    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                           GAME STOPPED? WHO WINS AND
                           LOSES WHEN SHORT SELLERS,
                            SOCIAL MEDIA, AND RETAIL
                          INVESTORS COLLIDE, PART III

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

                                VIRTUAL HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 6, 2021

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 117-22

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                  __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    44-837 PDF                 WASHINGTON : 2021

    -----------------------------------------------------------------------------------

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
    GREGORY W. MEEKS, New York           BILL POSEY, Florida
    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
    AL GREEN, Texas                      BILL HUIZENGA, Michigan
    EMANUEL CLEAVER, Missouri            ANN WAGNER, Missouri
    ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
    JIM A. HIMES, Connecticut            ROGER WILLIAMS, Texas
    BILL FOSTER, Illinois                FRENCH HILL, Arkansas
    JOYCE BEATTY, Ohio                   TOM EMMER, Minnesota
    JUAN VARGAS, California              LEE M. ZELDIN, New York
    JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
    VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
    AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
    MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
    CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
    SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
    AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
    RITCHIE TORRES, New York             JOHN ROSE, Tennessee
    STEPHEN F. LYNCH, Massachusetts      BRYAN STEIL, Wisconsin
    ALMA ADAMS, North Carolina           LANCE GOODEN, Texas
    RASHIDA TLAIB, Michigan              WILLIAM TIMMONS, South Carolina
    MADELEINE DEAN, Pennsylvania         VAN TAYLOR, Texas
    ALEXANDRIA OCASIO-CORTEZ, New York   PETE SESSIONS, Texas
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    NIKEMA WILLIAMS, Georgia
    JAKE AUCHINCLOSS, Massachusetts

                       Charla Ouertatani, Staff Director

                               C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 6, 2021..................................................     1
    Appendix:
        May 6, 2021..................................................    69

                                   WITNESSES
                             Thursday, May 6, 2021

    Bodson, Michael C., President and Chief Executive Officer, The
      Depository Trust & Clearing Corporation (DTCC).................     6
    Cook, Robert W., President and Chief Executive Officer, Financial
      Industry Regulatory Authority (FINRA)..........................     8
    Gensler, Hon. Gary, Chairman, U.S. Securities and Exchange
      Commission (SEC)...............................................     5

                                    APPENDIX

    Prepared statements:
        Bodson, Michael C............................................    70
        Cook, Robert W...............................................    76
        Gensler, Hon. Gary...........................................    89

                  Additional Material Submitted for the Record

    Williams, Hon. Nikema::
        Written responses to questions for the record from Hon. Gary
          Gensler....................................................    96

                           GAME STOPPED? WHO WINS AND
                           LOSES WHEN SHORT SELLERS,
                            SOCIAL MEDIA, AND RETAIL
                          INVESTORS COLLIDE, PART III

                                  ----------

                             Thursday, May 6, 2021

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 12 p.m., via
    Webex, Hon. Maxine Waters [chairwoman of the committee]
    presiding.
        Members present: Representatives Waters, Maloney, Sherman,
    Meeks, Scott, Green, Cleaver, Perlmutter, Himes, Foster,
    Vargas, Gottheimer, Lawson, Axne, Casten, Torres, Adams, Tlaib,
    Dean, Garcia of Illinois, Williams of Georgia, Auchincloss;
    McHenry, Lucas, Posey, Luetkemeyer, Huizenga, Wagner, Barr,
    Williams of Texas, Hill, Zeldin, Loudermilk, Mooney, Davidson,
    Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil,
    Timmons, and Taylor.
        Chairwoman Waters. The Financial Services Committee will
    come to order.
        Without objection, the Chair is authorized to declare a
    recess of the committee at any time.
        As a reminder, I ask all Members to keep themselves muted
    when they are not being recognized by the Chair. The staff has
    been instructed not to mute Members except when a Member is not
    being recognized by the Chair and there is inadvertent
    background noise.
        Members are also reminded that they may only participate in
    one remote proceeding at a time. If you are participating
    today, please keep your camera on, and if you choose to attend
    a different remote proceeding, please turn your camera off.
        Today's hearing is entitled, ``Game Stopped? Who Wins and
    Loses When Short Sellers, Social Media, and Retail Investors
    Collide, Part III.''
        I now recognize myself for 4 minutes to give an opening
    statement.
        Today, this committee convenes for part three of our series
    of hearings focused on market volatility related to GameStop
    and other stocks. In our first hearing on those events, we
    received testimony from the CEOs of trading app, Robinhood;
    Wall Street firms, Citadel and Melvin Capital; and social media
    company, Reddit; as well as Keith Gill, a trader involved in
    WallStreetsBets on subreddit. We heard directly from those
    involved in the short squeeze and volatility and we got the
    facts.
        In our second hearing, we received testimony from a number
    of capital markets experts and investor advocates to hear their
    views and begin to assess possible legislative and regulatory
    steps that may be necessary. We examined conflicts of interest
    in the market. We scrutinized payment for order flow, potential
    systemic risks to our financial system, the gamification of
    trading, the clearance and settlement process for trades, and
    the evolution of trading with the rising use of social media
    and new technologies.
        Today, we will focus on the regulatory response to the
    market volatility. Specifically, we will hear testimony from
    the U.S. Securities and Exchange Commission (SEC), the
    Financial Industry Regulatory Authority (FINRA), and the
    Deposit Trust and Clearing Corporation (DTCC) about their
    responses to events we are examining. It is critical for our
    cops on the block at the SEC to protect investors and ensure
    that our markets are transparent and fair. Unfortunately, the
    previous Administration's appointees to financial regulatory
    agencies were often more interested in helping out Wall Street
    than protecting Main Street.
        I am very pleased that, thanks to President Biden's strong
    leadership, we now have Gary Gensler at the helm of the SEC.
    Chair Gensler, I look forward to hearing your testimony and
    discussing your views on the short squeeze and surrounding
    events, as well as practices like payment for order flow.
        I am also interested in hearing from Mr. Cook and Mr.
    Bodson, the CEOs of private-sector corporation, FINRA, which
    oversees broker-dealers; and DTCC, which provides clearing and
    settlement services to our securities markets, respectively.
        Under my leadership, this committee is focused on ensuring
    accountability for Wall Street. I decided to convene this
    series of three hearings on this topic to ensure that Congress
    is well-informed on developments in and functioning of our
    capital markets, and to put Wall Street on notice that we are
    watching closely.
        I yield back the balance of my time, and I now recognize
    the ranking member of the committee, the gentleman from North
    Carolina, Mr. McHenry, for 4 minutes.
        Mr. McHenry. Thank you, Madam Chairwoman. I would like to
    talk about what was learned at our last hearing on GameStop, We
    learned that everyday Americans have a newfound interest in the
    markets, and that is positive. We learned that financial
    technology is here to stay, and it is providing more
    opportunities for retail investors to participate in our
    markets. That is positive. We learned that Reddit is powerful.
    And we learned that Roaring Kitty is indeed not a cat, and we
    know just as much as we did at the first hearing.
        And I continue to hear the same policy solutions from my
    Democrat colleagues, the repackaged, old, outdated, policy
    failures wrapped in whatever is in the news this week to sell
    the American people on the idea that this time is different.
    Well, it is not. Like so many other bad progressive ideas sold
    under the guise of investor protection, which I think is
    important, Democrats' proposals will ultimately reduce access
    to investment opportunities and charge D.C. bureaucrats and
    give them control of investing decisions of everyday Americans.
    If this committee is interested in responding to late January's
    events, we need to expand the credit investor regime, not
    restrict it.
        It is ridiculous that our securities laws force most
    everyday Americans to the sidelines of early-growth investment
    opportunities. We need to find innovative solutions that allow
    more people to invest in businesses they support, while
    retaining the flexibility our changing workforce needs and
    requires.
        This week I reintroduced my bill, the Gig Worker Equity
    Compensation Act, to expand the category of workers that can
    benefit from equity compensation to include nontraditional
    workers. If you want to see the juxtaposition of Democrat and
    Republican priorities right now, just yesterday, the Biden
    Administration moved to dismantle past efforts to provide gig
    workers with the flexibility they demand, that they need, that
    they require. If a State as liberal as California can recognize
    that a one-size-fits-all mandate on gig workers would be
    destructive, it should be obvious that the Biden Administration
    should not take those same actions that went down at the ballot
    box in California, actions that hurt nontraditional workers,
    not help them.
        I initially called for this hearing on GameStop to begin
    the process of fact finding to inform our policy discussions,
    and the bottom line is that we are still gathering a number of
    facts. That is why we have representatives from FINRA and DTCC
    testifying before us today. I think that is a good thing.
        Additionally, the SEC's review of the events is ongoing, as
    is the committee's work behind-the-scenes in terms of document
    review and interviews. Despite the ongoing investigations and
    the testimony we will receive today, many Democrats have their
    so-called solutions. A lot of these things have been kicked
    around for a long time.
        At our first GameStop hearing, I asked Democrats to side
    with everyday American investors. I will ask that same thing
    today. We should not punish everyday American investors with a
    Democrat agenda, a progressive agenda that results in fewer
    investment options or forces folks to start paying to make
    trades again. So, let's go off of what we have learned. Let's
    stand up for everyday investors and make it easier for them to
    invest, and let's tear down barriers keeping folks out of the
    market instead of throwing up new ones to impair their ability
    to be in the market. Let's stand up for equity--true equity--
    and that is ownership of the American economy, and ownership in
    our capital markets so we can remain the center of the free
    world's economic policies.
        And with that, Madam Chairwoman, I yield back.
        Chairwoman Waters. Thank you very much, Mr. McHenry. I am
    pleased that you see something good about our hearing today.
        I now recognize the gentleman from California, Mr. Sherman,
    who is also the Chair of our Subcommittee on Investor
    Protection, Entrepreneurship, and Capital Markets, for 1
    minute.
        Mr. Sherman. I thank Chairman Gensler for being here, and I
    hope he joins us often. The ranking member is concerned about
    whether gig workers in my State have the protection that we
    accord employees. It is a little far from the mandate of our
    committee. But within our committee's jurisdiction is to make
    sure that when investors trade stocks, they get the best
    possible deal and are not told that there is zero transaction
    cost when the big transaction cost is the spread, and you are
    paying for the transaction unless you are getting the best
    possible price improvement. Price improvement may not be fully
    available if your broker is getting paid for order flow or if
    your broker is acting as a market-maker.
        We also need to look at short-sale disclosures. Right now,
    there are disclosures filed with the SEC quarterly. That is so
    1977. We would expect reports to be filed far more often, and
    we have to discuss what reports should be made public, and I
    look forward also to looking at margin selling.
        Chairwoman Waters. Thank you. I now recognize the ranking
    member of the subcommittee, the gentleman from Michigan, Mr.
    Huizenga, for 1 minute.
        Mr. Huizenga. Thanks, Madam Chairwoman. Advancements in
    technology have improved access to our capital markets and
    created new opportunities for countless Americans to
    participate in our markets who were previously excluded. App-
    based interfaces, combined with zero commission trades,
    fractional share trading, and lowered account minimums, have
    ushered in a new generation of investors. However, instead of
    celebrating this new era of investment, how have my colleagues
    across the aisle responded for the most part? By falsely
    claiming that this increase in market participation has caused
    gamification in the experience, that markets are rigged, and
    some have even gone so far as to equating it to gambling in a
    casino.
        As Rahm Emanuel famously said, ``You never want a serious
    crisis to go to waste. It is an opportunity to do things that
    you think you could not do before.'' Well, that is exactly what
    my friends on the other side of the aisle are doing. They are
    exploiting a high-profile situation to push a radical
    progressive agenda of these proposed, small ``D,'' democratic
    solutions that will only further prevent everyday American
    investors from accessing our capital markets, and deny them the
    opportunity to further save and invest for a more prosperous
    future.
        I yield back.
        Chairwoman Waters. Thank you. I want to now welcome today's
    distinguished witnesses to the committee.
        First, we have the Honorable Gary Gensler, who is the
    recently-confirmed Chair of the U.S. Securities and Exchange
    Commission. This is Chair Gensler's first time appearing before
    the committee in his current capacity. He has previously served
    as Chair of the Commodity Futures Trading Commission, and in
    several senior roles at the Department of the Treasury.
        Second, we have Mr. Michael Bodson, who is the President
    and Chief Executive Officer of the Depository Trust & Clearing
    Corporation (DTCC).
        And finally, we have Mr. Robert Cook, who is the President
    and Chief Executive Officer of the Financial Industry
    Regulatory Authority (FINRA).
        Each of you will have 5 minutes to summarize your
    testimony. You should be able to see a timer on your screen
    that will indicate how much time you have left, and a chime
    will go off at the end of your time. I would ask you to be
    mindful of the timer, and quickly wrap up your testimony if you
    hear the chime. And without objection, your written statements
    will be made a part of the record.
        Chair Gensler, you are now recognized for 5 minutes to
    present your oral testimony.

        STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, U.S.
                SECURITIES AND EXCHANGE COMMISSION (SEC)

        Mr. Gensler. Good afternoon, Chairwoman Waters, Ranking
    Member McHenry, and members of the committee. I am honored to
    appear before you today for the first time as Chair of the
    Securities and Exchange Commission. I have been in front of
    this committee multiple times in multiple Administrations, and
    I will say this: I look forward to the day when we can meet in
    person in your beautiful hearing room again.
        Thank you for inviting me to testify about January's market
    volatility, and I am pleased to be here with Mike Bodson and
    Robert Cook, whom I have known for a number of years as well.
        I would like to note that my views are my own, and I am not
    speaking on behalf of my fellow Commissioners or of the SEC
    staff.
        These events are part of a larger story about the
    intersection of finance and technology, which have lived in a
    symbiotic relationship since antiquity. And one thing that I
    have come to believe is that technology can allow greater
    access to our capital markets. Our central question is this,
    though: When new technologies come along and change the face of
    finance, as they have done for decades, how do we continue to
    achieve our core public policy goals?
        In my role, I will always be animated by thinking about
    working families in the SEC's three-part mission: protecting
    investors; promoting fair, orderly, and efficient markets; and
    facilitating capital formation. I am pleased to submit written
    testimony that goes into detail on several factors at play
    during January's events. I will just highlight a few of those
    key issues in this opening statement.
        The first is gamification and user experience. I agree with
    the Members who have already said that these new user
    experiences have facilitated a lot of opportunity for
    investors. They have expanded access to capital, making it
    easier for investors to sign up, start trading, and learn about
    investing. These apps also use a host of features that have
    come to be familiar in our increasingly-online world such as
    gamification, behavioral props, and predictive data analytics.
    Many of these features, in essence, encourage investors to
    trade more frequently. This could have a substantial effect on
    a saver's financial position. Some academic studies suggest
    that the more actively you trade, the lower your returns, so
    while they are encouraging investing, they may also be
    encouraging active trading.
        I have asked the staff to prepare a request for public
    comment on these issues. The SEC must remain attuned to
    rapidly-changing technologies with an eye to freshening up our
    rule set, where appropriate, to continue to achieve our
    mission. If we don't address this now, the investing public,
    those saving for future retirement and education, may shoulder
    the burden later.
        The second topic I would like to discuss is this area
    around payment for order flow. This practice brings to mind a
    number of questions, including whether it creates inherent
    conflicts of interest between the broker-dealers on the one
    side, and their customers on the other, who want to achieve,
    under our rules, best execution. Now, it is important to
    consider this, I think, in the overall context of market
    structure. Currently, a significant amount of retail orders are
    routed to a small number of wholesalers. I detail this more in
    my written testimony, but I think it raises questions about
    whether the market structure best promotes fair, orderly, and
    efficient markets. Evolving market technologies, along with
    this payment for order flow, has also led to increasing market
    concentration, which we have found, and history and economics
    show, can lead to fragility in markets, deter healthy
    competition, and limit innovation.
        The next issue is short selling and market transparency,
    and, again, as outlined in my written testimony, under the
    Dodd-Frank Act reforms, the SEC received mandates and
    authorities to increase transparency in the markets. So, I have
    asked SEC staff to prepare recommendations on transparency and
    short selling, stock loan markets, and something called total
    return swaps, which was at the center of this Archegos event in
    March, for Commission consideration. And the five of us
    Commissioners can take a look to see what to do next.
        Next, today's social media tools have far greater reach,
    scale, and anonymity than previous technology. This raises the
    possibility that wrongdoers will attempt to use their powerful
    forums to hype certain stocks or manipulate markets. I am not
    concerned about regular investors exercising their free speech
    rights online; I am more concerned whether bad actors
    potentially take advantage of influential platforms.
        Further, the decisions by some broker-dealers to redirect
    customer trading raised several issues around clearance and
    settlement. In essence, they stopped investors from investing,
    and this raises questions of the market, what I will call,
    ``plumbing.'' Sorry to Mike Bodson if I call infrastructure,
    ``plumbing,'' but investors were shut out. I do believe we can
    lower costs and risk in our market by shortening the settlement
    cycle. For instance, I have asked SEC staff to put together a
    draft proposal for the Commission on the possibility of
    shortening the settlement cycles.
        Thank you. I look forward to your questions. It is good to
    be back with you, and, again, I look forward to doing this in
    person.
        [The prepared statement of Chairman Gensler can be found on
    page 89 of the appendix.]
        Chairwoman Waters. Thank you, Chair Gensler. Next, we will
    go to Mr. Bodson. You are now recognized for 5 minutes to
    present your oral testimony.

     STATEMENT OF MICHAEL C. BODSON, PRESIDENT AND CHIEF EXECUTIVE
      OFFICER, THE DEPOSITORY TRUST & CLEARING CORPORATION (DTCC)

        Mr. Bodson. Chairwoman Waters, Ranking Member McHenry, and
    members of the committee, my name is Michael Bodson, and I am
    the CEO of The Depository Trust & Clearing Corporation (DTCC),
    a holding company that operates three SEC-regulated clearing
    agencies, including the National Securities Clearing
    Corporation, or NSCC, of which I will speak to you today. I
    appreciate this opportunity to speak to the committee.
        In my line of work, the best days are those when nothing
    too exciting happens. That is because DTCC is, at its heart, a
    risk management organization enhancing efficiencies and
    reliability in the markets. On a normal day, we process about
    200 million buys and sells for a value of nearly $2 trillion.
    Through netting, that is reduced to about $1 million in
    securities movement and $35 billion in cash movement, creating
    significant efficiencies in the market.
        When you buy or sell a stock, it takes 2 days for the trade
    to be completed. This is called T+2 settlement: trade date plus
    2 days. A lot could happen during those 2 days that could
    create a risk that the buyer or seller fails to deliver money
    or shares. Because of clearing, investors don't have to worry
    about that. Clearing protects both firms and their customers
    against default risk. Default risk can destabilize markets,
    particularly in volatile times. People are reluctant to trade
    if they aren't sure they will get what they agreed to. And
    imagine how inefficient it would be for every market
    participant to have to assess the creditworthiness of everyone
    else in the market.
        That is where DTCC comes in. We are infrastructure. You can
    call us, ``plumbing.'' We are not insulted. We operate behind
    the scenes to guarantee completion of virtually all equity
    trades. We do not trade or take positions or bet on the
    direction in the market. We do not give investment advice. We
    do not know who the customers are behind the trades or their
    reasons for trading. We simply process and risk-manage trades.
        DTCC protects against default risk by collecting margin,
    which is money that clearing members post as collateral. If a
    declaring member defaults between trade date and settlement
    date, DTCC uses that collateral to complete the defaulting
    member's trades no matter how much prices may have changed.
        Margin requirements are calculated using statistical models
    and model-based calculations that are set forth in our rules,
    which must be approved by the SEC. Margin requirements increase
    the risk, and the member's portfolio increases. In other words,
    the greater the potential loss the default could produce, the
    greater the need for collateral.
        Volatility has a very large impact on margin requirements.
    We saw this play out during the week of January 25th. Both
    volume and volatility that week were extraordinary, exceeding
    the pandemic-related record volume from March 2020 by more than
    100 million trades. The concentration of trading in a small
    number of meme stocks that week was also extraordinary.
    Applying those statistical models of formulas, margin
    requirements increased substantially for firms with large
    volumes in these stocks.
        I appreciate that this committee is exploring ways to
    continue to improve our markets. I would like to describe one
    effort that DTCC has undertaken to date, which is shortening
    the settlement cycle for equities from 2 days to 1 day. That
    may sound like a small thing if it is just 1 day, but cutting
    the settlement period in half can make a difference. We believe
    that shortening the settlement cycle to T+1 would enhance
    market resilience, reduce margin requirements, and lower costs
    for investors. Following a multi-year, industry-wide effort,
    settlements were shortened in 2017 from T+3 to T+2, achieving
    margin savings estimated at 25 percent. DTCC estimates that the
    volatility component of margin requirement could potentially be
    reduced by 40 percent when it moves to T+1. This could save our
    clearing members upwards of $6 billion per day during periods
    of extreme volatility.
        While DTCC's technology can support T+1 today, changing the
    industry convention is a major undertaking that will require
    coordinated efforts across the whole industry. Over the past
    year, DTCC has engaged with a cross-section of the industry to
    assess readiness to further shorten the settlement cycle. In
    February, DTCC published a White Paper outlining the benefits
    associated with multiple changes to the settlement cycle,
    including a move to T+1. We are working with the Securities
    Industry and Financial Markets Association (SIFMA) and the
    Investment Company Institute (ICI) to accelerate this effort.
        Thank you again for the opportunity to testify today. I
    look forward to your questions.
        [The prepared statement of Mr. Bodson can be found on page
    70 of the appendix.]
        Chairwoman Waters. Thank you very much, Mr. Bodson. Mr.
    Cook, you are now recognized for 5 minutes to present your oral
    testimony.

      STATEMENT OF ROBERT W. COOK, PRESIDENT AND CHIEF EXECUTIVE
        OFFICER, FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

        Mr. Cook. Thank you, Chairwoman Waters, Ranking Member
    McHenry, and members of the committee for this opportunity to
    testify today, together with Chair Gensler and Mr. Bodson,
    regarding the January market events related to trading in
    GameStop and in other stocks. We commend the committee's review
    of these events and related investor protection concerns.
        FINRA's mission is to protect investors and promote market
    integrity. We are a not-for-profit self-regulatory organization
    (SRO), and we support the SEC in overseeing one critical part
    of the securities industry: certain broker-dealers and the
    individuals they employ. To that end, we administer
    comprehensive regulatory programs, including surveillance, risk
    monitoring, examination, and enforcement. And we, in turn, are
    subject to comprehensive examination and oversight by the SEC.
        This committee has heard already about the events of
    January, including the significant price swings and trading
    volume in GameStop and a limited number of other stocks. In
    this context, some broker-dealers restricted trading in these
    securities on a short-term basis. This led to confusion and
    frustration among some investors and concerns about the
    fairness of the markets. The event also focused attention on
    the growth of popular new retail trading platforms and
    services, changes in investor behavior, and the influence of
    social media on the markets.
        Our markets are dynamic and are continually evolving.
    Market participants constantly innovate new technologies,
    methods of communication, and investment products and services.
    These innovations often benefit investors, such as by providing
    easier access to the markets, lower costs, and a wider range of
    investment products and services to choose from, but they can
    also present new and sometimes unanticipated risks, so
    regulators must constantly review whether the rules governing
    the road need to be updated in light of new developments to
    better protect investors, while still facilitating vibrant and
    innovative markets and the opportunities these create. At
    FINRA, we are committed to doing just that. One important
    resource we rely on in this process is the research of the
    FINRA Investor Education Foundation, including recent research
    on new, inexperienced investors, and how they approach
    investing.
        Since the events of January, FINRA has established an
    internal working group that is devoting significant resources
    to investigating whether its broker-dealer members comply with
    SEC and FINRA rules. We have also issued regulatory notices
    reminding firms of relevant duties and responsibilities in this
    area.
        Although I cannot comment on specific firms or ongoing
    investigations or enforcement matters, generally speaking, we
    are reviewing order routing practices, the circumstances under
    which trading restrictions were imposed, any potential
    manipulative conduct, and compliance with short-sale
    requirements, among other matters. I can assure the committee
    that we will take all appropriate disciplinary or other
    remedial action as warranted if the facts indicate a violation
    of SEC or FINRA rules.
        The upcoming SEC report on these market events will be
    critical in analyzing whether existing rules and standards
    should be updated. Many of the policy questions raised in your
    hearings to date involve areas in which the SEC has primary
    policymaking responsibilities such as market structure, payment
    for order flow, short sale regulation and disclosure, the
    settlement cycle, enhanced broker-dealer financial
    responsibility requirements, and whether certain communications
    with retail investors constitute recommendations that should be
    covered by the SEC's Regulation Best Interest. We will support
    the SEC in its review of these areas and then align FINRA's
    rules and oversight activities where necessary or appropriate.
        My written testimony offers some further perspectives on
    key topics under the SEC's jurisdiction and also describes some
    areas where we are considering whether updates to guidance
    regarding our own rules would be appropriate. For example, we
    intend to review short sale position reporting by broker-
    dealers, as well as continue our review of the effects of
    gamification on retail investors. FINRA looks forward to
    working with this committee, the SEC, and our fellow regulators
    to review and learn from these recent market events so that we
    can strengthen investor protections and enhance confidence in
    our nation's capital markets.
        Thank you, and I would be happy to answer your questions.
        [The prepared statement of Mr. Cook can be found on page 76
    of the appendix.]
        Chairwoman Waters. Thank you very much, Mr. Cook.
        I now recognize myself for 5 minutes for questions, and my
    first question is for Chair Gensler. This committee has
    examined numerous issues that have arisen out of the GameStop
    short squeeze that took place earlier this year, including
    systemic risk arising from firms such as Citadel, who are
    executing close to 50 percent of all U.S.-listed retail volume.
    During the first hearing, I questioned whether Citadel poses a
    systemic risk to our financial markets. I am also concerned
    about what Citadel's outsized market impact means for pricing
    and best execution, another market structure issue that this
    committee has examined as part of these hearings.
        As the newly-confirmed Chair of the SEC, what will your
    approach be with respect to mitigating the risk associated with
    outsized market impact and understanding threats to our
    financial stability?
        Mr. Gensler. Thank you for that question. I think that at
    the heart of well-functioning markets and the mission of the
    SEC--fair, orderly, and efficient markets--is promoting
    competition in markets. It can be done through transparency,
    but it is also looking at our rule set to make sure that our
    rule set inspires more competition rather than concentration.
    And we have seen, as you noted in your hearing, an increasing
    concentration in market making, and also, separately, in
    brokerage, and particularly around retail order flow.
        And so I have asked the staff from the Divisions of
    Economic Risk and Analysis, and Trading and Markets, to sort of
    give us a view, give internally the Commission a view of what
    we should be thinking about in our market structure to address
    this.
        We have seen such concentration come in other markets. We
    know it is in search. When we all go online and search, there
    is really one dominant search engine. We know it is true in
    retail buying, retail products online. There is some dominance
    to that. And so, our modern 2020's economy does tend towards
    certain, what is called economics network effects. So, I have
    asked the staff just to think through that and to provide us
    with guidance as Commissioners on how do we promote competition
    in the face of these network economic effects that are leading
    to concentration.
        Chairwoman Waters. I want to thank you for that response,
    and I think what I am hearing from you is that there is real
    concern about concentration. And while you have instructed
    staff to do some additional research to determine the extent of
    it, it is something that we should be concerned about, is that
    correct?
        Mr. Gensler. Yes. I think that capital formation for
    issuers and for investors on the other side benefit from some
    broad competition amongst market actors. And as we get more
    concentration in the middle market, whether it is market making
    or brokerage, we could lose that concentration. It could lead
    to more fragile markets, meaning less orderly, and also more
    costly or less efficient markets. And that is what history and
    economics tell us when we get concentration.
        Chairwoman Waters. Thank you very much. I appreciate the
    concern that you are identifying as we talked about this
    concentration, and what could happen if, in fact, we are not
    aware of it and don't make an effort to deal with it.
        I now recognize the ranking member, Mr. McHenry, for his
    questions.
        Mr. McHenry. Thank you, Madam Chairwoman. Chairman Gensler,
    thank you for being here, and welcome back before the
    committee, and congratulations on your new role. I know that
    Acting Chair Lee, at the time of this GameStop trade,
    emphasized that the core market infrastructure is quite
    resilient. Does the Commission intend to release any additional
    findings?
        Mr. Gensler. Thank you. And thank you for our meeting
    earlier this week. I look forward to doing those on a regular
    basis with the Chair, and you, and the subcommittee, and other
    members. We are looking at putting together a report. I am only
    in my 3rd week on the job, but our economists, our Trading and
    Markets folks have come together, and I think we will be
    releasing a report sometime this summer that will detail the
    range of activities out of the January events.
        Mr. McHenry. Thank you for that. Small businesses right now
    are emerging from the pandemic just like everyone is, and these
    small businesses need access to capital. And, as you know, I
    have been focused on some of the burdensome requirements of the
    original Regulation Crowdfunding (Reg CF), which I helped
    legislate, and President Obama signed into law. There have been
    some helpful changes made to Reg CF to make it more efficient
    and to boost trading in Reg A and Reg CF securities, such as
    preemption under certain State regulations. Do you support
    these streamlining efforts for small businesses, and are you
    looking at additional steps?
        Mr. Gensler. I look forward to working with you and your
    staff to learn more about your initiatives and suggestions. But
    at the core, and maybe it is just a bit because my dad had a
    small business, never more than 30 employees, and didn't have
    access to the capital markets, but I think that small business,
    entrepreneur efforts are really kind of, if I might say, a bit
    of the backbone of American entrepreneurism and our economy.
    And so, access to the capital markets is a critical piece,
    whether it is accessing loans that might be securitized in the
    markets or accessing through equities. But I look forward to
    hearing more from you and your staff on ideas.
        Mr. McHenry. Okay. But no comment on Reg CF?
        Mr. Gensler. Again, I'm just 3 weeks on the job, so I
    haven't looked closely at Reg CF yet or, frankly, done a
    detailed enough briefing to see how we can, as you say, and I
    really do believe this, facilitate capital formation up and
    down the issue or spectrum.
        Mr. McHenry. Let's pivot to something that you spent some
    time out of government understanding. I think what we all have
    tried to seek is greater collaboration across agencies on the
    regulatory framework for digital assets, cryptocurrencies,
    notably. This includes more engagement from industry and
    appropriate regulators. In 2019, SEC staff produced the
    framework for investment contract analysis of digital assets.
    Since then, the staff has sought feedback on a number of
    issues, most recently on the evolving standards and the best
    practices for custody. This is progress, but I believe more
    concrete steps are necessary to further the crypto market. As
    you look at this issue, what steps can you outline to bring
    regulatory clarity so that we can have a vibrant digital asset
    marketplace with legitimate money and the rule of law?
        Mr. Gensler. Thank you for asking that. And I think that
    this market, which is close to $2 trillion, the crypto asset
    market, is one that could benefit from greater investor
    protection within the SEC's current authorities, our
    authorities around securities, and around asset managers and
    products that might invest in these cryptocurrencies. As you
    mentioned, we put out a comment, I think it was in October or
    November, asking for feedback on custody. I would hope that we
    would move forward and provide greater clarity around custody.
        I do think that working with Congress, and I think it is
    only Congress that could really address it, it would be good to
    consider, if you would ask my thoughts, to consider whether to
    bring greater investor protection to the crypto exchanges. And
    I think if that were the case, because right now the exchanges
    trading in these crypto assets do not have a regulatory
    framework either at the SEC, or our sister agency, the
    Commodity Futures Trading Commission, that could instill
    greater confidence. Right now, there is not a market regulator
    around these crypto exchanges, and, thus, there is really not a
    protection against fraud or manipulation or a--
        Mr. McHenry. I have time for one final question, Chairman
    Gensler. I am encouraged by your comments on crypto. Last year,
    the Commission proposed to allow certain gig workers to have
    access to equity compensation under the SEC's rules. Will you
    commit to finishing this important rulemaking?
        Mr. Gensler. Again, I'm in my 3rd week, so I need to get a
    briefing on it. I commit to work with the staff to understand
    what the comments were, because I don't know what comments came
    in, and to trying to understand the economics around that rule
    set.
        Mr. McHenry. Thank you, and I wish you great luck in your
    tenure, and thank you for your testimony. Thank you for your
    outreach.
        Mr. Gensler. Thank you.
        Chairwoman Waters. I now recognize the gentlewoman from New
    York, Mrs. Maloney, for 5 minutes.
        [No response.]
        Chairwoman Waters. We will go on to the gentlewoman from
    New York, Ms. Velazquez.
        [No response.]
        Chairwoman Waters. The gentleman from California, Mr.
    Sherman, who is also the Chair of our Subcommittee on Investor
    Protection, Entrepreneurship, and Capital Markets, is now
    recognized for 5 minutes.
        Mr. Sherman. Responding to the ranking member, who wants to
    instill confidence in those buying and selling
    cryptocurrencies, the only confidence I have is the U.S. dollar
    is an outstanding good currency, but cryptocurrencies, if they
    succeed, will have unique appeal to only two groups: narco-
    terrorists; and tax evaders. And for us to channel the animal
    spirits that should be investing in the American economy into
    creating tools for those who want to evade U.S. taxes is a step
    toward a much weaker America.
        Mr. Gensler, you talked about Archegos and the total return
    swap. The image I have of 1929 is investors jumping out of
    buildings on Wall Street because they bought stock at 7, 8, 9
    times margin. And in the 1930s, we decided to protect the
    markets and say that if you want to buy stock, the most margin
    you could get was 1-time margins, sometimes a little more. But
    we then see that using a total return swap, the big guys, like
    Archegos, can get 7 times margin, can invest only one-seventh
    of the cash to control $100 million worth of this block of
    shares or that block of shares.
        This raises the question, is 7-to-1 margin fine for
    everybody, and is that good for the markets? Should 1-time
    margin either rule for everybody and we should plug the
    loopholes, or should we continue to have a system where, if you
    are a family office, you can have 7 times margin by calling it
    a total return slot, and if you are the regular Robinhood
    investor, you can only get 1 time? What should the market rule
    be?
        Mr. Gensler. I think you raise some very important
    questions that came out of the market events late in March, not
    the January ones but the March events around a family office,
    Archegos. Family offices are outside of much of the SEC's
    remit, but not all of it.
        Mr. Sherman. If I can clarify, this is not a question about
    family offices.
        Mr. Gensler. Oh, okay.
        Mr. Sherman. Just that one investment company that has $1
    billion and decides they want a 7-to-1 margin. The fact this
    was a family office, put that aside. Whether you disclose it or
    you don't, whether you are a family office or a hedge fund or a
    billionaire, should you be able to get 7-to-1 margin, and if
    so, why can't Robinhood?
        Mr. Gensler. I have asked staff to better understand--and,
    again, it is just the 3rd week--the rules that were adopted by
    the SEC that are yet to go into final implementation around the
    margin and for these securities-based swaps, and how they would
    have affected the circumstances.
        Mr. Sherman. I look forward--
        Mr. Gensler. But you are right, sir, that they are
    different than the retail investor, and this is true across our
    markets. And I have asked staff to better inform me as to what
    are we seeing there.
        Mr. Sherman. For Mr. Cook, when it comes to disclosing
    short selling, there are arguments on both sides as to whether
    to disclose what an individual investor is doing. Some say it
    is harmful, some say it is helpful, but there seems to be
    agreement that the aggregate information is helpful, but we
    ought to know in aggregate how many shares of GameStop are
    short. You generate that information, but you don't put it on
    your website. I am told that you provide it to the exchanges
    and they publish it if they want to, and, often behind a pay
    wall. Why doesn't FINRA disclose all this information to
    everybody for free as quickly as you can?
        Mr. Cook. Thank you, Mr. Sherman. That is a great question.
    As we look at disclosure around short selling, I think there
    are some good arguments that we can do more here. I have asked
    our staff to prepare a regulatory notice to solicit comment on
    changes to FINRA's disclosure here to make it more frequent and
    more granular. And certainly as part of that, we can look at
    the way in which that disclosure is disseminated.
        Mr. Sherman. Is there any justification for what is a
    regulatory agency generating this information and giving it to
    private companies for them to sell rather than disclosing it to
    the public?
        Mr. Cook. I appreciate the gist of your question, sir, and
    I am inclined to be biased towards making it publicly
    available. I don't understand all the history behind how this
    developed. I think that is something we need to look into, but
    I commit to you that we can certainly do that.
        Mr. Sherman. My time has expired, but I look forward to
    looking at not only payment for order flow, but how we get the
    best price improvement for every investor, whether it be an
    internalized transaction or when it goes to a market maker. I
    will just say, if Citadel can't pay Robinhood, would it be
    different if Citadel bought Robinhood? That is just for the
    record. I yield back.
        Chairwoman Waters. Thank you very much. The gentlewoman
    from Missouri, Mrs. Wagner, is now recognized for 5 minutes.
        Mrs. Wagner. Thank you, Madam Chairwoman. Chairman Gensler,
    welcome as the new SEC Chair. And I want to take this
    opportunity to veer off course a bit and mention that after
    years of thorough and proactive input and feedback from
    stakeholders, including Main Street investors, the SEC has
    finalized its Regulation Best Interest (Reg BI), which is now
    in effect. This rule raises the standard of care for broker-
    dealers while preserving access and choices for Main Street
    investors.
        Chairman Gensler, under your leadership, does the SEC plan
    to make any amendments to Reg BI?
        Mr. Gensler. Thank you. It's good to see you here today. As
    I said in my confirmation hearing, when a similar question came
    up, I think that it is important that investors actually have
    brokers take their best interests to heart, and that is what we
    are going to do through examination and enforcement guidance,
    ensure that that rule is fully complied with as written.
        Mrs. Wagner. Great. Applied as written. I'm glad to hear
    it. Thank you. Chairman Gensler, as you begin your work at the
    SEC, I want to really urge you to ensure that the Commission
    and its staff, under your leadership, follow its very core
    mission, which is to protect investors, which I care deeply
    about here in Missouri's 2nd District; to maintain fair,
    orderly, and efficient markets; and to facilitate capital
    formation. I want to thank you for appearing before us today,
    and I hope that we can work together to provide investment
    choice, and access, and affordability, I would say, to
    America's Main Street investors. Thank you.
        Mr. Bodson, is it possible that a financial transaction tax
    (FTT) could increase financial market volatility?
        Mr. Bodson. Thank you, Congresswoman. FTT is not an area of
    my expertise. Obviously, there have been a lot of studies done
    in a lot of different markets with very, very mixed results,
    mostly focused on whether or not they are an effective tool for
    raising taxes. In some markets, like Hong Kong, they have been
    effective, but they have a very different income tax and
    capital gain structure, and no capital gains tax. In other
    markets, they have been shown to limit trading or subdue it, so
    they don't have the effect that is expected. I have not seen
    anything discussing FTTs and volatility, per se. My uneducated
    guess would be they would be somewhat separated, but, again, I
    have not seen any studies to indicate either way.
        Mrs. Wagner. Aren't there more effective ways to improve
    our financial market operations than the bills being proposed
    today? Can you describe any of those, Mr. Bodson?
        Mr. Bodson. Thank you, Congresswoman. The step from T+2 to
    T+1 will create a lot of efficiencies in the marketplace, both
    on the operational side as well as lowering the margin
    requirements that we imposed because of the 2-day settlement
    versus 1-day settlement. So, I think those would be steps in
    the right direction in terms of lowering cost, not just for our
    direct members, but for the end beneficiaries, be it mutual
    fund, pension funds, or the small retail investor. We look to
    decrease cost whichever way we can.
        Mrs. Wagner. Mr. Bodson, in your view, how would shortening
    the settlement cycle help prevent future trading restrictions
    similar to the ones imposed by Robinhood and other brokerages
    earlier this year?
        Mr. Bodson. I am not aware of the reasons for other firms,
    so I am not going to speculate about that. Robinhood did say
    that their decision was based on their ability to meet our
    margin charges. If we do lessen the time to settlement from T+2
    to T+1--time is risk, which I think has been well explained--
    that by lowering the period, the amount of open transactions
    that we have to charge margin against would get smaller. And
    our estimation is that the volatility charge, which is a main
    component, will go down by 40 percent. So in that sense, the
    capital charge against Robinhood would have been smaller, but,
    again, it is a little bit of apples and oranges, because to say
    it would automatically happen without knowing the market
    circumstances obviously is hard to say. But there would be a
    benefit to firms in having lower capital charges.
        Mrs. Wagner. It sounds like, if proposed, going even
    further than T+1 and moving to real-time trade settlement. What
    sort of impact do you think this would have on the market
    liquidity?
        Mr. Bodson. We are not a proponent for a real-time gross
    settlement, as you articulate. You would lose all the benefits
    that our clearinghouse provides, all the netting inefficiencies
    I spoke about in terms of trillions of trades being netted down
    to millions of movements or 100 millions of trades going down
    to millions of movements, and trillions of dollars being netted
    down to billions of dollars. You would lose all that benefit.
    All transactions would have to be pre-funded and the securities
    would have to be on hand, so it would have a very large impact
    on institutional trading. It would cause some liquidity issues
    across the marketplace, so, a bridge too far, in my eyes.
        Mrs. Wagner. Thank you, Mr. Bodson. My time has expired,
    and, Madam Chairwoman, I yield back.
        Chairwoman Waters. Thank you. The gentleman from Georgia,
    Mr. Scott, who is also the Chair of the House Agriculture
    Committee, is now recognized for 5 minutes.
        Mr. Scott. Thank you, Chairwoman Waters, for this
    interesting and much-needed hearing. The question before us
    today is, how can we on the Financial Services Committee ensure
    that our investors can both have access to our markets, but
    also are able to participate in our markets by investing
    safely? You see, when erroneous and inaccurate information
    posted on social media sites has the ability to broadly
    influence investors and move the market, sometimes drastically,
    this poses a serious question for you, our regulators. There is
    now such a huge hole in our regulatory process because of
    GameStop with inexperienced investors relying on unverified
    information from unqualified social media.
        Mr. Cook, let me start with you. How can we effectively
    regulate the impact of new technology social media sites as
    they pertain to inexperienced investors, and also, how do we
    treat that investment advice they are getting from unqualified
    people on social media? And then the real question, who is held
    accountable when bad investment advice leads to market
    volatility like we have seen and massive losses for our
    investors? I would like for the three of you--Chair Gensler,
    Mr. Cook, and Mr. Bodson--to answer this important question and
    the three parts that I outlined. This is what the American
    people need answers to from you, the regulators. Mr. Cook, why
    don't you start?
        Mr. Cook. Thank you, Congressman, for that question. I
    think you raised some really profound questions about where
    technology and other aspects of investor behavior may be going,
    and how does that fit within the current regulatory regime.
    When we talk about statements by people on social media and
    other places, just to be clear, FINRA doesn't regulate that
    environment, and we would look to the SEC in sort of
    understanding whether existing authorities around concepts like
    manipulation or providing investment advice might apply. I do
    think that what we are also seeing, though, to your point about
    retail investors making decisions without an intermediary or a
    financial advisor, is an important one. As we see more of that
    happen, and we are seeing a lot of that happen, I think we need
    to ask whether the existing regime is adequate in that regard.
        Mr. Scott. Let me quickly get to Chair Gensler. I worked
    with him when he was Chair of the CFTC. Chair Gensler, how do
    we hold somebody accountable? Answer this for me. As Mr. Cook
    just said, the SEC is the one responsible. What do we do about
    this, Chair Gensler?
        Mr. Gensler. I think you raise a good point. I know,
    probably like me, it is not about somebody's free speech rights
    on social media, but if somebody is trying to manipulate a
    market, to defraud the market through social media, and in our
    rapidly-changing technology, it could be computers and not even
    humans, by the way. It could be computers communicating. So,
    the SEC is a cop on the beat. We are going to vigorously lean
    in against individuals and companies to try to assess, but we
    will have to update our resources, too, to be able to see that
    relationship.
        Mr. Scott. My time is counting down. How are you going to
    solve this? Do you feel that we can so we don't have any more
    of this GameStop?
        Mr. Gensler. Madam Chairwoman, I don't know what I am
    supposed to do, because the timer is beeping.
        Chairwoman Waters. Thank you. I would expect that you would
    respond in writing to that question as we move on.
        And I am now going to call on the gentleman from Oklahoma,
    Mr. Lucas, who is recognized for 5 minutes.
        Mr. Lucas. Thank you, Madam Chairwoman. First,
    congratulations, Chairman Gensler, on your confirmation. I have
    confidence that you will bring the same gusto and tenacity to
    your role as you did as Chairman of the CFTC, and I look
    forward to working with you. And for the benefit of our
    colleagues, perhaps who are not on the Agriculture Committee,
    of course, Chairman Scott, you and I spent a lot of time in a
    previous position, both of us, working on a variety of issues
    over there. So that said, this past February, Acting Chair Lee
    announced that the SEC would enhance its focus on climate-
    related disclosure for public company filings and would begin
    to update climate disclosure guidance. As you can imagine, the
    industries that are vital to Oklahoma, meaning agriculture and
    energy, are following this topic very closely. I will put it
    that way.
        Chairman Gensler, could you shed some light on what this
    enhanced focus means? Does this represent a change from current
    SEC practices, or is this a continuation of current policy?
        Mr. Gensler. First, let me say thank you, I really do look
    forward to working with you and Chair Scott. I think we did
    some good work together on behalf of the American public, and
    on behalf of agricultural interests across the country as well.
        If I can broaden it out a little bit, I think that
    disclosure has been at the core of the securities laws for 90
    years. Investors get to take risk, but they want to understand
    their risk and have disclosures from the issuing companies, and
    technology has changed, markets have changed.
        So, what I have asked the staff to do is to prepare
    recommendations to the Commission on how we can, through notice
    and comment, hearing a lot of public input as to what are those
    disclosures in a climate-risked area, that investors want to
    take into consideration in their decisions and their investment
    decisions. Acting Chair Lee already put out a comment period.
    We are going to benefit from that, and I encourage the public
    to weigh in and tell us what is important to them and their
    investment decisions and their proxy decisions, and the like.
        And I think it actually can help an issuer to bring some
    consistency and comparability in this area because there are a
    lot of investors that are asking for things. We can try to
    maybe help bring some consistency and comparability, of course,
    through economic analysis and vital input from the public.
        Mr. Lucas. I promise you, Mr. Chairman, you have gotten the
    attention of my constituents, and, of course, how questions are
    asked and how the data is interpreted can have a dramatic
    effect. So with that in mind, give me a feel for what kind of a
    timeline we are looking at when we get to the review part of
    this process, where my folks can offer their insights?
        Mr. Gensler. If they wish, we could get some insight from
    them and input. There is an open comment period right now
    through June--we can tell you the exact date, but through
    June--that Acting Chair Lee had put up. But I think based on
    that and the economic analysis, we will try to put a proposal
    together. I don't want to commit to a certain month, since I
    have only been there for 3 weeks, but to try to put a proposal
    together and then put that out to public comment based on what
    we have already heard this summer. And then, that sort of
    starts a multi-month process after that.
        Mr. Lucas. Along that line, Mr. Chairman, the SEC has also
    created a climate and ESG task force within the Division of
    Enforcement to, I believe the phraseology is, develop
    initiatives to proactively identify ESG-related misconduct. Can
    you visit with us for a moment about that, and do you envision
    that there will be enforcement actions prompted by the task
    force based on this new guidance? This new standard, I guess,
    is the better way to put it.
        Mr. Gensler. The task force is looking at the guidance that
    is already in place. There is guidance that was put out on
    climate, I think in 2010. Two things: one, to see if companies
    are following that 2010 guidance and following the overall
    important disclosure regimes that are in place at this point in
    time; and two, it helps us and informs the Commission, all five
    of us, as we move forward to consider any future rules because
    we can sort of learn from what is happening right now in the
    Division of Corporation Finance, in the Division of
    Enforcement, and in the Division of Examinations, what is going
    on now. So one is just, are folks complying with the rules and
    laws that are in place, but two, it helps inform us about some
    of what is going on and how we can help bring more consistency
    and comparability in the future.
        Mr. Lucas. Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you. The gentleman from Texas, Mr.
    Green, who is also the Chair of our Subcommittee on Oversight
    and Investigations, is now recognized for 5 minutes.
        Mr. Green. Thank you, Madam Chairwoman, and I thank the
    witnesses for appearing as well.
        Madam Chairwoman, as you know, from the genesis of this
    process I have been concerned about trading ahead, and you
    called to our attention earlier that the one company, the
    largest market-maker, executes approximately 50 percent of all
    U.S. retail volume. That is quite an amount for one firm to
    manage, and that causes a good deal of consternation,
    especially when this firm finds itself engaged in trading
    ahead. There are penalties associated with trading ahead, but
    these penalties are primarily civil penalties. And as a result
    of a civil penalty, many times there is no acknowledgement of
    liability, just the penalty paid. For example, in one case,
    $700,000 was paid, but that $700,000, while it seems like a
    lot, really is not when we are dealing in billions of dollars.
        As a result, I have been very much concerned, and I see
    that there is one proposed piece of legislation that would
    amend the Securities and Exchange Act of 1934 to prohibit
    trading ahead by market makers and for other purposes as well.
        This is something that I think has reached a point where
    its time has come, and I'd like to ask Chair Gensler, are you
    of the opinion that we should not allow trading ahead, and also
    that we should not allow a major firm to simply build in a
    penalty as the cost of doing business?
        Mr. Gensler. I thank you for that question, and I look
    forward to working with you. I think that our current rules,
    you are correct, are civil, but our current rule is that if you
    take a customer order and then trade ahead of that, that is out
    of bounds, it's not allowed. And I think that is because the
    customer needs to come first, and in our market structure, that
    is what brokers are supposed to do.
        I look forward to working with you and your staff on any
    proposed legislation. I have not had a chance to look at that
    more carefully.
        Mr. Green. Thank you. The process, as Chair Gensler has
    indicated, is unfair to the persons who are making the purchase
    in the market, who would like to become a participant but they
    do not have the advantage of the market maker.
        Let me ask Mr. Bodson, do you agree that this is a
    circumstance that we have to take a look at because we don't
    want people to simply build into the cost of doing business,
    the cost of trading ahead?
        Mr. Bodson. Thank you, Congressman Green. DTCC is not a
    direct regulator of the market as the SEC and FINRA are, but I
    think the situation described obviously would not be something
    any company would endorse. Having similar criminal penalties
    viewed as a normal cost of business is not something that I
    think any individual should be supportive of, so your comments
    stand, but unfortunately, the part of the market you are
    talking about is the trading side. That is not what we are
    involved in. We are post-trade, and not being regulated there
    is not much I can do about that specific issue, but thank you
    for asking me.
        Mr. Green. Thank you, and that is one of the reasons why I
    think legislation similar to what is being proposed is
    necessary, because to penalize criminally requires some
    creative prosecution. We do not have a definitive law that
    makes it a crime to do this, literally. And I am concerned that
    if you can simply make it the cost of doing business, you can
    continue to do business and build in that cost. This
    legislation would require due diligence on the part of the CEO,
    would require the CEO to, on an annual basis, certify that the
    CEO has performed a reasonable due diligence in ensuring that
    the market maker has not traded ahead, and has some liability
    when this occurs.
        This is something that we cannot allow to continue as
    simply a pat on the back, to a certain extent--some would say a
    slap on the wrist--but we have to do something about it. I
    think this legislation addresses it, and I look forward to
    working with persons who are going to push this legislation to
    see if we can get it done.
        And I yield back, Madam Chairwoman.
        Chairwoman Waters. Thank you very much. The gentleman from
    Florida, Mr. Posey, is now recognized for 5 minutes.
        Mr. Posey. Thank you very much, Madam Chairwoman. Chairman
    Gensler, some people believe the current short-selling
    practices drag down share prices below fundamentals. What does
    your experience tell you, and what should we or could we do
    about it?
        Mr. Gensler. Thank you for asking that question. Short
    selling has been part of the market structure for many decades,
    in fact, even before the securities laws, and economists have
    many studies, and there have been many debates on short selling
    and long. Your question is, could it move something to
    something other than fundamentals. Long buying can also move
    something to something other than fundamentals.
        Our remit at the SEC is to ensure that the markets are
    fair, orderly, and efficient, and that they are free of fraud
    and manipulation, but there are some times that individual
    securities might be, in a personal opinion, not aligned with
    fundamentals. But it might be sentiment, is the other piece.
    So, I just want to be careful that we stick to our important
    piece of it.
        We do think that there is a need for greater transparency
    on the short-selling side, and I have asked staff to propose,
    under the authorities Congress has already vested, that we have
    greater transparency on the short-selling side. I am encouraged
    to hear that FINRA, under Robert Cook, is going to be doing
    some things in that area as well.
        Mr. Posey. Thank you. Mr. Bodson, please share with us how
    you are working to reduce the settlement cycle to 1 day while
    preserving the benefits of netting and [inaudible] what the
    savings proposed on margin funds might be?
        Mr. Bodson. Thank you, Congressman, for that question.
    Shortening the settlement cycle is the big concept of time
    equals risk. Reducing the period that trades are open and
    reducing the potential impact of the default of one of our
    members means that we simply have to collect lower levels of
    margin or collateral. One of the biggest components of our
    calculation of margin is volatility-driven, what is happening
    in the market, how are prices moving, and by shorting that
    period, we believe we can reduce that charge by 40 percent in a
    volatile period. That could be $6 billion less capital that
    firms have to post with us and can use elsewhere. So, it would
    be a significant amount for our members.
        Mr. Posey. Great. I am really glad to hear that.
        Chairman Gensler, tell us about what the SEC is doing to
    ensure that payment for order flow doesn't mean retail
    investors are subject to unfair trades?
        Mr. Gensler. I have asked the staff to take a close look at
    this in the context of the overall market structure, because
    payment for order flow, which some brokers use and some don't,
    is, in essence, a payment to the broker for that order flow,
    and it can be in conflict with the interests of that customer.
    And that inherent conflict--we found in a case that was settled
    in December, where there was actually communication between the
    wholesaler and broker saying, ``Look, I can give your customer
    more or I can give you more.'' There was a tradeoff between
    these two.
        I think that we need to take a closer look at that, but
    also in the context of the overall equity market structure,
    because there is also payment for order flow on exchanges,
    which is called rebates. So, there are other pieces of this
    puzzle, not just to wholesalers.
        Mr. Posey. Thank you, Mr. Chairman. Do you believe that
    cooperation among retail investors in chat rooms, for example,
    can be undesirable collusion in the equities market?
        Mr. Gensler. I think that we should always be vigorously
    enforcing our laws and ensuring that there is not fraud and
    manipulation. But again, we have a free speech right to go and
    say to a neighbor, whether it is online or in person, ``I like
    this investment,'' and thoughtfully say why I like this
    investment. Our laws are about if somebody is trying to defraud
    another person, mislead another person, manipulate the markets,
    and that we should root out and vigorously root that out,
    whether it is a big institution, or an individual. or, frankly,
    a computer that's controlled by a big institution.
        Mr. Posey. Okay. During your CFTC service, you once said
    that transparency isn't costly. Would you explain that concept
    in the context of financial markets?
        Mr. Gensler. Did you say that I had said transparency is
    a--
        Mr. Posey. Transparency isn't costly. It pays to be
    transparent.
        Mr. Gensler. I think transparency is at the heart of
    efficient markets. At dot-com, disclosure regimes are important
    for companies, and that is a form of transparency, but I think
    that is at the heart of investors being able to take risk and
    understanding their risks.
        Mr. Posey. Thank you, Mr. Chairman.
        Madam Chairwoman, my time is up, and I yield back.
        Chairwoman Waters. Thank you. The gentleman from Missouri,
    Mr. Cleaver, who is also the Chair of our Subcommittee on
    Housing, Community Development, and Insurance, is now
    recognized for 5 minutes.
        Mr. Cleaver. Thank you, Madam Chairwoman, and I thank all
    of our guests for being here. Chair Gensler, thank you for all
    the work you have done over the years, and I appreciate your
    presence here today.
        My great-grandpa, Reverend Noah Albert Cleaver, died in
    1980. He was 103. He used to say--some new invention would come
    out, whether it was a toaster or a microwave, and he would say,
    ``What are they going to do next?'' And he was concerned. He
    thought that the people landing on the moon created a bunch of
    weather problems in Texas. I never could get that out of his
    head.
        But sometimes, I am tempted to join in with my Grandpa on
    stuff. Going back to Mr. Scott's discussion with you earlier, I
    have to tell you, I do have a lot of concerns, and maybe it is
    just something I am going to have to learn to live with. But
    let me give you an example. The shares in Metro Bank in the UK,
    back in May, their shares fell over 10 percent before Metro
    could get control of the fake news about their financial free
    fall, and they are fortunate that it didn't go further.
        I am extremely concerned about what is going on in
    regulations and what we need to do to ensure that social media
    doesn't take control of our lives and take it in a direction
    that could be detrimental to our democracy. Do you share that
    concern, and if so, what should we do, and how do we address
    the issue that was just experienced with Metro Bank?
        Mr. Gensler. I think that the best way is to be technology-
    neutral but recognize that technologies in each generation
    provide us new ways to communicate, even as to when the
    telephone came along and there were debates about whether to
    allow the first telephone on the floor of the New York Stock
    Exchange. These are real debates that happened in the 1920s. I
    think technologies will come along in the 2020s, and we have to
    ensure we still stick to our principles of investor protection;
    fair, orderly, and efficient markets; and capital formation.
        So, we have to lean in at the SEC and learn how to
    basically be a cop on the beat so that free speech goes on but
    if somebody is trying to manipulate a market or spoof a market
    or put fraudulent information into a social media channel, that
    we protect investors against that. And particularly in this new
    computer age, that is more challenging. I think the SEC is up
    to the challenge, but it is definitely more challenging, and I
    have asked the folks at the SEC, how do we freshen up our rules
    in this new environment?
        Mr. Cleaver. Do you have a division that works on this,
    that thinks about this, that plans for this, that goes through
    all kinds of scenarios on what to do when this happens,
    anticipating an anticipatory department?
        Mr. Gensler. No. Again, I am only in my third week, but I
    think between our Trading and Markets Division, our Enforcement
    Division, and our Examinations Division, it is through those
    units. But I think we constantly have to be evaluating, and to
    an earlier question, even, about Regulation Best Interest, we
    are going to vigorously get the most out of regulation best
    interest, but we are also going to evaluate. If it is not
    serving the purpose of investors, then we will update and
    freshen that rule as well as other rules, because we always
    have to be evaluating that investors come first, aligned with
    our three-part mission.
        Mr. Cleaver. Let me congratulate you on your confirmation,
    and I do recognize that you just walked in the door, and I am
    asking you some questions that you probably need a little more
    time to deal with. But I am hoping that, on a night when you
    are about to get a peaceful night's rest, you will remember the
    questions raised by Congressman Cleaver about the markets and
    practice paranoia with the SEC, because I am really afraid of
    some bad stuff happening. I am hoping I am wrong, but I am glad
    you are there, and I look forward to you fixing some things.
        Mr. Gensler. Thank you, and I wish I had met your
    grandfather. My mother would say that out of a space journey,
    the best thing that came out of it was Velcro. Mrs. Gensler
    thought that was the best thing that came out, so there you go.
        Chairwoman Waters. Thank you. Thank you, gentlemen, very
    much.
        The gentleman from Missouri, Mr. Luetkemeyer, is now
    recognized for 5 minutes.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman, and welcome
    to our witnesses.
        Mr. Gensler, in September of 2018, the Federal Reserve, the
    FDIC, the NCUA, the OCC, and the CFPB all issued an interagency
    statement that clarified the differences between supervisory
    guidance and laws and regulations. Most notably, that
    supervisory guidance does not have the force and effect of law,
    and that the law and regulations does.
        In January of this year, the prudential regulators issued a
    final rule to confirm the difference of regulations and
    guidance by codifying the 2018 statement. While I understand
    the SEC operates differently from the regulators I just
    mentioned, in many key ways, it is still imperative that the
    SEC distinguishes between guidance and rule or law.
        Do you agree that distinguishing between guidance and rules
    is an essential proponent of sound regulation?
        Mr. Gensler. Thank you for that question, and I look
    forward to working with their Office of General Counsel to
    better understand what the bank regulators did in that
    circumstance. But there is a difference between rules that have
    gone through notice and comment and staff guidance, and that is
    something I am familiar with from my prior service in
    government as well.
        Mr. Luetkemeyer. I guess you maybe answered this question
    here, but will you commit to issuing a final rule similar to
    the prudential regulators that clarifies the role of guidance
    and ensures that enforcement actions will only be based on
    violations of rule or law?
        Mr. Gensler. Again, sir, I need to meet with staff,
    understand what the SEC has done in the past on this, and
    whether there is an appropriate need for such new rules, as you
    say. But I do understand rules as duly operating from Congress,
    delegated to the agencies, I understand are different than
    guidance. But I would look to work with you and understand your
    concerns better.
        Mr. Luetkemeyer. Very good. Thank you for that.
        Chairman Gensler, as you know, the Securities Act of 1933
    and the Securities Exchange Act of 1934 established the ability
    of the SEC to accept generally accepted accounting principles
    (GAAP) that have been established by a private entity. While I
    believe that private standard-setter can help facilitate the
    effective accounting principles that promote transparency for
    investors, recent actions by the Financial Accounting Standards
    Board (FASB), and an overall lack of oversight by any
    regulatory entity whatsoever, have raised serious concerns
    regarding the standard-setting process and FASB's ability to
    conduct proper analysis before finalizing a standard. In my
    opinion, since the SEC has given FASB the authority to operate
    as a private standard-setter, the SEC should ensure FASB is
    carrying out its duties in an appropriate manner.
        Can you broadly tell me what you think the relationship
    between the SEC and FASB is, and should be?
        Mr. Gensler. I think Congress has been clear, as I
    understand it, that the securities markets benefit by
    disclosure, and that includes accounting disclosure, and the
    SEC has that authority. And then through, I believe it was in
    the Sarbanes-Oxley Act, working with Senator Mike Oxley from
    your committee and Paul Sarbanes on the side, put in place
    exactly what you said, a provision that there could be reliance
    on a standard-setter meeting certain goals. But our Office of
    the Chief Accountant has an important role in communicating
    with FASB on these important accounting standards, and at the
    SEC, our congressional system is at the top of that chain.
        Mr. Luetkemeyer. My concern, quite frankly, is with their
    ability to implement something like current expected credit
    losses (CECL), which they did not do any standard-setting
    studies about. They just arbitrarily went out there and
    decided, in their own wisdom, that this was something that they
    should be doing.
        All of the other government agencies out there that affect
    what we do every day, how we administer the rules and
    regulations every day and the laws of this country, have to go
    through the Administrative Procedure Act. They do not.
        Would you support something along the line to rein them in,
    so to speak, so that maybe they would fall under the
    Administrative Procedure Act and have to do qualitative and
    quantitative studies before they can issue a rule or regulation
    that would protect the economy, protect the industry, protect
    the people, consumers, from a bad rule or regulation that they
    might implement?
        Mr. Gensler. Congressman, I would like to meet with you and
    your staff to better understand your concerns, because as I
    understand it, what Congress decided some 20 years ago in the
    Sarbanes-Oxley Act was that it is best to rely [inaudible] SEC
    to rely on an outside standard-setter, and that that helped
    sort of set them apart a bit.
        So, the concerns that you are speaking about, I would like
    to better understand, and see how we can address them as best
    we can.
        Mr. Luetkemeyer. I thank you for your answers, sir, and I
    look forward to working with you on this at length. I think it
    is a very serious concern there that I have with regards to
    these folks.
        With that, Madam Chairwoman, I yield back. Thank you very
    much.
        Chairwoman Waters. Thank you. The gentlewoman from New
    York, Mrs. Maloney, who is also the Chair of the House
    Committee on Oversight and Reform, is now recognized for 5
    minutes.
        Mrs. Maloney. Thank you, Chairwoman Waters.
        Chairman Gensler, it is great to have you before the
    committee once again, and to have you as the Chair of the SEC.
    I have a few questions. First, I want to ask you about a very
    important issue that I worked on for several years, and that is
    forced arbitration. A few years ago, some people were pushing
    public companies to include forced arbitration provisions in
    their corporate governance documents, which would prevent their
    own shareholders from suing them for securities fraud in
    Federal court. If the SEC allowed this, it would essentially be
    the end of all security fraud cases in Federal court, and
    shareholders wouldn't be able to hold companies accountable in
    court.
        So, I led a letter with Chairwoman Waters to then-SEC
    Chairman Clayton, which was signed by every Democrat on this
    committee, strongly opposing this move, which would reverse the
    Commission's longstanding position that such forced arbitration
    provisions violate Federal securities law. And because this
    effort came so close to succeeding, I think it is very
    important to get you on the record on this issue.
        So my first question is, do you believe it would violate
    Federal securities law if a public company inserted a forced
    arbitration provision into its bylaws and governance documents?
        Mr. Gensler. It is really good to see you, and to work with
    you again.
        Mrs. Maloney. Likewise.
        Mr. Gensler. I think, again, I need to get more fully
    briefed on the law, but let me say, on the spirit and where the
    SEC has been, the SEC has said consistently to issuers, as I
    understand it, that it would be best not to put this into these
    corporate charters. And I think that the American public needs
    to be able to have redress in their courts, and that is sort of
    a fundamental piece, to be able to go straight to the courts.
    And that has been true in terms of issuers for decades, and I
    think that has worked well.
        Mrs. Maloney. That is great to hear, and it is a very
    important signal to investors and the confidence in the U.S.
    capital markets, and I thank you for that position.
        Next, I want to talk to you about GameStop. In this
    committee's initial hearing on the GameStop frenzy, I
    questioned whether our capital markets were working for all
    investors or just for some investors, and I emphasized the need
    to have rules that are consistent, predictable, and, very
    importantly, enforceable.
        What struck me the most about Robinhood's behavior
    regarding the GameStop frenzy was the seemingly arbitrary
    nature of its trading faults and the lack of transparency on
    the front and back ends of how and why Robinhood and other
    broker-dealers imposed these restrictions.
        So, Chair Gensler, not speaking specifically to Robinhood's
    situation but broadly speaking, do you believe broker-dealers
    should improve their transparency with their customers about
    how and when they impose trading halts, and what role do you
    believe the SEC should play in improving these disclosures and
    ensuring trading halts are integrated into firms' risk
    management plans?
        Mr. Gensler. I think that probably what we could all agree
    on is that access to markets, whether you are an individual
    investor trading one share or a big institution, access to
    markets as they are moving up and down is a really critical
    piece of our capital markets. And what happened on January 27th
    and 28th was not good for millions of investors.
        So, the transparency you mentioned is important between
    broker-dealers and their customers, and we have asked, and I
    think Robert Cook has said already, that maybe they are looking
    at this too, is what is that transparency between, and under
    what circumstances? And do each of the broker-dealers have
    enough liquidity to meet their requirements with the
    clearinghouse, which Michael Bodson was talking about earlier.
        Mrs. Maloney. Thank you. And next, I would like to turn to
    the topic of corporate board diversity. Along with Chairman
    Meeks, I have made fighting for women a hallmark of my time in
    public service, fighting for equal pay, for equal work, to
    bring our family leave policies into the 21st Century, for
    Equal Right Administration, and I just left a hearing on
    maternal Black health. Mr. Meeks and I have also strongly
    advocated for measures to diversify the ethnic, racial, and
    gender composition of corporate boards and in executive ranks,
    because leaders set the tone and they set the priorities.
        From your perspective, does improving diversity on
    corporate boards bring a material benefit to companies?
        Mr. Gensler. I can speak just in terms of what we are doing
    at the agency, and I do believe that diverse points of view,
    diverse backgrounds help in decision-making, and we are leaning
    into that in terms of building a senior leadership at the SEC.
        Mrs. Maloney. Thank you. My time has expired.
        Chairwoman Waters. The gentlelady's time has expired. The
    gentleman from Michigan, Mr. Huizenga, is now recognized for 5
    minutes.
        Mr. Huizenga. Thank you, Madam Chairwoman. And before I
    begin, I would like to submit for the record a letter from the
    Private Investor Coalition.
        Chairwoman Waters. Without objection, it is so ordered.
        Mr. Huizenga. Thank you. Mr. Cook, my colleague from New
    York was talking a little bit about arbitration and what that
    would mean. And I am curious if arbitration clauses were banned
    in customer contracts, do you perceive potentially negative
    consequences on that, and what would those potentially be?
        Mr. Cook. Thank you for that question, Congressman
    Huizenga. I believe that if the current status of these clauses
    requiring arbitration--I just want to be clear that is not
    something that FINRA currently imposes; that is something that
    happens as a matter of contract. And FINRA does not have
    authority right now to address that. That is something that the
    SEC has authority to address.
        Mr. Huizenga. No, I understand that. I understand that
    FINRA does provide faster, less expensive ways to resolve
    disputes, correct?
        Mr. Cook. I think we work hard to administer an arbitration
    program that is fair for investors, that is prompt, that is--
        Mr. Huizenga. I understand. So, you are not willing to say
    whether there would be a negative impact on that. Okay, I am
    going to move on.
        Mr. Gensler, it's good to have you back, and I appreciate
    this time. I am going to ask you a pretty quick, simple
    question: Is market participation akin to gambling in a casino?
        Mr. Gensler. It is good to see you, and thank you for the
    call earlier this week. I think market participation is
    investing and it takes risk, and material disclosure behind
    that risk is important, and the cop on the beat is there to
    protect against fraud and manipulation. So I would consider it
    part of that capital formation and part of risk taking.
        Mr. Huizenga. I do not want to put words in your mouth, but
    I do want to be clear. So, it is not like gambling in a casino?
        Mr. Gensler. It is risk taking, and risk taking can be in
    different forms, but I am trying to choose my words carefully.
    The risk in capital markets is something where Congress has
    said, let's ensure that there is no fraud and manipulation in
    those risk-taking markets.
        Mr. Huizenga. Reclaiming my time, I understand. We have
    some people who are trying to portray this as literally walking
    in and letting chance decide whether you are going to walk out
    a winner or a loser. That is very different than taking a
    calculated risk.
        Very quickly, I want to touch on BDCs, and how the acquired
    fund fees and expenses disclosure requirements distort the
    operating costs of those. And will the Commission prioritize
    trying to fix the acquired fund fees and expenses (AFFE)
    disclosure requirements here very shortly?
        Mr. Gensler. Again, maybe it is just because I am in my
    third week, and you used some letters with which I am not
    familiar--
        Mr. Huizenga. BDCs are business development companies.
        Mr. Gensler. Oh, I'm sorry. I still need to get a briefing,
    and I look forward to working with you and your staff to
    understand that better in terms of the fee disclosure that is
    important to our public markets.
        Mr. Huizenga. Okay. We are happy to get you that
    information, and I want to continue that conversation.
        Earlier in the hearing, you had talked about
    cryptocurrencies and crypto exchanges, and you said that,
    ``Only Congress can bring greater regulatory protection to
    crypto exchanges.'' And I am curious, if Congress is needed for
    crypto exchanges, why would it not be necessary for Congress to
    be involved in specific regulations when we are talking about
    the environment and social issues and governance? It seems to
    me that those may not be appropriate just for the SEC to be
    doing on its own. Does it not need congressional involvement?
        Mr. Gensler. I think that at the heart of our securities
    laws are disclosures, and from the 1930s, the SEC has had
    robust authority to ensure that investors have the disclosures
    that investors wish to have to make their investments. So in
    that regard, I do think that there is the authority to move
    forward on climate and human capital and other--
        Mr. Huizenga. Reclaiming my last moments here, acting Chair
    Lee, at one point, implied that people attack companies that
    [inaudible] care about climate should not donate to Republicans
    and face securities liability and perhaps even SEC enforcement.
    I would hope that would not be the attitude of the SEC, moving
    forward.
        With that, I yield back, and I look forward to continuing
    the conversation.
        Mr. Gensler. Thank you.
        Chairwoman Waters. Thank you very much. The gentleman from
    Colorado, Mr. Perlmutter, who is also the Chair of our
    Subcommittee on Consumer Protection and Financial Institutions,
    is now recognized for 5 minutes.
        Mr. Perlmutter. Thanks, Madam Chairwoman. It's good to see
    all of you. I have two specific questions I want to start with.
    One involves delisting what would be penny stocks, if you will,
    and the second involves diversity and inclusion, and then I'll
    get into some general questions.
        So, Mr. Gensler, back in 2005, in response to changing
    market structure and then new technology, the SEC adopted
    amendments to the penny stock rule that, among other things,
    requires the stock to have a minimum bid price of $4 a share to
    initially be listed on a national exchange. And in addition,
    the SEC has classified penny stocks as securities trading with
    a value of less than $5.
        GameStop's stock traded under $4 back in 2019, and then
    hovered between $4 and $5 throughout 2020, until the end of
    2020, when it began to tick up and then went skyrocketing
    starting in mid-January.
        In Colorado, we used to be the penny stock capital of the
    world, and a lot of abuses occurred during that timeframe.
    Would you agree with my concerns about the potential to
    manipulate low-priced stocks?
        Mr. Gensler. Yes. There has been a long history. The lower
    the price, the lower the aggregate market value. Fraudsters
    find that more appealing. And, in fact, earlier this year the
    SEC took actions to delist, I think it was about 30 entities
    that fell into these various categories.
        Mr. Perlmutter. Okay. With so many more retail investors
    coming to the market through mass platforms like Reddit and
    other ways, do you think it would be timely for the Commission
    to examine whether the rules around penny stocks, including
    exchange listing standards for these stocks, need to be
    updated?
        Mr. Gensler. I think you raise a very good set of concerns,
    and now I have some more work to ask the staff to look at just
    what are the current roles, how did they affect what happened
    in the spring or late winter, and even how it relates to
    broader subjects in the markets.
        Mr. Perlmutter. Okay. Thanks. My second question primarily
    goes to you, Mr. Gensler, and it is a follow-up from Mrs.
    Maloney's diversity questions. It is a question that was raised
    to me by a friend of mine, so I am going to ask it, just as he
    presented it to me.
        When you were Chair of the CFTC, you did not have any Black
    division directors at that agency. Will you commit to doing
    better on this point in your current role at the SEC?
        Mr. Gensler. Well, not to fuss with your friend, but I
    actually hired the first Chief Operating Officer who is African
    American in the history of the CFTC. He has done just a
    terrific job, and he is still there, by the way.
        But yes, the answer is yes, sir.
        Mr. Perlmutter. Okay. Thank you. To all of you, I am
    perplexed by this whole GameStop thing. In 2019 and 2020, it
    was at $4. On January 7th, it was at $17, on January 27th, it
    was at $347, on February 9th, it was at $50, and now it is
    bouncing around at around $162.
        So, I am concerned about the mass platform and the
    potential for hyping a stock in that way. I am concerned about
    the unfair advantage in order flow. And I am concerned about
    the potential harm from short sales.
        Mr. Cook, I will start with you. If you were to look at
    those three things, which one bothers you the most, or do any
    of them?
        Mr. Cook. I think those are all important areas of concern.
    We are looking at all of those areas. The one that I think is
    most novel at the moment and requires our real attention, and
    we look forward to working with the SEC on this, is the
    expanded use of online trading platforms, which, again, can
    really create better access to our markets and be very good for
    investors. But how do we make sure that, at the same time, they
    are being protected and that we are making sure that,
    especially as they may go towards complex products, that that
    is being properly overseen.
        Mr. Perlmutter. I would like to talk about the dropping
    down to T1. Do you think that takes some of the potential for
    fraud out of the system?
        Mr. Cook. Yes. I think that while we fully support reducing
    the settlement cycle, I am not sure that, in and of itself, is
    going to address those types of concerns that you raised. I
    just think--
        Mr. Perlmutter. Okay. Thank you.
        Madam Chairwoman, I yield back.
        Chairwoman Waters. Thank you. The gentleman from Kentucky,
    Mr. Barr, is now recognized for 5 minutes.
        Mr. Barr. Thank you, Madam Chairwoman, and I appreciate
    this hearing, especially these witnesses, whom I think bring a
    great deal of expertise to the topic.
        Let me start with Mr. Bodson, on GameStop, specifically. As
    you noted in your testimony, the temporary restrictions on
    trading by Robinhood and others were due to the additional
    collateral required by the DTCC, but those were extraordinary
    circumstances in an exceptionally volatile market. For the sake
    of retail investors, of course, we do not want to see, and
    generally speaking, halts in trading to happen frequently or
    ever again.
        I do appreciate your testimony that moving to an
    accelerated settlement could reduce margin requirements, and
    specifically, value at risk (VaR) charges up to 40 percent if
    we go to T+1. But can you describe how DTCC communicates with
    brokers regarding their collateral requirements, and
    specifically, are there ways to improve that communication, and
    otherwise increase transparency to mitigate the risk of
    repeating this kind of surprise margin call and what happened
    in January?
        Mr. Bodson. Thank you, Congressman. Our process for
    computing the margin and communicating such are as laid out in
    our rules. We conclude the market formula itself--there are
    margin guides. We have a form that they can use to estimate
    their margin.
        The calculation works overnight. Every day, it is run at
    the end of the trading day. It takes into consideration market
    volatility. It looks at specific security volatility,
    concentration of activity in certain securities. So, what you
    saw in GameStop was almost the perfect storm of going through
    these retail platforms where a lot of buy activity, massive buy
    activity, 130 times normal buy, and we saw it weeks before, in
    stocks that were moving around anywhere from 100 to 300 percent
    a day, and just highly volatile over this period of time.
        So, the margin calculation reflects the risk that the firm
    is presenting to us. That calculation is done overnight, and it
    is communicated the next day, automatically, by email
    generation. In the case of Robinhood, there was an additional
    charge, a capital premium, which was as a result of the fact
    that their margin requirement was in excess of their net
    capital, indicating that they were taking on more financial
    risk than we felt would be prudent. That charge was later
    waived, but the core margin charge of a billion-four, again, it
    is articulated in our rules, we give the client the tools.
        Transparency is something that we will always try to get
    better at, but we do believe that we provide those tools.
        Mr. Barr. Thank you very much. Moving to Chairman Gensler,
    congratulations on your confirmation. I look forward to working
    with you, sir. Let me just, briefly, this is a question that
    Mr. Luetkemeyer and also Mr. Lucas asked, and kind of bring
    them together, the regulation by enforcement question from Mr.
    Luetkemeyer, and the ESG disclosure question from Mr. Lucas. We
    don't want to see regulation by enforcement. We want to see
    notice-and-comment rulemaking wherever possible.
        On March 4th, the SEC announced its new Enforcement Task
    Force focused on climate, as was discussed earlier, in ESG
    issues. But it wasn't until March 15th that it issued a request
    for public comment, and the SEC has not completed its recently-
    announced review of the 2010 guidance.
        Chairman Gensler, can you explain the sequence? In other
    words, why is the announcement of a new focus on enforcement
    coming before market participants know the rules, and will you
    commit to adhering to requirements under the Administrative
    Procedures Act in completing a notice-and-comment rulemaking
    prior to engagement in any enforcement actions?
        Mr. Gensler. I am committed to complying with the
    Administrative Procedure Act on rulemaking, and I said, in this
    hearing and in my confirmation process, I think the market
    investors do want to bring some consistency and comparability
    to climate disclosure, human capital disclosure, and moving out
    and getting that comment.
        But there are rules of the road that are already in place--
    the guidance from 2010, our overall securities laws--and we are
    going to be vigorously enforcing the laws and rules that are in
    place, as they are in place. But yes, I am committed to using
    notice and comment for new rules, but we still have to enforce
    the old guidance and old rules as vigorously as you would want
    us to.
        Mr. Barr. Thank you, and I don't have time for this
    question, but I am going to be talking to you about horse
    racing, Chairman Gensler. I represent the horse industry in
    Kentucky, and we have a Reg A problem. We want to democratize
    ownership of securities in racehorses, and I look forward to
    working with you and the Commission on that issue.
        Mr. Gensler. I look forward to that, a different issue than
    GameStop.
        Mr. Barr. That is right, and we just finished the Kentucky
    Derby, so it is a timely issue.
        I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    Connecticut, Mr. Himes, who is also the Chair of our
    Subcommittee on National Security, International Development
    and Monetary Policy, is now recognized for 5 minutes.
        Mr. Himes. Thank you, Madam Chairwoman, and thank you to
    our witnesses. It is a real pleasure for me to see all three of
    you before the committee.
        Chair Gensler and Mr. Cook, I am glad you are our cops on
    the beat. You have, in your careers and today, distinguished
    yourselves for your balanced approach and really intelligent
    approach to the issues.
        And Mr. Bodson, it is great to see you. Kudos to you. When
    the chant from both ends of the political spectrum was, ``Let
    them trade,'' kudos to you for pointing out that the trading
    stops were actually part of the system architecture designed to
    keep disaster and catastrophe from happening. We do not let
    airplanes fly in horrible thunderstorms, and there will be
    times when we need to just stop and pause the markets for
    prudential reasons.
        I want to reflect on a lot of thoughts on GameStop. There
    has been a lot said. And, as usual, we have sort of devolved
    into a little of a silly, partisan conversation on the topic.
    We ought to be able to agree, as I think we do, that investing
    is a critical part of asset accumulation for American families.
    We ought to be able to agree--I have a little problem with my
    good friend, Mr. Huizenga, on this--that investing done
    irresponsibly--that is to say, without research, without
    thought, around companies that you didn't know about--will, in
    fact, result in a return that begins to look a little bit like
    the return you will assuredly receive in a casino or on the
    horse track.
        So, I think our objective is how do we maximize the
    former--good, smart investing--and maybe discourage the latter,
    that is to say, investing that actually ends up hurting retail
    investors. And the facts are pretty clear on what behavior
    leads to them being hurt.
        This is a question for Mr. Gensler and Mr. Cook. Having
    really looked at what happened with GameStop, I am satisfied
    that the market will fix itself in the sense that when we do
    return to a bear market, some people are going to learn some
    fairly expensive lessons about the fact that the stock market
    is a risky place to put your money. And that will all be good.
        Where I get concerned, though, is when you start talking
    about a lot of complexity, and, in particular, leverage,
    margin, option strategies that I am really pretty certain that
    most of us, much less the average retail investors, don't
    understand.
        My question, I guess for Mr. Cook and Mr. Gensler, is, is
    there a point where you are employing leverage or synthetic
    leverage through margin or through derivatives that we should
    begin to think about restricting the ability of retail
    investors to employ those strategies? I do not need to remind
    the committee that we all know the story of Mr. Alex Kearns,
    who took his own life because he traded in some fairly
    complicated option strategies and discovered that he had
    created a liability for himself that he had not anticipated.
        So my question is, is there a line around leverage or
    complexity, where we ought to not let the market teach touch
    lessons?
        Mr. Gensler. I will go first, and I am sure Robert will
    want to add something. I do think that our core mission is
    protecting investors, and for a long time we have said to open
    an options account, there is more discussion between a broker
    and that customer. Suitability used to be the word, and if I
    have the word wrong, I apologize, in my third week. But
    basically, they are taking more risk.
        I would also add, in terms of these apps, these
    applications that have made it easier to open accounts, and
    making it easier, we have lost that human in the middle saying,
    ``Is this appropriate? Is this risk appropriate?'' The thing
    that is like those buildings in Las Vegas and Atlantic City is
    that through gamification, you are using psychological prompts
    and behavioral prompts to get investors to trade more, and
    trading more, economic studies show, doesn't necessarily mean
    getting better returns.
        I wanted to add that, if I could, Congressman Himes, but I
    know Robert wants to--
        Mr. Himes. Yes, thank you. Mr. Cook, do you have anything
    to add to that?
        Mr. Cook. Thank you for that question. I do think it is a
    matter of striking the right balance, because, as you say,
    there are lots of risks that people may be taking on, it is two
    complex products, margin, and we do have rules around some of
    that. There are limits on how much margin you can take. There
    are special requirements to open up an options account.
        But I think many of these rules were developed at a time
    when the only way you would do that was if you had a broker or
    an investment advisor, someone advising you and understanding
    the risks that might be appropriate for you. And so in light of
    that, in light of the fact that many of these same products are
    now available directly, without some intermediation, we need to
    think about whether the existing rules should reflect the
    change in the technology.
        Mr. Himes. Thank you very much. I yield back the balance of
    my time.
        Chairwoman Waters. Thank you very much. The gentleman from
    Texas, Mr. Williams, is now recognized for 5 minutes.
        Mr. Williams of Texas. Thank you, Madam Chairwoman. This is
    the third hearing on the GameStop saga, and one of the
    overarching themes has been protecting retail investors. I am
    completely in agreement with the need to do this and to ensure
    that everyone, no matter how much money they have invested, is
    competing on an equal playing field.
        However, one of the positive proposals that is being
    discussed to pay for some of the Democrats' progressive
    priorities would be detrimental to the investors we are trying
    to protect. Of course, I am speaking of the financial
    transaction tax (FTT). Contrary to what some on the left may
    want you to think, implementing this new tax would not only
    affect hedge funds and wealthy individuals, but rather anyone
    with a 401(k) or who opened their own brokerage account to
    trade stocks in their free time.
        So, Mr. Bodson, can you give us your thoughts on the most
    likely changes we will see if a financial transaction tax is
    imposed?
        Mr. Bodson. Thank you, Congressman. Again, I am not going
    to claim expertise in FTT, but the studies we have seen show
    mixed results. In some instances, they did slow down trading
    and it did dampen levels of market activity. Hong Kong is the
    contrary one, but again, Hong Kong has no income tax,and no
    capital gains tax, so it's a very different set of
    circumstances.
        And the question you raised is exactly how does the tax get
    paid, who ends up paying it? And in many cases it will flow, as
    you said, right back to the end investor, so the retail
    investor, the pension fund, the mutual funds, and if that is
    the case, then that would obviously impact returns natively, it
    would impact the wealth creation that you would want to see in
    the stock market.
        Mr. Williams of Texas. Okay. Raising taxes does not help, I
    will tell you.
        Chairman Gensler, first of all, congratulations to you, and
    I want to welcome you to your first hearing before this
    committee as the Chair of the SEC. I hope we will have a
    productive working relationship as you take on this important
    role. And I wanted to start by asking you about transparency,
    we have used that today, during the rulemaking process. For
    market participants, certainty is the key, and there needs to
    be a clear roadmap on what the SEC is focusing their attention
    on.
        So, Mr. Chairman, what steps do you plan on taking to
    ensure the public is informed about the priorities and
    regulatory agenda that the SEC is undertaking during your
    tenure?
        Mr. Gensler. I look forward to working with you,
    Congressman Williams, as well. I think that the transparency of
    our regulatory agenda, along with the rest of the
    Administration--we would be publishing, I think it is twice a
    year, a unified agenda that is required under the law to
    publish our agenda.
        But it is through hearings like this and talking with the
    public more broadly about the agenda, about disclosure, market
    structure, and ensuring that the markets work for working
    families.
        Mr. Williams of Texas. Thank you for that. Our capital
    markets are extremely regulated, and no single entity, whether
    it be exchange or broker-dealer or SRO, acts unilaterally
    without any oversight. As we are discussing broad changes to
    our capital markets we must first ensure we all have an
    understanding about how all of the different players interact
    within the ecosystem.
        So, Mr. Bodson, can you discuss quickly how the DTCC
    communicates and it is overseen by the SEC as you are setting
    margin requirements, as well as how you give notice to your
    clearinghouse members?
        Mr. Bodson. Thank you, Congressman. All of our margin
    requirements are reviewed and approved by the SEC. They are
    subject to public commentary. So if we are introducing any
    change to the margin rules, there will be a period of time
    where other members, or anybody else who is interested, can
    make a comment, and then the SEC approves it. The models are
    subject to very vigorous reviews internally by our risk
    department, and our audit department. They are reviewed by the
    board. So, we have a very rigorous governance and regulatory
    oversight of all of our models.
        Mr. Williams of Texas. I want to thank all of you for
    participating, and Madam Chairwoman, I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    New York, Mr. Meeks, who is also the Chair of the House
    Committee on Foreign Affairs, is now recognized for 5 minutes.
        Mr. Meeks. Thank you, Madam Chairwoman. Thank you very much
    for this timely hearing, and I want to thank our witnesses
    today.
        Chair Gensler, during these market volatility hearings,
    ensuring that markets are fair and transparent so that
    investors are well-informed has been a focus. Transparency is
    particularly important where investors are seeking information
    on the demographic makeup of company boards. In 2009, the SEC
    adopted its current board diversity rule to shine light on the
    demographics of corporate boards. However, the results of the
    current rule have been vague and abstract disclosures, as
    indicated by former Commissioner Luis Aguilar and former Chair
    Mary Jo White.
        In fact, an advisory committee at the SEC recommended, in
    2017, more specific disclosures around race, gender, and
    ethnicity, because of the current rule's deficiencies. Those
    recommendations were not adopted by your predecessor. So my
    question to you is, first, can you commit today to revisiting
    the SEC's board diversity rule and requiring more specific
    disclosures around race, gender, and ethnicity, as recommended
    by the SEC's Advisory Committee on Small and Emerging Companies
    in 2017?
        Mr. Gensler. Thank you, Congressman, and I look forward to
    working with you, or should I call you Mr. Chairman? And I have
    asked staff to make recommendations on how we can do what you
    have suggested, in terms of that investors increasingly want to
    understand these particular issues around diversity, and more
    broadly, human capital, both. And it is driven by what
    investors want to see, and I have asked staff to try to serve
    up some suggestions on this.
        Mr. Meeks. Thank you. I would hope that you could also
    think of maybe other initiatives that you can consider or
    encourage others within the department to have greater
    diversity in both corporate America and at the SEC itself. I do
    not know if you have any additional thoughts on that?
        Mr. Gensler. We have 4,400 people at the agency, but we
    also have a number of outside advisory groups, and as those
    terms roll, they are on rolling terms and everything, we have
    also asked the staff to look to ensure that those committees
    reflect the great diversity in our nation.
        Mr. Meeks. Thank you. Thank you for that, and I look
    forward to working with you on this particular issue.
        Let me go to Mr. Cook quickly with the time I have left.
    Mr. Cook, this committee has examined inherent conflicts of
    interest with payment for order flows that can be difficult to
    mitigate and adequately protect investors. For example, brokers
    can often be incentivized to route customer orders to a higher
    submitter instead of to another training venue or other better
    prices.
        Despite disclosures, investors may not entirely be aware of
    how payment for order flow affect their pricing, or whether
    they are getting the best execution. FINRA requires that any
    transaction should be bought and sold in a market in which the
    resulting price to the customer is as favorable as possible
    under the market conditions.
        So, Mr. Cook, how can FINRA ensure that firms are always
    meeting their best-execution obligations to their customers
    when the firm uses payment for order flow?
        Mr. Cook. Thank you for that question, Congressman. You are
    absolutely right. Our rules do require fast execution by both
    the firm that is routing the order and by the firm that is
    executing the order, and payment for order flow does create a
    conflict that does complicate that, because, of course, we have
    to evaluate, is the order flow being routed because of the
    payment or because that is where the best execution is
    available?
        And that is an analysis that we work on every day, through
    our oversight and surveillance, through our examinations, and
    through guidance. We look forward to working with Chair
    Gensler, who has indicated he is going to be asking his staff
    to take a fresh look at this, because I think fundamentally the
    question is, is that conflict that you are describing
    adequately addressed through disclosure? And also, what
    disclosures are retail investors really getting, and it is
    something that they understand? I think many investors really
    don't understand these aspects of the market. We need to think
    about, are there better ways we can help make sure they
    understand how their orders are being routed?
        Mr. Meeks. Thank you very much. I see my time is about to
    expire. Thank you, Madam Chairwoman, for holding this hearing.
        Chairwoman Waters. You are so welcome. The gentleman from
    Arkansas, Mr. Hill, is now recognized for 5 minutes.
        [No response.]
        Chairwoman Waters. Mr. Hill? If Mr. Hill is not on the
    platform--
        Mr. Hill. I'm sorry, Madam Chairwoman.
        Chairwoman Waters. Are you there?
        Mr. Hill. Yes, I am. Thank you.
        Chairwoman Waters. You are recognized for 5 minutes.
        Mr. Hill. Thank you so much. This is a good hearing. I like
    part three as much as I liked parts one and two. Thank you,
    Madam Chairwoman. Thank you for our panelists. And let me start
    with Robert Cook.
        Mr. Cook, in the first two hearings we talked a lot about
    Robinhood and other app-based broker-dealers versus a
    traditional retail-facing broker-dealer, and it was clear to me
    that customer service access for clients of Robinhood seemed to
    be lacking. I talked a little bit about sales practices in the
    area of small-dollar stocks or options. Have you looked into
    this, and what are your views here, Mr. Cook?
        Mr. Cook. Thank you, Congressman Hill, for that question.
    Without speaking about any particular firm, it is an area that
    we are taking a look at. You mentioned customer service. We do
    expect firms to have sufficient infrastructure to comply with
    our obligation that they capture knowledge and respond to
    customer complaints. We do not particularly require, for
    example, a live customer service agent. We provide flexibility
    for how that is done.
        But, basically, traditionally it wasn't thought necessary
    to regulate how firms provide customer service, and the
    expectation was that they knew how to be responsive to their
    customers without regulators telling them how to do so. But the
    financial services sector is evolving, as you know, just like
    the rest of the world, and commerce online, and lots of
    businesses do not have 800 numbers.
        So as we work with the SEC to review these events, that is
    one of the things we will consider, whether there might be
    additional guidance moving forward about kind of what the
    minimum levels of support customers might need.
        Mr. Hill. Thank you for that. Chairman Gensler,
    congratulations. We are delighted to have you back in the
    regulatory leadership space. My question for you, sir, is, are
    you familiar with the Task Force on Climate-Related Disclosures
    that was led by former Mayor Mike Bloomberg?
        Mr. Gensler. Yes, sir, I am. It is good to see you again.
        Mr. Hill. My pleasure. Have you read that yet or had a
    chance to study the sort of executive summary of it?
        Mr. Gensler. I had an opportunity to take a look at it
    during my confirmation process, but I have yet to sort of dig
    into it with the career staff at the SEC.
        Mr. Hill. Right. I noted in your comments in your
    confirmation hearing before the Senate Banking Committee that
    you believe that companies obviously should be required to
    disclose material things, and you made a statement that
    companies have a legal obligation to determine what is
    material. Do you think companies have any obligation to
    disclosure nonmaterial risks, regarding any topic?
        Mr. Gensler. I think that the heart of our disclosure
    regimes, over multiple decades, is that which investors are
    looking for, investors to make their decisions. And we have
    regimes from accounting regimes, management discussion and
    analysis, employment compensation, that those regimes are that
    which investors needs to pick up on and make their decisions
    on.
        Mr. Hill. But you believe that public companies should be
    based on materiality in their disclosures?
        Mr. Gensler. There is a materiality component of
    disclosures, but there are also individual disclosures that are
    often very small but still can have a really meaningful part in
    investment decisions.
        Mr. Hill. Do you think that the principles for effective,
    meaningful disclosures are that they are reliable, verifiable,
    and objective?
        Mr. Gensler. You have picked very specific words, sir.
        Mr. Hill. Because Mike Bloomberg picked the words. I am
    going by what Mike Bloomberg is suggesting. He says that
    disclosures have to be reliable, verifiable, and objective. I
    wondered if you agreed with that?
        Mr. Gensler. I think what we are going to be trying to do
    is to go out for public comment, get the best thoughts from the
    public on climate risk disclosure, human capital, diversity
    that we talked about here, and get that which the investing
    public wants for their decision-making to bring consistency and
    comparability in these various regimes as they make their
    decisions.
        So, I don't want to get caught up in Mike Bloomberg's
    words. I think the public will have a chance to comment, and I
    think you would probably not want me to just pick one person's
    words.
        Mr. Hill. In a cost-benefit analysis, do you believe that
    anything that is required, required disclosures, should be
    subject to the Commission's cost-benefit analysis?
        Mr. Gensler. I am very proud this week that we hired a
    world-class financial economist, Jessica Wachter, to lead our
    Division of Economic and Risk Analysis. Those 160 people are
    going to be integrated from the design phase all along in terms
    of doing rigorous economic analysis.
        Mr. Hill. Thank you, Madam Chairwoman. I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    Illinois, Mr. Foster, is now recognized for 5 minutes.
        Mr. Foster. Thank you, Madam Chairwoman, and to our
    witnesses. You are now going to be subject to yet another
    question on horse racing, for Mr. Cook and Chair Gensler, but
    this one will be about transparency in retail trade execution
    quality in payment for order flow.
        Retail investors don't care directly about payment for
    order flow. What they really care about are their total trading
    costs, how the price that they got for the trades that they
    completed on their trading app compares to a fair price that
    they--
        Mr. Hill. No. My--
        Mr. Foster. Careful, French. Anyway, so what they really
    care about is how the price they got compares to the price they
    should have gotten, or should have gotten on some competing
    end. The big players, and some retail investors, analyze this
    by holding horse races between different order execution firms,
    and small players, retail traders, can't do this. They are
    simply told that they paid no fees but they can't really
    compare the execution quality. To do that, they need some sort
    of reference price to know how the trades that they completed
    compared to some reference price that presumably could be based
    on the National Best Bid and Offer (NBBO) or the Consolidated
    Audit Trail (CAT), or something similar.
        Could you comment on the feasibility of providing retail
    investors some estimate of the quality of their order
    execution, so that they can use that to choose the app that
    works best for them in the items that they actually trade?
        Mr. Gensler. I look forward to working with you, and it is
    good to see you again, Congressman.
        I think that you have put your finger on it. There is an
    inherent conflict. If a broker has arrangements and has two or
    three sole-source arrangements on payment for order flow as to
    whether that payment for order flow is really getting best
    execution, or as you say, a horse race. Competition is a really
    good thing in markets and bringing market efficiency. And these
    are not free apps. They are just zero-commission apps. The cost
    is inside the order execution. And that is what I have asked
    staff to really take a look at and think about our overall
    market structure, because it is not just payment for order
    flow. It is a lot of other pieces--wholesalers have about 37,
    38 percent of the market now, which means that 38 percent of
    the market is not going to the markets like the New York Stock
    Exchange or NASDAQ, and not even going to regulated markets
    like alternative trading systems. So, looking at the overall--
        Mr. Foster. All of that information, I believe, is present
    on the Consolidated Audit Trail, correct? So what I am thinking
    about is just some algorithm that runs on the record of
    completed trades, and some time window around when the app
    claimed to have executed the trade, and then say what would a
    fair price have been, and report that back to the user,
    compared to the price that they got on the trade they executed,
    none of all fees and everything else.
        Mr. Gensler. I look forward to working with you and your
    staff to understand the specifics of what you are asking. There
    is some disclosure on a quarterly basis under SEC rules
    already, but you are talking about more like maybe daily or
    trade by trade. I look forward to understanding--
        Mr. Foster. Trade by trade--they could collect those
    statistics over the course of months or years, on the timescale
    that they could realistically transition to a better app, and
    they may find out what the institutional investors find out,
    that one order execution firm works well for very liquid, high-
    volume securities, and another one is best for options, and so
    on. And so, they could have access to that sort of information.
        Mr. Gensler. I think the question you raised at the center
    of it is disclosure, even if it is more specific disclosure,
    how does that work in the market structure, and do we somehow
    get best execution for a customer on one app, and it is even
    one app that is sort of promoting more activity through
    gamification, and so forth.
        Mr. Foster. Or not even that. Actually, Mr. Cook, do you
    have any comments on the feasibility of this?
        Mr. Cook. Yes, I think it is a very interesting idea. I
    think what you are raising is the point that would require us
    to think about what is the right benchmark, how do we ensure
    consistency in measurement against that benchmark, and then,
    how do we get that information to the customer?
        I think a lot of the data is there. There are the Rule 606
    reports that Chair Gensler just mentioned. But I think to get
    to what you are talking about would probably require some more
    reporting, maybe even more reporting of information into CAT if
    that was to be done by a regulator. You could imagine this
    process being done either by the firms themselves or through a
    centralized process.
        But I think it is a very interesting idea, and we welcome
    the chance to talk further with you about it.
        Mr. Foster. Although it would be necessary as an agreement
    on what the algorithm you are running in the time window to
    establish the reference price, and it doesn't have to be the
    best algorithm. It has to be a standard one that pretty well
    reflects the price that they should have gotten and allows an
    apples-to-apples comparison of the apps.
        Chairwoman Waters. Thank you. The gentleman's time has
    expired. The gentleman from Georgia, Mr. Loudermilk, is now
    recognized for 5 minutes.
        Mr. Loudermilk. Thank you, Madam Chairwoman. Chairman
    Gensler, I would like to switch topics a little bit with you
    and discuss the SEC's Consolidated Audit Trail. When I was in
    the military, I was in a position in Intelligence where I was
    responsible for protecting a lot of highly-sensitive data. And
    we had one principle that we lived by, and that principle was
    that you don't have to protect what you don't have. And if you
    don't absolutely need something, especially if you have access
    to get it by other means, do not keep it. Now, that is a basic
    rule of cybersecurity that you can't disclose something if you
    don't actually have it.
        As you know, the Consolidated Audit Trail is expected to
    collect 60 billion records every day of trading in the equities
    and options market. In July of next year, brokers will be
    required to report the personal identifiable information (PII)
    of every retail investor to the Consolidated Audit Trail.
        While there are certainly times when the SEC needs to
    access investor data, this massive database will be a major
    target for cyber criminals. That is why I proposed legislation
    that would require the SEC to instead obtain this data by
    requesting it from the broker, and make sure the SEC is able to
    quickly access the data it needs. Brokers would have to provide
    that data to the SEC within 24 hours.
        So, Chairman Gensler, a 2018 poll indicate that 89
    percent--89 percent--of retail investors opposed having their
    personal data collected in the Consolidated Audit Trail, and
    that is why I proposed decentralizing this data across
    thousands of different brokerage firms instead of just one
    giant database, which, when it is all consolidated, it is a
    primary target.
        My question is, will you take action to protect the
    investors' sensitive personal data?
        Mr. Gensler. Congressman, I thank you for asking that, and
    the SEC is committed to protecting data. I think also, just as
    an update, and I believe this was late last year under Chairman
    Clayton's leadership at the SEC, the SEC passed some updates to
    the Consolidated Audit Trail provision that a lot of that
    personal information that was going to be collected no longer
    will--people's birthdays, people's Social Security numbers, and
    the like. And it might be that Mr. Cook has more details,
    because it is really under FINRA that the Consolidated Audit
    Trail project is being put together.
        But I concur. I think a lot of that personal information is
    now not going to be collected, sir.
        Mr. Loudermilk. That is a good start, but again, the basics
    of cybersecurity and protecting data is, if you have access to
    get that data somewhere--and data is always more secure when it
    is dispersed in multiple locations. That is why a lot of
    companies are going to new technologies, the blockchain
    technology, which disperses that data. It is much more
    protected than when it is centralized. And if you don't have
    PII, if you have a certain amount of information that can close
    the loop from other information, it puts a lot of people at
    risk.
        And so, I think it is vitally important that we protect
    investors' data from unnecessary risk, and I hope that you will
    make an effort to address this, to make sure that people's
    information is protected, because, as we know, the Federal
    Government has been shown to be one of the targets, and has
    disclosed a lot of information in the past.
        On another topic, as I stated in the first hearing on the
    GameStop issue of February, it is unfortunate that some of my
    colleagues are using this issue to call for a laundry list of
    new regulations. But beyond just calling for the new
    regulations, they are actually proposing them in this hearing.
    Many of these proposals are actually solutions in search of a
    problem.
        So, Mr. Cook, if Congress was to ban payment for order
    flow, what effect would that have on the availability of
    commission-free trading for the everyday investor?
        Mr. Cook. Thank you for that question, sir. I think a ban
    on payment for order flow--the impact would vary significantly
    across different firms, based on their business models. There
    are some firms who don't accept payment for order flow now and
    still charge zero commissions. But there are others who rely
    heavily on it, and one of the things to think about, if you are
    thinking about banning payment for order flow, would be what
    would be the pass-through effects on investors?
        Payment for order flow also does have some advantages that
    have been identified by the SEC in the past, including the
    potential for guaranteed execution with some price improvement,
    or prompt execution. But I think this is a very complicated
    area. I think if the Congress and the SEC were to think about
    banning it, we would have to think about all of the knock-on
    effects throughout the market structure system.
        Mr. Loudermilk. Thank you for that.
        Chairwoman Waters. Thank you very much. The gentleman from
    California, Mr. Vargas, is now recognized for 5 minutes.
        Mr. Vargas. Thank you very much, Madam Chairwoman. I want
    to thank you again for holding not only this hearing but the
    two previous hearings. I think it was very important for us to
    really take a look at what happened at GameStop. The only thing
    I would ask, Madam Chairwoman, is please don't scare Mr. Hill
    again. He seemed to be very frightened at some point, and I
    would just ask you to be a little more delicate with him.
        Chairwoman Waters. I assure you it was not me. Thank you.
        [laughter]
        Mr. Vargas. He is a good friend to many of us, so please--I
    know; I am just teasing.
        I do want to thank the witnesses for being here. Again, I
    appreciate it very much. I was going to ask about two things,
    the shortening of the settlement cycle, the T1, and really if
    their savings are 40 percent, and also about market
    concentration. However, Mr. Lucas first opened the door to ESG,
    and then Mr. Huizenga kind of kicked it open, and then, of
    course, Mr. Hill smashed it open. I have to say that I am very
    interested in ESG myself, and I want to ask a few questions
    about that.
        Chair Gensler, I don't want to put words in your mouth. I
    noticed that others tried and they weren't very successful, so
    I am not going to do that. But I do want to say this: A very
    wise man once said, ``Transparency is at the heart of efficient
    markets.'' And the same very wise man said, ``At the heart of
    our laws are disclosures.'' Even though you have only been
    there for 3 weeks, Chair Gensler, I think you know the man who
    said that. Of course, you just did, a little while ago.
        I have a bill, H.R. 1187, which passed out of the
    committee, and among other things, it would establish a
    sustainable financial advisory committee to communicate with
    interest groups and individuals regarding sustainable finance,
    and ultimately provide the SEC with a report identifying policy
    changes that could facilitate sustainable investments. In
    addition, the bill requires this committee to submit
    recommendations to the SEC regarding what ESG metrics the SEC
    should require to be disclosed.
        Because many companies already disclose ESG metrics, and I
    think it is very unfair that some do and some don't, I am
    curious to know, in your own words, without putting words in
    your mouth, what do you have to say about that, Mr. Chairman?
        Mr. Gensler. I look forward to looking closely at your bill
    and talking to your staff about that. But I think that to the
    extent the broad public is listening to this, please give us
    comments. Even now, in an open comment period, it would be
    really helpful to understand, as investors, what you think you
    need and which, in making your investment decision, your proxy
    votes and the like, on climate, on human capital, on diversity,
    and the issues that we have been talking about here in this
    hearing, or other disclosures. And it is really helpful for the
    agency as we are doing this.
        I think consistency and comparability are helpful as well,
    and right now, a lot of issuers are dealing with varying needs
    around this issue, and around the globe, because our companies
    here have to look after U.S. investors, but our companies are
    also trying to raise money overseas, or operate overseas, and
    there is a bit of an alphabet soup of different approaches to
    that.
        So, I think it is important. It is within the authority and
    mission of the SEC to enhance this disclosure and bring some
    consistency and comparability to it.
        Mr. Vargas. That is music to my ears. What I would also
    add, and I think you have already discussed this, is
    materiality. When we take a look at materiality, it is the
    investor who gets to decide that, not the company. I think it
    is very, very important that the investors know this
    information. But again, I will put that aside.
        And I know my time is running out, but I did want to ask
    you about the T+1, Chair Gensler, what do you think? Is there
    really all that savings, 40 percent savings there? And if that
    is the case, why not real-time settlement? We heard that is
    probably impossible to do.
        Mr. Gensler. I think the technology exists to come to same-
    day settlement. There are real savings, lower costs, and lower
    risk. The question about same-day settlement is it is still
    netted, as Mr. Bodson pointed out. Netting is a really
    important piece of the economics. But you could have same-day
    evening, so to speak, and have it all netted. But there are
    obviously transition costs. Moving from T+5 to 3 to 2 took
    time. I noted that in the 1920s, we were at T+1, so getting
    back to T+1 100 years later, in modern technology--Mike Bodson
    is writing this down, and he is saying, ``Oh no.'' But I want
    to say that we can get to T+1, we can get to T+evening, but it
    will take some time.
        Mr. Vargas. Thank you. I yield back.
        Chairwoman Waters. Thank you. The gentleman from Ohio, Mr.
    Davidson, is now recognized for 5 minutes.
        Mr. Davidson. Thank you, Madam Chairwoman, and I thank our
    witnesses for their lengthy testimony today. It certainly adds
    value, Each of our three witnesses contributes important roles
    in ensuring that our capital markets operate efficiently and
    effectively, and I thank each of you for taking such important
    responsibility.
        The market volatility we saw in January has more people
    talking about the clearing and settlement cycle, and during the
    first GameStop hearing, I highlighted some projects that the
    DTCC was working on regarding use of distributed ledger
    technology to shorten the settlement cycle and enhance our
    capital market structure. Mr. Bodson, I want to personally
    thank you and your team for sending me an update on those
    projects, and I look forward to monitoring their progress.
        Speaking of distributed ledger technology, or blockchain,
    more broadly, I would like to hear Mr. Gensler's thoughts. It
    is well-known that you are a blockchain expert, as evidenced by
    your time as a professor at MIT. There are some fascinating
    videos on YouTube where you are teaching on that subject. If
    anyone has time and wants to learn more about blockchain
    technology, I highly recommend they take a look at these
    videos.
        Chairman Gensler, I would like to follow up on our
    conversation from 2 years ago at the Facebook Libra hearing. I
    want to get your views on regulation of digital assets. Since
    2017, this topic has been a passion of mine, and I have set out
    a legislative goal of creating a bipartisan and clear, light-
    touch regulatory framework for digital assets that promotes
    innovation while protecting consumers.
        The final product was the Token Taxonomy Act, first
    introduced in 2018, and reintroduced last Congress, and now
    this Congress. It has bipartisan support; it always has. The
    bill has had input from academics at Wharton School of
    Business, trade groups like the U.S. Chamber of Commerce,
    specialized groups such as the Blockchain Association, various
    State regulators, and plenty of market participants.
        In 2019, you told me, Chairman Gensler, that the SEC has
    been, ``slower than I think we want,'' in terms of creating a
    regulatory framework for digital assets. Just 2 days ago,
    Secretary Yellen publicly stated that we do not have adequate
    framework to deal with cryptocurrencies from a regulatory
    standpoint.
        Now with you at the helm of this agency, I think it is an
    opportune time for the SEC to work with Congress on creating
    this regulatory framework that is bipartisan and clear.
    Chairman Gensler, have your views changed since 2019 on the
    SEC's approach to digital asset regulation?
        Mr. Gensler. Congressman, thank you for that personal
    shout-out. It is a free course, by the way. It is free, online.
        But I think that there are things that we can do better and
    get done at the Securities and Exchange Commission, and we have
    the authority, but I also look forward to working with
    Congress, if it is a desire of Congress to try to fill some
    gaps. As I said earlier, I think crypto changes. Particularly
    if one trades bitcoin in America today, there is not an
    investor protection regime that really protects as I think
    would be appropriate around these exchanges.
        So I look forward to working with you and this committee,
    if the Chair wishes, on anything you would do in this area.
        Mr. Davidson. Thank you so much, and I look forward to
    working with you, and, frankly, our bipartisan group will
    certainly as well.
        Regulation by enforcement has been characteristic of this
    space. Obviously, XRP is a key case. But it would be great to
    have a bright-line test so that we wouldn't be dependent on so
    many enforcement actions or no-action letters. So, I greatly
    appreciate it.
        Lastly, I do want to talk about the SEC's authority to
    suspend trading. I look forward to working with you on a bill
    that would provide additional transparency about why the
    trading was suspended, and more specifics there. Some of that
    has already been commented on by others, but I would leave you
    the opportunity, sir, for any closing comments on that kind of
    transparency.
        Mr. Gensler. I look forward to hearing more about the
    issue, as you said. I haven't looked at your bill, and whether
    you are talking about suspending penny stocks or was it
    suspending others, because sometimes they're small, market-
    capped companies that in some cases have no products and no
    employees even, but that just are ripe for fraud and
    manipulation. There has been a regime for decades around penny
    stocks and trying to protect the public from what are easily-
    manipulated circumstances.
        Mr. Davidson. Just like that clarity that you had there,
    that is the piece that when you put the disclosure out for
    information flowing, what information triggered the halt. But I
    look forward to it. Madam Chairwoman, thanks again for the
    hearing. I yield back.
        Chairwoman Waters. Thank you. The gentleman from New
    Jersey, Mr. Gottheimer, is now recognized for 5 minutes.
        Mr. Gottheimer. Thank you, Madam Chairwoman, and thank you
    to our witnesses for being here today. Chairman Gensler,
    congratulations on your confirmation to lead the SEC, and
    welcome to the House Financial Services Committee. It is good
    to see you, and I know we are all looking forward to working
    with you in the coming years.
        I am helping to lead a bipartisan effort to reinstate the
    State and Local Tax (SALT) deduction that was eliminated in the
    tax hike bill of 2017. Capping the SALT deduction has
    enormously increased the tax burden on hard-working, middle-
    class families in New Jersey's 5th District. To make matters
    worse, some legislators now want to impose a financial
    transaction tax (FTT) on stock and bond transactions, including
    in my State.
        Chairman Gensler, according to a study by Vanguard, an FTT
    would cost retirement savers $36,000, more than 3\1/2\ years of
    savings over their lifetime, and would send jobs and markets
    overseas. Mr. Chairman, first, do you support a financial
    transaction tax?
        Mr. Gensler. First, let me say it is good to see you. Full
    disclosure, we first knew each other maybe 20-some years ago,
    working in an Administration.
        I really think that I alluded to Congress and the Executive
    Branch to sort through taxes, and our remit at the SEC is about
    ensuring that working families are protected, we protect them,
    and we have fair, orderly, efficient markets and capital
    formation. And the tax questions are really outside our
    jurisdiction, if that is okay, Congressman.
        Mr. Gottheimer. No, I appreciate that, and yes, I am
    excited to work together again.
        Can I maybe just ask it in a slightly different way? Maybe
    that will let you answer on the remit of the SEC. Are you
    concerned about an impact it would have on the markets, on
    pushing markets overseas, if we did any kind of new levy? There
    is a lot of concern that it is so easy, given technology, to
    move the back end of these processes overseas, which is kind of
    what we are facing in New Jersey. From a market perspective,
    would you be concerned about that, or would you prefer to--
        Mr. Gensler. Again, what you are raising is that there are
    tradeoffs, I think more appropriately made by Congress and the
    Executive Branch, in terms of those tradeoffs. We do have a
    modest fee. It funds the agency. It is about $2 billion a year
    that we have had. So but whatever tradeoffs beyond that, I
    think I would leave it to the appropriate--the White House,
    Treasury, and Congress.
        Mr. Gottheimer. Thank you, sir. Separately, if I can ask
    you about investment, broker-dealers are, as you know, legally
    required to offer best execution for their clients and to
    provide the most advantageous order execution for their
    customers, given the prevailing market environment. However, as
    you know, there is a perception that the practice of payment
    for order flow creates a conflict of interest between brokers
    and the investors they serve. Do you believe that payment for
    order flow presents a conflict of interest too significant to
    be adequately addressed by regulations such as enhanced
    disclosures or strengthening best-execution obligations?
        Mr. Gensler. You raised a good question, because we have
    found conflicts in various enforcement cases, like one that we
    filed in September, where the wholesaler was literally saying,
    ``Well, you tell me. I can pay more to the broker or I can pay
    the customer more.''
        We know, at least from that case, this inherent conflict is
    there, and whether we can address it enough through disclosures
    or it sort of implicates the broader market structure. And I
    have asked staff to think about that broader market structure,
    and not just the wholesaler payment order flow but also the
    exchanges through rebates, and just how is this market
    structure that has led to concentration--right now, we have a
    pretty highly concentrated and growing concentration in the
    retail order flow. Economics tells us that competition lowers
    costs to investors.
        Mr. Gottheimer. I appreciate that, and I really appreciate
    that you are hopefully going to have input from stakeholders
    before taking any action, and I like that you are asking the
    SEC to do so.
        Lastly, as Warren was saying, and building on your
    professorial acuity in the cryptocurrency space--and, by the
    way, I really enjoyed our conversations on this, because I
    think it is wonderful to have somebody with your level of
    expertise at the SEC, given the competitive marketplace, and I
    think it is really important that we take the lead here and
    cede the lead to others in the world on Fintech and
    cryptocurrency.
        As markets continue to grow and innovate, I would hope--and
    I think I know the answer to this, but commit to providing
    clarity for market participants in the crypto space and working
    with stakeholders to ensure that we do not lose our nation's
    place as the country for innovation and technology. Just making
    sure [audio interruption].
        Mr. Gensler. Congressman, I can't--our capital markets, for
    decades, have been part of our economic success story, and
    technology comes along, markets change, but we want to make
    sure we enhance our rules and get ahead of this, in the crypto
    space as well as in the traditional securities space, and
    always refresh our rules.
        Mr. Gottheimer. Thank you. I yield back. Thank you so much.
    It's good to see you.
        Chairwoman Waters. Thank you. The gentleman from North
    Carolina, Mr. Budd, is now recognized for 5 minutes.
        Mr. Budd. Thank you, Madam Chairwoman, and Chairman
    Gensler, welcome and congratulations on your new role.
        Following up on the crypto conversation, in all of my
    conversations about crypto, industry leaders mention a lot of
    the same priorities--the need for a coherent, clear, regulatory
    framework. Clarity from the legacy institutions to offer
    decentralized finance (DeFi) products and even regulatory steps
    to offer a bitcoin [inaudible]. But the U.S.'s lack of clear
    guidance is both a competitive disadvantage and it is a
    national security concern. As you know, this is a complex
    issue, but I hope you are going to be willing to work with
    Congress as we talk about some of the steps to be taken.
        There is a strong group of bipartisan lawmakers and
    regulators who want to help solve the issue, but I would just
    like to turn it back over to you and see what would you like to
    work with in this area in regards to blockchain and
    cryptocurrencies? I appreciate the other Members coming before
    me, who have mentioned cryptocurrencies and blockchain.
        Mr. Gensler. Thank you. I look forward to working with you
    and any member of this committee and your staffs. I think that
    there is a lot of authority that the SEC currently has in the
    securities space, and there a number of cryptocurrencies that
    fall within that jurisdiction. But there are some areas,
    particularly bitcoin trades in large exchanges, where the
    public is not currently really protected on these crypto
    exchanges, trading just bitcoin. And so, that would be one area
    I would highlight.
        Mr. Budd. Very good. Second question, the GameStop
    episode--switching back after talking about GameStop--it
    highlighted the need to revisit settlement times. So, it is
    understandable that any move away from T+2 will need full and
    strict support, but the struggle of moving from T+2 to T+0
    settlement time is not lost on me.
        So, Mr. Chairman, with today's state of technology,
    including blockchain technology, what is the SEC and the DTCC,
    and I also want to include Mr. Bodson in this, what are you all
    doing to evaluate the potential use of blockchain to help speed
    up settlements?
        Mr. Gensler. You are right that technology exists today to
    shorten settlement cycles, even maybe to the same day. I think
    there is a business model issue as to whether it is still
    netted, which has a lot of economic advantages.
        In terms of the underlying ledger technology itself, I
    would defer to Mr. Bodson as to whether they find it is helpful
    to have a distributed shared ledger or a sort of single-party
    ledger, and then what role the SEC would have is to ensure that
    whatever rules they are proposing have the resiliency and the
    important safety of a clearinghouse, because this is a
    systemically important clearinghouse. It is the largest,
    really, the sole clearinghouse for [inaudible]. But I would
    turn to Mr. Bodson.
        Mr. Budd. Thank you. Mr. Bodson?
        Mr. Bodson. Thank you, Congressman. Distributed ledgers are
    a very exciting technology. As was pointed out before, we have
    two projects underway that we are publicly discussing, Project
    Ion, which is using distributed ledger technology (DLT) for
    settlement purposes and digitizing securities, and Project
    Whitney, which is more concentrated on the private security
    market and bringing some standardization in record-keeping over
    those markets.
        What we are going to do, working with SIFMA and ICI and the
    entire industry, over the next few months, is look at those
    business processes, look at those conventions that are out
    there, and see how best to deal with the impact of shortening
    time.
        As I said before, time is risk. If you shorten it, your
    credit risk goes down, but if you shorten it without really
    understanding it, operational risk goes up, and all of a
    sudden, you have a market in disarray.
        DLTs, smart contracts, all of these are exciting
    developments. The question is, what is the right time to use
    it? They are new technologies. We have 45 years of resiliency--
    I am going to jinx our company--but we have a great track
    record. So anything we do, we want to maintain that reputation
    for the DTCC. But new technology is something obviously we are
    looking at, and it is very, very exciting for the industry,
    longer term, that it could revolutionize what we do.
        Mr. Budd. Very good. Thank you both. Madam Chairwoman, I
    yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    Florida, Mr. Lawson, is now recognized for 5 minutes.
        Mr. Lawson. Thank you, Madam Chairwoman, and I welcome our
    guests to the committee today. One of the things that I have
    been actually concerned about, more so than anything else, is
    safety for the investor ever since the pandemic hit, and we
    have seen a lot of things happen within the marketplace.
        So, Mr. Bodson, are current brokers of capital investments
    sufficient to prevent harm to the investor and to the financial
    system?
        Mr. Bodson. Thank you, Congressman. It is a difficult
    question. What we saw during this period of time is obviously
    our requirements went up tremendously as a result of the market
    conditions, which were unseen. I have to be truthful that I
    have been in this business for 40 years, and I have never seen
    this sort of concentrated activity in a series of stocks, and
    the impact that it had on the market, and therefore on the
    clearinghouse.
        What we want to make sure that people understand is that
    our collection of the margin protects everybody from almost
    everybody. We talk a lot about what happened with Robinhood and
    their meeting the margin charge, which they did and they
    remained in good standing. But if somebody else had gone into
    default during that period of time, neither Robinhood nor
    Robinhood's clients would have had to worry about trades being
    consummated. That is the story that I think is getting lost
    somewhere in this somehow, is that the system worked. There was
    incredible volume. The system processed that volume. There were
    big changes in margin. Firms met that margin. Nobody was
    defaulting. Nobody was pushed into that situation, from a firm
    basis. And the impact on the retail client, obviously, is
    something that both the SEC and this committee hopefully will
    come back with recommendations of [inaudible].
        But from our aspect, the post-trading aspect, it was an
    incredible period of stress. We didn't see the circumstances,
    but we were prepared for volume surges. We were prepared for
    market stresses, and that part of the process worked very well.
        Mr. Lawson. Okay. Thank you. And this is to the whole
    panel, do you believe that gamification has a place in
    investing, and if so, what guardrails should be in place to
    ensure investors are protected?
        Mr. Gensler. Congressman, I thank you for asking that. This
    term, ``gamification,'' which means embedding game-like
    features into applications, does not just relate to finance; it
    relates to our whole online existence. And if I might say, the
    streaming apps figured out some time ago that I am kind of a
    rom-com guy. Here, I admitted it, on open air, and I see a
    number of the Members are looking up. You thought I was a
    thriller guy, but I'm a rom-com guy.
        If I watch a rom-com that they recommend. and I lose an
    hour-and-a-half and it was a lousy rom-com, it is okay. But if
    you use gamification features and folks are trading more
    actively, and day trading, then all of a sudden, that is their
    investment future. That is their challenge for their future and
    for their security.
        So, I think we really have to take a look at this. We have
    asked the staff to put together something, a request for public
    comment, about all of these features that are getting imported
    into finance. Investing, good, but if it is sort of churning
    folks or getting them to trade a lot, what does that mean and
    what protections should we have in those communications?
        Mr. Lawson. That is a great answer, Mr. Chairman. Would
    anyone else like to comment on that?
        Mr. Cook. I would just add that I applaud the decision by
    Chair Gensler to solicit comment on this topic, because I do
    think we want to make sure we understand it, the different
    features, what they are used for and why. We need to make sure
    we understand the benefits, and I believe there are some really
    important benefits for investors. We also want to make sure we
    understand the risks, and I believe there are some important
    risks. And I think the benefits and risks may change in
    different contexts. We also need to understand that.
        So, I think we need to move forward in this area by really
    getting a process where all of the stakeholders can share their
    views, and the regulators can be even better-educated. We fully
    support the concept of soliciting more comment in this space.
        Mr. Lawson. Okay. Mr. Chairman, do you think that the SEC
    broker-dealer capital and liquidity framework needs to be
    strengthened for the larger retail broker-dealers? If so, how?
        Mr. Gensler. You have raised a great question, because what
    we found in January is a number of brokers then denied access
    or shut out access, and it was about liquidity to the
    clearinghouse or for margin to the clearinghouse. So, we are
    taking a close look at that. But you raised a good question,
    whether it also relates to their capital or liquidity needs.
        Mr. Lawson. Okay. Thank you. Madam Chairwoman, I yield
    back, but that is very important.
        Chairwoman Waters. Thank you. Thank you very much. The
    gentleman from Indiana, Mr. Hollingsworth, is now recognized
    for 5 minutes.
        Mr. Hollingsworth. Good afternoon. I appreciate the
    opportunity to participate in this hearing, and I know a lot of
    very important topics have been talked about.
        Chair Gensler, I wanted to speak directly with you for a
    few minutes. I was so encouraged to hear, during your Senate
    confirmation hearing, of your willingness to work on transition
    to an eDelivery system. Given the significant increase in
    communications via electronic means, it seems like a common-
    sense solution, where consumers would win, ultimately firms
    would win, and everyone would be better off on account of this.
    So, I certainly hope that this will continue to be a priority.
    Do you expect it to be a priority as you are getting started
    and spinning up in your new role?
        Mr. Gensler. Thank you. Yes, I was honored, in the late
    1990s, to work with Senator McCain on what was the eSignature
    bill that President Clinton signed. I think these are ways to
    bring efficiency. And look, the last 14 months we have been
    working through this pandemic largely because of some of those
    earlier reforms. It has been a very, very hard time, and too
    many of us have lost loved ones. But electronic delivery is
    something that I hope that we can continue to look to do, while
    still protecting investors and ensuring they get the proper
    disclosures.
        Mr. Hollingsworth. Wonderful. I certainly appreciate that,
    Mr. Chairman. I think this is an important area where we could
    ring a win both for consumers and their information, as well as
    for those that are providing it.
        I wanted to switch topics and talk about minimum tick
    sizes, though. I have mentioned, in previous hearings, that we
    have seen a dramatic increase over the last decade in off-
    exchange trading, with this year, at some point, frankly, more
    exchanges happening, off-exchanges than on-exchanges. And look,
    the reality is, I don't want this to be a matter of preference.
    I don't want it to be a matter of party. But I do want it to be
    a matter of parity, where we have a regulatory regime that is
    equal across both types of trading, and I don't think we have
    that right now, because of the minimum tick size requirements
    for lit or exchange trading.
        I wanted to reach out to you about this and help understand
    if there was any rationale for that discrepancy between on-
    exchange trading [audio interruption].
        Mr. Gensler. I don't know if we just lost the Congressman,
    but I think I got enough of the question to answer it. Should I
    go ahead, Madam Chairwoman?
        Chairwoman Waters. Go right ahead.
        Mr. Gensler. Okay. Thank you. One feature of our stock
    exchanges is there is a minimum price size of a penny, if I
    understand the question, or minimum tick size. I have asked
    staff to consider that in terms of market structure. Should
    that change? Should that address some of this segmentation that
    the wholesalers can trade within the penny, but on the
    exchanges we currently are not able to. And is that just a
    legacy of an earlier time?
        Chairwoman Waters. The gentleman from Illinois, Mr. Casten,
    is now recognized for 5 minutes.
        Mr. Casten. Thank you, Madam Chairwoman. You caught me by
    surprise with a technical glitch there. I really appreciate you
    all coming.
        Chair Gensler, I would like to dive into some of the weeds
    here on payment for order flow, and I want to frame this in the
    context of Robinhood, because it is top of mind in this
    hearing, but I think it is more illustrative of some challenges
    than the specifics.
        Number one, I would just point out that last year,
    Robinhood paid $65 million in fines for failing to disclose
    their reliance on payment for order flow as a revenue stream,
    $65 million. By comparison, they earned $91 million in payment
    for order flow revenue in the first quarter of 2020, $180
    million in the second quarter of 2020, and $331 million, 5
    times the fund, in the first quarter of this year.
        You were not at the SEC, so I am not going to ask you to
    comment on that, but I would just make the observation that if
    the pain of the fine is so much lower than the benefit of the
    crime, I am not sure it has the kind of deterrent property we
    would like.
        In our hearing with Mr. Tenev, he noted that their payment
    for order flow agreements are structured where their revenue is
    earned as a percent of the spread earned by the wholesalers.
    Now, leaving the question of payment for order flow broadly
    aside, that seems to me like a total conflict of interest. The
    structure of that agreement puts the interest of the
    wholesalers and the brokers directly at odds with the
    investors, does it not?
        Mr. Gensler. I think you highlight two really important
    points, if I may. One is that an enforcement regime, I believe,
    without fear or favor, lean into individuals and corporations
    and holds them accountable, and that what you are highlighting
    is sometimes just a dollar payment doesn't fully address
    holding companies or individuals accountable and change the
    behavior in the market.
        As to the behavior itself, what that finding in that case
    in December showed is that there was an inherent conflict, that
    there was the wholesaler saying, ``Which way do you want me to
    go on this? It is either you or the investor.''
        That is why I have asked staff--I think that we have to
    take a holistic look at the market structure and see not only
    whether customers are really getting best execution but how the
    market structure can be addressed to get that, and also address
    some of the increasing concentration in the markets.
        Mr. Casten. I appreciate that, because again, it is the
    structure. It is one thing to be paid 10 cents a trade. It is
    something else to say, I am going to get a percent of the
    spread.
        The second point that Mr. Tenev made in those hearings was
    that, at least for their options orders, they only route trades
    to the four firms listed on their 606s that they have payment
    for order flow contracts with. To my mind, I don't understand
    how that is consistent with a best-execution obligation, if you
    are consciously not even talking to firms who might be able to
    do this, but don't pay you a fee on it. Would you agree--again,
    I am talking about the structure of how you implement your
    payment for order flow, not the concept, generally?
        Mr. Gensler. I think that you highlight a very good point,
    that in circumstances where you don't have that, then a broker
    sort of says, ``Okay, I have to institute best execution,'' and
    goes out and surveys, I think it was earlier, a Member said it
    was a horse race, but you can go out and you can kind of say,
    okay, now--I think it was Congressman Foster, but I want to
    make sure--can I go out and sort of find the best execution,
    rather than a limited two or three or, in this case, four firms
    that are sending money back to the broker.
        Mr. Casten. Okay. I would like to then just tie this all to
    the gamification question, because I think all of us on this
    committee, regardless of party, want to see U.S. investors
    create as much wealth as possible, and I don't think any of us
    have evidence to suggest that retail investors with high
    trading frequency come out better than retail investors who
    just invest in index funds, and are long hold, other than a
    couple of lucky casino winners. And yet that is precisely what
    gamification is designed to do.
        And so, if you couple gamification with an incentive based
    on the spread, and you couple that with only funneling money to
    people who run the spread, I cannot conceive of a world where
    you are also fulfilling your best-execution obligations.
        So in the time we have left, what tools do you have to
    enforce compliance with folks who are violating that best
    execution, and can you commit to making sure that the fines are
    commensurate with the gains from the crime?
        Mr. Gensler. That is certainly what we are going to lean in
    to do. I think that without fear and favor--and it is not just
    about the firms but individuals and about sanctions and bars--
    you need to have orders that make sure of that.
        Mr. Casten. Thank you. I yield back.
        Chairwoman Waters. Thank you. The committee will be in
    recess for 5 minutes.
        [recess]
        Chairwoman Waters. The committee will come to order.
        The gentleman from Ohio, Mr. Gonzalez, is now recognized
    for 5 minutes.
        Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, and
    thank you to our esteemed panel. Mr. Gensler, I want to start
    with you, and thank you for your testimony and your
    thoughtfulness in today's hearing. It is our first time
    interacting, and it is great to meet you.
        I want to start with the Archegos situation. As you know,
    under SEC rules, any person or firm who acquires greater than 5
    percent ownership of a company must publicly disclose, and then
    greater than 10 percent, additional disclosures. Archegos, via
    swaps, had exposure, although not ownership, in excess of those
    triggers, and, therefore, they didn't have to disclose.
    Obviously, once the underlying shares started to tank, there
    were margin calls which they couldn't make, and then we had a
    disorderly liquidation. So my question around this is, from
    your view, how do we solve this going forward, and should the
    disclosures be triggered instead by exposure as opposed to
    outright ownership? Would that solve it? And if not, what are
    some ideas for that?
        Mr. Gensler. I think you raise a good point, and Congress
    anticipated this in reforms passed 12 years ago in the Dodd-
    Frank Act, and gave authority to the SEC with certain
    conditions, but authority to bring what is called securities-
    based swaps into these regimes, this 5- and 10-percent
    disclosure. I have asked staff to try to prepare
    recommendations for the full Commission. I think this Archegos
    circumstance, where this family office had well in excess of
    those numbers, shows some of the market-based and systemic-
    based reasons why, even if they didn't have the vote, it was an
    important set of exposures.
        Mr. Gonzalez of Ohio. Right. And then with respect to this
    situation, from a systemic risk standpoint, do you think that
    Archegos was close to a long-term capital management-style
    dislocation, or was it more a blip in the radar? Where are you
    on that?
        Mr. Gensler. It is a very good question. I guess I have
    been around finance law enough that I was asked by then-
    Secretary Rubin to visit long-term capital management in 1997.
    I don't know all the figures, but this was smaller, and it is
    24 years later. That circumstance had over $1 trillion of
    derivatives contracts and about $4 billion of capital, so I
    would say highly, highly levered. This was levered, as earlier
    members of this committee have said, pretty levered up, but I
    don't think it was quite at that level, but you raise a good
    point. There are systemic implications that we have to take the
    lessons even when the system holds, take those lessons and
    adjust our rules.
        Mr. Gonzalez of Ohio. Okay. Thank you. And then, with all
    the volatility that we have seen in the last year, whether it
    is GameStop or Archegos, I would be curious what your thoughts
    are on the effect of the zero interest rate environment and
    sort of the messaging around it, basically saying, hey, look,
    we are going to keep it low for as long as humanly possible,
    and what effect that has to risk taking, in general, and
    leverage, in particular. Just sort of your thoughts on that.
        Mr. Gensler. I am going to leave monetary policy to the
    Central Bank, and I think their remit under the securities laws
    is large enough. Regardless of where the markets are, up or
    down, interest rates high or low, I think our core mission of
    ensuring that we root out fraud and manipulation is a really
    critical piece. And what we found in the GameStop circumstances
    is that volatile markets, this is the time also to be
    protecting the retail public.
        Mr. Gonzalez of Ohio. Great. I tried to get you to wade in
    there, but I appreciate the dodge. This isn't your first rodeo
    clearly. So, on the payment for order flow (PFOF) situation,
    sort of following up on that, when I look at GameStop, I see
    PFOF as sort of a bit player, but not the primary driver,
    right? It happens to be how Robinhood executes trades, but, to
    me, it was a short squeeze of a handful of companies, but, in
    particular, GameStop, driven by social media and then traded on
    zero commission platforms. Do you agree with that perspective?
    I want to make sure we are not adding payment for order flow as
    the primary driver of the GameStop situation, when payment for
    order flow was around long before GameStop, and hopefully long
    after. But I would love to just hear you kind of put a bow on
    that, if you could.
        Mr. Gensler. Yes, thank you, and it is in our remit, so I
    will address it. I think that the GameStop events raised a
    handful of issues, and payment for order flow and the inherent
    conflicts that they present for brokers and their customers, we
    need to take a closer look at.
        Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, and I
    yield back.
        Chairwoman Waters. Thank you very much. The gentlewoman
    from Iowa, Mrs. Axne, is now recognized for 5 minutes.
        Mrs. Axne. Thank you, Madam Chairwoman, and thank you to
    the witnesses for being here. Chair Gensler, it is great to
    have you confirmed and have the SEC back at full strength.
        Mr. Gensler. Thank you.
        Mrs. Axne. It is obvious to everyone that people trade
    differently and invest, and it has changed a lot over the last
    10 years. And you know what? Contrary to what my colleagues on
    the other side of the aisle are saying, we believe in that.
    That is okay. But I do worry about some of the standards and
    protections for investors so that we can keep up with those
    changes. And recently, I have been very focused throughout this
    process on how new digital platforms have gamified trading and
    can be designed to influence behaviors within those users.
        My husband and I own a digital design firm, so I am pretty
    familiar with this, and one of the things I have heard along
    the way is that we shouldn't take away from some of those fun
    features of the apps. I don't disagree with that in general.
        However, at our last hearing, I asked Dr. Vicki Bogan, who
    is an expert in this area, about this, and she said that app
    design can absolutely influence the decisions people make while
    they are using that app. And in this case, that app design can
    encourage riskier trading, which is literally the last thing
    investors with limited knowledge need.
        So, Chair Gensler, what I am wondering is if that is
    something that the SEC will look at in evaluating whether the
    current regulatory structures are doing enough to protect
    investors against gamification, towards riskier behavior?
        Mr. Gensler. Yes, Congresswoman, and I look forward to
    working with you. I think what we have found in our modern
    internet age is that service providers outside of finance
    figured out how to basically engage us in a more fun app and
    make the user experience more enjoyable. Bringing that to
    finance can be good because it is easier to use the app, but it
    also can lead to high trading activity, and that high trading
    activity is really important. Tie that app with predictive data
    analytics, some fancy words like, ``deep learning,'' and
    ``machine learning,'' tie that to predictive data analytics,
    then they can say to Gary Gensler, ``This is the prompt you are
    going to get,'' and they can say to Chairwoman Waters, ``This
    is the prompt you are going to get.'' And the computers figure
    out how to market to us differently, and all of a sudden it
    becomes somewhat, potentially, behaviorally addictive, and you
    start to find that your returns go down. So, I think it is a
    very important thing. We are putting it out for public comment
    to find out from the public more about this area. I think it is
    best to get ahead of it, rather than 5 years from now to look
    back and say, some problems have occurred.
        Mrs. Axne. Listen, that is music to my ears, and thank you
    so much. We will continue to work on this. Also, in this
    committee, we have looked a lot at the industries which have a
    business model where people aren't actually the customer of the
    service that they count on. From student loans to credit
    reporting servicers, we consistently hear about those
    businesses where we have gotten a lot of complaints from
    consumers.
        Chair Gensler, it is pretty clear that this is a similar
    situation where Robinhood is selling to the marketplace, the
    vendor, so not the consumer. We have a clear conflict of
    interest here when it comes to payment for order flow, and one
    of the things that is pretty clear from both news coverage and
    from these hearings is that this business, with as much of a
    conflict here, we don't have enough transparency around the
    PFOF, both for the public and for policymakers to even
    understand. And I have had back and forth with Robinhood's CEO
    on this, and he said he would send us that information for the
    PFOF. We are still, of course, waiting to see that, since those
    currently aren't covered by Rule 606.
        So, Chair Gensler, I am wondering if that is something that
    you would consider including in updating those rules, and what
    are some other options that we can look at to address this
    conflict?
        Mr. Gensler. I have asked staff to consider what we should
    do in terms of broad market structure, payment for order flow,
    and I would add that data is very valuable. What we find in our
    online life, if we are not paying, if it is a free commission,
    it is often that somebody else is getting data. In this case,
    the data is the actual transaction flow. That data is very
    valuable to the wholesaler, the internalizer who is taking that
    order flow, and then, as we heard, maybe 50 percent of the
    retail flow, then they have a data advantage against all the
    other market makers, like a search engine that has data
    advantages against all other online platforms.
        Mrs. Axne. Listen, I can't wait to work with you on this,
    and I will tell you what, I am worried. While we all want
    people, of course, to be able to save and invest equitably,
    what we have right now could exacerbate inequity, so I am
    grateful to hear what you have to say. Thank you.
        Mr. Gensler. Thank you.
        Chairwoman Waters. Thank you very much. The gentleman from
    West Virginia, Mr. Mooney, is now recognized for 5 minutes.
        Mr. Mooney. Thank you, Madam Chairwoman. In the last few
    years, a record number of retail investors have opened
    brokerage accounts. Last year, individual investors' estimated
    share of equities trade volume reached a decade high. Although
    financial outcomes for individual investors will vary, I see
    increased participation in our capital markets as a positive
    development for wealth creation. Investors who bought shares of
    an ETF that tracks the S&P 500 on January 1, 2020, would see
    roughly a 29-percent return on their investment today. That
    kind of return can make it easier to buy a house or save for a
    child's education.
        So, Chairman Gensler, do you consider increased
    participation by retail investors to be a positive development,
    and, if so, how will market access factor into your decision-
    making at the SEC?
        Mr. Gensler. I think, Congressman, that market access is
    important, market access and an informed public making their
    own risk decisions and participating in markets, and that these
    new financial technology apps have helped facilitate that. What
    we are also doing, though, is ensuring that investors are
    protected and that we look at these gamification features and
    other prompts to see that they are still protected and they are
    not just encouraging a method to trade more and trade more,
    chasing after something that behavioral prompts are encouraging
    them to do.
        Mr. Mooney. Thank you. Aas a good Republican, we always
    say, whenever possible, to quote Ronald Reagan. As President
    Ronald Reagan once said: ``Government can and must provide
    opportunity, not smother it; foster productivity, not stifle
    it.'' So my fear is that overregulation could stifle the trend
    of greater participation from retail investors. Bad or just
    simply misguided legislation could have negative effects as
    well.
        Specifically, banning payment for order flow is not the
    right approach. If we ban payment for order flow, a practice
    that has been around for decades, I fear we may see the end of
    commission-free trading, and commission-free trading has been a
    driving force behind increased retail participation, and a
    return to commissions would make it harder for new retail
    investors to participate in our markets. The consequences of
    that could be devastating. As we discussed earlier,
    participating in our markets is a fantastic way for everybody
    in America, every person, to build wealth.
        So, I urge my Democrat colleagues to not get in the way of
    a good thing. Increased participation by retail is a positive
    development. Let's not regulate or legislate that progress
    away. Thank you, Madam Chairwoman, and I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    New York, Mr. Torres, is now recognized for 5 minutes.
        Mr. Torres. Thank you, Madam Chairwoman. My first question
    is to Chair Gensler. Mr. Chairman, do you believe there is an
    inherent conflict between payment for order flow and best
    execution?
        Mr. Gensler. Thank you, Congressman. I look forward to
    working with you. We have found, as highlighted earlier in the
    hearing, that there have been times where there is an inherent
    conflict, even when a wholesaler paying for that order flow
    said, ``Look, you tell me I can pay you more, or can sell the
    customer more.'' There are firms that have zero commission that
    don't have payment for order flow. And also to the earlier
    question, there are countries--the United Kingdom banned
    payment for order flow. Canada has banned payment for order
    flow. So I have just asked staff, let's look at this
    holistically as to what promotes fair, orderly, and efficient
    markets, and protects investors the best.
        Mr. Torres. I would ask you, payment for order flow is
    clearly a tradeoff. It has benefits. It has costs. Do you have
    a position on whether the costs outweigh the benefit at this
    moment?
        Mr. Gensler. I still want to hear from staff and work with
    my fellow Commissioners, but to your earlier question, there is
    this tension. There is a conflict there, and it has also led to
    a handful, really one or two wholesalers to have a dominant
    share in the retail market. And that concentration also raises
    issues of fragility, the data that they have. Do they get a
    competitive advantage on the rest of the market? Concentration
    usually leads to less efficient markets.
        Mr. Torres. It is often said that zero commission trading
    is free, but there is a sense in which it is deceptively free.
    It has no cost at the front end, but it certainly has a hidden
    cost at the back end. Do you agree with that assessment, and
    how can we make that hidden cost more visible to retail
    investors?
        Mr. Gensler. It is a very good question, because there are
    costs. It is sort of like an iceberg, but most of the iceberg
    is below the surface. The costs are below the surface. Payment
    for order flow is one of the costs. Someone else in the market
    gets enough data to trade that market better for them and a
    little less well for everybody else.
        Mr. Torres. Two concerns I have are market concentration
    and systemic risk. It has been reported that Citadel controls
    47 percent of the retail order flow market. It has also been
    reported that Melvin Capital, which sustained, what, 51 percent
    losses in January 2021, was heavily leveraged. How are we going
    to address market concentration and systemic risk in this
    market?
        Mr. Gensler. I think by thinking through, as best we can,
    how to instill, through market rules and transparency, vibrant
    competition, and vibrant competition so that one firm doesn't
    necessarily, through economics, get to that center and get to
    dominate. We see concentration also on the brokerage side,
    increasing concentration on the brokerage side, so it is not
    just on the market-making side. And that is what I have asked
    staff, and our Division of Economic and Risk Analysis, and
    others to work out.
        Mr. Torres. And as you know, there was controversy around
    Robinhood's decision to restrict trading. I have heard the
    arguments. I, for one, actually find the arguments to be
    reasonable. It seems like Robinhood would have had the
    inability to meet margin call, but it raises a larger question
    for me. It seems to me the ability of a broker to restrict
    trading appears to be absolute. I am wondering, should there be
    any limits on the ability of a broker to restrict trading to
    ensure that it is done reasonably, and that there is no abuse
    of power?
        Mr. Gensler. I think what happened there was to protect the
    clearinghouse, and because this firm didn't have enough
    liquidity and they scrambled around to raise a little over $1
    billion that fateful day, they and some others restricted
    trading. I think access to the markets is a fundamental part of
    the markets, and so the folks who took it on the chin, so to
    speak, were the people who wanted that access at that critical
    time. And so, we are looking at that very closely.
        Mr. Torres. But should there be limits on the ability of a
    broker to restrict trading?
        Mr. Gensler. Again, it is only my 3rd week on the job, so--
        Mr. Torres. You have been thinking about these topics for a
    long time.
        Mr. Gensler. I understand.
        Mr. Torres. Okay.
        Mr. Gensler. I would have to say, whether you are the
    smallest investor or the largest investor, one of the hallmarks
    of our markets is access to trading. And so, it does concern me
    that retail investors were shut out during a fateful time, but
    again, it is a balance. They had to protect the clearinghouses
    as well.
        Mr. Torres. Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you very much. The gentleman from
    Tennessee, Mr. Rose, is now recognized for 5 minutes.
        Mr. Rose. Thank you, Madam Chairwoman and Ranking Member
    McHenry, and thank you to our witnesses for your testimony and
    participation in today's hearing. Chairman Gensler, I want to
    welcome you as well to your first appearance before the
    committee in your new role.
        Historically, the SEC has administered the Federal
    securities laws in a bipartisan fashion. Chairman Gensler, I
    hope you continue that tradition, as I believe discussions
    about securities laws are not where we should be holding
    debates about climate change, or racial inequalities, or other
    extraneous issues. As the American economy continues to recover
    from the government-imposed shutdowns due to COVID-19, I also
    urge you to avoid placing overly burdensome regulations through
    backdoor regulating that could lead to limited consumer access
    to credit or stifle job growth.
        As we analyze the events surrounding GameStop, we, again,
    are discussing payment for order flow, a conversation that has
    been ongoing since the 1980s. I am not in favor of banning
    payment for order flow like the legislation my Democratic
    colleagues have introduced to this hearing, especially without
    the proper due diligence of studying its benefits and costs.
    The updated reporting requirements released in 2018 were a good
    step forward, but I think we should continue to investigate if
    those changes are providing the necessary transparency for
    investors.
        Chairman Gensler, in the previous hearing, I asked one of
    our witnesses what reforms he thought the SEC should implement
    or could implement with respect to payment for order flow to
    increase transparency for retail investors. And he suggested
    more granular 606 reports, specifically doing more to provide
    better public transparency of best execution. Are you looking
    into additional changes to those reports, and, if so, what
    changes?
        Mr. Gensler. I thank you for that, and I look forward to
    working with you and your staff in a bipartisan way with your
    advice. I want to turn to your question. I think transparency
    is very helpful, and transparency around these potential
    conflicts, I don't know if it will get us all the way there,
    and that is what I have asked the staff as to market structure,
    and, more broadly, not just about wholesalers and brokerage
    shops like Robinhood, but also exchanges and brokerage shops
    which pay rebates. In that whole market structure, what is
    going to promote the most competition, the most efficiency, so
    when a company goes to raise money, they have the most
    efficient markets, and when working families save, they can
    save best for retirement? And at the middle, if we have
    concentration, often economic shows leads to higher economic
    rents and higher costs. So, competition in that middle of the
    market is what would serve as my question to the staff.
        Mr. Rose. What is the timeframe and prioritization for your
    examination of payment for order flow?
        Mr. Gensler. Again, just 3 weeks on the job, so I don't
    know which month. But just because the chairwoman asked to have
    this hearing, you can imagine we have spent a lot of time just
    in the last 2 weeks. We are looking to probably publish a
    GameStop report this summer, but that won't be the only piece
    of it. It is really looking at what should we be doing in terms
    of overall market structure and whatever rules we can do,
    whether it be, as you said, updating our transparency around
    this Rule 606 or going further.
        Mr. Rose. Thank you. Mr. Cook, in your written testimony,
    you said that the SEC's 2018 disclosure requirement updates
    that took effect in 2020 have increased the public transparency
    of payment for order flow, but that FINRA believes that
    additional updates to order routing disclosure are necessary.
    Could you describe what updates you are planning to recommend?
        Mr. Cook. Thank you for that question, sir. I think we
    would like to explore that with the SEC to build on it. I think
    it was a very positive development. The 2018 disclosure you are
    referring to just became effective in 2020. A lot of the debate
    around payment for order flow now is informed by that
    additional disclosure, so I think that has been very helpful.
    The question is whether there might be more granular
    information about payment for order flow. We might think about
    some of that being imported to regulators to help them
    investigate how orders are being routed, but also more
    disclosure to investors, and that might be enhanced 606 reports
    considering disclosures at the point of sale.
        Mr. Rose. Thank you, and I yield back, Madam Chairwoman.
        Chairwoman Waters. Thank you. The gentlewoman from North
    Carolina, Ms. Adams, is now recognized for 5 minutes.
        Ms. Adams. Thank you, Madam Chairwoman. Thank you for
    holding this hearing, and thank you to our guests today.
        Chair Gensler, first of all, congratulations on your
    confirmation. I want to focus my questions on increasing
    transparency within the markets. As you know, on a quarterly
    basis, some of our largest institutional investors must
    disclose their equity holdings via Form 13F. However, both the
    GameStop and Archegos controversies have highlighted some
    serious weak points and loopholes in Form 13F. For example,
    Archegos, which caused billions in losses for some of the
    world's largest financial institutions, like Credit Suisse, was
    able to skirt disclosing its sizable derivatives positions
    because Form 13F doesn't require covered filers to disclose.
        As Chairman of the SEC, what reforms to 13F do you believe
    need to be made to provide more transparency to the markets and
    investors, and do you believe that 13F filings should be
    expanded to include derivatives?
        Mr. Gensler. Thank you for that question. I do think, and
    Congress anticipated this by giving authority to the SEC to do
    that. I think these derivatives, or what is known in this case
    as total return swaps, being included in those filings would be
    positive. I can't speak on behalf of the Commission. I am just
    speaking on my behalf. But I have asked staff to prepare
    recommendations to the five-member Commission to use that
    authority that the SEC has. I also think that there might be
    other updates that we should do beyond just derivatives as
    well.
        Ms. Adams. Thank you. Mr. Bodson, Robinhood's CEO blamed
    the trade settlement cycle on Robinhood's inability to meet the
    National Securities Clearing Corporation's (NSCC's) margin
    demands, which he said forced Robinhood to restrict trading in
    GameStop and other stocks so it could reduce its risk profile,
    therefore, reducing the amount that it would have to pay into
    NSCC's margin fund.
        So, Mr. Bodson, can you please describe generally what
    factors NSCC uses to determine a member firm's risk profile,
    and estimate how often it is that a member firm is surprised at
    the amount it has to pay into a clearinghouse's margin fund?
        Mr. Bodson. Thank you, Congresswoman. Our formulas, our
    models are all SEC-approved and subject to public commentary.
    The model is commonly known as a value-at-risk model. It is a
    widely-accepted and supported model to estimate the potential
    loss in the portfolio of open trades that a firm has, what is
    the loss over the 2-day period to settlement. In the case of
    Robinhood and others, because they were not the only firm that
    was facing these situations, the model saw that they had a
    large concentration of transactions in buy, so instead of
    portfolio buys and sells, they were all buy trades and stocks
    that were moving around 100 to 200 to 300 percent a day, which
    is incredible volatility, and with volumes that were over 100
    times above what would be normal. All of these factors led the
    model to say that this is a very risky situation. If a firm
    defaults, there is a possibility of those stocks losing all
    their value in an equal period of time. So, that is what drove
    the margin charge from Robinhood and some other firms where you
    saw this heavy retail flow.
        We provide our members the model itself in our rules. We
    have model guides to help them understand it. We have APIs
    which send information to the firms. We have a customer portal
    where they can see what we are seeing. Now, the model itself
    runs overnight, so one can understand a firm may not know the
    exact, precise amount that may come out the next day,
    especially in this type of marketplace. But they can anticipate
    that there will be a significant increase overnight as a result
    of seeing their customers' activity coming through them.
        Ms. Adams. Okay. So We know that it was an unprecedented
    week, but do you believe that it was the settlement cycle that
    is to blame for Robinhood's margin issues, or is this just a
    case of poor risk management?
        Mr. Bodson. I think it is more a question of, if there was
    a shorter settlement cycle, yes, the margin charge would be
    reduced, because that period of time would go from 2 days to 1
    day. Therefore, the portfolio of open trades would be lower.
    The volatility would not have to be over 2 days, but over 1
    day. I am not sure that, ``blame,'' is the right term for any
    settlement cycle. That simply is an industry convention.
        Ms. Adams. Okay. Thank you. Madam Chairwoman, I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    Wisconsin, Mr. Steil, is now recognized for 5 minutes.
        Mr. Steil. Thank you very much, Madam Chairwoman. I don't
    know about everybody else on these virtual hearings, but, man,
    I look forward to the Majority allowing us to be back in person
    in the not-too-distant future. I think it would be really nice
    just to actually see people instead of doing this virtually on
    some pretty important topics. But, away we go.
        Chairman Gensler, I really appreciate you being here today.
    At the hearing last month, I asked Acting Director Coates about
    some statements he made regarding the SPAC market in his then-
    temporary capacity as the head of the Division of Corporation
    Finance. As you know, in my opinion, his comments had some
    pretty impactful effects on the SPAC markets. Acting Director
    Coates was hired by Commissioner Lee when she was the Acting
    Chair, but has remained in that role under your chairmanship.
    In fact, several of the Commissioners that Lee hired remain in
    prominent roles, including your Chief of Staff. Do you intend
    to retain Acting Director Coates as the permanent head of the
    Division of Corporation Finance?
        Mr. Gensler. Thank you for that, and I look forward to
    working with you. John Coates is a valued member of the senior
    staff of the SEC, and while I only met him recently, he is
    contributing and working really well.
        Mr. Steil. Did you provide any consultation with
    Commissioner Lee about or exert influence over staff hiring,
    both in the roles in the Chairman's office and for the SEC
    divisions prior to being sworn in as Chairman?
        Mr. Gensler. No.
        Mr. Steil. Okay. That is helpful. Did you have any input
    into the hiring of Acting Director Coates then? No?
        Mr. Gensler. As I just said, no.
        Mr. Steil. Okay. I will shift gears. Let's jump into a
    favorite topic of mine, ESG disclosures. I have been concerned
    that our securities laws are going to be misused to push social
    policy agendas that are, at best, tangentially related to
    investor protection and capital formation.
        And with that in mind, I want to ask you about Commissioner
    Lee's recent remarks at the Center for American Progress. In
    her speech, Commissioner Lee suggested the SEC should focus its
    attention on political disclosures. She said, ``Many companies
    that have made carbon-neutral pledges or otherwise state they
    support climate-friendly initiatives have donated substantial
    sums to candidates with climate voting records inconsistent
    with such assertions.'' And I am concerned that pursuing
    policies like this with the SEC is going to lead to mandatory
    disclosures of information that aren't material to your average
    investor, and that is, instead, really an attempt to leverage
    the SEC to engage in naming and shaming. Did you by chance
    discuss Commissioner Lee's remarks before she made them?
        Mr. Gensler. Congressman, I was a private citizen at MIT.
        Mr. Steil. Completely fair. So, you were not engaged in
    providing advice on those comments or in consultation?
        Mr. Gensler. Until I was honored by the U.S. Senate and
    appointed by the President, I was at MIT as a professor.
        Mr. Steil. Totally fine. I just wanted to confirm that that
    was the case. With all of the critical challenges we are facing
    today and, in particular, in front of the SEC, do you feel, at
    this time, that you intend to prioritize that issue?
        Mr. Gensler. I am, sir, and let me explain why. I think
    that a quarter of our market structure is disclosure, and
    investors being able to decide what risks they take based upon
    the disclosure from issuers. And in this decade, the 2020s,
    climate risk is something that an increasing number of
    investors, measured in the trillions of dollars, have really
    said that this is something they want to better understand as
    they make their investment choices, and I think we can help
    bring consistency and comparability. I think we can do it
    through notice and comment. There is a comment period that
    Acting Chair Lee actually started. I wasn't a part of that; she
    started it, Acting Chair Lee.
        We are going to get a lot of comments from the public come
    June, and I encourage anybody to weigh in for or against. The
    details--it is really helpful to learn from the public their
    views on this, but it is about the investors and disclosure
    that investors want in making their investment and proxy
    choices.
        Mr. Steil. I appreciate you answering. With the limited
    time, I would say I look forward to the discussion. I look
    forward to working with you, and I appreciate you attending
    today's virtual hearing.
        Mr. Gensler. Thank you.
        Mr. Steil. And with that, Madam Chairwoman, I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    Illinois, Mr. Garcia, is now recognized for 5 minutes.
        Mr. Garcia of Illinois. Thank you, Chairwoman Waters and
    Ranking Member McHenry, for holding this hearing today, and
    thanks to all the witnesses for your informative testimony.
    This is the third hearing we have had about GameStop, and
    people joke about Congress having a short attention span, but
    unfortunatelyz, this is not old news. Every week, there is a
    stock price going up and down for no real reason. Every month,
    there is a new financial trend to get rich quick. GameStop
    [inaudible], and it is pretty much always the same people who
    are getting rich. People in working-class communities like mine
    don't know how they will retire. They are worried about whether
    their parents are going to live. But they are the ones who come
    out ahead.
        Mr. Gensler, as you mentioned in your written testimony,
    one firm, Citadel, apparently handles almost half of all retail
    trading volume. There are a lot of reasons why that is
    troubling, but retail traders talk all the time about
    democratizing finance and letting in the little guy. I think
    that is like saying Amazon democratized reading, because big
    players like Citadel, the only companies large enough to handle
    all these trades, are getting way bigger.
        Mr. Gensler, do you think that the payment for order flow
    arrangements that companies like Robinhood use simply entrench
    big players like Citadel?
        Mr. Gensler. You raise a very good question, and I think it
    is an interrelated question which I have asked staff to help
    our five-member Commission on, is the market structure right
    now has some concentration in the retail space that you just
    mentioned, that there are dominant market makers buying this
    payment for order flow. I think there are also some conflicts
    that arise between are we, the public, getting best execution?
        I no longer can do this because I am at the SEC, but before
    I got there, when I would put in an order to my broker that is
    a market order, about 90, 98 percent or something of those
    market orders, depending upon the month, are going to a handful
    of wholesalers. They don't go to the New York Stock Exchange or
    Nasdaq. They don't even go to dark markets, called ATSes. The
    retail order flows that are market orders to go to those, and
    so it raises questions. Is this the most efficient market? Is
    this the fair, orderly, efficient market that Congress has
    mandated the SEC to do? And does it lead to some fragility in
    markets from the market concentration? That is what I am going
    to look at, to make sure. And I think it matters to companies
    and issuers, too, that the capital formation is better when
    there is intense competition in the middle of the market.
        Mr. Garcia of Illinois. I am glad that you are looking at
    it, and that we will be hearing from you in the near future. Do
    you see a potential problem with one firm, like Citadel, having
    so much concentrated power in a single market?
        Mr. Gensler. It does raise questions of, does it leave the
    market potentially more fragile, potentially less innovative,
    and whether the pricing in that marketplace is not benefiting
    from as much robust competition? We know economics tells us
    that when there is a lot of competition in a market with
    multiple parties, it tends to lead to better pricing for the
    users of that market.
        Mr. Garcia of Illinois. Yes. And do you think that a firm
    like Citadel could potentially pose a systemic risk to the U.S.
    financial system, and should FSI review the risks associated
    with such a large market maker?
        Mr. Gensler. Again, sir, I haven't focused on just that
    firm, but I think that market concentration and market making
    can lead to issues that that player has data advantages like we
    have seen. There is one online search engine in America that
    most of us go to, and that has data advantages. Now, in the
    middle of our capital markets, one firm may be in the retail
    order flow. So it is in the retail order flow that you
    mentioned, it may have growing data advantages over other
    market participants.
        Mr. Garcia of Illinois. Thank you very much. Madam
    Chairwoman, I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    South Carolina, Mr. Timmons, is now recognized for 5 minutes.
        Mr. Timmons. Good afternoon. Thank you, Madam Chairwoman.
    And before I begin with my questions, I want to reiterate what
    my friend from Wisconsin, Congressman Steil, said. I really
    look forward to getting back in person. I hope that we can do
    that as soon as possible.
        Mr. Bodson, it is easy to be a Monday morning quarterback,
    but, in your opinion, did Robinhood act appropriately in
    restricting trading in certain stocks based on current
    regulations they and the DTCC are subject to?
        Mr. Bodson. I really can't comment on Robinhood's decision.
    Only Robinhood can do that. I would be speculating, and it
    really would not be appropriate. What we know is there was a
    large margin charge that they were subject to. The premium
    component was waived. They met their requirement and remain a
    member in good standing. What happened next, the decision to
    restrict trading ,really was internal to Robinhood. We did not
    have discussions about that.
        Mr. Timmons. Understood. Thank you. Chairman Gensler, do
    you believe that payment for order flow improves overall market
    liquidity and order execution for retail investors?
        Mr. Gensler. I am going to have to study it a little bit
    more with our Division of Economic Research and Trading and
    Markets in terms of this very important question that you just
    raised. Does it increase liquidity, is it neutral, or is it
    negative to liquidity? I haven't formed a view on that yet,
    sir.
        Mr. Timmons. Sure. Thank you. Also, Commissioner Gensler,
    Germany's financial regulator ran into trouble when it banned
    short selling in wire cardstock and filed criminal complaints
    against two journalists reporting whistleblower allegations
    against the company. Do you believe that it is necessary for
    short sellers to disclose their short positions in 13F filings,
    and could this additional disclosure lead to a similar
    situation of regulatory overreach in the United States?
        Mr. Gensler. I am not familiar with the circumstances you
    are mentioning, but let me say that Congress anticipated and
    gave authorities to the SEC to, on a monthly basis, require
    aggregate information in the short selling market. FINRA, and
    Mr. Cook could speak to it, already publishes some information
    on a biweekly basis. I think that transparency is positive to
    markets, and I have asked staff to put forward recommendations
    to our five-member Commission. It was actually a mandate from
    Congress. It wasn't a, ``may.'' It was a, ``shall.'' So we are
    going to lean in and follow Congress' mandate from 12 years
    ago.
        Mr. Timmons. Sure. Thank you. Last question for you, do you
    believe that short sellers play a role in maintaining fair,
    orderly, and efficient capital markets?
        Mr. Gensler. I think that short selling, which is probably
    as old as capital markets, several hundred years or more old,
    does play a role in capital markets and price formation. The
    important tenant for the SEC is to ensure that the markets are
    free of fraud manipulation, and so those participants in the
    market, whether they are on the buy side, or the long side, or
    on the short side, are doing so without defrauding and
    manipulating the markets and that there is the appropriate
    transparency.
        Mr. Timmons. Sure. Thank you. Mr. Cook, do you believe that
    Know Your Customer rules and current policies can continue to
    protect retail investors regardless of their broker-dealer?
        Mr. Cook. Could you repeat that question, sir? There was
    some interference.
        Mr. Timmons. Sure. Sorry. I said, do you believe that Know
    Your Customer rules and current policies can continue to
    protect retail investors regardless of their broker-dealer?
        Mr. Cook. Oh, thank you for that question, sir. I think it
    is important to note that there are existing rules, along the
    lines that you described, that include Know Your Customer and
    for certain more complex products, like options, a requirement
    that additional information be acquired, and also that the firm
    make a determination about whether the account would be
    appropriate. That said, I think as sort of the theme of the
    hearing and some of the conversations around these events,
    technology has changed the world and some of those rules are
    quite old. And I think it is worth at least looking at whether
    they should be updated, but while taking into account the need
    to avoid unintended consequences or unduly limiting access to
    the markets.
        Mr. Timmons. Sure. I appreciate that answer, and I am going
    to finish how I started. Madam Chairwoman, we really need to
    get back to work in person. I am getting very tired of ring
    lights and cameras on the computer, so I hope we can get back
    to work soon. And with that, I yield back. Thank you, Madam
    Chairwoman.
        Chairwoman Waters. The gentlewoman from Michigan, Ms.
    Tlaib, is now recognized for 5 minutes.
        Ms. Tlaib. Thank you, Madam Chairwoman. I appreciate it.
    Thank you for the panelists. I know that many of you know that
    high-frequency trading conducted by market makers, like Citadel
    Securities, drive market volatility, and working people pay the
    price through their 401(k) and pension funds. That is what I am
    most concerned about. Prior to 2008 and the financial crisis in
    2008, Citadel sought to leverage its status as a hedge fund to
    compete with U.S. investment banks. It didn't work, but Citadel
    has since used this regulatory blind spot to establish
    themselves as a dominant market maker for retail investors.
        So, Chairman Gensler, as a hedge fund, is Citadel
    Securities supervised by the Federal Reserve?
        Mr. Gensler. It's good to see you again, by the way,
    Congresswoman, and I was just thinking that, are they
    supervised by the Federal Reserve, is a question for them.
    Citadel Securities is registered at the SEC.
        Ms. Tlaib. Is this helpful? Are they designated as a
    systemically important financial institution by FSOC?
        Mr. Gensler. I do not believe that the Financial Stability
    Oversight Council (FSOC) has made such a designation.
        Ms. Tlaib. Yes. According to its own website, Mr. Chairman,
    Citadel Securities says they execute about 40 percent of all
    U.S. listed retail value and reportedly handles almost as much
    trading volume as Nasdaq. As market makers, like Citadel,
    conduct these high-frequency trades, it is estimated that
    pension and retirement accounts already pay an annual $5
    billion ``tax,'' which is extremely alarming. And even though
    50 percent of American families don't own stock at all, it is
    working people who pay the price when Wall Street gambles with
    our money.
        And so, Chairman Gensler, in your testimony today, you did
    acknowledge that, ``Issues of concentration may increase
    potential system-wide risks should any single incumbent with
    significant size or market value fail.'' Sorry if I misquoted
    you, but I think what I am more concerned about is, do you
    think Citadel, or a firm like it, currently poses systemic risk
    to our financial system?
        Mr. Gensler. Yes. I do think that what we are seeing inside
    the financial markets is concentration growth. We see this
    outside of finance as well. We see it in search engines and
    online retailing.
        Ms. Tlaib. Do you not think this is an extreme version of
    that, when they are doing this much trading and they are not
    considered a systemic risk?
        Mr. Gensler. I don't know how to compare it to other parts
    of the economy, but we are seeing similar economics about the
    network effects that a firm gets with an increased advantage of
    data, then they are growing concentration. So, I have asked
    staff to really take a look at this because there are issues
    not just of fragility or resiliency, which you have raised, but
    also, is this the most efficient capital market? Now, this is
    just in the retail space, but players that are so concentrated
    in the space, and is the pricing in the market the best.
        Ms. Tlaib. Yes. And, what is concerning is, as you know,
    with Citadel's own pricing and liquidity, they failed the
    pensions. There is going to be direct impact. But, Mr.
    Chairman, does the SEC have any contingencies in place in the
    event of a failure of a large market maker like Citadel right
    now if they fail?
        Mr. Gensler. Part of that is also our oversight of the
    clearinghouses and ensuring that there is appropriate oversight
    of their counterparties, and this would be true of any large
    market player. But I would like to work with you and your staff
    a little bit more, because in my 3rd week, I haven't yet sat
    down and sort of found out all those by rigorous oversight, of
    all the brokerage firms and the significant brokerage firms and
    clearinghouse.
        Ms. Tlaib. Yes. As a market maker, like Citadel, has grown
    larger and consolidated their market position, they have used
    their status as a hedge fund to evade regulatory scrutiny, and
    it is very clear. So, I hope that the SEC doesn't turn a blind
    eye to this regulatory loophole or the systemic risk that hedge
    funds like Citadel pose. And so, again, I really appreciate the
    chairwoman bringing this to light because we will not have a
    healthy, transparent market so long as retail orders are
    directed towards a shrinking handful of wholesale traders. And
    it is really important. Thank you, and I yield back.
        Chairwoman Waters. Thank you. The gentleman from Texas, Mr.
    Taylor, is now recognized for 5 minutes.
        Mr. Taylor. Thank you, Madam Chairwoman. And I appreciate
    our witnesses being here. I think this is an important hearing.
    I am Van Taylor. I represent Texas. I am the junior-most
    Republican, which means the end of the hearing is near, so you
    can celebrate that.
        I wanted to, Mr. Gensler, just talk to you about something
    that happened in the previous Administration. President Trump
    signed an Executive Order prohibiting investors from trading in
    dozens of Chinese securities. However, those primarily U.S.
    investors investing in ADRs are now unable to divest those
    Chinese securities, and so it is really unclear what the plan
    is for those U.S. investors to get out of those Chinese
    securities. I realize this didn't happen on your watch, but I
    am wondering what the plan is. And some of those investors,
    there are some big ones and some small ones. I, of course, hear
    from the small ones. They are concerned about, hey, how am I
    going to get out of this? What is the SEC's view on that?
        Mr. Gensler. First, I congratulate you on your first term,
    and it is great to get to know you. This is a terrific
    committee. I have worked with this committee in three
    Administrations. There are many other great committees, too,
    though, but I would like to work with you and your staff to
    understand the issue better. I have to say I haven't yet been
    briefed on what you are saying, for investors to basically sell
    out of investments that they are kind of locked in.
        Mr. Taylor. Right. The problem is that these investors got
    frozen into these investments, and as you said, and certainly
    it is something I heard in my time at Harvard Business School.
    I mean, hey, we have great capital markets in this country, and
    it is a major competitive advantage for our nation to have
    those great capital markets for the formation and allocation of
    capital. Chinese companies are taking advantage of that, and we
    said, okay, you are not going to take advantage of us anymore,
    but we ended up freezing investors into them, and so now
    investors have their capital stuck in investments, and I am
    trying to figure out how are we going to get them out? Again,
    we don't want people to play in that market, but how are we
    going to get them out of it?
        Mr. Gensler. One of the wonderful things for the public
    listening as a representative democracy, is if a Member raises
    a question like this to somebody in the administrative state,
    like me, I will now go back and try to learn about this issue,
    and I look forward to chatting more about it with you.
        Mr. Taylor. I appreciate that. Thank you for letting me
    flag this one for you. Obviously, it is important for those
    people, and I think it also could perhaps create a roadmap for
    this kind of action in the future instead of just locking it up
    and then everybody going, okay, what now, that there is
    actually an exit ramp.
        Mr. Bodson, the DTCC released a White Paper, ``Advancing
    Together: Leaving the Industry to Accelerate Settlement.''
    Obviously, the last iteration of this GameStop hearing focused
    a lot on accelerated settlement, T+1 versus T+2. I think you
    have done a good job of explaining some of the benefits of
    going from a T+1 to a T+2, and I think it would have certainly
    helped in this particular scenario that we are having this
    hearing under if you had had a T+1 instead of a T+2. But one of
    the things that I wanted to understand a little bit more from
    your point of view is, could you talk about distributed ledger
    technology, and what that would actually mean, and how it would
    work in this particular circumstance?
        Mr. Bodson. Thank you, Congressman, for the question. The
    move to T+1 really will be based upon existing technology,
    looking to see if we could apply DLT and other technologies to
    help solve the problem. As I said, speeding up the process
    lowers credit risk, but it increases operational risk, so there
    are a whole series of processes that have to be done before a
    trade is settled. The easy parts, in some ways, are the trading
    part and the settlement part, but they are somewhat just
    bilateral transactions. But in between, as an example, any
    institutional asset manager has to take the trade it has done
    throughout the day, aggregate that trade, break it up amongst
    all the funds, et cetera, et cetera. I don't want to go into
    too much nuance. All of these steps could require
    communication, reconciliation, passing of information. So,
    there are instances where something like DLT, where you do have
    that advantage of a golden source being distributed, where it
    could be very much applicable. DLT smart contracts--
        Mr. Taylor. I am sorry to interrupt you, Mr. Bodson.
        Mr. Bodson. Sure.
        Mr. Taylor. I just need to ask one quick question. Do you
    need any statutory authority to go from T+2 to T+1? Do you need
    us to pass a law, or do you have the authority you need?
        Mr. Bodson. No. Thank you, Congressman. If I do, I will
    definitely reach out to the committee, but at this point, the
    industry is coalescing around the move to T+1. As you heard
    from Chairman Gensler and Mr. Cook, we are all moving in the
    right direction, so I think at this point, the industry itself
    will get there.
        Mr. Taylor. Okay. Thank you. I yield back.
        Chairwoman Waters. Thank you very much. The gentleman from
    Massachusetts, Mr. Auchincloss, is now recognized for 5
    minutes.
        Mr. Auchincloss. Thank you to our witnesses for their
    patience and persistence in this hearing, and to the chairwoman
    for organizing this. In the first of these hearings, I focused
    on the tension between using technology to democratize access
    to assets and to wealth-building opportunities, and I believe
    that is critical and potentially a way for us to narrow the
    wealth gap in this country, but, on the other hand, the
    increasing gamification of finance for non-accredited investors
    or investors who don't have the wherewithal or the
    sophistication to be making the kind of bets that they are
    making.
        And I think, in particular, where the rubber hits the road
    on this tension is with options and with the gamification of
    options, which are a very fast way to make money, but a very
    fast way to lose money as well, and that they have binary
    outcomes and a very narrow time window.
        I would appreciate hearing from, first, Mr. Cook, and then,
    Mr. Gensler, on where FINRA and the SEC feels like they draw
    the line between creating a good user experience, which
    obviously is in the best interest of any business, without
    inappropriately inducing behavior that actually is not in the
    fiduciary interest of the user.
        Mr. Cook. Thank you for that question, sir. I think you
    touch on the issue and characterize it exactly. There is a
    tension. There is a balance here and we need to try to strike
    the right balance. With respect to options, we have issued
    guidance recently reminding firms of their obligations here,
    but I appreciate your raising options because I think there is
    a way in which all these issues kind of come together--options,
    payment for order flow, gamification--because options tend to
    provide greater payment for order flow.
        And so, one of the things we often think about with
    conflicts in payment for order flow is, which firm do I wrap my
    orders to, right? But there is a second level of conflict that
    options is one example of--I think there are others--where
    there is a question about which product and which orders do I
    want to route because some may give me more payment than
    others. And combined with the gamification, I think it becomes
    a package that we really need to look at all pieces of this
    together.
        So, I really appreciate Chair Gensler's leadership on this,
    and talking about getting his staff to think through all these
    issues, and we welcome the opportunity to engage with them.
        Mr. Auchincloss. Because, Mr. Cook, the spread is wider on
    options, and so they are more attractive for the payment for
    order flow?
        Mr. Cook. Yes, the amounts of payment for order flow in the
    options world, which tend to come from exchanges, not from the
    wholesalers, is generally higher, yes.
        Mr. Auchincloss. Thank you. Mr. Gensler?
        Mr. Gensler. I think that, as Mr. Cook said, it is taking
    somewhat of a holistic approach in a variety of places, but
    options raised a couple of other issues. There is more risk
    because of the inherent, what is called leverage. I can say I
    want to make an investment, that something is going to go up or
    down, but I could lose all my money very easily in an option.
        Mr. Auchincloss. No, I know what options are, and what
    leverage is. My question, Mr. Gensler, is, do you think the SEC
    standards for de-marketing where gamification, and a good user
    experience, and a fiduciary responsibility begin are clear
    enough and being followed in the industry?
        Mr. Gensler. I think that we need to look very seriously at
    freshening up our rules because behavioral prompts, the
    gamification, is inspiring people to trade more. And economic
    research shows that more trading doesn't necessarily lead to
    better results, particularly in the field of options. I was
    just mentioning the leverage because it is potentially more
    pernicious than options.
        Mr. Auchincloss. Absolutely, Chairman Gensler, and I
    appreciate that, and what I would encourage you and your staff
    to focus on is the reality that this trend of gamification is
    actually going to accelerate. It is a common maxim, for
    example, in the consumer technology industry that the frontier
    of tight feedback loops in user experience are actually in
    video games. Video games have always been on the leading edge
    of how to create captivating online experiences. And the time
    between when video games put something out there that works,
    and when other kinds of consumer technology adopt it, like
    brokers, is getting shorter and shorter and shorter.
        Mr. Gensler. And if I could add, it is also the use of
    predictive data analytics, or what is called deep learning and
    machine learning, which was part of my research at MIT. You
    combine that and then differentiate how you would market it to
    you differently than the chairwoman, and you would find a way
    to get the chairwoman to trade one way and you to trade another
    way. I am not saying that either of you are doing this, but I
    am just saying that is the sophistication of what is happening
    now.
        Mr. Auchincloss. It is an excellent point, sir, and I do
    hope that you will tell this committee if you feel like you
    need more statutory authority or more funding to fully draw
    that line and enforce it because it is critically important.
        Mr. Gensler. Thank you.
        Chairwoman Waters. Thank you very much. Before we close the
    hearing, I would like to just share information in relationship
    to a question we have been getting about a financial
    transaction tax (FTT). That was not a part of any proposal in
    this committee hearing, and we don't have jurisdiction over
    that anyway. So for those people who have been contacting us
    about an FTT, that was not a part of this hearing.
        And with that, I would like to thank our distinguished
    witnesses for their testimony today.
        The Chair notes that some Members may have additional
    questions for these witnesses, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        Again, I certainly would like to thank all of our witnesses
    today, and this hearing is now adjourned. Thank you very much.
        Mr. Gensler. Thank you, Madam Chairwoman.
        Chairwoman Waters. You are welcome.
        [Whereupon, at 4:02 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                  May 6, 2021

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