requisite disclosures.
        So has the SEC made any improvements to your 13(d)
    oversight, as we discussed this last year? And have you
    identified any statutory impediments that prevent the agency
    from sufficiently monitoring or enforcing potential 13(d)
    violations?
        Mr. Clayton. So, Senator, I agree with you, and I think our
    friends at the Treasury would agree with you, that
    understanding beneficial ownership and whether there is any
    evasion of 13(d) is very important. We did take a recent
    measure that I want to highlight for you. We just put out what
    I would call guidance, but you can also call it, you know, good
    hygiene in brokerage accounts--foreign omnibus accounts,
    accounts that mix ownership of different parties outside the
    United States, and then trade, what I will say, through a
    single pipe into the United States. I believe that they have
    been used to mask ownership, and we need to ensure that the
    U.S. broker-dealers, particularly--and this guidance comes out
    in the area of thinly traded and low-priced securities--are
    doing the appropriate diligence on those foreign omnibus
    accounts. So what I can do is assure you that we are focused on
    this area, and we are not just studying it; we are doing things
    about it.
        Senator Menendez. Well, I appreciate that, and I am
    particularly concerned about media and technology companies
    that are responsible for delivering unbiased and objective
    reporting of current events to the American public. And in
    these times, they play a special role in disseminating critical
    public health information so we can get the pandemic under
    control. I hope that your successor and the rest of the members
    will continue to prioritize this.
        I have seen elements of foreign entities purchasing and
    having significant controlling interest, and, you know, in and
    of itself that is not a terrible thing, but understanding the
    nature and having the disclosure so we know who is affecting
    these public information channels I think is incredibly
    important.
        Let me turn to another topic. Studies have consistently
    found that greater diversity on executive teams have led to
    greater profitability and, therefore, better outcomes for
    shareholders. McKinsey's most recent diversity report found
    that companies with more gender diversity on their executive
    teams were 25 percent more likely to have an above average
    profitability than companies with nondiverse teams. That same
    report found that companies that with the most ethnically
    diverse executive teams are 33 percent more likely to
    outperform their peers on profitability.
        So do you agree with these statistics that find companies
    with more diverse executive teams as more profitable?
        Mr. Clayton. Well, I have looked at that report, and let me
    just say what we do here at the SEC. We do believe and have
    acted on diversity and inclusion not only as the right thing
    but as value-enhancing, and I have seen firsthand, as we have
    increased inclusion here, that it has led to better
    performance.
        Senator Menendez. Well, I appreciate that, but I would like
    us to go beyond that. I think that in a marketplace, forgetting
    about doing the right thing, that simply in a marketplace where
    you have a trillion-plus dollars of domestic spending in the
    Hispanic community, for example, younger by a decade than the
    rest of the American population, more brand-loyal than any
    other group, and spends more of their disposable income, as a
    business proposition I would like to be on them like white on
    rice, understanding, however, the nature of the community
    having seen your people on corporate boards and senior
    executive management, good for the bottomline.
        My final question. Section 956 of Dodd-Frank requires the
    OCC, the Federal Reserve, FDIC, NCUA, FHFA, and the SEC to
    jointly propose an executive compensation rule to prohibit
    unsafe and unsound compensation plans.
        During your time as the SEC Chair, have all six regulators
    sat down together to discuss this rulemaking?
        Mr. Clayton. Yes, we have. If you consider conference calls
    sitting down together, yes, we have.
        Senator Menendez. OK. And what did these discussions
    ultimately lead to? Have you decided to move forward with a
    proposed rule?
        Mr. Clayton. Well, all I can say is we were at advanced
    stages on--I will say it this way, kind of corporate-speak. We
    were at advanced term sheet stages. But, you know, bandwidth
    has been constrained in some areas, particularly that kind of
    coordination, bandwidth is constrained by the events of the
    day.
        Senator Menendez. Yes, well, I would just say that it seems
    that sometimes the bandwidth on things we do not really want to
    deal with seems the most constraining, but thank you, and good
    luck in your future.
        Mr. Clayton. Thank you, Senator.
        Chairman Crapo. Senator Cotton.
        Senator Cotton. Thank you, Senator Crapo. And thank you,
    Chairman, for your appearance before us today, which I assume
    will be your final appearance. I am sure you hope so.
        [Laughter.]
        Senator Cotton. I want to thank you for 3\1/2\ years of
    service to our country at the SEC, and thank you for being a
    good partner to my office when we agree, and especially when we
    do not agree, and the open lines of communication you have had
    and representing the people of Arkansas.
        I would like to speak today about a topic that we have
    discussed in the past, both at these hearings and directly one
    on one, and that is the concept of regulation by enforcement.
    This is something that became infamous under President Obama.
    It is the act of using court rulings or administrative
    decisions to make changes in the rules as opposed to the notice
    and comment rulemaking process under the Administrative
    Procedures Act. It often means that enforcement decisions are
    based on things that regulators may or may not like, things
    that remain opaque and sometimes even unknown to regulated
    players in the market.
        Do you agree that enforcement actions should only be taken
    when an actor in the market violates rules, rules that have
    either been written by Congress in law or passed into
    regulations by an agency like yours?
        Mr. Clayton. Senator, I do. I want to qualify that by
    saying, you know, some rules rely on facts and circumstance
    application, but to the extent you are asking me should we
    expand authority or regulation without going through notice and
    comment, no, we should not. We should do that.
        Senator Cotton. I think it is a fundamental principle of
    the rule of law, which in some way predates the concept of
    self-government that it is hard to have an ordered society
    without clear and established rules known in advance that all
    citizens can obey and uphold. And that is irrespective of
    whether or not you agree with the laws or not. It is so vital
    that we have established written rules in advance.
        One example that we discussed before and that I want to
    discuss here today is the SEC's Share Class Selection
    Disclosure Initiative. Under that initiative, several firms
    were fined partly because they did not list three items in
    their disclosure: one, that a firm received 12b-1 fees; two,
    that cheaper shares of the same fund were available; and,
    three, that purchasing fund shares that paid 12b-1 fees when
    cheaper share classes were available would adversely affect the
    client's return.
        Again, these may be best practices for financial
    disclosures, but that is not exactly what we are talking about
    here. We are talking about having clarity in advance of any
    enforcement decision.
        Can the SEC cite a public document where all three of those
    elements were listed in advance of any of these enforcement
    actions, Mr. Chairman?
        Mr. Clayton. Let me put it like this: I do not have a
    document like that to hand, but I understand the issue very
    well. This was investment advisers engaged in their clients.
    They have a duty to those clients not to put the investment
    adviser's interest ahead of the client. They also have a duty
    of candor.
        Let me give you a stark case. You tell somebody, ``I am
    going to put you in the best option for you from a cost
    perspective, and you have two choices. One has a higher cost;
    one has a lower cost. But otherwise they are exactly the
    same.'' There is no doubt that that is a violation of that
    obligation.
        The Share Class Disclosure Initiative, what we tried to do
    was efficiently deal with what we saw was a widespread practice
    that was inconsistent with law. But, Senator, these are all
    facts and circumstances situations, and I understand that some
    people felt that they were within the bounds of the law when we
    felt they were not.
        I am hopeful that there has been clarity brought to this,
    more clarity brought to this, but I am also comfortable that
    the Enforcement Division pursued this believing and having that
    belief based on rigorous analysis that they were on the right
    side of the law. But I very much take your point that we should
    not, you know, use ambiguities or uncertainties in the law to
    our advantage.
        Senator Cotton. Well, let me conclude, Mr. Chairman, about
    the Enforcement Division action in this case, something that
    Commissioner Peirce said. The Division used prior settlements
    which have never been tried before a judge as precedents that
    advisers violated the disclosure obligations. In effect, the
    agency short-circuited the required rulemaking process by
    adopting a regulation through enforcement rather than through a
    rulemaking. I take it you disagree with Commissioner Peirce on
    that point?
        Mr. Clayton. Well, I agree with part of what she said, and
    that is, I believe using our administrative courts for matters
    like this, we need to do so cautiously, if at all. And I wish
    that precedent were in an Article III court.
        Senator Cotton. OK. Well, I will cut it off there since we
    are hearing bells ringings, but since we are going into the
    Christmas season, maybe that means an angel is getting its
    wings every time a Senator runs over his time.
        Chairman Crapo. Yeah, that is right. You may not have been
    on when I announced that I am having a tone rung at 30 seconds
    and at the end of the 5 minutes, because Senators do not seem--
    some Senators do not seem to be able to find the clock on their
    screen.
        With that, Senator Warren.
        Senator Warren. Thank you, Mr. Chairman.
        So the SEC's job is to protect our economy by ensuring that
    investors have the basic information they need to make good
    investment decisions, and that is why the SEC requires publicly
    traded companies to disclose things like outstanding lawsuits
    or pay for top executives. You know, if a company looks like a
    bad bet, then an investor could decide to put her money
    somewhere else.
        Now, in order for the SEC to make sure that companies stay
    honest, disclosure rules have to keep up with changes in our
    economy. And one of the biggest changes bearing down on our
    economy is climate change. Extreme weather events, rising sea
    levels, increasingly scarce resources--these all pose huge
    risks that big companies must navigate. Policies moving us
    toward clean energy are going to have a big impact on companies
    that are still dependent on dirty energy.
        So while the crisis has gotten worse, the SEC under your
    leadership has done nothing, and that has resulted in multiple
    problems. So I just want to go over the list. I thought we
    might do this together. Uniform standards for climate risk
    reporting. Chairman Clayton, has the SEC established a
    mandatory uniform standard for reporting on climate risk so
    that investors can compare companies head to head?
        Mr. Clayton. If you mean a standard metric, like, you know,
    a carbon emission metric applied across our 6,000--whatever the
    number is----
        Senator Warren. No. I mean a mandatory uniform standard,
    however you do it. I just want to know. Have you got a
    mandatory uniform standard?
        Mr. Clayton. To the extent that climate-related risks are
    material to the company's performance and prospects, they have
    to be disclosed, and we have outstanding guidance to guide
    companies on how to----
        Senator Warren. I understand you have some guidance, but I
    have read that guidance. That guidance does not establish a
    standardized framework. I am asking about a mandatory uniform
    standard, and I think your answer here--one word, yes or no?
        Mr. Clayton. It depends on what you mean--we do have a
    materiality standard.
        Senator Warren. You do not know what a mandatory uniform
    standard----
        Mr. Clayton. Well, I do not know what you are----
        Senator Warren. You have no uniform standards for
    reporting. What about----
        Mr. Clayton. No, I disagree.
        Senator Warren.----at least mandating that companies report
    something? Chairman Clayton, has the SEC mandated that all
    publicly traded companies report something about climate risk
    so that investors can compare those companies head to head?
        Mr. Clayton. To the extent it is material to an investment
    decision----
        Senator Warren. No, that is not what I asked. I asked the
    question about requiring all publicly traded companies to
    report something. They may decide to report that they have no
    risk at all, but do you require that?
        Mr. Clayton. We do not require them to report that they
    have no risk at all.
        Senator Warren. OK. So right now, we have got these huge
    gaps in the SEC's disclosure rules that basically allow a
    company, either to conceal or to downplay climate risk from
    investors. So how do the investors feel about that? How do the
    pension funds and the university endowments that are trying to
    make long-term investments or socially responsible investments
    feel about the SEC's failure to require full and consistent
    reporting of climate risk?
        Well, this summer, 40 major investors who collectively
    manage over $1 trillion in assets joined with nonprofits,
    businesses, and former regulators in sending you a letter
    arguing that the climate crisis is material and a systemic
    threat to our economy and asking the SEC to mandate corporate
    climate risk disclosure.
        And then, just last week, the Federal Reserve's Financial
    Stability Report stated that, ``Increased transparency through
    measurement and disclosure could improve the pricing of climate
    risks.'' In other words, more information on climate risk is
    good.
        So, Chairman Clayton, how do you explain to these
    investors, these businesses, these nonprofits, and even your
    fellow regulators that they are somehow better off with less
    information about climate change?
        Mr. Clayton. Well, that is not what I would say to them. I
    would say, ``You are better off with good information.'' I can
    tell you that I was up early this morning for a lengthy
    discussion with my IOSCO friends Mark Carney and others that
    has been ongoing as to how to actually address--and I am
    supportive of the Federal Reserve's report--how to actually
    address this issue in a meaningful way. And I----
        Senator Warren. So let me just ask----
        Mr. Clayton. I am happy to----
        Senator Warren.----I am getting letters from investors
    asking for climate risk information. Now, obviously, they are
    not getting it, or they would not be asking. So I want to know:
    Have you been getting letters from climate--from people
    representing over $1 trillion in investments? Have they sent
    you public letters asking you to shield them from getting
    climate risk information?
        Mr. Clayton. No, but they have asked me to get them good
    information, good decision----
        Senator Warren. I would like to see those letters from
    those who say they do not----
        Mr. Clayton. It is not--no, I----
        Senator Warren. You know, I----
        Mr. Clayton. What people want is decision useful
    information.
        Senator Warren. Yes, that is why they sent you letters
    asking for climate risk information. You know, I have a bill
    with Representative Casten that would force you to do your job
    and require publicly traded companies to disclose information
    about their
    climate risks. But the SEC does not have to wait for Congress
    to pass a law. You already have the authority to require
    companies to provide this information, and you have refused to
    ask.
        Chairman Clayton, climate risk--climate crisis is an
    existential risk. We need a new SEC Chair who will put this
    climate crisis at the top of the agency's agenda.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman.
        First, Chairman Clayton, let me begin by saying
    congratulations on the upcoming end of your tenure as Chairman,
    and thank you for all the hard work that you did while serving
    at the SEC. You have accomplished a great deal as Chairman, but
    one positive development that I would like to highlight is the
    SEC's expansion of people and entities that qualify as
    ``accredited investors'' under Regulation D. In particular, I
    was pleased that the SEC expanded Regulation D to include
    Native American Tribes. These reforms will make it easier for
    Tribes to participate in investment opportunities while also
    putting Native American Tribes on more equal footing with other
    investors and market participants.
        In considering the changes to Reg. D, particularly as it
    relates to Native American Tribes, are there additional ways
    the SEC and Congress can help level the regulatory playing
    field for Tribes?
        Mr. Clayton. The short answer is yes, and this is an issue
    I was not aware of when I arrived here, but I had a nice
    meeting with representatives of a number of Tribes and realized
    that they were not being treated fairly under our credit
    investor definition and some of our other definitions that
    provide access and opportunity for institutional investors.
        In short, they should be treated like any other
    institutional investor, like a pension fund or the like, and I
    believe we are going to be doing that going forward.
        Senator Rounds. Great. Thank you. Look, I appreciate that.
    I know that the Tribes in South Dakota have an interest
    specifically regarding that, so I appreciate the work that you
    have done.
        I am also sure that you have been closely following the
    conversations in State legislatures and city councils about
    imposing a financial transaction tax on security trading. These
    developments concern me for several reasons, chief among them
    because it would hurt both Main Street investors and
    institutional investors like the South Dakota Retirement Fund.
    South Dakota is a low-tax, business-friendly State, and I would
    like to say to any of the businesses that may fall victim to a
    financial transaction tax, health fund in the United States,
    whether you are an exchange in Manhattan, a data center
    operator in Syracuse, or a commodities trader in Chicago, you
    are welcome in South Dakota.
        Chairman Clayton, how do you see our securities market
    evolving if one or more State and local jurisdictions impose a
    financial transaction tax?
        Mr. Clayton. You know, a couple things just to highlight to
    think about. One is that transaction taxes, whether they are in
    financial services or other places, the incidence, you know,
    largely falls on the end user, so in our case the investor.
    Some of the frictions are absorbed by intermediaries, but at
    the end of the day, experience shows that. So they should be
    approached with that in mind, that the incidence in the tax
    falls on the person who uses the investor at the end of the
    day.
        The other thing is if we do have a piecemeal approach to a
    transaction tax, you are going to have critical infrastructure
    moving in response. You know, tax policy causes adjustments,
    and if we have our critical infrastructure moving from one
    jurisdiction to another for more favorable tax treatment, from
    my perspective that creates operational issues that we need to
    think about.
        Senator Rounds. Thank you.
        With regard to proxy advisory firms, there have been
    discussions about their impact, whether or not there should be
    more disclosures. Just in broad terms, in the time I have left,
    what are your thoughts regarding any regulatory activity that
    should involve proxy advisory firms? And where are we at right
    now, in your opinion? Are there other issues, are there
    concerns that you would like to express to this Committee
    regarding the firms, the impact they have, and whether or not
    additional regulatory activities should occur regarding them?
        Mr. Clayton. Let me try levels at this and a perspective
    going forward. I am sorry I am not going to be here in the
    future, but the proxy process is designed to approximate the
    quintessential shareholder meeting, and if you have somebody,
    you know, at that shareholder meeting who is soliciting votes
    one way or another, you want to know their interests.
        Now, just what we have done in our rulemaking is apply that
    concept to the proxy advisory firms and said to the extent you
    have material--and, again, material, not absolute--material
    conflicts that a reasonable person would believe would affect
    your advice, you should tell them. I think with that paradigm,
    you know, virtual shareholder meeting is a good way to look at
    it. Also, try to provide an opportunity for engagement so that
    shareholders can hear both sides or multiple sides or diverse
    views and make an informed decision. That is how I look at it.
        Senator Rounds. Thank you. Thank you for your service, and
    thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman. And, Chairman
    Clayton, I want to thank you for your public service. Our
    engagements have always been good and respectful, and sometimes
    we even find areas of common ground.
        I want to follow up a little bit on our ongoing
    conversation about climate risk. Last year, we discussed the
    SEC's enforcement of its 2010 guidance on climate-risk
    disclosure. You and Senator Warren had a brief exchange about
    that about 15 minutes ago. Where is the Division of Corporation
    Finance on the enforcement efforts? Could you give me an
    update?
        Mr. Clayton. So here is where we are, Senator, and I want
    to make it clear that this is an area where, for certain
    sectors and certain companies, you know, we all believe
    disclosure is required. It is material. Different sectors,
    different ways.
        What we have been doing--like I said, I just got off a long
    conference call this morning with IOSCO, you know, Task Force
    on Climate-Related Disclosures. How do we drive the standards
    that are meaningful? And I think we are all gravitating toward
    the view that these need to be sector-specific. It is very
    hard--this is all forward-looking information. I am sorry I am
    going to take so much time, but I need to say this. It is
    really hard to make forward-looking disclosure that is going to
    be accurate over time. We all know that, anybody who has been a
    securities law. We need something to disclose against, and
    whether that is carbon neutral by 2050, you know, how am I
    going to get my company carbon neutral by 2050, whether it is
    some other regulation, you need something to disclose against.
        We are working on that, and I believe, for example, in the
    property and casualty industry and in certain industries, you
    can start to see metrics where people will gravitate toward--
    you know, as regulation changes. But this is a vexing issue. We
    are on it.
        Senator Schatz. Sure, and I think the area of common
    ground--and this is really worth lingering on, at least for a
    moment--is that these risks are material. The FTC does not need
    additional statutory authority to require these disclosures,
    but--and this stuff is hard, and we are going to need some
    uniform platforms and disclosure requirements so that it is not
    sort of everybody inventing their own disclosure technique,
    either by sector or even by individual company. So we actually
    have a fair amount of common ground here.
        As you know, the United Kingdom announced last week it
    would require companies to disclose the financial impacts of
    climate on their businesses by 2025, and this is where we may
    have a disagreement, because it is not just against potential
    regulation; it is against what is currently happening. Right?
    You have physical----
        Mr. Clayton. It is both. It is what we see now and what we
    see in the future.
        Senator Schatz. Right, but this is not just about
    regulatory risk, political risk. This is about physical risk to
    property, to farms, to aviation, to tourism, whatever it may
    be. The question I have for you is: How deeply are you engaging
    bilaterally with your international counterparts on their
    plans? I think it is fair to say other countries and other
    regulators are a little further along. They are going to get
    wrapped around the axle on that particular question. But how
    deeply are you engaged in your international counterparts? And
    what is the next step for the SEC?
        Mr. Clayton. Deeply as in we--let us say monthly if not
    weekly at a very substantive level, because we need to be
    humble about this. Let me give you a financial comparison:
    backlog. A company discloses backlog. That is a forecast of how
    much they are going to be able to sell in the next 2 years.
    Backlog numbers usually prove to be meaningful but somewhat
    inaccurate. We need to try and get disclosure that people
    recognize is that forward-looking, gives you an assessment of
    the risks, but people are not going to be held to precision.
    They are not going to be held to metrics. And that is a very
    important way to approach this. This is not how did you do last
    quarter or what were the effects. This is what are you thinking
    about going forward, because I was an advocate for--I believe
    we will get better disclosure and move this forward if we have
    a safe harbor that--you cannot fraud, you cannot lie, you
    cannot do those kinds of things, but people need to know that
    if they miss their forecast, they are not--you know, in a good-
    faith way, we need that forecast information. We cannot deter
    it with, you know--anyway, you know what I am saying.
        Senator Schatz. Yes, I do get it. The one thing I will
    close with here is that we have actually moved along pretty
    nicely over the last several years on this question because we
    have gotten to the point where we can all agree, I think, this
    stuff is hard. It is highly technical. There is work that needs
    to be done through the network, the financial system, the Bank
    of England, what you are doing, what the Fed is doing. All of
    this stuff is not easy. But where we were, I think, 3 to 5
    years ago was because this stuff is difficult, it is,
    therefore, unknowable and it is, therefore, permissible to book
    the risk at zero. The risk may be difficult to quantify, even
    in terms of ranges, but everybody knows that the risk is not
    zero, and so we have got to put pen to paper and do the hard
    work, and I appreciate your partnership with us.
        Chairman Crapo. Thank you.
        Senator Tillis.
        Senator Tillis. Thank you, Mr. Chairman. And, Chair
    Clayton, thank you for being here. I want to first just thank
    you for what I think has been excellent work in your tenure,
    and my staff have high regard for the people that they have had
    an opportunity to work with over there.
        Before I ask you a few specific questions, when you were
    first moving into this role, I was really trying to emphasize
    regulators that were going to go out, take a look at the
    organization, and right-size some of the either regulatory or
    guidance requirements that your particular agency is
    responsible for. Can you tell me a little bit about what you
    have just done internally, what you have taken on yourself, and
    the things that you are most happy with under your tenure?
        Mr. Clayton. Well, it is nice of you to ask that question.
    We have looked across the landscape of our rules and seen which
    ones have not been touched in years and tried to modernize them
    and bring rationality to them. And, you know, in some cases we
    have increased regulation. We have increased the regulation of
    broker-dealers when they deal with customers significantly. And
    in some cases we have cut red tape. The patchwork system that
    is our exempt offering framework, that it was built up over 30
    years, you know, we made the seams between the patches a lot
    less rough. And so you do not need an army of lawyers to figure
    out how to get clearly qualified investors into an investment.
        Senator Tillis. Well, I for one think you have done a great
    job, and there are some specific things you and I have had more
    than one conversation over. The one in particular was the rule
    back in July over proxy advisers. Can you explain why you think
    that was worthwhile and important to people who may be watching
    this?
        Mr. Clayton. Well, I think anytime you have a participant
    in our marketplace who is soliciting votes or providing, you
    know, investment advice, understanding their conflicts is
    important, their material conflicts. So I think that is very
    important. And to the
    extent that you are participating in a shareholder meeting, you
    want that engagement at a shareholder meeting to be as
    meaningful as possible.
        So I think in many ways we codified best practices, brought
    transparency, and I hope it will lead to better decisionmaking
    by investors.
        Senator Tillis. I want to actually touch a little bit more
    on the shareholder process. I appreciate the work you did
    there. But you have also worked on updating the rules regarding
    the shareholder proposal process. Do you mind expanding on the
    steps the SEC has taken under your leadership on this issue?
        Mr. Clayton. Sure. That process, parts of that process,
    material parts of that process have not been updated since the
    1950s, so, you know, almost 70 years ago. And those were the
    days of the mails and the like. So what we did was on the
    proposal process, we looked at what a demonstration of a
    meaningful stake in the company is such that you can take up
    the time and attention of the other shareholders, such that one
    shareholder--I mean, this is an amazing system. You can be one
    shareholder having $2,000 or more, and if you have held it--
    under our new rules, if you have held is for 3 years, you can
    take the time and attention of all other shareholders on your
    proposals. You know, that is part of our system. But what is
    the amount you need to do to demonstrate the level of
    commitment that allows you to demand that time and attention of
    the other 20,000, 30,000, 40,000, 50,000 shareholders for them
    to go through the proxy?
        We updated that. We said you have $2,000, OK, that is a
    good minimum threshold, but a demonstrated commitment is 3
    years. If you have held it less, you know, you need a little
    bit more of a financial commitment, because, you know, you are
    proposing changes for the long term, you should demonstrate
    that you are in there with those other shareholders.
        And then on the resubmission thresholds, they were
    outdated. It was that if you--you know, you could get less than
    10 percent of shareholders--you know, more than 90 voting
    against it, you still had the opportunity to resubmit. If you
    got more than 10 percent after a few times, you could submit
    it, you know, for lack of a better term, into perpetuity. We
    tiered those, but we did not say you are out forever. We said
    you have got to take a time-out. So I think we did a very good
    job.
        Senator Tillis. And just a final question. I have some
    other ones I may try and submit for the record. But what is
    next? What else should we expect in your remaining weeks on the
    job?
        Mr. Clayton. Well, continued focus on COVID and the
    integrity of our markets. We have a few more rulemakings on our
    agenda, but just business as usual.
        Senator Tillis. Well, again, Chair Clayton, I appreciate
    the great work you have done. I especially appreciate how
    accessible you have been, and I am sure that I join the
    majority of my colleagues thinking it has been a great run, and
    I appreciate your service.
        Thank you, Mr. Chair.
        Mr. Clayton. Thank you.
        Chairman Crapo. Thank you.
        Senator Van Hollen.
        Senator Van Hollen. Thank you, Mr. Chairman. I too want to
    start by thanking you, Chairman Clayton, for your public
    service, for the open lines of communications that we have had,
    whether we agree on an issue or disagree on an issue.
        I want to talk about a couple of areas where I think we
    agree, but I have been, you know, frustrated that we have not
    made more progress recently and maybe tee up some action items
    for all of us, including the SEC going forward. And these are
    all designed to do what I think we all want, which is to
    provide accountability for insiders and corporate executives
    and transparency for investors.
        So on the issue of accountability and making sure that
    insiders are not exploiting unfairly information they have, you
    mentioned already the SEC rule 10b5, which allows executives an
    affirmative defense to insider trading if they essentially
    provide a schedule for their stock sales. But we have seen a
    number of incidences recently which, at the very least, I think
    undermine public perception that people are not using insider
    information. Most recently was the Pfizer time stock, the CEO
    of Pfizer, as you know, the stock sale occurred on the very
    same day that they announced their breakthrough on a COVID-19
    vaccine. That stock sale had been scheduled in August when the
    CEO changed their plan, their scheduled sales plan. And I heard
    you mention earlier, you know, putting guardrails up against
    this, maybe 3 months or 6 months. I really think we need to
    act. We also saw a similar situation with Moderna where, after
    announcing their progress toward a COVID-19 vaccine, their
    stock price increased, and then certain Moderna executives
    changed their 10b5-1 plans and as a result made an additional
    $4.8 million in profit.
        Again, this is currently legal, but I do believe it
    undermines public confidence in the system. And I want to know
    if you agree and whether you would encourage us to work to put
    up tighter guardrails against potential abuse and certainly a
    public perception that undermines confidence.
        Mr. Clayton. So I want to be very clear I am not commenting
    on any particular case, but as a general matter, I agree. And I
    do think that how we craft it, you know, people have different
    views, but for--let me just say it this way: For senior
    executive officers using 10b5-1 plans to sell stock, I do
    believe in a cooling-off period from the time that the plan is
    put in place or it is materially changed until the first
    transaction is appropriate. And whether that is 4 months so
    that you cover a full quarter or it is 6 months, you know, I
    can make arguments for either. I do think we should do it.
        Senator Van Hollen. I appreciate that. Well, Senator
    Fischer and I have a bipartisan bill that we have introduced to
    encourage the SEC to look at this and do a rulemaking. It
    passed on a bipartisan basis in the House. I am going to ask
    Chairman Crapo if we can look at it and maybe even pass it
    before the end of this year.
        Let me ask you a question regarding transparency in
    country-by-country reporting, because you stated at a hearing
    in the House on June 25th that, ``I want to be clear. It''--you
    were referencing country-by-country reporting--``is becoming an
    increasing part of how sophisticated investors are looking at
    companies.''
        And we have seen that 100 percent of investors managing a
    total of $2 trillion in assets who weighed in with the
    Financial Accounting Standards Board urged the Board to include
    country-by-country reporting on GAAP. Is this an area where you
    also would agree that more transparency would help investors?
        Mr. Clayton. Yeah, let me say this: I am not sure I can
    give you as absolute and as specific answer as I did to the
    last one. But to the extent that in the management and the
    boardroom people are looking at drivers on a country-by-country
    basis, I would hope that in the MD&A section of disclosure that
    companies would be disclosing that to their investors. So it is
    much more a company-specific issue, but yes.
        Senator Van Hollen. Right. Another area where, again, there
    is legislation to provide that kind of transparency, which it
    seems to me that it is hard to argue providing investors with
    that useful information.
        Mr. Chairman, I will follow up with a question for the
    record regarding something that Senator Brown raised regarding
    stock buybacks and insider trading, and I have talked with
    Chairman Clayton about this issue before. One of his former
    colleagues, Commissioner Jackson, was involved in this, and
    since his findings, Lenore Palladino at the Roosevelt Institute
    issued a paper finding a very, very clear correlation between
    stock buyback activity and insiders selling their own shares. I
    think this is another area that we have got to look at going
    forward. Maybe even after you leave public service, Mr.
    Clayton, we can work with you on that and get your input.
        Mr. Clayton. Thank you. I love markets, so love investors.
    Happy to help.
        Senator Van Hollen. Thank you.
        Thank you, Mr. Chairman.
        Senator Brown [presiding.] Thank you, Senator Van Hollen.
        Senator Kennedy is next. Chairman Crapo is voting, so,
    Senator Kennedy?
        Senator Kennedy. Thank you, Mr. Chairman. I am in a
    Judiciary Committee hearing and, of course, we are in the
    middle of a vote, so I just wanted to use this opportunity,
    rather than to ask questions, to make a short statement
    specifically to Chairman Clayton.
        I want to thank you for your service, Mr. Chairman. We
    understand that you will be leaving your post at the end of
    December. I want to just give you my point of view. You have
    been one of the best SEC Chairmen our country has ever had. You
    have been fair. You clearly care about investors. You also care
    about the investments. You have exercised power intelligently
    and materially, Jay.
        You have always been responsive. You have been frank with
    all of us. If you think our ideas have merit, you say so. If
    you think our ideas do not have merit, you say so in a very
    tactful way. And we are going to miss you, Mr. Chairman. And I
    just want to say that it has been a genuine honor and a genuine
    privilege to serve with you, Jay.
        Thank you, and best wishes to you as you go back to the
    private sector and sort through what I am sure are your many
    opportunities there.
        Mr. Clayton. Thank you, Senator Kennedy. Working with you
    and your staff has been tremendous, and in particular, I want
    to thank the Stanford victims for being willing to continue to
    engage with us to try and get them at least something back, and
    I--you are too nice to say it here, but we did not do a good
    job for them. But that will not happen again.
        Senator Kennedy. Godspeed, Jay.
        Mr. Clayton. Thank you.
        Senator Brown. Thank you, Senator Kennedy.
        Senator Cortez Masto.
        Senator Cortez Masto. Thank you, Ranking Member Brown. I
    too, Chairman Clayton, want to thank you for your service. It
    is not an easy task under the current environment. We have not
    always agreed on policy, but I too so appreciate your service
    to the country.
        Let me ask a question. I know you are leaving at the end of
    this year. We are going to have a change in the Administration
    with new President-elect Biden. What is it that you are
    preparing for right now with that transition? Are you
    undertaking any type of work with the transition team or
    coordinating with them in any way whatsoever? And if you are,
    can you talk specifics?
        Mr. Clayton. So in terms of transition to a new Chair and
    the like, let me just say this: I will be available. My
    predecessor was available to me. In terms of the ongoing work
    of the Commission, we are very transparent. We have four other
    Commissioners. We have an agenda that is transparent. And when
    the time comes in terms of legal restrictions and ability to
    engage with folks, we will do so.
        Senator Cortez Masto. Thank you. Thank you for that
    response. Clearly it sounds like no transition is happening
    until you get through the legal restrictions set by this
    current Administration.
        Let me ask you about 13(f), the proposed rule that has been
    very controversial. Is the SEC planning to finalize this
    rulemaking prior to your leaving by the end of the year?
        Mr. Clayton. The short answer to that is no, but if I can
    elaborate, this proposal has taught us something. The proposal
    goes to 13(f), which was there for a market integrity point of
    view. Let us find out how much institutional investors have in
    particular stocks and how that changes from quarter to quarter
    and whether there is market integrity. It is an outdated way to
    do that. We looked to modernize the threshold, but what we
    found was people were using 13(f) for two things it was not
    intended for. One was so that companies could find their
    shareholders. It is an incredibly inefficient way for that to
    happen, so we need to fix our proxy system, our OBO, NOBO--
    those are fancy terms for got to go through intermediaries--
    system to make it easier for companies to access their
    shareholders.
        Then the other thing people are using it for is to track
    people's trading strategies, so you have XYZ fund manager,
    someone looks at their 13(f) reports, and tracks their trading
    strategies. Two things. I am not sure that we want regulation
    that is there to facilitate trading strategy tracking. That is
    proprietary. Maybe we do, maybe we do not. That certainly was
    not the intent. But if we do, 13(f) is a pretty inefficient way
    to do it. It is there. It has only long positions. I can go
    into all the technical things, but investors should understand
    if they are looking at 13(f) as a robust indication of trading
    strategies, in many cases it is not.
        Senator Cortez Masto. Chairman Clayton, let me jump to
    another issue that is a concern of mine as well. I understand
    Senator Scott talked to you about this, and I have a Rules
    Committees going on as well, so I have been trying to attend
    both of them. It is the investor protection for unsophisticated
    investors, and it goes to the issue of too many young people
    being able to trade online in this kind of environment where it
    is trading on platforms, no fee, really kind of gamifies the
    stock market into a playful environment. We have seen horrific,
    horrific coverage of a young man, a college student who was
    trading on an online platform while home due to the pandemic,
    and then he received a text message from that platform that he
    understood to mean he had a negative cash balance of $730,000,
    and fearing financial ruin, I understand from the reporting
    that he was do distraught he committed suicide.
        This is horrific, and this is an area where we need to
    understand what is happening with these platforms, and really
    young adults, who are not sophisticated enough really to be on
    these platforms and thinking there is some sort of a gainful
    environment going on.
        So my question to you is: What has the SEC done to avoid
    such financial devastation for investors? And what are you
    doing to respond to some of these platforms that are no-fee
    online that kind of incentivize that gamified kind of
    environment?
        Mr. Clayton. Yes, let me say this: We have long allowed
    direct access for investors to what we call ``self-directed
    accounts.'' It has been that way for a long time. But to the
    extent that what I would say is technology has facilitated that
    and then people home with the pandemic, and you have people
    what I would say is trading, not investing, that risks go up,
    and, in particular, when they are options or other complex
    products. And one specific thing we have done recently is we
    have put out guidance, Commission guidance, and are looking at
    other ways to do this, to tell people, not only broker-dealers
    but investor advisers but those platforms, you need to make
    sure your people who are trading those instruments have the
    capability to understand those instruments.
        So long and short, you should not be playing around in
    leveraged investments and options where you can lose your shirt
    unless you can clearly understand them.
        Senator Cortez Masto. Well, clearly, there needs to be more
    education around this and really more involvement from the
    platforms and responsibility for young adults. So I think more
    needs to be done definitely.
        Thank you again. I know my time is up. I appreciate your
    service.
        Mr. Clayton. Thank you.
        Senator Brown. Thank you, Senator Cortez Masto.
        I still see Senator Crapo on the floor awaiting the second
    vote to start. The next people in line are Senator Moran. Is he
    here by chance? Or Senator Jones? Or Senator Smith?
        [No response.]
        Senator Brown. I will ask, is anybody here who wants to ask
    a question?
        [No response.]
        Senator Brown. I do not know quite what to do.
        Mr. Clayton. Do you want to ask a question?
        Senator Brown. Greg, if you would respond somehow to me
    whether I should wrap the hearing up or Senator Crapo would
    like to return? I assume there may be a couple of Members--
    well, let us do this, Chair Clayton. Anybody that did not get
    to ask because of the votes will send you questions in writing
    as we always do.
        Senator Brown. Thank you for always being responsive with
    that. You have been a good public official and public servant
    that way.
        Then probably we should wrap the hearing up, and I will
    just close it out. I just had one short statement I wanted to
    make that, of course, I cannot find now. I guess I will not be
    able to find it. Give me about 30 seconds.
        Let me just close with a statement, and then we will wrap
    this hearing up, Chair Clayton, and I am sorry it is just you
    and me here, but these things sometimes happen.
        As I said in my opening statement, your agenda in my view
    has limited transparency and hurt investor protection. The
    increase of the shareholder proposal thresholds will result in
    less shareholder engagement and management accountability. The
    new requirements on proxy investors will raise costs for
    institutional investors and make proxy voting harder.
    Regulation Best Interest that we talked about earlier in my
    earlier comments and statement does not put Main Street
    customers first. The proposal that enables unregistered finders
    to act without oversight hurts investor protection. Your
    proposal to shut down transparency reports for 90 percent of
    institutional investors would leave companies and investors in
    the dark and eliminating financial disclosures, while ignoring
    calls for climate risk in response to a couple questions you
    got that that was brought out, too, ignoring calls for climate
    risk disclosure ignores what investors have been asking for.
        It is quite a run. I know you and others will argue that
    less is more and that all these rollbacks are improvements. But
    to me, it is more likely that less is, well, just less.
        Thank you, Mr. Chairman. Thanks for coming in front of our
    Committee many times. Good luck as you pursue your interests in
    the private sector, and this Committee is adjourned. Thank you.
        Mr. Clayton. Take care.
        Senator Brown. All right. You, too. Thanks.
        [Whereupon, at 11:41 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        Today we will receive testimony from Securities and Exchange
    Commission Chairman Jay Clayton regarding the work and agenda of the
    SEC.
        I thank you for your appearance before the Committee today, which
    is essential to our oversight of the SEC. Chairman Clayton, welcome.
        You last appeared before this Committee in December of last year.
        The COVID-19 pandemic hit the United States shortly after that
    hearing, and the SEC has taken many important steps to help limit the
    economic shock to our markets as Governments have attempted to confront
    such an unprecedented event.
        The SEC used tools, such as the marketwide circuit breakers, for
    the first time since their adoption, when markets dropped 7 percent
    from the previous day's closing price of the S&P 500 Index.
        There were a number of uses of ``limit down'' circuit breaks when
    overnight stock futures hit their 5 percent limit, which resulted in
    halting of all further downward trades.
        Despite the high levels of volatility, it is my understanding that
    the current mechanisms in place served their intended purposes of
    increasing market stability.
        Additionally, in order to comply with CDC guidance, you oversaw an
    unprecedented temporary closure of physical trading floors. This
    business continuity measure supported orderly trading, while ensuring
    the health and safety of market participants.
        The SEC has continuously pursued enforcement actions, including a
    number of actions against those seeking to take advantage of investors
    during this vulnerable time.
        Remarkably, all of this has been done while the SEC staff is
    working remotely.
        It is commendable that despite the COVID-19 disruptions, you have
    continued to advance the items on your regulatory agenda which are the
    result of many months, and sometimes years, of diligent staff work.
        The SEC finalized amendments to update and improve the definitions
    of ``accredited investor'' and ``qualified institutional buyer,'' which
    will now take into consideration education and expertise, ultimately
    increasing investor participation in private offerings and expanding
    access to capital markets.
        The SEC recently modernized the exempt offering framework, which
    will be a lifeline to small and medium-sized companies navigating the
    previously complex system.
        These clear and concise rules will allow smaller companies to focus
    on getting their businesses back on track while improving the
    consistency of investor protections.
        Commissioner Roisman engaged investors and market participants in
    crafting modernized shareholder proposal thresholds and proxy voting
    rules.
        These modernizations no longer permit a small number of individuals
    with limited stakes to consume corporate boardrooms and will allow
    companies to better focus their efforts on COVID-19 recovery.
        The SEC improved the readability and streamlined the information
    collected for Regulation S-K disclosures. It had been more than 30
    years since these disclosures had been reviewed.
        Last year, the SEC finalized a package of rulemakings including
    Regulation Best Interest, Form CRS Relationship Summary and two
    interpretations under the Advisers Act.
        Compliance with these rules began on June 30, 2020. Since June, the
    SEC has been reviewing firms' compliance efforts and identifying
    additional areas for compliance improvements through a staff roundtable
    and other stakeholder engagement.
        Another modernization effort underway at the SEC is the creation of
    the Strategic Hub for Innovation and Financial Technology. This
    important initiative is critical in the interagency coordination and
    dissemination of information to the public regarding initial coin
    offerings and other cryptocurrency matters.
        Clearly, the SEC has been busy, and I commend you for balancing
    emergency COVID-19 responses while advancing critical rulemaking
    initiatives, risk-based inspections, enforcement actions, and issuer
    and fund filings.
        I look forward to continuing to work with the SEC to ensure that
    the U.S. markets come back from the COVID-19 disruptions stronger, more
    liquid, and more dynamic than ever.
        In closing, I also thank Chairman Clayton for his service and wish
    him the best of luck in his future endeavors as he departs the
    Commission in the coming weeks.
        The will and drive you brought to this job allowed you to bring
    about many significant improvements that were long overdue.
        I wish you the best of luck in your future endeavors and again,
    thank you for your service.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        Thank you Chairman Crapo, and welcome Chair Clayton. Thank you for
    your service.
        In this election, voters rejected this Administration and its Wall
    Street first attitude. Across the country, it is clear that people want
    financial watchdogs who look out for them, not make life easier for
    CEOs. It's time to turn the page on this failed Administration, and
    work together to build an economy that actually works for everyone.
        That means an economy where all workers can save and invest their
    hard-earned money for a downpayment, and to help their kids go to
    college or community college, and to retire with dignity. That's how we
    grow the middle class--and it's time that everyone had the chance to
    join it.
        That means finally working in a real way to eliminate the racial
    wealth gap. And it means we have to enlist everyone in our Government
    in that project, including the SEC.
        This year the dedicated public servants at the Commission have done
    important work in the middle of a public health crisis and an economic
    crisis, monitoring for fraud and misconduct related to the pandemic
    while continuing their work to protect investors, maintain orderly
    markets, and promote capital formation.
        Those efforts help working families saving and investing today, and
    build confidence in our markets for the future.
        But I believe we can aim higher than simply making sure markets are
    stable. We can do better than just preventing crashes and outright
    fraud--we need to make markets actually work for working people.
        Over the years, I have raised many concerns about how your
    leadership has left behind the people whose savings are stake in our
    markets--denying them the ability to hold executives accountable and
    withholding critical information about how companies are run and how
    they affect the environment and their communities.
        You've tried to reduce transparency and undermine the protections
    we do have--even in the face of strong opposition from large and small
    investors, advocates, and experts.
        From employees across the country scrimping and saving in their
    retirement accounts, to pension managers investing for a generation of
    workers, they are all in a worse place since you've been in office.
    That doesn't even include those who want to save for their family and
    retirement, but just can't because their paycheck isn't enough.
        You pushed for what you call ``Regulation Best Interest,'' a new
    standard that applies when brokers give advice to clients, but it
    doesn't put mom and pop customers first. A few weeks ago, you discussed
    the SEC's initial reviews after the standard went into effect in June.
        Even though you said firms are making ``good faith efforts,'' your
    staff reported shortcomings in compliance and failures to fully
    disclose disciplinary history to clients. In fact, it doesn't seem like
    you have any way to tell if this rule will help at all. Not a very
    auspicious beginning.
        The SEC's final rules on proxy advisors and shareholder proposals
    are also clear examples of the Administration taking the side of
    corporate interests over Americans saving and investing for their
    future.
        Over the years, shareholder engagement has forced important
    conversations to happen in boardrooms across America. We need to push
    companies to focus on improving diversity, implementing better
    governance, and addressing climate change risks. Yet your agenda has
    attempted to stifle these important conversations.
        And I'm not the only one who's worried about your agenda. Last
    week, the North American Securities Administrators Association wrote
    you because 30 of its members--State watchdogs, including from Ohio--
    are concerned about a recent, broad rule proposal with few safeguards
    that in their words, ``would facilitate unlicensed intermediaries in
    the private market''.
        That's a polite way of saying they are afraid of rampant fraud.
        Not only are they worried that you're putting their constituents at
    risk, they are upset that they didn't even get a heads-up.
        While you were advancing one bad rule after another, you didn't
    take the opportunity to make sure public companies disclose the risks
    climate change poses to their businesses. You did the opposite,
    watering down corporate financial disclosures.
        And when you tried to improve corporate workforce disclosure--it
    still fell short, failing to address basic concepts like employee
    turnover or to identify the numbers of full-time workers compared to
    part time.
        We are never going to be able to undo the corporate business model
    that treats workers expendable, if we can't even get companies to put
    out accurate information on the workers who make their businesses
    successful.
        While the pandemic posed challenges for the Commission's
    enforcement work, it also revealed how applying additional resources to
    the whistleblower program delivers results. By reallocating staff to
    review whistleblower tips, you managed record results. I hope that my
    concerns about the uncertainty created by your recent changes to the
    rules don't undermine the obvious success of the program.
        More broadly on enforcement, although the SEC has aggressively
    pursued COVID-related scams and frauds, the last year of enforcement
    shows more of the same--a few big cases create a big topline number,
    but looking under the hood, you see too many cases without individual
    accountability.
        Last week's announcement that the SEC charged Wells Fargo's former
    CEO and consumer bank head for deceiving investors as part of the fake
    account scandal that was uncovered in 2016 is a rare and long overdue
    case where your agency has actually held someone accountable for
    breaking the law and ripping people off at a big bank or corporation.
        Back when you were a nominee, you assured us that ``individual
    accountability drives behavior more than corporate accountability.''
    Well, you don't get better behavior by taking years to hold top
    executives individually accountable for intentional deception.
        American voters sent a clear message in this election: they're
    tired of an economy where big corporations and their wealthy CEOs play
    by a different set of rules than people who work for a living.
        With each rollback of important safeguards or disenfranchisement of
    shareholders, you claimed to be reforming, modernizing, or updating the
    rules.
        People are tired of that political spin. When you say ``reform,''
    what you mean is: Make things a little easier for the biggest
    corporations. When you say ``modernize,'' what you mean is: Make it
    that much harder to actually hold powerful CEOs accountable. When you
    say ``update,'' what you mean is: Further entrench the Wall Street
    business model that exploits workers.
        Eighty million Americans rejected your agenda in this election, and
    I hope we can reverse it.
        As you prepare to leave the Commission, you have changed the rules
    so much, even you'll need to relearn fundamental elements of securities
    law when you return to private practice.
        I've said it before--protecting workers' hard-earned savings should
    begin with a simple concept: putting their interests first.
        I'm disappointed you don't see it that way, but a decisive majority
    of the country does.
        Thank you, Mr. Chairman.
                                     ______
     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    RESPONSE TO WRITTEN QUESTION OF CHAIRMAN CRAPO FROM JAY CLAYTON

    Q.1. In September, the House of Representatives passed H.R.
    6210, the Uyghur Forced Labor Prevention Act by a vote of 406
    to 3.
        This bill, similar to S. 3471, contains a number of
    restrictions intended to punish those responsible for the
    horrific human rights violations occurring in China's Xinjiang
    Uyghur Autonomous Region. Most notable among the restrictions
    is the creation of a new SEC disclosure regime for issuers who
    knowingly engage or transact with an entity involved in the
    oppression of the Uyghurs. The bill also addresses the Uyghur's
    situation by prohibiting certain imports, imposing sanctions,
    and requiring reviews of strategy and reporting of tariffs.
        After the initial broad bill passed the House, the House
    voted on H.R. 6270, which contained solely the new SEC
    disclosure regime. This bill passed the House along party
    lines.
        As Congress considers taking action to punish and isolate
    those in this region for their heinous crimes, I have grave
    concerns about creating a new disclosure regime at the SEC,
    rather than utilizing the existing pressure channels available
    to the Departments of Treasury, Commerce, State, Defense, and
    others.

    A.1. Does the SEC view that a new disclosure regime, which will
    take years and billions of dollars in compliance costs to
    establish is necessary in order to stop forced Uyghur labor in
    China?
    I personally appreciate the focus in Congress on addressing the
    dreadful human rights abuses occurring in China's Xinjiang
    Uyghur Autonomous Region. Stopping forced Uyghur labor in China
    is an important and laudable goal that I support. I believe,
    however, this goal would be much more effectively and
    efficiently addressed through direct regulation of conduct
    rather than indirectly through the Federal securities laws. In
    my opinion, significantly more direct actions like restricting
    imports and imposing sanctions for transactions that further
    the abhorrent behavior in the Uyghur region are more likely to
    alter behavior and would likely affect a much greater number of
    companies and individuals than a new SEC disclosure regime for
    U.S.-listed public companies. It also would focus Federal
    action within agencies that have both the authority, as well as
    the expertise, in resolving these important issues.
        Disclosure is, of course, extremely important to investors
    and our markets, and companies should closely monitor their
    supply chains and provide investors with information about
    supply chain risks that would be material to an investment
    decision. In analyzing these risks, public companies should
    carefully consider, for example, whether congressional action
    designed to stop forced Uyghur labor in China or consumer
    actions would be reasonably likely to materially affect their
    business and supply chains, and if so,
    provide disclosure about these evolving regulatory risks and
    uncertainties.
        More broadly, based on my 25-plus years' experience with
    our securities laws and the securities laws of other countries
    in the private and public sectors, it is my view that any use
    of our Federal securities laws for purposes beyond the SEC's
    core mandate should be approached with great caution. These
    efforts have proven to be much less effective than anticipated
    for a variety of reasons, including, in particular, in the case
    of international and global issues, the limitation on the SEC's
    jurisdiction and practical authority, as well as the
    asymmetries in applicable law they often create (favoring those
    to whom U.S. law does not apply). In short, in these instances,
    the limits on the SEC's authority often serves to advantage
    those outside its scope and, in my view, have rendered such
    efforts ineffective when viewed on an international or global
    basis.
                                    ------

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JAY
                                CLAYTON

    Updating 10b5-1 Trading Plans
    Q.1. In your testimony, you stated that regulations and
    policies applicable to corporate stock buybacks and executive
    stock sales could be improved, including the use of ``cooling-
    off'' periods. Please describe further the types of
    requirements and prohibitions that you would recommend to
    ensure that 10b5-1 trading plans are not abused or manipulated
    and to avoid even the appearance of impropriety.

    A.1. The importance of good corporate hygiene cannot be
    overstated, nor can the importance of related controls designed
    to prevent not only insider trading but also the appearance of
    impropriety or misalignment of interests. Particularly in times
    of heightened market volatility and uncertainty, the potential
    for executives to possess material nonpublic information
    increases, as we have witnessed during this time of COVID-19-
    induced economic and market stress. While I believe many of our
    public companies, as a general matter, have discharged their
    responsibilities in the related areas of public disclosure and
    corporate controls well, there are some specific measures that
    would improve compliance, market integrity, and investor
    confidence, including through a demonstrated commitment to good
    corporate hygiene.
        First, Rule 10b5-1 plans, when designed and administered
    appropriately, can facilitate long-term interest alignment and
    other principles of good corporate governance. There are
    practices, however, that raise questions of interest alignment
    and fairness, including, in particular, issues that arise when
    plans are implemented, amended, or terminated and trading
    occurs (or does not occur) around those events. I believe that
    companies should strongly consider requiring all Rule 10b5-1
    plans for senior executives and board members to include
    mandatory seasoning, or waiting periods after adoption,
    amendment, or termination before trading under the plan may
    begin or recommence. In my view, such seasoning periods are
    appropriate between the establishment of a plan and the date of
    the initial trade, as well as between any modification,
    suspension or termination of a plan and the resumption of
    trading or entry into a new plan. These seasoning periods not
    only help demonstrate that a plan was executed in good faith,
    but they also can bolster investor confidence in management
    teams and in markets generally.
        In addition, many of my colleagues and I believe a well-
    designed insider trading policy should have controls in place
    to prevent senior executives and members of the board of
    directors from trading once a company is in possession of
    material nonpublic information, even if an individual officer
    or director did not personally have knowledge of the
    information. This includes the time period between the
    occurrence of an event and the required disclosure of the event
    to the public under Commission rules. In my view, such a policy
    is not difficult to adopt or administer, making the integrity
    bang for the compliance buck large. I also believe that our
    Forms 4 and 5 related to compliance with Section 16 of the
    Exchange Act should be modified so that disclosures of whether
    a transaction has been made pursuant to a Rule10b5-1 plan are
    made readily apparent. Adding a new box to these forms that
    would be required to be checked in these circumstances, which
    would be of little cost, would be sufficient, in my view, to
    achieve this objective.
        Finally, I believe that companies should consider, in
    addition to their legal obligations, the wisdom of issuing
    stock options to its executives while in possession of material
    nonpublic information. Many equity compensation plans require
    stock options to be granted with strike prices that are no less
    than fair market value. Implicit in this structure is the
    premise that equity awards are intended to incent performance
    that will result in future increases in company value. When a
    company grants an award based on the trading price of the stock
    while the company is in possession of materially positive
    nonpublic information, this premise is diluted to the extent
    future increases in company stock value are attributable to the
    release of positive information rather than future performance.
    In addition, such a grant may not be consistent with the terms
    of the incentive plan approved by its shareholders. Similarly,
    such a grant may also be inconsistent with existing accounting
    standards because, in short, the trading price of its stock is
    not a good indicator of fair market value.
        These are important corporate governance and policy
    considerations that I believe public companies and boards, as
    well as the Commission and Congress, should consider moving
    forward.
    Regulation of Money Market Funds
    Q.2. In March of this year, the financial markets seized up
    because cash was in high demand, and the dangers of the shadow
    banking system became evident, in particular the risk when
    money market funds face substantial redemptions.
        You, Federal Reserve Vice Chair Randal Quarles, and Deputy
    Treasury Secretary Justin Muzinich have all commented that the
    money market fund reforms from the last crisis were not good
    enough.
        What safeguards or requirements can the SEC put in place?

    A.2. After closely examining the events in March, I believe
    that additional reforms are warranted to promote the orderly
    functioning of short-term funding markets, which is essential
    to the performance of the broader financial markets and our
    economy more generally. In particular, SEC staff is actively
    reexamining the Commission's prior reforms to money market
    funds in light of the market stresses caused by the COVID-19
    pandemic and analyzing the performance of these funds over the
    recent period. This review is intended to provide a forward-
    looking assessment and consider reforms that, as much as
    possible, address vulnerabilities that have ultimately led the
    Federal Government to intervene twice within past 12 years to
    provide support. The Commission's Fall 2020 Regulatory
    Flexibility Act Agenda includes an item on reforms related to
    the regulation of money market funds.
        The SEC is working closely with our domestic and
    international regulatory counterparts as part of this process.
    One element of this exercise that is noteworthy is ensuring
    that the various markets underlying money market funds (e.g.,
    the Treasury market, municipal finance market, and commercial
    paper market) are examined separately and that any reforms
    reflect the differences in these markets. In addition, the
    President's Working Group on Financial Markets (PWG) recently
    issued a report on money market funds, which includes an
    overview of the market stress in March 2020 and a list of
    potential reform options for prime and tax-exempt money market
    funds.\1\
    ---------------------------------------------------------------------------
        \1\ https://home.treasury.gov/system/files/136/PWG-MMF-report-
    final-Dec-2020.pdf.
    ---------------------------------------------------------------------------
                                    ------

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON FROM JAY
                                CLAYTON

    Q.1. In your testimony, you stated that the SEC should not use
    ambiguity in the law to its advantage in an enforcement
    context. You observed that while the Share Class Selection
    Disclosure Initiative (SCSDI) was intended to efficiently
    correct a widespread practice that was inconsistent with the
    law, but also that industry members felt they were within the
    bounds of the law when the SEC felt they were not. You
    expressed the hope that more clarity has been brought to the
    issue, but if it has been, it was done through enforcement
    rather than through rulemaking. Why did the SEC not provide
    clear notice to the industry that this ``widespread practice''
    was inconsistent with its interpretation of the law before
    beginning enforcement actions?

    Q.2. Prior to the announcement of the SCSDI, what specific
    means did the SEC use to communicate to the industry that an
    investment advisors' duty of care and duty of candor required
    disclosing that the firm received 12b-1 fees; that cheaper
    shares of the same mutual fund were available to investors; and
    that purchasing fund shares that paid 12b-1 fees when cheaper
    share classes were available would adversely affect the
    client's return? Please reference the specific text announcing
    these elements of acceptable disclosures.

    Q.3. What were the potential costs associated with providing
    the industry with the specific guidance necessary to comply
    with the SEC's disclosure expectations? By what means was it
    determined that these costs outweighed the benefits of
    providing the industry with the clarity necessary to comply?

    Q.4. You noted that principles-based regulation relies on
    facts-and-circumstances based application, but you asserted
    that the SCSDI was based on investment advisors' duty of care
    and duty of candor, which are well-established principles of
    the Federal securities laws. If these disclosure requirements
    were so well established, how did almost 100 firms, or
    approximately 20 percent of dually registered firms (those
    registered as both an investment adviser and broker-dealer),
    miss them and why did the SEC allow that conduct to go on for
    over a decade before taking enforcement action?

    A.1.-A.4. The Share Class Selection Disclosure Initiative (the
    Initiative) concerned advisers that directly or indirectly
    received 12b-1 fees in connection with recommending,
    purchasing, or holding 12b-1 fee paying share classes for its
    advisory clients without adequate disclosure, including
    disclosures that were inconsistent with the advisers' actual
    practices. This voluntary initiative provided eligible advisers
    with the opportunity to address issues with disclosures, make
    distributions to clients harmed by the firm's undisclosed
    conflicts, and to do so quickly, with less cost than a typical
    investigation and without a civil monetary penalty. After
    reviewing a self-reporting adviser's submission, the staff
    asked follow-up questions and determined whether it believed
    that the facts and circumstances merited recommending an
    enforcement action and, if so, the appropriate scope of any
    such recommendation. The Commission then considered the
    recommendations and determined whether to initiate proceedings
    against each firm.
        The Commission's orders found that the investment advisers
    failed to adequately disclose conflicts of interest related to
    the sale of higher-cost mutual fund share classes when a lower-
    cost share class was available. Specifically, the Commission's
    orders found that the settling investment advisers placed their
    clients in mutual fund share classes that charged 12b-1 fee--
    which are recurring fees deducted from the fund's assets--when
    lower-cost share classes of the same fund were available to
    their clients without adequately disclosing that the higher
    cost share class would be selected. The 12b-1 fees were
    routinely paid to the investment advisers in their capacity as
    brokers, to their broker-dealer affiliates, or to their
    personnel who were also registered representatives, creating a
    conflict of interest with their clients, as the investment
    advisers stood to benefit from the clients' paying higher fees.
    Most of the advisory clients harmed by the disclosure practices
    were retail investors, and the Initiative helped to put money
    back into their hands and called for the advisers to take
    remedial steps.
        The Initiative and related cases were based on well-
    established principles under the securities laws, which the
    Commission applied to the specific circumstances of each firm
    that chose voluntarily to participate in the Initiative. Passed
    by Congress in 1940, the Investment Advisers Act establishes a
    Federal fiduciary standard for investment advisers. For
    decades, it has been recognized that the fiduciary obligations
    of investment advisers include an obligation to eliminate or at
    least make full and fair disclosure to clients and prospective
    clients concerning their conflicts of interest, including
    conflicts arising from financial incentives, and to act in
    their clients' best interest. These fiduciary principles were
    confirmed by the Supreme Court more than 50 years ago in
    Capital Gains\1\ and are enforceable through the antifraud
    provisions of the Advisers Act.\2\ Full and fair disclosures
    about conflicts and other material facts are necessary because
    they enable clients and potential clients, including retail
    investors, to make informed choices when deciding whether to
    hire or continue retaining an investment adviser.
    ---------------------------------------------------------------------------
        \1\ SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).
        \2\ The Commission also discussed the application of this principle
    in the context of share class selection at least as early as 2006 in
    the matter of IFG Network Securities, stating that where the only bases
    for the difference in rate of return between mutual fund share classes
    are the cost structures of those share classes, information about the
    cost structure would be important to a reasonable investor.
    ---------------------------------------------------------------------------
        In addition, Form ADV, which all registered advisers must
    file and which has been adopted and amended in Commission
    rulemakings after notice and comment, requires disclosure of
    conflicts that an adviser has or is reasonably likely to have.
    Form ADV specifically requires disclosure concerning the
    compensation and fees that advisers and their supervised
    persons receive, including from asset-based charges and other
    fees received in connection with client investments. In
    addition, Form ADV reminds advisers that, to satisfy their
    disclosure obligations as fiduciaries, they may need to
    disclose to their clients information about conflicts that is
    not specifically required by the Form.
        The conduct that resulted in the mutual fund share class
    selection cases, including the cases brought through the
    Initiative, involved violations of these long-standing
    disclosure requirements and principles. Firms know or should
    know what compensation they receive and whether the
    circumstances under which they receive it create incentives
    that give rise to actual or potential conflicts of interest.
    The compensation at issue in these cases, 12b-1 fees and
    revenue sharing, gave rise to conflicts related to, for
    example, the types of investments, the fund families, the
    particular funds and the share classes of individual funds that
    the advisers recommended. For instance, when an adviser
    receives, directly or indirectly, 12b-1 fees in connection with
    mutual fund recommendations, it has a financial incentive to
    recommend that a client invest in a share class that pays 12b-1
    fees. The resulting conflict of interest is especially
    pronounced when share classes of the same funds that do not
    bear these fees are available to the client.
        There are more than 13,000 registered investment advisers,
    which offer a wide range of services and products through a
    variety of business models. Moreover, market practices evolve
    regularly, including with respect to compensation arrangements
    and fund sales practices more generally. The Advisers Act is,
    by design, a principles-based regime, which has helped enable
    it to provide robust investor protection while establishing a
    flexible framework that accommodates this variety and
    development. The Initiative and the cases that preceded the
    Initiative reflect a key fiduciary and investor protection
    principle that is well-established and well-understood by
    investment advisers--an adviser must provide full and fair
    disclosure of its conflicts of interest and other material
    facts and act in accord with its disclosures. Indeed, many
    investment advisers appear to have recognized the kinds of
    conflicts addressed in the Initiative and had previously
    responded through practices designed to address them, including
    through elimination, disclosure or a combination of disclosure
    and mitigation.
        The Commission will continue to look for opportunities to
    provide its views to market participants regarding their
    responsibilities, where needed and in an appropriate form. In a
    recent example, last year, the Commission published an
    interpretive release about the fiduciary duties of investment
    advisers to reaffirm, and in some instances clarify, certain
    aspects of the fiduciary duty that an investment adviser owes
    to its clients under the Advisers Act.

    Q.5. You have observed that staff statements and documents do
    not have the force and effect of law (as only the Commission's
    rules and regulations do). Is Enforcement staff relying on
    other settled matters instead of litigated decisions as legal
    support for bringing subsequent enforcement actions? If so, is
    that appropriate given that settlements do not set legal
    precedent and your testimony that matters like these should be
    brought in administrative courts ``cautiously, if at all.''

    A.5. Generally speaking, enforcement actions are not
    recommended solely on prior actions--whether settled or
    adjudicated. There is a basis in law for the alleged violation.
    However, staff may point to particular cases to illustrate the
    application of law to a set of facts and as evidence of how the
    Commission has viewed similar matters in the past.
                                    ------

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JAY
                                CLAYTON

    Q.1. A bill I was the original cosponsor of, S. 3795, the
    Registration for Index Linked Annuities Act of 2020, calls upon
    the SEC to streamline the registration process for Registered
    Indexed Linked Annuities (or RILAs) and improve access to this
    innovative retirement savings product. As you are likely aware,
    a RILA is an innovative product which allows investors a way to
    protect their investment savings from losses due to stock
    market volatility. This bill would require that a new form be
    designed to specifically register RILAs rather than continue to
    require the use of forms designed primarily for equity
    offerings, requiring the disclosure of extensive information
    that is not relevant to prospective annuity purchasers.
        Would you commit to have your staff take a look at what's
    been proposed the Registered Index Linked Annuities Act to see
    if the actions called for in the legislation can be implemented
    by the Commission?

    A.1. Indexed annuities, much like structured notes, provide a
    measure of the performance of a referenced instrument or index,
    and represent a direct obligation of the insurer. I appreciate
    the concern regarding registered indexed annuities as sales of
    this investment product have grown as an increasingly popular
    investment option for Main Street investors. I understand the
    concerns expressed by the sponsors of the legislation and
    recognize that the general registration form currently used to
    register these products is not tailored to their unique
    features and risks, and requires some disclosure that may not
    be material to investors in these products. Further, I
    understand the concerns that because
    registered indexed annuities are issued through an insurer's
    general account, rather than a separate account that is
    registered as an investment company, the registration form for
    variable annuities (which are issued by registered separate
    accounts) is not well-suited either.
        SEC staff have been in dialogue with market participants on
    this issue and recently met with representatives of insurance
    industry trade groups and issuers of registered indexed-linked
    annuities to discuss the challenges in applying the
    requirements of the current registration forms to these
    products, as well as the potential for developing a more
    tailored form. As staff continues to consider options for a
    more tailored form for specific types of registered annuities,
    I expect the dialogue with market participants to continue.
    Staff has also provided technical assistance to Congress on the
    legislation and will be available to provide further assistance
    as requested.

    Q.2. I have been interested in the issue of margin eligibility
    for over-the-counter securities that have similar liquidity and
    trading characteristics as those traded on exchanges. As you
    know, holders of marginable securities can borrow against them,
    which increases the utility of owning those securities,
    improves market quality and increases the value for investors.

       LShould holders of over-the-counter American
            Depositary Receipts (ADRs) that have similar trading
            and liquidity characteristics as ADRs traded on
            exchanges be margin eligible?

       LWouldn't it make sense for margin eligibility to be
            the same for exchange-traded ADRs and over-the-counter
            ADRs if they have similar trading, liquidity,
            disclosure and other requirements?

    A.2. Margin requirements for customers of broker-dealers are
    primarily governed by the Federal Reserve Board's Regulation T
    and self-regulatory organization (SRO) margin rules, such as
    FINRA Rule 4210. Regulation T covers initial margin
    requirements and specifies which types of securities are margin
    eligible. There are about 2,260 ADRs trading in the United
    States, of which some 360 are listed. U.S.-listed ADRs are
    considered margin securities under Regulation T, and therefore,
    margin eligible. Over-the-counter ADRs are generally not margin
    eligible under Regulation T. SROs set margin requirements
    (including maintenance margin requirements) for securities
    through proposed rule changes filed with the Commission for
    notice, public comment and Commission approval prior to
    implementation.
        It may be challenging initially to determine whether a
    particular over-the-counter ADR has similar trading, liquidity,
    disclosure and other requirements as listed ADRs for purposes
    of determining margin eligibility. Moreover, this determination
    would need to be made on a periodic basis. However, I believe
    it is worth considering whether Regulation T should be amended
    to expand the definition of margin security to include those
    over-the-counter ADRs where the underlying are securities which
    have been deemed to be marginable under Regulation T. To that
    end, SEC staff are engaged with staff at the Federal Reserve
    Board and discussing
    potential updates to the scope of Regulation T that will
    modernize the rule while maintaining important investor
    protections.

    Q.3. I commend the SEC for recently adopting amendments to
    Exchange Act Rule 15c2-11, which is part of the over-the-
    counter market regulatory structure.
        Is the SEC prepared to grant exemptions to Rule 15c2-11
    that would protect the substantial value of the nearly 2,000
    Level 1 ADRs currently held by U.S. investors, and to allow
    U.S. investors continued access to these important investment
    opportunities?

    A.3. In adopting the amendments, the Commission solicited and
    considered comments from market participants, including
    comments from persons concerned that certain securities may be
    adversely affected by the amendments. Further, in its adopting
    release, the Commission acknowledged that market participants
    may have unique facts and circumstances as to how the amended
    Rule affects their activities. Thus, in the adopting release,
    the Commission stated that it will consider any requests from
    market participants--including from those engaged in
    transactions related to ADRs--for exemptive relief from the
    amended Rule for OTC securities that may be affected by the
    amendments to the Rule. In considering whether an exemption
    from the Rule is necessary or appropriate and in the public
    interest and is consistent with the protection of investors,
    the Commission may consider a number of factors, such as
    whether, based on data or other facts and circumstances, the
    issuers and/or securities are less susceptible to fraud or
    manipulation.
        The Commission also stated it may consider, among other
    things: (1) securities that have an established prior history
    of regular quoting and trading activity; (2) issuers that do
    not have an adverse regulatory history; (3) issuers that have
    complied with any applicable State or local disclosure
    regulations that require that the issuer provide its financial
    information to its shareholders on a regular basis, such as
    annually; (4) issuers that have complied with any tax
    obligations as of the most recent tax year; (5) issuers that
    have recently made material disclosures as part of a reverse
    merger; or (6) facts and circumstances that present other
    features that are consistent with the goals of the amended Rule
    of enhancing protections for investors, particularly retail
    investors.
        The Commission encouraged any requests for exemptive relief
    to be submitted expeditiously during the 9-month transition
    period to avert potential interruptions in quotations in such
    securities that may occur on or after implementation. Market
    participants that may be concerned about such ADRs may want to
    consider contacting Commission staff for further assistance
    regarding potential requests for exemptive relief.
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM JAY
                                CLAYTON

    NRSROs
    Q.1. Given that the SEC has not recommended a new model for
    NSROs and other CRAs since Dodd-Frank became law more than 9
    years ago, why has the SEC not implemented an independent board
    as prescribed by the Dodd-Frank Act's adoption of the
    bipartisan Franken-Wicker Amendment?

    Q.2. The makeup of the Board, as written in the Franken-Wicker
    Amendment, leaves much of the structure up to the SEC. Are
    there certain technicalities that could be adjusted as written
    in the Franken-Wicker Amendment, which would make the
    Commission more likely to institute an independent board?

    Q.3. Are there concrete findings made by the Commission that
    shows that an independent board would not curb inflated
    ratings?

    A.1.-A.3. NRSROs play a significant role in our domestic and
    international credit markets. Many institutional and retail
    investors rely, to varying extents, on NRSRO ratings and other
    services in making issuer-specific and more portfolio-oriented
    investment decisions. I take seriously the Commission's role in
    overseeing NRSROs and other third-party market participants on
    whom investors rely, such as investment advisers, proxy
    advisory firms, auditors, and research analysts.
        As a general matter, during this time of broad economic
    stress during the COVID-19 pandemic, there is a renewed
    regulatory interest in the influence of credit rating agencies
    on market structure and market function. Before the recent
    economic events, I suggested a few areas of focus for the
    Commission's Investor Advisory Committee, including: (1) how
    much retail investors rely on credit rating agencies; and (2)
    how much ratings influence today's marketplace, such as the
    potential risks and downstream effects of investment strategies
    and mandates that reference ratings. This topic is even more
    important now, and SEC staff, in coordination with our
    international regulatory counterparts, is analyzing the
    potential risks and downstream effects of investment strategies
    and mandates that mechanically react to credit ratings,
    directly or through index tracking. In addition, Commission
    staff are exploring whether credit ratings actions may
    contribute to procyclicality and have implications for
    financial stability.\1\ My view is we must continue to strive
    to advance the statutory goals of fostering accountability,
    transparency and competition and disclosing and mitigating
    potential conflicts of interest, without diminishing the
    marketwide benefits of, but also recognizing the inherent risks
    and limitations of unchecked reliance on, the credit rating
    services currently provided.
    ---------------------------------------------------------------------------
        \1\ See Credit Ratings, Procyclicality and Related Financial
    Stability Issues: Select Observations (July 15, 2020) available at
    https://www.sec.gov/news/public-statement/covid-19-monitoring-group-
    2020-07-15.
    ---------------------------------------------------------------------------
        With respect to compensation models, I share your concerns
    about conflicts of interest in the rating agency compensation
    models. By way of background, the ``issuer-pays'' business
    model--in which the issuer pays for the services of the rating
    agency in providing the ratings--is the dominant business model
    among the NRSROs. Prior to 1970, an alternative business model,
    the ``subscriber-pays'' model, dominated the ratings space.
    Under this model, investors are charged for ratings by paying
    the rating agency a subscription fee to access ratings, and
    issuers receive their own ratings without charge. The
    Commission's Office of Credit Ratings (OCR) has noted the
    potential conflicts inherent in both business models.\2\ With
    respect to the issuer-pays model, OCR has noted potential
    conflicts in that the NRSRO may be influenced to determine more
    favorable (i.e., higher) ratings than warranted in order to
    retain the obligors or issuers as clients. Similarly, OCR has
    noted that the subscriber-pays model may also be subject to
    potential conflicts of interest, including where an NRSRO may
    be aware that an influential subscriber holds a securities
    position (long or short) that could be advantaged if a credit
    rating upgrade or downgrade causes the market value of the
    security to increase or decrease or if an NRSRO may be aware
    that a subscriber wishes to acquire a particular security but
    is prevented from doing so because the credit rating of the
    security is lower than internal investment guidelines or an
    applicable contract permit.
    ---------------------------------------------------------------------------
        \2\ See Annual Report on Nationally Recognized Statistical Rating
    Organizations (Jan. 2020), available at https://www.sec.gov/files/2019-
    annual-report-on-nrsros.pdf.
    ---------------------------------------------------------------------------
        I believe a new approach to addressing conflicts may be
    needed. In this regard, I note that our staff is assessing the
    recent recommendation from the Commission's Fixed Income Market
    Advisory Committee (FIMSAC) regarding ways to mitigate some of
    the perceived potential conflicts of interest associated with
    the issuer-pay model. The FIMSAC recommended that the
    Commission explore the following three elements to mitigate
    potential conflicts: (1) increased NRSRO disclosure; (2)
    enhanced issuer disclosures for corporate credit issuers and
    securitized products; and (3) a mechanism for bondholders to
    vote on the issuer-selected NRSROs.\3\
    ---------------------------------------------------------------------------
        \3\ FIMSAC Recommendation Regarding Ways to Mitigate Conflicts of
    Interest in Credit Ratings (Jun. 1, 2020), available at: https://
    www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-
    recommendations-credit-ratings-subcommittee.pdf.
    ---------------------------------------------------------------------------
        The Franken-Wicker Amendment to the Dodd-Frank Act
    contemplated the adoption of an independent ratings board in
    which a board would assign qualified NRSROs to rate structured
    finance products. In 2012, SEC staff submitted a report to
    Congress on assigned credit ratings that includes a detailed
    analysis of the potential benefits of the independent board.
    This report also raised a number concerns including: (1) the
    continuance of ratings shopping under the assignment system;
    (2) the potential for new conflicts of interest and incentives
    that run contrary to the goal of ratings quality; (3) the
    challenges related to operational feasibility such as
    uncertainty and cost to the market; (4) how to determine
    whether a qualified NRSRO has the capacity and expertise to
    produce quality credit ratings for particular types of
    securities; and (5) whether the assignment system creates a
    Government endorsement which would be inconsistent with efforts
    to reduce reliance on credit ratings.\4\ I believe, as
    highlighted in the 2012 Report, that these serious concerns
    must be thoughtfully considered and resolved before moving
    forward with the establishment of such a board. The 2012 Report
    also includes recommendations for statutory changes that would
    be required for the establishment of such a board.
    ---------------------------------------------------------------------------
        \4\ See Report to Congress on Assigned Credit Ratings (Dec. 2012),
    available at https://www.sec.gov/news/studies/2012/assigned-credit-
    ratings-study.pdf.
    ---------------------------------------------------------------------------
    China
        Two years ago, the Commission worked with the Committee on
    Foreign Investment in the United States (CFIUS) in deciding to
    block the sale of the Chicago Stock Exchange to a group of
    Chinese-led investors. The Commission said at the time that it
    was concerned about the ability of a new, foreign owner to
    ``effectively monitor or enforce compliance,'' and there were
    also significant concerns about how American's personal
    information would have been protected if the sale had been
    approved. Many Americans participating in investing for the
    first time are doing so through companies and phone
    applications designed, owned, and operated in some of the same
    countries that will not comply with PCAOB audit requirements--
    specifically, Chinese platforms like Webull (which has ties to
    Xiaomi Technology) and Moomoo (which has ties to Tencent).

    Q.4. Do American investors using these platforms benefit from
    the full range of regulatory protections and assurances that
    they would if using a U.S.-owned and -operated platform?

    Q.5. Is the SEC concerned that American retail investors who
    use these foreign trading platforms could face uncertainties
    due to any change in the People's Republic of China's
    regulatory regime?

    A.4.-A.5. From a U.S.-regulatory perspective, the protections
    that govern the operation of U.S. broker-dealers and SEC-
    registered investment advisers apply and, as a general matter,
    should not be affected by the ownership of that broker-dealer
    or the regulatory regime of other countries. The platforms you
    referenced, Webull Advisors LLC and Moomoo (whose securities
    products and services are offered by Futu, Inc.), are
    registered with the SEC, FINRA, and SIPC. These firms must
    comply with all capital, market and investor protection rules
    with respect to their business in the United States.
        That said, registration and oversight as a broker-dealer or
    investment adviser does not insulate obligations of individuals
    or firms with respect to customer information. I have requested
    that our Division of Examinations consider these issue in
    connection with their examinations of investment advisers and
    broker-dealers, including any concerns raised by a lack of
    transparency in firm ownership.
                                    ------

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER FROM JAY
                                CLAYTON

    Q.1. Mr. Chairman, I have been following the proposed changes
    to the 13F reporting that would raise the threshold for filing
    for institutional investment managers from $100 million to $3.5
    billion. I have heard opposition to this from various
    stakeholders due to the reduction in transparency around
    holdings. In fact, it is my understanding that 99 percent of
    the comment letters filed with the SEC were opposed to the
    proposed changes. Can you tell me what the status of the
    proposal is? Do you expect the SEC to withdraw this proposal
    given the overwhelming opposition to it?

    A.1. The Commission proposed to raise the reporting threshold
    to $3.5 billion, reflecting proportionally the same market
    value of U.S. equities that $100 million represented in 1975,
    the time that Congress enacted section 13(f) under the Exchange
    Act. The legislative history of the 1975 statute indicates that
    the reporting threshold of $100 million was intended to capture
    the largest institutional managers. The proposed adjusted
    threshold would provide relief to smaller managers who are now
    subject to Form 13F reporting, while retaining data on over 90
    percent of the dollar value of the securities currently
    reported.
        The Commission's proposal included numerous requests for
    comment, including on the proposed threshold increase and
    alternative approaches analyzed in the release. The Commission
    has received over 2,000 comment letters on the proposal to date
    from a broad range of interested parties, the vast majority of
    which addressed the increase in the reporting threshold. Many
    expressed one of two concerns: (1) the potential impact of the
    proposal on the ability of publicly traded companies to engage
    with their shareholders, and (2) the desire not to lose insight
    into certain individual firm trading information. Notably,
    there was little concern that the proposed amendments would
    affect the objections of section 13(f).
        As I noted during the hearing, I do not plan to finalize
    the Form 13F proposal by the end of the year. The Form 13F
    proposal was intended to modernize the threshold, but in the
    process, commenters highlighted that the uses of Form 13F have
    evolved beyond its intended purpose since the statute was
    enacted. For example, public companies are using the data to
    identify and engage with certain of their shareholders on
    corporate governance issues. We appreciate the desire of
    issuers to have transparency into their institutional
    shareholder base or ensure that they are able to efficiently
    reach their shareholders even if the shareholders wish to
    remain anonymous. We are exploring ways to modernize our rules
    on shareholder communications so that issuers can engage with
    their shareholders more directly and efficiently. Currently,
    however, information reported on Form 13F appears to fill a
    gap--a gap I believe can be filled much more effectively and
    efficiently through other means--in providing this information
    to corporate issuers.
        In addition, commenters stated that corporate issuers may
    use Form 13F data to identify potential new investors based on
    whether an investor's historical Form 13F disclosures show
    holdings of similar issuers or reveal a relevant investment
    strategy. Similarly, institutions seeking to hire money
    managers asserted that they use 13F data to identify smaller
    managers with attractive holdings and strategies. Form 13F data
    may be particularly useful here because smaller managers
    oftentimes are not able to engage in widespread marketing
    efforts. However, 13F filings are an imperfect means to
    understand how a professional manager manages portfolios. Form
    13F can be filed up to 45 days after quarter end and is a
    backward-looking snapshot of a manager's holdings. Also, the
    filing only requires disclosure of certain equity securities,
    and does not necessarily include all of a manager's
    investments.
        These and other issues raised by commenters require careful
    consideration by the staff, and the involvement of multiple
    divisions and offices within the Commission. We are focused on
    examining these important issues before moving forward with
    determining the appropriate threshold for the Form.

    Q.2. Chairman Clayton, over 90 percent of American adults use
    the internet, almost 89 percent file their Federal taxes
    electronically, and most clients of financial firms prefer
    electronic delivery for
    investor communications. You've spoken about the importance of
    modernizing the delivery of investor communications, especially
    in the midst of the COVID-19 pandemic. Could you provide
    clarity on how you think this could best be achieved, while
    preserving a paper option for those who prefer it? Will the SEC
    act on this initiative in the near-term?

    A.2. The shift to a mandatory telework environment across our
    entire economy, including our critical market infrastructure,
    showed the importance of being able to conduct business
    electronically and remotely and highlighted the need to move
    our regulatory framework for all investors to an electronic
    framework, while preserving a paper delivery option for those
    who prefer it.
        At the outset of the pandemic, the Commission and its staff
    provided temporary relief to address operational issues arising
    from COVID-19, including relief from in-person meeting, manual
    signature and physical document-delivery requirements. I
    believe in many instances, this relief enhanced investor
    protection and market integrity, and staff are currently
    assessing areas where permanent relief makes sense. In November
    2020, the Commission adopted rules that will provide additional
    flexibility in connection with documents filed with the
    Commission to permit the use of electronic signatures in
    authentication documents and facilitate electronic service and
    filing in SEC administrative proceedings. Additionally, the
    Commission's Fall 2020 Regulatory Flexibility Act Agenda
    contains several items building on the SEC's COVID-19 relief.

    Q.3. I'm concerned that Troubled Debt Restructuring (TDR)
    guidance will soon expire. Is the SEC aware of this concern and
    are you working with FASB to ensure existing regulatory
    guidance on TDRs continue?

       LWhat is the timeline for additional TDR guidance?

       LIs there any opposition to extending TDR relief?

       LIn your view, do you and other Federal agencies
            have the authority to extend TDR relief? Does Congress
            need to act?

    A.3. Since the onset of the pandemic, the SEC staff has been
    actively engaged with stakeholders relating to the application
    of the TDR guidance. SEC staff have worked closely with the
    Financial Accounting Standards Board (FASB) on TDR guidance,
    and this collaborative approach will continue.
        On March 22, 2020, the prudential banking regulators,
    working together with the FASB, issued an interagency statement
    on loan modifications for financial institutions working with
    customers affected by COVID-19. The interagency statement
    covered different relevant topics and specifically provided
    that short-term modifications made on a good faith basis in
    response to COVID-19 to borrowers who were current prior to any
    relief are not TDRs. This interagency guidance did not include
    an expiration date.\1\
    ---------------------------------------------------------------------------
        \1\ Subsequent to the issuance of this guidance by the FASB and the
    banking regulators, the CARES Act was signed into law. Section 4013 of
    the CARES Act provided eligible institutions to suspend U.S. GAAP TDR
    requirements for certain loan modifications meeting the criteria in the
    CARES Act. The interagency statement and the provisions of the CARES
    Act are similar; however, unlike the guidance published by the banking
    regulators, the CARES Act provisions included an expiration date.
    ---------------------------------------------------------------------------
        SEC staff have been in ongoing dialogue with the FASB,
    banking regulators, financial institutions, and banking
    industry groups to understand any challenges relating to the
    accounting for loan modifications. While certain institution-
    specific application questions have arisen, because the
    guidance from the banking regulators and the FASB does not
    include an expiration date, we believe market participants have
    clarity on the approach they should utilize to account for loan
    modifications. To the extent specific questions continue to
    arise regarding the application and scope of this guidance
    related to TDRs, I believe that the FASB is well positioned to
    act. The SEC's Office of the Chief Accountant also stands ready
    to assist, and I would encourage stakeholders to consult with
    them on any specific issues they may have.
                                    ------

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JAY
                                CLAYTON

    Coronavirus Disease 2019 (COVID-19)
    Q.1. Last month, I sent a letter to you and Commodities Futures
    Trading Commission (CFTC) Chairman and Chief Executive Tarbert
    urging the SEC and CFTC to conduct an insider trading
    investigation following press reports revealing that Trump
    administration officials privately gave dire warnings to
    conservative allies and Republican donors about the risk from
    the COVID-19 pandemic while President Trump was publicly
    optimistic about the impact of the virus.\1\
    ---------------------------------------------------------------------------
        \1\ Letter from Senator Warren to Securities and Exchange
    Commission Chairman Clayton and Commodities Futures Trading Commission
    Chairman and Chief Executive Tarbert, October 15, 2020, https://
    www.warren.senate.gov/imo/media/doc/2020.10.15%20Letter%20to%20SEC%20
    CFTC.pdf.
    ---------------------------------------------------------------------------
        The letter cites news reports showing that senior Trump
    administration officials indicated that certain investors
    should ``[s]hort everything . . . betting on the idea that the
    stock prices of companies would soon fall'' and that ``aspects
    of the readout from Washington informed their trading that
    week, in one case adding to existing short positions in a way
    that amplified . . . profits.''\2\ My letter stated that
    ``Federal law bars individuals from `purchasing or selling a
    security while in possession of material nonpublic
    information'--in this case, high-level Administration
    officials' dire views of the economic risks from the
    coronavirus that were in stark contrast to the public
    statements of the President and other top officials.''\3\
    ---------------------------------------------------------------------------
        \2\ New York Times, ``As Virus Spread, Reports of Trump
    Administration's Private Briefings Fueled Sell-Off'', Kate Kelly and
    Mark Mazzetti, October 26, 2020, https://www.nytimes.com/2020/10/14/us/
    politics/stock-market-coronavirus-trump.html.
        \3\ Letter from Senator Warren to Securities and Exchange
    Commission Chairman Clayton and Commodities Futures Trading Commission
    Chairman and Chief Executive Tarbert, October 15, 2020, https://
    www.warren.senate.gov/imo/media/doc/2020.10.15%20Letter%20to%20SEC%20
    CFTC.pdf.
    ---------------------------------------------------------------------------
        Please describe any action that the SEC has taken in
    response to these or other reports or indications of insider
    trading related to the COVID-19 pandemic.
    A.1. As a matter of policy, the SEC conducts investigations on
    a confidential basis and generally does not acknowledge the
    existence or nonexistence of any investigation unless or until
    charges are filed. Accordingly, I cannot comment specifically
    on the matters you have cited as they relate to any specific
    entity or person, but I assure you that the SEC's staff will
    consider carefully the information included in your previous
    correspondence in connection with our statutory and regulatory
    responsibilities.
        I also note that we are generally aware of the information
    asymmetries and other consequences of COVID-19 that may
    implicate our Federal securities laws, have publicly commented
    on these matters and are incorporating this into our day-to-day
    operations. For example, early on in the pandemic, the Co-
    Directors of the Division of Enforcement released a statement
    reminding market participants of the importance of maintaining
    market integrity and following corporate controls and
    procedures, especially during times of market volatility. Good
    corporate hygiene cannot be overstated, nor can the importance
    of related controls designed to prevent not only insider
    trading, but also the appearance of impropriety or misalignment
    of interests. Following this theme, in September, in a letter
    to the House Financial Services Committee, I provided a series
    of specific suggestions regarding corporate hygiene--including
    the use of Rule 10b5-1 plans--that I believe companies should
    follow and that could be the basis of legislation or future
    rulemaking.
    Private Equity
    Q.2. 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.\4\
    ---------------------------------------------------------------------------
        \4\ 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.
    ---------------------------------------------------------------------------
        Private equity transactions are fueled by risky loans that
    are immediately securitized and sold.\5\ 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.\6\
    ---------------------------------------------------------------------------
        \5\ 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.
        \6\ 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
    from being immediately passed onto unknowing investors?
        If not, how, if at all, you would you mitigate risky
    corporate lending and the ability of lenders to spread
    irresponsible private equity debt across financial
    institutions? How would you ensure that regulators have the
    appropriate information to assess the exposure of financial
    markets to leveraged loans?

    A.2. Loan securitization vehicles are typically sold under an
    exemption from registration under the Securities Act of 1933.
    As a result, limited information is made available to the SEC
    regarding these offerings, though consistent with the exemption
    on which these vehicles rely, the purchasers of interests in
    these vehicles are
    typically institutional investors. SEC staff have coordinated
    with domestic and international financial regulators on work to
    explore and monitor the leveraged loan market and CLO markets.
    SEC staff also continue to monitor these markets using publicly
    available data, commercially available data and data reported
    to the SEC, though as a consequence of the variety of
    purchasers in these markets, no single data set contains
    comprehensive information concerning the owners of leveraged
    loans and CLOs. For example, as part of the SEC staff report
    U.S. Credit Markets: Interconnectedness and the Effects of the
    COVID-19 Economic Shock, staff reviewed how the leveraged loan
    and CLO markets functioned in March 2020 in response to both
    the COVID-19 induced economic shock and the related monetary
    and fiscal policy responses. As discussed in more detail below,
    I do not believe leveraged lending presents significant risks
    to financial stability at this time. As noted in a December
    2020 GAO report, ``leveraged lending activities had not
    contributed significantly to the distress of any large
    financial entity whose failure could threaten financial
    stability. Large banks' strong capital positions have allowed
    them to manage their leveraged lending exposures, and the
    exposure of insurers and other investors also appeared
    manageable.''\7\ The SEC will continue to monitor the CLO
    market in coordination with our domestic and international
    regulatory counterparts.
    ---------------------------------------------------------------------------
        \7\ See Government Accountability Office, Financial Stability:
    Agencies Have Not Found Leveraged Lending to Significantly Threaten
    Stability but Remain Cautious Amid Pandemic (Dec. 16, 2020), available
    at https://www.gao.gov/assets/720/711293.pdf.
    ---------------------------------------------------------------------------
    Leveraged Lending
    Q.3. In November 2018, I sent a letter to you, 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.\8\
    ---------------------------------------------------------------------------
        \8\ 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 %20Lette%20to%20Regulator; https://www.sec.gov/
    spotlight/dodd-frank/assetbackedsecurities
    .shtmls%20on%20Leveraged%20Lending.pdf.
    ---------------------------------------------------------------------------
        In a section addressed to you, 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.\9\ In response to the rollback of the
    Volcker Rule, SEC Commissioner Robert J. Jackson, Jr., stated,
    `` `[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.' ''\10\
    ---------------------------------------------------------------------------
        \9\ 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.
        \10\ 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.
    ---------------------------------------------------------------------------
        Your January response provided a procedural, but not a
    substantive, explanation of the status of SEC's proposed
    amendments to the Volcker Rule.\11\
    ---------------------------------------------------------------------------
        \11\ Letter from Securities and Exchange Commission Chairman Jay
    Clayton to Senator Warren, January 31, 2019.
    ---------------------------------------------------------------------------
        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 loans account for a relatively small portion of
    total debt outstanding in U.S. markets. Nonetheless, leveraged
    loan and collateralized loan obligation (CLO) markets have
    connections across a wide range of participants in U.S. capital
    markets. The market for CLOs has grown rapidly in recent years,
    with the market more than doubling since 2012, from $250
    billion to $642 billion. Because these markets provide insight
    into market function and have the potential to contribute to
    certain market stresses, we have been following the CLO market
    and the leveraged lending and high-yield debt markets with
    increased attention since 2018. At that time, I asked SEC
    staff, including our Division of Economic and Risk Analysis and
    our Office of Credit Ratings, to review and closely monitor
    these markets with two issues in mind: (1) whether there are
    elements of these markets that could have systemic or other
    spill-over effects in our capital markets and in particular,
    undetected potential effects; and (2) whether these markets,
    and in particular CLOs, are structured in a way, such that
    changes in ratings of the securities could trigger substantial
    selling into markets (e.g., below investment grade markets)
    that historically have less liquidity.
        CLO issuance in the United States was at an all-time high
    before the COVID-19 economic shock to the global financial
    system. As part of the SEC staff report U.S. Credit Markets:
    Interconnectedness and the Effects of the COVID-19 Economic
    Shock, staff reviewed how the leveraged loan and CLO markets
    functioned in March 2020 in response to both the COVID-19
    induced economic shock and the related monetary and fiscal
    policy responses. The onset of the COVID-19 economic shock and
    its widespread impact on a large number of borrowers had a
    pronounced effect on the leveraged loan market, but despite a
    sharp initial decline in March 2020, the market has since
    stabilized. The COVID-19 economic shock to date has not
    appeared to significantly impair the CLO market. Risk to the
    financial system more generally appears to be mitigated as a
    result of various factors, including because of the diverse set
    of investors and numerous intermediators that are active in the
    CLO market, and as a general matter, CLO structures have
    features designed to match funding and absorb risk. As noted in
    a December 2020 GAO report, ``leveraged lending activities had
    not contributed significantly to the distress of any large
    financial entity whose failure could threaten financial
    stability. Large banks' strong capital positions have allowed
    them to manage their leveraged lending exposures, and the
    exposure of insurers and other investors also appeared
    manageable.'' Additionally, present-day CLO securities appear
    to pose less of a risk to financial stability than did similar
    securities during the financial crisis, as they have better
    investor protections, are more insulated from market swings and
    are not widely tied to other risky, complex instruments.\12\
    ---------------------------------------------------------------------------
        \12\ See Government Accountability Office, Financial Stability:
    Agencies Have Not Found Leveraged Lending to Significantly Threaten
    Stability but Remain Cautious Amid Pandemic (Dec. 16, 2020), available
    at https://www.gao.gov/assets/720/711293.pdf.
    ---------------------------------------------------------------------------
        I do not believe leveraged lending presents significant
    threats to financial stability. However, while these markets
    have fared reasonably well thus far with the disruption brought
    on by the COVID-19 economic shock, there is a heightened level
    of uncertainty in the leveraged loan and CLO markets.\13\ The
    SEC staff will continue to monitor the CLO market in
    coordination with our domestic and international regulatory
    counterparts.
    ---------------------------------------------------------------------------
        \13\ As noted in FSOC's most recent annual report, with cash-flows
    impaired due to the COVID-19 pandemic, many businesses may be
    challenged to service their debt. Since March, nearly $2 trillion in
    nonfinancial corporate debt has been downgraded, and default rates on
    leveraged loans and corporate bonds have increased considerably.

    Q.4. Please explain the SEC's rationale for removing
    ---------------------------------------------------------------------------
    protections against excessive risks under the Volcker Rule.

    A.4. The Volcker Rule was intended to constrain proprietary
    risk-taking by banking entities and promote the safety and
    soundness of the U.S. financial system. The Volcker Rule
    generally prohibits banking entities from engaging in
    proprietary trading and from owning or controlling hedge funds
    or private equity funds, referred to as ``covered funds.'' It
    is intended to restrict high-risk, speculative trading activity
    by banking entities, while preserving their ability to engage
    in important customer-oriented financial services, such as
    underwriting, market making and asset management services. That
    mandate is straightforward in concept, yet in our multifaceted,
    highly interconnected, global and ever-changing financial
    markets, it is challenging to design a rule that effectively
    and efficiently implements this statutory mandate.
        Since my response to your November 2018 letter, the
    agencies responsible for implementing the Volcker Rule adopted
    three sets of changes to the original rule: (1) amendments to
    implement congressional directives consistent with the Economic
    Growth, Regulatory Relief, and Consumer Protection Act (July
    2019); (2) amendments to tailor and simplify the rule to allow
    banking entities to more efficiently provide financial services
    in a manner that is consistent with the requirements of the
    statute (November 2019); and (3) amendments modifying and
    clarifying requirements relating to covered funds (July 2020).
    I believe that, collectively, these amendments will improve
    application of the Volcker Rule in a number of respects. The
    November 2019 amendments will improve application, in part by:
    (1) tailoring compliance requirements more directly to a firm's
    trading activity; (2) providing greater clarity and certainty
    about what activities are prohibited; and (3) improving
    effective allocation of compliance resources where possible.
    The 2020 amendments similarly will improve application in part
    by: (1) reducing the extraterritorial impact of the
    regulations; (2) improving and streamlining the covered fund
    provisions; and (3) providing clarity to banking entities
    regarding the provision of financial services and the conduct
    of permissible activities. These amendments are consistent with
    the requirements of Section 13 of the Bank Holding Company Act
    and are unlikely to materially increase risks to the safety and
    soundness of banking entities or the financial system.
        Additionally, these amendments reflect the experience
    gained by banking entities and the agencies charged with
    implementing the Volcker Rule, including through examinations.
    Based on that experience, and in response to feedback received
    in the course of administering the rule, we and the other
    agencies identified opportunities--consistent with the
    statute--for improving the regulations. In the November 2019
    amendments, that improvement included tailoring implementation
    based on the level of a banking entity's trading activity and
    recognizing, in short, that to implement the Volcker Rule
    effectively, one size does not fit all, and the terms of the
    regulations should reflect our collective experience.
    Similarly, the 2020 amendments will improve the regulations, in
    part, by excluding from the ``covered fund'' definition certain
    types of investment vehicles that do not present the risks that
    the Volcker Rule was intended to address.
        In short, the Volcker Rule is now better implemented to
    achieve its objectives and ensure that it does not unduly
    constrain liquidity and capital formation.

    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.''\14\
    ---------------------------------------------------------------------------
        \14\ Id.

       LPlease describe any evidence that the amendments
            rolling back the Volcker Rule are beneficial to the
    ---------------------------------------------------------------------------
            safety and security of securities markets.

       LPlease provide any specific analyses indicating
            that rolling back the Volcker Rule has improved
            liquidity and capital formation.

    A.5. As part of the process of adopting the amendments to the
    Volcker Rule in both November 2019 and July 2020, the
    Commission conducted an economic analysis focused on the
    potential effects of these amendments on Commission
    registrants, the functioning and efficiency of the securities
    markets, investor protection, and capital formation and was
    informed by comments received on the original regulations
    implementing the Volcker Rule in 2013.
        With respect to the 2019 Volcker amendments, the economic
    analysis was informed by a body of academic research concerning
    the effects of Section 13 of the Bank Holding Company Act and
    the original Volcker Rule on dealer provision of liquidity and
    on the risk of market dislocations in times of stress. In
    particular, those comments and research focused on: (1) the
    effects of the rule on risk-taking by banking entities; (2) the
    degree to which the rule may have impacted conflicts of
    interests between banking entities and their clients,
    counterparties, and customers; (3) effects of the rule on
    client-oriented financial services and market quality; and (4)
    compliance burdens and competitive effects. With respect to
    liquidity and capital formation, the Commission's economic
    analysis referenced several studies that show significant
    declines in various measures of liquidity after the financial
    crisis and postcrisis reforms, including a recent study that
    ties these effects to the Volcker Rule's underwriting
    exemption. In addition, the Commission's economic analysis also
    analyzed other costs and benefits of the rule, including its
    effects on risk-taking, noting, in relevant part, that while
    the Volcker Rule may have reduced exposure related to trading,
    it is not clear it reduced the overall risk of individual
    banking entities and potentially of banking entities as a
    whole. Former Commissioner Jackson did not address these
    matters in meaningful detail in the comments you cite.
        I note that the bodies of studies in this area can
    generally be classified as ranging from limited or no evidence
    of adverse effects on liquidity and capital formation to
    significant adverse effects on one or both of these important
    Commission objectives. Through the great work of the staff, we
    have advanced these issues without adversely affecting (and I
    believe, furthering the risk-mitigating objectives) of the
    Volcker Rule.
        With respect to the 2020 Volcker amendments, the
    Commission's economic analysis acknowledged that these
    amendments could increase the ability of banking entities to
    engage in certain types of activities involving risk, and, in
    the abstract, increases in risk exposures of large groups of
    banking entities could have negative effects. The analysis
    highlighted three important considerations that could mitigate
    those possible risks, including: (1) banking entities already
    engage in a variety of permissible activities involving risk
    and the activities of many types of funds excluded from the
    ``covered fund'' definition under the 2020 amendments largely
    replicate permissible and traditional activities of banking
    entities; (2) banking entities may also be subject to multiple
    prudential capital, margin and liquidity requirements that
    facilitate the safety and soundness of banking entities and
    promote financial stability; and (3) the new exclusions from
    the ``covered fund'' definition each include a number of
    conditions aimed at preventing evasion Volcker Rule, promoting
    safety and soundness, and allowing for customer oriented
    financial services provided on arms-length, market terms. I
    believe these considerations will effectively mitigate any such
    risk exposures.
    Inflated Bond Ratings
    Q.6. In September, I wrote you a letter regarding troubling
    reports of inflated bond ratings and the perverse incentives
    within the bond rating industry and urged the SEC to take
    immediate action to protect the economy from risky lending
    propped up by conflicts of interest between bond issuers and
    rating agencies.
        My letter described the flows in the incentive structures
    of bond ratings firms' through the ``issuer-pays'' model used
    by major firms like S&P and Moody's. Under the issuer-pays
    model, bond issuers pay the agencies for their assessments of
    the products they hope to sell, ultimately giving the rating
    firms an incentive to give better ratings, regardless of the
    risk, since bond issuers might otherwise go to their
    competitors.\15\ In your November response, you stated that you
    shared my concerns about conflicts of interest in rating agency
    compensation models and said that you are awaiting
    recommendations or advice from various advisory committees.\16\
    ---------------------------------------------------------------------------
        \15\ Council on Foreign Relations, ``The Credit Rating
    Controversy'', CFR Staff, February 19, 2015, https://www.cfr.org/
    backgrounder/credit-rating-controversy.

        \16\ Letter from Securities and Exchange Commission Chairman Jay
    Clayton to Senator Warren, November 21, 2019.

       LWhat is the current status of these
    ---------------------------------------------------------------------------
            recommendations?

       LHave 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? If so, please explain the
            SEC's instructions and any requested deadlines.
            Additionally, please explain if these recommendations
            or advice will be made public.

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

    A.6. In my November 2019 remarks to the Fixed Income Market
    Structure Advisory Committee (FIMSAC), I noted the importance
    of continually reviewing whether market participants who
    substantially influence or are relied upon by investors are
    appropriately disclosing, monitoring, and managing their
    conflicts.\17\ In my view, the interests of credit rating
    agencies are not fully aligned with that of investors, and I
    have questioned whether there are alternative compensation
    models that would better align their interests. The FIMSAC and
    the FIMSAC Credit Ratings Subcommittee have been thoughtfully
    deliberating this important question.
    ---------------------------------------------------------------------------
        \17\ See Remarks at Meeting of the Fixed Income Market Structure
    Advisory Committee (Nov. 4, 2019), available at https://www.sec.gov/
    news/public-statement/statement-clayton-fimsac-110419.
    ---------------------------------------------------------------------------
        The FIMSAC Credit Ratings Subcommittee held several
    meetings to further discuss the matter. At the February 2020
    FIMSAC meeting, the Subcommittee hosted a discussion on issuer-
    pay conflict of interest. Along with the agenda for the
    meeting, the FIMSAC published the Subcommittee's working
    document that summarizes the various viewpoints on an
    alternative compensation model and other potential initiatives.
    At the June 2020 FIMSAC meeting, the Subcommittee presented its
    ``Preliminary Recommendation Regarding Ways to Mitigate
    Conflicts of Interest in Credit Ratings'', which includes
    increased NRSRO disclosures; enhanced issuer disclosures; and
    exploration of a mechanism for bondholders to vote on issuer-
    selected NRSROs.
        In November 2019, I also suggested some topics and areas of
    focus for the Investor Advisory Committee (IAC), including
    questions relating to the influence of credit rating agencies,
    their conflicts and compensation models and whether there are
    alternative payment models that would better align the
    interests of rating agencies with investors. The IAC hosted a
    panel discussion regarding credit rating agencies at its
    meeting on May 21, 2020. The SEC has dedicated pages on its
    website to provide the public with information about the
    important ongoing work of the FIMSAC and the IAC.\18\
    ---------------------------------------------------------------------------
        \18\ See https://www.sec.gov/spotlight/fixed-income-advisory-
    committee and https://www.sec.
    gov/spotlight/investor-advisory-committee.shtml.
    ---------------------------------------------------------------------------
        I have benefited from the insight, perspective and
    experience that advisory committees have brought to the SEC in
    recent years. I appreciate the time and effort that advisory
    committee members have devoted in supporting the SEC's mission
    to protect investors, maintain fair, orderly, and efficient
    markets and facilitate capital formation. I expect that the
    advisory committees continue will provide informed, diverse
    perspectives and related advice and recommendations, which will
    inform the Commission's policy decisions.
        It is also worth noting that the SEC, in response to the
    current COVID-19 crisis, formed an internal, cross-divisional
    COVID-19 Market Monitoring Group to assist the Commission and
    its various divisions and offices in: (1) Commission and staff
    actions and analysis related to the effects of COVID-19 on
    markets, issuers, and investors--including our Main Street
    investors; and (2) responding to requests for information,
    analysis, and assistance from fellow regulators and other
    public sector partners. The group was also formed to assist in
    the SEC's efforts to coordinate with and support the COVID-
    related efforts of other Federal financial agencies and other
    bodies, including the President's Working Group on Financial
    Markets (PWG), the Financial Stability Oversight Council (FSOC)
    and the FSB, among others. Credit ratings have been a focus for
    the Monitoring Group, and staff has been exploring whether
    credit assessments and credit rating agency downgrades--and
    market anticipation of, and responses to, those ratings
    actions--may (1) contribute to negative procyclicality in
    certain circumstances and (2) have implications for financial
    stability. Together these projects are informing the
    Commission's assessment of the risks facing the markets.

    Q.7. Your 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.
    ---------------------------------------------------------------------------
        Please explain why the SEC's efforts to respond to the bond
    ratings agencies' conflicts of interest have failed to prevent
    them from artificially inflating bond ratings.

    A.7. As an initial matter, it is important to note that the
    Commission is statutorily prohibited from regulating the
    substance of credit ratings or the procedures and methodologies
    by which an NRSRO determines ratings. Within these statutory
    bounds, the Office of Credit Ratings (OCR) conducts an
    examination of each NRSRO at least annually, covering eight
    review areas mandated by statute, including conflicts of
    interest and internal controls. Within the required review
    areas, the staff identifies areas of emphasis and issues of
    focus for the exams based upon a risk assessment. For example,
    as discussed in the staff's most recent examination report, the
    CLO market is an area of focus that the staff identified
    through the risk assessment process and reviewed as part of the
    NRSRO examinations. As part of the annual exam process, the
    staff examines whether an NRSRO conducts its business in
    accordance with and accurately discloses its policies,
    procedures, and methodologies, and can also examine compliance
    with the applicable regulatory requirements. The SEC makes
    available to the public the annual examination report that
    summarizes the staff's findings and recommendations from each
    NRSRO examination.
        OCR is engaging with users of credit ratings and other
    market participants regarding potential improvements to
    regulation, including evaluating the effectiveness of Rule 17g-
    5(a)(3) of the Securities Exchange Act. OCR is also considering
    whether additional disclosures, including disclosures regarding
    ratings performance, economic stress assumptions, and
    deviations from methodologies, would help in assessing credit
    ratings.\21\
    ---------------------------------------------------------------------------
        \21\ See The SEC's Office of Credit Ratings and NRSRO Regulation:
    Past, Present, and Future, Feb 24, 2020, available at https://
    www.sec.gov/news/speech/speech-jessica-kane-2020-02-24.

    Q.8. Your 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.''\22\
    ---------------------------------------------------------------------------
        \22\ Letter from Securities and Exchange Commission Chairman Jay
    Clayton to Senator Warren, November 21, 2019.

       LPlease describe any near-term discussions you have
            had with national and international regulatory
    ---------------------------------------------------------------------------
            colleagues on this topic.

       LPlease describe any communications you have had
            with SEC staff or other SEC Commissioners regarding
            these issues.

    A.8. In the area of corporate debt issues and other topics, the
    level of coordination among staff at the SEC and from the
    Treasury, Federal Reserve, CFTC, OCC and FDIC has been strong
    and helps all of us to better understand the broader trends and
    market implications. This coordination often takes place
    through the FSOC, where nonfinancial corporate credit and
    leveraged loans have been topics of discussion, including in
    the FSOC's 2020 annual report.
        In terms of international work, I am a member of the board
    of the International Organization of Securities Commissions
    (IOSCO) and the Financial Stability Board (FSB) Plenary. In
    both organizations over the past year, we have focused on
    issues in corporate credit. The IOSCO board issued a report on
    liquidity in corporate bond markets under stressed conditions,
    and the FSB published a report on leveraged loans and CLOs.\23\
    SEC staff also was involved in drafting both reports.
    ---------------------------------------------------------------------------
        \23\ See IOSCO Board, Liquidity in Corporate Bond Markets Under
    Stressed Conditions (June 2019), available at https://www.iosco.org/
    library/pubdocs/pdf/IOSCOPD634.pdf; FSB, Vulnerabilities Associated
    With Leveraged Loans and Collateralized Loan Obligations (Dec. 19,
    2019), available at https://www.fsb.org/wp-content/uploads/P191219.pdf.
    ---------------------------------------------------------------------------
        Additionally, as previously mentioned, the SEC formed an
    internal, cross-divisional COVID-19 Market Monitoring Group to
    assist the Commission and its various divisions and offices in
    (1) Commission and staff actions and analysis related to the
    effects of COVID-19 on markets, issuers, and investors; and (2)
    responding to requests for information, analysis, and
    assistance from fellow regulators and other public sector
    partners.
        At the Commission, staff have closely coordinated to ensure
    that we are appropriately monitoring and assessing developments
    in the leveraged loan and CLO markets, including with respect
    to funds that participate in these markets. As previously
    mentioned, SEC staff analyzed the leveraged loan and CLO
    obligation markets as part of its interconnectedness and the
    effects of COVID-19 on the credit markets. SEC staff has also
    been utilizing public and nonpublic data to monitor holdings
    levels and changes over time. The Division of Investment
    Management staff also has a team dedicated to reviewing filings
    by registered funds, including those that invest in leveraged
    loans. The team has been especially focused on promoting clear
    and concise disclosure of credit and liquidity risks, including
    as it relates to extended settlement times.
        Additionally, the COVID-19 Market Monitoring Group has been
    the exploration of whether credit assessments and credit rating
    agency downgrades--and market anticipation of, and responses
    to, those ratings actions--may contribute to negative
    procyclicality in certain circumstances and have implications
    for financial stability. The interrelationships between ratings
    actions, procyclicality and financial stability is a topic that
    other members of the global financial regulatory community are
    also examining, and we have benefited from our ongoing
    coordination and sharing of analysis and observations with
    them.\24\
    ---------------------------------------------------------------------------
        \24\ See Credit Ratings, Procyclicality and Related Financial
    Stability Issues: Select Observations (July 15, 2020), available at
    https://www.sec.gov/news/public-statement/covid-19-monitoring-group-
    2020-07-15.
    ---------------------------------------------------------------------------
    Climate Risk Disclosure
    Q.9. In July, Representative Sean Casten (D-IL-06) and I
    introduced H.R. 3623/S. 2017, the Climate Risk Disclosure Act
    of 2019.\25\ 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.
    ---------------------------------------------------------------------------
        \25\ Office of Senator Warren, ``Senator Warren, Representative
    Casten Lead Colleagues Introducing a Bill To Require Every Public
    Company To Disclose Climate-Related Risks'', press release, July 10,
    2019, https://www.warren.senate.gov/newsroom/press-releases/senator-
    warren-representative-casten-lead-colleagues-introducing-a-bill-to-
    require-every-public-company-to-disclose-climate-related-risks.

    Q.9.a. The most recent volume of the National Climate
    Assessment, a scientific report issued by 13 Federal agencies
    in November 2018, stated that climate change may cause losses
    of up to 10 percent of the U.S. economy by 2100.\26\
    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.\27\
    ---------------------------------------------------------------------------
        \26\ 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.
        \27\ The Economist Intelligence Unit, ``The Cost of Inaction'',
    2015, p. 41, https://eiuperspectives.economist.com/sites/default/files/
    The%20cost%20of%20inaction_0.pdf.
    ---------------------------------------------------------------------------
        During the hearing, I asked you whether the SEC has a
    mandatory, uniform standard for climate risk so that investors
    can compare companies head-to-head.\28\ You declined to answer
    my question directly, instead broadly stating that the SEC has
    a materiality standard.\29\ In an October letter, you also
    stated that ``investors must have the information necessary to
    understand the material risks posed to an issuer's business and
    financial performance.''\30\
    ---------------------------------------------------------------------------
        \28\ Office of Senator Warren, ``Senator Warren to SEC Chairman
    Clayton: You Have Done Nothing To Protect the Economy From Climate
    Change Risks'', press release, November 17, 2020, https://
    www.warren.senate.gov/newsroom/press-releases/senator-warren-to-sec-
    chairman-clayton-you-have-done-nothing-to-protect-the-economy-from-
    climate-change-risks.
        \29\ Id.
        \30\ Letter from Securities and Exchange Commission Chairman Jay
    Clayton to Senator Warren, October 13, 2020.
    ---------------------------------------------------------------------------
        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?

    Q.9.b. As I mentioned during the hearing, this summer, 40 major
    investors who collectively manage over a trillion dollars in
    assets joined with nonprofits, businesses, and former
    regulators in sending you a letter arguing that the climate
    crisis is material and a systemic threat to our economy and
    asking the Commission to mandate corporate climate risk
    disclosure.\31\
    ---------------------------------------------------------------------------
        \31\ New York Times, ``Climate Change Poses `Systemic Threat' to
    the Economy, Big Investors Warn'', Christopher Flavelle, July 21, 2020,
    https://www.nytimes.com/2020/07/21/climate/investors-climate-threat-
    regulators.html.

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

       LIn an October letter, you stated that you ``will
            consider [climate risk] issues . . . as [you] continue
            to evaluate whether current requirements elicit
            disclosures that provide insight into a company's
            assessment of, and plans for addressing, material
            risks--including those related to climate change--to
            its business, operations and financial condition.''\32\
            Please provide detailed information about the meetings,
            advisory groups, processes, or decisions that the SEC
            or senior SEC staff have held or made regarding climate
            risk disclosure this year.
    ---------------------------------------------------------------------------
        \32\ Letter from Securities and Exchange Commission Chairman Jay
    Clayton to Senator Warren, October 13, 2020.

    A.9.a.-b. To be clear, investors must have the information
    necessary to understand the material risks posed to an issuer's
    business and financial performance. Climate-related issues can,
    depending on the facts and circumstances, be material to an
    issuer. To the extent material, issuers are required to
    disclose the current and expected future effects of climate-
    related issues on their operations and performance, and our
    rules are designed to elicit disclosures that are appropriately
    tailored to the particular issuer. This approach is important,
    particularly when the risks and uncertainty are not uniform. In
    these circumstances, issuers are generally in the best position
    to assess their particular facts and circumstances to determine
    whether an issue such as climate change presents a material
    risk, and what disclosures are required based on those facts
    and circumstances.
        It has often been noted that this process can be more
    efficient if disclosure is standardized or uniform. However,
    standardization can be difficult across industries, and in
    particular, forward-looking information can be difficult to
    standardize in that different participants within and across
    industries may reasonably have differing assumptions about
    future developments. In addition, forcing metric-specific
    standardization in this area, particularly across differing
    sectors (e.g., insurance, biotechnology, data services and
    transportation), may lead to a loss of information and the
    insights that can be derived from examining a range of well-
    informed, company and sector-specific disclosures. SEC staff is
    diligently working through this complex issue through various
    domestic and international channels to see if greater
    standardization or comparability can be achieved, particularly
    within specific sectors. Personally, I am of the view that
    improving the decision-useful nature of disclosures in this
    area, including efforts to enhance comparability, may be best
    approached through broad principles, applied on a sector-by-
    sector basis.
        The Commission and SEC staff have been actively engaged in
    climate-related disclosure issues for over a decade and remain
    committed to ensuring that investors are receiving accurate and
    adequate information about the companies in which they are
    investing. Since the early days of my tenure, I have been
    engaged with fellow regulators, investors, and other market
    participants on climate-related matters and, in particular,
    have sought to make the engagement between investors and
    companies, as well as investors and providers of financial
    products and services, substantive and further the
    dissemination of material information. This engagement includes
    work within IOSCO, where we have been active participants in
    the Sustainable Finance Task Force, and work within the FSB,
    including with its staff and current and former Chairmen (Randy
    Quarles and Mark Carney) and participating in its
    Sustainability Finance Network (Network). I have supported the
    work of the FSB's Task Force on Climate-Related Financial
    Disclosures (TCFD) and the Network, and they have issued
    several recent reports.\33\ I also have engaged with the
    Investor Advisory
    Committee\34\ and our Asset Management Advisory Committee\35\
    on these topics and have encouraged each to do their part to
    improve the investor-registrant and investor-provider dialogue.
    Further, I have made my view on improving disclosure in these
    areas clear and welcomed input in various other fora.\36\
    ---------------------------------------------------------------------------
        \33\ See, e.g., Financial Stability Board, Stocktake of Financial
    Authorities Experience in Including Physical and Transition Climate
    Risks as Part of Their Financial Stability Monitoring (July 22, 2020),
    available at https://www.fsb.org/wp-content/uploads/P220720.pdf; Task
    Force on Climate-related Financial Disclosures: Status Report (June
    2019), available at https://www.fsb-tcfd.org/wp-content/uploads/2019/
    06/2019-TCFD-Status-Report-FINAL-053119.pdf; ``Sustainable Finance and
    the Role of Securities Regulators and IOSCO (Apr. 2020), available at
    https://www.iosco.org/library/pubdocs/pdf/IOSCOPD652.pdf.
        \34\ See, e.g., Chairman Jay Clayton, Remarks to the SEC Investor
    Advisory Committee (Nov. 7, 2019), available at https://www.sec.gov/
    news/public-statement/clayton-remarks-investor-advisory-committee-
    110719; Chairman Jay Clayton, Remarks to the SEC Investor Advisory
    Committee (Dec. 13, 2018), available at https://www.sec.gov/news/
    public-statement/clayton-remarks-investor-advisory-committee-meeting-
    121318.
        \35\ See Remarks at Asset Management Advisory Committee Meeting
    (May 27, 2020), available at https://www.sec.gov/news/public-statement/
    clayton-amac-opening-2020-05-27.
        \36\ See, e.g., FCLTGlobal, ``A Conversation With SEC Chairman Jay
    Clayton: Long-Term Investing, Sustainability, and the Role of
    Disclosures'' (June 23, 2020), available at https://www.fcltglobal.org/
    resource/jay-clayton-sec-webinar/.

    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.''\37\ 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.
    ---------------------------------------------------------------------------
        \37\ 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?
        In an October letter, you stated ``I do not believe that
    any issues raised by the GAO Report . . . are cause for changes
    to our programs or approach.''\38\ Please explain why the SEC
    has declined to act on the GAO's concerns.
    ---------------------------------------------------------------------------
        \38\ Letter from Securities and Exchange Commission Chairman Jay
    Clayton to Senator Warren, October 13, 2020.

    A.10. I am satisfied with the Commission's approach to this
    complex issue to date and believe it has been consistent with
    our ongoing commitment to ensure that our disclosure regime
    continues to provide investors with a mix of information that
    facilitates well-informed capital allocation decisions. This
    commitment has been, and in my view should remain, focused on
    providing investors with information material to an investment
    decision, including in areas involving future risks and
    uncertainty, such as climate change. Disclosure and materiality
    are at the heart of the Commission's regulatory approach. Our
    principles-based disclosure requirements should elicit
    disclosure that provides investors with insight regarding an
    issuer's assessment of, and plans for addressing, material
    risks to its business operations but also keeps pace with
    emerging issues, like climate change, without the need for the
    Commission to continuously add to or update the underlying
    disclosure rules as new issues arise.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JAY
                                CLAYTON

    Q.1. What discussion has the SEC staff and leadership had about
    business interruption insurance? How has the expectation of
    disclosure regarding the business interruption insurance
    carried by publicly traded companies changed due to the
    pandemic?

    A.1. A fundamental principle for the SEC and our capital
    markets has always been--and today is even more important than
    ever--the importance of issuers providing investors with
    financial and operational disclosures that are clear, high-
    quality and timely. It is no surprise we have observed the
    presence of uncertainty regarding the financial and operating
    status of companies, as well as their future prospects, and a
    resulting thirst for information from investors and the
    marketplace more generally. I believe that the timely
    disclosure of high-quality information--be it positive,
    negative, or neutral, and be it definitive or subject to
    uncertainty in light of the circumstances--increases
    credibility and has a generally calming value that contributes
    to market function, and in turn, reduces the potential for
    systemic risk. In March 2020, along with the Director of the
    Division of Corporation Finance, I issued a statement
    discussing the importance of corporate disclosures and urging
    issuers to provide investors with as much information as
    practicable regarding their current financial and operating
    status, as well as forward-looking information about their
    future operational and financial planning.
        Companies should consider their disclosure obligations
    within the context of the Federal securities laws and our
    principles-based disclosure system. The cornerstone of this
    system is the timely, robust, and complete disclosure of
    material information. The Commission has made clear that
    disclosure requirements can apply to a broad range of business
    risks even in the absence of specific line-item requirements. A
    number of existing rules or regulations may require disclosure
    about the known or reasonably likely risks and effects of
    COVID-19 on a company's business operations and financial
    condition. For example, disclosure may be necessary or
    appropriate in management's discussion and analysis, the
    business section, risk factors, legal proceedings, disclosure
    controls and procedures, internal controls over financial
    reporting and the financial statements. Disclosure about the
    risks and effects of COVID-19 may need to include information
    about how the company and management are responding to them,
    including to the extent material, whether the company has
    obtained business interruption insurance. While companies
    should routinely disclose material information about how they
    are addressing business risks, disclosure about whether a
    company has obtained business interruption insurance may be
    particularly important in helping investors make informed
    investment and voting decisions in the current environment.

    Q.2. Regarding the changes to the Accredited Investor rule,
    does the SEC have any data or research evidence to show that a
    million dollars in wealth indicates that someone is
    sophisticated enough to invest in an illiquid offering that
    provides limited information?

       LDo you think people who qualify solely based on
            assets are vulnerable to fraud?

       LWhy did the SEC not index the monetary thresholds
            to inflation?

    A.2. The Commission recognized in the adopting release for the
    recent amendments to the definition of ``accredited investor''
    that in the case of individuals, higher income or net worth
    does not necessarily correlate to a higher level of financial
    sophistication. However, until these amendments were adopted,
    the test for individuals to qualify as accredited investors had
    relied exclusively on a person's income and net worth. This use
    of income or wealth as the only proxy for a person's financial
    sophistication set up a binary test, where an individual who
    may not meet the wealth tests but who is clearly financially
    sophisticated was denied the opportunity to participate in our
    private markets. In my view, the goal of the amendments is to
    more effectively include in the accredited investor definition
    investors that have the knowledge and experience to invest in
    private offerings. The definition now includes ways for
    individual investors to qualify for accredited investor status
    that are not tied to wealth but rather actual sophistication.
    It is my view that, speaking generally, this measure will
    improve the overall level of sophistication of our accredited
    investor pool, benefiting all members of that pool.
        We will continue to consider the appropriateness of the
    financial thresholds in connection with the Commission's
    quadrennial review of the accredited investor definition
    required by the Dodd-Frank Act. Staff is also monitoring the
    size of the accredited investor pool, the characteristics of
    individual accredited investors who participate in the private
    markets, and, to the extent data is available, performance and
    incidence of fraud in exempt offerings.

    Q.3. What has the SEC done to make it easier for shareholders
    to vote?

    A.3. The proxy system is the primary means through which most
    public company shareholders cast their votes and express their
    views on matters of collective importance. Modernizing and
    enhancing the efficiency of the proxy process for the benefit
    of all shareholders is an important priority of the Commission.
    In recent years, the Commission has made a number of changes to
    the rules governing proxy voting, many of which had not been
    updated in decades.
        In July 2020, the Commission adopted amendments to the
    rules governing proxy solicitations that are designed to ensure
    that clients of proxy voting advice businesses have reasonable
    and timely access to transparent, accurate, and complete
    information on which to make voting decisions. Facilitating
    investor access to enhanced discussion of proxy voting matters,
    even where proxy voting advice is not adverse to the
    registrant's recommendation or where there are no errors in the
    advice, contributes to more informed proxy voting decisions.
    The principle that more complete and robust information and
    discussion akin to what would be available at an in-person
    shareholder meeting leads to more informed investor
    decisionmaking, and therefore results in choices more closely
    aligned with investors' interests, was a principal factor in
    the Commission's adoption of these amendments. Indeed, in the
    adopting release, the Commission stated its belief that it is
    appropriate to adopt reasonable measures designed to promote
    the reliability and completeness of information available to
    investors and those acting on their behalf at the time they
    make voting determinations, regardless of the incidence of
    errors in proxy voting advice.
        The Commission's actions are of significant importance to
    long-term retail investors. The majority of our Main Street
    investors participate in our public markets through
    intermediaries, most commonly through ownership of mutual funds
    and exchange-traded funds. Institutional investors, including
    the funds that hold retail investments, own approximately 72
    percent of the domestic stock market value. Proxy voting, in
    the interests of those retail investors, is important to fund
    performance and retail investor welfare. Many of the
    institutions that manage retail investor money retain proxy
    voting advice businesses for services relating to both the
    substance of voting decisions and the process of voting,
    including automated voting. These businesses are uniquely
    situated to influence proxy voting decisions. To the extent
    that investment professionals rely on the advice of these
    businesses when voting the shares of Main Street investors, it
    is important that (1) they do so in a manner consistent with
    their fiduciary obligations, and (2) they have access to
    transparent, accurate, and materially complete information on
    which to make their voting decisions. I believe the
    Commission's actions will help ensure that the interests of
    Main Street investors and the obligations of those who vote on
    their behalf will not only be better aligned, but better
    decisions will be made.
        In September 2020, the Commission also adopted amendments
    to modernize its shareholder proposal rule, which governs the
    process for a shareholder to have its proposal included in a
    company's proxy statement. These amendments are designed to
    facilitate engagement among shareholder-proponents, companies,
    and other shareholders, and preserve the ability of smaller
    shareholders to access the proxy statements of the companies in
    which they have demonstrated a continuing interest. The
    amendments are intended to help ensure that a shareholder's
    ability to have a proposal included alongside management's in a
    company's proxy materials--and thus to draw on company
    resources and to command the time and attention of the company
    and other shareholders--is appropriately calibrated and takes
    into consideration the interests of not only the shareholder
    who submits a proposal but also the company and other
    shareholders, who bear the costs associated with the inclusion
    of such proposals in the company's proxy statement.
        I expect the Commission's work to modernize and enhance the
    proxy process to continue, including by looking at ways to
    increase the voting participation rates of retail investors.
    Staff is also engaging with issuers, broker-dealers, transfer
    agent representatives, proxy service providers and other market
    participants to explore ideas for improvements to the ``proxy
    plumbing.'' In particular, the staff has regularly engaged with
    major proxy service providers about their efforts to enhance
    the readability of the proxy materials sent to investors and to
    utilize modern communications methods in delivering these
    materials to retail investors. The staff is also focused on
    ways to ensure greater accuracy in the tabulation of votes.
    Market participants have strong and differing views on the best
    approach for addressing this concern, with, for example, some
    advocating for premailing reconciliation of the eligible voting
    shareholder base to minimize the likelihood of voting
    tabulation errors at the meeting. Others, however, express
    concerns about the costs of such an approach and prefer
    alternative solutions. The staff will assess these issues as it
    finalizes recommendations for the Commission.

    Q.4. What has the SEC done to implement the Investor Advisory
    Committee's recommendations to improve public companies'
    disclosures on environmental, social, and governance (ESG)
    issues?

    Q.5. Do you think that asset prices fully incorporate the
    relevant risks due to climate change, such as physical risk,
    transition risk, and liability risk?

    Q.6. Currently, investors seeking ESG information mostly rely
    on third party data providers. Will the SEC provide issuers
    with a reliable and consistent framework to disclose material
    that is decision useful, comparable, and consistent
    information?

    Q.7. How will the SEC level the playing field in providing ESG
    information among all U.S. issuers, regardless of market cap
    size or capital resources?

    Q.8. The International Accounting Standards Board recently
    issued guidance addressing how existing requirements under the
    International Financial Reporting Standards intersect with
    climate-related risks. The guidance defined how climate-related
    risks may need to be reflected within financial statements.
    Should the Financial Accounting Standards Board undertake a
    similar analysis of how climate risks may translate when
    applying Generally Accepted Accounting Principles (GAAP)?

    A.4.-A.8. As a general matter, I believe the Commission's long-
    standing, principles-based approach to disclosure is consistent
    with our ongoing commitment to ensure investors are provided a
    mix of information that facilitates well-informed capital
    allocation decisions. This commitment has been, and in my view
    should remain, focused on providing investors with information
    material to an investment decision, including in areas
    involving future risks and uncertainty, such as climate change.
    Disclosure and materiality are at the heart of the Commission's
    regulatory approach. Our principles-based disclosure
    requirements should elicit disclosure that provides investors
    with insight regarding an issuer's assessment of, and plans for
    addressing, material risks to its business operations but also
    keeps pace with emerging issues, like climate change or COVID-
    19, without the need for the Commission to continuously add to
    or update the underlying disclosure rules as new issues arise.
        I believe ``ESG'' is not monolithic and should not be
    treated as such. ``E'', ``S'', and ``G'' should each be viewed
    within its own context because, for one reason, the approach to
    investment analysis appears to vary widely, in some cases
    incorporating objectives other than investment performance over
    a particular timeframe or frames. With respect to ``E'' issues
    and climate change specifically, as a threshold matter, I note
    that, to the extent material to an investment decision, issuers
    are required to disclose the current and expected future
    effects of climate-related issues on their operations and
    performance. The issue of climate change and its current and
    potential future impact on issues, including as a result of
    regulatory and other developments is one where we are engaged
    on many levels, including with our domestic and international
    counterparts. I and others at the Commission, including through
    the work of the Asset Management Advisory Committee, have
    invested substantial time and effort, domestically and
    internationally, in this area, including through our
    participation in various International Organization of
    Securities Commissions (IOSCO) and Financial Stability Board
    (FSB) efforts. As examples, at IOSCO, we have been active
    participants in the Sustainable Finance Task Force and have
    supported the work of the FSB, including the industry-led Task
    Force on Climate-Related Financial Disclosures (TCFD).
        While I believe that in many cases one or more ``E''
    issues, ``S'' issues, or ``G'' issues are material to an
    investment decision, I have not seen circumstances where
    combining an analysis of ``E'', ``S'', and ``G'' together,
    across a broad range of companies, for example with a
    ``rating'' or ``score,'' particularly a single ``ESG'' rating
    or score, would facilitate meaningful investment analysis that
    was not significantly over-inclusive and imprecise. It has
    often been noted that this process can be more efficient if
    disclosure is standardized or uniform. However, depending on
    the issue, standardization can be difficult, ineffective and
    inappropriate across industries. In particular, forward-looking
    information can be difficult to standardize in that different
    participants within and across industries may reasonably have
    differing assumptions about future developments. I have
    discussed these considerations in some detail previously. In
    particular, efforts to ``score'' a particular investment (e.g.,
    a mutual fund or ETF) from an overall environmental or ``ESG''
    perspective appear particularly problematic, including that
    they may be designed more for marketing reasons than to further
    an investment thesis. In addition, forcing metric-specific
    standardization in this area, particularly across differing
    sectors (e.g., insurance, biotechnology, data services and
    transportation), may lead to a loss of information and the
    insights that can be derived from examining a range of well-
    informed, company and sector-specific disclosures.
        That said, as noted above, we are diligently working
    through this complex issue through various domestic and
    international channels to see if greater standardization or
    comparability can be achieved, particularly within specific
    sectors. Personally, I am of the view that improving the
    decision useful nature of disclosures in this area, including
    efforts to enhance comparability, may be best approached
    through broad principles, applied on a sector-by-sector basis.
    From my perspective, I believe the work of international
    bodies, for example TCFD as discussed in its recent 2020 Status
    Report, is trending in this direction.

    Q.9. Please explain how the SEC calculated a $2.5 million fine
    for former Wells Fargo Chief Executive Officer John Stumpf. Why
    did the settlement not requiring him to admit wrongdoing?

    A.9. Section 8A(g)(1) of the Securities Act authorizes the
    Commission to impose a civil money penalty when it is in the
    public interest. In making the public interest determination,
    the Commission considers: (1) whether the act or omission
    involved fraud; (2) whether the act or omission resulted in
    harm to others; (3) the extent to which any person was unjustly
    enriched; (4) whether the individual has committed previous
    violations; (5) the need to deter that person and others from
    committing violations; and (6) such other matters as justice
    may require. Section 8A(g)(2) of the Securities Act establishes
    a three-tier system for setting the maximum penalty the
    Commission may impose on an individual: (1) a first-tier
    penalty for each act or omission; (2) a second-tier penalty for
    each act or omission involving fraud, deceit, manipulation, or
    deliberate or reckless disregard of a regulatory requirement;
    and (3) a third-tier penalty for each act or omission involving
    fraud, deceit, manipulation, or deliberate or reckless
    disregard of a regulatory requirement that, directly or
    indirectly, resulted in (or created a significant risk of)
    substantial losses to other persons or resulted in substantial
    pecuniary gain to the wrongdoer.
        With respect to admissions, the Commission employs a case-
    by-case assessment based on the particular facts and
    circumstances of the matter and considers the relative benefits
    of added accountability and deterrence from admissions and the
    value in avoiding, where appropriate, drawn-out proceedings
    that strain resources and lengthen the time to resolution,
    including for injured investors to receive compensation.

    Q.10. The SEC has encouraged public companies to provide
    details on how they consider diversity when making decisions
    regarding the makeup of boards. Firms were asked to voluntarily
    report diversity metrics. Last year, you reported that only
    about 5 percent of firms chose to report diversity metrics. How
    has that changed since last year?

    A.10. In addition to promoting a culture of diversity,
    inclusion, and opportunity at the agency, we are also looking
    to the industry we regulate to be leaders in promoting
    opportunities for historically underrepresented populations
    within their workforces. To that end, the SEC, led by the
    Office of Minority and Women Inclusion (OMWI), has increased
    its focus on diversity in the financial services industry and
    the related value-enhancing proposition in a number of ways,
    including through outreach and advisory committee
    participation, including several diversity-specific panel
    discussions through the Asset Management Advisory Committee.
        In 2018, the SEC launched its first-ever Diversity
    Assessment Report and communicated directly with approximately
    1,300 of the largest SEC-registered firms to encourage
    responses. Thirty-eight regulated entities responded, and while
    this response was representative of almost half of the
    employees in the securities and investment industry, the
    results in terms of total firm participation were
    disappointing.
        The 2020 collection of the Diversity Assessment Reports is
    now underway, and the SEC has taken steps a number of steps to
    encourage more firms to share information. For example, in
    March 2020, OMWI hosted a webinar for regulated entities to
    discuss the Diversity Assessment Report and to promote
    collaboration and best practices, and over 50 regulated
    entities joined via WebEx. In April and August 2020, OMWI had
    virtual meetings with the Securities Industry and Financial
    Markets Association (SIFMA) Diversity Committee and discussed,
    among other topics, how SIFMA could assist the SEC efforts to
    improve the number for self-assessment reporting by member
    firms.
        The responses for the 2020 Diversity Assessment Report
    exercise are encouraging. In several instances, multiple
    entities of the same parent company received a request, and a
    single response covers all the parent company's regulated
    entities on our list of companies. We have received 41
    responses from this group, which represents an 86 percent
    increase in the number of responses received from this group of
    regulated entities in 2018 (22). The 41 responses received from
    this group cover 105 entities (8.4 percent) on the entire list
    of potential respondents. By comparison, the 38 responses
    during the entire 2018 collection covered about 5 percent of
    the list of potential respondents that year.
                                    ------

    RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM JAY CLAYTON

    Q.1. During this pandemic, the SEC has cautioned investors
    against fraudulent schemes perpetrated by actors that claim to
    prevent or cure the coronavirus.

       LWhat measures has the SEC taken to protect
            investors from COVID-related scams?

       LWhen it comes to COVID-related scams, have
            fraudsters been targeting any particular demographics,
            such as seniors?

    A.1. During the pandemic, the SEC's Office of Compliance
    Inspections and Examinations (OCIE) and Division of Enforcement
    (Enforcement) expanded their continuous investor protection
    work to incorporate the unique compliance challenges and the
    unfortunately inevitable frauds and illicit schemes generated
    by COVID-19. Starting in February 2020, the Commission began
    suspending trading where immediate action was necessary in
    light of questions regarding the accuracy and adequacy of
    information in the marketplace. The Commission suspended
    trading in 36 issuers, with 24 of those in March and April
    alone. The Commission also brought seven COVID-related
    enforcement actions within the first year of the pandemic, six
    of which alleged fraud against issuers and individuals based on
    COVID-19-related claims. Enforcement has also opened over 150
    COVID-related investigations and inquiries.
        Led by the Office of Investor Education and Advocacy
    (OIEA), the SEC has also continued its important education and
    outreach to investors and market participants about COVID-19-
    related scams. OIEA, along with Enforcement's Retail Strategy
    Task Force, has issued investor alerts to inform and educate
    investors about concerns related to recent market volatility
    and COVID-19-related schemes, as well as an alert warning
    investors of bad actors using CARES Act benefits to promote
    high-risk, high fee investments and other inappropriate
    products and strategies. OIEA and the SEC's 11 regional offices
    have also continued targeted outreach events to retail
    investors, including to seniors, servicemembers, and other
    potentially vulnerable populations. In addition, two of the
    Commission's advisory committees--the Investor Advisory
    Committee and the Small Business Capital Formation Advisory
    Committee--convened special meetings that were held virtually
    and broadcast live to the public to provide insight into the
    operational, health, safety, and other challenges faced by
    public companies and small businesses, as well as individual
    and institutional investors, during this time.