[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
  
  
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                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.
                                 ______
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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.