[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

                              ----------                              
                                                                   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
                             
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]