[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF AMERICA'S STOCK
EXCHANGES: EXAMINING THEIR
ROLE IN OUR ECONOMY
=======================================================================
HYBRID HEARING
BEFORE THE
SUBCOMMITTEE ON INVESTOR PROTECTION,
ENTREPRENEURSHIP, AND CAPITAL MARKETS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MARCH 30, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-75
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
47-273 PDF WASHINGTON : 2022
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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
Subcommittee on Investor Protection, Entrepreneurship,
and Capital Markets
BRAD SHERMAN, California, Chairman
CAROLYN B. MALONEY, New York BILL HUIZENGA, Michigan, Ranking
DAVID SCOTT, Georgia Member
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois FRENCH HILL, Arkansas
GREGORY W. MEEKS, New York TOM EMMER, Minnesota
JUAN VARGAS, California ALEXANDER X. MOONEY, West Virginia
JOSH GOTTHEIMER. New Jersey WARREN DAVIDSON, Ohio
VICENTE GONZALEZ, Texas TREY HOLLINGSWORTH, Indiana, Vice
MICHAEL SAN NICOLAS, Guam Ranking Member
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois, Vice Chair BRYAN STEIL, Wisconsin
EMANUEL CLEAVER, Missouri VAN TAYLOR, Texas
C O N T E N T S
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Page
Hearing held on:
March 30, 2022............................................... 1
Appendix:
March 30, 2022............................................... 29
WITNESSES
Wednesday, March 30, 2022
Greene, Ellen, Managing Director, the Securities Industry and
Financial Markets Association (SIFMA).......................... 8
Jackson, Robert J., Jr., Professor of Law, New York University
School of Law, and former SEC Commissioner..................... 5
Kimmel, Manisha, Chief Policy Officer, MayStreet, Inc............ 12
Piwowar, Michael S., Executive Director, Milken Institute Center
for Financial Markets, and former Commissioner and acting
Chairman, SEC.................................................. 7
Sukumar, Nandini, CEO, the World Federation of Exchanges (WFE)... 10
APPENDIX
Prepared statements:
Greene, Ellen................................................ 30
Jackson, Robert J., Jr....................................... 44
Kimmel, Manisha.............................................. 55
Piwowar, Michael S........................................... 69
Sukumar, Nandini............................................. 76
Additional Material Submitted for the Record
Huizenga, Hon. Bill:
Written statement of Kevin R. Edgar on behalf of the Equity
Markets Association........................................ 78
Written responses to questions for the record from Ellen
Greene..................................................... 88
Written responses to questions for the record from Manisha
Kimmel..................................................... 92
Written responses to questions for the record from Michael S.
Piwowar.................................................... 93
Written responses to questions for the record from Nandini
Sukumar.................................................... 95
OVERSIGHT OF AMERICA'S STOCK
EXCHANGES: EXAMINING THEIR
ROLE IN OUR ECONOMY
----------
Wednesday, March 30, 2022
U.S. House of Representatives,
Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets,
Committee on Financial Services
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
room 2128, Rayburn House Office Building, Hon. Brad Sherman
[chairman of the subcommittee] presiding.
Members present: Representatives Sherman, Himes, Vargas,
Gottheimer, Axne, Casten; Huizenga, Wagner, Hill, Emmer,
Mooney, Davidson, Gonzalez of Ohio, and Steil.
Ex officio present: Representative Waters.
Chairman Sherman. The Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of the subcommittee are authorized to
participate in this hearing.
Today's hearing is entitled, ``Oversight of America's Stock
Exchanges: Examining Their Role in Our Economy.'' This will
serve as the formal hearing on eight bills or discussion drafts
that have been circulated to Members, and copies of each bill
or discussion draft will, without objection, be part of the
record of this hearing.
I usually thank our witnesses. Today, I am going to thank
them profusely, because we are going to be interrupted by eight
votes, during which time those of you who are here in person,
but not those of you who are appearing virtually, will
hopefully get some refreshments and otherwise be entertained,
while we will be voting.
I now recognize myself for 4 minutes for an opening
statement.
The U.S. Stock Exchanges are as old as our nation itself.
For over 200 years, they have been a symbol of American
capitalism, serving as drivers of economic growth. Since they
play such a critical role in our financial system, they have
long been recognized as self-regulatory organizations (SROs)
under the Securities Exchange Act of 1934, giving them
responsibility for creating regulations that oversee the
securities exchanges. For most of the life of the exchanges,
they have operated as member-owned, non-profit entities, but in
the early 2000s, the New York Stock Exchange, NASDAQ, and the
Chicago Board Options Exchange (CBOE), the three largest
exchanges, transitioned to becoming publicly-traded, for-profit
companies.
Over recent years, the SEC has raised concerns about the
potential conflicts of interest from acting, on the one hand,
as a quasi-governmental regulatory entity, and on the other
hand, as a for-profit entity. This arises, first, in the area
of selling and providing data. The exchanges sell the basic
information, sometimes called the tape, at a modest cost, for a
higher cost. They provide proprietary information, which is
both delivered more quickly and is more complete.
In 2020, the SEC issued rules to reform this system,
requiring the public data to be more detailed and basically
allowing broker-dealers, the users of the information, to have
more voting seats on the National Market Systen (NMS) boards
that oversee the status sales. The exchanges sued and blocked
that regulation.
One of the bills before us today is the Securities Exchange
Reform Act, which would clearly give the SEC the authority to
adopt that regulation. We saw with the Facebook offering in
2012, a breakdown of the system. Investors lost as much as $500
million. They were compensated chiefly by broker-dealers. The
exchanges used their authority as SROs to establish rules that
capped their liability. And we will explore here whether it is
reasonable for them to use their authority as self-regulatory
organizations to block or limit the liability, and to what
degree they should limit the liability that they incur in
operating their for-profit businesses.
The exchanges have performed well over the last several
years, and these have been difficult years for everyone in our
economy. Our hearing will focus on the data-providing process
of the exchanges and the Regulation National Market System
(NMS) oversight thereof. We will focus on the liability
limitations that they have imposed. We hope also to deal with
the governance standards for those stocks listed on exchanges,
particularly whether those companies are, for example, overseen
in their audits by the Public Company Accounting Oversight
Board (PCAOB), something that Chinese companies have refused.
In addition to looking at those that are designated as
exchanges, we should keep in mind that we had our GameStop
hearings, which focused on the recent trading activity taking
place off the exchanges, both in the somewhat regulated
alternative trading systems and the relatively unregulated dark
pools. And, of course, an increasing part and a large part of
our trading is taking place there.
So we look forward to hearing from our witnesses, but
first, we get an opportunity to hear from the ranking member.
I now recognize the ranking member of the subcommittee, Mr.
Huizenga, for an opening statement.
Mr. Huizenga. Thank you, Mr. Chairman. Today's hearing,
entitled, ``Oversight of America's Stock Exchanges: Examining
Their Role in Our Economy,'' I unfortunately believe is another
example of how off track we have gotten here in this
subcommittee and in the full committee.
So, why are we here this afternoon? What even prompted this
hearing with this timing? Our equity markets have served both
investors and businesses, powering economic growth and
expanding wealth that has benefited investors, savers, and
businesses. But instead of focusing on areas that expand
opportunities for retail investors, promoting capital formation
for small businesses, or even a discussion of recent SEC
actions, the Majority has decided that this is a timely
hearing.
In the 117th Congress, this subcommittee has held 5
hearings to date, this being the 6th, and the first one in over
5 months. Since the last time we met as a subcommittee,
Committee Republicans have highlighted several issues that
warrant further attention and oversight.
In October of 2021, Ranking Member McHenry sent a letter to
SEC Chair Gensler, asking for clarification on the SEC's
authority to regulate the digital asset ecosystem. The
subcommittee has taken no action to clarify these statements.
In November of 2021, Ranking Member McHenry and I called on
Chairwoman Waters to join Republicans' investigation into the
Biden Administration's attempt to politicize the PCAOB, the
Public Company Accounting Oversight Board. To date, Committee
Democrats have been silent.
In December, Congressman French Hill sent a letter to Chair
Gensler with several of our colleagues, sharing concerns over
new, ``staff guidance,'' on shareholder proposals submitted to
publicly-traded companies under SEC Rule 14a-8. This guidance
comes from staff at the SEC who have become arbiters of social
policy for our financial markets.
In January, Committee Republicans demanded answers from the
SEC, raising serious concerns with Chair Gensler's decision to
limit outside input on rulemaking by providing unreasonably-
short public comment periods. Yet, these 30-day comment periods
continue to be the norm.
In February, Congressman Steil and I sent a letter to the
SEC regarding proposed changes to the 2020 proxy rule, advisor
rule, a rule, by the way, that was proposed and finalized under
former SEC Chairman Clayton, that wasn't even allowed to take
effect before the proposed amendments were put forth.
And finally, just last week, Republican Members of this
subcommittee sent a letter to Chair Gensler expressing concerns
about the upcoming meeting on climate-related disclosure for
investors. Of course, Republican concerns were ignored in the
meeting, and the proposed rule went forward.
Time and time again, subcommittee and Democrat leadership
have chosen to focus on issues that fail to shine a light on
the SEC and its Chairman, who is embarking on an aggressive
rulemaking agenda, and, I might add, leaving us constitutional
players in this whole system by the roadside. It is
unacceptable that we have not had the full Commission before
the committee in 3 years. I hope Chairman Sherman will see the
importance in this hearing, of having all of those
Commissioners here, and will join me in requesting its
prioritization.
And finally, today we are having a hearing where no
exchange is here to testify. Let me remind you, the hearing is
entitled, ``Oversight of America's Stock Exchanges: Examining
Their Role in Our Economy.'' So, I am perplexed why we are
having a hearing that does not include the viewpoint from one
of the exchanges, or all of them, as was proposed by them, is
my understanding. I would hope my Democrat colleagues would
want to have a productive hearing focused on the issues that
matter to American investors and that includes all parties
involved.
We as lawmakers should be working to create an atmosphere
that helps promote more capital formation to allow the free
flow of capital, strengthen job creation, and increase economic
growth, and Committee Republicans look forward to discussing
how to do that today. But I, again, will note that this is not
a fulsome conversation, and I have been assured by at least the
participants that they would like to have a fulsome
conversation. We are missing some key elements, and I am not
sure what final outcome the Chair plans with his proposed
discussion language, and where these bills are going to go.
There is a lot more work to be done before there are any kind
of markups, and I hope that is going to be taken into
consideration.
And with that, I yield back.
Chairman Sherman. Thank you. I would like to clarify a
couple of things about the hearing. The first is this that is
the Capital Markets Subcommittee, so, it seems in order to have
a hearing overseeing our capital markets, and any question
dealing with our stock exchanges is within the scope of this
hearing.
The second is that the ranking member decries the absence
of representatives from the New York Stock Exchange and from
NASDAQ. I join with him in that. They both refused to come. We
were able to get a representative from the International
Xchange Organization.
Mr. Huizenga. Mr. Chairman?
Chairman Sherman. Yes?
Mr. Huizenga. Parliamentary inquiry. What time are you
taking to opine about all of this?
Chairman Sherman. The need to clarify the purpose of the
hearing so that Members understand what questions are in order.
Mr. Huizenga. So, you will be, of course, offering equal
time, then?
Chairman Sherman. If you have comments about which
questions are in order, you can bring them up.
Mr. Huizenga. Mr. Chairman, it just seems that you could
deal with that on your time. We know that we have votes. If you
would like to take this time, and grant us equal time, we can
have that debate. This needed to be pointed out.
Chairman Sherman. Sir, in your opening statement, you
criticized me for not inviting two relevant witnesses. It is
appropriate for me to inform you that those witnesses were
invited.
I now recognize the Chair of the full Financial Services
Committee, Chairwoman Maxine Waters, for 1 minute.
Chairwoman Waters. Thank you very much, Mr. Chairman, for
holding this hearing.
In the United States, there are thousands of companies and
exchange-traded funds (ETFs) traded on our stock exchanges,
representing $47 million in market capitalization. Stock
exchanges have a dual role of helping businesses raise funds to
support their business and creating transparent opportunities
for people to invest their funds. Unfortunately, despite being
invited to testify, the major exchanges, as the Chair has
said--the New York Stock Exchange, NASDAQ, and CBOE--are not
here today to describe their role in our economy or to help us
assess how to reform them. That said, I am very pleased that we
are considering, among other reforms, proposals to strengthen
corporate governance and limitations on exchange legal
immunity.
Thank you very much, Chairman Sherman.
Chairman Sherman. Now, I will introduce our first witness.
We have Professor Robert J. Jackson, Jr., a professor of law at
New York University School of Law, and a former Commissioner of
the SEC.
STATEMENT OF ROBERT J. JACKSON, JR., PROFESSOR OF LAW, NEW YORK
UNIVERSITY SCHOOL OF LAW, AND FORMER SEC COMMISSIONER
Mr. Jackson. Thank you, Chairman Sherman, and Ranking
Member Huizenga, for the opportunity to testify about the
oversight of the nation's stock exchanges today. For someone
like me, our stock exchanges are a symbol of how investing can
change the lives of American middle-class families. You see, I
was born in the Bronx, New York, to a big Irish Catholic
family. My mother is one of nine kids, my father is one of
five, and the day I was born, none of them had been to college.
So my parents plowed their paychecks into the stock market
every week, confident that their savings could give their son
the chance to go to school.
Forty years later, my parents sat behind me at my Senate
confirmation hearing to be a Commissioner of the Securities and
Exchange Commission. So, to me, our stock exchanges are not
only to encourage investment, and entrepreneurship, and growth;
they make it possible for two middle-class parents to change
their son's life. Our stock exchanges are at the core of the
American Dream, and that is why it is so crucial that our
exchanges give investors a level playing field and that is why
today's hearing is so important.
When I served as a Commissioner, I was fortunate enough to
give two speeches, one hosted by George Mason University and
the Healthy Markets Association, and the other by the Open
Markets Institute, on what I think is the uniquely American
solution to the problems that plague our exchanges:
competition. Both institutions are very different
ideologically, but they reflect strong bipartisan support for
ensuring that exchanges compete, like all American businesses
should, by adding value, not leveraging their market power and
legal status.
During my time at the SEC, my office led a series of
initiatives designed to achieve just that. Unfortunately,
exchanges have responded with litigation and lobbying to stall
important progress on these issues. Several of the bills you
are considering today would leave no doubt that the SEC has the
authority it needs to make our exchanges more than just symbols
of competition instead of businesses that thrive based on
innovation, not litigation, and I will address two issues in
those bills shortly.
When I first took office at the SEC, I asked our staff to
explain a puzzling fact. Even though we had 13 public stock
exchanges at the time, 12 of them were owned by just 3
companies. Now, I have worked on mergers and acquisitions as an
investment banker and a corporate lawyer, so I am familiar with
the economies of scale that justify acquisitions, but I rarely
come across an industry where conglomerates buy and then
continue to run identical businesses.
So, I asked the SEC staff, why are our markets structured
this way, and the answer lies in who decides what data
investors get on stock prices. We have a two-tiered system of
stock price information in this country: a lower-quality public
feed; and generally higher-quality private ones. The key is we
allow the exchanges to run them both while profiting from
private feeds. The more exchanges a company owns, the more
private data feeds they can charge for, even if doing so
conflicts with overall market efficiency. As a result, the
public feed is lower and less reliable than the private feed
the exchanges sell. That is because exchanges have
understandably underinvested in the public feed. It is a
product they compete with. As I said before, it is like letting
Barnes & Noble run our public libraries. Nobody could be
surprised to find out that our libraries don't have enough
books.
And as I said, during my tenure, the SEC took two key steps
to address exchanges' power over stock price data. First, we
adopted rules requiring exchanges to upgrade the public feed by
including additional information that has become essential to
trading in modern markets. Second, we adopted rules requiring
the exchanges to propose reforms to the governance of the feeds
so other stakeholders have a say in the quality and price of
the information available to investors.
Unfortunately, as I mentioned, exchanges responded by
suing, exercising the free option our courts had given
regulated entities to block changes to market structure. The
result is that much of the market structure reforms that we
pursued while I was a Commissioner still haven't happened. And
that is why the Securities Exchange Reform Act of 2022 is so
important. Among other things, the Act would leave no doubt
about the SEC's authority to require exchanges to give
stakeholders a say about the pricing and quality of the public
feed. The Act ensures that Congress, rather than the exchanges'
lawyers, will determine when these key reforms arrive.
The Act would also address another vestige of our outdated
regulatory structure. Although exchanges are now private,
profit-making entities, when they are sued, they seek the
shield of government immunity. Generally, market participants
expect to be held liable for the harm that they cause, and this
expectation gives them incentives to take care when dealing
with others. Government actors, by contrast, are usually held
harmless from liability so that their decisions reflect optimal
policy.
Exchanges claim that they are regulatory entities, so they
should be immune from liability when their profit-maximizing
decisions harm investors. Now, back when I was a corporate
lawyer, that was a better argument. Back then, exchanges
actually developed meaningful corporate governance rules that
gave investors a chance to hold insiders accountable. But
today, exchanges' profit motive leads them to pursue listings,
not investor protection. And since exchanges have exited the
business of corporate governance, they can't have it both ways,
pursuing profit when it suits them, and the shield of
regulatory immunity when it doesn't.
We have learned through hard experience that extending the
government's protections to profit-making actors gives them a
reason to take excessive risk, since they privatize gains from
their actions, but don't bear the losses. Moreover, exchange
rule books impose low liability limits, even when exchanges are
found liable for investor losses. Both of these are
inconsistent with the accountability we see in truly
competitive markets and both put investors at risk of losses
from decisions that are shielded--
Chairman Sherman. Professor, your time has expired. Perhaps
one more sentence to summarize?
Mr. Jackson. Of course. Let me just say that while it is
understandable that market participants seek legal advantage
where they can, we owe it to investors like my mom and dad to
give them confidence that the biggest participants in our
markets compete on a level playing field. Thank you again for
the opportunity to testify today.
[The prepared statement of Mr. Jackson can be found on page
44 of the appendix.]
Chairman Sherman. Witnesses are reminded their oral
testimony should be limited to 5 minutes. You should be able to
see the timer that will indicate how much time you have left.
And without objection, all of the witnesses' written
statements will be made a part of the record. It is the Chair's
intention to hear from two more of our witnesses, and then
adjourn so that we can vote.
We will now hear from, Mr. Michael Piwowar, who is the
executive director of the Milken Institute Center for Financial
Markets, and a former Commissioner and acting Chairman of the
SEC.
STATEMENT OF MICHAEL S. PIWOWAR, EXECUTIVE DIRECTOR, MILKEN
INSTITUTE CENTER FOR FINANCIAL MARKETS, AND FORMER COMMISSIONER
AND ACTING CHAIRMAN, SEC
Mr. Piwowar. Yes. Thank you, Chairman Sherman. You can just
call me Mike. It is easier to pronounce than my last name. And
thank you for inviting me here today. Ranking Member Huizenga
and members of the subcommittee, it is great to see you, many
of you in person. It is great to see so many familiar faces in
person today.
For those of you who don't know me, as Chairman Sherman
mentioned, I am the executive director of the Milken Institute
Center for Financial Markets. Over the course of my career,
most relevant to today's hearing, I spent 9 years serving at
the U.S. Securities and Exchange Commission. Earlier, I spent 4
years there as a visiting academic scholar and a senior
financial economist. More recently, I had a 5-year term as a
Commissioner, and also served as acting Chairman. During my SEC
tenure, I always appreciated the thoughtful work of this
subcommittee to help ensure that the SEC remained focused on
its noble mission to ensure that capital markets work, and to
make sure that they work well for everyone.
The U.S. capital markets are the envy of the world, due in
large part to the role that our stock exchanges play. America's
stock exchanges list the thousands of public companies that
millions of Americans invest in. They trade literally billions
of shares every single day, representing more than trillions of
dollars every single year.
As this subcommittee evaluates various legislative
proposals to change regulatory policies affecting U.S. stock
exchanges, my written testimony contains details that I won't
cover now, but I thought I would mention two broad areas. One
is guiding principles that I use when thinking about general
market structure policy, and then also, some comments on some
of the specific policy proposals listed for this hearing. I am
happy to provide more information about any of them during
today's hearing.
Our capital markets help make America's future bright for
everyone. For some, that future is to take their
entrepreneurial spirit and put it into action, take a risk,
start a company, raise capital from investors, hire workers,
and bring a product or service to market, thereby improving the
standards of living of the customers they serve, the employees
they hire, and the investors who share in their success.
For others, that future is to take their hard-earned
savings and invest in the job-creating entrepreneurs, and to
take the proceeds from those investments and provide for
retirement and security investments in their children's
education, and then reinvest some of those proceeds into other
job-creating entrepreneurs in their community and throughout
our great nation. So, when all is said and done, our capital
markets help all Americans invest in America's future by
investing in each other.
Mr. Chairman, thank you for bringing attention to the
critical role that exchanges play in our capital markets, our
economy, and America's future. Thank you again for the
opportunity to testify here today. I look forward to answering
all of the questions that you and your colleagues have.
[The prepared statement of Mr. Piwowar can be found on page
69 of the appendix.]
Chairman Sherman. Thank you for your brevity.
We now move to Ms. Ellen Greene, who is the managing
director at the Securities Industry and Financial Markets
Association (SIFMA).
STATEMENT OF ELLEN GREENE, MANAGING DIRECTOR, THE SECURITIES
INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)
Ms. Greene. Chairman Sherman, Chairwoman Waters, Ranking
Member Huizenga, Ranking Member McHenry, and distinguished
members of the subcommittee, thank you for the opportunity to
testify today on behalf of the Securities Industry and
Financial Markets Association (SIFMA). I commend you for
bringing transparency to the urgent need to modernize the self-
regulatory system underpinning the U.S. equity markets. SIFMA
is the leading trade association for broker-dealers, investment
banks, and asset managers. Our members' combined businesses
represent 75 percent of the U.S. broker-dealer sector by
revenue, and 50 percent of the asset management sector by
assets under management.
It is an honor to testify on behalf of our industry's 1
million employees and the hundreds of millions of Americans
they serve, whose retirement, education, and personal savings
are invested in the capital markets. This puts me in the
privileged position of being the only witness today who
represents communities in every district served by members of
this subcommittee: the former schoolteacher whose pension
allows her to retire comfortably; the working parent saving to
send their kids to college; the recent graduate who invests a
portion of her paycheck each month; and many more like them.
Those are your constituents, they are our clients, and it is
the financial future that should be our focus for today's
discussion.
Our equity markets facilitate the capital formation that is
the lifeblood of our economy. Government's primary objective is
to protect the interests of the investing public. Most
securities laws meet that standard, but there are features of
the self-regulatory system that fall short and need to be
updated.
In the Securities Exchange Act of 1934, Congress codified
exchanges as self-regulatory organizations known as SROs. As
such, each exchange is required to enforce compliance with both
its own trading rules and Federal securities laws. This
includes the power to examine, investigate, and bring
disciplinary actions against broker-dealers. This system made
sense in 1934 when exchanges were organized as non-profit
cooperatives owned by their broker-dealer members who operated
them like utilities. But starting in the early 2000s, America's
exchanges became for-profit entities, and many are part of
publicly-traded companies.
Driven by their duty to maximize profits, exchanges now
sell market data and other products to broker-dealers who
compete against them for order flow and execution services. In
other words, the institutions upon which our self-regulatory
system was built no longer exist. Like other for-profit
companies, exchanges act in the best interest of their
shareholders, but there is a fundamental conflict of interest
between that duty and their regulatory duties to protect the
interests of the investing public. This conflict is made worse
by special privileges granted to the exchanges prior to them
becoming for-profit entities. For example, exchanges have
historically been exempted by courts from private liability for
damages they cause while performing their regulatory duties,
but have sought to expand this immunity to damages caused while
acting as for-profit entities.
Exchanges also impose non-negotiable, unreasonably low
limitations on their private liability for damages they cause.
In fact, the exchanges try to impose a $500 limitation of
liability on broker-dealers in the event of a cyber breach of
the Consolidated Audit Trail, known as CAT. Exchanges have the
unique right to sell their data products, and monopolistic
power to set their prices, while broker-dealers and others are
captive customers with no alternatives. Exchanges exclude their
competitors from fully participating in but require them to
comply with and help finance major initiatives developed as NMS
plans. And exchanges' overlapping regulatory jurisdictions give
them access to broker-dealers' highly-valuable trading data
through their access to CAT. In sum, the powers that for-profit
exchanges have to regulate and set the costs for their
customers and competitors make our equity markets less fair,
competitive, efficient, transparent, and inclusive. This harms
the investing public.
My written testimony discusses five reforms targeted at
these unfair privileges. Enacting them will modernize our self-
regulatory system and make our equity markets fairer and more
efficient. They offer a rare chance for bipartisan cooperation
to serve the interests of individual investors. We stand ready
to work with anyone who shares this goal. We have a unique
opportunity to make a positive difference in the lives of
hundreds of Americans in every State and congressional district
in the country whose financial futures are invested in the
capital markets. We should not let it pass.
Thank you, and I look forward to answering your questions.
[The prepared statement of Ms. Greene can be found on page
30 of the appendix.]
Chairman Sherman. Thank you. The Chair notes that over 300
Members have yet to vote, and, accordingly, we will recognize
at least one more witness.
I now recognize Nandini Sukumar, the CEO of The World
Federation of Exchanges, and our one witness who is willing to
come before us representing the exchanges, both here in the
United States and elsewhere. Ms. Sukumar, you are recognized
for an oral presentation of your testimony.
STATEMENT OF NANDINI SUKUMAR, CEO, THE WORLD FEDERATION OF
EXCHANGES (WFE)
Ms. Sukumar. Good afternoon, Chairman Sherman, Ranking
Member Huizenga, and members of the subcommittee. It is a
pleasure to be here, and I'm happy to do it anytime. We
represent not only U.S. exchanges, but exchanges around the
world. Our U.S. members have a solid history with the WFE. We
are an old trade association founded in 1961. So, U.S.
exchanges here today have indeed been active participants
engaged in leadership roles across the world in the world of
exchanges.
As I mentioned, the WFE is the global trade body for
regulated exchanges and clearinghouses. Since the beginning, we
have focused on improving markets. We now represent over 300
pieces of market infrastructure, exchanges, and CCPs. All of
them are highly-regulated businesses.
As a preliminary point, I would like to note that exchanges
work very hard to ensure robust infrastructure, including
cybersecurity and operational resilience, more generally. They
demonstrated this extensively through one of the most testing
times for financial markets during the pandemic, of course, a
period when broker-dealers by contrast very clearly faced
operational difficulties.
In all cases, WFE member exchanges fulfill a function that
we see as critical to capital markets and price formation.
Without clear, unbiased, authoritative, and up-to-the minute
information about the ever-changing value of financial assets,
markets would simply struggle to serve society. This is why it
is one of the key criterion of membership of the WFE that an
exchange performs such a role, ensuring a properly-structured
setting for establishing the consensus price of financial
assets at any given moment.
At the same time, the modern exchange has to be a dynamic
and competitive business, constantly investing in new capacity
in order to meet the ever-increasing demands of investors, of
issuers, of securities, and of financial service companies
globally. The exchange, therefore, performs a valuable role
from which financial service intermediaries benefit
particularly greatly, and which has broader public benefits
serving the businesses that need capital to grow and the
investors whose savings can be put to worth.
Our members have many things in common, but the deeper,
more fundamental shared characteristic is that they are the
core of capital markets in their respective jurisdictions.
Supporting fair and transparent trading is their purpose and,
in our view, an essential component of public trust in the
financial system. Our members recognize that the central role
has always come with significant responsibility and will
continue to do so.
There are many ways in which this responsibility manifests
itself, including setting the rules for who can participate and
how, ensuring surveillance of the trading process and
overseeing everything from listing requirements to trading
halts to stock splits. These functions relating to the
operation and oversight of their markets are highly regulated
and complex and are all conducted in furtherance of fair and
orderly markets and protection of investors.
I want to stress that the exchange really creates the
marketplace and flow of price information, but it does not
participate in it. In other words, the great strength of the
exchange model is that they act as an impartial facilitator of
business, ensuring that transactions can take place in a safe
and efficient manner while staying at arm's length from the
back and forth that characterizes the typical trading day. This
is a very important distinction, and just as importantly, it
applies whatever the ownership and governance structure of the
exchange. The very nature of the exchange role is to be a
trusted third party that must fulfill considerable statutory
obligations every single day. The U.S. securities exchanges are
not only very highly regulated, but incredibly transparent. All
rules and charges are filed with the SEC and publicly
available, something that cannot be said for many other
entities in capital markets.
I started by talking about the exchange business being
modern in outlook, but it is built on well-established
principles, much longer than the WFE's own history. It is a
blend of these well-established principles and state-of-the-art
operations that makes exchanges so effective for the full range
of market participants, including everyday investors as well as
Wall Street.
In summary, exchanges take their role and responsibility
seriously because this is what makes them effective and
valuable. Thank you.
[The prepared statement of Ms. Sukumar can be found on page
76 of the appendix.]
Chairman Sherman. Thank you. I am now going to recognize
our fifth witness, with the warning that if we get down to only
70 Members not voting, I may ask you to suspend.
We have with us Manisha Kimmel, who is the chief policy
officer of MayStreet.
STATEMENT OF MANISHA KIMMEL, CHIEF POLICY OFFICER, MAYSTREET,
INC.
Ms. Kimmel. Thank you for holding this hearing and for
offering me the opportunity to appear before you today. My name
is Manisha Kimmel. I am the chief policy officer at MayStreet,
and throughout my 25-year career, I have worked at the
intersection of regulation and technology. At MayStreet, I
focus on the policy issues that impact market data and our
business model.
MayStreet is a fast-growing fintech. Our software processes
market data from hundreds of trading venues across multiple
asset classes worldwide. Market data from the U.S. stock
exchanges is a big part of what we do. We are active in the
market structure through our comment letters and membership and
industry associations, including the Healthy Markets
Association and the Financial Information Forum. I look forward
to offering our view on the important role American exchanges
play in our capital markets and on how Congress can improve
oversight of the national market system.
The exchange world has changed. I would like to highlight a
few of these changes. First, the major exchanges are now
publicly-traded companies. Second, broker-dealers are not just
customers of the exchanges; they are competitors to them.
Third, exchanges sell their raw data and package it into a
number of products. The sale of their own data as well as their
allocation of sales from the public market data stream are
significant sources of revenue. Fourth, exchanges seek to
innovate in terms of order types, product offerings, and
pricing models, and to support those business decisions, the
exchanges filed over 1,300 rules in 2021 alone. Over 700 of
those were immediately effective. Compare that to 20 years ago,
when exchange filings numbered in the dozens.
In light of these market dynamics, we believe this
subcommittee should take action in the following areas. Our
first recommendation is that Congress give the SEC direct
control over the public market data stream. Industry and
investor groups have raised concerns that the current NMS plans
structure that administers the public data stream is not
serving investors. The SEC has tried to address these concerns
through recent rules, specifically the CT Plan and the Market
Data Infrastructure Rule, also known as the MDI Rule. The CT
Plan, among other things, includes the industry and investors
as voting members of the governance of the NMS plan. The MDI
Rule would expand the content of the public data stream and
bring competition to its production and distribution. Both of
these rules are tied up in litigation between the SEC and major
exchanges.
This conflict calls into question the value of operating
the public data streams as NMS plans. Why? Because there is a
fundamental misalignment of interests. On the one hand, the
congressional mandate to ensure timely access to core market
data at a reasonable price, and on the other hand, the
commercial interests of the major exchanges seeking to maintain
revenue, the over $400 million in revenue from the public
market data stream and revenues associated with the exchange's
own data products that directly compete with that public data
stream. While adding investors and brokers to the NMS plan
governance is a step in the right direction, we believe that
Congress should go further and give the Commission control of
the public market data stream.
Our second recommendation is that Congress eliminate
immediately effective exchange fee filings. Subjecting exchange
fee filings to notice and comment would mean that fee changes
cannot be retroactive, nor can they be effective until after
the SEC reviews and approves them. Exchange fees matter to
investors because they directly affect order routing decisions
and the ability of broker-dealers to achieve best execution for
their customers.
Market participants should be given a voice in how and when
fee changes go into effect. To that end, MayStreet supports the
discussion draft legislation posted in connection with today's
hearing that would amend the Exchange Act to modernize the
filing and approval requirements for these fee filings.
Specifically, by requiring exchange fee filings to go through
the regular Commission review and approval process, the
proposed legislation will allow the SEC to discharge its
statutory duty to affirm the Exchange Act standards are met,
namely that exchange files are reasonable, equitably allocated,
not unduly burdensome, and not discriminatory.
Our third recommendation is that Congress create a clear
mechanism for the SEC to review and remand filings already on
the books. The SEC attempted to summarily remand over 400
filings for review. Unfortunately, the SEC's efforts were
overturned by the courts, so Congress should step in. Investors
and others should not continue to pay fees that are
inappropriate, given the application of the Exchange Act
standard in today's environment.
Our fourth recommendation is that Congress and the SEC
provide definitive guidance on the Exchange Act standard as it
relates to exchange fee filings. While Congress has explicitly
declared that exchange fees need to meet Exchange Act
standards, it has not defined what that means. Having the
exchanges and the Commission on the same page helps investors,
because when you set expectations properly, the process is less
time-consuming and more consistent.
Thank you for your consideration of our recommendations,
and for the opportunity to share my thoughts on these important
topics.
[The prepared statement of Ms. Kimmel can be found on page
55 of the appendix.]
Chairman Sherman. Thank you for your testimony.
The subcommittee will now stand in recess, and we will
reconvene immediately following the conclusion of this series
of votes.
[recess]
Chairman Sherman. The subcommittee is back in session.
I now recognize myself for 5 minutes for questions.
Ms. Greene, in your written testimony, you highlight that
when NASDAQ was sued by market participants for mishandling
Facebook's 2012 IPO, the exchange argued that it was immune
from liability because it was also an SRO. However, handling
the Facebook IPO is something they did in their proprietary
capacity, and, in fact, they charged for it. My discussion
draft, the Securities Exchange Reform Act, which has been
noticed for this hearing, would clarify that exchanges are
shielded by immunity only when carrying out their regulatory
functions. Could you speak to how a clarification of this
standard would help market participants?
Ms. Greene. Certainly. A clarification of this standard
would help clarify some of the judicial standings that we have
today where exchanges have historically been exempted by courts
from private liability for damages they cause while performing
their regulatory duties, but have sought to expand this for
damages caused while acting as for-profit entities. And making
changes to this and having the exchanges be responsible for
damages that are caused when they are acting in a for-profit
capacity, we think is important, because we do see them
increasingly hiding behind their regulatory shield. And that
was adopted back in 1934, in the Exchange Act, and certainly,
we have seen a lot of evolution in the exchanges in the early
2000s to for-profit companies.
So, it seems that some of these special privileges that
they enjoy today really need to be addressed through some of
the legislation that has been put forth so that they are more
similar to other publicly-traded companies that don't enjoy
immunity from commercial activities. And also, looking at
things like limitation of liability, prohibiting the exchanges
from setting an artificially-low cap so that when there are
incidents like Facebook, there is adequate funding or the
ability to sue them in court so that there is able to be
compensation to cover investor losses.
Chairman Sherman. I would point out that my discussion
draft provides that there would be or allows for some cap with
the intention that we would set that cap at a level where the
exchanges could get insurance. The goal here is not to endanger
them, even if there should be something like what happened with
Facebook, which some have said was a $500 million item, but
rather to make sure that we put liability where the negligence
resides.
Ms. Kimmel, as you know, data is the lifeblood of all
financial markets. Through their control of the National Market
System (NMS) plans, which govern the collection, aggregation,
and distribution of public stock market data, the exchanges
have control over what investors rely on that data in their
market trading decisions. They have the, ``public data, the
tape,'' which is provided for one price, but then they
simultaneously sell separate proprietary data to market
participants, which is more detailed, and delivered more
quickly than the public market data. Would you agree this
creates a disincentive for the exchanges to improve the quality
of the tape, the market public data, when they have a competing
product that sells for more?
Ms. Kimmel. I think it absolutely does, but just to explain
it, the exchanges actually sell two types of proprietary feeds.
One type is the top-of-book feeds, and the other type is the
depth feeds. The depth feeds are the ones that you are talking
about that are more expensive, have lower latency and every
order of data. But it is important to understand that this top-
of-book data they sell is less expensive, has less data, and is
chosen by retail broker-dealers instead of the consolidated
tape because of those reasons. Because of that, we think it is
very important that this market data infrastructure rule
proceed, which would expand the content on the tape.
Chairman Sherman. In my remaining seconds, I would note
that of roughly 44 percent of stock trading happening off the
exchanges, 70 percent of that was Citadel and Virtu. And I am
going to ask Professor Jackson for comments on the record
regarding that as my time has expired.
And I now recognize the ranking member of the subcommittee,
Mr. Huizenga.
Mr. Huizenga. Mr. Chairman, before I ask my questions, I
ask unanimous consent that the testimony of Kevin Edgar on
behalf of the Equity Markets Association be entered into the
record.
Chairman Sherman. Without objection, it is so ordered.
Mr. Huizenga. Thank you. Ms. Greene, it is my understanding
that this is your first time testifying in front of Congress.
Well, welcome to the circus. I won't ask you to identify the
clowns, but we try to be productive here. So, yes, that is
looking in a mirror every day, right?
I wanted to take a moment to the discuss Consolidated Audit
Trail (CAT). This is something that we have discussed before.
Currently, the SEC has it before it, and because I believe that
this is an issue that is important for everyone represented in
the room, I just wanted to touch on that. Frankly, it has been
an issue we have been discussing for quite a while. In fact, in
2017, when I chaired this subcommittee, we had a hearing on
that topic, and at the time, I discussed a proposal I had
introduced that was meant to safeguard and govern the security
of the information reported to, stored by, and accessed by the
Consolidated Audit Trail.
Fast forward to August 2020, and the SEC proposed
amendments to the National Market System Plan governing the
Consolidated Audit Trail to bolster its data security. I think
it is important to remember that the CAT will be the largest
database of customer and institutional trading data ever
created, and will include a lot of very sensitive information,
to say the least. So given this, I think it is imperative for
all market participants that the SEC get this right. They have
to have the confidence of investors that their information is
going to be safe and will not be at risk of a data breach.
Would you mind sharing your perspective on: one, the SEC
getting it right; and two, the SEC moving quickly to approve
the proposal?
Ms. Greene. Yes, of course. Thank you. SIFMA remains in
full support of the CAT. We do agree with you that there
remains a lot of data security issues and privacy concerns that
haven't been addressed to this day. Certainly, the SEC proposal
that was put forth by former SEC Chair Clayton was something
that SIFMA supported. We did have minor modifications to it,
yet we thought that the Commission's concept of keeping the
data within CAT in a secure environment that they could work on
was a big improvement to having them download the data out of
CAT. And, in fact, we saw many of the exchanges file comment
letters opposing that proposal and their ability to take data
out of the CAT. When we do look at CAT, we really think that a
breach is more of a win, and if, again, we continue--
Mr. Huizenga. And, in fact, it has happened.
Ms. Greene. Yes, it has. And as I said, we continue to
raise this issue with FINRA CAT, the SROs, and the SEC, as well
as this committee. And we were very supportive of your
legislation back in 2018, Congressman Huizenga, and we think
that the American Customer Information Protection Act that
would prohibit the collection of personally-identifiable
information was something that was very important. SIFMA did
work with the SROs to keep Social Security numbers out of CAT,
but we do remain concerned about that data and think those
changes are really long overdue.
Mr. Huizenga. I appreciate that. I have a minute-and-a-half
left, and we can continue this discussion about how fast the
SEC is moving or not.
Mr. Piwowar, you are a former Commissioner, as well as a
former acting Chair of the SEC. There is lots of concern, at
least on this side of the aisle, about the impact of the short
comment periods that the SEC is giving market participants.
Could you touch on that very quickly? And then, somewhat
related to that, by the SEC's own admission, there are economic
consequences and potential negative unintended consequences
that are there. SEC's climate-related disclosures are estimated
to cost $10.2 billion in paperwork burden alone, and some
estimates have it at greater than that.
So if you could couple those things, short comment periods
and dramatic, huge moves like that coming out of the SEC?
Mr. Piwowar. No, that is absolutely right. When I was on
the Commission, I was an advocate for 90-day comment periods,
the longer, the better. Some people think it is a way to sort
of keep special interests from weighing in during the comment
period, but it has the opposite effect. The trade associations
can hire lawyers to do this. It is everyday Americans who don't
have time to read through these huge, long proposals--the
climate proposals more than 500 pages. And the other thing is
that there are so many proposals out at the same time, right?
It is not that you have 30 days--
Mr. Huizenga. They are just flooding the zone at this
point.
Mr. Piwowar. Flooding the zone. Chairman Gensler is very
smart, and he has run an agency before. And when he was at the
Commodity Futures Trading Commission (CFTC), he was very famous
for putting something very important into Footnote 513 on a
cross-border rule. So, folks have to read these rules very,
very carefully, and they need the time to do that.
Mr. Huizenga. My time has expired. I appreciate it.
Chairman Sherman. Without objection, I would like to submit
for the record a statement from Fidelity Investments, and a
letter sent to the committee for this hearing from OTC Markets,
American Securities Association, Insured Retirement Institute,
and Public Citizen.
Without objection, it is so ordered.
I now recognize the gentleman from Illinois, Mr. Casten.
Mr. Casten. Thank you, Mr. Chairman. And thank you to the
witnesses. I want to talk about something or ask questions on
something that is off the topic here, but certainly top of
news, and that's Russian money laundering. This is as much as
just sort of background for me because I feel like, as a member
of this committee, I should be smarter on this issue than I am.
In 2017, there was the whole Deutsche Bank mirror trade scandal
with folks buying on a Russian market a dual-listed security,
and then selling it on a London market and essentially
converting Russian assets into hard currency.
And I guess I want to start with you, Mr. Jackson. Just
walk me through, if you can, from an exchange perspective, if
you have a same party or a related party executing the same
trade on two different markets that are obviously connected, do
you, as the U.S. exchange, as a U.S.-domiciled exchange, have
any obligation? Do you have the data? Do you have any
monitoring of that trade, or is the only compliance on the
trader in Deutsche Bank? And I realize this was 2017, so it was
a lifetime ago in Russian money laundering, but I just want to
understand what you are monitoring right now, and are we
satisfied that barn door is closed?
Mr. Jackson. Thank you, Congressman, and I certainly think
it is a crucial issue. And I share the concern about the degree
to which foreign money finds its way into U.S. companies and
exchanges. I think on this front, the exchanges have done very
well to collaborate internationally with exchanges all around
the world about the flow of funds into various kinds of
companies.
But, Congressman, I do want to highlight a concern about
this. You might know that Congress just last year unanimously
passed what I think is a very important statute, the Holding
Foreign Companies Accountable Act, which requires the listing
of firms, particularly those from China, that refuse to have
auditors' books inspected. And to me, audit inspection of the
company's books is the basic lifeblood. It is the most basic
rule of the road that we have in American capital markets.
And a question that someone could ask, sir, and the
question that I would like to ask is, why was it necessary for
Congress to pass a law letting exchanges know that they
shouldn't be listing companies that refuse to have their books
inspected? Here, too, I would think that the exchanges, if they
were going to take their regulatory role more seriously, would
not require a Federal law to be more careful about the kinds of
companies that Americans are investing in. So, I do think the
concerns you have raised are quite serious. The exchanges face
a serious problem, a serious challenge there. And they have
done important and very hard work on questions around money
laundering and foreign investment, but I think we have a long
way to go.
Mr. Casten. Okay. Ms. Sukumar, same question for you, but
from your vantage point of seeing a lot of different
international markets that are all in somewhat different
regulatory regimes. And I want to frame this question by
saying, if your answer to this question is, we should talk off
the record, that is fine. But are there gaps in regulatory
structures between the reporting structures, the compliance
between these markets, so that if you had a dual listed
security, maybe I can't go straight from Russia to London
anymore. But are there other international markets, are there
areas where you are concerned about so that we can ensure that
we are not using our markets to launder money?
Ms. Sukumar. Thank you very much for the question and the
opportunity. I would start by saying that every exchange in the
world, every public market in the world is incredibly focused
on ensuring that there is integrity of their markets. So, money
laundering is a key concern, I think, that every exchange, not
just in America, but across the world, shares that focus,
shares that drive, that vision really of having clean money,
and stringent standards across markets globally.
I have two things, really, at this point to offer you. One
is that every member of the WFE has to pass membership
criteria. So we do a kind of assessment, and a really important
membership criteria for us is, do the members comply or
conform? Do they recognize international money laundering
standards, and the answer is a resounding, ``yes.''
And the second is that, among our membership criteria,
almost the first rule is where we look at regulatory
jurisdiction, and we say, is your regulator a member of the
international regulatory association, the International
Organization of Securities Commissioners (IOSCO). And the
reason that is particularly important is because regulators
internationally have a memorandum of understanding (MOU). So,
they sign this agreement where there is information sharing
that helps them crack down on international crime.
I would say to you, it is obviously a complex topic. It is
obviously a topic that worries everyone. And I think the
exchanges have been doing a remarkable job at keeping markets
clean. It helps, of course, that in that DNA exchanges are
transparent markets, right? We live by corporate disclosure.
Thank you. I see I am out of time.
Mr. Casten. Now, I am out of time. And I guess I will just
leave it at, I still don't understand whether this was Deutsche
Bank that was not reporting information that the exchanges
should have had access to, or whether the exchanges weren't
monitoring that information. And I would be happy to continue
with any of you offline should you have more to share. I yield
back.
Chairman Sherman. Thank you. I now recognize the gentleman
from Ohio, Mr. Davidson.
Mr. Davidson. Thank you, Mr. Chairman. I thank our
witnesses and appreciate the chance to talk to you about this.
Frankly, Ms. Kimmel, when I heard your testimony, there are a
lot of things I would love to go into, but we have a hard time
in the Minority picking topics for hearings. So, I am going to
stretch some of the experience that you have had, and Mr.
Piwowar, in particular, with your time at the SEC.
While this hearing discusses regulatory proposals to
enhance our current market structure, I would like to focus for
a second on what we have learned from our existing structure
and how that can help us craft a framework for the future with
respect to crypto exchanges. It is inevitable that crypto
exchanges will continue to expand and become accepted over the
course of the next few years. We can probably all agree that
they will need to be regulated by someone. And an inherent part
of that regulation will include an adequate disclosure regime
like we have in place today with respect to equity markets.
In your testimony, Mr. Piwowar, you do a good job of laying
out the guiding principles for market structure for traditional
equities markets. In your opinion, what are some of the
principles or perhaps some of the aspects of Reg NMS that we
could emulate for a future crypto exchange framework?
Mr. Piwowar. Yes, thank you, Congressman. The first thing
to recognize is that the U.S. equity markets are very complex.
As has been mentioned here, it is not just exchanges, there are
market makers, and there are alternative trading systems, and
the like. We have the same thing in the crypto world. We have
exchanges. We have wallets. We have all kinds of different
things.
And so to recognize that this is a dynamic and changing
environment, and you want to set down the rules of the road, so
you sort of balance the two pieces of the sort of two of the
three parts of the SEC's mission. On the one hand, you want to
protect investors, but on the other hand, you want to
facilitate capital formation and innovation, and the key is
getting that right. And the way you do that is through economic
analysis, cost-benefit analysis, and then continuing to look at
it over time to see whether or not we need to make changes over
time based upon when markets change and what type of
technologies change.
Mr. Davidson. Are long, drawn-out enforcement actions
selectively applied effective, or is a clear rulemaking process
more effective?
Mr. Piwowar. Yes, clear rulemaking, obviously. Throughout
my entire term, I was against rulemaking by enforcement. It is
not fair to the people who aren't parties to the enforcement
action. Oftentimes, you have a settlement that is entered into
by one party and the Commission. And then, there are
undertakings that become de facto rulemakings, that were not
put out for notice and comment, that were not put out for other
people to weigh in on, and now, that becomes a de facto
rulemaking with which they have to comply.
Mr. Davidson. And investors are hurt when that happens,
correct?
Mr. Piwowar. That is correct.
Mr. Davidson. Yes. And I think that it becomes incumbent
upon Congress at some point to really provide that clarity and
not just for the investors, but for the innovators, and
frankly, for the regulators, because then you know there is a
bright line. You are on this side of it or that side of it. And
if can I shift, Ms. Sukumar, on a similar note, how do you
think we could effectively build a framework that prevents
market fragmentation and promotes transparency? Obviously, the
crypto market has inherent differences such as a global reach;
75 to 90 percent of the liquidity is offshore; and it runs 24/
7. But here in the United States, how can we entice future
exchanges to build their presence here in the United States
versus offshore?
Ms. Sukumar. Thank you, Congressman. That is a great
question. The crypto, I think, continues to preoccupy us all,
partly because we do want that innovation to occur, but I would
also say to you, innovation isn't innovation if it is breaking
the rules. So, we have had a question on Russia, and I am
really thinking, I wake up every morning, and there is a
headline about crypto platforms. I can't think of any that are
registered as licensed exchanges, crypto platforms, saying, we
are not going to follow sanctions dictates. So, I think really
what would be incredibly helpful in thinking about crypto,
because crypto is an asset class, is it needs to be traded in a
way the retail investors in the world--
Mr. Davidson. Yes. Let me interrupt you there for a second,
because if you are asking a foreign exchange to do something
that has Know Your Customer (KYC) provisions, that is a
different question. If you are asking for something like a node
to be able to do it, you don't even know the identity of who
owns which wallet, and frankly, you can't do that and not try
to kill the entire concept. So, I think there are a lot of
people who don't really actually understand the space, which is
a barrier to creating regulatory clarity. I do hope that we can
have future hearings where we deal with these topics because we
touch on a lot of topics with--
Chairman Sherman. The time of the gentleman has expired.
I now recognize the gentleman from West Virginia, Mr.
Mooney.
Mr. Mooney. Thank you, Mr. Chairman. SEC Chairman Gary
Gensler assumed office on April 17, 2021, so we are approaching
the 1-year anniversary of Mr. Gensler's tenure. Already, I have
some concerns about the direction of the Commission under Mr.
Gensler's leadership. Mr. Piwowar, you spent 5 years on the
Commission, and you know the way it functions as well as
anyone. So, Mr. Piwowar, in your testimony today, you wrote at
length about pilot studies as a tool for the Commission to
measure and test the impact of changes in policy before
implementation. Can you further elaborate on the pilot studies
and how they have helped the Commission avoid bad policy
changes in the past?
Mr. Piwowar. Yes, thank you for your question. I am a big
proponent of pilot studies. At the same time, I recognize there
are limitations and we need to put some guardrails around them.
One of the examples of a successful pilot study was the Tick
Size Pilot program that the SEC did, and also the Reg SHO Pilot
where it got rid of short sale restrictions.
The Tick Size Pilot, which they were proponents of for a
long time, said if we increase the tick size for small cap
securities, it would improve liquidity. Some people thought
that it would increase analyst coverage. We did that pilot, and
it showed that neither one of those happened. It wasn't a
success in that it wasn't a success because it didn't help
small cap companies, but it allowed us to sort of say, okay,
that is not a problem. We can move on and look at other things
to help improve the liquidity there.
In terms of limitations, I recognize that pilot studies can
be costly for market participants to implement, so the SEC
needs to do a robust cost-benefit analysis to make sure that it
is proper. On that note, I will note that some pilot studies
like the Tick Size Pilot were done through an NMS plan, and I
know that NMS plans are a large part of this hearing. I would
prefer the pilot studies be done through notice-and-comment
rulemaking so that everyone has a chance to weigh in and can
say what they believe in terms of the cost and the benefits of
any particular pilot program.
Mr. Mooney. Thank you. I have a general concern about the
Administration, all levels of government making law, which is
the rule of Congress, not the Administration. But at least if
you are going to issue new rules and regulations, I think a
pilot study and being cautious would make sense.
Mr. Piwowar. Yes. And if I may, one of the unfortunate
things that came out of the access fee pilot was challenged in
court, and the D.C. Circuit said in there that the SEC did not
have the authority to conduct a pilot study. And I think what
would be helpful, a great role for this committee, if I may,
would be to clarify that the Commission does, in fact, have the
authority to engage in pilot studies, and maybe also put some
guardrails around that where it should be done through notice-
and-comment rulemaking rather through an NMS plan.
Mr. Mooney. Thank you. We will look into that. Second
question, capital formation is a core part of the SEC's three-
part mission if the Commission's current agenda does not
include any capital formation proposals. So, Mr. Piwowar, can
you speak to the importance of reducing burdens for companies
seeking access to capital?
Mr. Piwowar. Yes. As a matter of fact, next week is the
10th anniversary of the hugely bipartisan JOBS Act. It was
probably the most successful piece of bipartisan legislation
during the Obama Administration. And what we saw there was that
if you can do some tweaks around the edges, lessening some of
the burden for companies going public--the IPO on-ramp was
probably the most successful provision in that legislation--
that works. So, I would encourage this committee and the
Commission to keep looking at what are some new ideas, 10 years
later, that we could continue to do while protecting investors,
but to improve the formation of capital.
Mr. Mooney. Fair enough. And I will just make some closing
comments in the minute I have left, but I am concerned that the
Commission's current leadership seems more interested in
regulating broadly and asking questions later. Mr. Gensler has
repeatedly said that digital assets are securities. Imminently,
for Mr. Gensler, that legal interpretation could give the SEC
broader authority to regulate the entire industry. On the issue
of climate disclosure, the SEC has decided to play the role of
social activist by requiring that Scope 1 and Scope 2 emissions
be disclosed by all public companies, whether or not those
emissions are material to investors. So, regardless of whether
they are sought by the average investor, the SEC has decided
that public issuers must provide them.
It is not at all clear how this climate requirement fits
within the three pillars of the SEC's mission of protecting
investors; maintaining fair, orderly, and efficient markets;
and facilitating capital formation. Yet, Mr. Gensler has
prioritized his agenda item over making any single rule related
to the capital formation. So, unfortunately, the Commission's
current leadership is not adhering to the restrained, measured
approaches that characterize good government, and I wish he
would look more carefully at your testimony instead of pursuing
the priorities of climate change activists.
Thank you, Mr. Chairman. I yield back.
Chairman Sherman. Those watching the hearing will notice
that we don't have as many Members as usual. They should be
aware that there is now a classified briefing regarding Ukraine
going on, and Members had a tough decision.
The gentleman from Ohio, Mr. Gonzalez, is now recognized
for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Mr. Chairman. And thank
you to our witnesses. Let me start by thanking you and
Chairwoman Waters for attaching the bipartisan Registration for
Index-Linked Annuities Act that I introduced with my friend,
Alma Adams. It is my hope that this committee can advance this
common-sense legislation in the coming weeks. It has strong
support from Members on both sides of the aisle. I look forward
to debating that, hopefully soon.
Mr. Piwowar, I want to start specifically with you. You
mentioned the JOBS Act's 10-year anniversary. I know you are
very familiar with it. I want to give you some time to maybe
comment on areas where you think we can go further to improve
that IPO on-ramp, to make sure that there are more companies
going public and that they can do so in an efficient manner. I
would love any of your thoughts on that.
Mr. Piwowar. Sure, I have some. I see Congressman Emmer is
here. We are going to get into his Venture Exchange Bill a
little bit later. I think that could be a nice piece of the
puzzle. What the JOBS Act showed was that we can make some
differences around the edges. What it also showed was that
there were a number of provisions in the JOBS Act that a lot of
people ahead of time ex ante thought were going to be taken up
and be used, and they weren't. But other ones, we didn't
realize were going to be as important as they ended up to be.
So, for example, the ability of companies to do confidential
filings with the SEC has proven to be a huge success that
allows companies to go through that process, and if they decide
not to go through with the offering, it is not like there is
some sort of stain on the company or whatever.
Mr. Gonzalez of Ohio. Yes.
Mr. Piwowar. Biotech companies really like that idea
because it allows them to keep proprietary information from
their competitors, but then that information becomes public in
enough time for investors to move forward. So, just as a
general matter, I would encourage this subcommittee, and the
committee at large, and Congress to come up with as many
different ideas as possible, because we don't know which ones
are going to be used.
Now, having said that, I think venture exchanges are one
potential way to go forward, but there are things you could do
in that area. The other one is, I think, opening up the
accredited investor definition to allow more investment in
private companies is something--
Mr. Gonzalez of Ohio. I totally agree.
Mr. Piwowar. --that we could do. And then, just anything in
the IPO. There are other types of burdens and regulations to
take a look at. So, 10 years later, are there new things now
that are burdening companies? There is what is called the,
``pebbles in the stream,'' analogy in terms of regulatory
accumulation.
The Commission does a good job of looking at, on an
individual basis, cost-benefit analysis, but over time, those
regulatory burdens can go over time. And they are like,
``pebbles in a stream,'' where each individual pebble doesn't
stop the flow of the stream, but cumulatively, they can, and
you can't look back and say it was any one of those. So, I
would encourage folks to look back and say, well, what has
accumulated over the last 10 years that could potentially be
scaled back for these smaller emerging growth companies.
Mr. Gonzalez of Ohio. Yes, I think the accredited investor
rule, in particular, just by definition, shuts out so many
Americans. And we know that the bulk of the returns or a lot of
the returns of our fastest-growing companies are now happening
in private markets. So, we are excluding minorities, and we are
excluding lower-income retail investors from being able to get
involved at the ground level at some of these exciting
companies. I think it is a horrible rule. I would love to see
bipartisan support around coming up with something more
sensible. Sure, we have to protect folks, but good God, let's
give them an opportunity.
Mr. Piwowar, I am going to ask for your quick thoughts on
another SEC rule that has been considered, which is to require
U.S. private companies to disclose more information as if they
were public, but without any of the benefits of accessing the
public markets. Do you have any concerns with that approach? Do
you think it is the right approach? And how do you feel about
it with respect to capital formation?
Mr. Piwowar. Yes, I do have concerns. We obviously have a
regime for public companies and a regime for private companies.
And I worry about the unintended consequences from these.
Obviously, if you overburden public companies, you are going to
have more private companies. And I worry about the fact that
these companies will just go overseas, and then U.S. investors
won't have access to the potentially great growing companies
and the entrepreneurs of the future.
Mr. Gonzalez of Ohio. I only have 30 seconds left, so I
don't know if I can get this out, but it was a similar concern
with the ESG disclosures, and I was talking to a friend of mine
who works in the investment industry, and he said, look, this
is a total giveaway to the private equity industry because what
is going to happen is smaller companies, who aren't going to be
able to make or don't want to make those disclosures, are going
to have trouble making those disclosures. It is just going to
be easier for them to sell. So, we'll see a wave of
consolidation when I think we should be promoting more
competition, and more capital formation. Hopefully, we will
have a hearing on that. Hopefully, we can get Chair Gensler and
others to come before our committee again.
With that, I yield back.
Chairman Sherman. The gentleman yields back.
Now, I recognize the gentleman from Minnesota, Mr. Emmer.
Mr. Emmer. Thank you, Chairman Sherman, and Ranking Member
Huizenga. I was pleasantly surprised and proud to see my bill,
the Main Street Growth Act, noticed for this hearing. The Main
Street Growth Act would allow the Securities and Exchange
Commission to provide for the creation of venture exchanges so
that small- and medium-cap companies can go public through a
more streamlined process. This bill passed out of this
committee unanimously in the 115th Congress, and it passed the
House as well. In fact, I would like to thank Chairman Sherman,
Mr. Scott, Mr. Himes, Mr. Foster, Mr. Meeks, Mr. Gottheimer,
and Mr. Gonzalez on this subcommittee for voting in support of
this bill, and I hope to have your support again.
We have a capital formation problem in this country, and
ultimately the compliance burden borne by government
overregulation is making the initial public offering process
unrealistic for a large segment of private American companies.
This hurts everyday American investors the most, much like Mr.
Piwowar and Representative Gonzalez were just talking about.
Small, private companies that need capital are at a
disadvantage today because the trading and listing environment
is geared for much larger IPO companies than it was 25 years
ago. How do we know? The participation in the IPO process has
significantly declined since the 1990s.
Let's look at the facts. The number of IPOs declined more
than 63 percent from the 1990s to the 2000s, and has stayed
relatively flat up to 2020. At the same time, the United States
has doubled the regulatory compliance costs the business has to
take on for going public in a traditional IPO. Just to give you
an idea, it costs an average of $2.5 million for a company to
achieve just the initial regulatory compliance for going
public, and then, it is an additional . $1.5 million on an
annual basis thereafter. These are SEC estimates.
In the past 2 years, we have seen a surge in companies
going public through alternative strategies, like Special
Purpose Acquisition Companies (SPACs), indicating that the
traditional IPO process is not feasible for emerging innovative
companies. The small start-up IPO should not be on the
superhighway designed for trading Apple and Microsoft. We need
to move away from the one-size-fits-all SEC regulatory posture
and allow the market to try new innovative strategies. After
all, capital formation starts when a company can list its
shares on a quality electronic venue plugged into the full
force of America's investment potential.
I appreciate my colleagues' willingness to advance
legislation that creates new exchanges tailored to small- and
medium-cap companies because exchanges are integral in the
capital formation process. And America's capital markets are
the envy of the world. The broader discussion of this hearing,
I worry, centers around making it harder for exchanges to
operate, which could impose barriers on the new small
competitors in the venture exchange space, and ultimately make
our capital markets less competitive and accessible. When we
set up structures that allow for more companies to go public,
we give the American people more access to our capital markets.
We give them more opportunities to build financial wealth.
Mr. Piwowar, do you believe that my legislation, the Main
Street Growth Act, can eliminate some of the barriers currently
deterring small emerging growth companies from going public?
Mr. Piwowar. Thank you, Congressman. Yes, you pointed out
the streamlined IPO process, and those are for existing private
companies that do want to go public. In addition, as you point
out, it also addresses the fact that the exchanges, the trading
system is set up for the larger public companies. And, frankly,
the exchanges don't have the incentive to try to do innovative
things, like you said, and experiment because of unlisted
trading privileges. So, in your bill, you would give exclusive
trading rights to the venture exchange.
The Commission is looking at that. It is going to look at
that very, very carefully, and we need to be very careful about
that. The reason for that is you want to encourage the
experimentation by the exchanges to compete with one another,
to make the market more conducive for that. It is my hope that
would be the case--you mentioned tick sizes and potentially
doing call markets instead of continuous trading. But there are
probably some other things the exchanges could do if they were
granted that exclusivity.
Mr. Emmer. Great point. And on that note, with the majority
of American companies searching for alternative avenues from
the traditional IPO process to form capital, such as SPACs, as
I referred to earlier, are simply staying private. Do you
believe that there is a timely need for Congress to pass this
legislation?
Mr. Piwowar. In a word, yes. Whatever you can do in
Congress, and the SEC can do to encourage more companies to go
public at the appropriate time--you mentioned SPACs, right?
Another one is direct public listings, and those are instances
where you have companies that have grown very large in the
private sector. And the only reason why they are going public
is to have a liquidity event. They don't even need to raise
capital at that point, so the more, the better.
Mr. Emmer. Thank you. I appreciate it. Thank you, Mr.
Chairman.
Chairman Sherman. Thank you. I now recognize the gentleman
from Wisconsin, Mr. Steil.
Mr. Steil. Thank you very much, Mr. Chairman. We have had a
really interesting discussion today about the friction between
exchanges, broker-dealers, investment banks, and asset managers
on the liability question. And one of the things that I've been
kind of pondering up here is, have there been any instructive
kind of global examples that we could look at outside the U.S.
structure? In many ways, the U.S. capital markets are
significantly stronger, bigger, and different than the global
markets, but I'm curious if that gives us any light into this
conversation, and I will open it up to you, if I can, Ms.
Greene, for a quick comment on that. And I would like to come
to you, Ms. Sukumar, as well, if you have a brief comment on
that.
Ms. Greene. Sure. When we look at the markets, my
understanding is, and we can certainly come back to you and
confirm this, but that the regulatory structure in the U.S. is
unique in these special privileges that it does provide to the
exchanges, things like immunity, rules-based liability caps,
and even on the SEC plans that we see, the exclusion of
industry members, so clearly things that can be improved here
in this structure. And I would defer to Nandini on her views on
how the global markets are structured here.
Mr. Steil. Thank you for that feedback. Ms. Sukumar, would
you like to comment?
Ms. Sukumar. Yes, with pleasure. I would like to start
perhaps by just saying that across the world, across our
members, and we have 300-odd, this kind of regulatory immunity
is the standard model. And why is that? It is because the
exchange, by nature, the nature of its work, the nature of its
business, needs to do things, counseling trades, invoking
volatility mechanisms, all of these kinds of things, and these
are often unpopular. So, they need to be able to do it. They
are a neutral, trusted third party that operates markets, so
they need to be able to have regulatory immunity.
Mr. Steil. I appreciate that comment. So, you see certain
consistency in that?
Ms. Sukumar. Yes, absolutely.
Mr. Steil. Mr. Piwowar, do you see that as well, or are
there any comments you'd like to offer on that?
Mr. Piwowar. No further comments on that.
Mr. Steil. No further comments. Let me shift gears
slightly, if I can, because I think we have had interesting
conversations. I would like to go to you, Mr. Piwowar, if I
can. You commented in your testimony, and particularly on an
area that I have an interest in, that banning restricting dual
class stocks would lead some companies to delist, I think was
your testimony. I am always concerned about proposals that
reduce retail investors' options, especially when the purported
benefits are questioned. And as you may know, the vast majority
of Americans can't invest in many companies because they are
not accredited investors under our U.S. rules and our U.S.
structure.
So, you have essentially made a large number of promising
investment opportunities off limits to all but the rich, which
seems a bit counterintuitive to me. We could get in the weeds
if we had more time, but would any other bills attached to
today's hearing lead to a reduction in the number of public
companies, in your opinion?
Mr. Piwowar. I think anything that increases the burden on
being a public company vis-a-vis a private company, creates
incentives for either private companies to stay private or
public companies to either go private or to simply move to
other capital markets, right? What we forget is that there is
not only a competition between the public markets and the
private markets here, but Nandini's members are all competing
to try to get listings around the world, and capital is truly
global. So, I worry about not only companies going private, but
then also companies leaving the U.S. markets altogether.
Mr. Steil. Shifting more specifically to the accredited
investor, do you think Congress should revisit the accredited
investor standard?
Mr. Piwowar. Congress or the SEC has the ability to do it.
They don't need additional authority. But I think potentially,
from this committee's perspective, if you could direct the SEC
to do something with that, to put the focus on it, I think that
would be very helpful.
Mr. Steil. Thank you very much. And thank you very much for
holding today's hearing, Mr. Chairman. I yield back.
Chairman Sherman. Thank you for your brevity.
I now recognize the ranking member for a 1-minute closing
statement.
Mr. Huizenga. Thank you, Mr. Chairman. And, yes, we are
missing some briefings, and it is unfortunate that this was
interrupted with votes. I appreciate the time, especially the
additional time that all of the panelists have put forward.
To kind of underscore my point from earlier, with all of
the things that are going on and Mr. Piwowar has highlighted,
as we talked about SEC actions, the SEC came out with another
rulemaking today on SPACs. And it is like we can't even catch
up to where we currently are or where they currently are. And
the capacity and bandwidth of the SEC, much less everybody else
who is being affected by all of these things, is just getting
stretched to the absolute limits, and we ought to be talking
about that, not that this isn't an important issue. The
structure of markets is very important. It is what guarantees
we have the liquidity and the depth, and makes this the premier
place to invest in the world. But we are killing the goose that
lays the golden egg here, in my opinion, and we have to do
better at tending to that.
My time has expired. I yield back.
Chairman Sherman. I recognize myself for a 1-minute closing
statement, and then the obligatory housekeeping.
First, Mr. Piwowar, thank you for bringing to our attention
that we may need legislation to provide for pilot studies by
the SEC. The Republican side has constantly advocated to get
poor and middle-class people the opportunity to make high-risk
investments in low-information securities. I would point out
that the vast majority of middle-class and poor people's
investments in the markets is through their interest in pension
plans, plus, of course, mutual funds and business development
companies.
I thank Mr. Davidson, an advocate of cryptocurrency, for
explaining it to us clearly that you ruin the whole purpose of
cryptocurrency if you require them to adhere to Anti-Money
Laundering and Know Your Customer (AML/KYC) rules. After all,
cryptocurrency literally means, ``hidden money.'' And if it
can't be hidden money, why would anybody prefer it over the
currency we have now?
And finally, Ms. Sukumar, I thank you for bringing to my
attention the fact that crypto exchanges call themselves
exchanges, but aren't regulated exchanges. You can't call
yourself a bank if you are not a bank. I will ask you to
comment on for that for the record.
My time has expired. I want to thank our 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.
This hearing is now adjourned.
[Whereupon, at 5:09 p.m., the hearing was adjourned.]
A P P E N D I X
March 30, 2022
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