[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE SEC'S
DIVISION OF ENFORCEMENT
=======================================================================
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
__________
JULY 19, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-94
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
48-470 PDF WASHINGTON : 2022
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 TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York BRYAN STEIL, Wisconsin
STEPHEN F. LYNCH, Massachusetts LANCE GOODEN, Texas
ALMA ADAMS, North Carolina WILLIAM TIMMONS, South Carolina
RASHIDA TLAIB, Michigan VAN TAYLOR, Texas
MADELEINE DEAN, Pennsylvania PETE SESSIONS, Texas
ALEXANDRIA OCASIO-CORTEZ, New York RALPH NORMAN, South Carolina
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:
July 19, 2022................................................ 1
Appendix:
July 19, 2022................................................ 31
WITNESSES
Tuesday, July 19, 2022
Grewal, Gurbir S., Director, Division of Enforcement, U.S.
Securities and Exchange Commission (SEC)....................... 4
APPENDIX
Prepared statements:
Grewal, Gurbir S............................................. 32
Additional Material Submitted for the Record
Grewal, Gurbir S.:
Written responses to questions from Representative
Auchincloss................................................ 38
Written responses to questions from Representative Emmer..... 40
OVERSIGHT OF THE SEC'S
DIVISION OF ENFORCEMENT
----------
Tuesday, July 19, 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 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Brad Sherman
[chairman of the subcommittee] presiding.
Members present: Representatives Sherman, Scott, Himes,
Foster, Vargas, Gottheimer, Axne, Casten; Huizenga, Wagner,
Hill, Emmer, Mooney, Davidson, Hollingsworth, 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 today's hearing.
Today's hearing is entitled, ``Oversight of the SEC's
Division of Enforcement.''
I now recognize myself for 4 minutes for an opening
statement.
There is nothing more important for this subcommittee to do
than oversee the SEC. I look forward to the Full Committee
bringing the Chair of the SEC before the Full Committee. I
would hope that would happen either at the subcommittee level
or at the Full Committee level several times each year. But
oversight of the SEC is also enhanced by bringing before us the
Division Director of the largest division of the SEC.
The Securities and Exchange Commission oversees $100
trillion in securities investments, and reviews disclosures of
7,400 public companies, including more than 4,000 exchange-
listed public companies. The SEC has an annual budget of $2
billion, supporting 4,500 employees across both the
headquarters and the 11 regional offices, the most important of
which is now in my new district in Los Angeles. The Agency's
largest division is the Enforcement Division with some 1,366
employees, representing a quarter of the SEC staff. The
Division is responsible for enforcing our securities laws. In
2021, the SEC filed some 434 new enforcement actions,
representing a 7-percent increase.
As the Chair of the SEC, Gary Gensler, pointed out, the
purpose here is to discourage misconduct before it happens.
Today, the Division faces new challenges in the form of
cryptocurrencies and other digital assets. The combined value
of these digital assets hit $3 trillion at their peak, from
which it has declined. In response, in 2017, the SEC
established the Crypto Assets and Cyber Unit within the
Division of Enforcement. That Division has brought some
enforcement actions related to fraudulent and unregistered
crypto asset offerings and platforms, resulting in monetary
relief totaling $2 billion. This is by far the most of any
Federal or State regulatory body.
Obviously, there have been recent downturns in the
purported value of crypto assets. In particular, their
enforcement actions depend upon the definition of the word,
``security,'' under a relatively ancient Howey Test. The
Division has determined that XRP is a security and is going
after XRP, but for reasons that I will bring up in questions,
has not gone after the exchanges where tens of thousands of
illegal securities transactions were occurring.
The Division faces a number of longstanding challenges.
Today, we are considering a number of important bills that are
listed for all of the members of this subcommittee and are
being considered in this hearing. There is no Federal statute
defining, ``insider trading.'' I know Mr. Himes has a bill
designed to do just that. And, of course, the Newman decision
narrowed the definition somewhat of, ``insider trading.''
Another issue for us to confront is the maximum civil monetary
penalties, which some bad actors simply regard as a cost of
doing business.
A recent decision in the Fifth Circuit has called into
question the use of administrative law judges (ALJs), which is
the primary method of enforcing our securities laws. The Court
found a number of problems. Some are constitutional and would
require a change in practice if that court decision, which is
now on appeal to an en banc review, is upheld. But other
concerns of the Court are about the inadequate standards that
the Congress has put into the statute, and we need to correct
those by legislation, probably even if the Court decision is
successfully appealed. Finally, we are looking at the SEC's use
of waivers, where bad actors admit to wrongdoing but then don't
face the full penalties.
With that, I recognize the ranking member of the
subcommittee, the gentleman from Michigan, Mr. Huizenga, for
his 5-minute opening statement.
Mr. Huizenga. Thank you, Mr. Chairman, and welcome,
Director Grewal. I'm glad to see you here. And interestingly
enough, it has been 4 years since the Director of Enforcement
was sitting where you are today, 4 years since the subcommittee
provided oversight for your Division, and 4 years since members
of this committee on both sides of the aisle were given the
opportunity to raise concerns over enforcement actions taken by
the SEC. I think it is safe to say this hearing is long
overdue. This hearing is entitled, ``Oversight of the SEC's
Division of Enforcement,'' which is a key element of what this
subcommittee's jurisdiction is, and it has been missing.
And I appreciate the efforts of the Chair, who has been
advocating, at least privately with us, about having you and
other Directors and frankly, even having the Chair of the SEC.
But this is not going to stop the request from myself and, I
think, from other members of this committee. This is a
constitutional requirement and duty to act as the oversight for
the Administration at all levels.
The SEC has come a long way in the last 4 years. And in
that 14 months since you were sworn into office, Chair Gensler
has charted a path for the SEC unlike any other time in its 88-
year history, from an Agency that has a mission to protect
investors; to maintain fair, orderly, and efficient markets;
and to facilitate capital formation, those three things. Let me
repeat that: protect investors;--we all agree on that--maintain
fair, orderly, and efficient markets;--we all agree on that.
But to facilitate capital formation seems to be something that
has fallen off of his radar in many ways. And he has embarked
on one of the most ambitious rulemaking agendas in our modern
era, since we have had the SEC.
Let's put this in perspective. The SEC's past three Chairs
issued half as many proposals in their first 14 months compared
to the current Chair. The flurry of activity is evidence that
the rapidly-evolving enforcement and regulatory landscape at
the SEC is an indicator of things to come. I don't think it is
going to slow down.
In the past, increased enforcement activity at the
Commission has signaled that they will act aggressively,
pressing the boundaries of their enforcement authority. Look no
further than the SEC's announcement this past May to nearly
double its Crypto Enforcement Unit. While the Commission does
not intend to provide any clarity surrounding the application
of securities laws to digital assets, the unit plans to focus
on violations related to crypto asset offerings, so crypto
asset exchanges, crypto asset lending and staking products,
decentralized financial platforms, non-fungible tokens,
stablecoins, et cetera, et cetera. It is worth mentioning that
of the 63 items included in the Agency's rulemaking agenda this
past spring, there is actually zero pertaining to digital
assets.
In addition to the Division's proactive enforcement
efforts--your words not mine--the SEC continues to use its own
administrative law judges (ALJs) to adjudicate enforcement
actions, a controversial decision that has been used
increasingly over the past decade. In a recent court decision,
the Fifth Circuit Court of Appeals noted that Congress
unconstitutionally delegated legislative power to the SEC when
it allowed the Commission to decide when to use these ALJ's,
coupled with the SEC's admission earlier this year that there
was a control deficiency related to the separation of the SEC's
enforcement and adjudicatory function, with serious
ramifications regarding the fairness of prior SEC enforcement
actions for the party subject to those actions.
Finally, I would be remiss if I didn't mention the one
person who is not here this morning, the Chair of the
Securities and Exchange Commission, Chair Gensler, but I know
he is paying attention. So, Chair Gensler, I appreciate you
allowing Director Grewal to come before the subcommittee, but I
can't help but mention your absence and request your
attendance.
Mr. Chairman, I would like to submit two letters from
Ranking Member McHenry and myself, one dated October 6, 2021,
and the other May 5, 2022, requesting Chairwoman Waters to hold
a hearing with all 5 of the SEC Commissioners. It has now been
nearly 3, 4 years since we last heard from the Commission, and
since then, Chair Gensler has proposed 23 rules that await
adoption. I think it is long overdue.
And Director, let me caution you with this last word. We
should not evaluate the true effectiveness of the regulatory
agency or its enforcement program solely based on how many
headlines it can generate. That is true of any Federal or State
regulatory agency in the country, and it is certainly true for
the SEC. And I look forward to hearing from you on the impact
on our capital markets. With that, I yield back.
Chairman Sherman. Thank you. I now recognize the Chair of
the full Financial Services Committee, the distinguished
Chairwoman Waters.
Chairwoman Waters. Thank you, Chairman Sherman, for holding
this important hearing. Between last year's main stock events,
the employees in Special Purpose Acquisition Companies (SPACs),
and this year's catastrophic crypto crash, the life savings of
ordinary Americans who were drawn into risky and fraudulent
investment schemes have been lost. The work you do every day to
go after scammers and those who peddle unsuitable financial
products is critical. It is refreshing and promising to have as
our witness today Director Grewal, an Enforcement Director who
fought for years as an Attorney General on behalf of the people
of New Jersey.
Director Grewal, welcome to the committee, and thank you
for your years of public service.
Chairman Sherman. Thank you. Today, we welcome the
testimony of our distinguished witness, Mr. Gurbir Grewal, who
is the Director of the Division of Enforcement at the
Securities and Exchange Commission. Previous to that, he was
the Attorney General of the State of New Jersey.
Director Grewal, you are reminded that your oral testimony
is limited to 5 minutes. You will see the timer. You know the
drill. And without objection, your full written statement will
be made a part of the record.
Also without objection, the letters referred to by the
ranking member will be made a part of the record.
Director Grewal, you are now recognized for 5 minutes.
STATEMENT OF GURBIR S. GREWAL, DIRECTOR, DIVISION OF
ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)
Mr. Grewal. Chairman Sherman, Ranking Member Huizenga,
Chairwoman Waters, and members of the subcommittee, good
morning, and thank you for inviting me to testify today on
behalf of the SEC's Division of Enforcement.
Since its founding more than 85 years ago, the SEC has
stayed true to its three-part mission of protecting investors;
of maintaining fair, orderly. and efficient markets; and
facilitating capital formation. Central to that mission is the
work of the Enforcement Division. Since my appointment, I have
been amazed by the talent and the expertise of the Division
staff, and I am privileged to call them all my colleagues.
Each year, the Commission brings hundreds of enforcement
actions and obtains meaningful relief on behalf of the
investing public, and Fiscal Year 2021 was no exception.
Despite the challenges of the global pandemic, we filed 434 new
enforcement actions, covering a broad range of violations and
representing a 7-percent increase over the prior fiscal year.
Yet, many Americans' trust in our financial markets and
institutions is at near historic lows. While there is no single
cause for that decline, part of it is certainly due to repeated
lapses by large institutions and gatekeepers, and the
perception by many that they are not being held accountable. It
is critical that we at the Enforcement Division do our part to
restore that trust and to increase accountability. And I
believe that is best done by focusing on three things: robust
enforcement; robust remedies; and robust compliance.
Robust enforcement means investigating and litigating every
type of case within our remit with a sense of urgency. It also
means keeping pace with new areas of importance for investors,
as well as continually-evolving risks. That is one reason we
recently added 20 positions to our Crypto Assets and Cyber
Unit. The expanded unit will leverage the Agency's expertise to
ensure investors are protected in the crypto markets and
against cyber-related threats.
Robust enforcement also means focusing on gatekeepers such
as compliance officers, accountants, and attorneys. We can't be
everywhere, and gatekeepers are often the first lines of
defense against misconduct. So when they fail to live up to
their obligations, their professional responsibilities, and
when they give cover to corporations or executives engaged in
misconduct, investors and market integrity suffer and trust
deteriorates.
A second component of restoring trust is seeking robust
remedies in our cases. Put simply, the remedies we seek must
both punish wrongdoers and deter those violations from
happening in the first place. To ensure that is the case, we
are constantly assessing what penalties in prior comparable
cases have sufficiently deterred the misconduct at issue. Where
they haven't, especially recidivists, we will seek stiffer
penalties.
Robust remedies must also include obtaining all appropriate
prophylactic relief available, such as bars, suspensions,
conduct-based injunctions and undertakings, and relief, which
directly protects investors and market integrity by preventing
violators from engaging in future misconduct. And while most of
our cases will continue to include no-admit, no-deny
settlements, we will seek admissions from wrongdoers in certain
cases, especially in cases where heightened accountability and
acceptance of responsibility are in the public interest.
Finally, robust compliance is also critical to restoring
trust. We are in a time of rapid and profound technological
change. Public companies and other market participants need to
think rigorously about how their specific business models and
products interact with both emerging risks and their
obligations under the Federal Securities Laws. And they must
tailor their internal controls and compliance practices and
policies accordingly. In short, they must work to foster a
culture of proactive compliance and responsibility. To ensure
that is the case, we are pushing enforcement actions that go to
the heart of robust compliance efforts, including actions
targeting wholesale recordkeeping failures by firms that have
either promoted or failed to rein in off-channel
communications.
All of what I have described requires resources. As the
number of enforcement employees has decreased over time, we
have faced significant and mounting challenges which are
described in more detail in our budget requests and in my
submitted testimony. At the same time, many of our
investigations are becoming more and more difficult as
fraudsters find new ways to communicate.
Our Fiscal Year 2023 budget seeks additional staff to
enable us to meet these mounting challenges and to maintain an
effective investigative capacity and deter presence for the
benefit of our markets and investors. I am confident that with
adequate resources, and by emphasizing robust enforcement
remedies and compliance in our work, we will be able to meet
future challenges, achieve our tripartite mission, and do our
part in restoring public trust in our financial markets and
institutions.
Thank you for inviting me today, and I look forward to
answering your questions.
[The prepared statement of Director Grewal can be found on
page 32 of the appendix.]
Chairman Sherman. Thank you, and I now recognize myself for
5 minutes for questions.
I will point out that Chairman Gensler came before our full
Financial Services Committee twice last year, and he will be
coming before us, I believe, later this year. More is better,
but we are certainly doing our job. The ranking member points
out that the SEC has a number of regulatory projects. I commend
them for having those projects, because as the ranking member
points out, we need clarity. If anything, we need another
project, and that is to define a security, particularly with
regard to the digital world. I would also point out that
investor protection is the very best thing we can do for
capital formation. It may be a hassle for the individual
issuer, but when we build a system where investors are
confident, that is what causes people in this country to invest
in growing businesses.
My first question relates to spring-loaded stock options.
The SEC has analyzed these as to whether they are insider
trading. I would like you to focus on whether they are, in
effect, a fraud on shareholders in their annual filings. They
filed a statement saying that they have a stock option plan in
which stock options are going to be granted at fair market
value on date of grant. If it is 6 p.m., before the next day,
you are going to make the big announcement, and you look at the
market price with the market not knowing about your upcoming
big announcement. You can say, well, that is the market value,
because that is what ignorant shareholders bought and sold the
stock at. And the Compensation Committee got approval for
granting the stock option at fair market value. They know the
fair market value is going to skyrocket the next day because
the big announcement is coming.
Why are you not enforcing against spring-loaded stock
options when shareholders are defrauded when they are told that
the option will simply give the grantee a share in future
appreciation after option grant date?
Mr. Grewal. Thank you for the question, Chairman Sherman. I
can't comment on specific investigations that may or may not
exist at this moment. I would agree that your hypothetical
raises serious fraud concerns. The facts that you have laid out
would implicate accounting issues on how those options are
being accounted for, and they would implicate disclosure
issues. As you mentioned, what did the issuer disclose in its
filings? What did it say about how--
Chairman Sherman. I would hope you would go back and look
at the many instances of spring-loaded stock options,
particularly when, in the headline, the shareholders who are
asked to approve these plans, are making knowledgeable plans,
told that the option exercise price is going to be fair market
value on the option grant date. And then, they may define fair
market values as what the market closed at, which is usually
true, except the market closed right before the big
announcement.
I want to move on to another question. You have gone after
XRP because XRP is a security, but you haven't gone after all
of the major crypto exchanges that process tens of thousands,
if not far more transactions. If XRP is a security, and you
think it is and I think it is, why are these crypto exchanges
not in violation of the law? And is it enough that the crypto
exchanges have said, well, having committed tens of thousands
of violations in the past, we promise not to do any more in the
future? Is that enough to get you off the hook for enforcement?
Mr. Grewal. Again, I can't talk about what matters we are
looking at or not looking at. We have brought exchange cases.
We brought one last year against Poloniex. I share your
concerns that if the securities are--
Chairman Sherman. It is easier to go after the small fish
than the big fish, but the big fish operating the major
exchanges did many, many tens of thousands of transactions with
XRP. It is a security, which means that they were illegally
operating a securities exchange. They know it is illegal
because they stopped doing it, even though it was profitable.
So if they know it is illegal, and you know it is illegal, and
I know it is illegal, I hope you focus on that.
And then finally, we have Tether, which is a money market
mutual fund in every way. It broke the buck. I realize you are
reluctant to talk about individual matters, but can you tell us
why you went after Terra, but not Tether?
Mr. Grewal. Again, it would be inappropriate for me to
comment on who we are going after or not going after, but I
understand your concerns. And we have added resources to our
Crypto Assets Unit to look at issues that put investors at
risk, including the issues you have raised in your questions.
Chairman Sherman. And fortitude and courage as well. You
are going to have to take on some cases that you are not
certain of winning.
I now recognize the ranking member of the subcommittee, the
gentleman from Michigan, Mr. Huizenga, for 5 minutes.
Mr. Huizenga. Thank you. And Director Grewal, like I said
in my opening statement, we want to see more of you, not less
of you. I will note to the Chair that, yes, the Chair of the
SEC was in front of this Full Committee in October. But look at
what has happened since October with the rulemaking, the number
of proposals, et cetera, et cetera. And unless there is some
secret plan to make sure he is here in September, he is not
going to be here, maybe not even for the rest of this Congress,
which would be over a year since we have seen the Director.
Director Grewal, I am concerned about a couple of things,
and I am going to try to hit this quickly: one, unprecedented
attempts by the SEC to slip drastic market changing
interpretations of securities laws into otherwise routine
enforcement cases; and two, the lack of internal consistency
when it comes to the SEC's own ideas about basic foundational
elements of market regulation.
In a recent case, the SEC, rather than relying on decades
of existing case law and legal precedent, presented a case in
which it defined a, ``dealer,'' as, ``any business that
purchases and sells securities for its own account.'' So if I
am interpreting this correctly, it quite literally means that
every market participant in the country, under the SEC
definition, regardless of their business model or current
regulatory regime, would somehow now be subjected to a wildly
different, and inappropriate, in my opinion, regulatory
framework, that quickly, overnight. And that is not all. At the
same time, in the same SEC, there is a controversial proposal
under way in which the SEC is attempting to dramatically expand
the definition of this core term, ``dealer,'' but this time, in
a wholly different manner than how your Enforcement team
defines the term.
So, two different definitions being presented by the same
SEC are, in fact, wholly inconsistent with each other. It seems
to me that the SEC is frankly brazen about it, and thinks that
it can rewrite the most basic elements of securities law
whenever it wants, to fit whatever purposes it needs at the
current moment, with no regard to the effect on markets, the
economy, or even internal consistency.
I am a guy from Michigan, so I think in car terms, right?
This is a little like we are asking people to buy a car, but we
won't tell them what the speed limit is going to be. We won't
tell them what the car should or shouldn't do, what safety
products ought to be on it, but we are going to determine that
later, and we are just going to mail you a ticket for speeding.
We have a responsibility to set speed limits and/or then to
make sure that there is a consistent approach and application
of that. Could please illuminate me on this approach?
Mr. Grewal. Thank you for that question, Ranking Member
Huizenga. With respect to the enforcement action that you
referenced, that is a litigated matter, and we are confident
that our position will survive scrutiny in that litigation. We
have succeeded in another--
Mr. Huizenga. How about the inconsistency of it?
Mr. Grewal. I can't speak to the rulemaking. That is being
done by the Rulemaking Division, and I think it is in a
different context. I would refer you to my colleagues in those
divisions who are responsible for that rulemaking.
Mr. Huizenga. If we could get them here, I would love to
ask them. I want to return to something I brought up during my
opening remarks about the the administrative law judges (ALJs).
As you know, the SEC announced in April that they had
identified a control deficiency related to the separation of
its enforcement and adjudicatory functions within its system
for administrative adjudications. To quote an article from The
Wall Street Journal, ``It is the equivalent of a party in
litigation having access to a judge's briefs from her law
clerks.'' Given the scrutiny that the SEC has received over the
use of their ALJs, I find this breach very concerning. Quickly,
Director, can you assure members of this committee that the
cases brought before an ALJ during that time of the breach were
fairly adjudicated?
Mr. Grewal. Again, with respect to the breach, as soon as
that breach was discovered, it was reported, and it was
publicly reported, and the matter is under investigation right
now internally. But importantly, no Enforcement Division
personnel were found to have access to those materials. It was
simply that there were some permissions that allowed people to
do so, but not access--
Mr. Huizenga. And what gives you that confidence? Has there
been an investigation to determine that?
Mr. Grewal. It is underway right now, Ranking Member
Huizenga.
Mr. Huizenga. Then, how can you say that there was no
breach? You actually don't know if the investigation is still
going on.
Mr. Grewal. Excuse me. I am sorry to talk over you. In the
announcement that the Commission made--again, it is not being
handled by my Division; it is being independently
investigated--it was indicated that the materials weren't
accessed. The investigation is going to cover how this lapse
happened in the first place.
Mr. Huizenga. Has the SEC Office of Inspector General
reviewed this incident?
Mr. Grewal. I would direct you to the Office of Inspector
General. I am not aware of what they are looking at or not
looking at.
Mr. Huizenga. I will be following up with some additional
questions in writing as well, but this underscores the
importance of this, so I appreciate it. Thank you.
Chairman Sherman. I now recognize the gentlewoman from
California, the Chair of the Full Committee, Chairwoman Waters,
for 5 minutes.
Chairwoman Waters. Thank you very much. Director Grewal, as
you know, I have been focused on the problems associated with
the lack of clear fiduciary standards for broker-dealers going
back to the days when we were debating and drafting the Wall
Street Reform and Consumer Protection Act. After the financial
crisis, I continued to believe that brokers providing
investment advice need to clearly put the interests of their
customers ahead of their own. This fiduciary standard is the
gold standard to which all financial professionals who offer
personalized advice to investors must adhere.
Former SEC Chair Clayton, despite opposition from
investors, approved the flawed Regulation Best Interest (Reg
BI). Calling something, ``best interest,'' doesn't make it so.
For example, it relied excessively on disclosure to cure deep
conflicts-of-interest problems. It allowed brokers to place
their interests at par with those of the investors. Under Chair
Gensler's leadership, and your leadership of the Division of
Enforcement, the SEC for the first time enforced Reg BI. The
case you brought forward showed that between July 2020 and
April 2021, Affirm and its brokers recommended and sold certain
bonds to senior investors with limited financial wherewithal.
While the issuer of the bond had clearly stated that the bonds
are high-risk and suitable for those with substantial financial
resources, I can't imagine only one firm or a handful of
brokers are engaging in these kinds of practices and harming
investors.
Director Grewal, I know you can't talk about specific
cases, but please do describe your experience in enforcing
Regulation Best Interest. Also, please address how, if at all,
the broker-dealers have changed their practices? How are they
better managing conflicts of interest? For example, do they
offer the kinds of products and get paid at the same level that
they did prior to Reg BI?
Mr. Grewal. Thank you for the question, Madam Chairwoman.
As you know, Reg BI became effective on June 30, 2020. And
after it became effective, there was a period of educating the
market, and then our Division of Examinations went and
conducted exams with a priority focus on looking at Reg BI
compliance. That examinations process yielded a number of
referrals, including the case you have referred to, which was
our first Reg BI action. It is a litigated action against a
broker-dealer and five of its registered reps for selling
highly-illiquid debt securities to elderly retirees where it
didn't fit with their investment profile. So, that matter will
be litigated. There are other referrals. Exams in its 2022
priorities has also indicated that it will be going out to look
for compliance.
And to answer the questions you raised, is it having its
intended effect, is it changing behavior, or are broker-dealers
addressing conflicts of interest, it remains to be seen. But it
is my hope that with enforcement actions, with education, and
with compliance, that it is having its desired effect in the
market.
Chairwoman Waters. Thank you very much. Director Grewal, as
you know, nearly two-thirds of capital raised through our
capital markets nowadays is done under various exemptions of
the securities laws. These securities are not registered with
the SEC, and investors in these securities, including pension
funds, university endowments, foundations, and other large
funds do not benefit from the protection provided by the
securities laws and the rules of the SEC. For example,
investors often do not have access to audited and timely
financial statements of the issuer of benefit from certain
conflicts-of-interest provisions that apply to brokers that
market these unregistered securities. Separately, but related,
I am also concerned that foreign issuers, including foreign
hedge funds and private equity funds that raise capital in the
United States, take advantage of these exemptions. And I am
concerned that U.S. regulators don't know who invests in these
funds or where these funds are themselves in this.
Chairman Sherman and I have been working on legislation to
increase transparency into this exempt offerings market. In the
America COMPETES Act that the House passed earlier this year,
there is a provision that would require issuers of exempt
offerings to provide a basic level of information to the SEC,
including the beneficial owner of the fund and in which country
the fund intends to invest the proceeds of the offering.
I am over my time at this point, and you don't have to
respond to this right now, but I will be getting back to you to
talk about this issue. And I yield back the balance of my time.
Chairman Sherman. Thank you. I now recognize the
gentlewoman from Missouri, Mrs. Wagner, for 5 minutes.
Mrs. Wagner. Thank you, Chairman Sherman, and Ranking
Member Huizenga. Director Grewal, the SEC is expected to
finalize its proposal on mandatory climate disclosures in the
coming months. Issuers will be required to disclose very
detailed and scientific climate-related data, possibly
including data on downstream Scope 3 emissions such as
production and transportation of goods, employee commuting, and
a host of other indirect missions. Operationally, sir, how do
you plan on handling enforcement cases involving an issuer's
disclosure of its Scope 3 emissions?
Mr. Grewal. Thank you for that question. Again, the
rulemaking process is being run out of--
Mrs. Wagner. I am talking about the enforcement.
Mr. Grewal. Yes, I will speak from an enforcement
perspective. We will take the same approach we have taken to
date. We know that ESG and climate issues are important to
investors. We know that issuers are making statements about
their climate risk already, and we know that investment
advisers are marketing ESG funds. We brought greenwashing cases
when they breached their fiduciary duty on the adviser side. We
brought cases against issuers, most recently, a litigated case
against Brazilian issuer, Vale, for lying about its ESG
policies. And it is the same thing: if we find that sort of
deceit in their statements, we will bring a case.
Mrs. Wagner. But how will the SEC verify whether the issuer
has misstated its Scope 3 emissions?
Mr. Grewal. Again, I can't speak to the climate
rulemaking--
Mrs. Wagner. From an enforcement standpoint?
Mr. Grewal. --but how we are doing it in our enforcement
actions, is we are relying on experts in our litigating
matters.
Mrs. Wagner. Experts? Really? Is the SEC an expert in
climate policy?
Mr. Grewal. We have retained experts in our case to
litigate that matter.
Mrs. Wagner. You have?
Mr. Grewal. Yes.
Mrs. Wagner. What statute provides the SEC with the direct
authority to regulate climate change?
Mr. Grewal. In the litigated matter, there are violations
of the anti-fraud provisions of the Federal Securities Laws.
That is a theory in the litigated case.
Mrs. Wagner. And you say the SEC has experts on staff to
address climate change?
Mr. Grewal. Again, I can't speak to the rest of the SEC. I
could just talk to--
Mrs. Wagner. But you just did. I am just asking. Do they
have--
Mr. Grewal. I am just talking about my Enforcement Division
and the people we have retained in that particular case as
experts.
Mrs. Wagner. You have experts?
Mr. Grewal. We have retained them in the litigation, yes.
Mrs. Wagner. How will the SEC recruit and hire qualified
staff who are both experts on climate change, in your purview,
and securities law disclosures?
Mr. Grewal. Our attorneys and investigators are the experts
on the securities laws, and we consult with experts in our
investigations and in our litigation, regardless of the
subject. In the particular example I am sharing with you, we
rely on experts on the types of issues that--
Mrs. Wagner. Perhaps we need to bring those, ``experts on
climate change in the SEC,'' before this committee. Director
Grewal, when it comes to enforcing the SEC's ESG disclosure
rule, how do you envision determining whether a fund has
incorporated ESG factors into its investment selection process
when the SEC has not defined and likely cannot define just what
those factors are?
Mr. Grewal. Again, I don't want to speak to the rulemaking.
I would refer you to--
Mrs. Wagner. I am not speaking to the rulemaking. I am
saying there is no definition. How do you do enforcement?
Mr. Grewal. The tools we have, you are talking about
advisers. We brought a case recently against BNY Mellon for
misstating their ESG practices. They said they were conducting
ESG review before making certain investments, and it turns out
they weren't abiding by the processes that they had made out in
their disclosures--
Mrs. Wagner. Reclaiming my time, sir, just how are these
funds expected to know what the letters, ``ESG,'' even mean
without a clear definition in the proposed rule, and how will
the Enforcement Division know what the letters, ``E,'' ``S,''
and ``G,'' mean without a clear definition?
Mr. Grewal. Again, in the adviser space, in that particular
case, we alleged a violation of the anti-fraud provisions of
the Advisers Act. We alleged a breach of the advisers'
fiduciary duties because they misstated to the investing public
what they were doing when it came to how they were--
Mrs. Wagner. Has the SEC put out a definition of, ``ESG?''
Mr. Grewal. Again, I think that is what the rulemaking
process is--
Mrs. Wagner. But you can't enforce something that is not
defined, sir.
Mr. Grewal. Representative Wagner, you can enforce lies,
when the adviser lies about what it is doing.
Mrs. Wagner. Lies, when they don't even know what the clear
definition in the proposed rule is. We really need some answers
on this. Mr. Chairman, I hope that we can bring in some of
these so-called SEC experts, and I am highly disappointed in
the lack of answers and transparency today. I yield back my
time. Thank you.
Chairman Sherman. Thank you. I now recognize the gentleman
from Georgia, Mr. Scott, who is also the Chair of the House
Agriculture Committee, for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. I appreciate that, and
welcome, Director Grewal. But first, I want to set the record
straight. This whistleblower program has been very, very
effective, and I want to commend Chair Gensler and our SEC for
the excellent job they are doing. The program has brought
violations using whistleblower information. It has resulted in
$5 billion in monetary sanctions, rewards totaling $1.2
billion. The program deteriorates crime, it places fraudsters
in jail, and it protects the integrity of our capital markets,
so job well done.
Now, I want to make sure that you have the proper funds,
the money to continue to do the fine work that you are doing.
My first question is this, Mr. Grewal: Can you guarantee that
the whistleblower program is now properly equipped, and
properly funded to process the current number of complaints
with the money that you have, and hold these fraudsters
accountable?
Mr. Grewal. Thank you, Representative Scott, for that
question. Our whistleblower program is critical to our
enforcement program. The information that whistleblowers
provide about wrongdoing sometimes allows us to bring actions
that we otherwise wouldn't be able to make. We have dedicated
more resources to more timely-resolved whistleblower
applications. The number of applications is increasing, but we
are investing the resources to make sure that the program
remains the success that it is now.
Mr. Scott. Let me ask you this, I think that you and the
SEC are requesting for your budget for Fiscal Year 2023, an 8-
percent increase over the Fiscal Year 2022 budget. I understand
that this will go towards an increase of 12.5 new positions for
the Enforcement Division, is that correct?
Mr. Grewal. I think it is 125.
Mr. Scott. 125, with 20 new positions for crypto assets, is
that correct?
Mr. Grewal. I think--
Mr. Scott. And your Cyber Unit?
Mr. Grewal. I believe that is accurate.
Mr. Scott. And 90 new positions for the Division of
Examinations. Can you share with us how many of these enhanced
staffing increases will be solely focused on the whistleblower
program?
Mr. Grewal. I think it will depend, Representative Scott,
on what we ultimately receive as part of the budget process,
but I can assure you that we have put resources in already. We
continue to put people in on detail, and we continue to find
ways to give them the resources they need to do their work. But
it is a priority for us, and we try to balance that with all of
our other priorities.
Mr. Scott. So, you are telling us that this will be
adequate funding for you to continue?
Mr. Grewal. Yes.
Mr. Scott. Okay. Now, let me briefly discuss the SEC's
recently-proposed amendments aimed at enhancing the rules
governing its whistleblower program. The first proposed
amendment would allow the SEC to pay whistleblower awards for
actions brought by other entities. The second amendment would
uphold the SEC's authority to consider increasing the dollar
amount of an award, but not lowering it. Why do you believe,
Mr. Grewal, that adopting these changes is critical to
continuing to protect our whistleblowers?
Mr. Grewal. The changes you discussed, Representative, I
think are important in recognizing what whistleblowers bring to
our investigations, that it is not just the SEC, but sometimes,
also parallel Department of Justice (DOJ) investigations, or
parallel investigations by other regulators that result in
recoveries that should be considered in the process when we are
determining what a whistleblower award is.
Mr. Scott. Thank you again, Director Grewal. My time has
expired. Continue to do the great job that the SEC is doing
with this vitally important and needed whistleblower program.
Mr. Grewal. Thank you.
Chairman Sherman. Thank you. The Chair has been advised
that there will be votes on the House Floor sometime between
11:00 and 11:30. My hope is that we will be able to conclude
the hearing before we actually have to cast the votes. And I
will now recognize Mr. Hill from Arkansas for 5 minutes.
Mr. Hill. Thank you. Director Grewal, thanks for coming
before us today, and I want to follow up on a couple of
comments from Mrs. Wagner's questions. In the BNY Mellon
enforcement case on greenwashing, can you share with the
committee who the experts were that your litigation team
consulted with on that case, or did you have any in that
particular case?
Mr. Grewal. That is not the investigation I was
referencing.
Mr. Hill. You were talking about the Brazilian dam
situation?
Mr. Grewal. That is right.
Mr. Hill. Yes. Okay. Let me turn to BNY Mellon. The
allegation there was, as they said, that they had a process by
which they determined if companies were eligible to be in an
ESG fund, and, in your view, they just didn't follow it, so
they were misleading. Is that a fair assessment?
Mr. Grewal. That is what they admitted to as well.
Mr. Hill. Yes. And that would tell me that you have all of
the authority you need as it relates to protecting investors in
the mutual fund ESG arena using simply the power you have now.
Is that fair? You can go in and make a judgement if someone is
misleading in advertising, either at the financial advisor
level or at the fund-sponsor level. Is that fair?
Mr. Grewal. I would agree that the anti-fraud provisions we
have that allow us to bring these cases are adequate. Again,
the rulemaking is not my division, but what the rulemaking will
help with is putting all of those disclosures in a consistent,
comparable format that would allow us to more easily further
our investigations.
Mr. Hill. I have been looking at the proposed rule and
reflecting on how that might provide clarity if you were then
going to pursue an enforcement case, and I have a couple of
comments on that topic. Have you read the recommendations of
the Task Force on Climate-related Financial Disclosures that
was chaired by Mark Carney and promoted by Mike Bloomberg? Have
you read that 2017 document?
Mr. Grewal. I have not, Representative.
Mr. Hill. Because it outlines many of the things that I
think Chair Gensler and some of my colleagues on the other side
of the aisle say are very important. And one of those--again,
Representative Wagner raised Scope 3 emissions, and Scope 3
emissions is in that proposed rulemaking, is it not?
Mr. Grewal. I believe it is, yes.
Mr. Hill. Yes. Thank you. Let me read you what the task
force says about trying to do this. ``The gaps in emissions
measurement methodologies, including Scope 3 emissions and
product lifecycle emissions methodologies, make reliable and
accurate estimates difficult. The lack of robust, cost-
effective tools to quantify the potential impact of climate-
related risks and opportunities at the asset or project level
makes aggregation across the organizations activities or an
investment portfolio problematic and costly. The need to
consider the variability of climate-related impacts across and
within different sectors and markets further complicates the
process and magnifies the cost of assessing potential climate-
related financial impacts. And finally, the high degree of
uncertainty around the timing and magnitude of climate-related
risks makes it difficult to determine and disclose the
potential impacts with precision.''
That is what the Carney/Bloomberg task force says about
trying to deal with Scope 3. How in the world could the SEC
have that in a rulemaking?
Mr. Grewal. Again, I would have to refer you to the
Policymaking Division--
Mr. Hill. We will do that, but how do you think, as an
enforcement officer, you could take that to court? Challenging?
Yes or no?
Mr. Grewal. Again, I haven't read the report you are
talking about, and I try to--
Mr. Hill. Just read the proposed rulemaking that your
Agency has put forward because it has the same philosophy, that
this is a no-brainer, and we need to do it to save the planet.
So, I am asking you, can you enforce something that is vague,
not reliable, not accurate, not timely, not comparable across
industries, not comparable within the industry, and not agreed
upon by the accounting profession, those companies, or your
staff? It's pretty hard to take a case to court on that, yes or
no?
Mr. Grewal. Again, I haven't looked at the report you are
talking about, and I will share your concerns with the
Policymaking Division. I try to explain how we go about our
enforcement actions.
Mr. Hill. Right. We are grateful for your enforcement
service. And a lot of us on both sides of the aisle share the
greenwashing concerns about misleading advertising by the
biggest fund companies in the country, and we have studied
that. We have heard testimony here about funds that allegedly
are sustainable funds, but they actually look just like an S&P
500 fund, but charge a higher fee. Is that what you have seen
in some of your research on litigation?
Mr. Grewal. We have seen that type of misrepresentation
certainly in the matter that we talked about today. And again,
I can't talk about other investigations that we are looking at
in this space, but it is a concern when investors are not
getting accurate information about what they are investing in.
Mr. Hill. We thank you for your service to the people of
New Jersey, and now the people of the United States. I yield
back.
Mr. Grewal. Thank you.
Chairman Sherman. Thank you. I think we all agree with the
gentleman from Arkansas that clear standards are helpful. That
is why I am pleased to recognize the gentleman from
Connecticut, Mr. Himes, who is the author of the Insider
Trading Prohibition Act, which would codify and define,
``insider trading.'' He is also the Chair of our Subcommittee
on National Security, International Development and Monetary
Policy. Mr. Himes is recognized for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman, and welcome, Director
Grewal. And since the chairman teed me up for it, I will just
note that in your written testimony, you say something very
important. You say many Americans' trust in our financial
markets and institutions is at near historic lows, quoting a
Gallup poll. And then, you go on to say that some believe that
there are two sets of rules: one for the big and powerful; and
another for everyone else. That, I think, is accurate and
should concern us. And I think it does concern people on both
sides of the aisle here.
Maybe I will just point out that my bill, H.R. 2655, the
Insider Trading Prohibition Act, has now passed through
Congress, has been included as an amendment to the NDAA, and it
is time for it to become law. I am grateful to my Republican
colleagues for making that bipartisan. Now, of course, we just
need to get it through the United States Senate. I do
appreciate your Agency's assistance on that. I think it is
important, given all that you have to do, that your enforcement
people not spend a whole lot of time slicing and dicing Newman
and Solomon, and that we finally do what we should have done
long ago, which is, if we are going to prosecute people, make
it clear precisely why we are prosecuting them. But I do thank
you and your Agency for the assistance there.
In my remaining time, Director, I have been focusing quite
a bit, as I know you have, on cryptocurrency, and I have a
question for you. I have watched the ramping up of both people
and resources on that side. I wonder, given the list of names--
Tether, Voyager, Excelsior, et cetera, et cetera, et cetera--
where we have seen really substantial either declined
bankruptcies or questions around fraud, do you have the
resources and the expertise that you need? Even if the answer
to that question is, ``yes,'' what more does the SEC need in
this maybe paused excitement around cryptocurrency to make sure
you are in a position to enforce?
There is a second question I want you to ask that may be a
little bit less comfortable, which is I am pleased that the
Congress is really working hard in educating itself on
cryptocurrency and even moving some legislation. So, this may
not be a comfortable question for you, but since you have the
panorama of misbehavior and make decisions about when to
enforce and not to enforce, what advice would you give us as
lawmakers for what should be at the top of our priority list in
terms of legislating?
Mr. Grewal. I will start with the first question on
resources. Certainly, resources are an issue across our
Division and across the Agency. We are still not up to the
numbers we were at prior to 2016. The additional resources in
the Crypto Asset Unit will help. They include litigators,
because a number of these cases are in court right now and are
a drain on our resources, but the expertise is not within
Enforcement alone. We rely on Finnhub, which is our strategic
hub for finance and innovation technology, and we rely on other
divisions and their expertise. So, it is a team effort on these
issues as they touch the other divisions.
I think we will need more resources moving forward. But for
the time being, I think this will allow us to focus on all of
the risks that we are seeing right now in the market that you
alluded to in your question, and to continue our investigations
on pace to make sure investors are protected, and those that
aren't compliant with our laws come into compliance.
With respect to the second part of your question, I would
be happy to sit down with your staff and talk through some of
the issues that we are seeing in a different setting, and go
through some thoughts that we may have on that. I just need to
consult with others because, again, it is not just an
enforcement issue alone.
Mr. Himes. Let's talk for a second. It is a nice
opportunity to address a lot of people who are thinking about
and working on this, so let me push you on that a little bit.
Obviously, we are doing a lot of thinking here about how you
divide the world between the SEC and the Commodity Futures
Trading Commission (CFTC). I don't have a lot of time, but
maybe talk a little bit about partnership cooperation. How is
that going? Is there anything, again, as we draft legislation,
that we should bear in mind?
Mr. Grewal. Not just with respect to crypto, but there are
a whole host of other spaces in which we work well with the
CFTC, and we run into them where issues may touch both of our
remits, and we know how to deconflict. We know how to work in
parallel. We did that. With the collapse of the Archegos family
office, they brought charges that touch on their remit. We
brought charges that touched on our remit. The Southern
District of New York (SDNY) brought criminal charges. We did
that with the collapse of infinityQ in other cases, so we know
how to work with them. We work well together. And the Chair has
alluded to some areas in which we could use additional
guidance, and I would defer to the Chair's office on those
issues.
Mr. Himes. Thank you, Director. My time has expired.
Chairman Sherman. Thank you. I now recognize the gentleman
from Minnesota, Mr. Emmer.
Mr. Emmer. Thank you, Chairman Sherman, and Ranking Member
Huizenga, for hosting this hearing today. Mr. Grewal, you
frequently acknowledge that public trust and confidence in our
capital markets is eroded. In fact, on October 13, 2021, you
stated, ``The decline in trust undermines the investor
confidence needed for the fair, efficient, and orderly
operation of our capital markets. Put simply, if the public
doesn't think the system is fair, they are not going to invest
their hard-earned money.'' I agree, but time and time again,
you placed the cause of blame for this erosion of trust almost
squarely on the shoulders of industry participants and
companies.
Mr. Grewal, the SEC is in no way blameless here. Chair
Gensler's political regime at the SEC, carried out by its
Division of Enforcement, has been characterized by a focus on
using enforcement to expand SEC jurisdiction at the expense of
public resources, public investment in our country, and public
trust in our markets. It seems clear to everyone, except maybe
those at the Commission, that the SEC is not regulating in good
faith. Although many sectors of the industry have grappled with
the SEC's politicization of regulation over the last 14 months,
it can be seen most clearly when it comes to the digital asset
industry.
Take, for example, industry sweeps. As you know, industry
sweeps are not novel to the digital asset industry. They are a
series of voluntary document production request letters that a
regulator sends to everyone in a given industry who is
similarly situated or is involved in the same type of activity.
Mr. Grewal, does the SEC Division of Enforcement do industry
sweeps?
Mr. Grewal. We do industry sweeps from time to time when we
have an--
Mr. Emmer. Thank you. The answer is, ``yes.'' I reclaim my
time. Are there currently any industry sweeps underway?
Mr. Grewal. I'm sorry. I can't talk about investigations on
our public--
Mr. Emmer. You can't talk about it legally or you won't
talk about it?
Mr. Grewal. It is our policy not to confirm or deny
investigations.
Mr. Emmer. So, you won't talk about it. Okay. What do you
do if a company, sir, cannot respond to a sweep letter because
they are not in your jurisdiction?
Mr. Grewal. If we issue a voluntary request for
information, there is not much we can do. We can proceed with
the subpoena and then a subpoena enforcement action.
Mr. Emmer. So, you do extraterritorial jurisdictional
requests?
Mr. Grewal. Voluntary requests are just that. They are
voluntary. They are an important part--
Mr. Emmer. Again, sir, I am not asking about the request
now. I am asking about the people you direct those to. There
are some that would be within the SEC's jurisdiction, and there
are some that are not. My question is, and I think you have
confirmed it, that you do industry sweeps to extraterritorial
jurisdictional market participants, people you do not have
enforcement authority over?
Mr. Grewal. We subpoena individuals and witnesses who may
be in the market, market participants--
Mr. Emmer. Are they within your jurisdiction and outside of
your jurisdiction?
Mr. Grewal. We are not limited by our jurisdiction. When we
are collecting evidence, we follow the evidence wherever it
leads to and to whomever it leads. There may be someone who
doesn't work in the--
Mr. Emmer. I would say, sir, or I would ask you, so you do
extraterritorial jurisdictional work. Someone argued that that
is not appropriate. But Mr. Grewal, has Chair Gensler ever
directed you, or to your knowledge as to any of your
colleagues, to make it a bloodbath for companies who don't
respond to a sweep letter, which are voluntary?
Mr. Grewal. No, that has not happened.
Mr. Emmer. Interesting. We have become aware that Chair
Gensler has in the past directed the Division of Enforcement to
send a sweep letter to a particular sector of the crypto
community designed to jam them into a violation that is
allegedly unconstitutional. And if any company does not respond
to said sweep letter, which I will reiterate, as you said
several times, are supposed to be voluntary, then the SEC would
make it a, ``bloodbath,'' for them. If true, I imagine such a
tactic would significantly erode trust between the public and
the SEC.
Here is the problem. The SEC isn't interested in clarifying
what areas of the crypto industry fall under SEC jurisdiction.
We know that because Finnhub, which you have referred to, the
SEC Division focused on crafting crypto regulation, has
essentially dissolved under Chair Gensler. Nonetheless, while
abandoning good-faith attempts to clarify how the Commission's
existing authority applies to digital assets, the SEC is hell-
bent on expanding the size of its Crypto Enforcement Division
and using enforcement to unconstitutionally expand its
jurisdiction.
Under Chair Gensler, the SEC has become a power-hungry
regulator, politicizing enforcement baiting companies to,
``come in and talk to the Commission,'' then hitting them with
enforcement actions and discouraging good faith cooperation.
Understand, sir, there is a new day coming. Thank you. I yield
back.
Chairman Sherman. I now recognize the gentleman on the
screen, Mr. Vargas from California.
Mr. Vargas. Thank you very much, Mr. Chairman, and I thank
the ranking member for this hearing, and, in particular, thank
you, Director Grewal, for being here.
Director Grewal, last year Congress passed my ESG
Disclosure Simplification Act which would require public
companies to disclose certain environmental, social, and
governance (ESG) matters in annual filings with the Securities
and Exchange Commission. Investors in my district and across
the country have increasingly been demanding that public
companies disclose ESG material that is material and informs
their market activity. As a result, the SEC has received
thousands of comments from the economists, market advocates,
and investors requesting that companies and banks file ESG
disclosures to protect investors, ensure fair, orderly, and
efficient markets, and facilitate capital formation.
Therefore, I am glad that the SEC has proposed an ESG rule
that clarifies reporting standards, ``to promote consistent,
comparable, and reliable information for investors concerning
funds and advisers in cooperation in environmental, social, and
governance factors.''
Director Grewal, can you please describe how your Division
is positioned to enforce this rule, once implemented, and
ensure that investors have access to standardized ESG
disclosures?
Mr. Grewal. Thank you, Representative Vargas, for the
question. As I mentioned earlier, the rulemaking is done by
different divisions than mine.
Mr. Vargas. Okay.
Mr. Grewal. It is impossible for me to talk about climate
enforcement pursuant to those rules because they haven't been
adopted, and the version of the final rule hasn't been put out.
What I could tell you is that we have seen from the enforcement
perspective that ESG issues are certainly important to
investors, and that greenwashing is occurring. We are using the
tools available to us, the anti-fraud provisions of the
securities laws to hold bad actors accountable, whether they
are issuers who are making material misstatements about climate
risks or about their ESG strategies, or advisers who are doing
the same thing. We are holding them accountable under the
Advisers Act.
Mr. Vargas. You have been using the anti-fraud provisions,
but they do seem a little bit inadequate. I think that is why
they are coming up with the rules. Is that the reality?
Mr. Grewal. Again, I would have to refer you to the
Rulemaking Division, but I think you mentioned it at the
beginning of your question. It is to have in one format
consistent, comparable information when the issuers are
speaking on these issues or when advisers are speaking on these
issues, so that consistency will help us evaluate compliance.
And if people are lying about their compliance with those
regulations, then certainly that is something we would look at,
but it is hard to talk about the rules before they are proposed
or before they are made final.
Mr. Vargas. That is a good point, but you did talk about
lies. You can enforce lies. In fact, you said that companies
have already confirmed that they had lied in cases. So, you
were able to go after them under the anti-fraud provisions with
respect to ESG?
Mr. Grewal. That is right. We brought some recent actions,
both in the adviser space and against issuers.
Mr. Vargas. I was a little curious here when you said that,
obviously, you have experts in the law. Those are your lawyers,
and you do have very good lawyers, but you said that you rely
on experts for the environment or ESG matters, I believe that
you said experts outside of the SEC. Are those regular experts
that you use in litigation, let's say, but you wouldn't in
medical purposes, but an attorney would rely on experts
bringing their case. Is that what you mean? Is that the type of
expert you are talking about?
Mr. Grewal. That is exactly right. That is something we
frequently do in this space and other spaces where we need
litigation experts, where we need to qualify experts for court
proceedings, where we need to produce expert reports on
litigation-related matters. That is right.
Mr. Vargas. I would commend you, again, for working in this
ESG space. I think it is very important. I do think that many
investors see that as material, which is what matters, and,
again, I appreciate you doing that. Lastly, I do want to
comment very briefly on the issue of cryptocurrency. I can't
believe that you are getting criticism for an industry that
basically has almost collapsed and has taken so many retail
investors down. I appreciate what you are doing. I know you
need more people in that section, and I am happy to support you
in that. I have 13 seconds left, 12 seconds, and I just say
again, thank you for showing up. We appreciate you, and I think
you are doing a great job. Thank you.
Mr. Grewal. Thank you.
Chairman Sherman. I thank the gentleman from California for
his observation, and I now recognize Mr. Davidson of Ohio for 5
minutes.
Mr. Davidson. Thank you, Mr. Chairman. Thanks for finally
holding this really important hearing, and thankfully, our
colleague, Mr. Vargas, doesn't give investment advice,
particularly with respect to the crypto market. And thankfully,
we can clarify some of the things here.
I just want to clarify that I think enforcement is a very
important function for the SEC. So, thank you, and those who
are committed to doing it honestly and ethically as part of our
government at the Securities and Exchange Commission. But
fundamentally, are digital assets exempt from treatment as
pump-and-dump scams?
Mr. Grewal. No. We have seen pump-and-dump schemes
involving digital assets.
Mr. Davidson. How many enforcement actions have been taken
by the SEC?
Mr. Grewal. Again, I would have to provide you that
information at a later date.
Mr. Davidson. I would appreciate that.
And frankly, I am curious why some of the biggest ones that
look, to an outsider, like probably pump-and-dump scams don't
get targeted? It seems like some things are given a pass and
some things are targeted. What is the criteria for targeting?
Mr. Grewal. There is no selective prosecution. We have to
balance the risk that we are seeing with the resources that we
have, and we have a number of investigations.
Mr. Davidson. And maybe the big ones take too many
resources to go after, so you just say, you will get a pass?
Mr. Grewal. No, I am very proud of the work that the 1,300
women and men in my Division do. They don't give people a pass.
They hold violators accountable.
Mr. Davidson. Okay. Let me run a hypothetical scenario by
you, whereby an SEC official gives a speech at a conference.
And the official begins, of course, by stating that, ``their
views are their own and not necessarily those of the
Commission.'' Anyone who has ever heard an SEC official speak
would know that this is standard and they would not interpret
the speech as legal guidance. However, let's say that the SEC
official consulted SEC staff, and perhaps even ethics directly,
to assist them in writing the speech or giving guidance. Under
this scenario, would the written speech still be considered
personal views of the individual and not views of the
Commission?
Mr. Grewal. Respectfully, I can't answer that right now,
because that hypothetical is a real scenario that is playing
out in litigation.
Mr. Davidson. Oh, what litigation would that be?
Mr. Grewal. That would be the KRipple litigation
Mr. Davidson. Ripple XRP. Is it true that Director Hinman
submitted his speech to ethics for approval?
Mr. Grewal. Again, I can't comment on pending litigation.
Mr. Davidson. Okay. Director Grewal, we talked a little bit
about the SEC. Last year, the SEC made a quote: ``no action
enforcement announcement regarding the amendments to proxy
advisor rules from July 2020.'' Further, the financial services
and general government appropriations bill moving through the
Rules Committee this week prohibits any funds from being used
to implement these proxy adviser rule amendments. On July 13th,
Chair Gensler even announced that the SEC would consider
adopting different amendments to the rules governing proxy
voting.
Given that regulation by enforcement is Chair Gensler's
specialty, I find it ironic that the Agency refuses to enforce
the already-settled proxy adviser rules. Here, we have
regulatory clarity and, yet, no enforcement. When it comes to
digital assets, we have zero clarity, yet the Commission
chooses to regulate by enforcement selectively, it appears,
frankly. Can you please explain this Gensler paradox?
Mr. Grewal. Again, I can't speak to the rulemaking. That is
being handled by a different division as is the exemptive
relief--
Mr. Davidson. The rulemaking on proxy advisors is clear. It
is already the law. Why aren't you enforcing it?
Mr. Grewal. Again, our Division doesn't engage in selective
enforcement. We have over 1,500 investigations--
Mr. Davidson. So, you just aren't actively commenting
because there is active enforcement going on of that rule?
Mr. Grewal. I am responding to the statement that we are
selectively--
Mr. Davidson. No, no, I want you to respond to my question.
Is there active enforcement of the standing proxy adviser rule?
Mr. Grewal. Again, I am not going to talk about
investigations that may or may not exist. It is our policy that
investigations are confidential, so--
Mr. Davidson. There is a specific one, but are there other
actions to enforce the existing law?
Mr. Grewal. We enforce the Federal securities laws when we
see violations. We have 1,300 women and men who investigate
those violations, and when we make a recommendation to the
Commission, and they agree with our recommendation to move
forward with an enforcement action, we do. When a matter is
settled, we recommend that settlement to the Commission.
Mr. Davidson. Okay.
Mr. Grewal. We are doing everything we can to hold
violators accountable, so I have to push back because--
Mr. Davidson. I think we will disagree about performance. I
am glad you are here. Director Grewal, as you know, U.S.
capital markets boast nearly 41 percent of global equity and 40
percent of global fixed income. Needless to say, we have the
deepest, most-robust capital markets in the world. Was it that
way prior to Chair Gensler taking over at the SEC?
Mr. Grewal. I think the Chair has constantly recognized how
robust our capital markets are.
Mr. Davidson. Okay. So, it was that way before. I think he
has recognized that he didn't make our markets great. They were
that way before and continued to be that way despite his
presence, or maybe in spite of his presence here. Do you
believe Chair Gensler will ever stop pursuing a social-
political agenda in weaponizing securities law--
Chairman Sherman. The time of the gentleman has expired,
but he is welcome to submit his question for the record, and I
am sure our witness will give him a good written response.
I now recognize the gentleman from Illinois, Mr. Casten,
who is also the Vice Chair of this very subcommittee.
Mr. Casten. Thank you, Mr. Chairman. And thank you,
Director Grewal. I want to ask you a couple of questions, if I
could, more on the investor protection realm. It is a little
over the 2-year anniversary of the death of Alex Kearns from
Naperville, Illinois. This was the young man who was told by
Robinhood that he owed them $730,000, then took his own life
after writing his parents a note saying that he didn't know how
someone who only had $5,000 to his name was allowed to trade
$730,000 of options. That story was soon eclipsed in the
national zeitgeist by the GameStop hearings and getting into
where were the incentives within Robinhood.
And what emerged on this committee was that Robinhood is
really this sort of near perfectly toxic brew of selling only
to people where they have payment for order flow (PFOF)
contracts, earning their revenue not as a fixed fee on those
PPF contracts, but as a percent of the spread, the bid ask
spread, on the back end and then relying on gamification. So,
they just have these incentives to find the least-sophisticated
money in the market, connect them to the most-sophisticated
players, and then basically use gamification to put the whole
thing on steroids.
We have had a number of hearings in this committee. We have
had a number of bills. I wonder if you could just speak for a
moment about what the SEC is doing specifically around
gamification and payment for order flow, because as I sit here,
we still have not created the regulatory conditions that will
protect a future Alex Kearns from being caught up in this same
toxic brew. Can you speak briefly to that?
Mr. Grewal. First, I am sorry to hear that about the
constituent. It is a horrible, horrible story, and I have read
about it. Gamification is a huge concern. Last year, in the
fall, we put out a request for information about gamification,
and we are trying to gather more details from people across the
market to see how this practice exists, and get different
perspectives on that practice. And my hope is that will help
inform our next steps.
From an enforcement perspective, I am concerned when
gamification crosses the line into a recommendation. If it
does, then those folks have to comply with Reg BI. And I see
that as a potential avenue for us to get involved in that
space, and we are concerned about it. And gamification also, I
think, as we have seen, can be used for further manipulative
conduct, and so is a concern from an enforcement perspective as
well.
Mr. Casten. You have touched exactly on my follow-up. This
format is horrible, because we want to play, ``gotcha,'' and
get zingers on the record. But at least as I sit there, from my
perspective, I have no idea how you could honestly say you were
looking out for the best interests of your customers if you are
using gamification to recommend stocks and if you are only
relying on payment for order flow off takers, right? By
definition, you are not looking, and can you say anything
affirmatively that we know this?
And it hurts me because we are 2 years in, in what seems to
be obvious, and we are still waiting for a hearing and a
ruling. Meanwhile, companies like Robinhood continue to make a
lot of money from what seems to be not looking after their
investors' best interests.
Mr. Grewal. Again, I can't talk about specific entities or
individuals or firms that we may or may not be looking at. I
could tell you that digital engagement practices more broadly
are a concern for the Chair. We started this information-
gathering last fall on this issue. Perhaps, that will inform
future rulemakings. I have shared with you how I think it
impacts enforcement. It is something that we are very concerned
about, particularly with Reg BI, how it intersects, and
couldn't constitute a recommendation. And then on the
manipulation side, how it could be used in furtherance of
manipulative conduct, and it could have horrific consequences
as well, as we have seen in the case that you highlighted.
Mr. Casten. I know I only have 50 seconds left here, but
the crypto rise and crash looks an awful lot like the meme
stock rise and crash. It is driven by a lot of the same
zeitgeist that, again, looks like the unsophisticated players
taking charge. Leaving aside that, you can't tell us exactly
what you are doing on the gamification and P5 issue? Is crypto
the same way, or we are going to have to at some point clarify
whether you or the CFTC has authority over crypto before we can
make sure that we are protecting those investors there?
Mr. Grewal. We are using, Congressman, our authorities to
investigate and bring actions against those who violate our
laws, whether they be the anti-fraud provisions or other
aspects of the securities laws.
Mr. Casten. Are you satisfied you have the resources to do
that?
Mr. Grewal. I could always use more resources, but we are
making the best of it with the additional 20 slots, and then
hopefully, we'll get the 125 additional slots that we have
asked for.
Mr. Casten. Okay. I yield back. Thank you.
Chairman Sherman. I should point out that votes have been
called. Some 413 Members have not voted, and 7 minutes and 13
seconds are remaining on the clock. We may be able to conclude
the hearing before we all have to go vote. I will announce when
we are down to 110 people who haven't voted, and if we don't
get to conclude, we will reconvene after the two votes.
I now recognize the gentleman from Indiana, Mr.
Hollingsworth.
Mr. Hollingsworth. Director Grewal, thank you for being
here today. I know you have been asked many questions, some of
which are inside your bailiwick and others perhaps outside. I
want to ask something that I believe is very, very germane to
your daily job enforcement. Do you agree that there is a
difference in the legal authority and legal obligations you
have to enforce rules and regulations promulgated by the SEC as
compared to guidance from staff through staff accounting
bulletins?
Mr. Grewal. Excuse me. Staff accounting bulletins are
exactly that, they are guidance that the Office of the Chief
Accountant (OCA) offers on an issue where there has been some
question and is there--
Mr. Hollingsworth. Is there a difference in the industry? I
understand the definition of staff accounting bulletin. Is
there a difference in the enforcement, or level of enforcement,
or the actions of enforcement, or the likelihood of enforcement
of these things under your control between rules and
regulations promulgated versus staff accounting bulletins?
Mr. Grewal. Again, we wouldn't be involved in the
enforcement of violations of staff accounting guidance.
Mr. Hollingsworth. For clarity, there is no enforcement
that you would bring based on that which is promulgated or put
forth through staff accounting bulletins alone?
Mr. Grewal. Again, every violation is facts and
circumstances. I don't know what else might be in that
hypothetical situation.
Mr. Hollingsworth. It is not a hypothetical situation. I am
asking. That is not a hypothetical situation. There is no
example here. I am asking you to repeat exactly what you just
said, ``We do not enforce.'' This is what I heard you say, and
I just want to make sure that you repeat it. We do not enforce,
``violations,'' actions in contravention, I should say, to
staff accounting bulletins. Is that what you said?
Mr. Grewal. I said that staff accounting bulletins are
guidance. We enforce violations of the Federal securities laws
and the rules and regulations promulgated from those laws.
Staff accounting guidance or staff accounting bulletins may
intersect with another violation or may be part of a fact
pattern and we--
Mr. Hollingsworth. Okay. But it alone is not law?
Mr. Grewal. Standing alone, no.
Mr. Hollingsworth. It alone is not law, and you are
enforcing the laws of this country, correct?
Mr. Grewal. The laws, and the rules, and regulations that
are promulgated from those laws.
Mr. Hollingsworth. Great. As you know, I wrote a letter to
the SEC last week regarding Staff Accounting Bulletin No. 121
(SAB 121), signed by a majority of committee Republicans. That
letter raised several concerns with the policy in the bulletin,
the absence of a transparent process from SEC staff. Very
specifically again, does SAB 121 legally require counterparties
that participate in the activities included in the bulletin to
adhere to the bulletin, legally require them to do so?
Mr. Grewal. Again, it is guidance. And I don't mean to push
off these questions on my other divisions, but that is the
Office of the Chief Accountant that promulgated that--
Mr. Hollingsworth. I thought it was your office that
enforced these things, or failed to, or does not enforce these
things?
Mr. Grewal. This staff accounting bulletin was promulgated
by the Office of the Chief Accountant, so I would direct you to
that office about how they are ensuring compliance or how they
are pushing that out.
Mr. Hollingsworth. If someone refers to you an activity
that is in contravention to SAB 121, and requests that you
enforce it, what is your response to that?
Mr. Grewal. It would depend on the facts and circumstances
of what is referred to us. It would, again, depend on the facts
and circumstances of what is referred.
Mr. Hollingsworth. And those facts and circumstances would
be whether they violated other actual laws or whether they
violated this guidance?
Mr. Grewal. It could be part of a larger violation. I just
can't engage with hypothetical--
Mr. Hollingsworth. But standing alone, you don't believe
SAB 121 or other SABs promulgated our law and can be enforced
by virtue of the law?
Mr. Grewal. Again, they are guidance.
Mr. Hollingsworth. Understood. How does the SEC plan to
address the implications of accounting firms that require
organizations to adhere to that guidance?
Mr. Grewal. Again, I would refer to the Office of the Chief
Accountant that deals with those issues and deals with the
accounting firms.
Mr. Hollingsworth. What I have heard you repeatedly say,
which is very impactful, and I appreciate your candor, is that
these staff accounting bulletins are not law and cannot be
enforced as though they were law. This is something that
continues to concern many firms that interact with our office,
and many Americans who believe that is in contravention to how
we create laws in this country. Staff accounting bulletins are
carrying the force of law instead of going through the normal
process by which we promulgate rules. I appreciate your candor
about the difference between those two and the activities that
you can and cannot undertake in enforcement as it relates to
those two. Thank you, and I yield back my time.
Chairman Sherman. Thank you. I will point out that we are
trying to organize a hearing to deal with accounting and
auditing issues. We hope to have the Chief Accountant of the
SEC, the Chair of the Financial Accounting Standards Board
(FASB), and the Chair of the Public Company Accounting
Oversight Board (PCAOB). Stay tuned.
I now recognize the gentleman from Wisconsin, Mr. Steil,
and I believe you will be our last questioner.
Mr. Steil. Last, but not least. Thank you for being here,
Mr. Grewal. I appreciate it. We have covered a wide range of
topics. I want to cover three in the limited time that I have.
First question, can you tell us about any enforcement actions
regarding proxy advisors that you have taken during your tenure
at the SEC?
Mr. Grewal. I'm sorry, I didn't hear the first part of your
question.
Mr. Steil. No worries. Can you tell us about any
enforcement actions regarding proxy advisors that you have
undertaken during your tenure at the Securities and Exchange
Commission?
Mr. Grewal. It will be a year for me next week, but I would
have to go back and consult with our office on that and get
back to you with that information.
Mr. Steil. That would be terrific.
Is it your view that as proxy advisors are not a proxy
solicitation under the 1934 Act, that you would need an action
by Congress to further oversee proxy advisors? Do you think you
have current authority to review proxy advisor firms in your
current position?
Mr. Grewal. Again, that is something for which I would
refer you to our Policymaking Division, which is handling the
proxy advisor rules and the changes thereto.
Mr. Steil. Okay. I am pretty concerned with the changes
that were just recently made. I think it was a mistake to
strike down the Clayton proxy advisor rules not under your
relevant jurisdiction. But I do think it is relevant as we
think about the power that these two proxy advisors, who
control roughly 97 percent of proxy advice in this country,
play. I think it is a very reasonable place for the SEC to be
providing substantive oversight.
Let me shift gears. I want to echo my colleague, Mr.
Huizenga's, comments regarding the Division of Enforcement,
that historically adopted a historically-broad understanding of
what the term, ``dealer'' means. I listened to your answers, so
I won't ask you my questions. But I just would note, and I
think I echo my colleague here, that I want to caution that
these broad definitions and aggressive enforcement approaches
come with a real cost. Specifically, classifying everyone as a
dealer could chill investment in particular in small public
companies, and my concern is that it will hurt innovation and
competition. I won't ask you a question, because I think it was
covered previously. I know there is ongoing litigation in that
space.
Let me get to my final topic here, and I know Mrs. Wagner
commented on this. Mr. Grewal, I am really concerned about the
SEC's climate disclosure proposal. You would be in the
enforcement arm at the SEC, and American businesses are
struggling in high inflation with labor costs, supply
shortages, and mountains of red tape, while at that same time,
the SEC seems determined to push companies to spend scarce
resources on disclosure of where they have used non-material,
climate change-related items.
I have two concerns. First, the proposal itself. Public
companies already disclose material information to investors,
and to force issuers to disclose information that may not be
material comes with great costs and little benefit.
Second, and this is where your office comes in, I am
concerned whether or not this rule would be difficult to
implement, and would probably fail to achieve its desired
effect. One of the trickiest aspects of the climate proposal
concerns Scope 3 emissions, the downstream emissions impact,
and the issuers that will be expected to report on this topic.
Could you walk us through how your office intends to handle
compliance cases related to Scope 3 emissions disclosures?
Mr. Grewal. Again, Congressman, I will refer back to an
earlier answer I gave on that specific question. It is
impossible for me to talk about how we would enforce this rule,
which has yet to be finalized and yet to be adopted, and we
don't know yet what it will look like. I tried to explain how
we have gone about dealing with these issues using our existing
authorities.
Mr. Steil. I appreciate that. Maybe, I can get a little
more clarity then. Does your office have expertise in climate
science?
Mr. Grewal. As I mentioned earlier, where we need expertise
for our enforcement actions, for example, a climate-related
matter that we are prosecuting now in court, we have gone out
and gotten that expertise in litigation.
Mr. Steil. What would be the cost structure of that, in the
case you just referenced?
Mr. Grewal. It would be the same with any litigated
enforcement action where we go out and retain experts within
the rules that allow--
Mr. Steil. There are individuals probably charging in the
neighborhood of $1,000 an hour, rough estimate?
Mr. Grewal. We could provide you that information.
Mr. Steil. I think that would actually be helpful, because
here is my concern, if we take the rules, if we assume to
currently implement, it would fall to your office. I think it
would involve hundreds of individuals who would be required to
have very specific climate expertise. We could judge whether or
not they are politically motivated. It would cost thousands of
dollars, not only for the SEC, but also for these companies to
comply rather than allowing these companies to build jobs here
in the United States of America.
I know we are out of time. Mr. Chairman, and recognizing
that there are votes, I will yield back.
Chairman Sherman. Thank you. Some 341 of our colleagues
have yet to record their votes, so it looks like we can
conclude. The ranking member is recognized for 1 minute for a
concluding statement.
Mr. Huizenga. Mr. Grewal, I am appreciative of you being
here. This is too little, too late, in my opinion, and,
frankly, on the too little, I would observe that neither side
really got answers from you. There was a lot of, ``you need to
talk to somebody else, you need to talk to a different division
head.'' It causes me to wonder how we are going to get those
answers. And it is true, maybe the other side is a little more
polite about it, but we need to have these answers because this
is our constitutional duty as we, according to the
Constitution, are the purse bearers for the U.S. Government,
meaning you have to come to the House of Representatives for
appropriations. And this committee works with our ESG
counterparts on the Appropriations Committee to deal with the
policy and the funding of it. So, we had better start getting
some answers, especially when you are coming up and asking for
more resources.
I do want to correct one thing on the ALJ situation. The
breach happened in 2017. The SEC disclosed the breach in April
of 2022, the statement. But according to The Wall Street
Journal, the breach was discovered in the fall of 2020. That
lack of time of being transparent, open, and honest with this
committee and with the public is problematic. And my time is
up.
Chairman Sherman. Thank you. I want to thank the witness
for joining us, and enlightening us with his comments. There
have been a number of comments from our colleagues about the
need for a definition. No definition is more important than to
define, ``security,'' since that is what the SEC does. Congress
really hasn't acted. Courts have acted with the Howey Test,
which was not focused on digital assets, since it was written
in the 1940s. But the fact remains that XRP, I think, clearly
is a security, and we need enforcement, not only on those who
issued the unregistered security, but on those who provided an
exchange for it.
Likewise, it would be good to have a definition of,
``ESG,'' but right now, companies in mutual funds put forward
their own definitions of, ``ESG,'' and promise the investors
that they will follow them when they don't. That is when
enforcement is called for. It is not enforcement by regulation
to take a security, which clearly is a security, I believe,
under the Howey Test and to enforce our rules against it. Of
course, more clarity would be helpful.
My Republican colleagues have said that there is no formal
rule that has been adopted on ESG. We understand that. You
still need to go forward, and it is my understanding that you
are going forward in those areas where they are not meeting
their own stated standards.
The Chair notes that some Members may have additional
questions for this witness, 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 this witness and to place his 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 11:35 a.m., the hearing was adjourned.]
A P P E N D I X
July 19, 2022
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