    [Senate Hearing 117-699]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-699

            OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

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

                                    HEARING

                                   BEFORE THE

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

       EXAMINING OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
                                   __________

                               SEPTEMBER 14, 2021
                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

                      [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE

    52-997 PDF               WASHINGTON : 2023

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                         SHERROD BROWN, Ohio, Chairman

    JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
    ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
    JON TESTER, Montana                  MIKE CRAPO, Idaho
    MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
    ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
    CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
    CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
    TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
    KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
    JON OSSOFF, Georgia                  JERRY MORAN, Kansas
    RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                         STEVE DAINES, Montana

                         Laura Swanson, Staff Director

                     Brad Grantz, Republican Staff Director

                           Elisha Tuku, Chief Counsel

                     Dan Sullivan, Republican Chief Counsel

                         Mark Uyeda, Republican Detail

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                          TUESDAY, SEPTEMBER 14, 2021

                                                                       Page

    Opening statement of Chairman Brown..............................     1
            Prepared statement.......................................    37

    Opening statements, comments, or prepared statements of:
        Senator Toomey...............................................     3
            Prepared statement.......................................    38

                                    WITNESS

    Gary Gensler, Chair, U.S. Securities and Exchange Commission.....     5
        Prepared statement...........................................    39
        Responses to written questions of:
            Chairman Brown...........................................    46
            Senator Toomey...........................................    46
            Senator Menendez.........................................    59
            Senator Cortez Masto.....................................    60
            Senator Sinema...........................................    60
            Senator Scott............................................    61
            Senator Rounds...........................................    64
            Senator Tillis...........................................    66
            Senator Kennedy..........................................    74
            Senator Moran............................................    77
            Senator Daines...........................................    84

                  Additional Material Supplied for the Record

    Letter from American Securities Association......................    86

                                     (iii)

            OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

                                  ----------

                          TUESDAY, SEPTEMBER 14, 2021

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10:06 a.m., via Webex and in room 538,
    Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
    the Committee, presiding.

              OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

        Chairman Brown. The Senate Committee on Banking, Housing,
    and Urban Affairs will come to order. This hearing is in a, our
    first time, a hybrid format. Our witness is in person. Mr.
    Gensler is here in person. Thank you. Members have the option
    to appear both in person or virtually.
        For those joining remotely, a few reminders. Once you start
    speaking there will be a slight delay before you are displayed
    on the screen. To minimize background noise, please click the
    Mute button until it is your turn to speak or ask questions.
    You should all have one box on your screens labeled ``Clock''
    that will show how much time is remaining. For those of you
    joining virtually, you will hear a bell ring when you have 30
    seconds remaining and then when time has expired. If there is a
    technology issue we will move to the next Member.
        Our speaking order will be as usual, that is by seniority
    of the Members who have checked in before the gavel came down,
    either in person or virtually, and then by seniority of Members
    arriving, alternating between Democrats and Republicans.
        Welcome, Chair Gensler, back to the Committee. Five months
    ago today, the Senate confirmed you as Chair of the Securities
    and Exchange Commission, one of the historically most important
    jobs in the Federal Government. I know you have already gotten
    to work for the American people, and you had your work cut out
    for you.
        Over the past year-and-a-half, the disconnect between the
    stock market and most Americans' lives has never been more
    painfully clear. Most of the country has been devastated by
    this awful virus. Hundreds of thousands have lost loved ones.
    People lost jobs, lost family businesses. Mothers were forced
    to leave their paid jobs in droves. Millions today are at risk
    of evictions from their homes.
        But you would never know any of that by looking at the
    stock market. It hits new records month after month. Listen to
    this: 53 records since the beginning of the year. Eye-popping
    gains in the stock market and crypto assets attracted millions
    to start investing.
        And like during past times of upheaval, the COVID crisis
    opened the doors for bad actors looking to seize upon people's
    fears and insecurity. Pandemic-related fraud, from Ponzi
    schemes to offers to invest in COVID-related medical care,
    skyrocketed last year.
        The SEC stepped up to educate investors and to punish bad
    actors. The dedicated public servants at the Commission have
    continued to fight for all the Americans whose pensions and
    401(k)s and college savings are at risk. Many have been enticed
    by dramatic jumps in the value of new digital assets. They have
    dreamed of riding the coattails of professional investors and
    celebrities in a new wave of public offerings of more
    speculative investments known as ``special purpose acquisition
    companies,'' or SPACs.
        Some professional investors and celebrities make earning
    millions look easy. But as we are reminded time and again
    through history, it is never that simple. Too often, someone's
    quick profit comes at the expense of workers, sometimes even
    entire communities.
        Chair Gensler, it is your job to make sure that efficient
    markets are balanced with strong enforcement that protects
    Americans from the worst Wall Street greed and careless risk,
    even if that means challenging practices or shady investment
    products that previous chairs had ignored. It means working to
    increase transparency that the last Administration simply did
    not take seriously. We all know that on this Committee. For
    example, the SEC approved new human capital disclosure last
    year without requiring companies to provide even basic details
    or data. ``Just give us some information,'' we almost
    disdainfully said. And let's remember, ``human capital'' is
    business school-speak for the tens of millions of Americans who
    work for these companies.
        Despite the new standard and the investor demand for
    essential information used to judge how companies treat and
    manage these workers, most companies are barely providing any
    additional information.
        My colleagues have been working to improve transparency.
    Senator Warner of Virginia introduced the Workforce Investment
    Disclosure Act to get companies to provide important
    information on how they pay, train, and invest in their
    workers. His bill will shed light on how companies outsource
    and subcontract their workers, such an important part of our
    economy now, and something he and I have jointly written to the
    GAO about.
        Today's tech companies like to say they are more
    ``efficient'' than companies of the past, when in reality they
    hire the same number of workers. Half of them are just
    invisible to us under today's disclosure requirements.
        Senator Warren of Massachusetts introduced the Climate Risk
    Disclosure Act, calling for significant new public disclosures
    from public companies regarding the risks climate change poses
    to their financial results and to their operations.
        These bills are good policy. The largest investors have
    been calling for more of this kind of information. I am a
    cosponsor of both bills.
        Of course this would be just a start. Transparency is only
    a first step to getting corporations and the biggest investors
    to behave better. There is much you already have the authority
    to do to make markets work better for the real economy, outside
    of investment firm and hedge fund board rooms.
        For too long, the financial system has catered to the big
    guys, and left everyone else on their own. There are far too
    many stories of how insiders game the system. Big banks abuse
    customers while they make record profits. Brokers who have
    taken advantage of customers use the system to cover up and
    erase their misconduct. Private equity firms buy up companies
    and treat workers as a cost to be minimized. Workers as a cost
    to be minimized--where have we heard that before? They buy up
    houses, they raise rents, they evict families, even during a
    pandemic.
        And of course no matter what happens to the workers at the
    companies they have raided for parts, or to the families in the
    mobile home complex where they have jacked up the rents, or to
    the larger economy, the big guys--the hedge funds, the SPAC
    sponsors, the big banks, the brokers--the big guys seem to do
    just fine.
        That system is not sustainable.
        Increasing people's trust and faith in the market and the
    financial system will lead to more saving and broader
    participation. Yet some of my colleagues say we should let the
    market sort it out. They want to tie the SEC's and other
    watchdogs' hands.
        We know that is counterproductive. It is the same thinking
    that led to a market collapse 13 years ago, and that has led to
    decades of more and more investment flowing to a smaller and
    smaller share of the country.
        The last Administration subscribed to that same always Wall
    Street-first view, and left this country worse off than they
    found it. The damage is too vast to measure. Our economy and
    markets were no exception.
        Investors have fewer tools to hold management accountable;
    savers--and that means retirees, widows, families--have fewer
    protections. And corruption runs rampant; existing, serious
    conflicts of interest have too often been ignored.
        This Administration is taking a different view, thankfully.
    The economy and the markets should work for everyone, not just
    the well-connected. They should reflect the economy we all
    want, with broadly shared prosperity, and a growing middle
    class that all workers can join.
        When that happens, people will have confidence that markets
    will actually work for them, not just Wall Street. And we will
    see more Americans save, and we will see more Americans invest
    for the future.
        Chair Gensler, I look forward to hearing about the progress
    you are making toward those goals.
        Ranking Member Toomey, welcome.

             OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

        Senator Toomey. Thank you, Mr. Chairman. Chair Gensler.
    Welcome back. It is good to see you, despite our significant
    disagreements. I do appreciate your dedication and enjoy
    working with you.
        As you know, the SEC has historically administered
    securities laws on a bipartisan basis, generally. During your
    confirmation process, I expressed concerns that you might stray
    from this tradition and use the SEC to advance a liberal
    political agenda, such as combating global warming and
    advancing so-called social justice, and push the legal bounds
    of the SEC's authorities to pursue disclosures that are not
    financially material to the reporting companies. Unfortunately,
    this appears to be exactly what you are doing.
        You have added mandatory disclosures on global warming and,
    quote, ``human capital,'' end quote, such as board and employee
    racial and gender identity, to the SEC's agenda. You have
    essentially said that if large investment advisors and pension
    funds like BlackRock and CalPERS, who invest other people's
    money, if they want information about global warming or
    workforce diversity, it must be disclosed even if it is
    financially insignificant and irrelevant to a particular
    business.
        Even President Obama's SEC Chair, Mary Jo White, opposed
    using the SEC's disclosure powers for the purpose of, quote,
    ``exerting societal pressure on companies to change behavior,
    rather than to disclose financial information that primarily
    informs investment decisions,'' end quote. That is exactly what
    you are doing, and you are also well on your way to
    politicizing the PCAOB after firing all of the existing board
    members.
        See, it is not the SEC's role, nor its expertise, as an
    independent financial regulator with zero democratic
    accountability, to address these political and social issues.
        Similarly, I have worried that you would favor the
    paternalistic push by some on the left to restrict investor
    freedom under the guise of protection, while actually harming
    retail investors. Such harm may result from your apparent
    opposition to payment for order flow, which helped allow
    brokers to offer commission-free trading. Payment for order
    flow allows a broker to keep a portion of the price improvement
    obtained by routing a transaction to a wholesaler. To my
    knowledge, the SEC has not demonstrated any failure or harm
    associated with payment for order flow, which the SEC has
    allowed for many years. Banning payment for order flow could
    very well have the effect of eliminating commission-free
    trading, which would be a grave disservice to average
    investors.
        Likewise, you have criticized mobile apps that make
    investing easy and fun as, quote, ``gamification,'' end quote.
    But in my view, delivering a product that customers like is not
    a bad thing.
        And I worry that you are attempting to fix problems that do
    not exist. Today is the best time ever to be a retail investor
    in the United States of America. Retail investors receive the
    best execution. A person of modest means can share in the gains
    of stock market at negligible transaction costs. We see the
    tightest bid/offer spreads ever.
        At least four major developments for retail investors made
    this all possible--commission-free trading, accounts with no
    minimum balances, low- or no-fee mutual funds and ETFs, and
    yes, user-friendly technology like mobile apps. Hence,
    investors can also voluntarily use a broker who declines
    payment for order flow but may, therefore, charge a commission.
        Now despite decades of rapidly growing numbers of retail
    investors participating in stock market gains, and enjoying
    more product opportunities at lower costs, some of my
    colleagues suggest that the markets are somehow rigged against
    retail investors. I would like to hear how it is rigged. Don't
    retail investors receive dividends like institutional
    investors? Aren't retail investors entitled to best execution,
    like institutional investors? Don't the value of retail
    investors' shares and those of institutional investors both
    increase when a stock's price increases?
        In my view, the SEC's job is not to make retail investing
    more expensive, or unpleasant, and difficult. In America,
    adults investing their own money should be free to decide how
    to do so.
        Let me turn to cryptocurrency, which together with the
    blockchain technology is a very, very important and very
    promising new technology. As you know, cryptocurrencies are
    actively traded on many platforms. A really important question
    is whether a cryptocurrency is a security for regulatory
    purposes under Howey or some other test.
        Now based on your public statements, it is pretty clear
    that you believe that some are securities but others are not.
    So, I am frustrated by the lack of helpful SEC public guidance
    explaining how you make this distinction. What makes some of
    them securities while others are not securities?
        I understand that the SEC staff will privately provide
    feedback and analysis on whether a cryptocurrency is a
    security, but why keep this analysis private? Why not publicly
    announce what characteristics make a cryptocurrency a security
    or not a security? In other words, how do you apply Howey and
    the Reves tests to these new products? Why wait to make the
    SEC's views known only when it swoops in with an enforcement
    action, in some cases years after the product was launched?
        This is regulation by enforcement, and it is extremely
    objectionable, and I am concerned it can stifle domestic
    innovation.
        So, Mr. Chairman, I hope we will get a better understanding
    of your views on these and a number of other issues. There are
    many things on which you and I agree and where we could work
    together to protect investors, to ensure fair, orderly, and
    efficient markets, and facilitate capital formation. I hope
    that we can work together on these really important parts of
    the SEC's mission.
        Chairman Brown. Thank you, Ranking Member Toomey.
        Today we will hear Securities and Exchange Commission Chair
    Gary Gensler, no stranger to this Committee. This is Chair
    Gensler's first appearance here in this role. Chair Gensler,
    please proceed.

    STATEMENT OF GARY GENSLER, CHAIR, U.S. SECURITIES AND EXCHANGE
                               COMMISSION

        Mr. Gensler. Good morning, Chairman Brown, Ranking Member
    Toomey, and Members of the Committee. I am honored to appear
    here before you today for the first time, as you said, as Chair
    of the Securities and Exchange Commission, and I would like to
    thank you all for your support in my confirmation this spring.
    I would also note I think, Chairman, you may be the eighth
    chairman that I have appeared before in this Committee. I am
    aging myself a little bit, but I think Chair D'Amato might have
    been the first that I was in this Committee room.
        As is customary, I should note that my views are my own. I
    am not speaking on behalf of my fellow commissioners or the
    staff.
        The U.S., as Ranking Member Toomey said, is blessed with
    the largest, most sophisticated, and most innovative capital
    markets in the world. We actually represent 38 percent of the
    world's capital market, and that is when we are only about 23
    percent of the world's economy. They are competitive. They are
    efficient. They are transparent.
        But I think we cannot take our remarkable capital markets
    for granted. New technologies continue to change the face of
    finance for investors and businesses, and more retail investors
    than ever are accessing our markets. Our country and other
    countries are also developing deep competitive capital markets
    as well. And though I provide greater detail in the written
    technology, I would just like to flag three areas for now.
        First is market structure. Market structure is fundamental
    to our mission, to protect investors, on the other side,
    facilitate capital formation, that which is in the middle,
    fair, orderly, and efficient markets. How do we do that? It is
    through transparency and competition in those markets.
        So I have asked staff to take a look at a number of market
    structures. The Treasury market, that is the base of all other
    fixed income markets. The non-Treasury fixed income markets,
    corporate bonds and municipals, which, by the way, in the U.S.
    are twice to 2.5 times the lending out of banks are loaned
    through our capital markets. Our equity markets and securities-
    based swaps as well. In each of these crucial markets I think
    companies and investors alike benefit if we can increase
    competition, lower costs, and bring more transactions out of
    the dark.
        Second is a rapid change in technology. We are living in a
    transformational time, perhaps as transformational as the
    internet itself. Now I expect some Members might ask a question
    or two about crypto, but actually the first thing I just want
    to mention is artificial intelligence. AI, predictive data
    analytics, and machine learning are shaping and will continue
    to shape many parts of our economy, and while these
    developments, I believe, can increase access, increase choice,
    and lower costs, they also raise new questions about potential
    conflicts, biases in the data, and yes, even systemic risk.
        And now, for the crypto, because I know that you are all,
    you know, keenly interested. We just don't have, I believe,
    enough investor protection in crypto--finance, the issuance of
    these tokens, the trading, and particularly the lending.
    Frankly, as I have said before, I think it is more like the
    Wild West. I have asked the SEC staff, working with our fellow
    regulators--the Commodity and Futures Trading Commission, the
    bank regulators, the Treasury as well--using our current
    authorities, how can we best bring investor protection to these
    markets? I stand willing also to work with this Committee and
    other committees of Congress if you take up any legislative
    initiatives.
        And then third, issuer disclosure. You see, since the
    1930s, we have had a basic bargain. Investors get to decide
    what risks they take. That is up to the investors. But Congress
    said that it should be based on full and fair disclosure of the
    issues. Over the decades we have updated what those disclosures
    are, and today's investors are increasingly looking for
    consistent, comparable, and decision-useful disclosures around
    climate risk, so-called human capital, cybersecurity, and other
    areas.
        So I have asked staff to develop proposals for the
    Commission to consider these potential disclosures, and yes,
    put these proposals out to public comment, put rigorous
    economic analysis again, and what it is that investors want to
    see and have the public comment.
        Beyond these policy areas, the SEC employees oversee 28,000
    registered entities, more than 3,700 broker-dealers, and 24
    national security exchanges. You have got the picture. A lot
    going on in our capital markets--$110 trillion capital markets.
        Last month, we authorized voluntary return to work, but we
    have been largely remote for 18 months now. This speaks to the
    dedication of the SEC staff. I cannot compliment them enough.
    And while capital markets have grown, the SEC has not grown to
    meet the needs of the 2020s, though. Over 5 years ago we were
    about 4 or 5 percent bigger, and so I just think that it would
    be helpful to be a little bit wise and add to our staff. I hope
    that you can agree with me on that.
        Thank you. I look forward to your questions.
        Chairman Brown. Thank you, Chair Gensler. How a company--as
    we have discussed, privately, and you have spoken publicly--how
    a company treats its employees matters. The SEC can require
    companies to disclose that information, but instead of crafting
    a rule that would provide information and data that could give
    real insight, the last SEC chair wrote a vague rule that
    companies can interpret to require as much or more of, and as
    little information as they like. That lets companies say they
    pay their workers a living wage with ample paid leave and
    retirement contributions while subtracting out half their
    workforce while subcontracting out half their workforce to
    companies that pay lower wages with stingy benefits. We know
    that is a business model for many companies.
        Why is it important to have disclosures standards that are
    consistent and comparable across companies?
        Mr. Gensler. I think that investing in a company, the human
    capital, the workforce, is a key asset. I remember when I
    started on Wall Street at Goldman Sachs and we used to sell
    companies. And when we sold companies we would always have a
    section in that private offering memo about the employees--what
    they are paid, how many part-time and how many are full-time,
    where they are located, retention, and the like. It is even
    more important in the 2020 than when I was young on Wall Street
    because it is so critical to the valuations of the company.
        Now again, we will put to this out--if my fellow
    commissioners concur, we will put it out to public comment and
    see what investors have to say, and then their feedback is
    going to guide us on any final rulemaking.
        Chairman Brown. I think it is pretty clear investors are
    going to want more information, like you suggest, in your
    Goldman days.
        We have talked before about how Wall Street has treated the
    markets as a game for decades, a game they always seem to win
    at the expense of pretty much everyone else, including
    communities in Wyoming and Louisiana and Rhode Island and Ohio
    and Pennsylvania. SPACs, for instance, draw in companies that
    want to please Wall Street, sometimes make promises that they
    cannot deliver on. Look at Youngstown, Ohio. There is a lot to
    unpack with what is happening at Lordstown Motors, whether or
    not the company is only able to succeed, and I hope it does. It
    seems clear there were outside investors looking at this not as
    a long-term investment in a community with a proud
    manufacturing heritage and a talented workforce but as a way to
    make a quick buck with no follow-through.
        There will always be people, of course, like that, but that
    does not mean we need to encourage risky financial mechanisms
    to encourage speculation over a long-term investment.
        In a situation like that one, investors make their money
    and pull out, companies break promises, and workers and
    community pay the price. What are the risks, Chair Gensler,
    that the SPAC market has highlighted over the last year and
    what can we do about it?
        Mr. Gensler. I think the special purpose acquisition
    companies, these blank check companies, the risks are to
    investors and the disclosure to the investors. I have asked
    staff to serve up recommendations that we could consider as a
    Commission. But in essence there are a lot of costs in these,
    and second, they usually have a 2-year fuse, and in that 2-year
    fuse they try to go out and buy something. And a lot of the
    institutional investors, when that happens, sell--it is called
    a ``redemption right''--and retail investors are often left
    holding the dilution or the significant cost of the bankers and
    the promoters.
        So we are looking at greater disclosure and also looking at
    if there are inherent conflicts along the way, and then again,
    try to put this out to notice and comment and rulemaking.
        Chairman Brown. Thank you. My last question. It has been 11
    years since we passed Dodd-Frank. The rules and executive
    compensation, as you know, remain unfinished. We have seen
    executive compensations soar. We have watched executives leave
    with huge bonuses after presiding over fraud and scamming
    customers. The phrase ``golden parachute'' has become a cliche.
    It is that commonplace.
        Why is it important to have strong rules to claw back
    incentive-based compensation when executives got that
    compensation by breaking the rules, and disclose the
    relationship, how important it is to disclose the relationship
    between executive pay and financial performance?
        Mr. Gensler. Let me break it in two things. For the SEC, it
    is important to move forward because this Committee and then
    the whole Congress, with the President, put it in law, and it
    is a mandate that we shall follow. I remember being a staffer,
    sitting on the other side for Senator Sarbanes. I know that
    that is how he felt.
        But too, in terms of the substance, I think why Congress
    addressed this and put it into law is that if there a material
    misstatement or omission in the financials, and those
    financials need to be restated, then the executives should not
    benefit. And there is a certain number of years, a lookback
    period, a clawback period that Congress said, well, then you
    should give up the performance-based compensation, if it was
    based upon faulty numbers.
        Chairman Brown. Thank you. Senator Toomey.
        Senator Toomey. Thanks, Mr. Chairman. Chairman Gensler, one
    area that appears to have nearly universal agreement is the
    benefit of a faster settlement cycle for equities securities.
    As you know, market participants seem to be confident in a T+1.
    My understanding is that you support these efforts. I
    appreciate that. I would just encourage the SEC to move ahead
    as quickly as reasonably possible so that that can proceed.
        I also think there is widespread support for fixing the
    money market fund rule by removing the link between the 30
    percent weekly average liquidity and the possibility of
    imposing fees and gates. You and I have discussed this. I do
    not think there is a need for regulatory reforms that would
    eliminate or reduce the viability of money market funds as an
    investment, but improving this regulation would reduce the risk
    that I think the regulatory regime imposes now.
        I am concerned about the SEC not adequately fulfilling its
    capital formation mission. Last year's appropriation law
    instructed the SEC to deliver two reports to Congress by the
    end of June, which would help benefit small public companies.
    These reports are now past due. I certainly hope the SEC will
    submit those reports promptly.
        And you testified to the House that the SEC would have a
    report on GameStop and Robinhood by this summer. That report
    has not been produced yet. We have got a week left in the
    summer. I do certainly hope that we will see it soon.
        Now let me turn to cryptocurrencies, and my time is limited
    so I am going to try to do this as efficiently as I can, Mr.
    Chairman. But I think I know your position, among other things,
    is that not all cryptocurrencies are inherently securities.
    Right? That is true.
        Mr. Gensler. There are a small number that are not, but I
    think that as Chair Clayton said when he was in front of
    Congress, I think very many of these facts and circumstances
    are investment contracts.
        Senator Toomey. So here is my concern. So some are and some
    are not, is basically what you are saying, and I am concerned
    that the SEC has not provided sufficient definition and
    explained how it would apply the Howey test, which I think is
    the court standard for determining when something is an
    investment contract.
        So, for instance, stablecoins do not have an inherent
    expectation of profit. They are just linked to the dollar. Now
    you might use them in an attempt to make a profit, but that is
    a second-order activity. Is it your view that stablecoins
    themselves can be securities?
        Mr. Gensler. I think, Senator, they may well be securities.
    As Thurgood Marshall wrote in the Reves opinion, in defining
    the scope of the market that it, Congress, wished to regulate,
    Congress painted a broad brush. And it actually included about
    35 different things inside the definition of a security in the
    33 Act.
        Senator Toomey. OK. I have just got limited time here, so I
    acknowledge that. Here is my problem, though. I think what you
    just said was that they may be securities, or that some are
    securities. To me, a stablecoin does not meet the second prong
    of the Howey test, that there has to be an expectation of
    profits from the investment. And so if it does not meet the
    Howey test it looks to me like it is not a security.
        Now maybe you have got a good argument for why some are and
    some are not. My whole point is I think we need to have clarity
    on this. I think you should publicly disclose this. Apparently,
    there are private conversations where you work with people who
    are proposing particular structures and you give them advice,
    your staff gives them advice. I just think we ought to have
    that publicly, and we certainly should not be taking
    enforcement action against somebody without having first
    provided that clarity.
        Mr. Gensler. Well, Senator, this Congress could change the
    laws, but the laws that we have right now have a very broad
    definition of security, including a note, including an
    investment contract and the like. And my predecessor, Chair
    Clayton, and others actually put out a lot of guidance with
    regard to the Howey.
        Senator Toomey. I have just got to push back a little bit
    on that. It is broad but it is well defined. There is a very
    specific litany of the instruments that constitute securities,
    and you know this better than I do. Investment contract is one
    of them. And there is a court decision that lays out the prongs
    for what constitutes an investment contract.
        I am just saying, as a layman who can read English, when I
    read those tests, stablecoins do not seem to meet that test, to
    me. Maybe I am wrong, but if I can misinterpret this I think
    others could too, and some clarity, public clarity I think
    would be helpful.
        Mr. Gensler. I see the red light, but I agree with you that
    some of these tokens have been deemed to be commodities. Many
    of them are securities. And the Supreme Court has weighed in a
    number of times. You noted the Howey test. We have talked about
    the Reves test, which was in the 1990s, as well, as weighed in.
    And I think that there is a fair amount of clarity.
        Over the years, the SEC has even found, believe it or not,
    whiskey caskets, and the courts agreed, in the 1960s, were
    investments. And I think at the heart of our securities laws
    was protecting investors against fraud. They get to decide.
    They get to take the risk. You will find I am not negative or a
    minimalist about crypto. I just think it would be best if it is
    inside the investor protection regime that Congress laid out.
        Senator Toomey. I see my time has expired, Mr. Chairman.
        Chairman Brown. Thank you, Senator Toomey. Senator Reed
    from Rhode Island is recognized.
        Senator Reed. Thank you, Mr. Chairman, and welcome, Mr.
    Chairman. Cybersecurity is one of the greatest threats that we
    face, both as a national security threat and also as an
    economic threat. And in 2018, the SEC issued guidance with
    respect to public companies. I have been trying, over the last
    several years, to enact legislation. Senate 808, the
    Cybersecurity Disclosure Act, was very simple. It would require
    a public company to disclose whether they have a cyber expert
    on their boards, and if not, why not, i.e., they have other
    means to compensate.
        In fact, we did precisely that when it came to financial
    experts. We do require a financial expert on the audit
    committee or an explanation why they do not have one.
        Do you believe that the framework in S. 808 would be
    appropriate for dealing with cyber?
        Mr. Gensler. Senator, I thank you for highlighting that and
    our conversations over the last couple of months. I have asked
    staff to take up two initiatives on cyber, one, company
    disclosure and one with regard to funds, the investment funds.
    And on the company disclosure side I have asked them to look
    very closely at your bill and see whether we would not only
    potentially include that as a recommendation but also some
    other issues around, I will call it, cyber hygiene, and then
    second, incident reporting. When you do have an event or pay
    ransomware, for instance, when does one report. And that is in
    the, you know, 6,000 or 7,000 public companies, and then
    separately we are looking something around funds, the
    cybersecurity of the investment management field.
        Senator Reed. Thank you, Mr. Chairman, and I would
    encourage you to continue to pursue this, and would very much
    like to see my legislation become law and your regulations
    become adopted. So thank you.
        Another issue that has come up, we are all very happy about
    the increased retail participation in the stock market. There
    are a lot of people who never owned stocks before that are
    buying stocks. And some of it is the result of discount brokers
    offering zero commissions, aggressively marketing, et cetera.
        But there is another aspect of this, and that is the
    payment for order flow issue, where a lot of these brokers have
    essentially deals with high-frequency trading firms in exchange
    for rebates, and they will send their orders to these firms.
    And the question is, is the owner of the security getting the
    best deal, or is the intermediary getting a lot of money? And
    it looks like there is a disconnect there, an inherent conflict
    of interest, I think you described it recently.
        So are you trying to move forward efforts to evaluate this
    practice of payment and see if it is fair to the consumer?
        Mr. Gensler. We are. I have asked staff to take a look at
    this. It has been about 16 years since we did a major rewrite
    of the national market structure, and I think the inherent
    conflicts of payment for order flow and rebates on the stock
    exchanges both may make our markets less efficient. And this is
    important for capital formation and it is important for the
    retail investors, that all three Senators have already raised,
    is that retail investors may not be getting best execution,
    even if they get a price improvement, but there it is price
    improvement versus sort of an out-of-date measuring rod. And if
    you measure against the wrong measurement stick it does not
    mean you are getting best execution.
        So we are looking out for retail investors. If anybody on
    this Committee or staff, legally, traded in the retail markets,
    there is like a 97 percent chance that it does not go to a
    transparent exchange. It goes to the dark markets or the
    wholesalers. And so it is harder to get best execution when you
    are not competing order to order.
        So I am like deeply a markets person and believe in the
    competition of markets to bring those orders in competition.
        Senator Reed. Well, thank you, Mr. Chairman. You mentioned
    in your opening remarks that one area you are looking at is the
    Treasury market, and I think that is critical. As you know, in
    March 2020, there was a free seizure of the market, not by
    opponents but the whole market sort of seized up for a moment.
    And a volatility in the Treasury market is very much a danger
    to the entire economy.
        And so I would ask that you continue to look very closely
    at the Treasury markets. I know we have tried to learn lessons
    from March 2020, but I do not think we fully learned all the
    lessons and incorporated them in action.
        Mr. Gensler. I agree with you, and it is one place I hope
    that there is maybe even more bipartisanship. I am working
    closely with Chair Powell at the Federal Reserve, closely with
    Secretary Yellen and her team to try to bring more resiliency,
    safer Treasury market, but also more competitive, that we might
    lower the cost to all of us, the taxpayers. Because we are the
    issuer in that sense.
        Senator Reed. Thank you, Mr. Chairman. Thank you, Mr.
    Chairman.
        Chairman Brown. Senator Kennedy is recognized.
        Senator Kennedy. Thank you, Mr. Chairman. I read your
    editorial in the Wall Street Journal today about the Holding
    Foreign Countries Accountable Act. For what it is worth, I
    agree with most of it. It is a damn good bill, by the way, if I
    may say so.
        Mr. Gensler. I want to thank you. I think it helps us do
    our job, both at the SEC and at the Public Company Accounting
    Oversight Board.
        Senator Kennedy. I appreciate that. I agree with you,
    obviously.
        There was a 3-year implementation period, as you know.
    Foreign companies, including our friends in China, have 3 years
    to comply. The Senate has passed a bill reducing that to 2
    years. We are having a little trouble getting the House to take
    it up. Would you be willing to contribute your considerable
    efforts to encouraging the House to take it up?
        Mr. Gensler. Senator, I have already had some discussions
    and expressed to some of the leadership over there that I
    support that.
        Senator Kennedy. OK. Who pays corporate income taxes?
        Mr. Gensler. Senator, it is the corporation that pays the
    taxes, of course, then ultimately the owners of those
    corporations are the shareholders.
        Senator Kennedy. Corporations just is not a payer. It is a
    tax collector, isn't it?
        Mr. Gensler. Well, I am not here as an expert on the tax
    code. I think the corporation literally----
        Senator Kennedy. But you are an expert on corporations. I
    think economists are generally in agreement that the
    corporation is not a payer. It is a tax collector. The owners
    and the customers and the workers that Chairman Brown spoke so
    eloquently about actually pay the tax, don't they?
        Mr. Gensler. Well again, I never want to mince words but I
    think that the corporation, of course, is paying, and then the
    shareholders have less net income.
        Senator Kennedy. Don't the workers pay it too?
        Mr. Gensler. I think that it is a cost of the corporation.
    Like all costs of the corporation those costs compete with each
    other. Even the cost of the real estate----
        Senator Kennedy. Yeah, but do the workers pay it? I am just
    trying to--I do not have much time. Sorry about that.
        Mr. Gensler. I am not--the workers pay individual income
    tax, workers pay Social Security tax, and all that.
        Senator Kennedy. I just want to be sure I understand your
    testimony, Mr. Chairman. You are saying that the workers are
    not impacted at all by the corporate income tax?
        Mr. Gensler. I am sorry. I thought you were asking a
    different question. All costs in a company compete with each
    other, whether it is the real estate costs----
        Senator Kennedy. I get that, but----
        Mr. Gensler. ----or any other costs.
        Senator Kennedy. But are the workers impacted negatively by
    corporate income tax? It is a real simple question.
        Mr. Gensler. No, I understand it but I think it is best, as
    the head of the Sec, to leave----
        Senator Kennedy. You do not want to answer it.
        Mr. Gensler. ----debates about taxes to Congress. I really
    do think that that is----
        Senator Kennedy. I understand why you do not want to answer
    it. I get it.
        Look, I do not mean any disrespect to you. I followed your
    career. You have had quite a career in public service. You have
    made a lot of money on Wall Street. I respect that. I honor
    that. But as to the people and the companies that you regulate,
    as Chairman of the SEC, do you consider yourself to be their
    daddy?
        Mr. Gensler. No. No.
        Senator Kennedy. Then why do you act like it?
        Mr. Gensler. I try to take the oath of office seriously,
    that the SEC is set up to promote investor protection and
    facilitate capital formation, and that which is in the middle.
        Senator Kennedy. Yeah, but why do you impose your personal
    preferences about cultural issues and social issues on
    companies, and, therefore, their customers and their workers,
    like climate change and the Second Amendment? I mean, I am sure
    you have personal feelings about abortion. Do you have plans to
    implement or impose those values on companies?
        Mr. Gensler. So I want to thank you for the compliment you
    gave me, and I have followed your career and have the deepest
    respect for you too, sir. I think that I am not doing that. I
    think what I have been trying to do is say if investors want
    information about climate risk, and it looks like tens of
    trillions of dollars of assets under management are asking, we
    at the SEC have a role to put something out to notice and
    comment, do the economic analysis, and really see what
    investors are saying. It is really in that narrow set of chalk
    lines that we are operating.
        Senator Kennedy. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Kennedy. Senator Tester
    from Montana is recognized.
        Senator Tester. Thank you, Mr. Chairman, and I want to
    thank Chairman Gensler for being here today. I have just got to
    say one thing really quickly. I have got a farm. My wife and I
    have a farm. We have a corporation. That corporation pays the
    taxes, we do not, and we are the only stockholders of that
    corporation. And that corporation exists, over the last 30
    years or so, has, quite frankly, helped us financially as we
    move forward. So just a different perspective.
        I want to talk about Citizens United decision, which I
    believe is one of the worst decisions that has ever come down
    from the Supreme Court. Incredibly detrimental. It has ended up
    with literally hundreds of millions of dollars, billions of
    dollars, flowing into our political system in an untransparent
    way. I do not think it helps with our democracy.
        That being said, the SEC has the power to require companies
    to disclose corporate political spending. Now the money that
    these companies put into campaigns may or may not be determined
    as being materially important, but nonetheless it depends on
    who you are talking about. If somebody throws a million dollars
    at me in a campaign it is materially important for me in that
    campaign. It may not be materially important to that
    corporation.
        Right now, the current appropriations bill prevents the SEC
    from doing anything about these contributions. Do you believe
    shareholders should have access to that material information
    about how companies, who these shareholders own, spend their
    money?
        Mr. Gensler. Senator, I thank you, and as you noted there
    is the appropriations rider. But putting that to the side----
        Senator Tester. Yep.
        Mr. Gensler. ----you are asking, similar to the other
    issues around climate risk and human capital, to the extent
    that investors want to see that information, and it looks like
    an increasing number of investors do----
        Senator Tester. Yep.
        Mr. Gensler. ----I mean, we see that each of the
    shareholder voting periods, there have been petitions on this
    to the SEC, and so forth, I think the SEC has a role,
    similarly, putting out to notice and comment and see what the
    process brings.
        Senator Tester. Thank you. Thank you for that answer. I
    have talked about this in this Committee before. I think we
    really need to take a strong look at extreme weather events. As
    a farmer this year, for example, this is my wife and my 44th
    harvest, it was the worst one, by far, ever, due to drought and
    due to extreme weather conditions.
        If you take a look at the amount of money that the American
    taxpayer is putting out for extreme weather events in this
    country, it is billions and billions and billions of dollars,
    and it may even be trillions and trillions and trillions of
    dollars. I think it is irresponsible for us not to look at the
    impacts that climate has had on our lives and on our economy,
    because this ain't going away, and it is getting worse.
        And so as Chairman of the SEC, how do you view your work in
    considering the impacts of climate change as they pertain to
    your role as a regulator?
        Mr. Gensler. So again, as I have said to other Senators,
    our role is prescribed by Congress about the issuing companies,
    these 7,000 or so companies, and the investing public, and to
    bring consistent comparable disclosure where investors want it.
    So in climate risk, investors have been asking for it, and
    hundreds of companies--amongst the 500 largest I think it is
    80-plus percent--disclosed something. But we can bring
    consistency, comparability, and make the decision useful
    information.
        Senator Tester. For the investor.
        Mr. Gensler. For the investor, and it would be regarding to
    some of the physical risks that you mentioned, but also the
    transition risk over time.
        Senator Tester. OK. Senator Reed talked to you a little bit
    about cybersecurity. Could you briefly, in the next minute,
    talk about the list of cybersecurity requirements that the SEC
    is looking at implementing?
        Mr. Gensler. I am willing to meet with you or your staff to
    go through.
        Senator Tester. I should have prefaced this by saying, not
    unlike climate change, this problem is going to continue to get
    worse.
        Mr. Gensler. I could not agree with you more. So there are
    two lists we are looking at. One is those activities, how are
    you managing your cyber risk, because it is a real risk. How
    are you governing and managing it, and what are your sort of I
    will call cyber hygiene?
        Second is incident reporting. If you have a breach and you
    are paying ransomware and the like, what are you saying to the
    public when this occurs, especially if you have private
    information. Some companies have tens of millions, sometimes
    hundreds of millions of the American public's confidential
    information, then taken by the bad actor who has just breached
    the wall.
        Senator Tester. So it would be--your work is going to be in
    the realm of hygiene and reporting the attacks.
        Mr. Gensler. That is correct.
        Senator Tester. And the system they have in place.
        Mr. Gensler. Yeah, the system they have and incident
    reporting, but any advice you have, and your staff, we would
    look forward to having good conversations.
        Senator Tester. We look forward to it. Thank you. Thank
    you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Tester. Senator Lummis
    of Wyoming is recognized.
        Senator Lummis. Thank you, Mr. Chairman, and thank you for
    joining us, Chair Gensler. It is nice to see you.
        I have two questions. One is specific and the other very,
    very general. So I will start with the specific. In your
    previous tenure at the Commodity Futures Trading Commission you
    were an advocate of providing no-action relief to regulated
    financial entities within your jurisdiction. Now over the last
    few years the SEC has not provided no-action relief to
    innovators in my opinion nearly enough. The SEC has also
    provided 21(a) investigatory reports on matters of general
    interest under the Exchange Act.
        What would you say to innovators who are nervous about
    approaching the SEC, and how can you improve the use of no-
    action relief and other public statements, like 21(a) reports?
        Mr. Gensler. Senator, I thank you for that question, and
    thank you for our continuing dialogue about innovation. I do
    think that Congress gave the SEC important authorities, not
    only to do what you call no-action letters but exemptive
    authorities and the like. And so I have said come in, whether
    it is in the cryptocurrency space or in other innovative
    spaces, come in, talk to us, and see if our rules for custody,
    for instance, which I know we have talked about, or transfer
    agents or something, do not quite fit because they were written
    in a bricks-and-mortar time and now we are in a digital time.
    Let's talk about that, and if we need to go to Congress, go to
    Congress. But maybe we can cobble together something.
        We did this in money markets in the 1970s. Good people in
    the State of Pennsylvania, Senator Toomey's State, came into
    the SEC and sought authorities to do money markets, and that is
    now a $5 trillion asset class.
        So I think there is room here to sort things out and try to
    figure it out, to keep things investor protection-focused, but
    to sort out the new innovations.
        Senator Lummis. And my adjunct question is the general
    question, just about innovation. Do you support responsible
    innovation?
        Mr. Gensler. Oh, my gosh, yes. It has brought us these
    lights in the room. It has brought us this ability to have a
    hybrid hearing with your fellow Members. I mean, innovation is
    what supports access, economic activity, and gives so much of
    us better opportunities in life.
        Senator Lummis. So given that, how do you right-size the
    protections that are within your ambit to innovation,
    generally?
        Mr. Gensler. It is an excellent question that I am sure
    this Committee grapples with decade after decade. I think it is
    the core public policy framework around ensuring that the
    public is not defrauded, that somebody is not misleading them
    and lying to them. To ensure that if you hold somebody's asset
    you do not misuse it or abuse it, so to speak, the physical
    asset.
        And then on trading platforms, at the heart of our 1934
    act, was that competition basically drives to more efficient
    market and people do not manipulate that market, do not front-
    run, for instance, in those markets. And I think that these
    basic tenets of antifraud, antimanipulation, but
    procompetition, lower the cost of capital for companies raising
    money and innovators and entrepreneurs, even if they are using,
    for instance, cryptocurrencies and the like.
        But I think that inside that policy envelope that we have
    is a great deal of opportunity. I think it is at the heart of
    our economic success these last 90 years, that we have deeply
    market-based economy. We have the largest capital markets in
    the world, almost 70 percent greater than our economic share,
    38 points versus 23 points. There is a reason, and I think it
    helps our economy. But it is also because it is regulated,
    antifraud, antimanipulation.
        Senator Lummis. So what gaps do you think exist, and what
    additional regulatory authority would be useful, both at the
    CFTC and at the SEC, specifically with regard to digital
    assets?
        Mr. Gensler. I think that we have a great deal of
    authority. I think there is more clarity than some Members on
    this Committee--I mean, I know we are maybe a little bit
    different on that. But I think that in terms of the gaps, we
    have a great deal of clarity on, I think, what is a security,
    but the gaps is the coordination amongst our agencies. So, for
    instance, the coordination with the banking agencies on stable
    value coins, that Senator Toomey raised earlier. The
    coordination with my sibling agency that I was honored to
    chair, the Commodity Futures Trading Commission, on the tokens
    themselves and the platforms. Because to the extent that
    something is a commodity, even the CFTC does not have
    regulatory authority. They have enforcement authority, a
    wonderful piece that Dawn Stump wrote recently that I thought
    was worth reading.
        But working together with the CFTC in how to coordinate,
    and then in the, I would say, infrastructure side, things
    around transfer agents, custody, and the like, that I think we
    could work with Congress to help clarify.
        Senator Lummis. Thank you very much.
        Chairman Brown. Thank you, Senator Lummis. Senator Warner
    from Virginia is recognized.
        Senator Warner. Thank you, Mr. Chairman, and thank you for
    your comments, in your opening comments, about my legislation
    that deals with disclosure around the workforce. I want to come
    to that topic but I want to quickly, Chair Gensler, respond to
    a couple of my colleagues' comments. One, I want to agree with
    Senator Reed. This payment for order flow, we have been talking
    about for close to a decade, and we need to sort through it. I
    think there would be broad bipartisan agreement about that.
    Let's make sure we make that happen.
        On incident reporting, in terms of cyber, I think the
    Intelligence Committee probably has as much visibility into
    that space as anyone, anywhere. We have virtually every member
    of the Intelligence Committee, Democrat and Republican,
    together on a bipartisan mandatory incident reporting bill for
    critical infrastructure, for Federal contractors. We are trying
    to work through details. My hope is we can work with you. If
    you are going to have a mandatory reporting requirement you
    have got to have a penalty or it is toothless. But we are
    trying to work with industry to make that happen, because I
    think, echoing Senator Tester, it is only going to get worse.
        And, you know, as someone who shares some of your concerns
    about crypto, I will acknowledge that you have only put one
    ``wild'' in front of ``West,'' as opposed to two, Wild, Wild
    West. And as somebody who has worked with Senator Toomey and
    Senator Lummis, and somebody who managed to do pretty well
    financially because of innovation, I am all in. But we do need
    some guidance. We do need some direction. I would go to the two
    wilds in terms of the description of this area, as good as some
    of the innovation is. Some of the things that I see from the
    intel side scare the dickens out of me. So we need to figure
    out a way to, you know, maybe I ought to join the caucus,
    because we have got to find a way to come together on this area
    of innovation but also area where I can assure you of abuse.
        I will give the industry one credit here. When we were
    going through this definitional process, I heard from more
    newspapers, newsletters, entities. For a group that says they
    are not very well organized, I have never seen a group that has
    got as many publications as the cryptoworld already has.
        Let me get to my last, two-and-a-half minutes, get to the
    topic I wanted to address, which is human capital investment. I
    think we have all acknowledged that every CEO says, ``My
    biggest asset walks out the door each day--human capital.''
    Yeah, we do not have virtually any reporting. I agree with the
    Chairman. You know, when companies offload their workers as
    contractors, they are really not putting their money where
    their mouth is.
        So I think our Workforce Investment Disclosure Act, which
    passed the House, I hope will be part of the guidance of what
    kind of activities you take. We have got to make sure we have
    ways, because I believe employers--I am sorry, investors, want
    to know employee retention. They want to know what kind of
    skills and training is taking place. As a matter of fact, I
    hope that you will also go beyond workforce and really look at
    the whole realm of ESG reporting. Investors want this, yet
    there are no standards at this point. I am not saying we need
    to move to mandatory across the board, but we really need some
    more look there.
        And I do want to make sure I get a question in here, and
    this is, again, a topic you and I have talked about in the
    past. I have got other legislation that would create the
    equivalent of an R&D tax credit, which was a radical notion, as
    you know, in the accounting world back in the 1970s and early
    '80s, to create an R&D tax credit type equivalent for companies
    that invest in upskilling particularly low- and moderate-paid
    workers. I think creating an asset class around human capital
    make some sense, or at least is worthy of a discussion, and I
    hope you will be willing.
        You can pick any of those items along the way, Chair
    Gensler and comment back, but I hope you will focus on the
    workforce piece.
        Mr. Gensler. Senator, I thank you on cyber. I look forward
    to working further with your staff, and I share your view. In
    the cryptospace there is an intersection that it is almost--it
    a way to subvert our current anti-money laundering laws and
    subverts various things within the intelligence community, and
    we are all trying to protect on.
        I did not use that term. I want to be respectful. I mean, I
    just used one ``wild.'' Also, I do look forward to getting out
    to your great State of Wyoming with all these masks go away and
    everything.
        But on the workforce, just to say we have looked closely at
    your bill and other Committee Members. It is like ultimately
    what investors tell us during the notice and comment period
    too. So when we put something out, hopefully that you will
    weigh in also, all of the Members will weigh in and say, do
    investors really want this information? I have always found
    that if you are going to buy a company, or sell a company, when
    I was doing that at Goldman Sachs, that people really wanted to
    have a thorough review of that workforce and its ups and downs.
    It is an asset, and it is a critical asset. So I could not
    agree with you more on that, sir.
        Chairman Brown. Thank you, Senator Warner. Senator Tillis
    of North Carolina is recognized.
        Senator Tillis. Thank you, Mr. Chairman. Chair Gensler,
    thank you for being here.
        Are you familiar with Rule 17j-1 under the Investment
    Company Act of 1940, and Section 10(b) of the Securities
    Exchange Act of 1934?
        Mr. Gensler. Yes, generally, sir. Yes.
        Senator Tillis. Just for others' edification, 17j-1, under
    the Investment Company Act of 1940, and Section 10(b) of the
    Securities Exchange Act of 1934, are the two provisions used by
    the SEC, combined with judicial precedent, to prosecute
    individuals for the practice of frontrunning. This prohibition
    on frontrunning includes any efforts to do so, including via
    information obtained through payment for order flow.
        So is the practice of frontrunning already illegal?
        Mr. Gensler. The practice of frontrunning is against the
    rules that you said but also the exchanges. A number of the
    exchanges, self-regulated organizations, have that, and it is
    really to protect the public, that if I put an order in that I
    can get that inside the market and somebody is not going to
    take that and use it in front of me.
        Senator Tillis. I know that you have been critical of
    payment for order flow, contending that it presents conflicts
    of interest for broker-dealers, and that retail customers are
    harmed through inferior execution quality. Do you still stand
    by that?
        Mr. Gensler. I think that we need to take a look at this
    whole market structure, because many orders are not competing
    with other orders. If you placed an order to an exchange--with
    a broker, I am sorry--if you placed an order it might be bought
    by one party, and has been publicly disclosed there is one
    wholesaler that has 50 percent of their market share in the
    retail market.
        And so it is really about are the orders competing with
    other orders. So I am procompetition, and I am not sure that
    this payment order flow system really is the best competitive
    landscape.
        Senator Tillis. Is it accurate to say there is another
    safeguard designed into the system, this one by retail brokers,
    to cure potential conflicts of interest for payment for order
    flow arrangement from all of their execution partners? In other
    words, this means that the execution partners will pay the same
    rate and act within the same system, essentially putting all
    execution partners in competition with one another on execution
    policy and not payment for order flow.
        Mr. Gensler. I think the challenge is, if a party is buying
    all the order flow, or a bulk of the order flow, then the
    order-by-order competition does not exist, so the retail public
    does not benefit from that competition. When I was growing up
    you had competition. It was not modern technology but it was
    competition on the floor of the New York Stock Exchange, and
    brokers could scream and yell at each other about what they
    were going to pay. Now if one party is buying literally half
    the retail flow in America of these market orders, that could
    actually have diminished competition in the marketplace.
        Senator Tillis. Do you think the retail brokers should
    route orders to the market center where they have the highest
    likelihood of obtaining the most favorable execution for their
    customers? Why or why not?
        Mr. Gensler. I have asked staff to consider the economic
    analysis and really think about the whole market structure. How
    can we lower the cost of capital formation and raise the
    returns for the retail public, and the institutional public?
    And we have not updated, in 16 years, that national market
    structure.
        So I think it is really--it is almost like a sweater where
    everything is knitted together. I was quoted recently about if
    something was on the table, and I said, ``Yes, because I think
    in this area, kind of it is all on the table,'' to think about
    the rebates at the exchanges, what is called the tick size, the
    national best offer, all with one goal--competition the
    marketplace to lower the cost and raise the efficiency. That
    helps capital formation and it helps investors.
        Senator Tillis. Thank you. I will probably add a couple of
    questions for the record to expand on that, but thank you for
    your answers.
        I want to talk a little bit, in my remaining time, about
    the gamification of retail investing. How would you describe
    gamification?
        Mr. Gensler. It is a term that I must admit I had only
    heard in the last year or so, but if I can broaden it out, it
    is----
        Senator Tillis. And do you think Governments should prevent
    gamification?
        Mr. Gensler. I think the role of the SEC is about
    protecting investors, so I think the question is are there
    conflicts that arise by doing behavioral prompts to encourage
    Senator Lummis to trade and sending Senator Lummis a different
    prompt than Senator Warner or Warren. And they have sort of
    differentially marketed to the three.
        Senator Tillis. If we go down that path--and I want to be
    respectful of time--but if we go down that path, in States like
    mine that have an educational lottery--I think in Maryland you
    have a similar lottery--if we go down that path and we look at
    possible restrictions or eliminating gamification in the
    investment sector, why wouldn't we apply that same logic to
    lottery systems across the Nation, or any publicly gamified
    ventures?
        Mr. Gensler. I think what I am interested in learning, and
    we just put out a public comment, a request for comment, not
    even a rule, to ask could you help us, the public comment on if
    a platform is maximizing to revenues by marketing to each of
    these Senators in this room differently, could there be a
    conflict rather than considering what is best for each of you
    in your families for your investment needs.
        And so it is that. These platforms are now optimizing based
    upon our Fitbit, based upon our mobile apps, based upon how we
    drive our cars. They are maximizing based upon all this data,
    and that brings us greater innovation. It is a plus to
    innovation, a plus to access. It can be a plus to lower costs.
    What we are just raising is could it be a conflict as well if
    they are trying to market to everybody differently.
        Senator Tillis. Thank you.
        Chairman Brown. Thank you, Senator Tillis. Senator Menendez
    from New Jersey is recognized.
        Senator Menendez. Thank you, Mr. Chairman. Chair Gensler,
    good to see you. As we all know, the asset management and
    investment consultant industries are overwhelmingly White and
    male. We also know that study after study has shown that
    greater diversity leads to greater profitability.
        So in an effort to improve performance in these industries
    and thereby benefit everyday investors, the SEC's Asset
    Management Advisory Committee unanimously recommended that the
    SEC take several tangible, concrete actions to improve
    diversity in the industry in a way that is aligned with the
    SEC's own diversity and inclusion goals and its mandate to
    protect investors and promote fair and open markets.
        Have you had the opportunity to read the full Advisory
    Committee's report?
        Mr. Gensler. Sir, I am familiar with the report. I have
    read a summary, to be candid with you.
        Senator Menendez. OK. Have you been briefed by the authors
    of the recommendations on the Advisory Committee's Diversity
    and Inclusion Subcommittee leadership?
        Mr. Gensler. I have met with the leadership of the
    committee.
        Senator Menendez. Uh-huh. Have they advised you about it?
        Mr. Gensler. Oh yes. Yes.
        Senator Menendez. OK. Well, these recommendations, they are
    simple, they are straightforward. For example, one is to
    require enhanced disclosure requirements on gender and racial
    diversity of advisory firms. Some firms already report this
    information voluntarily. And others to establish a procedure to
    allow the SEC, when it receives reports of discriminatory
    practices, to direct reporting parties to the Government agency
    best equipped to investigate the complaint.
        None of this is particularly difficult or controversial, as
    is evidenced by the unanimous vote of the Advisory Committee.
    So given that broad support, can you commit to bringing these
    items before the Commission for a vote before the end of the
    year so we can bring transparency and diversity to the industry
    and ultimately deliver better market outcomes for investors?
        Mr. Gensler. I have asked staff to look very closely not
    only at these recommendations but other recommendations with
    regard to issuers, but you are speaking about on the investment
    management side and make recommendations up to the Commission.
    With a full docket I do not want to say what time that will be.
    It might be after----
        Senator Menendez. Let me just say----
        Mr. Gensler. ----after the end of this year.
        Senator Menendez. Let me just say I have been around here
    for a while, and I get similar answers from every chair. And
    the problem is we never end up with any concrete steps to
    creating the diversity that everybody claims that they support.
    So I am tired of hearing about we are going to study it, we are
    going to get more recommendations. I want to know what is our
    pathway to action.
        Mr. Gensler. So, sir, we are doing more than just studying.
    I have asked staff for recommendations on the issuer side, as
    we have talked about earlier, about human capital, and that is
    the 7,000-plus issuers, and that includes diversity. It
    includes workforce statistics, as Senator Warner and I were
    discussing earlier as well, and Chair Brown.
        So I have asked to bring that up in front of the five-
    member commission. It is a lot to take on to do the economic
    analysis, and it be very investor focused, because we have to
    live within the chalk lines. This is about investors and what
    investors make their decisions upon.
        Senator Menendez. Well, we will be following up with you.
    This is an issue I have been pursuing for some time, and
    without satisfaction, to be honest with you.
        Should shareholders of companies that make public pledges
    expect their company to act in a manner consistent with the
    stated company policy?
        Mr. Gensler. I think it is at the bedrock of our securities
    laws. President Roosevelt called the first action front of
    Congress, the '33 Act, the Truth in Securities Law. And so you
    are talking about that if you make a pledge to your
    shareholders about building a factory or any pledge, that you
    not defraud the public, that it be honest rendition of the
    disclosures you are making.
        Senator Menendez. Well, after the insurrection attempt
    earlier this year, many companies made public pledges to stop
    donating money to the 147 Members of Congress who objected to
    Congress' certification of President Biden's victory. However,
    since then, many of these companies resumed their political
    donations, in direct contradiction to their public pledges. So
    I do not believe necessarily that they follow what they say.
        So, therefore, do shareholders have the right to know
    whether their companies' political donations contradict their
    public commitment and whether those companies may be supporting
    outcomes which might pose a material risk to the companies'
    bottom line?
        Mr. Gensler. If it poses, as you said, material risk and
    there has been a material misstatement to the public, that is
    at the center of our securities laws.
        Senator Menendez. Well, I look forward to seeing some
    enforcement on that.
        Finally, due to public health concerns, in November of
    2020, FINRA provided member firms the option to complete branch
    office inspections remotely for calendar years 2020 and 2021.
    What is your assessment of the quality of those remote
    inspections? Do you think regulators sacrificed any oversight
    by allowing these remote inspections, and because we are still
    facing, with the Delta variant pretty high, is the SEC
    considering extending remote inspections, given the current
    public health?
        Mr. Gensler. Senator, we are. I mean, we, as a Nation, are
    living through the most challenging time, well at least in my
    life, health-wise and economically related to that. When I have
    conversations with our head of examinations, we have about a
    1,200-person examination unit, I ask that very question. What
    do we lose, what do we gain being remote? And there are
    tradeoffs. We have gained--people are not commuting as much.
    The people have a better work-life balance and so forth, our
    examiners. What we lose is you are not sitting in a room,
    eyeball to eyeball, talking to somebody as you are trying to
    inspect a fund or a company, and so forth.
        But yes, we are looking at extending this, just because of
    the realities of this health pandemic that we are in.
        Senator Menendez. Thank you. Thank you, Mr. Chairman.
        Chairman Brown. Senator Scott from South Carolina is
    recognized.
        Senator Scott. Thank you, Chairman, and thank you for
    holding this important hearing today, and thanks to the Ranking
    Member for his comments earlier on, his opening statement,
    about the importance of having market accessibility to all
    Americans. It seems like we have been heading in the right
    direction for quite some time here, over the last 10 years or
    so. Some of the concerns I have, Chair Gensler, is that what I
    have seen from a policy position from you so far seems to
    actually jeopardize that path to financial opportunity for the
    average American.
        I think back to my days in business when I was in the
    insurance and, for a small time, in the financial services
    business, I would tell my clients oftentimes that there are
    really only three ways to create wealth in America. The first
    is real estate, and one of the reasons why we focus on the
    American dream is synonymous with home ownership. There is no
    question in my mind that the fact is that you build equity in
    your house and you are actually building equity in this Nation.
    It is your share of the American dream that is so powerful and
    important that we focus on.
        The second way that you create wealth in this Nation and
    experience more of the American dream is through having a
    business, and have that business grow, and it becomes more
    profitable, and that net worth that you see accumulating is
    part and parcel to the American dream.
        And then finally it is having an equity position in the
    marketplace. And to the extent that we make it more affordable
    for the average person to invest in this marketplace they have
    a chance to literally experience the American dream, to exceed
    their wildest imaginations financially.
        If you think back 32 years ago, do you have any idea what
    percentage of American households that were investing in the
    stock market?
        Mr. Gensler. Well, we have grown. I mean, particularly in
    the last 10 years.
        Senator Scott. But 32 years ago, any idea what it was?
        Mr. Gensler. I mean, I do not know the specific number, but
    lower than today, about 10 points lower.
        Senator Scott. Good answer. So 32 percent of American
    households, 32 years ago, had access to one of the three
    streams that leads to creating wealth in this Nation, and much
    of the reason why they had such limited access is because the
    fees to make a trade were so darn high.
        Imagine today the average stock price is around $119, the
    S&P 500. If you invested in a stock in the '70s and '80s, your
    stock would have to increase to $139 before you made a penny,
    because you were using that increase to pay the transactional
    costs. Today, it is zero. So literally you have a chance to
    invest in the marketplace because we have gotten rid of those
    high transactional costs.
        So, as you said, today the actual number of households that
    are able to invest in the market, 53 percent of households are
    invested in the market. Why? Because the price to get involved
    in the market has plummeted. And so when we hear things like
    banning payment for order flow, it sends shivers down the
    spines of people who have waited for this day to come. Fifteen
    years ago it was $15 or $20 to make your trade. Today it is
    nothing. Literally, you have access to a market. If you are in
    rural America, living in Saluda, South Carolina, or inner-city
    Chicago, for the first time you have a chance to be in the
    marketplace.
        Under the Biden administration, those opportunities could
    vanish away so quickly, and that is painful, as a kid who grew
    up in poverty, who now has access to the market. Forty percent
    of the households in this Nation who make less than $75,000,
    they are in the market. Why? Because it is affordable. We have
    to trust Americans to make their own decisions on their own
    investments and not have a paternalistic regime helping protect
    Americans because they cannot figure it out for themselves.
        I am concerned about that, and my question for you is, what
    is your plan to ensure that the existing system, the potential
    for innovation within that system, continues so that the
    average retail investor benefits from that and we do not see
    ourselves going backwards that leads to higher trade costs, so
    that fewer Americans are able to invest their hard-earned money
    in the way that they see fit?
        Mr. Gensler. Senator, I am sitting here thinking, one, how
    much my father, Sam Gensler, if he was alive today, would like
    you, because he would have agreed on your three points about
    real estate, start a small business, which he did--he never had
    more than 30 employees--and as a kid he used to toss us value-
    line tear sheets and he would say, ``What do you think of this
    stock?'' and he would try to buy 50 shares of something.
        Senator Scott. Yes.
        Mr. Gensler. I could not agree with you more. In terms of
    the retail investing, I think that is a positive thing in
    America, and it was when I was a kid as well.
        On the cost, we can always do better. And what I am saying
    is, technology has driven down, and competition has driven down
    the cost of, as you said, investing. But there is still a cost
    left, the payment for order flow. Even if it is a couple of
    pennies out, it is a cost. So it is buried behind the scenes.
    What I have raised to the economists, with Jessica Wachter and
    her whole team, is can we do better to have more competition,
    that orders compete with orders rather than one wholesaler
    buying half of the retail flow in America?
        And so it is about trying to even do better in these great
    capital markets we have, but we cannot take anything for
    granted. So I think we are more aligned. It is about trying to
    drive it down even lower cost.
        Senator Scott. And, Chair, I will take you at your word,
    and frankly it sounds like your father was an amazing guy who
    had a chance to own his house, start a business, and invest in
    the marketplace.
        Mr. Gensler. He never went to college and raised five kids.
        Senator Scott. Yep, and that is the story of the American
    dream. One of the things that I hope that we protect is the
    notion that the American dream is accessible for all Americans.
    And we have within the Administration parts of the puzzle that
    can make it worse for the average person in our Nation, I think
    we should pause and take a serious look at how the market works
    and how can we make it better. Thank you.
        Chairman Brown. Thank you, Senator Scott. Senator Warren
    from Massachusetts is recognized.
        Senator Warren. So thank you, Mr. Chairman. We hear a lot
    about how crypto is all about financial inclusion, a way for
    people who do not have a lot of money to be able to manage it
    or invest it.
        Now the banks have done a pretty lousy job on financial
    inclusion, so I want to test out with you whether or not crypto
    is an improvement. Last Tuesday, the cryptomarket tanked once
    again. The prices of Bitcoin and Ether each fell by about 10
    percent, while a bunch of other tokens failed by as much as a
    third. So in a matter of hours, $400 billion in market value
    disappeared. Poof. It was just gone.
        And meanwhile, several of the biggest crypto exchanges had
    outages, which kept customers from making withdrawals or
    trades. So how did that affect people who do not have a lot of
    money to lose?
        Chair Gensler, let's say that last Monday I took out the
    last sliver of my savings. I went on the crypto exchange,
    Coinbase. I bought $100 worth of Ether. Then I woke up early on
    Tuesday morning, I saw that the market looked like it was
    beginning to tank, and I thought I better sell right now. But
    when I tried to sell, Coinbase, the exchange, was down.
        So Chair Gensler, was there anything I could do to get my
    money out?
        Mr. Gensler. Not at a Federal agency, because they have not
    yet registered with us, even though they have dozens of tokens
    that may be securities.
        Senator Warren. Yeah. OK. So that sounds pretty risky to
    me. But let's say that instead of buying Ether on Coinbase last
    Monday I decided instead to put that $100 toward buying a cool,
    new token, let's call it Newcoin, that was being hyped on
    Twitter. Now Newcoin is available only on a quote/unquote,
    ``decentralized'' crypto exchange, so to buy it I had to pay a
    fee, about $20, to the cryptominers who process the
    transactions. That is $20 to buy $100 worth of tokens. But I
    figured that was OK because Twitter told me that Newcoin was
    going to make me a lot of money. But then, of course, I woke up
    on Tuesday morning and the market was tanking.
        So let's ask about this one. Chair Gensler, on Tuesday,
    when I wanted to sell Newcoin and get back to dollars fast,
    that exchange had not shut down. But remember, I had to pay $20
    on Monday to get into decentralized finance. So how much would
    I have had to pay to get out of DeFi on Tuesday to sell my
    coins? Would I have had to pay a second $20 fee, or might I
    have had to pay even more?
        Mr. Gensler. I do not know because it would be all in the
    user agreement. And, by the way, you put quotes around
    ``DeFi.'' I think that is helpful, because they are really
    decentralized in name only. There is a user agreement. There is
    something you are doing with this platform. There is a
    governance token. There are usually some fees. But I do not
    know what the particular fees would be.
        Senator Warren. Well actually, we do know some of the fees
    from last Tuesday. The fee to swap between two cryptotokens on
    the Ethereum network was more than $500, obviously way more
    than the $100 I was trying to trade in the first place.
        So the question I have is, in the face of these high,
    unpredictable fees, small investors could easily get jammed and
    wiped out entirely. Chair Gensler, advocates say cryptomarkets
    are all about financial inclusion, but the people who are most
    economically vulnerable are the ones who are most likely to
    have to withdraw their money the fastest when the market drops.
    Does this sound like the path to financial inclusion to you?
        Mr. Gensler. It is a highly speculative asset class. It
    does not sound like the path that you mentioned.
        Senator Warren. Yeah. You know, there are a whole list of
    problems with crypto--unreliable tech, scams, devastating
    climate impact--but high unpredictable fees can make
    cryptotrading really dangerous for people who are not rich.
    Regulators need to step up to address crypto's regulatory gaps
    and ensure that we are actually building the inclusive
    financial system that we need. And, Chair Gensler, I expect you
    and the SEC to take a leading role in getting this done. Thank
    you.
        Mr. Gensler. Thank you.
        Chairman Brown. Thank you, Senator Warren. Senator Daines
    from Montana is recognized.
        Senator Daines. Thank you, Mr. Chairman, and thank you,
    Chair Gensler, for being here today. I want to, I think, join
    my colleagues by expressing my concern with the SEC's posture
    toward cryptocurrency and blockchain. The keyword here is
    ``innovation.'' As I have said before, I believe a lighter
    touch regulatory approach is what is called for here, and that
    overregulating this young and emerging industry could drive
    jobs and innovation overseas in the global race, which we
    should all agree on would be a very bad outcome.
        America has long led the world in innovation, and we must
    do our very best to ensure that the conditions continue to
    exist for America to lead in this space, and especially in the
    cryptosector.
        Chair Gensler, you have, on multiple occasions, asked
    cryptocompanies to come in and speak with you. However, many of
    these companies that have come to speak with you have soon
    after found themselves the targets of enforcement actions, or
    even legal threats. The question is, what is the process for
    the SEC to provide guidance, and what might companies expect
    from talking directly with you?
        Mr. Gensler. I thank you. I want to say, I think the way we
    innovate is within public policy frameworks. But we have asked
    companies to come in, talk to us. If they are trading or
    lending a security there is a registration regime, and
    companies, since the 1930s on for 90 years, have found ways to
    innovate but register, or seek an exemption, or seek a no-
    action letter, and work with us to ensure that they are
    registered but there is a public policy framework around that.
        Senator Daines. So you are drawing lines, I think, through
    public statements without actually going through, you know, APA
    process. What kind of responsibility do you have to provide
    clarity to market participants as opposed to really chilling
    the marketplace through some of these vague speeches, vague
    remarks, vague interviews?
        Mr. Gensler. So with all respect I think that actually the
    SEC has the authorities that Congress granted, and it is a very
    broad definition of security that includes investment contract,
    that includes note, includes 35 other things. My predecessors
    put out various guidance. Chair Clayton, and so forth, put out
    guidance in this area as well.
        And so I think come in, talk to us. Not you, Senator, but,
    you know, the entrepreneur, and work within an investor
    protection regime that also facilitates capital formation. I
    fear if it stays outside, this field that I studied for 3\1/2\
    years at MIT, I have a belief that this has been a catalyst for
    change. But I think if it stays outside of the public policy
    framework for anti-money laundering, tax compliance, investor
    protection, it is not going to long persist.
        Senator Daines. I want to shift gears for a moment and talk
    about China. You have made it clear that you will be increasing
    oversight of Chinese firms who are trading in the U.S. markets.
    However, it is not clear to me that the SEC is doing enough as
    it relates to the oversight of Chinese broker-dealers who have
    substantial U.S. customer bases, and frankly they are growing
    rapidly.
        My question is, what is the SEC doing to ensure that
    Americans are not unknowingly having sensitive personal and
    financial information transferred to the Chinese Government?
        Mr. Gensler. Senator, if I could ask if we could meet, you
    know, one on one or with your staff and so forth, because I
    want to understand more about your concerns there, because I do
    think that is an important issue to ensure that Americans are
    protected, their personal information and their privacy is
    protected, just as if they were working with a U.S. firm.
        Senator Daines. Yeah. Having spent a lot of years in the
    cloud computing world it is a real threat where this data
    resides and the access the Chinese Government have to this very
    sensitive and important personal information.
        I want to shift to the CFTC for a moment. You have
    previously acknowledged the need to work together with the CFTC
    to provide effective oversight on the cryptomarket. At the same
    time, you have stated that, quote, ``Many tokens may be
    unregistered securities,'' end quote. What role do you see the
    CFTC playing with respect to oversight of the cryptosector and
    in your capacity as SEC chair, and have you had any
    conversation with the CFTC on this topic to date?
        Mr. Gensler. Yes, I have had some really good conversations
    with Acting Chair Behnam. I was honored to chair the agency
    once as well and think the world of the agency. I think we each
    have respective jurisdictions. They have an enforcement
    authority on commodities, not a regulatory authority. We have a
    regulatory authority where we can write rules and we can
    register companies that are trading platforms and the like. But
    on those trading platforms there may be some commodities on it.
    So what Chairman Behnam and I have been talking about is how
    could we partner up, using our existing authorities, to best
    protect investors.
        Senator Daines. Chair Gensler, thanks for your time.
        Mr. Gensler. Thank you, and I look forward to following up
    on that China issue.
        Chairman Brown. Thank you, Senator Daines. Senator Cortez
    Masto from Nevada is joining us remotely.
        Senator Cortez Masto. Mr. Chairman, thank you. Chair
    Gensler, thank you for joining us.
        Let me jump back--this seems to be the topic of
    conversation with my colleagues--the cryptocurrency. One thing
    I just want to verify. Is the SEC sufficiently equipped,
    whether by regulation or funding, to appropriately ensure
    compliance and keep pace in the cryptocurrency market? Do you
    believe so? And if you do not, then what should we be doing in
    the Committee? What do we need to know to help you?
        Mr. Gensler. I think you have raised both points. I think
    funding-wise we could use a lot more people. I just have to be
    frank with you. I mean, there are 6,000 projects, and while
    some of those are commodities, many of them are securities
    under the laws, and many of the platforms are. So we could use
    some more funding.
        In terms of legislation, I think what I have said earlier
    in this hearing is the coordination between the market
    regulators is strong, and Chair Behnam has been talking through
    how to do this, but there may be things that Congress can weigh
    in and help on the coordination, and also around stablecoins,
    the coordination with the banking regulators.
        And then there are some things, frankly, a bit in the weeds
    about transfer agents and custody and the like.
        Senator Cortez Masto. Thank you. And so let me just say, I
    look forward to working with you on that. Whatever we can do
    here, on the Committee, to support how we address and look at
    the cryptocurrencies, please know that you have got support
    from me.
        Let me talk a little bit about gamification. When you were
    here in March for your confirmation hearing I raised concerns
    about behavioral prompts and gamification, and I said that free
    apps that encourage trading could be detrimental to some retail
    investors.
        So I know that you are looking at this. Senator Toomey
    mentioned that you had talked about doing a report sometime
    this summer and putting a report out, if I remember correctly.
    Can you talk a little bit about where you are and your concerns
    with gamification and how it impacts investors?
        Mr. Gensler. So three things. One, on the GameStop report,
    we are pretty close. It is in front of my fellow commissioners,
    and I would assume it will be out shortly. On the, quote,
    ``gamification,'' we have asked the public, through a request
    for comment, to give us feedback. I think the issue there is we
    are living through a transformation time in America, and we are
    seeing this is in every bit of our society, and so forth. But
    if Netflix figures out that I am a rom-com guy, and yes, I am a
    rom-com type of guy, I might see a bad rom-com for an hour-and-
    a-half. But this is about people's investing future.
        So what I have asked, I think the core question is, is if
    the data analytics are maximizing the platforms' revenues,
    optimizing for revenues, optimizing for data collection, that
    may be in conflict with maximizing for the users' investment
    returns, and how do we square that.
        And last, if I could, and I apologize, respectfully, to say
    it is not actually free on these apps. It might be zero
    commission, but you are still paying. The payment for order
    flow is underneath the hood, and it is still there, and my real
    concern is about whether the competition is there, whether it
    is sufficient order-by-order competition.
        Senator Cortez Masto. Thank you. I appreciate that
    clarification.
        And then let me just add one final thing, and I know
    Senator Tester talked about this, but climate risk. We have
    seen, from the West, and particularly in Nevada and California,
    some of the worst wildfires we have ever seen, because of the
    extreme weather, impacting the air quality as well that we
    breathe.
        And so I know there was discussion earlier about why should
    the SEC be concerned about the climate crisis and climate risk,
    but would you talk a little bit about this? I understand you
    have said that investors should be able to understand what is
    under the hood of green or sustainable funds. What do you mean
    by that?
        Mr. Gensler. So we have--I thank you for asking that--we
    have a separate rule docket where I have asked for
    recommendations from staff. There are funds, asset managers
    that are making themselves as green or sustainable or carbon-
    free, and just as we walk into a grocery store and it might say
    fat-free, it is like what is behind that marketing? And I think
    that actually probably will unite Senators on this Committee. I
    mean, what is behind the marketing and the name? So staff will
    make recommendations, but I hope that we would say something
    about that there has to be some metrics standing behind if you
    are marketing yourself, so to speak, as carbon-free or green.
        Senator Cortez Masto. Thank you. And I would assume there
    is a reason why they are making themselves that way, because
    that is what investors, some investors are looking for. Is that
    correct?
        Mr. Gensler. I think that is right. I think that investors
    increasingly are interested. Investors get to decide. In the
    basic bargain of our capital markets, investors get to decide.
    But investors also get to decide how they make their decisions.
    And all the SEC is trying to do is response to investors, say
    here is how we can maybe help bring consistency, comparability,
    and some decision-useful information.
        Senator Cortez Masto. Thank you. Chair Gensler, thank you
    again for joining us.
        Mr. Gensler. Thank you.
        Chairman Brown. Thank you, Senator Cortez Masto. Senator
    Warnock of Georgia is recognized.
        Senator Warnock. Thank you, Chairman Brown, and thank you,
    Chairman Gensler, for your testimony.
        America's capital markets are some of the most robust and
    transparent markets in the world, but not everyone has equal
    access to them. In Georgia, people of color account for nearly
    half of the total Georgia population while only about 23
    percent of Georgia's startups are minority owned. Women-owned
    businesses are also lagging, with women accounting for only 38
    percent of business owners in the State.
        According to a study by the Kauffman Foundation, Black
    entrepreneurs are three times as likely as White entrepreneurs
    to report that their businesses' profitability is negatively
    impacted by a lack of access to capital, and almost twice as
    likely to cite the cost of capital as hurting their businesses'
    profitability. Needless to say, all of us have a stake in the
    ability of entrepreneurs to pursue the American dream, to
    create jobs.
        Chair Gensler, what initiatives is the SEC leading right
    now to increase diversity within the venture capital industry?
        Mr. Gensler. We have a number of tools in the toolkit, and
    this question came up earlier for Senator Menendez too. We had
    some recommendations from Investment Advisory Committee earlier
    this year, and I have asked staff to say, all right, now what
    can we do with regard to disclosure regimes in the investment
    management side?
        We have more clear disclosure regimes in the company side,
    the issuer side, than the investment management side, but there
    is something, it is in the weeds, Form ADV, that we are taking
    a look at more closely.
        Senator Warnock. What tools do we have to increase
    diversity?
        Mr. Gensler. We are very much, at the SEC, a disclosure-
    based regime, and disclosing to decisionmakers, investors,
    about those funds or the companies they invest with, and
    ensuring that that disclosure is what those investors want. So
    it is sort of like it has got to come from investors, we stay
    in the chalk lines we talked about earlier, and both on the
    issuer side and the investment management side what investors
    wish to make their decisions.
        Senator Warnock. And so the role you play in providing that
    kind of transparency and disclosure, I understand that. Let me
    ask it in a different way. What is the SEC doing, or, in your
    view, what could SEC do to help encourage investor capital
    funds to look outside of their traditional geographical areas
    for investment opportunity in other areas of the country, and
    not just in big cities like Atlanta but small cities like
    Augusta and Macon and Columbus? I think a lot of this happens
    because without intentionally doing something else, there is a
    way in which the way things are traditionally done has its own
    momentum.
        Mr. Gensler. You know, I could not agree with you more, and
    I think it might sound like back to basics but fundamentally it
    is the middle part of our mission, making sure that the markets
    are efficient and competitive. And even in the private funds
    space, we have some projects to promote competition in that
    space so that the person raising money, in Georgia or
    elsewhere, of any background--ethnic, racial background--that
    the cost of them raising money is lower as well, for that small
    business entrepreneur raising money, that it is not just a
    friends and family round but they can go to a venture
    capitalist, as you say, and raise money efficiently.
        Senator Warnock. All right. I am going to shift to another
    topic. It is vitally important, and I think we all agree, that
    investors have confidence that financial regulators are keeping
    their protection top of mind so that our markets work for
    everyone. The pandemic has wreaked havoc on our Nation, caused
    significant strains for every aspect of Americans' lives,
    including hardworking families in Georgia and throughout the
    country. Georgians face layoffs, small businesses permanently
    closing and having constantly to worry about the health of
    their families and loved ones.
        Through all of this, criminals saw an opportunity to prey,
    particularly on vulnerable populations, and commit fraud,
    whether it is tricking folks into investing in companies
    falsely claiming to be producing medical equipment or
    businesses using the pandemic to disguise their own fraudulent
    dealings.
        What tools and resources do you believe Congress can
    further provide your agency with to support in its work to
    fight fraud and protect retail investors?
        Mr. Gensler. I thank you for that question. I think two
    areas. One is, frankly, funding. We have shrunk during the
    prior Administration by about 5 percent. We have grown a little
    bit since this new Administration. But we are about 4 percent
    down in head count, and yet retail investing is up. We are in
    the middle of a pandemic. We have got the challenges of doing
    things remotely.
        So it would be good, at a minimum, just to get back to
    where we were in 2016, and I think we actually should get a
    little bit further than that.
        And two, in some areas--and we have talked about the
    cryptocurrency area--is really just to help bring people into
    the investor protection remit, because right now there are many
    individuals in this country that have already been hurt, and
    there are unfortunately going to be more spills on aisle three,
    so to speak--an old grocery store term--because this crypto
    area is trying to stay outside an investor protection
    perimeter.
        Senator Warnock. Thank you so much, Chairman. We certainly
    want to see job growth. We want to see the economy continue to
    thrive. And my first question, I guess, is about equity, and
    the other about integrity. We need both of these things in
    order for the market to perform for everybody.
        Mr. Gensler. Thank you so much, sir.
        Chairman Brown. Thank you, Senator Warnock. Senator Smith
    is recognized, from her office.
        Senator Smith. Thank you so much, Chair Brown and Ranking
    Member Toomey, and welcome, Chair Gensler. It is nice to be
    with you virtually.
        Mr. Gensler. It is good to see you.
        Senator Smith. I have a specific question to start with.
    Having a safe and secure retirement is a crucial goal for so
    many American families, and here is my specific question.
    Registered index-linked annuities has become a rapidly growing
    savings option for many Americans. In the first quarter of 2021
    alone, more than $9.2 billion of these annuities were sold.
        So here is the problem. The SEC does not have a
    registration form for these products. Now this might seem like
    not a big deal, but it is a big problem, and kind of a classic
    bureaucratic quagmire. Because what it means is that for big
    portions of the year these new products cannot be registered at
    all, and when they are registered reporting costs are higher,
    the disclosure forms have a bunch of information that actually
    is not that useful to investors, as they are trying to find the
    information that really matters.
        So I have introduced a bipartisan bill to fix this problem,
    and I am really glad that the Consumer Federation of America, a
    leading investor advocacy organization, is supporting my bill.
    But I think you know, the reality is that we do not need
    legislation to fix this problem, and we do not need
    congressional action. The SEC has the authority to create a new
    registration form itself. And, in fact, I think the SEC has
    literally dozens of product-specific registration forms in
    place.
        So my question to you, Chair Gensler, is can you commit to
    me today to issuing a new registration form for registered
    index-linked annuities?
        Mr. Gensler. Senator, I know that we have different regimes
    for index-linked annuities, and so I look forward to working
    with you and your staff and learning more. Just 5 months into
    the job, I have to admit that I do not know all the details of
    the RILAs, but I look forward to working with you and your
    staff about the potential of doing, as you say, another form,
    because I think we do have different forms for index-linked
    annuities.
        Senator Smith. Right. Thank you. Yeah, it is a specific
    thing and it is something that I think we could solve
    relatively easily, and I hope your agency, when you are
    releasing your updated regulatory agenda soon, I would love to
    see a fix for this issue on that regulatory agenda.
        Mr. Gensler. Again, I look forward to meeting with you and
    getting our staffs together to understand. I think our staffs
    have already chatted, but to understand that even better.
        Senator Smith. I think so too. We will follow up, and I
    look forward to working with you on this.
        So let me ask you a slightly broader question. You know, we
    often have conversations in this Committee about risk
    disclosure to investors, and I think there is general agreement
    that the market works better when investors have clear and
    trusted and transparent information about the risks that
    businesses face, and that that information is provided in a
    systematic way so that investors can compare risks across
    organizations.
        But some of my colleagues on this Committee just take a
    completely different approach when it comes to risk disclosure
    for climate change, and this just does not make any sense to me
    when, as we, as Senator Tester pointed out, we are seeing
    billions and billions of dollars in costs for extreme weather
    events caused by climate change, and that is not only a public
    sector cost, it is also a private enterprise cost as well.
        So right now, when companies release climate-related
    information, if they release any at all, it is not in a
    systematic format or with any specific guidelines, and I think
    this is a problem for investors, and it gets, as you say, the
    goal of the SEC should be to protect investors. It is also a
    problem for regulators, as Chair Powell has laid out and talked
    about to this Committee earlier this year.
        So I just want to commend the work that you and
    Commissioner Allison Herren Lee have done so far on climate
    risk disclosure. I am glad that you are working to solicit
    comments on how best to address this problem, and I understand
    that you are reviewing those comments right now.
        So let me just ask you a question about this, Chair
    Gensler. Why do you think that climate risk disclosure is an
    important priority for investors, to help them understand
    climate risk?
        Mr. Gensler. Well, I think investors have spoken loudly to,
    to your question, and companies right now are making
    disclosures. They are just not consistent disclosures, and it
    is better when it is consistent. But why it is important is
    there can be physical risks, as we have seen, whether it is
    from flooding or weather events and the like, but it also can
    be transition risks, the transitioning to a new economy as we
    globally address this. But investors are really demanding it,
    and the role the SEC might have is to help bring some
    consistency and comparability to all of this.
        Senator Smith. Well, thank you. Thank you for your work on
    this. Mr. Chair, I do not see climate risk disclosure as a
    social issue. I see it as systemic risk that investors face,
    because of climate change, and it is important, we all
    understand that, including investors. Thank you.
        Chairman Brown. Thank you, Senator Smith. Senator Van
    Hollen of Maryland is recognized, and thanks for your patience,
    Chris.
        Senator Van Hollen. No, thank you. Thank you, Mr. Chairman,
    and, Mr. Chairman, great to see you. Let me start by thanking
    you for your efforts to move forward on a rulemaking on 10b5-1
    plans. Senator Fischer and I had bipartisan legislation that
    would have directed the SEC to look at this, because you know
    well that public confidence in the markets requires confidence
    that there is not insider trading, and I look forward to your
    rulemaking in that regard.
        I just want to try and cover a couple other points. One
    involves the whistleblower provisions. As you know, we have
    whistleblower laws designed to encourage individuals to surface
    cases of fraud. And beginning in 2010, a Marylander, John
    McPherson, he was a former forensics accountant, gave the SEC
    what the SEC described as, quote, ``extraordinary and
    continuing,'' unquote, assistance, that helped the agency shut
    down a $1.4 billion investment scam by a company called Life
    Partners Holdings, Inc.
        Despite his substantial assistance, Mr. McPherson did not
    receive the whistleblower award, because the company went
    bankrupt, and as a result the SEC did not collect its fine. But
    the case did require over $1 billion for investors. As you
    know, in bankruptcy, all the lawyers and accountants got paid,
    but the person who was the most instrumental in bringing this
    case to light and exposing the fraud did not receive his
    whistleblower award.
        So I want to work with you and the SEC to see if you can,
    through your existing authorities, make sure that he gets what
    would normally be expected in this case, or if a change in law
    is required to work with us, because I think you would agree,
    would you not, that we do want to continue to incentivize
    people to bring these cases to light.
        Mr. Gensler. Senator, I agree wholeheartedly. I know the
    work that Senator Grassley did to bring this whistleblower
    regime into place. The SEC, to date, has had a really robust
    whistleblower program, and it has helped the American public
    and the investors public. But I look forward to working with
    your office on this matter.
        Senator Van Hollen. Right. I mean, this kind of situation
    obviously may discourage people from coming forward at great
    risk, potentially, to themselves, at the end of the day.
        Mr. Gensler. What I do not know yet is whether it will need
    a change in law rather than something in our current authority.
        Senator Van Hollen. That is what we are exploring now with
    your team, but I look forward to continuing to do that.
        So turning to DiDi, in July, following the collapse of the
    share prices of DiDi, I urged the SEC to thoroughly investigate
    the incident to see if investors were intentionally misled by
    DiDi's public disclosures. As you know, that collapse in share
    price came shortly after that happened. I know you cannot
    disclose whether there is an ongoing investigation, and I
    commend you for the statements you have made generally about
    reviewing listings of Chinese companies on the U.S. exchanges.
        Can you expand on that? I heard Senator Kennedy also
    reference your op-ed piece in the Wall Street Journal regarding
    implementation of the legislation that he and I introduced on
    holding companies responsible to ensure that we are allowed to
    see their books, through an independent entity, to protect
    American shareholders and investors. Can you just talk about
    both those pieces of the need to better protect American
    investors?
        Mr. Gensler. So there is about 270 Chinese-related
    companies in our capital markets, between $1.5 and $2 trillion,
    to give you a sense of scope and scale, but many of these
    actually, the U.S. cannot invest directly. See, in China, they
    prohibit foreign ownership in the internet and telecom and
    other fields. So there has been a form of setting up a shell
    company in the Cayman Islands. That Cayman Islands company
    raises money in the U.S., and it has some operating
    arrangements with the Chinese company, which, by the way,
    usually is still owned 100 percent in China by friends and
    family, and so forth.
        So I sort of got to the SEC; you all had passed the Holding
    Foreign Companies Accountable Act. I think there are two
    issues. One is 19 years after Sarbanes-Oxley, Chair Sarbanes
    sitting in this chair, in this room, passed, and our good
    friend, our Maryland mentor--I consider a mentor--passed that
    bipartisan bill, 50-plus jurisdictions have complied, and 2
    have not--China and Hong Kong. So Congress, on a bipartisan
    basis, again said, let's address that. We have got 3 years. We
    have had discussions directly with the Chinese authorities. The
    clock is ticking.
        But I also think, in the meantime, in the meantime we
    should enhance the disclosures of the existing companies, these
    200-plus companies, as to the political risks, the regulatory
    risks, and the real financials between China and the Cayman
    Islands.
        Senator Van Hollen. Thank you. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Van Hollen. Senator
    Ossoff is joining us from his office.
        Senator Ossoff. Thank you, Mr. Chairman, and thank you,
    Chair Gensler, for joining us.
        The COVID-19 pandemic has presented the most immediate and
    ongoing threat to the U.S. economy and the global economy of
    the last 2 years. But beyond the risks presented by the
    pandemic, Chairman Gensler, as a voting member of the Financial
    Stability Oversight Council and in your capacity as SEC Chair,
    can you please provide to this Committee your assessment of the
    greatest systemic risks to financial stability in the United
    States?
        Mr. Gensler. We work together at the Financial Stability
    Oversight Council on an annual report, and we are sort of in
    the midst of that right now. And I think that systemic risk
    issues are something that can spill over into the whole
    marketplace. Though our capital markets have weathered the
    storm of this pandemic, and actually weathered, I think, better
    than it would have because of the reforms of DoddFrank and the
    greater capital in the system, there is still risk in the
    system, whether it is in the commercial real estate area, the
    reach for yield--a second area I am mentioning is a reach for
    yield, that many investors, not just retail investors but
    investors more broadly are reaching for yield.
        We, in our country, are also transitioning off of something
    that created systemic risk in the past called the London
    Interbank Offered Rate, and the transition away from LIBOR to
    another set of rates is, I think, being managed well, but it
    still presents some risk in that transition because there are
    $200 to $300 trillion of assets on top of that.
        But I would say the biggest risk is the health care risk
    itself, and the health care risk and how that is managed as a
    Nation, and the economic risk associated with that are probably
    the biggest risks.
        Senator Ossoff. You have a three-part mission, Mr.
    Chairman, to protect investors to maintain fair, orderly, and
    efficient markets and to facilitate capital formation. Could
    you please inform the Committee how you view climate change as
    impacting that three-part mission, and the actions you are
    going to take in order to protect investors maintain fair,
    orderly, and efficient markets and facilitate capital
    formation, given the projections of significant negative
    impacts from climate change?
        Mr. Gensler. I think that we are taking up two initiatives,
    and I think both of them relate to all three of the pieces. I
    think investors increasingly want to know about the climate
    risk of their companies they own, and I think by bringing
    consistent, comparable information and standards into this that
    the companies themselves will benefit. The companies will
    benefit because they will say, Oh, now we can compete
    efficiently in the capital markets by presenting this set of
    standards around their greenhouse gas emissions and around
    their management of climate risk.
        The second docket is around the fund management side, and
    if they are saying that they are green or sustainable or
    carbon-free, what stands behind that. But again, I think that
    that helps investors make decisions and companies raise money.
    So I think it helps all three of our mission points.
        Senator Ossoff. Thank you, Chairman Gensler. Returning to
    the question of systemic risk and financial stability, in
    recent testimony before this committee the Fed Chair testified
    about his concerns regarding money market funds and Treasury
    markets, the performance of money market funds during
    conditions of financial stress in March of 2020, requiring
    Federal intervention. And he testified regarding Treasury
    markets, quote, ``that at that time the Treasury market really
    lost functionality. The most important financial market lost
    functionality significantly during the acute phase of the
    crisis,'' that being the initial onslaught of COVID-19.
        Do you share the Fed Chairman's assessment and concerns
    regarding money market funds and Treasury markets?
        Mr. Gensler. I thank you for reminding me. To your earlier
    question I should have said that Treasury market itself does
    present, the functioning of that market, some systemic risks.
    Three times--October 14, the fall of '19, and the spring of
    '20--we had more than hiccups inside the Treasury market, and
    it is about the structuring of that market. And so working with
    Secretary Yellen, Chair Powell, even Acting Chair Behnam, I
    would hope we can produce more resilience through central
    clearing in that market and also bringing the principal trading
    firms, the high-frequency trading firms, into that remit.
        To your other question about money market and open-end
    funds, we do have that on our docket, as Ranking Member Toomey
    asked earlier. We do hope to do that, I would say, maybe by Q1
    of the year, to address money market funds around the
    connection between the liquidity provided and what are called
    gates, but also to look at the liquidity rules themselves in
    that market as well as open-end bond funds.
        Senator Ossoff. Thank you, Mr. Chairman. I appreciate your
    testimony, and Chairman Brown, I yield back.
        Chairman Brown. Thank you, Senator Ossoff. Thank you, Chair
    Gensler, for joining us today.
        For Senators who wish to submit question for the record
    those questions are due 1 week from today, Tuesday, September
    21st. Chair Gensler, per our Committee rules, we ask that you
    respond to any questions within 45 days from the day you
    receive them. Thank you again.
        With that the hearing is adjourned.
        [Whereupon, at 12:03 p.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                  PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
        Welcome Chair Gensler.
        Five months ago today, the Senate confirmed you as Chair of the
    Securities and Exchange Commission. I know you have already gotten to
    work for the American people, and you had your work cut out for you.
        Over the past year-and-a-half, the disconnect between the stock
    market and most Americans' lives has never been more painfully clear.
        Most of the country has been devastated by COVID-19. Hundreds of
    thousands have lost loved ones. People lost jobs and family businesses.
    Mothers were forced to leave their paid jobs in droves. Still today,
    millions are at risk of eviction from their homes.
        But you would never know any of that by looking at the stock
    market. It hits new records month after month--53 records since the
    beginning of the year. Eye-popping gains in the stock market and crypto
    assets attracted millions to start investing.
        And like during past times of upheaval, the COVID crisis opened the
    door for bad actors looking to seize upon people's fears and
    insecurity. Pandemic related fraud--from Ponzi schemes to offers to
    invest in COVID-related medical care--skyrocketed last year.
        The SEC stepped up to educate investors and punish bad actors. The
    dedicated public servants at the Commission have continued to fight for
    all the Americans whose pensions and 401(k)s and college savings are at
    risk.
        Many have been enticed by dramatic jumps in the value of new
    digital assets. They've dreamed of riding the coattails of professional
    investors and celebrities in a new wave of public offerings of more
    speculative investments known as ``special purpose acquisition
    companies,'' or SPACs.
        Some professional investors and celebrities make earning millions
    look easy. But, as we are reminded time and again, it's never that
    simple--and too often, someone's quick profit comes at the expense of
    workers and entire communities.
        Chair Gensler, it's your job to make sure that efficient markets
    are balanced with strong enforcement that protects Americans from the
    worst Wall Street greed and careless risk--even if that means
    challenging practices or shady investment products that previous chairs
    ignored.
        It also means working to increase transparency that the last
    Administration didn't take seriously. For example, the SEC approved new
    human capital disclosure last year without requiring companies to
    provide even basic details or data.
        And let's remember--``human capital'' is business school-speak for
    the tens of millions of Americans who work for these companies.
        Despite the new standard and investor demand for essential
    information used to judge how companies treat and manage these workers,
    most companies are barely providing any additional information.
        My colleagues have been working to improve transparency.
        Senator Warner of Virginia introduced the Workforce Investment
    Disclosure Act to get companies to provide important information on how
    they pay, train, and invest in their workers.
        His bill will finally shed some sunlight on how companies outsource
    and subcontract their workers, something he and I have jointly written
    to the GAO about.
        Today's tech companies like to say they're more ``efficient'' than
    companies of the past, when in reality they hire the same number of
    workers--half of them are just invisible to us under today's disclosure
    requirements.
        Senator Warren of Massachusetts introduced the Climate Risk
    Disclosure Act, which calls for significant new public disclosures from
    public companies regarding the risks climate change poses to their
    operations and financial results.
        These bills are good policy, and the largest investors have been
    calling for more of this kind of information. It's why I'm a cosponsor
    of both bills.
        Of course this would be just a start. Transparency is only a first
    step to getting corporations and the biggest investors to behave
    better.
        And there's much you already have the authority to do to make
    markets work better for the real economy, outside of investment firm
    and hedge fund board rooms.
        For too long, the financial system has catered to the big guys, and
    left everyone else on their own.
        There are far too many stories of how insiders game the system.
        Big banks abuse customers while they make record profits. Brokers
    who have taken advantage of customers use the system to cover up and
    erase their misconduct. Private equity firms buy up companies and treat
    workers as a cost to be minimized. Or they buy up houses, raise rents,
    and evict families, even during a pandemic.
        And of course no matter what happens to the workers at the
    companies they've raided for parts, or to the families in the mobile
    home complex where they've jacked up the rents, or to the larger
    economy, the big guys--the hedge funds, the SPAC sponsors, the big
    banks, the brokers--the big guys seem to do just fine.
        That system isn't sustainable.
        Increasing people's trust and faith in the market and the financial
    system will lead to more saving and broader participation. Yet some of
    my colleagues say we should let the market sort it out. They want to
    tie the SEC's and other watchdogs' hands.
        We know that's counterproductive. It's the same thinking that led
    to a market collapse in 2008, and that has led to decades of more and
    more investment flowing to a smaller and smaller share of the country.
        The last Administration subscribed to that same Wall Street-first
    view, and left this country worse off than they found it. The damage is
    too vast to measure. Our economy and markets were no exception.
        Investors have fewer tools to hold management accountable; savers--
    and that means retirees, widows, families--have fewer protections. And
    corruption runs rampant--existing, serious conflicts of interest have
    been ignored.
        The Biden administration is taking a different view--that the
    economy and the markets should work for everyone, not just the well-
    connected. And they should reflect the economy we all want--with
    broadly shared prosperity, and a growing middle class that all workers
    can join.
        When that happens, people will have confidence the markets will
    actually work for them, not just Wall Street. And we'll see more
    Americans save and invest for the future.
        Chair Gensler, I look forward to hearing about the progress you're
    making toward those goals.
                                     ______

                PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
        Thank you, Mr. Chairman. Welcome, Chair Gensler.
        The SEC has historically administered securities laws on a
    bipartisan basis.
        During your confirmation process, I expressed concerns that you'd
    stray from this tradition and use the SEC to advance a liberal
    political agenda, such as combatting global warming and advancing so-
    called social justice; and push the legal bounds of the SEC's authority
    to pursue disclosures that are not financially material to the
    reporting companies. Unfortunately, your actions at the SEC have not
    alleviated these concerns.
        You added mandatory disclosures on global warming and ``human
    capital''--such as board and employee racial and gender identity--to
    the SEC's agenda. And you've essentially said that if large investment
    advisors and pension funds like BlackRock and CalPERS--who invest other
    people's money--want information about global warming or workforce
    diversity, it must be disclosed even if financially insignificant and
    irrelevant to a particular business.
        Even President Obama's SEC Chair, Mary Jo White, opposed using the
    SEC's disclosure powers for the purpose of ``exerting societal pressure
    on companies to change behavior, rather than to disclose financial
    information that primarily informs investment decisions.'' That's
    exactly what you're doing. You are also well on your way to
    politicizing the PCAOB after firing all of the existing board members.
        It's not the SEC's role nor expertise--as an independent financial
    regulator with zero democratic accountability--to address these
    political and social issues.
        Similarly, I worried that you'd favor the paternalistic push by
    some on the Left to restrict investor freedom under the guise of
    protection, while actually harming retail investors. Such harm may
    result from your apparent opposition to payment for order flow, which
    helped allow brokers to offer commission-free trading.
        Payment for order flow allows a broker to keep a portion of the
    price improvement obtained by routing to a wholesaler. The SEC hasn't
    demonstrated any failure or harm associated with payment for order
    flow, which the SEC has allowed for years. Banning payment for order
    flow could very well have the effect of eliminating commission-free
    trading, and would be a grave disservice to average investors.
        Likewise, you've criticized mobile apps that make investing easy
    and fun as ``gamification.'' Since when has delivering a product that
    customers like been a bad thing?
        I worry that you're attempting to fix problems that don't exist.
    Today is the best time ever to be a retail investor. Retail investors
    receive best execution. A person of modest means can share in the gains
    of stock market at negligible transaction costs. We see the tightest
    bid/offer spreads ever.
        Four major developments made this possible. Retail investors can
    access commission-free trading, accounts with no minimum balances, low-
    or no-fee mutual funds and ETFs, and user-friendly technology like
    mobile apps. Investors can also voluntarily use a broker who declines
    payment for order flow but may charge a commission.
        Despite decades of rapidly growing numbers of retail investors
    participating in stock market gains, and enjoying more product
    opportunities at lower costs, some colleagues suggest that the markets
    are rigged against retail investors. I'd like to hear how it is rigged.
    Don't retail investors receive dividends like institutional investors?
    Aren't retail investors entitled to best execution like institutional
    investors? Don't the value of retail investors' shares and those of
    institutional investors increase when a stock's price increases?
        The SEC's job is not to make retail investing expensive,
    unpleasant, and difficult. In America, adults investing their own money
    should be free to decide how to do so.
        Let me turn to cryptocurrency, which we should further study and
    support. Cryptocurrencies and blockchain are important new technologies
    that are actively traded on many platforms.
        A key question is whether a cryptocurrency is a security for
    regulatory purposes under Howey or some other test. Based on your
    public statements, you believe that some are securities but others are
    not. So, I am frustrated by the lack of helpful SEC public guidance
    explaining how you make this distinction. What makes some of them
    securities and others not?
        I understand that SEC staff will privately provide feedback and
    analysis on whether a cryptocurrency is a security. Why keep this
    analysis private? Why not publicly announce what characteristics make a
    cryptocurrency a security or not a security? Why wait to make the SEC's
    views known only when it swoops in with an enforcement action, in some
    cases years after the product was launched?
        This regulation by enforcement is extremely objectionable and will
    kill domestic innovation.
        Chair Gensler, there are many things on which you and I agree and
    that the SEC can do to protect investors, ensure fair, orderly, and
    efficient markets, and facilitate capital formation. I hope that we can
    productively work together on this mission.
                                     ______

                       PREPARED STATEMENT OF GARY GENSLER
                 Chair, U.S. Securities and Exchange Commission
                               September 14, 2021
        Good afternoon, Chairman Brown, Ranking Member Toomey, and Members
    of the Committee. I'm honored to appear before you today for the first
    time as Chair of the Securities and Exchange Commission. I'd like to
    thank you for your support in my confirmation this spring. As is
    customary, I will note that my views are my own, and I am not speaking
    on behalf of my fellow Commissioners or the staff.
        We are blessed with the largest, most sophisticated, and most
    innovative capital markets in the world. The U.S. capital markets
    represent 38 percent of the globe's capital markets. \1\ This exceeds
    even our impact on the world's gross domestic product, where we hold a
    24 percent share. \2\
    ---------------------------------------------------------------------------
         \1\ See Securities Industry and Financial Markets Association,
    ``2021 SIFMA Capital Markets Fact Book'', available at https://
    www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf.
         \2\ See World Bank data: https://data.worldbank.org/indicator/
    NY.GDP.MKTP.CD.
    ---------------------------------------------------------------------------
        Furthermore, companies and investors use our capital markets more
    than market participants in other economies do. For example, debt
    capital markets account for 80 percent of financing for nonfinancial
    corporations in the U.S. In the rest of the world, by contrast, nearly
    80 percent of lending to such firms comes from banks. \3\
    ---------------------------------------------------------------------------
         \3\ Ibid.
    ---------------------------------------------------------------------------
        Our capital markets continue to support American competitiveness on
    the world stage because of the strong investor protections we offer.
        We keep our markets the best in the world through efficiency,
    transparency, and competition. These features lower the cost of capital
    for issuers, raise returns for investors, reduce economic rents, and
    democratize markets. That focus on competition is in every part of the
    SEC's work, particularly with respect to market structure.
        We can't take our remarkable capital markets for granted, though.
    New financial technologies continue to change the face of finance for
    investors and businesses. More retail investors than ever are accessing
    our markets. Other countries are developing deep, competitive capital
    markets as well.
        The SEC is a remarkable organization. In just under 6 months, I
    have gotten to know many of the dedicated 4,400 people across 12
    offices. Our agency covers nearly every part of the $110 trillion
    capital markets. Those markets touch many Americans' lives, whether
    they're investing for their future, borrowing for a mortgage, taking
    out an auto loan, or taking a job with a company that's tapping our
    capital markets. We engage with companies raising money and with the
    key parties that sit in between companies and investors, including
    accountants, auditors, and investment managers.
        While just last month we authorized voluntary return to office,
    we've largely been remote for 18 months now. I cannot compliment the
    dedication of this staff enough for their service to the American
    public.
        In this testimony, I will cover some of the broad themes from the
    SEC's unified agenda, \4\ before closing with a few words on our
    enforcement and examinations divisions.
    ---------------------------------------------------------------------------
         \4\ See https://www.sec.gov/news/press-release/2021-99.

    ---------------------------------------------------------------------------
        Market Structure

        Predictive Data Analytics

        Issuers and Issuer Disclosure

        Funds and Investment Management
    Market Structure
        I'll start with market structure. In every generation, we have to
    look at how we can revisit our rule sets to better enhance efficiency
    and competition in our markets.
        Markets work best when they are transparent and competitive.
    Issuers and investors alike benefit from that competition because it
    lowers the cost of capital.
        I have asked staff to take a look at five market structure-based
    projects across our $110 trillion capital markets: the Treasury market,
    non-Treasury fixed income markets, equity markets, security-based
    swaps, and crypto asset markets.
    Treasury Market
        First, let me turn to the Treasury market. This $22 trillion market
    \5\ is integral to our overall capital markets as well as to global
    markets. It is the base upon which so much of our capital markets are
    built. Treasuries are embedded in money market funds; myriad other
    markets and financial products are priced off of Treasuries; and they
    are an essential part of our central bank's toolkit. They are called
    the ``risk-free asset'' not just here in the U.S. but globally. They
    are how we, as a Government and as taxpayers, raise money: we are the
    issuer.
    ---------------------------------------------------------------------------
         \5\ Statistics from Securities Industry and Financial Markets
    Association: https://www.sifma.org/resources/archive/research/
    statistics/.
    ---------------------------------------------------------------------------
        During the start of the Covid crisis, liquidity conditions in the
    Treasury market deteriorated significantly. This wasn't the first time
    we observed challenges in this market, though. Back in October of 2014,
    there was the Treasury ``Flash Crash''. In the fall of 2019, we had
    significant dislocations in Treasury funding markets, called the
    Treasury repo market.
        I've asked staff to work with our colleagues at the Department of
    the Treasury and the Federal Reserve on how we can better enhance
    resiliency and competition in these markets.
        To the extent that this market is more efficient, that could
    potentially save money for U.S. taxpayers and lower the cost of our
    debt. To the extent that this market is more resilient, it is less
    likely to add to systemic risks during times of stress.
        We will seek to consider some of the recommendations that external
    groups, like the Group of Thirty \6\ and Inter-Agency Working Group for
    Treasury Market Surveillance, \7\ have offered around potential central
    clearing for both cash and repo Treasuries.
    ---------------------------------------------------------------------------
         \6\ See Group of Thirty, ``U.S. Treasury Markets: Steps Toward
    Increased Liquidity'', available at https://group30.org/publications/
    detail/4950.
         \7\ See Brian Smith, ``Remarks at the Federal Reserve Bank of New
    York's Annual Primary Dealer Meeting'' (April 8, 2021), available at
    https://home.treasury.gov/news/press-releases/jy0116.
    ---------------------------------------------------------------------------
        Further, I've asked staff to reconsider some initiatives on
    Treasury trading platforms, and also to consider how to level the
    playing field by ensuring that firms that significantly trade in this
    market are registered as dealers with the SEC.
    Non-Treasury Fixed Income Market
        Additionally, I've asked staff for recommendations on how we can
    bring greater efficiency and transparency to the non-Treasury fixed
    income markets--corporate bonds, a $11 trillion market; municipal
    bonds, a $4 trillion market; and asset-backed securities (which back
    mortgages, automobiles, and credit cards), a $13 trillion market. \8\
    This market is so critical to issuers. It is nearly 2.5 times larger
    than the commercial bank lending of about $10.5 trillion in our
    economy. \9\
    ---------------------------------------------------------------------------
         \8\ Statistics from Securities Industry and Financial Markets
    Association: https://www.sifma.org/resources/archive/research/
    statistics/.
         \9\ See Federal Reserve, ``Assets and Liabilities of Commercial
    Banks in the United States'', available at https://
    www.federalreserve.gov/releases/h8/current/default.htm.
    ---------------------------------------------------------------------------
    Equity Market
        Next, I'd like to discuss equity market structure.
        Every so often, in response to new technologies, the SEC updates
    its rules around market structure. After the internet came along,
    buyers and sellers could meet in new trading venues. An earlier
    Commission created a new rule in the 1990s to facilitate that. In 2005,
    the Commission further addressed this fragmented structure under
    Regulation National Market Structure.
        In the last 16 years, though, technology has expanded by leaps and
    bounds. It has changed how market makers interact, how trading
    platforms compete, how investors access those markets, and the economic
    incentives amongst these various market participants. Retail investors
    can trade over commission-free brokerage apps. Telecommunication has
    transformed the speed of high-frequency trading. That wasn't the case
    even a few years ago.
        Despite these new technologies and developments affecting the
    structure of equity markets, we are often relying on rules written in
    an earlier period. Rules mostly adopted 16 years ago do not fully
    reflect today's technology.
        I believe it's appropriate to look at ways to freshen up the SEC's
    rules to ensure that our equity markets reflect our mission and are as
    efficient and competitive as they could be.
        I think it's time we take a broad view about what the market
    structure should look like today. The Commission started this exercise
    with regard to market data under former Chairman Jay Clayton. I've
    asked staff for recommendations, particularly around two key questions:
        First, how do we facilitate greater competition and efficiency on
    an order-by-order basis--when people send each order into the
    marketplace?
        While there is fragmentation amongst trading platforms, past
    reforms and new technologies may have led to more segmented markets and
    higher concentration amongst market makers. Nearly half of the volume
    transacted is executed in ``dark pools'' or by wholesalers. One firm
    has publicly stated that it executes nearly half of all retail volume.
    \10\ Further, I wonder whether this means that the consolidated tape--
    the so-called National Best Bid and Offer--fully reflects the full
    range of activity on exchanges.
    ---------------------------------------------------------------------------
         \10\ See Citadel Securities, ``Equities & Options'', available at
    https://www.citadelsecurities.com/products/equities-and-options/.
    ---------------------------------------------------------------------------
        Second, how do we address financial conflicts in the market? As I
    have stated previously, I believe payment for order flow and exchange
    rebates may present a number of conflicts of interest.
        Around those two key principles, I've asked staff for
    recommendations as to how we can ensure a more level playing field,
    enhance competition, and improve resiliency in our markets.
        Moreover, I believe shortening the standard settlement cycle could
    reduce costs and risks in our markets. I've directed the SEC staff to
    put together a draft proposal for the Commission's review on this
    topic.
    Security-Based Swaps
        The security-based swaps market is not a large market compared to
    the fixed income and equity markets, but it was at the core of the 2008
    financial crisis. More recently, total return swaps were at the heart
    of the failure of Archegos Capital Management, a family office.
        This year, the SEC is implementing rules related to securities-
    based swaps. Security-based swap dealers and major security-based swap
    participants will begin registering with the Commission by Nov. 1.
        Further, on Nov. 8, new post-trade transparency rules will go into
    effect, requiring transaction data to be reported to a swap data
    depository and thus available to the SEC and, under appropriate
    circumstances, other regulators. Then, beginning on Feb. 14, 2022, the
    swap data repositories will be required to disseminate data about
    individual transactions to the public, including the key economic
    terms, price, and notional value.
        In addition, the Commission has yet to finish the rules for the
    registration and regulation of security-based swap execution
    facilities. I've asked staff for recommendations on how the Commission
    can finalize mandates to stand up the regime established under the
    Dodd-Frank Act and to consider whether it would be best to do this
    consistent with the regime established by the Commodity Futures Trading
    Commission for security-based swap execution facilities. The CFTC has
    had swap execution facility rules that have worked well since they were
    adopted nearly a decade ago.
        Further, to allow the Commission and the public to see aggregate
    positions, Congress under Exchange Act Section 10B gave us authority to
    mandate disclosure for positions in security-based swaps and related
    securities. I've asked staff to think about potential rules for the
    Commission's consideration under this authority. As the collapse of
    Archegos showed, this may be an important reform to consider.
    Crypto Assets Market
        Next, I'll turn to a newer market structure issue: crypto assets.
        Right now, large parts of the field of crypto are sitting astride
    of--not operating within--regulatory frameworks that protect investors
    and consumers, guard against illicit activity, and ensure for financial
    stability.
        Currently, we just don't have enough investor protection in crypto-
    finance, issuance, trading, or lending. Frankly, at this time, it's
    more like the Wild West or the old world of ``buyer beware'' that
    existed before the securities laws were enacted. This asset class is
    rife with fraud, scams, and abuse in certain applications. We can do
    better.
        I have asked SEC staff, working with our fellow regulators, to work
    along two tracks:
        One, how can we work with other financial regulators under current
    authorities to best bring investor protection to these markets?
        Two, what gaps are there that, with Congress's assistance, we might
    fill?
        At the SEC, we have a number of projects that cross over both
    tracks:

        The offer and sale of cryptotokens

        Cryptotrading and lending platforms

        Stable value coins

        Investment vehicles providing exposure to crypto assets or
            crypto derivatives

        Custody of crypto assets

        With respect to investor protection, we're working with our sibling
    agency, the CFTC, as our two agencies each have relevant, and in some
    cases, overlapping jurisdiction in the cryptomarkets. With respect to a
    broader set of policy frameworks, we're working with not only the CFTC,
    but also the Federal Reserve, Department of Treasury, Office of the
    Comptroller of the Currency, and other members of the President's
    Working Group on Financial Markets on these matters. \11\
    ---------------------------------------------------------------------------
         \11\ See ``Readout of the Meeting of the President's Working Group
    on Financial Markets to Discuss Stablecoins'' (July 19, 2021),
    available at https://home.treasury.gov/news/press-releases/jy0281.
    ---------------------------------------------------------------------------
        Further, I've suggested that platforms and projects come in and
    talk to us. Many platforms have dozens or hundreds of tokens on them.
    While each token's legal status depends on its own facts and
    circumstances, the probability is quite remote that, with 50, 100, or
    1,000 tokens, any given platform has zero securities. Make no mistake:
    To the extent that there are securities on these trading platforms,
    under our laws they have to register with the Commission unless they
    qualify for an exemption.
        I am technology-neutral. I think that this technology has been and
    can continue to be a catalyst for change, but technologies don't last
    long if they stay outside of the regulatory framework. I believe that
    the SEC, working with the CFTC and others, can stand up more robust
    oversight and investor protection around the field of cryptofinance.
    Predictive Data Analytics
        The second theme is predictive data analytics.
        We are living in a transformational time, perhaps as
    transformational as the internet itself. Artificial intelligence,
    predictive data analytics, and machine learning are shaping and will
    continue to reshape many parts of our economy.
        To take just one example, I believe we're in an early stage of a
    transition toward driverless cars. Policymakers already are thinking
    through how to keep passengers and pedestrians safe, if and when these
    changes take hold.
        Finance is not immune to these developments. Here, too,
    policymakers must consider what rules of the road we need for modern
    capital markets and for the use of predictive data analytics.
        Today, trading platforms have new capabilities to tailor marketing
    and products to individual investors. While this can increase access
    and choice, such differential marketing and behavioral prompts raise
    new questions about potential conflicts within the brokerage, wealth
    management, and robo-advising spaces, particularly if and when
    brokerage or investment advisor models are optimized for the platform's
    revenue and data collection.
        These models also could inadvertently reflect historical biases
    embedded in data sets that may be proxies for protected
    characteristics, like race and gender.
        Advances in predictive data analytics also could raise some
    systemic risk issues when we apply new models and artificial
    intelligence across our capital markets. This could lead to greater
    concentration of data sources, herding, and interconnectedness, and
    potentially increase systemic risk. We've just put out a request for
    comment on digital engagement practices.
    Issuers and Issuer Disclosure
        The third theme relates to issuers and issuer disclosure.
    Disclosures
        Since the 1930s, when Franklin Delano Roosevelt and Congress worked
    together to reform the securities markets, there's been a basic bargain
    in our capital markets: investors get to decide what risks they wish to
    take. Companies that are raising money from the public have an
    obligation to share information with investors on a regular basis.
        Those disclosures changes over time. Over the years, we've added
    disclosure requirements related to management discussion and analysis,
    risk factors, executive compensation, and much more.
        Today's investors are looking for consistent, comparable, and
    decision-useful disclosures around climate risk, human capital, and
    cybersecurity. I've asked staff to develop proposals for the
    Commission's consideration on these potential disclosures. These
    proposals will be informed by economic analysis and will be put out to
    public comment, so that we can have robust public discussion as to what
    information matters most to investors in these areas.
        Companies and investors alike would benefit from clear rules of the
    road. I believe the SEC should step in when there's this level of
    demand for information relevant to investors' investment decisions.
    Special Purpose Acquisition Companies, China, and 10b5-1 Plans
        There are three other important topics relating to issuers that we
    have prioritized at the SEC.
        First, given the surge in special purpose acquisition companies
    (SPACs), I have asked staff for recommendations about enhancing
    disclosures in these investments. There are a lot of fees and potential
    conflicts inherent within SPAC structures, and investors should be
    given clear information so that they can better understand the costs
    and risks.
        Second is related to China. We have another basic bargain in our
    securities regime, which came out of Congress on a bipartisan basis
    under the 2002 Sarbanes-Oxley Act. If you want to issue public stock in
    the U.S., the firms that audit your books have to be subject to
    inspection by the Public Company Accounting Oversight Board. While more
    than 50 jurisdictions have complied with this requirement, two do not:
    China and Hong Kong.
        Once again on a bipartisan basis, Congress last year said that it's
    time for all jurisdictions around the world to comply with Sarbanes-
    Oxley. The SEC has acted quickly to meet our requirements under the
    Holding Foreign Companies Accountable Act.
        Further, we are working to enhance disclosures with regard to how
    Chinese companies issue securities in the U.S. Chinese companies
    conducting business in certain industries, such as internet and
    technology, are prohibited from selling their ownership stake to
    foreigners. As a workaround, they use structures called variable
    interest entities to raise capital on U.S. exchanges through shell
    companies in the Cayman Islands and other jurisdictions. We are working
    to ensure that the heightened risks related to these structures and
    other risks related to operating in China are clearly and prominently
    disclosed to investors.
        The last priority area with respect to issuers is trading by
    corporate insiders. I have asked staff for recommendations on how we
    might tighten Rule 10b5-1 to modernize this 20-year-old safe harbor and
    fill perceived gaps in our insider trading regime.
    Funds and Investment Management
        The fourth theme I will discuss is the potential reforms we are
    exploring in the funds and investment management space.
        First of all, we've seen a growing number of funds market
    themselves as ``green'', ``sustainable'', ``low-carbon'', and so on.
        I've asked staff to consider ways to determine what information
    stands behind those claims and how we can ensure that the public has
    the information they need to understand their investment choices among
    these types of funds.
        Additionally, staff are developing a proposal for the Commission's
    consideration on cybersecurity risk governance, which could address
    issues such as cyber hygiene and incident reporting.
        The third topic centers on private funds, and in particular the
    conflicts of interest their managers may have and the information they
    are providing investors about the fees they charge. I believe we can
    enhance disclosures in this area, better enabling pensions and others
    investing in these private funds to get the information they need to
    make investment decisions. Ultimately, every pension fund investing in
    these private funds would benefit if there were greater transparency
    and competition in this space.
        Fourth, following the challenges of the spring of 2020, I believe
    we can build greater resiliency in both money market funds and open-end
    bond funds. I've asked staff for recommendations to address those
    issues, building upon feedback we received on the President's Working
    Group report as well as other information.
        Given the disruptions in the nearly $5 trillion money market fund
    sector in spring 2020, particularly amongst prime money market funds, I
    believe it is time to reflect upon the reforms of 2014 and 2010 to see
    if we can further improve resiliency, particularly in times of stress.
        Given significant growth in open-end funds and some lessons learned
    last spring, I believe it also is appropriate to take a close look at
    this $5-plus trillion sector, to enhance resiliency during periods of
    stress.
    Enforcement and Examinations
        Beyond the new policy areas we are exploring, we also have robust
    enforcement and examinations regimes. About half of SEC staff work in
    these two divisions, ensuring that firms are inspected and wrongdoers
    are held accountable for their misconduct. These functions are
    essential to protecting investors, maintaining fair, orderly, and
    efficient markets, facilitating capital formation, protecting the
    competitiveness of our capital markets, and holding those who violate
    our securities laws accountable.
        Our Division of Enforcement continues to be the cop on the beat,
    build on its successes, and focus on matters important to investors and
    the marketplace in order to ensure that investors are being protected.
    We cover the entire securities waterfront--investigating and litigating
    every type of case within our remit. This fiscal year, despite our
    remote work posture, the Division of Enforcement is on track to exceed
    the number of stand-alone actions against wrongdoers.
        Moreover, our Division of Examinations continues to play the role
    of the ``eyes and ears of the Commission.'' This staff is dedicated to
    protecting investors and working families through examinations of
    investment advisers, investment companies such as mutual funds and
    exchange traded funds, broker-dealers, and other SEC registrants. This
    fiscal year, this division is again on track to complete approximately
    3,000 examinations, which are critical to ensuring that firms comply
    with our Federal securities laws and regulations.
    Conclusion
        Having started at the SEC in the spring, I have been struck by the
    sheer breadth and scope of the operations of this great agency and
    remarkable staff. The SEC's employees oversee 28,000 registered
    entities, more than 3,700 broker-dealers, 24 national securities
    exchanges, and 7 clearing agencies. \12\ A record 67 million U.S.
    families held direct and indirect stock holdings in 2019. \13\
    ---------------------------------------------------------------------------
         \12\ See Securities and Exchange Commission, ``Fiscal Year 2021
    Congressional Budget Justification--Annual Performance Plan'',
    available at https://www.sec.gov/files/secfy21congbudgjust.pdf. Numbers
    from fiscal year 2019. See Securities and Exchange Commission,
    ``National Securities Exchanges'', available at https://www.sec.gov/
    fast-answers/divisionsmarketregmrexchangesshtml.html.
         \13\ Data drawn from the public version of triennial Survey of
    Consumer Finances (SCF): https://www.federalreserve.gov/econres/
    scfindex.htm. The SCF is sponsored by the Board of Governors of the
    Federal Reserve System with the cooperation of the U.S. Department of
    the Treasury. The 2019 SCF is the most recent survey.
    ---------------------------------------------------------------------------
        As our capital markets have grown, though, the SEC has not grown to
    meet the needs of the 2020s. At the end of fiscal year 2016, the SEC
    had 4,650 people on board. Nearly 5 years later, though, that number
    had decreased by about 4 percent.
        Despite that, the agency has worked hard to keep up our mission. I
    hope you all agree that, as more Americans are accessing the capital
    markets, we need to be sure that the Commission has the resources to
    protect them.
        Thank you and I look forward to answering your questions.
            RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
                           FROM GARY GENSLER

    Q.1. In his 2020 Report to Congress, the SEC Investor Advocate
    indicated his willingness to work with Congress and other
    regulators to implement the ``Senior Investor Protection Grant
    Program'' established by Sec. 989A of the Dodd-Frank Act if
    Congress were to pass a change moving the program to the SEC
    for implementation. Do you support this change? How would the
    SEC implement the program if Congress acted to make the change?

    A.1. If Congress were to move the implementation of the Senior
    Investor Protection Grant Program to the SEC, I would welcome
    the addition of this function to the SEC's other important
    responsibilities. In order to implement the program, we would
    need additional resources for Commission offices to support
    implementation and administration, as well as the appropriation
    to fund the grants. The amount of resources required would
    depend on the size of the grant program that is ultimately
    approved.

    Q.2. In 2013, the Commission proposed rules to enhance
    transparency in the marketplace for so-called private
    offerings, but the proposal was never finalized. Since then the
    market for private offerings has continued to grow, but without
    sufficient transparency. What are some ways for the Commission
    to address this information deficit and enhance investor
    protection?

    A.2. As indicated on the spring regulatory agenda, the Division
    of Corporation Finance is considering ways to further update
    the Commission's rules related to exempt offerings to more
    effectively promote investor protection, including ensuring
    appropriate access to and enhancing the information available
    regarding Regulation D offerings. Division staff will continue
    to study these issues and make recommendations to the
    Commission.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                           FROM GARY GENSLER

    Q.1. At the Banking Committee hearing on September 14, 2021, in
    response to questions, you stated ``I agree with you that some
    of these tokens have been deemed to be commodities. Many of
    them are securities.'' Please identify the specific
    characteristics that distinguish a cryptocurrency that is a
    security from one that has been deemed a commodity.

    A.1. Congress established the definition of a security, which
    includes about 20 items, like stock, bonds, and notes. One of
    the items is an investment contract. The Supreme Court took up
    the definition of an investment contract, stating that it
    exists when ``a person invests his money in a common enterprise
    and is led to expect profits solely from the efforts of the
    promoter or a third party.'' The Supreme Court has repeatedly
    reaffirmed this Howey Test. Thus it depends upon the particular
    facts and circumstances, whether any particular financial
    instrument, including a crypto asset, is being offered or sold
    as a security. The SEC's Section 21(a) 2017 Report of
    Investigation on The DAO and subsequent settled enforcement
    orders set forth the SEC's views on how the Federal securities
    laws apply to particular crypto assets. Under the Commodities
    Exchange Act, derivatives on commodities that are not
    securities are subject to the CFTC's exclusive jurisdiction.

    Q.2. At the same hearing, I asked whether stablecoins that are
    linked to the dollar and lack any inherent expectation of
    profit are securities. Your response was that ``they may well
    be securities.''
        Is it your contention that such a stablecoin constitutes an
    ``investment contract'' and is therefore a security? If so,
    could you please explain why you believe such a stablecoin
    would meet the ``expectation of profit'' prong of the Howey
    test? \1\
    ---------------------------------------------------------------------------
         \1\ SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
    ---------------------------------------------------------------------------
        If your response is that such a stablecoin may be a
    security under one of the other types of securities listed in
    the definition of a security in Section 2(a)(1) of the
    Securities Act (U.S.C. 77b(a)(1)), please specify which type
    and explain your analysis.
        Let's say there is a proposed stablecoin called
    ProposedCoin that is linked to the dollar and the holder of
    ProposedCoin does not expect any profit or return from holding
    ProposedCoin. Underlying dollars received by ProposedCoin will
    be held in multiple FDIC-insured bank accounts held at
    thousands of Federal or State-charted banks throughout the
    country. Holders intend to use ProposedCoin as a medium of
    exchange for goods and services within the ProposedCoin
    ecosphere and do not view ProposedCoin as a means of
    investment. Is ProposedCoin a security? Why or why not? Please
    explain your analysis. Please do not address any potential
    effects of ProposedCoin on the banking system or systemic risk
    implications.
        If additional information is needed in order to determine
    whether ProposedCoin is a security, please specify what
    information is missing.

    A.2. The existing stablecoin market is worth nearly $138
    billion and is embedded in cryptotrading and lending platforms.
    Though they represent only about 5 percent of all crypto
    assets, more than 75 percent of trading on all cryptotrading
    platforms occurred between a stablecoin and some other token.
        While I appreciate your inquiry regarding a particular
    hypothetical fact pattern, there are many facts that come into
    play when determining whether any particular financial
    instrument is or is not a security. As the President's Working
    Group report on stablecoins notes, ``stablecoins, or certain
    parts of stablecoin arrangements, may be securities,
    commodities and/or derivatives.'' Thus, the use of stablecoins
    presents a number of public policy challenges with respect to
    protecting investors.
        Stablecoins may facilitate those seeking to sidestep a host
    of public policy goals connected to our traditional banking and
    financial system, such as anti-money laundering, tax
    compliance, sanctions compliance, and other safeguards against
    illicit activity. We at the SEC will be working with our
    sibling regulators, including the CFTC, to deploy the full
    protections of the law to these products and arrangements where
    appropriate.

    Q.3. At the September 14, 2021, hearing, you referenced that
    the SEC had previously taken the position, upheld in the
    courts, that the acquisition interests in whiskey caskets were
    securities. In what ways are interests in whiskey caskets are
    comparable to interests in stablecoins for purposes of
    analyzing whether a security exists. For example, is each
    whiskey casket, and its contents, viewed as indistinguishable
    from other whiskey caskets? If not, would that analysis apply
    comparably to stablecoins within a particular cryptocurrency?

    A.3. Congress created a definition of security that is intended
    to be broad, in order to encompass new and different types of
    investments that are presented to investors and that invoke the
    protections of the Federal securities laws. The definition of
    security includes ``investment contract'' among the list of
    other types of securities. Whether a particular instrument is
    within the definition of security is based on the facts and
    circumstances. As it relates to investment contracts, the U.S.
    Supreme Court's Howey case and subsequent case law have found
    that an ``investment contract'' exists when there is the
    investment of money in a common enterprise with a reasonable
    expectation of profits to be derived from the efforts of
    others.
        For example, in the late 1960s and early 1970s, the
    Commission published releases that warned about investment
    contracts that were sold in the form of whiskey warehouse
    receipts. In the whiskey warehouse scenario, the promoters sold
    receipts to finance the aging and blending processes of Scotch
    whiskey, where purchasers expected a return from the promoter's
    efforts in developing and selling the Scotch. These cases
    highlight the fact that whether something is a security or not
    will depend on the economic reality of the transaction or
    product, not on any name or label given.

    Q.4. Please list all no-action letters, arranged in
    chronological order, issued since January 1, 2021, through the
    date of your response, that reference cryptocurrencies, tokens,
    digital assets, and similar items. Please also provide the
    number of pending no-action letter requests that involve such
    items.

    A.4. All issued no-action letters are publicly available on the
    SEC's website. A list of digital asset-related staff no-action
    letters can be found at the SEC's website at https://
    www.sec.gov/finhub under the ``Blockchain/Distributed Ledger''
    section and ``Regulation, Registration, and Related Matters''
    drop-down tab. More specifically, there have been a number of
    SEC staff no-action letters issued that relate to
    ``cryptocurrencies, tokens [and] digital assets,'' including
    staff letters to TurnKey Jet, Inc., Pocketful of Quarters,
    Inc., Paxos Trust Company, LLC, and IMVU, Inc. Staff also
    issued a no-action letter to the Financial Industry Regulatory
    Authority (FINRA), and the Commission published a no-action
    statement, relating to the custody of digital asset securities
    by special purpose broker-dealers. There have been no such no-
    action letters issued since January 1, 2021.
        Pending no-action inquiries with the staff are nonpublic
    and in most cases are submitted to the staff subject to claims
    of confidential treatment. As pending inquiries are not staff
    actions that are public, I am unable to provide any information
    about them.

    Q.5. Please list all exemptive orders, arranged in
    chronological order, issued since January 1, 2021, through the
    date of your response, that reference cryptocurrencies, tokens,
    digital assets, and similar items. Please also provide the
    number of pending applications for exemptive orders that
    involve such items.

    A.5. The SEC has not issued any exemptive orders that reference
    cryptocurrencies, tokens, digital assets, or similar items
    during the period between January 1, 2021, and November 23,
    2021.
        Pending inquiries, including requests for exemptions from
    applicable provisions of the Federal securities laws are,
    unless required to be submitted publicly, generally nonpublic
    and in most cases submitted to the staff subject to claims of
    confidential treatment. I am unable to provide any information
    about pending applications for exemptive orders that are
    nonpublic. I am aware of one pending public request, which can
    be found here: https://www.sec.gov/Archives/edgar/data/1009268/
    000095010321008030/dp151409-406b.htm.

    Q.6. Please list all publicly disclosed enforcement actions,
    arranged in chronological order, taken since January 1, 2021,
    through the date of your response, that reference
    cryptocurrencies, tokens, digital assets, and similar items.
        Which of these actions identify a specific cryptocurrency,
    token, or digital asset that is a security?

    A.6. These are matters of public record, and there is a list of
    such actions, and the information requested on the SEC's
    website at https://www.sec.gov/spotlight/cybersecurity-
    enforcement-actions. The SEC's complaints and orders in those
    actions are also a matter of public record and are available on
    the SEC's homepage at the link above. The SEC's complaints and
    orders in those actions are also a matter of public record and
    are available on the SEC's homepage at the link above. The
    actions and trading suspensions filed since January 1, 2021,
    are listed below for convenience.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Q.7. Please list all guidance materials posted to sec.gov or
    investor.gov since January 1, 2021, through the date of your
    response that reference cryptocurrencies, tokens, digital
    assets, and similar items. You may omit any items listed in
    response to the prior three questions.

    A.7. Statements and other materials relating to digital assets
    are available to the public from our website homepage on the
    sec.gov and investor.gov websites. Click through: SEC.gov/
    Strategic Hub for Innovation and Financial Technology (FinHub);
    Investor.gov/Spotlight on Initial Coin Offerings and Digital
    Assets.
        Statements since January 1, 2021, include:

            Risk Alert: The Division of Examinations' Continued
            Focus on Digital Asset Securities.
            Staff Statement on Funds Registered Under the
            Investment Company Act Investing in the Bitcoin Futures
            Market.
            Funds Trading in Bitcoin Futures--Investor Bulletin.
            Digital Asset and ``Crypto'' Investment Scams--Investor
            Alert.
            President's Working Group on Financial Markets, the
            Federal Deposit Insurance Corporation, and the Office
            of the Comptroller of the Currency Report on
            Stablecoins.
            Statement by Chair Gary Gensler on President's Working
            Group Report on Stablecoins.

    Q.8. You recently stated in an August 5, 2021, letter to
    Senator Warren that the public would benefit from ``additional
    (Congressional) authority to write rules for and attach
    guardrails to crypto trading and lending.'' Do you believe the
    SEC needs additional Congressional authority to properly
    regulate the digital asset marketplace?

    A.8. I have stated before that I believe we need additional
    authorities to prevent crypto asset-related transactions,
    products, and platforms from falling between regulatory cracks.
        Additional SEC regulatory authority over cryptotrading and
    lending platforms and intermediaries could aid the SEC's
    ability to prevent fraud and abuse and promote investor and
    market protection. I have asked SEC staff, working with our
    fellow regulators, to work along two tracks. First, I have
    asked them how we can work with other regulators under our
    current authorities to best bring investor protection to these
    markets. Second, I've asked them what gaps we might need
    Congress' assistance to fill.

    Q.9. I want to learn more about your thoughts on the threshold
    for a token to be deemed decentralized. In a 2018 New York
    Times article, you spoke about the decentralization of Ethereum
    (ETH). As the article lays out, ``Mr. Gensler said Ether could
    have more problems because the first Ether tokens were sold in
    2014, before the network was functional, by the Ethereum
    Foundation. Ether could get off the hook, Mr. Gensler said,
    because its development has been more decentralized recently,
    and new Ether tokens are now given out to so-called miners
    through a network.'' \2\ Meanwhile, you have also repeatedly
    said that you agree with former SEC Chair Clayton's statement
    that he has yet to see an initial coin offering that was not a
    security.
    ---------------------------------------------------------------------------
         \2\ https://www.nytimes.com/2018/04/22/technology/gensler-mit-
    blockchain.html
    ---------------------------------------------------------------------------
        I highlight these two instances because to me it appears
    that you believe ETH transitioned from a security to a
    commodity. The concept that ETH can transition to a commodity
    because ``its development has been more decentralized'' appears
    to conflict with your past statements that all ICO tokens are
    securities. I understand there are pending court cases that may
    address this very issue, but as we await decisions in these
    cases, can you clarify your position as to when a token is
    sufficiently decentralized in light of your previous
    statements?

    A.9. Though I am unable to comment about any particular crypto
    asset or project, I find myself generally agreeing with former
    SEC Chairman Jay Clayton when he testified in 2018: ``To the
    extent that digital assets like [initial coin offerings, or
    ICOs] are securities--and I believe every ICO I have seen is a
    security--we have jurisdiction, and our Federal securities laws
    apply.'' Purchasers of ICO tokens generally are buying these
    tokens anticipating profits, and there's a small group of
    entrepreneurs and technologists standing up and nurturing the
    projects. I believe we have a cryptomarket now where many
    tokens may be unregistered securities, without required
    disclosures or market oversight.
        The U.S. Supreme Court's Howey case and subsequent case law
    have found that an ``investment contract'' exists when there is
    the investment of money in a common enterprise with a
    reasonable expectation of profits to be derived from the
    efforts of others.

    Q.10. I understand from your previous remarks that a Bitcoin
    exchange-traded fund (ETF) approval is unlikely to occur soon
    given your concerns around market structure and volatility.
    However, even with these concerns being voiced publicly over 20
    companies have applied to launch a Bitcoin ETF due to the
    strong amount of interest cited by U.S. institutions. We have
    seen regulatory bodies in Canada, Germany, Switzerland and
    Sweden approve bitcoin ETPs, and many U.S. investors are
    finding ways to access these products in lieu of the absence of
    an SEC-approved domestic product.
        What are your views on other international regulators
    approving these bitcoin ETPs?

    A.10. Various international jurisdictions have different legal
    standards and processes for consideration of new investment
    products, including proposed exchange-traded products that may
    be based on bitcoin. Our staff continues to monitor
    developments in other jurisdictions with respect to bitcoin-
    focused investment vehicles and has engaged with fellow
    international regulators on their approaches to potential
    bitcoin-based investment vehicles and ongoing monitoring of
    such vehicles if they exist. As fellow regulators, our staff
    seeks to learn from the experiences of others. However, actions
    in the other jurisdictions are not binding on U.S. regulators,
    and our staff continues to follow applicable legal standards
    and processes under the Federal securities laws when
    considering bitcoin-focused investment products.

    Q.11. Is there a role Congress can play in hopes of making
    bitcoin ETPs (including an ETF) happen here in the United
    States?

    A.11. I welcome Congress' interest and input on the prospect of
    bitcoin ETPs. As noted above, our staff continues to follow
    applicable legal standards and processes under the Federal
    securities laws when considering bitcoin-focused investment
    products. That being said, the markets for actual bitcoin
    itself today are largely unregulated. This lack of regulatory
    oversight and surveillance leads to concerns about the
    potential for fraud and manipulation. Congress could bring the
    bitcoin markets under the U.S. regulatory umbrella, which could
    be helpful in our consideration of bitcoin ETPs.

    Q.12. You stated in a recent speech that you look forward to
    reviewing filings of ETFs registered under the Investment
    Company Act, adding that you look forward to the filings
    ``particularly if those are limited to these CME-traded Bitcoin
    futures.'' \3\ Can you please explain why you look forward to
    evaluating CME-traded Bitcoin futures but do not express the
    same enthusiasm for approving a Bitcoin spot exchange-traded
    product (ETPs), particularly when they both are based upon the
    same underlying spot Bitcoin markets? Please also explain
    whether your views also apply to the submission of proposed
    listing rule changes for national securities exchanges
    regarding Bitcoin-related ETPs and ETFs.
    ---------------------------------------------------------------------------
         \3\ https://www.sec.gov/news/public-statement/gensler-aspen-
    security-forum-2021-08-03

    A.12. The first of the bitcoin futures ETFs have gone effective
    and are operating. The Commission considers all exchange-
    ---------------------------------------------------------------------------
    trading products under the standards applicable to them.

    Q.13. In December 2020, the SEC put out a statement and request
    for comment regarding the custody of digital asset securities
    by special purpose broker-dealers (SPBDs). The statement
    requires the SPBD to limit its business to ``dealing in,
    effecting transactions in, maintaining custody of, and/or
    operating an ATS [alternative trading system] for digital asset
    securities.'' \4\ Several submitted comments have noted that
    requiring a broker-dealer to bifurcate its operations to be
    able to deal separately with digital asset securities is
    unnecessary and could lead to additional operational risk for
    the broker-dealer, among other challenges. Is the SEC
    considering revisions to its statement to remove the
    requirement to bifurcate a broker-dealer's operations for the
    purposes of acting as a custodian of digital asset securities?
    ---------------------------------------------------------------------------
         \4\ https://www.sec.gov/rules/policy/2020/34-90788.pdf

    A.13. In the December 2020 statement, the Commission expressed
    certain concerns regarding the custody of crypto asset
    securities and the potential ramifications that would result
    from the loss or theft of crypto asset securities. The period
    in which the statement and request for comment is in effect
    will provide the Commission and its staff an opportunity to
    gain additional insight into the evolving standards and best
    practices with respect to custody of crypto asset securities.
    During this 5-year period, the Commission will continue to
    evaluate its position on an ongoing basis and will consider
    comments to inform any future rulemaking or other Commission
    ---------------------------------------------------------------------------
    action in this area.

    Q.14. Recent press articles have discussed high fees being
    charged to public companies in connection with distribution of
    proxy materials. Historically, these have been set according to
    a fee schedule adopted by the New York Stock Exchange (NYSE).
        Earlier this year, the SEC rejected a proposed rule change
    by NYSE to cease setting a fee schedule.
        What steps are being taken to lower these costs,
    particularly as more proxy materials are being distributed
    electronically?
        Some service providers who fulfill brokers' obligations to
    distribute proxy materials impose an additional ``suppression
    fee,'' which results in the service provider receiving a higher
    fee for electronic distributions than for paper mailings.
    Please explain whether charging higher fees for electronic
    distributions is in the best interests of investors.

    A.14. Thank you for your interest in NYSE's schedule of proxy
    distribution fees. I agree that these fees present important
    issues. An NYSE petition for Commission review of staff's
    disapproval of an NYSE proposal to remove the fee schedule from
    its rules is before the Commission. I'm looking forward to
    learning more about these issues and appreciate your
    engagement.

    Q.15. I have previously suggested to the SEC that it make
    permanent the relief it granted for allowing virtual meetings,
    rather than in-person, for investment company boards under the
    Investment Company Act. Please discuss whether you intend to
    add this project to the SEC's next regulatory agenda.

    A.15. The Investment Company Act requires certain board votes
    to be cast in person. The Commission has at times granted
    temporary industrywide relief from this requirement in response
    to various national emergencies, including the COVID-19
    pandemic. The Commission's exemptive authority depends on,
    among other things, the exemption being consistent with the
    purposes intended by the provisions of the Investment Company
    Act. The Commission could consider applications for in-person
    voting relief for appropriate situations beyond emergencies, as
    its exemptive authority permits.

    Q.16. The Consolidated Appropriations Act, 2021, Public Law No.
    116-260, instructed the SEC to deliver two reports about small
    issuers by June 2021--one on analyst research \5\ and one about
    the effects of the 10 percent limitation on investments by
    investment companies. \6\ These reports are now overdue. What
    is the estimated timeframe for delivery of these reports?
    ---------------------------------------------------------------------------
         \5\ Division Q, Sec. 106.
         \6\ Division Q, Sec. 107.

    A.16. SEC staff are in the process of preparing the requested
    reports based on a review of relevant legal and regulatory
    requirements, academic literature, and available data. These
    are important topics that require careful consideration and
    evaluation of a number of issues. We are working diligently to
    ---------------------------------------------------------------------------
    complete the reports as soon as possible.

    Q.17. In your responses to a question for the record from your
    confirmation hearing, you stated that you would ``work with
    fellow Commissioners and SEC staff to eliminate unnecessary
    costs [on public companies] where possible.'' \7\ Please list
    the most promising items to eliminate unnecessary costs on
    public companies that you have identified to date.
    ---------------------------------------------------------------------------
         \7\ Gary Gensler's March 5, 2021, response to Senator Toomey's
    question for the record, #14, for Senate Banking Committee's March 2,
    2021, hearing, ``Nominations of Gary Gensler and Rohit Chopra'',
    available at https://www.banking.senate.gov/imo/media/doc/
    Gensler%20Resp%20to%20QFRs%203-2-21.pdf.

    A.17. Consistent with our statutory mandates to consider
    efficiency, competition, and capital formation alongside
    investor protection, we continue to strive to eliminate
    unnecessary costs in our rules. One recent example is the
    Commission's rule to modernize how filing fees are reported,
    calculated, and paid. We also released two proposed rules for
    public comment increasing the use of electronic filing for
    submissions, which we expect will expedite and ease the filing
    process going forward. We will continue working to eliminate
    ---------------------------------------------------------------------------
    unnecessary costs as we consider future rules.

    Q.18. In your responses to a question for the record from your
    confirmation hearing, you stated that you would ``holistically
    review capital formation rules related to small and medium-
    sized companies and make individualized determinations about
    whether to preserve, expand or revise such rules.'' \8\
    ---------------------------------------------------------------------------
         \8\ Id. at #18.
    ---------------------------------------------------------------------------
        What are the most promising items you have identified so
    far to facilitate capital formation for small and mid-size
    companies?
        If you have not completed this review, please provide an
    estimated timeframe for its completion.

    A.18. Small and medium-sized companies need access to our
    capital markets to fund innovations and scale their operations.
    We are continuously looking at what is working, what barriers
    may be preventing the facilitation of capital formation, and
    how investors are faring and being protected in these markets.
    As noted on the Spring 2021 regulatory agenda, staff in the
    Division of Corporation Finance are considering recommendations
    to the Commission on ways to further update the Commission's
    rules related to exempt offerings. In addition, our Office of
    the Advocate for Small Business Capital Formation has been
    publishing new educational content to help small businesses and
    their investors demystify the offering process, thereby
    facilitating capital formation and promoting compliance. As
    part of that initiative, the staff recently released a new
    interactive capital raising navigator tool on sec.gov to help
    small businesses and their investors navigate their options for
    funding small businesses.

    Q.19. Any change to the current wealth and income thresholds in
    the Regulation D definition of accredited investor may have a
    relatively larger impact on smaller and rural communities where
    the cost of living and incomes are lower than in metropolitan
    areas. This could complicate the ability of entrepreneurs in
    non-urban areas to raise capital from investors located in
    those areas. If you intend to pursue changes to the accredited
    investor thresholds, how will you ensure it does not become
    more difficult for companies to raise money outside of the
    largest cities?

    A.19. Historically, the accredited investor definition has
    generally used wealth and income based criteria as proxies to
    determine those persons whose financial sophistication may
    render certain protections of the Securities Act's registration
    process superfluous. The Commission recently expanded the
    definition of accredited investor to provide additional
    measures for establishing an individual's financial
    sophistication that are not connected to their annual income or
    net worth.
        The Dodd-Frank Act directs the Commission to review the
    accredited investor definition at least every 4 years to
    determine whether the definition should be modified or
    adjusted. The next required review is due to be completed no
    later than 2023. I expect the Commission will carefully review
    both how effectively the wealth- and income-based criteria of
    the accredited investor definition--along with the
    effectiveness of the recently adopted amendments--are serving
    their intended regulatory function and what impact any changes
    in those thresholds would have.

    Q.20. In your responses to a question for the record from your
    confirmation hearing, you stated that you would ``work to
    improve liquidity for thinly traded stocks of smaller
    companies.'' \9\ Please describe how you intend to consider
    these concerns as part of your market structure review.
    ---------------------------------------------------------------------------
         \9\ Id. at #19.

    A.20. We will take the liquidity concerns around thinly traded
    securities into consideration as we continue to review U.S.
    ---------------------------------------------------------------------------
    market structure.

    Q.21. In your responses to a question for the record from your
    confirmation hearing, you stated that you would ``review . . .
    the SEC's proposed Exemptive Order issued last year that would
    exempt certain `finders' from broker registration
    requirements'' and determine if further action is appropriate.
    \10\ Please provide an update on your review of the proposed
    Exemptive Order.
    ---------------------------------------------------------------------------
         \10\ Id. at #21.

    A.21. The regulatory status of ``finders'' has been a long-
    standing issue in the area of broker regulation. The Commission
    received a wide range of comments in response to the proposed
    Exemptive Order. SEC staff are considering the comments
    received as they continue to evaluate potential appropriate
    ---------------------------------------------------------------------------
    next steps to recommend to the Commission.

    Q.22. In your responses to a question for the record from your
    confirmation hearing, you stated that you would ``more
    thoroughly'' evaluate former SEC Chairman Clayton's December
    2020 letter to the SEC Asset Management Advisor Committee
    regarding ``Thoughts on the Future Progress of Private
    Investment Subcommittee''. \11\ This letter outlined ways that
    the SEC could expand retail investor exposure to private equity
    and venture capital, including through a diversified target
    date retirement fund. Please provide an update on your review
    of the ideas set forth in this letter.
    ---------------------------------------------------------------------------
         \11\ Id. at #22.

    A.22. The Private Investments Subcommittee of the AMAC issued a
    Final Report and Recommendations on September 27, 2021. \12\
    The staff from the SEC's Division of Investment Management is
    reviewing the final report and its recommendations, and I look
    forward to their input.
    ---------------------------------------------------------------------------
         \12\ Available at Final Recommendations and Report of the Private
    Investments Subcommittee (sec.gov).

    Q.23. On June 1, 2021, the SEC's Division of Corporation
    Finance issued a statement stating that it would not recommend
    enforcement actions to the SEC based on the 2020 amendments for
    proxy voting advice businesses, entitled ``Exemptions From the
    Proxy Rules for Proxy Voting Advice''.
        Please explain why it is appropriate for recipients of
    proxy voting advice distributed by firms like Institutional
    Shareholder Services (ISS) and Glass Lewis to not receive
    disclosure about any conflicts of interest.
        Please explain why it is appropriate to exempt ISS, Glass
    Lewis, and other proxy voting advisory firms from possible SEC
    enforcement if they distribute fraudulent and misleading
    information in connection with their advice.

    A.23. We have heard from market participants who use the proxy
    advisory firms about the rules' current and future possible
    impact on the independence, timeliness, and costs of the
    advice.
        Last Wednesday, November 17th, the Commission voted to
    propose amendments to these rules. Those proposals are tailored
    to address the independence, timeliness, and cost concerns
    raised by clients of proxy advisory firms and the confusion
    around sources of liability. The proposals would make no change
    to the conflict of interest disclosure requirements of the 2020
    amendments. The release further clarifies, but does not alter,
    the application of the antifraud provisions of our proxy rules
    to proxy voting advice. These proposals are now in the notice
    and comment process and we encourage the public to share their
    views with the Commission.

    Q.24. To the extent that the Internal Revenue Code is amended
    to eliminate the current tax treatment for ETFs and their
    investors, will that reduce returns for long-term buy-and-hold
    investors that hold ETF shares in nonretirement accounts?

    A.24. I understand that the Code currently does not require
    ``regulated investment companies'' to realize capital gains
    when they distribute property in response to redemption
    requests and that the proposed amendment would remove this
    exception. Accordingly, the proposed amendment may change when
    a shareholder of an investment company that uses in-kind
    redemptions would recognize capital gains. This change is more
    likely to affect ETF shareholders than mutual fund shareholders
    because many ETFs use in-kind redemptions, while mutual funds
    generally do not.

    Q.25. My office has received concerns that career SEC staff are
    waiting for direction from the SEC Chair's office before
    proceeding on no-action letters and similar requests involving
    technical interpretations of the Federal securities laws and
    SEC rules. In some cases, the requestors had been working with
    the SEC staff for a significant period of time. For example, my
    office is aware of one request for no-action relief involving
    the application of Sections 13 and 16 of the Securities
    Exchange Act of 1934 to authorized participants in connection
    with non-fully transparent active exchange-traded funds that
    have been already approved by the SEC. What steps are you
    taking to ensure that career SEC staff can resolve pending
    requests on such technical issues?

    A.25. The Commission staff continues to review and issue no-
    action and similar requests, with numerous requests processed
    in the last few months. As part of its review, the staff
    considers investor protection concerns as well as the
    complexity and the novel nature of the issues raised by the
    request. The staff continues working to expeditiously review
    pending requests and to complete its review in a manner
    consistent with the Commission's investor protection mandate.

    Q.26. In May 2021, the Federal Housing Finance Authority (FHFA)
    finalized a rule that requires Fannie Mae and Freddie Mac
    (each, an ``Enterprise'') to develop plans to facilitate their
    rapid and orderly resolution in the event FHFA is appointed
    receiver. 86 FR 23,577 (May 4, 2021). These resolution plans
    are intended to, among other things, ``foster[] market
    discipline by making clear that no extraordinary Government
    support will be available to indemnify investors against losses
    or fund the resolution of an Enterprise.'' Id. at 23,580.
    Specifically, ``[i]n developing a resolution plan, each
    Enterprise shall: . . . [n]ot assume the provision or
    continuation of extraordinary support by the United States to
    the Enterprise to prevent either its becoming in danger of
    default or in default (including, in particular, support
    obtained or negotiated on behalf of the Enterprise by FHFA in
    its capacity as supervisor, conservator, or receiver of the
    Enterprise, including the Senior Preferred Stock Purchase
    Agreements entered into by FHFA and the U.S. Department of the
    Treasury on September 7, 2008, and any amendments thereto).''
    12 CFR 1242.5(b)(2). Related to this, Treasury's Housing Reform
    Plan released in September 2019 recommended that ``[a] credible
    resolution framework can ensure that shareholders and unsecured
    creditors bear losses, thereby protecting taxpayers against
    bailouts, enhancing market discipline, and mitigating moral
    hazard and systemic risk.'' In light of FHFA's policy that,
    notwithstanding the Senior Preferred Stock Purchase Agreements,
    unsecured creditors of each Enterprise should be at risk of
    loss upon an insolvency event affecting the Enterprise, why
    should SEC regulations governing money market mutual funds,
    registration requirements, or other market activity continue to
    treat securities issued by the Enterprises in a manner similar
    to securities issued by the U.S. Treasury?

    A.26. The Investment Company Act defines ``Government
    securities'' to include any security issued by the United
    States, or by a person controlled or supervised by and acting
    as an instrumentality of the U.S. Government pursuant to
    Congressional authorization. \13\ The Enterprises currently are
    in conservatorship, and FHFA, an agency of the U.S. Government,
    is the conservator of each Enterprise. \14\ If and when plans
    for ending conservatorship are developed, SEC staff would
    expect to consider any questions regarding the treatment of
    securities issued by the Enterprises under the Act and its
    rules as they arise.
    ---------------------------------------------------------------------------
         \13\ Investment Company Act 2(a)(16).
         \14\ The Enterprises are federally chartered housing finance
    enterprises whose purposes include providing liquidity, stability, and
    affordability to the residential mortgage market. See FHFA, Fannie Mae
    and Freddie Mac, https://www.fhfa.gov/about-fannie-mae-freddie-mac.
    FHFA was appointed by its Director as conservator of each Enterprise on
    Sept 8, 2008. See FHFA, History of Fannie Mae and Freddie Mac
    Conservatorships, https://www.fhfa.gov/Conservatorship/Pages/History-
    of-Fannie-Mae-Freddie-Conservatorships.aspx.
    ---------------------------------------------------------------------------
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                   SENATOR MENENDEZ FROM GARY GENSLER

    Q.1. Dodd-Frank Section 1504 introduced a disclosure
    requirement for mining, oil, and gas companies requiring them
    to disclose payments made to foreign Governments. The SEC
    issued a strong rule implementing this provision in 2016 which
    was then disapproved via CRA by Congress. In 2020, the SEC
    voted to implement a new, much weaker rule. In particular, the
    2020 rule fails to properly carry out the Congressional intent
    of fighting corruption and protecting investors. Additionally,
    the rule falls short of international standards and redefines
    the term ``project'' in a way that does not align with other
    jurisdictions.
        Given this, would the SEC commit to amending the 2020 rule
    to better align with global standards and meet Congressional
    objectives?

    A.1. As noted in the 2021 Unified Regulatory Agenda, the
    Division of Corporation Finance is currently considering
    recommending that the Commission review the rules under Section
    1504 of the Dodd-Frank Act to determine if additional
    amendments to the rules might be appropriate. We are actively
    monitoring developments in this area.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                 SENATOR CORTEZ MASTO FROM GARY GENSLER

    Q.1. LIBOR--How will the SEC work with companies to prepare for
    the discontinuation of LIBOR and the transition to an
    alternative reference rate?
        Is action needed from Congress to ensure a smooth
    transition from LIBOR to an alternative rate?

    A.1. SEC staff is actively working on the issue through
    engagement with the industry during meetings and examinations.
    The staff has published statements and risk alerts, including
    Staff Statement on LIBOR Transition (July 12, 2019), EXAMS Risk
    Alert--Examination Initiative: LIBOR Transition Preparedness
    (June 18, 2020), and Office of Municipal Securities Staff
    Statement on LIBOR Transition In The Municipal Securities
    Market (January 8, 2021). SEC staff participate in the
    Alternative Reference Rates Committee, including on accounting
    and regulatory issues, and routinely coordinate with domestic
    and foreign regulators.
        Federal legislation to address tough legacy USD LIBOR
    products, and to amend the Trust Indenture Act of 1939 (TIA),
    could help ensure a smooth transition from LIBOR to an
    alternative rate and lower the risk of disruptive litigation
    related to the transition--especially for those products with
    ineffective fallback provisions subject to indentures governed
    by the TIA.

    Q.2. Processing Fees--Mutual funds pay ``processing fees'' to
    deliver prospectuses and other SEC-required documents to their
    investors. Some have raised concerns that the prices charged by
    these processing fee vendors is excessively high. \1\ Is the
    SEC looking into the ``processing fee'' framework and if not,
    will you commit to its review?
    ---------------------------------------------------------------------------
         \1\ Darbyshire, Madison; Temple-West, Patrick. `` `A True
    Monopoly': Fee Fight Reveals Heft of Wall Street Linchpin Broadridge''.
    Financial Times. August 24, 2021. https://www.ft.com/content/5f912194-
    cd4e-424a-8d42-da3a98ca3836; Stoller, Matt. ''Other People's Money: The
    Email Monopoly Gouging Investors Over Shareholder Reports''. BIG.
    August 24, 2021. https://mattstoller.substack.com/p/other-peoples-
    money-the-email-monopoly

    A.2. Thank you for your interest in the ``processing fee''
    framework. I agree that these are important issues. In fact, a
    New York Stock Exchange (NYSE) petition for Commission review
    of staff's disapproval of a NYSE proposal to remove the fee
    schedule from its rules is before the Commission. I'm looking
    forward to learning more about these issues and appreciate your
    engagement.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                           FROM GARY GENSLER

    Q.1. The pandemic has changed how we live, work, and do
    business. This includes the SEC and the companies it regulates.
    These changes include regulatory relief extended as a practical
    matter due to the remote nature of work during the pandemic,
    such as inspections of home offices. What regulatory activities
    do you anticipate reverting to in-person as we reach our new
    normal, and what regulatory activities can continue to be
    conducted remotely?

    A.1. Since the beginning of the pandemic, the Division of
    Examinations (EXAMS) has conducted examinations through
    correspondence to protect both the health and safety of its
    staff and those of SEC registrants. When it is safe to do,
    EXAMS expects to resume conducting examinations on-site,
    particularly where staff may benefit from in-person meetings
    and review of documents. EXAMS will likely continue to rely on
    correspondence examinations in certain instances such as where
    efficiencies can be gained from a remote presence. Further, in
    September, FINRA filed a proposed rule change with the
    Commission that would allow broker-dealers to continue to
    conduct branch office inspections remotely until June 30, 2022.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                           FROM GARY GENSLER

    Q.1. Environmental, Social, and Governance (ESG) based
    investing is the form of investing by which investment
    decisions are made based on a firm's environmental impact, its
    relationship with various communities and social agendas, and
    management culture. From 1995 through 2018, the number of
    assets in funds with ESG criteria increased from $0.6 trillion
    to $12 trillion, an increase of 2,000 percent. More than half
    of all public pension funds are now invested with ESG criteria.
        I was concerned to learn that a recent study by the Center
    for Retirement Research at Boston College found that State
    mandates and ESG investing policies reduce annual returns by 70
    to 90 basis points. As SEC Chairman, you have clearly
    telegraphed the Commission's intention develop and implement
    mandatory climate risk investment disclosure by the end of
    2021.
        Based on the findings of the Boston College study cited
    above, would you agree that by making climate risk disclosures
    mandatory the SEC will be prioritizing a political agenda over
    financial returns for Americans saving for retirement?

    A.1. Full and fair disclosure promotes efficiency,
    transparency, and competition in our markets, and is crucial to
    informed investment decision-making. It allows investors to
    decide what risks they wish to take.
        From time to time the SEC freshens up our disclosure
    regimes to reflect investor demands. Today, investors in our
    markets increasingly want to understand the climate risks of
    the companies whose stock they own or might buy. Thus, I have
    asked SEC staff to develop a proposal for climate risk
    disclosure requirements--to provide consistent, comparable, and
    decision-useful disclosures--for the Commission's
    consideration.
        In the asset management space, many funds these days brand
    themselves as ``green,'' ``sustainable,'' ``low-carbon,'' and
    so on. I've directed staff to review current practices and
    consider recommendations about whether fund managers should
    disclose the criteria and underlying data they use to market
    themselves as such.

    Q.2. In the same Boston College study, one main factor that
    researchers cited as contributing to lower returns for funds
    with ESG criteria were the increased fees associated with ESG
    disclosures and investing. ESG disclosures and investing
    requires a tremendous amount of research and trading, research
    and trading which is often provided by a cadre of Wall Street
    banks, consultants, asset managers, and advisory firms. I fear
    that ESG investing may simply be another form of active trading
    aimed at bolstering Wall Street's bottom line.
        Rather than lining the pockets of Wall Street traders and
    banks through high ESG investment fees and expenses, wouldn't
    most Americans be better served putting their money into broad
    market index funds or other instruments with very low or no
    management fees?

    A.2. All registered funds, including ESG-focused funds, are
    required to provide clear and robust disclosure of their fees
    and expenses in their registration statements. This information
    allows investors to compare fees and expenses across funds and
    make informed investment decisions. Earlier this year, the
    SEC's Office of Investor Education and Advocacy issued an
    Investor Bulletin providing investors with information about
    ESG funds. The bulletin encourages investors to ask questions
    before investing in ESG funds and carefully read all of the
    fund's available information. When selecting an investment
    product, investors should make sure they understand the fees
    and expenses they will pay for a fund. The bulletin also
    reminds investors that they should compare the fees and
    expenses of an ESG fund to other available investment options.

    Q.3. Digital assets are a new and exciting technological
    development that holds the potential to transform not just the
    finance industry, but also energy, logistics, art, and so many
    others. I know you have a background and understand the
    potential of this emerging technology sector.
        As policymakers, we must ensure the United States remains a
    leader in the world for technology and financial innovation.
    Despite this, I noted that there are no proposed rulemakings on
    the SEC's most recent Unified Agenda related to digital assets.
    For these reasons, I'm perplexed by several of your recent
    recent public announcements and actions taken by the SEC
    regarding cryptoregulation.
        Rather than releasing clear and transparent rules of the
    road for the industry, does the SEC plan to regulate via
    enforcement and one-off private staff guidance to stakeholders?

    A.3. I support innovative developments in our capital markets.
    Before starting at the SEC, I had the honor of researching,
    writing, and teaching about the intersection of finance and
    technology at the Massachusetts Institute of Technology. In
    that work, I came to believe that, though there was a lot of
    hype masquerading as reality in the cryptofield, Satoshi
    Nakamoto's innovation is real. Further, it has been and could
    continue to be a catalyst for change in the fields of finance
    and money.
        While I'm technology-neutral, I am anything but public
    policy-neutral. As new technologies come along, we need to be
    sure we're achieving our core public policy goals. In finance,
    that's about protecting investors and consumers, guarding
    against illicit activity, and ensuring financial stability.
        I also believe that innovation should not be used to
    circumvent the important investor and market protections that
    are at the heart of the SEC's mission--protecting investors,
    maintaining fair, orderly, and efficient markets, and
    facilitating capital formation. Innovation in our capital
    markets has been ongoing over many decades and such innovation
    facilitates new and effective ways to invest, trade, and raise
    capital. As innovation in financial products and markets
    further develops, we will continue to foster that development
    while assuring compliance with the Federal securities laws.

    Q.4. As we discussed during the hearing, over the last decade
    technological advancements and innovation have spurred
    competition among retail brokers, lowering costs and barriers
    to entry for retail investors. This has resulted in a younger
    and more diverse group of Americans reaping the benefits of
    stock ownership--many of them for the first time.
        The existing rules regulating the markets have worked well
    to both foster and keep up with the pace of innovation and
    competition in the marketplace. I remain concerned that the SEC
    may move prematurely, and without sufficient analysis or
    stakeholder input, to pursue proposals that would raise costs
    and curb retail investor access to the markets.
        Can you please provide additional details regarding the
    areas of regulation or market structure that, as SEC Chairman,
    you are encouraging the Commission to reexamine in an effort to
    ensure that the rules of the road are keeping pace with
    marketplace innovation?

    A.4. We can't take our leadership in capital markets for
    granted. New financial technologies continue to change the face
    of finance for investors and issuers. More retail investors
    than ever are accessing our markets. Other countries are
    developing deep, competitive capital markets as well. Because
    of rapidly changing technology and business models, I think the
    SEC needs to look for opportunities to freshen up our rules
    related to market structure to continue to maintain markets
    that are the envy in the world.
        Ultimately, promoting fair, orderly, and efficient markets
    can help reduce the cost of capital for issuers and increase
    the rate of returns for investors across each of the markets
    the SEC oversees--Treasury markets, corporate bonds, municipal
    bonds, mortgage and other asset back securities, equity
    markets, and security based swaps amongst others. This helps
    contribute to economic growth and is a competitive advantage
    for our Nation.
        I recently addressed your core question--how we might
    reexamine regulation of market structure to ensure keeping pace
    with innovation--at a talk to the Securities Industry Financial
    Market Association. \1\
    ---------------------------------------------------------------------------
         \1\ https://www.sec.gov/news/speech/gensler-sifma-110221

    Q.5. During our conversation at this hearing, one of the issues
    we both strongly agreed upon was the importance of small
    business and entrepreneurship in empowering Americans to
    accumulate wealth and achieve long-term financial stability. In
    some of your previous appearances before Congress the issue of
    business development companies, or BDCs, have been discussed.
    As you're probably well aware, there's been longstanding
    bipartisan support to reform the rules that apply to BDCs so
    they can deploy more capital to small and businesses throughout
    the country and provide the opportunity for them to grow.
        One of these issues that's arisen is known as acquired fund
    fees and expenses, or AFFE. Essentially, AFFEs require a
    misleading disclosure about the actual cost of investing in
    BDCs and basically ``double counts'' investor expense. This
    creates an unintended consequence of harming both investors and
    small businesses by closing the door to increased investment.
        This effectively discourages investment into American small
    businesses. For example, after this rule was implemented, we
    saw a decline in the number of BDCs available to invest it,
    resulting in a massive decline in investment and as such a
    decline in small business growth.
        This has harmed both BDC investors and their portfolio
    companies and has had a negative economic effect in areas that
    have a large BDC presence, like South Carolina.
        Please answer the following with specificity:
        We know that BDCs play a vital role in providing
    opportunities for investors to help encourage small business
    growth. What can you tell us about the SEC's agenda to remove
    disincentives to invest in BDCs at this point?
        Last year the SEC proposed a rulemaking that would have
    provided at least a partial fix for the AFFE problem, however
    there is bipartisan support for the SEC to go further and
    ensure that BDCs can be re-included in indices. What is the
    SEC's plan for finalizing this proposal and is your goal to
    facilitate institutional investment in BDCs?

    A.5. The Commission has an outstanding proposal addressing
    AFFE, among a number of other disclosure topics. Specifically,
    the proposal would permit funds, including BDCs that make
    limited investments in other funds to disclose AFFE in a
    footnote to the fee table and fee summary, rather than as a fee
    table line item. Comments on the proposal have been mixed, with
    some supporting and others opposing the proposed changes. The
    staff is reviewing the comments received, and I look forward to
    engaging with the team and my fellow Commissioners on this
    topic.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
                           FROM GARY GENSLER

    Q.1. Mr. Gensler, citizens and entrepreneurs alike are
    concerned the SEC will disrupt the domestic operation of the
    burgeoning crypto industry through ``regulation by
    enforcement.'' Considering the unique characteristics of crypto
    assets, namely the ability to engage with exchanges globally or
    with counterparties directly, do enforcement actions have the
    potential to do more harm than good to the investing public?

    A.1. The SEC's Division of Enforcement is responsible for
    investigating potential violations of the Federal securities
    laws and regulations and prosecuting the SEC's civil suits in
    the Federal courts as well as the SEC's administrative
    proceedings. As currently operating, I believe that
    cryptosecurities markets that are not registered or exempt from
    registration are acting outside of, and in noncompliance with,
    laws that provide important investor and market protections. I
    have asked SEC staff, working with our regulatory and law
    enforcement partners, to use our current authorities to bring
    more investor protection to these markets, including by
    prosecuting violations of the law.

    Q.2. Mr. Gensler, the SEC has been instrumental in developing
    U.S. capital markets into the global gold standard by
    addressing abuses such as market manipulation, insider trading,
    etc. Enforcement as a way to implement policy was effective, in
    part, because market actors fell under the same set of
    regulations, and citizens exclusively engaged the market
    through SEC regulated market actors. Cryptomarket structure,
    however, includes countless individuals and entities operating
    outside of the SEC's jurisdiction. Will the investing public be
    misled by the appearance that the SEC is the cop on this beat?
    More generally what, if any, assurances will the SEC be able to
    provide to citizens engaging with permissionless platforms?

    A.2. The SEC's Division of Enforcement is responsible for
    investigating potential violations of the Federal securities
    laws and regulations and prosecuting the SEC's civil suits in
    the Federal courts as well as the SEC's administrative
    proceedings. As currently operating, I believe that the
    cryptosecurities markets that are not registered or exempt from
    registration are acting outside of, and in noncompliance with,
    laws that provide important investor and market protections. I
    have asked SEC staff, working with our regulatory and law
    enforcement partners, to use our current authorities to bring
    more investor protection to these markets, including by
    prosecuting violations of the law.

    Q.3. Mr. Gensler, during the Senate Banking Committee hearing
    on oversight of the SEC, Senator Lummis inquired about
    responsible innovation. When you consider the breadth of
    products and services being deployed on permissionless
    blockchains, in your opinion do those products and services
    represent ``responsible innovation?''

    A.3. I support innovative developments in our capital markets.
    Before starting at the SEC, I had the honor of researching,
    writing, and teaching about the intersection of finance and
    technology at the Massachusetts Institute of Technology. In
    that work, I came to believe that, though there was a lot of
    hype masquerading as reality in the cryptofield, Satoshi
    Nakamoto's innovation is real. Further, it has been and could
    continue to be a catalyst for change in the fields of finance
    and money.
        While I'm technology-neutral, I am anything but public
    policy-neutral. As new technologies come along, we need to be
    sure we're achieving our core public policy goals. For those
    who want to encourage innovations in crypto, I'd note that
    financial innovations throughout history don't long thrive
    outside of public policy frameworks. In finance, that's about
    protecting investors and consumers, guarding against illicit
    activity, and ensuring financial stability.
        I also believe that innovation should not be used to
    circumvent the important investor and market protections that
    are at the heart of the SEC's mission--protecting investors,
    maintaining fair, orderly, and efficient markets, and
    facilitating capital formation. Innovation in our capital
    markets has been ongoing over many decades and such innovation
    facilitates new and effective ways to invest, trade, and raise
    capital. As innovation in financial products and markets
    further develops, we will continue to foster that development
    while assuring compliance with the Federal securities laws.

    Q.4. Mr. Gensler, are there unique opportunities for misuse or
    abuse of customer's crypto assets compared to traditional
    markets? For example, what consideration is the SEC giving to
    things like rug pulls, trading bots, and so-called
    ``extractable value?''

    A.4. The SEC's Division of Enforcement is responsible for
    investigating potential violations of the Federal securities
    laws and regulations and prosecuting the SEC's civil suits in
    the Federal courts as well as the SEC's administrative
    proceedings. As currently operating, I believe that the
    cryptosecurities markets that are not registered or exempt from
    registration are acting outside of, and in noncompliance with,
    laws that provide important investor and market protections. I
    have asked SEC staff, working with our regulatory and law
    enforcement partners, to use our current authorities to bring
    more investor protection to these markets, including by
    prosecuting violations of the law.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
                           FROM GARY GENSLER

    Q.1. I understand that mutual funds are forced to pay what some
    characterize as unreasonable ``processing fees'' to brokers
    just to have prospectuses and other SEC-required documents
    delivered to investors. These fees cost fund investors
    approximately $220 million annually, which reduces the returns
    of retail mutual fund investors--Americans saving for their
    retirement, their children's college education, and other
    important life goals. The SEC recently had an opportunity to
    reform the ``processing fee'' framework but opted instead to
    preserve the status quo. What steps might the SEC, under your
    leadership, take to right-size this regulatory system and
    protect the interests of retail fund investors?

    A.1. Thank you for your interest in the ``processing fee''
    framework. I agree that these are important issues. In fact, a
    New York Stock Exchange (NYSE) petition for Commission review
    of staff's disapproval of a NYSE proposal to remove the fee
    schedule from its rules is before the Commission. I'm looking
    forward to learning more about these issues and appreciate your
    engagement.

    Q.2. You have previously stated that bringing ``greater
    transparency and resiliency'' \1\ to the U.S. Treasury market
    it is a priority of yours. I agree that the effort to
    strengthen the U.S. Treasury market should be a top priority.
    In a recent report released by the Group of Thirty, entitled
    ``U.S. Treasury Markets; Steps Towards Increased Resilience'',
    \2\ leading market experts and academics endorsed increasing
    public post-trade transparency as a key step regulators could
    take to strengthen the Treasury market. Do you agree that steps
    should be taken to increase the post-trade transparency of U.S.
    Treasuries, bringing this market in-line with our stock,
    options, and corporate bond markets?
    ---------------------------------------------------------------------------
         \1\ https://static.politico.com/f9/3e/
    aa7bf5714cb19cea53a55c21a345/0623gensler-126251.pdf
         \2\ https://group30.org/images/uploads/publications/G30-U.S.-
    Treasury-Markets-Steps-Toward-Increased-Resilience-1.pdf

    A.2. As outlined in a recent speech at the U.S. Treasury Market
    Conference, there is much work that can be done to bring
    greater efficiency, competition and transparency; market
    integrity; and resiliency to the $23 trillion Treasury markets.
    \3\ The SEC plays a critical role in our overall efforts to
    improve the functioning of the Treasury market. I've asked
    staff to make recommendations for the Commission's
    consideration to freshen up our rules to reflect the state of
    the Treasury market today.
    ---------------------------------------------------------------------------
         \3\ https://www.sec.gov/news/speech/gensler-us-treasury-market-
    conference-20211117
    ---------------------------------------------------------------------------
        One work stream relates to data quality. Currently, the
    Trade Reporting and Compliance Engine (TRACE), a facility
    operated by FINRA, facilitates the mandatory reporting of over-
    the-counter transactions in Treasury securities. TRACE does not
    publicly disseminate any information about these individual
    transactions. Further, only broker-dealers that are registered
    with FINRA, however, report Treasury transactions to TRACE,
    leaving out major market participants like commercial banks and
    proprietary trading firms.
        I support the Fed's recently announced new rule requiring
    large banks to report transactions to TRACE. I've asked staff
    to continue to work with FINRA, the Department of the Treasury,
    and the Federal Reserve to consider further enhancements to
    TRACE. In part to help make the TRACE data set more
    comprehensive, I have directed the SEC staff to consider
    whether nonbank firms that significantly trade in the Treasury
    market should be registered as dealers with the SEC and
    required to become TRACE-reporting members of FINRA.

    Q.3. Though many in industry have asked the Federal Reserve
    over the past several years to update the outdated margin
    eligibility rules under Regulation T (i.e., which securities
    are eligible to be held on margin), the Fed has yet to act.
    Without revised guidance, many established companies that are
    not traded on a national stock exchange, including hundreds of
    community banks across the U.S., are disadvantaged because
    their stock is not margin eligible. In the past, the SEC has
    exercised authority over the Federal Reserve's margin rules as
    applied to securities of foreign companies. Will the Commission
    consider working with the Federal Reserve, or issuing updated
    guidance, to review and modernize the margin requirements so
    that investors in qualified companies can take advantage of
    margin benefits?

    A.3. I'm looking forward to working with you and your staff to
    learn more about this issue.

    Q.4. As Americans work to rebuild financially following the
    COVID-19 pandemic, Congress and Federal regulators should look
    for ways to encourage capital formation. Unfortunately data
    reveals that the number of public offerings continues to
    decline, a trend already in place prior to the pandemic. Fewer
    companies go public and those that do, often do so later in
    their life cycle, depriving investors of alpha. Investors--
    informed and able to make reasoned financial decisions--should
    be able to invest in private markets to access growth
    opportunities and diversify holdings with this asset class.
    Last year, the Commission took an important first step to
    expand the definition of accredited investor based on financial
    sophistication instead of a strict income or wealth-based test.
        Do you believe wealth and income is the only way a person
    should be able to qualify as an accredited investor?
        Will you commit to examining other metrics to allow
    investors to demonstrate financial sophistication and ability
    to assess risk, including the possibility of a test to
    determine financial sophistication?

    A.4. Historically, the accredited investor definition has
    generally used wealth and income based criteria as proxies to
    determine those persons whose financial sophistication may
    render certain protections of the Securities Act's registration
    process superfluous.
        The Commission recently expanded the definition of
    accredited investor to provide additional measures for
    establishing an individual's financial sophistication that are
    not connected to their annual income or net worth.
        The Dodd-Frank Act directs the Commission to review the
    accredited investor definition at least every 4 years to
    determine whether the definition should be modified or
    adjusted. The next required review is due to be completed no
    later than 2023. I expect the Commission will carefully review
    both how effectively the wealth- and income-based criteria of
    the accredited investor definition--along with the
    effectiveness of the recently adopted amendments--are serving
    their intended regulatory function and what impact any changes
    in those thresholds would have.

    Q.5. During the hearing last week you reiterated that major
    changes to equity market structure, including banning payment
    for order flow, are still ``on the table.'' If the SEC intends
    to ban PFOF, will you commit to considering and analyzing
    alternatives to such a ban before moving forward?

    A.5. I have not reached any conclusions with regard to equity
    market structure and have asked the staff to develop
    recommendations for consideration by the Commission. In this
    regard, I've asked staff to consider: how do we facilitate
    greater competition and efficiency on an order-by-order basis--
    when people send each order into the marketplace? I've asked
    staff to consider whether shrinking tick sizes, reevaluating
    what is included in the National Best Bid and Offer, enhancing
    disclosure, or leveling competition between trading venues and
    wholesalers could increase transparency and competition. I've
    asked staff to consider the potential conflicts of interest in
    the context of payment for order flow and on-exchange use of
    rebates. Further, such review includes consideration of
    enhancements of rule 605 with regard to order execution
    information.

    Q.6. During last week's hearing, you stated that the goal in
    equity market structure reform is to improve ``competition in
    the marketplace to lower the cost and raise the efficiency.''
    Given possible reforms you have discussed--including allowing
    exchanges to execute in sub-penny increments and updating the
    ``out of date measuring rod'' (or the NBBO) by which best
    execution is measured--could achieve the objectives of
    increased competition and efficiency, shouldn't we explore the
    impact of these ideas before contemplating out-right bans on
    business practices (like PFOF), which would clearly limit
    competition?

    A.6. As noted above, I believe that our market structure should
    provide investor orders with an opportunity for the best
    possible execution. I have not reached any conclusions in this
    area and have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.7. You have previously stated that execution firms who
    transact off-exchange get valuable information about retail
    orders that other market participants do not have and as such,
    execution firms have an improper information advantage. You may
    be aware that every trade--regardless of execution venue--must
    be immediately reported to the public tape for market wide
    dissemination and incorporation into real-time price discovery.
    While we acknowledge that scale conveys operational benefits,
    your statements suggest that you are conflating operational
    scale with an improper information advantage that harms
    competition and retail investors. Can you please elaborate on
    the data and analysis you conducted on our U.S. Equities
    markets to make those statements, including a list of factors
    you are assessing and comparing to determine whether or not one
    firm has an information advantage over another?

    A.7. As you note, executed trades in NMS stocks are publicly
    reported and disseminated. Certain off-exchange execution
    dealers that receive the great majority of retail investor
    orders, typically known as wholesalers, however, receive
    information earlier than or beyond what is publicly reported
    and disseminated. Examples of such additional information
    include: (1) information on investor orders prior to execution
    or cancellation, including the submission of nonmarketable
    limit orders that wholesalers typically route out to exchanges
    for execution, as well as investor ``stop loss'' orders (orders
    that are not executable until the stock price hits the stop
    price selected by the investor); and (2) the identity of the
    routing broker (typically a broker that focuses on retail
    investors) for executed trades. In contrast, the public reports
    of orders executed in the off-exchange market do not identify
    the wholesaler that executed the trade or the identity of the
    retail broker whose customer submitted the order.

    Q.8. You have been critical of the PFOF model, contending that
    it presents inherent conflicts of interest for broker-dealers
    and that retail customers are harmed through inferior execution
    quality. It is my understanding that among the ways retail
    brokers cure the potential conflict is to require similar PFOF
    arrangements from all of their execution partners such that all
    pay the same rate and retail brokers similarly put all of their
    execution partners in competition against one another to
    compete on execution quality--not amount of PFOF. Thus, retail
    brokers award order flow based on the a market center's ability
    to consistently provide best execution as measured by a variety
    of factors including price improvement levels, size improvement
    levels, and service levels. According to filings made to the
    SEC by broker dealers, retail investors received over $3.6
    billion in price improvement dollars from execution firms in
    2020 as measured under current SEC Rule 605 metrics.
        Do you agree that retail brokers should route orders to the
    market center where they have the highest likelihood of
    obtaining the most favorable execution for their customers?
    Why? Why not?
        Do you agree that uniform payment rates adequately mitigate
    the theoretical conflict? Why? Why not?

    A.8. I believe that our equity market structure should promote
    the opportunity for investor orders to receive best execution
    and have asked the staff to develop recommendations in this
    area. Retail brokers should route orders to the market center
    where they can be executed on the best terms reasonably
    available in the market, which is required of brokers pursuant
    to the duty of best execution they owe to their customers.
        Further, it is not clear that a uniform PFOF rate, as you
    describe it, adequately mitigates the conflict concerns raised
    by PFOF.

    Q.9. Relatedly, are you familiar with the concept of ``size
    improvement''? That's where an execution firm fills an order
    for greater size than the size available at the NBBO. For
    example, a retail customer has an order for 1,000 shares, but
    there are only 300 shares being offered at the NBBO. The
    execution firm offers ``size improvement'' by executing the
    full 1,000 share order at or better than the NBBO, giving the
    customer a better price than she would have received if the
    order were sent to an exchange. I've been told that when you
    factor in both price improvement and size improvement, retail
    investors benefited to the tune of $11 billion in 2020. This
    amount is missing from the current Rule 605 reports due to
    shortcomings in Rule 605--a shortcoming which many folks,
    including exchanges, argue should be addressed.
        Do you agree that Size Improvement is a valuable benefit
    that retail receives today? Why? Why not?
        If retail orders are forced onto exchanges, where do you
    suppose the Size Improvement would come from?

    A.9. I have not reached any conclusions with regard to equity
    market structure and have asked the staff to develop
    recommendations for consideration by the Commission. In this
    regard, I've asked staff to consider: how do we facilitate
    greater competition and efficiency on an order-by-order basis--
    when people send each order into the marketplace? I've asked
    staff to consider whether shrinking tick sizes, reevaluating
    what is included in the National Best Bid and Offer, enhancing
    disclosure, or leveling competition between trading venues and
    wholesalers could increase transparency and competition. I've
    asked staff to consider the potential conflicts of interest in
    the context of payment for order flow and on-exchange use of
    rebates. Further, such review includes consideration of
    enhancements of rule 605 with regard to order execution
    information. Your query with regard to size improvement is
    amongst questions I've asked staff to consider when making
    recommendations.

    Q.10. If the SEC were to ban PFOF, broker-dealers naturally
    would need to find alternative sources of revenue in order to
    run their businesses. I have a very difficult time
    understanding how a retail investor is better off paying $9.99
    or even $4.99 a trade than under the current framework where
    there is no commission for trading and retail investors receive
    very substantial price and size improvement from execution
    firms. Moreover, even if some brokers retained a zero
    commission model wouldn't you expect those revenues to be made
    up in less transparent ways like margin interest rates, lower
    interest rates on cash balances, inactivity fees, and other
    methods. What analysis have you and your staff done to
    determine how a return to commission-based trading will impact
    retail investors--especially lower-income investors? What data
    did you use?

    A.10. I agree that transparency is a one of the SEC's important
    tools to promote competition in the U.S. equity markets. As
    noted above, I believe that our market structure should provide
    investor orders with an opportunity for the best possible
    execution. I have not reached any conclusions in this area and
    have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.11. On multiple occasions, you have pointed out that other
    jurisdictions, including Canada and the U.K. have banned PFOF
    and forced trading onto lit exchanges. In these statements,
    you've suggested that the investor experience in those
    jurisdictions is better as a result. Can you please elaborate
    on the data and analysis you conducted to make those
    statements, including a list of factors you are assessing and
    comparing to determine that retail investor execution quality
    is better in those markets compared to the U.S.?

    A.11. I have noted that other jurisdictions have prohibited
    their brokers from accepting PFOF from off-exchange venues.
    Amongst key questions on which I have asked the staff to
    consider in developing recommendations is what we can learn
    from these other markets and how our market structure could be
    improved to provide an opportunity for retail investors to
    receive the best possible execution quality for their orders.

    Q.12. There is substantial research out there suggesting that
    the investor experience is worse in jurisdictions that have
    implemented rules forcing trades to be executed on exchanges
    rather than requiring brokerages to route orders to the market
    centers that provide the most favorable execution for the
    investor. According to an analysis by the CFA Institute, in
    Canada retail investors' average price improvement dropped 70
    percent after such rule was adopted.
        Do you believe that forcing retail orders to go to
    exchanges--rather than requiring brokerages to route based on
    best execution--will achieve the best outcome for retail
    investors? Why? Why not?
        Do you agree that forcing retail order flow to exchanges
    will be a significant financial win for exchange operators at
    the expense of retail investors? Why? Why not?

    A.12. Fair competition between market centers is essential for
    our market structure. I believe that our market structure
    should provide investor orders with an opportunity for the best
    possible execution. I have not reached any conclusions in this
    area and have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.13. You have made comments suggesting that the recent growth
    in ``off-exchange'' trading is harmful to investors, and that
    our equity markets would benefit from more trades being routed
    to lit exchanges. Do you agree that investors' orders should be
    executed wherever they are able to obtain the most favorable
    execution? Why? Why not?

    A.13. As noted above, I believe that our market structure
    should provide investor orders with an opportunity for the best
    possible execution. With regard to the equity markets, I've
    asked staff to consider: how do we facilitate greater
    competition and efficiency on an order-by-order basis--when
    people send each order into the marketplace? I have not reached
    any conclusions in this area and have asked the staff to
    develop recommendations for consideration by the Commission.

    Q.14. Under the current framework, retail brokers incentivize
    competition for order flow by rewarding execution firms that
    provide superior execution quality. Forcing more retail order
    flow to exchanges would remove this direct link which is
    necessary for brokers to hold execution firms accountable and
    thus would reduce the competition that drives the price and
    size improvement benefits that retail investors receive today.
        Do you agree that forcing retail orders on-exchange will
    reduce the retail brokers' ability to demand better price and
    size improvement benefits for retail investors? Why? Why not?
        Do you agree that forcing retail order flow to exchanges
    will be a significant financial win for exchange operators at
    the expense of retail investors? Why? Why not?

    A.14. As noted above, I believe that our market structure
    should provide investor orders with an opportunity for the best
    possible execution. I've asked staff to consider: how do we
    facilitate greater competition and efficiency on an order-by-
    order basis--when people send each order into the marketplace?
    I have not reached any conclusions in this area and have asked
    the staff to develop recommendations for consideration by the
    Commission.

    Q.15. In addition, there is hard data showing that forcing
    trades onto lit exchanges does not result in better executions
    for investors. For example, data from the SEC's Tick Size Pilot
    showed that, for the category of securities that included a
    ``Trade-At'' requirement that orders be executed on lit
    exchanges, spreads in fact widened more than other test groups.
    The same result flowed from similar ``Trade-At'' initiatives in
    other jurisdictions, such as Canada and Australia. What data
    and analysis do you have from our markets to suggest that the
    opposite outcome will occur in the U.S.?

    A.15. As noted above, I believe that our market structure
    should provide investor orders with an opportunity for the best
    possible execution. I have not reached any conclusions in this
    area and have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.16. Chair Gensler, I am sure you would agree with me that the
    proliferation of low or no-commission online trading firms has
    greatly reduced the barriers to entry for retail investors to
    access the markets. Firms like Robinhood that introduced
    commission-free trading are responsible for attracting tens of
    millions of new investors to our markets who are saving for
    college, to buy a home, or for retirement. This phenomenon--
    which was made possible by the current regulatory structure
    that promotes competition among a diverse array of market
    participants, including retail brokers and execution firms that
    compete for order flow--has often been called the
    ``democratization'' of investing and has greatly promoted
    financial inclusion in the U.S. As you are considering
    potential changes to equity market structure, will you commit
    to me that you will refrain from pursuing any drastic changes
    that will threaten the substantial gains we have made in
    promoting financial inclusion?

    A.16. New financial technologies continue to change the face of
    finance for investors and issuers. More retail investors than
    ever are accessing our markets.
        Promoting fair, orderly, and efficient markets can help
    reduce the cost of capital for issuers and increase the rate of
    returns for investors across each of these markets. This helps
    contribute to economic growth and is a competitive advantage
    for our Nation. Market integrity is about financial inclusion
    and fairness of the markets. Promoting inclusion and equal
    access facilitates greater competition among capital providers.
        As noted above, I believe that our market structure should
    provide investor orders with an opportunity for the best
    possible execution. I have not reached any conclusions in this
    area and have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.17. I am writing to ask if you have had a chance to review my
    letter submitted to you on June 9, 2021, regarding the harmful
    impacts that the proposed amendments to Rule 144 put forth
    under former Chairman Clayton will have on small businesses.
    Prohibiting the ``tacking'' of the time between the investment
    and the conversion in calculating the relevant holding period
    under Rule 144 for market-adjustable convertible loans and
    other convertible securities provided to unlisted public
    companies would lead to a significant decrease in capital.
        Have you and your staff had a chance to properly collect
    data and review how this proposed rule change could remove
    access to capital from the small and microcap markets
        What impact the disappearance of this capital will have on
    women and minority-owned businesses? If so, what are your
    findings on likely and possible adverse impacts?

    A.17. Thank you for your continued engagement on important
    aspects of Rule 144. As noted in my prior reply to your letter,
    the staff is actively working on developing recommendations for
    the Commission concerning the proposed amendment to Rule 144.
    Currently, the staff is actively reviewing public comment
    submissions in response to a request for data or studies that
    would facilitate estimating effects on access to capital, as
    well as comments on all aspects of the analysis, including the
    number of small entities that would be affected by the proposed
    amendments, the existence or nature of the potential impact of
    the proposals on small entities discussed in the analysis, and
    how to quantify the impact of the proposed amendments.
                                    ------

           RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
                           FROM GARY GENSLER

    Q.1. Chairman Gensler, you have previously stated that it is a
    priority of yours to bring ``greater transparency and
    resiliency'' to the U.S. Treasury market. I agree that the
    effort to strengthen the U.S. Treasury market should be a top
    priority.
        In a recent report released by the Group of Thirty,
    entitled ``U.S. Treasury Markets; Steps Towards Increased
    Resilience'', leading market experts and academics endorsed
    increasing public post-trade transparency as a key step
    regulators could take to strengthen the Treasury market.
        Do you agree that steps should be taken to increase the
    post-trade transparency of U.S. Treasuries, bringing this
    market in-line with our stock, options, and corporate bond
    markets?

    A.1. As outlined in a recent speech at the U.S. Treasury Market
    Conference, there is much work that can be done to bring
    greater efficiency, competition and transparency; market
    integrity; and resiliency to the $23 trillion Treasury markets.
    \1\ The SEC plays a critical role in our overall efforts to
    improve the functioning of the Treasury market. I've asked
    staff to make recommendations for the Commission's
    consideration to freshen up our rules to reflect the state of
    the Treasury market today.
    ---------------------------------------------------------------------------
         \1\ https://www.sec.gov/news/speech/gensler-us-treasury-market-
    conference-20211117
    ---------------------------------------------------------------------------
        One work stream relates to data quality. Currently, the
    Trade Reporting and Compliance Engine (TRACE), a facility
    operated by FINRA, facilitates the mandatory reporting of over-
    the-counter transactions in Treasury securities. TRACE does not
    publicly disseminate any information about these individual
    transactions. Further, only broker-dealers that are registered
    with FINRA, however, report Treasury transactions to TRACE,
    leaving out major market participants like commercial banks and
    proprietary trading firms. I support the Fed's recently
    announced new rule requiring large banks to report transactions
    to TRACE. I've asked staff to continue to work with FINRA, the
    Department of the Treasury, and the Federal Reserve to consider
    further enhancements to TRACE. In part to help make the TRACE
    data set more comprehensive, I have directed the SEC staff to
    consider whether nonbank firms that significantly trade in the
    Treasury market should be registered as dealers with the SEC
    and required to become TRACE-reporting members of FINRA.

    Q.2. I would like to ask you about a longstanding problem that
    needlessly reduces the returns of retail mutual fund
    investors--Americans saving for their retirement, their
    children's college education, and other important life goals. I
    understand that mutual funds are forced to pay excessive and
    unreasonable ``processing fees'' to brokers just to have
    prospectuses and other SEC-required documents delivered to
    investors. These fees cost fund investors approximately $220
    million annually. The SEC recently had an opportunity to reform
    the broken ``processing fee'' framework but preserved the
    status quo.
        What is the SEC going to do, under your leadership, to fix
    this broken system and protect the interests of retail fund
    investors?

    A.2. Thank you for your interest in the ``processing fee''
    framework. I agree that these are important issues. In fact, a
    New York Stock Exchange (NYSE) petition for Commission review
    of staff's disapproval of a NYSE proposal to remove the fee
    schedule from its rules is before the Commission. I'm looking
    forward to learning more about these issues and appreciate your
    engagement.

    Q.3. It is widely accepted that one of the principal reasons
    for the 2008 financial crisis was inflated credit ratings from
    Credit Rating Agencies (CRAs). As a result of the crisis, the
    SEC was required to study and recommend a new model for how
    credit rating agencies should operate. If no model was adopted
    by the SEC, and independent board would recommend a solution.
        Given that the SEC has not recommended a new model for
    NSROs and other Credit Rating Agencies since Dodd-Frank became
    law more than 10 years ago, will you implement an independent
    board as prescribed by the Dodd-Frank Act's adoption of the
    bipartisan Franken-Wicker Amendment?

    A.3. Weaknesses at credit rating agencies contributed to the
    2008 financial crisis, as the ``issuer pays'' model led to
    conflicts and potentially misaligned incentives. Section 939F
    of Dodd-Frank mandated that the SEC issue a report to Congress
    on its findings and recommendations regarding the credit rating
    process for structured finance products and various conflicts
    of interest. Additionally, Dodd-Frank provides the SEC
    rulemaking authority to address these conflicts of interest and
    directs the SEC to ``give thorough consideration to the
    provisions of the [Franken-Wicker amendment] . . . ''. As
    required under section 939F, the SEC issued a report to
    Congress titled ``Report to Congress on Assigned Credit
    Ratings'' in December 2012. As noted in the Spring 2021 Unified
    Regulatory Agenda, the Office of Credit Ratings is considering
    recommending that the Commission propose rules and amendments
    designed to address the conflicts of interest associated with
    the issuer-pay business model (i.e., the NRSRO receives
    compensation from issuers and obligors for rating the
    securities of the issuer or the obligor) and increase
    transparency and promote competition for the ratings of
    securities.

    Q.4. As I have raised with your predecessors in the past, once
    fully operational, the Consolidated Audit Trail (CAT) will be
    the largest Government database of its kind, capturing all
    trading activity in equity securities and listed options in the
    U.S. as well as information on all individuals and institutions
    engaged in such trading. The CAT will ultimately hold data on
    100 million plus retail and institutional accounts. This
    massive database will be a major target for hackers and foreign
    enemies. Investors trust the U.S. stock market with their
    savings and expect that their privacy is protected by the firms
    where they hold their accounts. The SEC's CAT puts their
    privacy at risk by collecting personal information it doesn't
    need.
        Earlier this year I introduced the Protecting Investors'
    Personally Identifiable Information Act that would prohibit the
    Securities and Exchange Commission (SEC) from requiring brokers
    to submit investors' personally identifiable information and
    instead obtain this data by requesting it from the broker. To
    address the SEC's concern that such a process takes too long,
    the bill would require brokers to provide the data to the SEC
    within 24 hours.
        Do you agree that the approach in my bill is a better and
    safer approach to protecting investors' data than the one
    currently contemplated by the CAT?
        When do you intend to finalize Proposed Amendments to the
    National Market System Plan Governing the Consolidated Audit
    Trail to Enhance Data Security; Release No. 34-89632; File No.
    S7-10-20; RIN 3235-AM62, especially the sections that relates
    to the personal information the CAT can and cannot collect?

    A.4. The protection of investors' personally identifiable
    information is critically important. The Commission previously
    issued relief that exempts the SROs from collecting or
    retaining the most sensitive data: (1) individual social
    security numbers and individual tax payer identification
    numbers; (2) dates of birth, and (3) account numbers. As a
    result of the relief, broker-dealers are required to report
    only ``phone-book'' type information: that is, name, address,
    and birth year. The Commission has proposed to codify the
    exemptive relief, and to adopt some additional protections for
    all CAT data, in the CAT Data Security Amendment. Commission
    staff are currently considering comments on the proposed
    amendments.

    Q.5. It's been nearly 10 years since Allen Stanford's arrest
    for running the second largest Ponzi scheme in U.S. history and
    the collapse of Stanford Financial Group. Over 21,000 victims
    of Mr. Stanford's crimes, throughout the United States, have
    yet to be repaid in any meaningful way, collecting 11 cents on
    the dollar of the $7.2 billion swindled from them. These
    victims, who purchased what were marketed as safe Certificates
    of Deposit, are primarily working class families. These
    families continue to deal with the economic overhang and
    financial hardship inflicted upon them by the Stanford Fraud
    each and every day.
        Last year several Senators and I wrote to the SEC urging
    the Chairman to audit the books of the court appointed
    receiver, Ralph Janvey, who has proven to be dysfunctional, and
    demands high fees from victim's compensation, most recently a
    $300 fee deducted from the recovery amount to transfer funds
    into their bank accounts. The receiver has recovered $937
    million for victims, however total receiver fees and expenses
    incurred exceeds $210 million and is at least 38 percent of the
    amounts distributed to the wronged investors. This year, the
    receiver sought and was approved for a 42 percent hourly rate
    fee hike, and is further seeking approval for fees and expenses
    up to $2.5 million for the months of March and April 2021.
        I am constantly receiving complaints from my constituents
    about the lack of transparency of the receivership.
        What role does the SEC have in overseeing fees charged by
    the receiver, which have already exceed $210 million?
        Will you commit to reporting back on whether increased SEC
    oversight is meaningfully improving recoveries for victims?
        If increased oversight is not meaningfully improving
    recoveries, will you petition the Federal court in Texas for
    removal of the receiver?
        The core problem here is that the Securities Investor
    Protection Corporation (SIPC) refused to help these victims, on
    legal and technical grounds. Now I know the SEC sued SIPC and
    lost. I respect the SEC for trying to do right.
        What recommendations do you have for us, here in Congress,
    to fix this gross injustice?

    A.5. The Receiver was appointed by the United States District
    Court for the Northern District of Texas, and he reports to the
    court. To be paid, the Receiver must submit, and the court must
    approve, detailed fee applications. While the SEC does not have
    formal oversight or audit authority over the Receiver, both SEC
    staff and the court-appointed Examiner closely monitor the work
    and fee applications of the Receiver. Our staff reviews and
    questions the Receiver's fee applications before they are
    filed, and has objected to prior fee applications. For example,
    the SEC objected to the recent increase in the Receiver's
    hourly rate, but the district court approved the increase
    anyway, over the SEC's objection. Should Congress determine
    that additional legislation is necessary to address similar
    challenges that might arise in the future, the SEC staff and I
    would be happy to work with your staff and you on possible
    legislation.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
                           FROM GARY GENSLER

    Q.1. You have previously stated that execution firms who
    transact off-exchange get valuable information about retail
    orders that other market participants do not have and because
    of this, execution firms have an improper information
    advantage. You may be aware that every trade--regardless of
    execution venue--must be immediately reported to the public
    tape for market wide dissemination and incorporation into real-
    time price discovery. While we acknowledge that scale conveys
    operational benefits, your statements suggest that you are
    conflating operational scale with an improper information
    advantage that harms competition and retail investors.
        Can you please elaborate on the data and analysis you
    conducted on our U.S. Equities markets to make those
    statements, including a list of factors you are assessing and
    comparing to determine whether or not one firm has an
    information advantage over another?

    A.1. As you note, executed trades in NMS stocks are publicly
    reported and disseminated. Certain off-exchange execution
    dealers that receive the great majority of retail investor
    orders, typically known as wholesalers, however, receive
    information earlier than or beyond what is publicly reported
    and disseminated. Examples of such additional information
    include: (1) information on investor orders prior to execution
    or cancellation, including the submission of nonmarketable
    limit orders that wholesalers typically route out to exchanges
    for execution, as well as investor ``stop loss'' orders (orders
    that are not executable until the stock price hits the stop
    price selected by the investor); and (2) the identity of the
    routing broker (typically a broker that focuses on retail
    investors) for executed trades. In contrast, the public reports
    of orders executed in the off-exchange market do not identify
    the wholesaler that executed the trade or the identity of the
    retail broker whose customer submitted the order.

    Q.2. You have been critical of the PFOF model, contending that
    it presents inherent conflicts of interest for broker-dealers
    and that retail customers are harmed through inferior execution
    quality. It is my understanding that among the ways retail
    brokers cure the potential conflict is to require similar PFOF
    arrangements from all of their execution partners such that all
    pay the same rate and retail brokers similarly put all of their
    execution partners in competition against one another to
    compete on execution quality--not amount of PFOF. Thus, retail
    brokers award order flow based on the a market center's ability
    to consistently provide best execution as measured by a variety
    of factors including price improvement levels, size improvement
    levels, and service levels.
        According to filings made to the SEC by broker dealers,
    retail investors received over $3.6 billion in price
    improvement dollars from execution firms in 2020 as measured
    under current SEC Rule 605 metrics.
        Do you agree that retail brokers should route orders to the
    market center where they have the highest likelihood of
    obtaining the most favorable execution for their customers?
    Why? Why not?
        Do you agree that uniform payment rates adequately mitigate
    the theoretical conflict? Why? Why not?

    A.2. I believe that our equity market structure should promote
    the opportunity for investor orders to receive best execution
    and have asked the staff to develop recommendations in this
    area. Retail brokers should route orders to the market center
    where they can be executed on the best terms reasonably
    available in the market, which is required of brokers pursuant
    to the duty of best execution they owe to their customers.
        Further, it is not clear that a uniform PFOF rate, as you
    describe it, adequately mitigates the conflict concerns raised
    by PFOF.

    Q.3. Relatedly, I want to discuss ``size improvement,'' where
    an execution firm fills an order for greater size than the size
    available at the NBBO. For example, a retail customer has an
    order for 1,000 shares, but there are only 300 shares being
    offered at the NBBO. The execution firm offers ``size
    improvement'' by executing the full 1,000 share order at or
    better than the NBBO, giving the customer a better price than
    she would have received if the order were sent to an exchange.
    I've been told that when you factor in both price improvement
    and size improvement, retail investors benefited to the tune of
    $11 billion in 2020. This amount is missing from the current
    Rule 605 reports due to shortcomings in Rule 605--a shortcoming
    which many folks, including exchanges, argue should be
    addressed. We understand that your view is that retail orders
    should be forced onto an all-to-all exchange for order-by-order
    competition.
        Do you agree that Size Improvement is a valuable benefit
    that retail receives today? Why? Why not?
        If retail orders are forced onto exchanges, where do you
    suppose the Size Improvement would come from?

    A.3. I have not reached any conclusions with regard to equity
    market structure and have asked the staff to develop
    recommendations for consideration by the Commission. In this
    regard, I've asked staff to consider: how do we facilitate
    greater competition and efficiency on an order-by-order basis--
    when people send each order into the marketplace? I've asked
    staff to consider whether shrinking tick sizes, reevaluating
    what is included in the National Best Bid and Offer, enhancing
    disclosure, or leveling competition between trading venues and
    wholesalers could increase transparency and competition. I've
    asked staff to consider the potential conflicts of interest in
    the context of payment for order flow and on-exchange use of
    rebates. Further, such review includes consideration of
    enhancements of rule 605 with regard to order execution
    information. Your query with regard to size improvement is
    amongst questions I've asked staff to consider when making
    recommendations.

    Q.4. If the SEC were to ban PFOF, broker-dealers naturally
    would need to find alternative sources of revenue in order to
    run their businesses. I have a very difficult time
    understanding how a retail investor is better off paying $9.99
    or even $4.99 a trade than under the current framework where
    there is no commission for trading and retail investors receive
    very substantial price and size improvement from execution
    firms. Moreover, even if some brokers retained a zero
    commission model wouldn't you expect those revenues to be made
    up in less transparent ways like margin interest rates, lower
    interest rates on cash balances, inactivity fees, and other
    methods.
        Do you agree that transparency is important to fostering
    competition among retail brokers? Why? Why not?
        What analysis have you and your staff done to determine how
    a return to commission-based trading will impact retail
    investors--especially lower-income investors? What data did you
    use?

    A.4. I agree that transparency is a one of the SEC's important
    tools to promote competition in the U.S. equity markets. As
    noted above, I believe that our market structure should provide
    investor orders with an opportunity for the best possible
    execution. I have not reached any conclusions in this area and
    have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.5. On multiple occasions, you have pointed out that other
    jurisdictions, including Canada and the U.K. have banned PFOF
    and forced trading onto lit exchanges. In these statements,
    you've suggested that the investor experience in those
    jurisdictions is better as a result.
        Can you please elaborate on the data and analysis you
    conducted to make those statements, including a list of factors
    you are assessing and comparing to determine that retail
    investor execution quality is better in those markets compared
    to the U.S.?

    A.5. I have noted that other jurisdictions have prohibited
    their brokers from accepting PFOF from off-exchange venues.
    Amongst key questions on which I have asked the staff to
    consider in developing recommendations is what we can learn
    from these other markets and how our market structure could be
    improved to provide an opportunity for retail investors to
    receive the best possible execution quality for their orders.

    Q.6. There is substantial research out there suggesting that
    the investor experience is worse in jurisdictions that have
    implemented rules forcing trades to be executed on exchanges
    rather than requiring brokerages to route orders to the market
    centers that provide the most favorable execution for the
    investor. According to an analysis by the CFA Institute, in
    Canada, retail investors' average price improvement dropped 70
    percent after such rule was adopted.
        Do you agree that competition among market centers is
    essential to operating efficient and resilient markets? Why?
    Why not?
        Do you believe that forcing retail orders to go to
    exchanges--rather than requiring brokerages to route based on
    best execution--will achieve the best outcome for retail
    investors? Why? Why not?
        Do you agree that forcing retail order flow to exchanges
    will be a significant financial win for exchange operators at
    the expense of retail investors? Why? Why not?

    A.6. Fair competition between market centers is essential for
    our market structure. I believe that our market structure
    should provide investor orders with an opportunity for the best
    possible execution. I have not reached any conclusions in this
    area and have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.7. You have made comments suggesting that the recent growth
    in ``off-exchange'' trading is harmful to investors, and that
    our equity markets would benefit from more trades being routed
    to lit exchanges.
        Do you agree that investors' orders should be executed
    wherever they are able to obtain the most favorable execution?
    Why? Why not?

    A.7. As noted above, I believe that our market structure should
    provide investor orders with an opportunity for the best
    possible execution. With regard to the equity markets, I've
    asked staff to consider: how do we facilitate greater
    competition and efficiency on an order-by-order basis--when
    people send each order into the marketplace? I have not reached
    any conclusions in this area and have asked the staff to
    develop recommendations for consideration by the Commission.

    Q.8. Under the current framework, retail brokers incentivize
    competition for order flow by rewarding execution firms that
    provide superior execution quality. Forcing more retail order
    flow to exchanges could remove this direct link which is
    necessary for brokers to hold execution firms accountable and
    thus would reduce the competition that drives the price and
    size improvement benefits that retail investors receive today.
        Do you agree that forcing retail orders on-exchange will
    reduce the retail brokers' ability to demand better price and
    size improvement benefits for retail investors? Why? Why not?
        Do you agree that forcing retail order flow to exchanges
    will be a significant financial win for exchange operators at
    the expense of retail investors? Why? Why not?

    A.8. As noted above, I believe that our market structure should
    provide investor orders with an opportunity for the best
    possible execution. I've asked staff to consider: how do we
    facilitate greater competition and efficiency on an order-by-
    order basis--when people send each order into the marketplace?
    I have not reached any conclusions in this area and have asked
    the staff to develop recommendations for consideration by the
    Commission.

    Q.9. There is hard data showing that forcing trades onto lit
    exchanges does not result in better executions for investors.
    For example, data from the SEC's Tick Size Pilot showed that,
    for the category of securities that included a ``Trade-At''
    requirement that orders be executed on lit exchanges, spreads
    in fact widened more than other test groups. The same result
    flowed from similar ``Trade-At'' initiatives in other
    jurisdictions, such as Canada and Australia.
        What data and analysis do you have from our markets to
    suggest that the opposite outcome will occur in the U.S.?
        Do you agree that forcing retail order flow to exchanges
    will be a significant financial win for exchange operators at
    the expense of retail investors? Why? Why not?

    A.9. As noted above, I believe that our market structure should
    provide investor orders with an opportunity for the best
    possible execution. I have not reached any conclusions in this
    area and have asked the staff to develop recommendations for
    consideration by the Commission.

    Q.10. There has been significant debate about the form that
    climate disclosures should take--mandates vs. guidance,
    prescriptive vs. principles-based, et cetera.
        What direction do you believe the Commission will take in
    the proposal and what types of modeling are you doing to
    determine which form will yield the most informative
    disclosures for investors?
        Will any of the various existing standards be used for
    mandatory ESG reporting (SASB, GRI, CDP)?
        As you know, the Task Force on Climate-Related Financial
    Disclosures is only a framework and not a reporting standard.
    Does the SEC plan to incorporate TCFD into mandatory reporting
    requirements and if so, how might this be structured into
    metrics reporting?
        Will mandatory reporting include verification and/or third
    party certification of reported elements? How has the SEC
    considered the cost of the increased burden of data gathering,
    verification, certification, and auditing?
        It is undeniable that climate and ESG disclosures more
    broadly may have global impacts, but several international
    jurisdictions are seemingly ahead of the U.S. and the SEC in
    promulgating reporting obligations and standards around climate
    change and ESG. To that end, how do you see the Commission
    becoming more engaged with global standard setters in the
    coming years, particularly in leadership roles since U.S.
    markets are the deepest and most liquid in the world?

    A.10. Today, investors increasingly want to understand the
    climate risks of the companies whose stock they own or might
    buy. Large and small investors, representing literally tens of
    trillions of dollars, are looking for this information to
    determine whether to invest, sell, or make a voting decision
    one way or another. Investors are looking for consistent,
    comparable, and decision-useful disclosures so they can put
    their money in companies that fit their needs.
        I have asked the staff of the Division of Corporation
    Finance to develop recommendations for the Commission to
    consider. The staff are currently engaged in that process,
    including considering how best to structure any recommended
    disclosure proposals.
        As staff put together their recommendations, we have
    benefited from the input that the public submitted this spring.
    Among other frameworks and standards, many commenters referred
    to the Task Force on Climate-related Financial Disclosures
    (TCFD) framework. I've asked staff to learn from and be
    inspired by these external standard-setters. I believe, though,
    we should move forward to write rules and establish the
    appropriate climate risk disclosure regime for our markets, as
    we have in prior generations for other disclosure regimes.
        Our Division of Economic and Risk Analysis will conduct an
    economic analysis that will carefully consider the effects on
    efficiency, competition, and capital formation along with
    investor protection of any proposal that the Commission
    considers.

    Q.11. There is a longstanding problem that needlessly reduces
    the returns of retail mutual fund investors--Americans saving
    for their retirement, their children's college education, and
    other important goals. I understand that mutual funds are
    forced to pay excessive and unreasonable ``processing fees'' to
    brokers just to have prospectuses and other SEC-required
    documents delivered to investors. These fees cost fund
    investors approximately $220 million annually. The SEC recently
    had a clear opportunity to reform the broken ``processing fee''
    framework and failed to do so, just leaving it as it is.
        What is the SEC going to do, under your leadership, to fix
    this broken system and protect the interests of retail fund
    investors?

    A.11. Thank you for your interest in the ``processing fee''
    framework. I agree that these are important issues. In fact, a
    New York Stock Exchange (NYSE) petition for Commission review
    of staff's disapproval of a NYSE proposal to remove the fee
    schedule from its rules is before the Commission. I'm looking
    forward to learning more about these issues and appreciate your
    engagement.

    Q.12. In its request for information on climate disclosures
    promulgated by then-Acting Chair Allison Lee, the SEC included
    a question on whether disclosure requirements should extend to
    private companies. Specifically, question 14 posed the
    following question:
        ``What climate-related information is available with
    respect to private companies, and how should the Commission's
    rules address private companies' climate disclosures, such as
    through exempt offerings, or its oversight of certain
    investment advisers and funds?''
        In your view, does the SEC have the authority to regulate
    the disclosure activities of private companies?
        Does the SEC intend to promulgate rules or guidance that
    targets climate-related disclosures for privately held
    businesses?

    A.12. Today, investors increasingly want to understand the
    climate risks of the companies whose securities they own or
    might buy. Large and small investors, representing literally
    tens of trillions of dollars, are looking for this information
    to determine whether to invest, sell, or make a voting decision
    one way or another. Investors are looking for consistent,
    comparable, and decision-useful disclosures so they can put
    their money in companies that fit their needs. I have asked the
    staff of the Division of Corporation Finance to develop
    recommendations for the Commission to consider to provide
    investors with decision-useful disclosures. The staff are
    currently engaged in that process.
        Over the last several decades, the Commission has adopted
    several rules to create safe harbors from registration
    requirements under Section 5 of the Securities Act. These
    regulations provide issuers with greater certainty than
    statutory exemptions alone. Many of these existing regulatory
    transaction and resale exemptions include disclosure
    requirements. Advisers to private funds also have disclosure
    obligations and antifraud liability.

    Q.13. In June of this year, the SEC announced that it would
    reexamine and therefore not enforce the Proxy Advisor Rule that
    had been adopted by a majority of the Commission in July 2020
    following a meticulous and years-long process under the
    Administrative Procedure Act. The Proxy Advisor Rule was guided
    by efforts to increase transparency, quality, and
    accountability in the proxy advisory system in the United
    States.
        When does the SEC expect to announce further regulatory
    action related to the Proxy Advisor Rule?
        Could you describe how SEC staff will conduct an
    appropriate review of the rule given that the SEC has decided
    not to enforce the existing rule before it has gone into
    effect?
        How will the SEC's additional regulatory actions prioritize
    increasing the transparency, quality, and accountability around
    proxy advisor firms?

    A.13. Although some parts of the 2020 rules are not yet
    effective, other parts have been effective since November 2020.
    We have heard concerns from market participants who use the
    proxy advisory firms about the rules' current and future
    possible impact on the independence, timeliness, and costs of
    the advice.
        Last Wednesday, November 17th, the Commission voted to
    propose amendments to these rules. Those proposals are tailored
    to address the independence, timeliness, and cost concerns
    raised by clients of proxy advisory firms and the confusion
    around sources of liability. The proposals would make no change
    to the conflict of interest disclosure requirements of the 2020
    amendments. The release further clarifies, but does not alter,
    the application of the antifraud provisions of our proxy rules
    to proxy voting advice. These proposals are now in the notice
    and comment process and we encourage the public to share their
    views with the Commission.

    Q.14. News sources have reported that the SEC informed Coinbase
    that it would sue if Coinbase launched its cryptocurrency
    lending product, but has not disclosed the reasoning for its
    decision--either to Coinbase or the public.
        Appreciating that the SEC's mission is both ``to protect
    investors'' and ``maintain fair, orderly, and efficient
    markets,'' does the Commission have any plans to disclose its
    reasoning for barring lending products like the one proposed by
    Coinbase?
        Wouldn't the issuance of public guidance help prevent the
    development of products the SEC finds problematic?

    A.14. I cannot comment on any particular product. To the extent
    that crypto asset platforms are offering or selling crypto
    assets that are securities or securities derivatives, or are
    engaging in other activities that involve securities, the
    Federal securities laws would apply. The definition of security
    is intended to be broad, in order to encompass new and
    different types of investments that are presented to investors
    and that need the protections of the Federal securities laws.
    Whether a particular instrument is within the definition of
    security is based on the facts and circumstances. As I have
    stated at the hearing, none of the significant crypto asset
    trading platforms are registered as securities exchanges with
    the SEC or are operating pursuant to an exemption from
    registration, such as the exemption for alternative trading
    systems. The SEC has been clear about how it applies the
    Federal securities laws in this area, as explained, for
    example, in the 2017 DAO Report and SEC settled orders.

    Q.15. You indicated in your testimony that you are working with
    the CFTC and other Federal agencies on policy frameworks for
    digital asset issues.
        Could you be more specific on how you are working with the
    CFTC?
        Are other CFTC and SEC Commissioners involved in these
    discussions?

    A.15. The SEC and CFTC work closely and collaboratively on a
    wide range of crypto asset-related issues. Both agencies have
    dedicated offices responsible for staying abreast of
    developments in the crypto asset space, and our respective
    staff communicate frequently about these developments. Our
    efforts are assisted further by our respective participation in
    broader interagency initiatives, such as the President's
    Working Group on Financial Markets, which worked on addressing
    issues related to stablecoins. The SEC and CFTC also both
    participate in multiple international bodies that are
    addressing crypto asset-related issues, such as the
    International Organization of Securities Commissions. Dating
    back to the Shad-Johnson accord, the SEC and CFTC have
    repeatedly been called on to address issues that implicate the
    unique and also the overlapping jurisdictions of each agency
    and, in response, we have worked collaboratively on areas where
    our authorities overlap. We will continue to closely
    communicate and work together to ensure the integrity and
    transparency of our financial markets.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
                           FROM GARY GENSLER

    Q.1. On August 27, the Securities and Exchange Commission (the
    Commission) issued a 78-page ``Request for Information and
    Comments on Broker-Dealer and Investment Adviser Digital
    Engagement Practices, Related Tools and Methods, and Regulatory
    Considerations and Potential Approaches; Information and
    Comments on Investment Adviser Use of Technology To Develop and
    Provide Investment Advice''. In addition to defining ``digital
    engagement practices'' (DEPs) for the first time, the
    Commission poses 91 categories of questions. The Commission
    also makes clear that these questions are ``not intended to
    limit the scope of comments, views, issues, or approaches to be
    considered.'' Furthermore, the Commission requests
    ``statistical, empirical, and other data'' in response to its
    questions on the newly defined DEPs.
        This is an exceedingly broad request for information on a
    loosely defined topic that could be relevant to nearly every
    financial services company. I am concerned that the unusually
    short current 30-day comment deadline of October 1 is
    insufficient to allow thoughtful and data backed engagement
    with the SEC on this topic--and breaks with the Commission's
    own practice of providing a longer comment period for similar
    requests. For example, the SEC's March 15 request for public
    input on climate disclosure gave commenters 90 days to respond.
        Will you extend the comment period past the October 1
    deadline?
        Will you consider giving longer, more reasonable comment
    periods for RFIs in the future?

    A.1. As you note, the comment period for the Request closed on
    October 1. To date, we have we received over 2,000 comments in
    response to the Request, including many responses from retail
    investors to our ``Feedback Flyer''. The Commission evaluates
    comment periods on a case by case basis consistent with the
    applicable law.
        Although the comment period has closed, we continue to
    welcome additional feedback, including statistical, empirical
    and other data, as we consider all of the comments and evaluate
    potential next steps.

    Q.2. Can you provide an update on what the Commission has done
    to date, and what it is planning to do moving forward, to
    protect seniors from fraudulent scams?

    A.2. Deterrence through strong enforcement action has been an
    important part of the SEC's efforts to protect senior
    investors, and the Division of Enforcement places a high
    priority on investigating frauds targeting seniors. For
    example, on February 4, 2021, the SEC announced charges against
    three individuals and their affiliated entities with running a
    Ponzi-like scheme that raised over $1.7 billion from over
    17,000 senior and other retail investors. In addition, the
    Division's Retail Strategy Task Force develops and implements
    strategies for identifying potential violations to uncover the
    types of misconduct that most affect individual investors, with
    a focus on data-driven approaches, and investigates cases that
    involve schemes targeting the most vulnerable members of the
    investing public, often including senior investors. With the
    Office of Investor Education and Advocacy, the Division also
    seeks to educate senior investors so they can better protect
    themselves, through investor outreach, including in partnership
    with AARP, and issuing alerts and bulletins to educate seniors
    and other investors.
        Finally, on June 15, 2021, in recognition of World Elder
    Abuse Awareness Day, the SEC, the North American Securities
    Administrators Association (NASAA), and the Financial Industry
    Regulatory Authority (FINRA) announced a training program to
    assist securities firms in identifying and reporting
    exploitative activity against seniors.
                  Additional Material Supplied for the Record
                  LETTER FROM AMERICAN SECURITIES ASSOCIATION

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]