[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]



                      EXAMINING THE SEC'S AGENDA:
                      UNINTENDED CONSEQUENCES FOR
                   U.S. CAPITAL MARKETS AND INVESTORS

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 2, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-55 
                           
                           
                           
                           
                                                     
                          
                           
               [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
               
               
               
               

               
                                ______

                  U.S. GOVERNMENT PUBLISHING OFFICE  
                  
55-021 PDF               WASHINGTON : 2024 
















                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director 
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                    Subcommittee on Capital Markets

                    ANN WAGNER, Missouri, Chairwoman

FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                DAVID SCOTT, Georgia
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania             SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice     WILEY NICKEL, North Carolina
    Chairman                         STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York                EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana 
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 2, 2023.............................................     1
Appendix:
    November 2, 2023.............................................    35

                               WITNESSES
                               
                       Thursday, November 2, 2023

Bentsen, Kenneth E., Jr., President and CEO, Securities Industry 
  and Financial Markets Association (SIFMA)......................     4
Blass, Dalia Osman, Partner, Sullivan & Cromwell LLP.............     6
Borrus, Amy, Executive Director, Council of Institutional 
  Investors......................................................    11
Kothari, S.P., Gordon Y Billard Professor of Accounting and 
  Finance, the Massachusetts Institute of Technology (MIT) Sloan 
  School of Management...........................................     8
Quaadman, Tom, Executive Vice President, Center for Capital 
  Markets Competitiveness, U.S. Chamber of Commerce..............     9

                                APPENDIX

Prepared statements:
    Bentsen, Kenneth E., Jr......................................    36
    Blass, Dalia Osman...........................................    48
    Borrus, Amy..................................................    57
    Kothari, S.P.................................................    67
    Quaadman, Tom................................................    73

              Additional Material Submitted for the Record

Wagner, Hon. Ann:
    Written statement of the American Securities Association 
      (ASA)......................................................    82
    Written statement of the Small Business Investor Alliance 
      (SBIA).....................................................    86
Hill, Hon. French:
    Wall Street Journal editorial, ``Gary Gensler and the SEC 
      Lose Again,'' dated November 1, 2023.......................    88
Lawler, Hon. Mike:
    Written responses to questions for the record submitted to 
      Kenneth E. Bentsen, Jr.....................................    90
    Written responses to questions for the record submitted to 
      S.P. Kothari...............................................    92
    Written responses to questions for the record submitted to 
      Tom Quaadman...............................................    93
Nickel, Hon. Wiley:
    Letter to SEC Chair Gary Gensler from various Members of 
      Congress, dated October 31, 2023...........................    95
Sherman, Hon. Brad:
    Letter to Hon. Jared Bernstein, Chair, Council of Economic 
      Advisers, dated October 31, 2023...........................   100

 
                      EXAMINING THE SEC'S AGENDA: 
                      UNINTENDED CONSEQUENCES FOR  
                  U.S. CAPITAL MARKETS AND INVESTORS

                              ----------                              


                       Thursday, November 2, 2023

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                            Committee on Financial Services
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Lucas, Huizenga, 
Hill, Mooney, Steil, Meuser, Lawler, Nunn, Houchin; Sherman, 
Vargas, Gottheimer, Gonzalez, Casten, Nickel, and Cleaver.
    Ex officio present: Representative Waters.
    Chairwoman Wagner. Good morning, everyone. We are 
multitasking here today, and I would ask your indulgence as we 
are already starting late. The ranking member is on his way. We 
can get started because we are going to have to recess for a 
quick rule vote on the House Floor, and we are going to try and 
keep things going as fast as we can, so I appreciate all of 
your indulgence, both Members and our witnesses.
    The Subcommittee on Capital Markets will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Examining the SEC's Agenda: 
Unintended Consequences for U.S. Capital Markets and 
Investors.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    I want to thank you for joining us today to examine the 
rulemaking process of the U.S. Securities and Exchange 
Commission (SEC), an institution central to upholding the 
integrity, transparency, and stability of our nation's capital 
markets. The United States boasts the world's deepest and most-
liquid capital markets, serving as a cornerstone of our 
economic growth and prosperity. These markets are already among 
the most heavily-regulated sectors in our economy.
    This underscores the need for our regulators to exercise 
the utmost diligence in their rulemaking activities. 
Interventions must narrowly address known market deficiencies 
without inadvertently causing harm or disruption, especially in 
times of economic stress and uncertainty. Regulators should not 
use their position to experiment with academic pet projects. 
Transformative changes must be meticulously crafted and 
thoroughly vetted to account for indirect costs and cumulative 
effects, and only undertaken when explicitly authorized by 
Congress.
    Regrettably, we have observed a departure from this 
approach under the current leadership of the SEC, led by Chair 
Gensler. In recent months, our subcommittee has undertaken a 
rigorous examination of the SEC's actions. We have heard 
testimony from various SEC Division Directors, including those 
overseeing the Divisions of Investment Management, Corporation 
Finance, Trading and Markets, and Economic and Risk Analysis. 
In these dialogues, we have raised serious bipartisan concerns 
regarding both the content and process of the Commission's 
rulemakings.
    Today, I would like to draw attention to the most 
concerning aspects of the SEC's present approach to rulemaking. 
First, the SEC has embarked on an extraordinary pace of 
rulemaking since the spring of 2021, a pace that raises 
questions about the agency's ability to comprehensively 
evaluate the cumulative effects, indirect costs, and cross-
market implications of these rules. Chair Gensler's rush to 
implement his unprecedented rulemaking agenda is jeopardizing 
the health of our capital markets and the hard-earned dollars 
that millions of Americans have invested in them.
    Second, the SEC has significantly curtailed public comment 
periods for proposed rules, at times even overlapping them with 
major holidays. This inhibits affected investors and market 
participants from providing thorough feedback, and shortened 
comment periods deprive the SEC of the information they need to 
craft better, more-surgical proposals.
    I would like to enter into the record, a record of nearly 
20 rulemakings and proposals that have undergone less than 30-
day comment periods.
    So, it is clear that this is happening. Extending these 
comment periods is imperative to allow market participants 
ample time to assess and evaluate the potential implications of 
these rules.
    Third, the SEC's apparent disregard for congressional 
concern and congressional inquiries undermines trust in the 
regulatory process and raises accountability questions. This is 
evident in bipartisan opposition to the SEC's approach to a 
number of issues, including of two equity market structures, 
swing pricing, and conflicts of interest.
    One of the most recent examples of this blatant disregard 
for congressional inquiries is in response to a letter that I 
sent in September, along with Mr. Hill and 19 other 
Representatives and Senators regarding the predictive data 
analytics proposal. It has been more than 30 days since we sent 
that letter, which posed specific questions to the SEC, 
questions that need timely responses. We received emails 
assuring us that the SEC would be following up with a response, 
but more than 30 days have passed and still nothing.
    Finally, the hearings leading up to today made it clear 
that the SEC is exceeding its mandate, particularly in areas 
related to environmental and social policies. It is our duty to 
ensure agencies adhere to their statutory authority and do not 
create far-reaching policies that Congress never intended. 
Today, we have the opportunity to explore these concerns while 
shedding light on the potential consequences of the SEC's 
agenda and current approach to rulemaking. I look forward to 
hearing from our esteemed panel of experts as we delve deeper 
into these matters in order to promote sound financial 
regulation and safeguard our capital markets.
    Welcome, Mr. Sherman.
    Mr. Sherman. Yes.
    Chairwoman Wagner. Just in the nick of time. Are you ready 
to proceed, sir?
    Mr. Sherman. I am indeed.
    Chairwoman Wagner. Thank you. The Chair now recognizes the 
ranking member of the Subcommittee on Capital Markets, the 
gentleman from California, Mr. Sherman, for----
    Mr. Sherman. Four minutes.
    Chairwoman Wagner. ----4 minutes for an opening statement.
    Mr. Sherman. First, I apologize for being late. We had a 
critical meeting on the Israel supplemental, and that is an 
issue in which I am very involved. As to the issues before us, 
the most important issue affecting the SEC is the possible 
shutdown of the government in 15 days. That means no IPOs. That 
means that our hundred trillion dollar capital markets are 
without any police force. What could go wrong? And it means 
that many established companies seeking an additional stock at 
issuance or bond issuance will not be able to make it. So, 
shutting down the government means shutting down a big chunk of 
our capital markets.
    I think that it is important to focus on some of the things 
that the SEC is doing right, starting with crypto. Some $130 
million of cryptocurrency has gone to Hamas and Palestinian 
Islamic Jihad. And the SEC is the one agency here in Washington 
that is most effective in clamping down on crypto, which is 
designed to be a perfect means for, ``hidden money,'' hence the 
term, ``cryptocurrency,'' getting to the worst actors in the 
world. As to environmental, social, and governance (ESG), it is 
now obvious that a material number of investors find it 
material to their investment decisions. That is why there are 
literally dozens and dozens of mutual funds and corporations 
and investment vehicles that design themselves for those 
investors that care about the environment in their investing.
    I do think that Scope 3 is a problem because as an 
accountant, I just don't know how you can possibly get there. 
Our accounting system captures what is on the balance sheet. 
Fifty years ago, 90 years ago, I believe 90 percent of the 
value of the company was there on the balance sheet. Now, 90 
percent isn't. That is to say the cap value of the company is 
not explained by the balance sheet accepted to the extent of 10 
percent.
    That is why we need to start reporting better research, 
which should be capitalized, workforce metrics, and other 
metrics that help determine the real value of the company. 
Swing pricing is a mistake. It is unfair to the middle class 
because the wealthy can put together their own portfolios, and 
they don't need mutual funds. Institutions can be on collective 
investment trusts (CITs), and, of course, the West Coast is 
disadvantaged to the tune of 3 hours.
    Hopefully without objection, I would like to put in the 
record my letter to the Administration identifying how it is 
also a junk fee, and, thus, focused on what President Biden is 
saying as preventing us from having junk fees is critical.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Sherman. I am concerned about some of the SEC 
proposals, but in general, they are doing a good job. In 
particular, the conflict of interest proposal is well-
intentioned if it is properly limited. We shouldn't be able to 
design a unique investment and then bet against it. On the 
other hand, it is very important that every major player in the 
market be able to invest on the long side or on the short side 
in widely-traded indexes and hedges and prices that they did 
not invent, and they do not control. So, I look forward to 
hearing from our witnesses, and I yield back.
    Chairwoman Wagner. The gentleman yields back.
    Today, we welcome the testimony of: Mr. Kenneth Bentsen, 
Jr., the president and CEO of SIFMA; Ms. Dalia Osman Blass, the 
senior investment management partner at Sullivan & Cromwell, 
LLP.; Mr. S.P. Kothari, the Gordon Y Billard Professor of 
Accounting and Finance at the Massachusetts Institute of 
Technology Sloan School of Management; Mr. Tom Quaadman, the 
executive vice president of the Center for Capital Markets 
Competitiveness at the U.S. Chamber of Commerce; and Ms. Amy 
Borrus, the executive director of the Council of Institutional 
Investors.
    I want to thank you all for taking the time to be here. You 
will each be recognized for 5 minutes to give your oral 
remarks, and without objection, your written statements will be 
made a part of the record.
    We are going to try and get through as much of this is 
possible. So, Mr. Bentsen, you are now recognized for 5 minutes 
to give your oral remarks.

STATEMENT OF KENNETH E. BENTSEN, JR., PRESIDENT AND CEO, 
    SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 
    (SIFMA)

    Mr. Bentsen. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, and distinguished members of the subcommittee. Thank 
you for the opportunity to testify today.
    As you said, the U.S. securities markets are the deepest, 
most-liquid in the world. They are also the envy of the world. 
They are among the most-regulated sectors of our economy and 
unique to the United States; 75 percent of commercial activity 
is financed through our markets. Our markets enable investors 
to put their savings to work spurring job creation and economic 
growth. Therefore, it is critical that regulators tailor 
policies to address legitimate market failures without 
unnecessarily harming or disrupting markets, especially when 
our economy faces serious headwinds.
    However, the high volume and speed of regulatory change 
proposed by the Securities and Exchange Commission could result 
in negative consequences for the real economy. Throughout the 
last 2 years, stakeholders, academics, and Members of Congress 
on both sides of the aisle have expressed concerns with the 
volume and pace of new rule proposals from the SEC. The data 
demonstrates that these concerns are well-founded.
    Chairwoman Wagner. Mr. Bentsen, could you please pull the 
microphone a little closer and----
    Mr. Bentsen. I'm sorry about that.
    Chairwoman Wagner. Thank you.
    Mr. Bentsen. Right. In addition to the concerns regarding 
the unprecedented volume commenters, including staff, have 
expressed concern that truncated timelines for multiple 
overlapping rule proposals limit stakeholders' ability to 
analyze the collective impact of the proposals, and that 
failure to do so can result in conflicting and poorly-drafted 
rules, with potential negative impacts on capital markets and, 
importantly, investors and issuers.
    There may be justification for certain rules, such as the 
transition of the security settlement cycle from 2 days to 1, 
which SIFMA and the industry strongly support, and are mandated 
by the Dodd-Frank Act. We remain concerned, however, that the 
SEC has not sufficiently prioritized its agenda and, in several 
cases, is acting without clear evidence of market failure or 
direction from Congress.
    Lack of prioritization and pursuit of novel proposals has 
crowded out other important mandates, such as the pending data 
security rule for the Consolidated Audit Trail (CAT), the 
largest securities transaction database ever created, which 
collects trade data and customer personally identifiable 
information (PII) on every stock and option transaction. That 
rule was proposed 3 years ago and still has not been finalized.
    In addition, there is much more to implementing market 
rules than simply promulgating new regulatory text. In most 
cases, the industry must develop programs and processes, often 
with significant technology builds, as well as policies and 
procedures to comply with the new rules. The industry will face 
an unprecedented implementation situation. Rushing to implement 
dozens of complex, far-reaching new regulations simultaneously, 
absent prioritization, coordination, and robust cost-benefit 
analysis, is not conducive to effective and enduring 
policymaking.
    Perhaps most controversial and least considered are the 
SEC's equity market structure proposals. These proposals 
dramatically overhaul the U.S. equity market structure and 
potentially undermine the recent expansion of market access 
that investors enjoy today. Going back to the late 1990s, 
Congress, and in particular, this committee, studied and 
proposed various changes to our equity market structure.
    In response, multiple Commissions undertook a methodical 
and deliberate approach to developing proposals and receiving 
public comment that culminated in Regulation National Market 
Structure (Reg NMS) in 2005. In developing Reg NMS, the 
Commission sought and received significant public and 
stakeholder feedback over a period of years before proceeding, 
including multiple public hearings, concept releases, and rule 
proposals to receive the input from stakeholders. There has not 
been the same deliberative process with these substantial 
proposals.
    The proposals also lack clear direction from Congress. As 
recently as 2021, this committee held three hearings in 
response to the GameStop meme stock phenomenon. The committee 
issued a detailed report proposing several policy 
recommendations for the SEC, the Financial Industry Regulatory 
(FINRA), and the Depository Trust & Clearing Corporation (DTCC) 
to undertake. None of the Commission's proposals are among 
those congressional recommendations. There is also almost no 
analysis on how the proposals relate to or would operate with 
each other and the anticipated cumulative effects on markets 
and intermediaries and investors if more than one proposal were 
adopted.
    And I would note that is contrary to the guidance put out 
in 2011 by the Obama Administration's Office of Management and 
Budget (OMB) as part of the OMB's work to expand cost-benefit 
analysis that agencies should consider the cumulative impact of 
multiple proposals going out. And that builds on the Clinton 
Administration's guidance with respect to cost-benefit analysis 
administration, which built on the Reagan Administration's 
guidance from the OMB. Stakeholders from all corners of the 
markets had voiced opposition to these proposals. The one 
exception is the proposal to update Rule 605, which has not 
been updated since its adoption in 2000. SIFMA supports this 
proposed update and believes it is a natural starting point for 
the path forward.
    While we support some of the Commission's proposals, we 
believe others fail to identify a market failure and lack clear 
direction from Congress. The agenda also lacks prioritization 
and sufficient cost-benefit analysis, particularly the 
cumulative impact, as I mentioned. Just as the Commission has a 
duty to ensure fair, orderly, and efficient markets, rushing to 
do too much, too quickly, could result in poor policy outcomes 
and could overwhelm market infrastructure. Thank you.
    [The prepared statement of Mr. Bentsen can be found on page 
36 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Bentsen.
    Ms. Blass, you are now recognized for 5 minutes to give 
your oral remarks.

      STATEMENT OF DALIA OSMAN BLASS, SENIOR INVESTMENT  
         MANAGEMENT PARTNER, SULLIVAN & CROMWELL LLP 

    Ms. Blass. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, and distinguished members of the subcommittee. I 
appreciate the opportunity to testify today. I am testifying in 
my personal capacity and not on behalf of Sullivan & Cromwell, 
or any of its clients. Before joining the firm, I was the 
global head of external affairs at BlackRock. Prior to that, I 
had the honor of serving at the SEC for more than 14 years, 
culminating my tenure as the Director of the Division of 
Investment Management.
    Based on my experience at the SEC, in industry, and in 
private practice, I am concerned by the pace and scope of the 
SEC's rulemaking agenda. I strongly support well-reasoned 
rulemaking. My support for such rulemaking is clear from my 
record as Division Director, where I recommended several major 
rules to the Commission that improved investor protection and 
the resilience and efficiency of our markets, including 
derivatives, fund valuation, and advisor marketing.
    I also led the interdivisional team that resulted in a 
recommendation for the standards of conduct for financial 
professionals. During my tenure at the Commission, I came to 
appreciate the important role of funds in our economy and the 
lives of Main Street investors, including retirement savers. 
Regulated funds provide professional management at a reasonable 
cost and with exposure to assets and strategies that investors 
could not obtain on their own. Simply put, they have 
democratized investments for Main Street investors.
    Private funds are integral to portfolios of well-managed 
pension plans and endowments, and have been key to the 
continued economic growth of our economy, driving job creation 
and innovation. And this is why I am concerned with the breadth 
and scope of the SEC's rulemaking agenda, which is not in 
response to a legislative mandate, extraordinary market 
dislocations, or regulatory failures.
    The SEC has issued an unprecedented number of rule 
proposals; to date, there are 52. Assessed on an individual or 
aggregate level, they have the potential to fundamentally alter 
the capital markets, how investors interface with the markets, 
and the availability of products to meet their financial goals. 
The proposals have been issued at a rapid-fire pace with 
inadequate comment periods and without adequate analysis or 
explanation by the Commission of why they are necessary and 
their costs and impact.
    As further explained in my written testimony, many of the 
proposed rules have substantive and procedural flaws. Some fail 
to show an accurate understanding of the markets, the role of 
intermediaries, or the participants they seek to regulate. 
Others rely on speculative statements rather than rigorous 
substantive analyses backed by factual and empirical evidence. 
And generally, throughout, there is no analysis of the 
interconnections and interdependencies that we are now starting 
to see with dozens and dozens of rules in our hindsight.
    To address at least some of these deficiencies, the SEC 
should publish a thorough analysis of the cumulative effect of 
its interconnected proposals, reopen comment periods thereafter 
to provide stakeholders with an opportunity to understand and 
assess these interconnections holistically, and only with the 
benefit of these efforts, finalize the rules holistically, not 
in an isolated series with phased multiyear implementation 
schedules that take into account the interconnections and the 
costs of complying with these rules. Not only does this process 
help protect investors and maintain the vibrancy and 
competitiveness of the deepest and most-liquid capital markets 
in the world, but it also ensures the durability of the 
Commission's rules and the Commission's authority.
    The SEC has already been sued over major rules that have 
been finalized. Just yesterday, it was handed down a couple of 
decisions that were not favorable. If the SEC continues 
hurtling towards a finish line of its own making, it will harm 
investors and the vibrancy of our capital markets, which rely 
on regulatory clarity and predictability. It will also 
potentially harm its own ability to fully and fairly regulate 
the capital markets as its authority is challenged and tested 
in courts.
    The SEC is fortunate to have an incredibly talented and 
dedicated staff of economists, lawyers, analysts--you name it. 
It has a tremendous bench of career staff in the agency. With 
time to do their job and an agenda that is grounded in the 
SEC's three-part mission of protecting investors and promoting 
capital formation and market integrity, these talented 
officials have and will deliver on behalf of Main Street 
investors.
    Thank you again for the opportunity to be here today to 
share my views, and I look forward to answering your questions.
    [The prepared statement of Ms. Blass can be found on page 
48 of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Blass.
    Dr. Kothari, you are now recognized for 5 minutes to give 
your oral remarks.

STATEMENT OF S.P. KOTHARI, GORDON Y BILLARD PROFESSOR OF 
    ACCOUNTING AND FINANCE, THE MASSACHUSETTS INSTITUTE OF 
    TECHNOLOGY (MIT) SLOAN SCHOOL OF MANAGEMENT

    Mr. Kothari. Thank you. Chairwoman Wagner, Ranking Member 
Sherman, and members of the subcommittee, thank you for 
inviting me to appear before you today.
    I have been on the faculty of the MIT Sloan School of 
Management since 1999. I currently hold the Gordon Y Billard 
Professorship of Accounting and Finance. From March 2019 to 
January 2021, I had the honor of serving as Chief Economist and 
Director of the Division of Economic and Risk Analysis at the 
U.S. SEC. In that role, I led a team of 160 economists and data 
scientists.
    Given my expertise and background, over the past few years, 
I have submitted several comments to the SEC noting 
deficiencies in the comprehensiveness and quality of the 
Commission's cost-benefit analyses. These deficiencies pose 
risks that the costs of such rules will exceed the benefits, 
harming the competitiveness and efficiency of U.S. capital 
markets and the U.S. economy. I will use my comments to 
illustrate examples of recent deficiencies in economic 
analysis.
    To begin with, private funds regulation. In February 2022, 
the Commission proposed new rules affecting the reporting and 
management of the private funds industry that manages an 
estimated $18 trillion of gross assets. This industry is highly 
competitive and open to sophisticated investors, including 
institutions and accredited investors. In its proposed 
rulemaking, the Commission did not consider the full economic 
context, and consequently failed to consider the full set of 
costs and benefits of the contract between fund managers and 
investors that are negotiated by sophisticated parties, and 
significant choices in investment funds, which ensure that fund 
managers compete on cost, performance, and reputation.
    Second example, best execution and order competition rules. 
In December 2022, the Commission proposed rules related to best 
execution regulations for broker-dealers, which would require 
detailed written policies and procedures for all broker-
dealers, imposing additional requirements and for conflicted 
transactions with retail customers. To support the rule, the 
Commission relied on an economic analysis on the relationship 
between payment for order flow (PFOF), and the prices received 
by retail investors, execution quality.
    The Commission used the regression analysis of 12 to 14 
million observations that were intended to control for 
differences in stocks traded by customers of PFOF brokers and 
non-PFOF brokers. The economic analysis, however, was 
fundamentally flawed. It was biased and overstated in 
statistical significance. Moreover, putting aside the flaws in 
the regression analysis, the Commission did not consider how 
even its flawed analysis implied an economically-miniscule 
effect of PFOF on execution quality, indicating that PFOF rates 
were, at best, a second-order determinant of execution quality.
    Turning to climate-related disclosures, in March 2022, the 
Commission proposed rules requiring climate-related 
disclosures. There are fundamental problems with the proposed 
rule. To begin with, the rules subverted the existing standard-
setting process in which the Financial Accounting Standards 
Board (FASB) set accounting disclosures, albeit under the SEC's 
oversight and authority.
    The Commission failed to provide an adequate cost-benefit 
analysis of its proposal. Although the Commission estimated 
compliance costs, which are most likely underestimated, it did 
not attempt to quantify the benefits of the proposal, but 
instead noted that the proposed disclosures could or may be of 
value to investors.
    However, many economic reasons suggest the disclosures 
would be burdensome, while providing limited benefits. First, 
existing standards already require disclosure of material risks 
and financial impacts. Second, the proposed disclosures would 
not require uniform metrics across companies, which, even if 
investors read, understood, and compared companies' 
explanations of how their climate impact figures were derived, 
inconsistent metrics across companies would make such 
information of limited value. Third, the meaning of, 
``materiality,'' would be diluted by the proposal's requirement 
to make disclosures without netting positive and negative 
impacts against each other.
    Finally, share repurchase disclosure, which was the subject 
of yesterday's court ruling, in December 2021, the Commission 
proposed expanding required disclosures of corporate share 
repurchases because managers might potentially use share 
repurchases for their own benefit by decreasing share count to 
manipulate compensation targets or earnings per share (EPS). 
However, the Commission ignored the empirical research on this 
issue, which has found no evidence to suggest any systemic 
problem of share repurchases motivated by manager self-
interest.
    [The prepared statement of Dr. Kothari can be found on page 
67 of the appendix.]
    Chairwoman Wagner. The gentleman's time has expired. If you 
could submit the rest for the record, I would appreciate it. 
And sadly, pursuant to my previous announcement, we will now 
recess until after votes.
    We will get back to you, Mr. Quaadman and Ms. Borrus, as 
soon as we get back. My apologies to the panel for the delay, 
but this shouldn't take much time. Members, hurry back.
    [recess]
    Chairwoman Wagner. This hearing of the Capital Markets 
Subcommittee will now come back to order.
    Let us resume with our witness testimony. Mr. Quaadman, you 
are now recognized for 5 minutes to give your oral remarks.

STATEMENT OF TOM QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER FOR 
    CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, and members of the subcommittee.
    American capitalization of global public capital markets 
stands at 42 percent. To put that in context, the European 
Union is at 10 percent, China is at 10 percent as well, and we 
all know what the benefits of the IPO market are, right? When a 
business goes from small to large and goes to the IPO market, 
you see the biggest spike in revenue, job creation, and wealth 
creation on Main Street. And that is why Congress appropriately 
put into the SEC tripartite mission, capital formation and 
competition. The reason why Congress did that was for the 
continued global leadership that benefits American investors, 
workers, consumers, and businesses.
    Since 2001, however, the SEC has had a negative capital 
formation agenda. The SEC has repealed the proxy advisory firm 
rule, a rule that was developed over 10 years on a bipartisan 
basis that would have regulated the proxy advisory from 
industry. Leaving this unregulated now allows two firms that 
are foreign-owned to drive corporate governance policy in the 
United States, and those two firms control effectively 37 
percent of the shareholder vote.
    We have also seen the gutting of shareholder proposal 
thresholds, which emboldens gadfly investors and activists. We 
also have the institution of the universal proxy card, which 
incentivizes proxy votes, balkanizes boards, and endangers 
board fiduciary duties. We also have as the plaintiff, in the 
case of people mentioned today, we have a rule that 
disincentivizes stock buybacks. Everyone in this room who has a 
401(k) plan and is in the TSP plan has benefited from buybacks. 
Why was this important to challenge? Because the SEC was 
looking to supplant the business judgment of a business.
    We also have an activist Public Company Accounting 
Oversight Board (PCAOB) that is pushing forward on proposals 
like the Noncompliance with Laws and Regulations (NOCLAR) 
proposal, which would change the auditor from auditing 
financial statements to becoming a legal umpire and could, if 
implemented, make things like parking tickets a material issue. 
We also have Staff Legal Bulletin 14L, which will further 
inject political discussions into the boardroom. For those who 
like 14L today, wait until the opposing party takes control, 
and see if you like it then.
    We can talk about how this impacts IPOs, but let me give a 
real-life example. In addition to running the Center for 
Capital Markets Competitiveness at the U.S. Chamber, I also 
head up the policy teams that deal with technology issues as 
well as intellectual property. Over the last 5 weeks, I have 
spent 2 weeks in Silicon Valley meeting with businesses to talk 
about artificial intelligence and quantum computing. In every 
meeting I have had, capital formation has come up, and it has 
come up because we are in the old normal, and by that, I mean 
high interest rates. We have venture capital (VC) funds 
receding, and we have the Federal Government soaking up dollars 
that could have gone into the productive economy to fund the 
deficit.
    And the conversation goes like this, ``The only other 
option we really have is the IPO market, but look at what the 
SEC is doing. We don't want to do proxy advisory firms, we 
don't want to deal with activist PCAOB issues, we don't want to 
deal with thresholds that allow gadflies to tell us what to do, 
and we don't want to have a board that is not going to abide by 
its fiduciary duties. That is not an option.'' So for people 
who are concerned about competition policy, guess what? No 
IPOs, no competition. It is a dangerous thing that is going to 
have impacts throughout the economy.
    We appreciate the work that the subcommittee has done on 
things like accredited investors and e-delivery. They have been 
important, but this subcommittee can also act in other ways 
that are going to be important. It can pass the Mandatory 
Materiality Requirement Act, proposed by Congressman Huizenga, 
that would require the SEC to come out with a disclosure when 
they are working on a disclosure to have a materiality 
statement. This subcommittee passed the Putting Investors First 
Act, proposed by Mr. Steil, that would regulate proxy advisory 
firms. Why? Because the SEC has decided not to act. We should 
have Acquired Fund Fees and Expenses (AFFE) relief, either 
through the Garbarino bill or the bill that has been introduced 
by Mr. Sherman and Mr. Huizenga, that would allow VDCs to fund 
startups and middle-market companies.
    We want to work in partnership with the subcommittee on 
these issues, so thank you, and I am happy to take any 
questions you may have.
    [The prepared statement of Mr. Quaadman can be found on 
page 73 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Quaadman.
    Ms. Borrus, you are now recognized for 5 minutes to give 
your oral remarks.

         STATEMENT OF AMY BORRUS, EXECUTIVE DIRECTOR,  
           COUNCIL OF INSTITUTIONAL INVESTORS (CII)

    Ms. Borrus. Chairwoman Wagner, Ranking Member Sherman, and 
members of the subcommittee, good morning. My name is Amy 
Borrus, and I am the executive director of the Council of 
Institutional Investors (CII). I am pleased to appear before 
you today on behalf of CII. We are a nonpartisan, nonprofit 
association of more than 130 public, corporate, and labor 
employee benefit plans with combined assets of more than $5 
trillion. Our focus and expertise is on corporate governance 
and shareholder rights. CII members are long-term share owners 
responsible for safeguarding assets used to fund the employee 
benefit plans of millions of workers and retirees throughout 
the United States. Since CII members invest most or much of the 
portfolios in U.S. company stocks, issues relating to U.S. 
corporate governance are very important to our members.
    Two-and-a-half years into his term as SEC Chair, Gary 
Gensler has pursued a sweeping regulatory revamp, from crypto 
assets to corporate disclosure. From CII's perspective, Chair 
Gensler's leadership has greatly advanced the SEC's tripartite 
mission of protecting investors; maintaining fair, orderly, and 
efficient markets; and capital formation. And CII and its many 
members are especially heartened that a number of the reforms 
Chair Gensler has spearheaded align with longstanding CII 
policies that strengthen corporate governance of the U.S. 
public companies.
    I will briefly highlight just two of those critical reforms 
and why they benefit our members and long-term investors 
generally. The first is universal proxy. In November 2021, the 
Commission adopted a rule to require the use of a universal 
proxy card in director election contests. The rule established 
a more-level playing field for those investors, and that is 
many of them who vote by proxy rather than in person at the 
company's annual meeting. It simply requires that when there is 
a contest for board seats, the names of all candidates must 
appear on the proxy cards that the company and the nominating 
shareholder distribute. This allows all shareholders to vote 
for the combination of director candidates they believe best 
serves their economic interests.
    The SEC final rule reflected many of the points that CII 
raised when we filed a rulemaking petition for universal proxy 
back in January of 2014. That petition was based on our 
policies on director elections, which simply state that when 
there is a contest for board seats, opposing sides should use a 
proxy card that names all management nominees and all 
shareholder proponent nominees. CII and many market 
participants agree that the SEC final rule appropriately 
provides shareholders voting by proxy, which is how the vast 
majority of investors actually do vote, the same options 
available to other shareholders to express their view on who 
they think are the best candidates to serve on corporate 
boards.
    The second recent SEC reform I would like to highlight 
deals with insider trading arrangements and related 
disclosures. Last December, the SEC adopted amendments to Rule 
10b5-1. That rule was originally intended to prevent executives 
from running afoul of the prohibition on material nonpublic 
information, as long as they bought or sold company stock at a 
predetermined time, on a set schedule. The SEC adopted this 
rule in 2000, but within a decade, loopholes emerged in this 
operation, and there were press reports and empirical research 
which suggested that some executives were using 10b5-1 plans to 
pursue fortuitously-timed trades in company stock while they 
had material nonpublic information.
    In December of 2012, more than a decade ago, CII submitted 
a rulemaking petition to the SEC requesting amendments to Rule 
10b5-1 to close loopholes and enhance disclosure of these 
trading plans. The petition reflected CII policy, which 
acknowledges that Rule 10b5-1 plans have a legitimate purpose 
but calls for specific safeguards. These plans should be 
publicly disclosed and adopted when the participating executive 
is not in possession of material nonpublic information. Our 
policy also states that there should be a ban on trades for at 
least 3 months following the adoption of a trading plan and 
that such plans should not be substantively modified 
thereafter.
    The SEC final rule adopted many of our recommendations, and 
CII and many of our members and other market participants 
believe that the rule benefits investors by better protecting 
them from misuse of these plans and by enhancing public 
confidence in corporate management and the fairness of the 
capital markets.
    In closing, CII looks forward to working cooperatively with 
the SEC, with the Committee on Financial Services and the 
Capital Markets Subcommittee, and other interested parties to 
further improve the corporate governance of the U.S. public 
companies. Thank you for inviting me to participate in this 
hearing. I would be pleased to answer any questions.
    [The prepared statement of Ms. Borrus can be found on page 
57 of the appendix.]
    Chairwoman Wagner. Thank you, Ms. Borrus. We will now turn 
to Member questions, and I recognize myself for 5 minutes for 
questions.
    Ms. Blass, I am concerned about the SEC's predictive data 
analytics (PDA) proposed rule and the negative effects it will 
have on innovation and retail investors. The scope of the 
proposal is extremely broad and could be applied to virtually 
any technology used by broker-dealers and investment advisors. 
Can you discuss the impact the PDA proposal will have on 
innovation and retail participation?
    Ms. Blass. Thank you, Chairwoman Wagner. I think we can all 
agree that the use of artificial intelligence (AI) by advisors 
and broker-dealers is something that we should be looking at, 
but there are a few things to consider: one, there is no 
explanation on the part of the Commission as to why the current 
regulatory environment does not address the conflicts with the 
use of AI; and two, this proposal is not limited to the use of 
AI.
    Chairwoman Wagner. Correct.
    Ms. Blass. It covers, frankly, like per our analysis, Excel 
spreadsheets.
    Chairwoman Wagner. Right.
    Ms. Blass. So when you look at the breadth of that 
proposal, tools, technology which has been used to deliver 
better outcomes to investors, like model portfolios, could be 
at risk. Technology that has been used by advisors and broker-
dealers to manage risk trading surveillance could be at risk. 
But even more importantly, technologies used to educate 
investors, like self-directed investors, so they can manage 
their own portfolios and learn how to trade in the markets, 
could potentially go away. And technologies that financial 
professionals use to monitor financial wellness, for example, 
are you underinvested in retirement--all of that can also go 
away.
    Chairwoman Wagner. And quickly, what about its impact on 
smaller firms, which actually have fewer resources to manage 
the heavy compliance costs and, thus, less opportunity to 
compete against the larger incumbents?
    Ms. Blass. Given the breadth of the coverage of the rule 
from cover technology to investor interaction, this rule would 
be extremely hard to comply with. In fact, in the actual real 
proposal, the Commission does acknowledge that it could be 
impractical or impossible at times to comply with this. This is 
wording----
    Chairwoman Wagner. Thank you.
    Ms. Blass. ----in the Commission's proposal.
    Chairwoman Wagner. Thank you. Mr. Bentsen, the SEC's 
proposal on open-end fund liquidity would make significant 
changes to the liquidity risk management practices of mutual 
funds, that would narrow the investment strategies available 
for retail investors and retirement savers. Can you elaborate 
on the impact limiting investment strategies in mutual funds 
would have on those retail investors, and would it potentially 
reduce returns?
    Mr. Bentsen. Thank you, Madam Chairwoman. You are right. 
First of all, there are already liquidity risk management rules 
in place for open-end mutual funds and have been for quite some 
time. The problem with the proposal now is there has been a lot 
of focus on swing pricing, and there are real concerns with 
that. We can talk about that, but the liquidity risk management 
part, as proposed, would really make it complicated for a 
number of traditional types of mutual funds to operate because 
of the level of cash that you would have to keep in it. And 
probably the most extreme would be corporate loan funds, which 
are liquid, which do trade, but would be very negatively 
impacted by this, and that product would be very hard to 
maintain as a retail investment product. The same can be said 
for small cap funds as well.
    We think the Commission really needs to think about how the 
current models work, which we think have worked pretty well, 
even during the period of the 2020 pandemic.
    Chairwoman Wagner. A solution in search of a problem as 
usual.
    Mr. Quaadman, as you know and you have outlined, the SEC's 
mission is to protect investors; maintain fair and efficient 
markets; and promote capital formation. It can't be said often 
enough. Can you name any initiatives undertaken by the SEC 
within the last 2 years that specifically promote capital 
formation?
    Mr. Quaadman. The short answer to that is, no. As I also 
said in my opening statement, it is actually negative in what 
they have done. And one other thing I would just point out as 
well is there is a study that came out from Professor Hal Scott 
at Harvard that actually showed with the aggressive rulemaking 
agenda that the SEC has, at least 80 percent of the rules 
either don't have a congressional mandate or aren't authorized 
by Congress. And one of the things the court also found to 
abide back, which we also believe is true with some of the 
other proposals, is they could not articulate a reason for 
moving forward on some of that.
    Chairwoman Wagner. And I will tell you that the SEC has 
neglected the capital formation aspects of their mission very 
badly, much worse than under any previous SEC Chair, and I 
think you all would agree with me on that. Why is it critical, 
sir, for the SEC's regulatory agenda to explicitly prioritize 
measures to facilitate capital formation for small businesses?
    Mr. Quaadman. For two reasons: first, as I stated, the IPO 
process is a very important way for businesses to access the 
capital they need for innovative technologies or whatever they 
are doing; and second, it allows investors on Main Street to 
reap the benefits of it.
    Chairwoman Wagner. My time has expired. If you would like 
to elaborate in writing, that would be terrific.
    I now recognize the ranking member of the subcommittee, Mr. 
Sherman, for 5 minutes for questions.
    Mr. Sherman. I have a few comments about Mr. Quaadman's 
presentation. IPOs are important. That is why we shouldn't shut 
down the government and shut down the whole IPO process. It has 
been good to work with you on FASB issues, and someday FASB 
will repeal FASB Number 2, and we will capitalize research.
    Investor protection is not the entity. It is not at odds 
with capital formation. It is a necessary antecedent for 
capital formation. It is somewhat unfair that public companies 
have to make all these disclosures and giant private companies 
do not, and I look forward to working with my colleagues on 
legislation to require multi-billion dollar private companies 
to at least disclose some of their effects on our society. The 
deficit is critically important. That is why we need an 
effective IRS. For 5 years, I headed the second-largest tax 
agency, and you get the estimates for the CBO, I think are way 
too low in terms of the amount of revenue that ultimately comes 
in by expanding the auditing of multinational corporations and 
wealthy individuals.
    Mr. Quaadman, thank you for your comments on business 
development companies (BDCs), and I did want to just mention 
something on Scope 3 for environmental disclosures. And I have 
said this before, that it makes sense for Bank of America to 
tell us their carbon footprint, but if they have to gather 
information about every pizzeria they make a loan to--and don't 
say a pizzeria isn't material to Bank of America, because all 
of their small business loans together are hundreds of billions 
of dollars--if they have to gather information about whether 
the pizzeria delivers or doesn't deliver the pizza: first, it 
is absurd; but second, it discriminates against the pizzerias 
who deliver the pizza and, therefore, have a bigger carbon 
footprint. But when all of us from Sherman Oaks have to drive 
individually to Encino to get the really good pizza, that is 
more carbon because we are all in our separate cars, but that 
doesn't count for Scope 3. That is Scope 4, because we are the 
customers of the customer of the Bank of America.
    Safeguarding, we have seen with FTX what happens when you 
trust your asset to a broker and the broker needs to buy a home 
in the Bahamas. We need to make sure assets are safeguarded. On 
the other hand, the SEC is working on a safeguarding rule that 
seems pretty well-designed for intangible assets like crypto, 
but I would think they would write a separate rule for tangible 
assets such as real estate.
    Mr. Bentsen, is the rule they are working on over there 
well-designed for tangible assets, particularly real estate?
    Mr. Bentsen. Thank you, Mr. Sherman. No, it is not. The 
rule is overly broad and undefined, and captures a number of 
traditional assets, and really upends the existing custodian 
relationship, and, frankly, is inconsistent with how prudential 
regulators govern custodians, as well. So, the Commission 
really needs to go back to the drawing board on that rule if 
their intent is to focus on non-traditional assets, as you 
point out, crypto, or if it is to focus on registered 
investment advisors in the more retail space. They far 
overshoot the mark on what they have done with the rule.
    Mr. Sherman. And it may have also overshot with regard to 
the conflict-of-interest proposal. Obviously, if you design an 
asset, you shouldn't bet against it, but nobody designed pork 
belly futures or oil futures. What are the risks of the 
proposed rule, Mr. Bentsen, that would impede the traditional 
kinds of investments that people make? Would they go long or 
short in, say, the oil market?
    Mr. Bentsen. Definitely, it impacts things like prime 
brokerage in the institutional market, which is a big function 
of the institutional market, and it could cause firms to pull 
back on the services. And the other problem is that it is going 
to force firms to more or less police their clients, which is 
really the role of the SEC, so getting clients to comply with 
this will be very difficult. They may not want to do business 
with the firm, so it has a lot of knock-on effects to it.
    Mr. Sherman. And finally, Mr. Quaadman, getting capital to 
Main Street small businesses is critically important. Business 
development companies (BDCs) play an important role. The SEC 
has apparently decided not to address how these AFFEs have 
impacted business development companies and their investors. 
What should the SEC be doing?
    Mr. Quaadman. We believe the SEC should either exempt the 
AFFE disclosure or allow for tabular footnote disclosures, as 
you have suggested as well, because that is double counting 
expenses, which prevents BDCs from going into NDCs and shuts 
off their ability to provide that needed capital for Main 
Street.
    Mr. Sherman. Thank you.
    Chairwoman Wagner. The gentleman's time has expired. The 
Chair now recognizes the gentleman from Oklahoma, Mr. Lucas, 
for 5 minutes.
    Mr. Lucas. Thank you, Madam Chairwoman, for holding this 
hearing, and thank you to the witnesses for testifying. I think 
we all agree that the United States has the strongest capital 
markets in the world and has been essential for U.S. businesses 
and investors during the last several, shall we say, turbulent 
years. During times of significant economic and geopolitical 
uncertainty, it is imperative that our capital markets are 
healthy and well-functioning. That is why it is concerning that 
U.S. banks must navigate the extensive and disruptive 
rulemakings from the SEC, while also absorbing increased 
capital requirements under the Basel proposal from the banking 
regulators.
    Mr. Bentsen, could you speak to how this level of 
uncertainty impacts the resilience of U.S. capital markets, 
and, for that matter how the industry is embracing what appears 
to be ahead of them?
    Mr. Bentsen. Thank you, Mr. Lucas, for the question, and 
while not necessarily the purpose of this particular hearing, 
you raised a very important point about the Basel III Endgame 
capital proposal. This is something that has been in the works 
really for a decade, and the U.S. prudential regulators have 
put out a proposal that really gold-plates compared to what the 
Europeans are doing and what we think the U.K. will do in this 
proposal, and in particular, where we are concerned at SIFMA, 
is that it raises the capital on the trading by as much as 70 
percent. And when you add that to what the U.S. has uniquely, 
the stress testing regime, and as somebody who knows the global 
market shock, it is really a compounding, a double counting 
effect.
    And when you consider that the dealer banks that will be 
subject to this proposal comprise the vast majority of the 
underwriting and trading market for traditional assets, whether 
it is corporate debt, Treasuries, munis, equities, or 
securitizations, it is really going to create a squeeze on 
market capacity. And as I pointed out in my testimony, we 
finance 75 percent of U.S. commercial activity through our 
markets, which is different than any other jurisdiction in the 
world, and so that capacity, and we represent the broad market, 
right? We don't just represent the large dealer banks; we 
represent smaller broker-dealers as well and everybody in 
between. That capacity doesn't necessarily exist. So if you 
take that capacity out of the market, you are going to have a 
knock-on effect into not just investment returns, but the 
ability of corporate communities and others to raise credit and 
capital.
    Mr. Lucas. Absolutely. We have heard from the witnesses 
today about the unprecedented pace and scope of the SEC's 
rulemaking agenda, and I am confident there is still much more 
to be said on that topic. I want to focus on why the SEC is 
undertaking such a massive rulemaking agenda.
    Ms. Blass, most of the proposed rules have no legislative 
mandate. What deficiencies is the Commission responding to with 
this volume of rulemaking? Where is it coming from?
    Ms. Blass. That would actually be a fantastic thing for the 
stakeholders to know so that we could actually help the SEC in 
the comment process, but when you look at the rules, they do 
not clearly articulate the necessity for why the breadth, the 
scope, and the pace is not articulated by the Commission.
    Mr. Lucas. Mr. Quaadman, could you elaborate on the 
negative impact on capital markets when the financial 
regulators undertake such massive shifts in policy?
    Mr. Quaadman. Yes. As I mentioned, it prevents businesses 
from wanting to access the IPO market, and having to look for 
other places to raise capital. The other thing that it does as 
well is it also endangers the ability of the United States to 
be the endpoint of global capital, so we are not going to have 
as much coming into our system. But this plays out in terms of 
negatively impacting the competitiveness of the American 
economy and the global economy.
    Mr. Lucas. That result is fascinating.
    Mr. Bentsen, could you touch on this for just a little bit, 
the question about the negative impact on capital markets when 
financial regulators undertake such massive shifts in policy?
    Mr. Bentsen. Thank you for that. There are a few things 
that you have to consider. All of these different rules are 
going to impact the market in different ways. As I pointed out, 
the Open-End Fund Liquidity Rule and liquidity risk management 
could impact the ability for investors to invest in corporate 
loans, then could impact the people who are the borrowers in 
the corporate loan markets. Radically changing our equity 
market structure could raise costs for retail investors, who 
had the lowest cost they have had in history, and that could 
impact their returns as well.
    If you squeezed the private fund market, which has been a 
growing market in the U.S., as Mr. Quaadman mentioned, you do 
cut off the ability for firms to raise capital to invest in 
plants and equipment and grow the economy. So, this really goes 
back to why you really need to look at all these rules 
together, and not just what the mandate is, but also how they 
are going to play off one another.
    Mr. Lucas. Thank you. Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman's time has expired. The 
Chair now recognizes the gentleman from North Carolina, Mr. 
Nickel, for 5 minutes.
    Mr. Nickel. Thank you, Chairwoman Wagner and Ranking Member 
Sherman. Two days ago, Congressman Steil from the great State 
of Wisconsin and I led a group 25 Members in sending a letter 
to SEC Chair Gary Gensler expressing our concerns with the 
proposed rule on conflicts of interest and securitization. 
Without objection, I would like to enter this letter into the 
record.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Nickel. While we support the goal of preventing bad 
actors from taking advantage of conflicts of interest in 
securitization as required under Section 621 of the Dodd-Frank 
Act, this proposal goes far beyond the congressional mandate by 
outlawing many ordinary course activities that have nothing to 
do with securitization transactions. I am concerned that this 
will impair the ability of securitization markets, which fund 
residential mortgages and auto loans, which would increase the 
cost and reduce the availability of consumer mortgage and 
business credit for my constituents when they are already 
struggling to make ends meet.
    Mr. Bentsen, thanks for being here. Can you tell us what 
harm this proposal as written will cause the markets, and why 
is it important for this proposal to be more narrowly tailored?
    Mr. Bentsen. Thank you, Congressman, for that question, and 
thank you, Congressman from Wisconsin, for weighing in on this 
issue. It is entirely the role of this committee and Congress 
to opine on congressional intent where this is a rule that was 
part of Section 621 of the Dodd-Frank Act. It has been 
appending rule for over a decade.
    The rule proposed is overly broad. First of all, the 
securitization market is hugely important, as you pointed out, 
not just in the mortgage market, but it is also important to 
credit card lending, auto loan lending, and equipment 
financing, has both commercial and retail implications, and it, 
again, helps expand the economy as a function. As the rule is 
written, it goes well beyond the intent of Congress in seeking 
to address conflicts, as you mentioned, and there are 
sufficient anti-fraud rules on the books to deal with that. And 
the problem is that it will be impossible for firms to comply 
with. They will have to curtail their activity because of being 
worried about tripping over the conflict aspect in the rule, so 
the Commission really needs to go back and narrowly tailor this 
down. And Congress weighing in is very important because the 
securitization market is an important financing tool to the 
general economy.
    Mr. Nickel. Thank you so much, Mr. Bentsen. I would like to 
move on to the SEC's Staff Accounting Bulletin 121 (SAB 121). I 
have expressed concerns over how this will actually make 
digital assets less safe. On Tuesday, the Government 
Accountability Office (GAO) found that the SEC was wrong not to 
send SAB 121 to Congress for review, as it should, with an 
official rule. I am happy that Congress will now get a say on 
this rule. The GAO decision is just the latest in a series of 
losses for the SEC, demonstrating the agency's disregard for 
the statutorily-required processes in the Administrative 
Procedure Act.
    Mr. Bentsen, the SEC claims that the goal of SAB 121 is 
investor protection, but can you explain how preventing the 
most highly-regulated banks from providing custody for digital 
assets is actually against the best interest of investors, and 
will their services make the digital assets ecosystem even 
safer?
    Mr. Bentsen. Yes, we believe so. SAB 121 is a situation 
where the SEC was in conflict with the prudential rules that 
banks are subject to and is an example of where there was not 
sufficient coordination between the agencies. It would have the 
effect of basically precluding publicly-listed commercial banks 
from being able to provide, who are the primary custodians in 
the world, from being able to provide custody to these assets, 
so, when, in fact, it would have the counterintuitive effect of 
driving these outside of the regulated sector of it. So, we 
think that was the appropriate decision by the GAO.
    Mr. Nickel. Thanks so much. Moving on to the e-delivery, as 
the Democratic lead on the Improving Disclosure for Investors 
Act, which passed out of this committee with bipartisan 
support, it would make it easier for broker-dealers to deliver 
documents electronically. Some claim that seniors are against 
this policy change because they prefer paper and are 
comfortable with digital tools. What does the data show on this 
claim?
    Mr. Bentsen. More and more clients are certainly moving to 
e-delivery. And we have surveyed investors and found that 
three-quarters of investors would like to have all or some of 
their documentation delivered electronically. And there has 
been no variation in the demographics among age, so it is 
really an area where we need direction. When we go to T+1, 
which we will do the day after Labor Day next year, we are 
going to have to go to e-delivery on certain things because the 
mail system cannot move fast enough to keep up with that.
    Chairwoman Wagner. The gentleman's time----
    Mr. Bentsen. But more importantly, more investors are 
finding that they view this as more secure, and knowing as well 
that they can always go back and ask for paper, but they view 
it as more efficient, and more secure. So, we appreciate the 
work that you and the committee are doing on that.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Nickel. I yield back, and I thank Mr. Casten for 
letting me skip ahead of him.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from Michigan, Mr. Huizenga, who is also the Chair of our 
Subcommittee on Oversight and Investigations, for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman, and it's good to 
see all of our witnesses. I appreciate it and I appreciate your 
time. I am going to move kind of quickly here. I do want to 
touch on something that Mr. Sherman brought up with Mr. 
Quaadman, and I appreciate you bringing this up in your 
testimony about our ability to attempt to fix the problem. Mr. 
Garbarino also has an approach on that as well, kind of trying 
to solve the problem in a bit of a different way, and 
ultimately, we want to get something moving in this space. I am 
curious if you could take just a moment to unpack, and I know 
this is the technical side of this, but the footnote versus the 
full exemption. Is there a preferred method in your mind as to 
how we should move forward?
    Mr. Quaadman. I think full exemption is a cleaner way to 
get there. But recognizing that, we want to have a pathway for 
success, having AFFE being in a footnote disclosure, I think 
avoids the double counting issue, which is really at the heart 
of why they are not included in the indices, and then prevents 
them from providing the capital formation tools that they can.
    Mr. Huizenga. Okay. I am going to move on to Ms. Blass. 
But, Mr. Quaadman, did I hear you say that there was a study 
that showed 80 percent of all of the rulemaking coming out of 
the SEC has no congressional mandate?
    Mr. Quaadman. Either no congressional mandate or is not 
authorized, and that comes from Professor Hal Scott's Capital 
Markets Center up at Harvard.
    Mr. Huizenga. Okay. Well, that flows nicely into Ms. Blass. 
For full disclosure, we have crossed policy swords a few times 
in my office privately when I happened to be the chairman and 
the ranking member of this very committee. And I grew to 
appreciate you over those years of doing that because in your 
14 years of dedication to the SEC and, by extension, our 
country and our markets and our economic system, I figured out 
that you were there for the right reasons, and I appreciate 
that.
    I just wanted to say that, but I also wanted to put out 
there that we did not always agree, and it seems to me that the 
SEC is frankly delegitimizing itself with these types of 
things, when 80 percent of their actions aren't actually 
authorized, aren't actually sanctioned, are beyond their scope, 
and I am curious, in your opinion, is the SEC actually doing 
damage to its ability to do what is important work? Mr. Nickel 
just brought this up, and Mr. Lucas just brought this up, and I 
know others are going to bring this up as well.
    There is a lot of concern. It should be on both sides of 
the aisle, and I am curious if you could just comment from your 
14 years of having worked there.
    Ms. Blass. I think I would raise two points, the first 
being with this onslaught of rules. Chair Gensler stated to 
finalize 61 rules by the end of his term, and with this 
onslaught of rules, resources are not finite in terms of 
dollars and cents, but also human capital to put this in place. 
So, the first point is we could risk getting to a jurisdiction, 
and these jurisdictions do exist where there is no compliance 
with the rules because it is impossible to comply.
    And the second point is that we can get to a place where 
there is a regulator-created systemic risk because we break 
something in the market. We are a very complex, mature market, 
and if you move too many pieces at once, which is what we are 
doing here, something is going to break.
    Mr. Huizenga. Agreed. I have a minute-and-a-half left.
    Dr. Kothari, you co-signed a letter with Craig Lewis, of 
Chair Mary Schapiro's regime, as he was the former Chief 
Economist. That letter was with respect to the climate rule, 
and you noted that the Commission, ``made no attempt to 
understand the effects of the changes across the economy,'' and 
that the proposal, ``fails to quantify these costs or even 
discuss what the impact might be, particularly on small 
businesses and their employees with whom registrant ceases to 
do business.'' Do you stand by that analysis with Mr. Lewis, 
and, ultimately, how do we manage our way through this issue?
    Mr. Kothari. I do stand by the analysis, and more work that 
I am doing points in the same direction, that it seems that 
regulation is in search of a problem rather than attempting to 
address an existing problem. This has nothing to say about 
whether or not climate risk is real, but as far as the SEC and 
corporations go, do investors face that risk? And the answer 
is, at least so far, there isn't any evidence of that, and we 
want that to be a targeted approach rather than a blanket 
approach of each and every firm having to disclose or having to 
report about climate risk, whether it exists or not.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Huizenga. Thank you. I yield back.
    Chairwoman Wagner. And the Chair now recognizes the 
gentleman from Illinois, Mr. Casten, for 5 minutes.
    Mr. Casten. Thank you, Madam Chairwoman. And thanks to all 
of our witnesses today. In 2020, the Commodity Futures Trading 
Commission (CFTC), under President Trump, issued a report on 
managing climate risk in the financial sector that said, among 
other things, that climate change poses a major risk to the 
stability of the U.S. financial system. In 2021, the Financial 
Stability Oversight Council (FSOC) essentially said the same 
thing, that climate change is an emerging threat to U.S. 
financial stability.
    Last year, there were $165 billion in insured losses from 
weather-related disasters in the United States. Not total 
losses, insured losses, and, of course, we are now seeing 
multiple property insurers pulling out of markets in California 
and Florida along the Gulf Coast and moving that risk on to 
other parts of the system. I am hoping we all agree, but is 
there anybody on the panel right now who disagrees that climate 
change is creating risks to our financial system?
    [No response.]
    Mr. Casten. Okay. Good. I asked that question because I 
have been in this gig for 5 years, and I was in the private 
sector for 20 years before that. I don't say that to brag; it 
is just that I view things from that lens. And if I was running 
a company that had risks that I was exposed to that markets 
didn't know about, I would not be standing up and saying, hey, 
look at my company, I am sitting on a lot of risk here. I try 
to offload it, right? And, in fact, we are seeing that the 
sophisticated players are moving risks onto unsophisticated 
players, whether that is property owners in coastal areas who 
are selling that risk down to Fannie Mae and Freddie Mac, a 
coal industry that is losing market share to cleaner, cheaper 
alternatives, and is shifting their risks onto pension holders, 
and that creates risks for the broader economy.
    Ms. Borrus, do you believe that investors need reliable 
information about companies' climate risks so that they can 
allocate their portfolio?
    Ms. Borrus. Thank you for the question, and that is very 
much what we are hearing from many of our members who are long-
term institutional investors. CII generally supports the SEC's 
proposed rule on climate-related disclosures. Many CII members 
and other investors believe climate change is a systemic risk 
that long-term institutional investors must address as part of 
their fiduciary duty.
    Mr. Casten. And I would argue that whether you believe that 
or not, investors should be free to make their own decisions.
    Ms. Borrus. Of course, and we agree with Chair Gansler that 
the SEC has a role to play in making sure there is some 
standardization to the conversation happening between investors 
and companies on climate. Investors need comparable, 
consistent, decision-useful information on which to make 
investment decisions and proxy voting decisions.
    Mr. Casten. I don't want to cut you off, I want to just get 
to a couple of things, but I am glad you said that. You 
answered my second question. I often say that the loneliest 
position in Congress is to advocate for competitive markets 
because nobody comes to Congress and says, you know what? What 
my market needs is more transparency, lower barriers to entry 
for my competitors. That is not a thing, but I would presume 
you would agree that if you have transparent information, 
markets are more efficient.
    Ms. Borrus. Yes.
    Mr. Casten. Okay. Does anybody disagree with that 
proposition?
    [No response.]
    Mr. Casten. Okay. Mr. Quaadman, I want to move to you 
because in your testimony, you mentioned the European Union's 
(EU) corporate sustainability reporting directive and some of 
the challenges, and I think there is a rich conversation we 
could have about that. I would hope you would agree, given how 
many U.S. companies are affected by European regulation 
multinationals, would you like the U.S. to have a seat at that 
table?
    Mr. Quaadman. Yes, and, in fact, we have been meeting quite 
frequently with the EU on these very issues. And one of the 
reasons why we had Chairman Gensler from the SEC at the Chamber 
last week was to discuss some of this. That being said, we do 
think that the extraterritorial impact of the EU rules, 
particularly when a double materiality concept puts American 
companies at a competitive disadvantage.
    Mr. Casten. I think there are parts of that I agree with, 
and there are parts of that I disagree with. The concern that I 
have, that I would just ask all of you to consider and my 
colleagues to consider is that lots of U.S. companies are 
regulated in other markets. Lots of U.S. companies are 
regulated in California. And we cannot say that we do not want 
the United States to have a leadership role by actually passing 
regulations and then complain about the fact that other people 
lead. We are sailing down a path whereby if we stop the SEC 
from acting, we are basically deferring leadership to other 
countries. I have more questions, but I am out of time here.
    After the United States pulled out of the Paris Climate 
Accord, I was one of 12 people representing the United States 
Government at the COP in Madrid. We were the only country that 
was not there, and I got pulled aside by some of my European 
colleagues who said, can you please go back and tell folks back 
home that really bad things happen in the world and----
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Casten. ----the United States chooses not to lead? I 
yield back.
    Chairwoman Wagner. The gentleman yields back, and the Chair 
now recognizes the gentleman from Arkansas, Mr. Hill, who is 
also the Chair of our Subcommittee on Digital Assets, for 5 
minutes.
    Mr. Hill. Thanks, Chairwoman Wagner. And I thank you and 
Chairman McHenry for your dedication to liquid capital markets 
that are orderly, and investor protection and capital 
formation, and for bringing this panel to us to talk about the 
impact of the SEC's regulatory agenda on those goals. And from 
looking and listening today, I think the SEC under Chairman 
Gensler has lost credibility with a lot of market participants, 
issuers and investors, because of what Ms. Blass talked about: 
61 rules dumped out on the market, ivory tower ideas without 
any analytic or statutory framework to support them.
    He has lost respect here on Capitol Hill on both sides of 
the aisle due to his flagrant ignoring of the statutory 
obligation of cost-benefit analysis that actually stands up to 
a cost-benefit analysis, and his flagrant shortening of comment 
periods, which time and time again, the members of this 
committee on both sides of the aisle have had to write and 
extend. And finally, having lost in the court of public 
opinion, now Chairman Gensler is losing where it really hits: 
his resume. He is losing in the Federal Court's opinion. Being 
accused, the Commission, of being arbitrary and capricious is 
not something I would want on my resume were I a staff lawyer 
at the SEC.
    And so, I would like to enter in the record today's Wall 
Street Journal editorial, ``Gary Gensler and the SEC Lose 
Again.''
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Hill. Thank you. Mr. Bentsen, I visited with Chair 
Gensler about the Consolidated Audit Trail. I know that large 
Wall Street firms have been somewhat supportive of that, many 
of the others less so, but he alleged to me in his testimony 
that the SEC's and the market exchange's ability to surveil the 
market for self-regulatory organizations (SROs) and the SEC is 
inadequate. Do you think their ability to surveil the market is 
inadequate?
    Mr. Bentsen. No, I do not. No, sir, and there are a lot of 
issues with the Consolidated Audit Trail that really need to be 
resolved. And as I pointed out in my oral testimony, a major 
concern for us is the 3-year pending data privacy rule, where 
we have the largest database in the world with no protocols for 
the 25 SROs that oversee it or the thousands of employees who 
work for them. This is something that those committees looked 
at in the past, and you have, and others. And we think it shows 
a lack of prioritization at the Commission, that what is a 
really important rule that needs to get done has been sitting 
for 3 years.
    Mr. Hill. Yes. First, I do not think we need it. We have 
Blue Sheets. We have a regular ability to do surveillance any 
day in our market, for any number of firms, any way we want to 
right now under regulatory supervisory standards and the 
statute. And so, number one, it is not necessary. Number two, 
it has a privacy concern on the storing of that data. We are 
not very good in the Federal Government at storing people's 
personal information. We have all been victims of breaches here 
at OPM or the IRS or the Consumer Financial Protection Bureau 
(CFPB), for example.
    But the third point, I want to get your view on, too, is it 
has unveiled a 2023 budget of $222 million, which is a little 
higher than when they came to the committee and suggested it 
would cost $50 million a year. Is there any limit to the 
spending on this, what would have cost a billion dollars to run 
the CAT?
    Mr. Bentsen. Congressman, two things. One is, we actually 
advocated for an expedited Blue Sheet approach as opposed to a 
data multiple times with the Commission over multiple 
Commissions, and they didn't agree with us on that, but you are 
absolutely right that the broker-dealers have all the 
obligation and no authority, and now we have all the cost, 
which will get passed on to the end client under the CAT.
    Mr. Hill. Yes.
    Mr. Bentsen. And we are not part of the management group of 
it. We have no line of sight into how the budgets developed. We 
have no line of sight of what the budget is, and you are right. 
It has grown exponentially.
    Mr. Hill. Thank you. Let me switch gears, and anything you 
want to add, I encourage you to participate by forwarding it to 
me for the record.
    Ms. Blass, I am concerned that we are trying to take 
private institutional funds and have them be disclosed as if 
they are for retail investors. You ran the SEC's Investment 
Management Division. Is this overkill, and is it unnecessary, 
the private fund advisors rule that Mr. Gensler has proposed?
    Ms. Blass. Sir, it rewrites a $26-trillion industry between 
advisors and the most-sophisticated participants in our 
markets. It does not explain why it is necessary or 
appropriate. The costs will be extreme, and it is going to have 
a large impact, in particular on the smaller advisors, and 
create a tremendous barrier to entry. A lot of these smaller 
advisors are women and minorities, and private funds support 
small business. So, all of this will be impacted by a rule that 
the SEC really has not explained why it is necessary or 
appropriate.
    Chairwoman Wagner. The gentleman's time----
    Mr. Hill. Thank you. I yield back to the Chair, and I thank 
the gentlewoman.
    Chairwoman Wagner. The gentleman yields back, and the Chair 
now recognizes the gentleman from Missouri, Mr. Cleaver for 5 
minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. And I thank all 
of the witnesses for giving of your time today. Ms. Borrus, as 
you noted in your testimony and on your organization's website, 
``The Council of Institutional Investors' members include U.S.-
based asset owners or issuers and include more than 130 public 
pension funds, corporate and labor funds, and foundations and 
endowments with more than $5 trillion in combined asset under 
management.''
    As you may expect, I like to raise the diversity issue. The 
assets began with investors, including institutional investors, 
and flow through professional asset managers before taking root 
in companies and projects, providing asset managers a critical 
role in influencing how capital is distributed throughout our 
economy. Despite this critical rule, women- and minority-owned 
asset management firms currently control 1.4 percent of the 
over $82 trillion in management assets in the United States 
compared to the 98.6 percent of assets controlled by firms 
owned by White men.
    And studies have shown that the performance of diverse-
owned firms is critically important, from my perspective. It is 
not statistically different, and, in some cases, even better 
than the broader industry. The lack of utilization of women and 
minority asset managers by individuals, organizations, and 
institutions, including some of our largest universities, some 
of our elite universities, is not explained based on 
performance or availability. Senator Booker and I introduced a 
bill, the Endowment Transparency Act, to require reporting from 
colleges and universities about how they are working with 
women- and minority-owned firms. And my office is also 
connected with several of your members about the business case 
for adopting policies to monitor and strengthen relationships 
with women and minority-owned firms and companies, and how this 
issue is material. Can you tell me what your members think 
about this proposal and whether the Council has workstreams on 
this issue?
    Ms. Borrus. Thank you for the question. Many of our public 
fund members and our asset manager members do have emerging 
manager programs to extend and deepen their use of minority-
owned firms. CII does not have particular policies on asset 
manager programs or diverse-owned investment programs, but we 
do support and have supported for a very long time, disclosures 
about board diversity and the diversity of executive officers. 
For example, we have a long policy on board diversity that we 
think it should reflect the view that corporate governance best 
practices support diversity that reflects the communities, the 
employees, and the customers of corporations, and that would 
include investment firms as well. And we have also supported 
the Nasdaq listing standard calling for disclosure of board 
diversity.
    Mr. Cleaver. Thank you. I appreciate that. The issue is 
that major universities, for example, are proud and honored 
when they have a diverse faculty, and they can go out and 
recruit students and say to them, we have a diverse faculty and 
a diverse student body. Some corporations will do that as well, 
but we are never going to be able to have the level of equality 
in this country, in this industry, until we are able to 
participate in the economics. And when you have 1.4 percent, do 
all of you agree that is insufficient and that we need to take 
some steps? Go ahead, please?
    Mr. Kothari. I think it is a supply issue. If there is any 
active discrimination, of course, we should stamp it out, and 
we should also educate and encourage different people to 
participate. But in the end, if we find the fewer, I do not 
know if we necessarily have to step in and have an identity-
based or gender-based----
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Kothari. ----dictated policy.
    Mr. Cleaver. I would like to talk to you about that 
further. Thank you.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Cleaver. Madam Chairwoman, thank you.
    Chairwoman Wagner. The Chair now recognizes the gentleman 
from Wisconsin, Mr. Steil, for 5 minutes.
    Mr. Steil. Thank you, Chairwoman Wagner. Mr. Quaadman, 
thanks for being here. And thank you all for being here. As you 
know, I am very concerned about the proxy advisor duopoly 
surprise, no surprise. I am going to have a little bit of a 
conversation here about that as we look back at Chairman 
Gensler removing the 2020 proxy advisory reforms, blocking 
enforcement of these rules in order to rewrite before the 
reforms had even gone into effect. And just to scale this, can 
you think of another example where the SEC decided to undo its 
own rulemaking before it had even gone into effect? Mr. 
Quaadman?
    Mr. Quaadman. The other example I would actually raise, and 
it is not finalized yet, but the Gensler SEC is also pulling 
back on the shareholder proposal threshold rule. They have not 
finalized that yet, but what I would say is, and I mentioned 
this in my opening statement on the proxy advisory firm rule, 
that was based on a 10-year effort that spanned different 
Administrations as bipartisan, had roundtables, concept 
releases, and common periods, and there was empirical evidence 
that went into that.
    Mr. Steil. They completely ran a full review.
    Mr. Quaadman. Right.
    Mr. Steil. Then, they go in and they nix it. That is really 
an unprecedented move by the SEC as we think about the broad 
rules, the rulemaking process over decades that the SEC is 
engaged in.
    Mr. Quaadman. Yes.
    Mr. Steil. Had you seen that type of action previous to 
Chairman Gensler?
    Mr. Quaadman. No, and that is why I do think your bill is 
so important, that if the SEC is not going to act in order to 
prevent our corporate governance from being mandated by two 
foreign-owned firms, the Congress is going to have to----
    Mr. Steil. Does the SEC acting in this manner impact the 
SEC's credibility, in your opinion?
    Mr. Quaadman. Yes. What it does is it degrades their 
ability to allow for an important part of the marketplace to be 
unregulated. It also impacts their rulemaking capacity as well 
as enforcement capacities as well.
    Mr. Steil. Let me slightly shift gears here as we look at 
the SEC, trying to drive forward more ESG-related shareholder 
proposals. And in particular, I have been concerned about Staff 
Bulletin 14L--I have had this conversation with multiple 
individuals working at the SEC--in kind of the widespread 
definition, ``widespread public debate,'' with a, ``broad 
societal impact.'' And not surprisingly, following 14L coming 
out, we saw one of the highest number of shareholder proposals 
ever submitted, most focused on non-material ESG issues. Are, 
``widespread public debate,'' and, ``broad societal impact,'' 
clearly defined terms in securities law?
    Mr. Quaadman. They are not, and, in fact, we sent a letter 
to the SEC in November of 2021 where we highlighted those 
issues, those controversial political issues that the SEC is 
now going to have to weigh in on. And what it will also do is 
it is going to create a pendulum swing between Administrations 
as to what those issues are, and it would actually say that no 
actual process before 14L came in, in both Democratic and 
Republican Administrations, was a color-blind process. And, in 
fact, when no actual relief was given, there are studies that 
show that the stock price actually went up, which means the 
system was working.
    Mr. Steil. When you say, ``color-blind,'' you mean for 
political purposes?
    Mr. Quaadman. Correct.
    Mr. Steil. And now, you are seeing that the SEC is 
operating under a political lens, because they have an 
opportunity because of the broad language of 14L?
    Mr. Quaadman. Yes. The board and the shareholder proposal 
process is about the strategic direction of a company. It is 
about a fiduciary steward of the assets of the company. It is 
not about creating a political debating society in the 
boardroom, yet that is exactly what 14L is going to do.
    Mr. Steil. Thank you. Let me jump gears to you, if I can, 
Mr. Bentsen, in particular, as it relates to the conflict of 
interest in securitization. I just want to dive in kind of 
quickly here. Can you describe what happened to some of the 
largest financial institutions' scaled-back securitization 
activities or they stepped away from the securitization 
business lines altogether? What would be the real-world impact 
if this has the draconian impact that I believe it will have?
    Mr. Bentsen. Thank you for that question, and you are 
right. The rule is broad, and it would affect the ability of 
firms to do hedging, to fund that market, fund floor plan 
lending, and fund equipment financing for small and mid-sized 
businesses.
    Mr. Steil. And 100 percent, what would be the impact on 
housing or on consumer credit?
    Mr. Bentsen. Again, the more you pull back credit that you 
are going to affect price, and----
    Mr. Steil. And affect price is going to make loans more 
expensive for everyday Americans. Is that right?
    Mr. Bentsen. Considerably, yes.
    Mr. Steil. And it is so broad, would it force participants 
out of the market? Do you think that is one of the intended 
goals of the Securities and Exchange Commission?
    Mr. Bentsen. I cannot speak to what the intended goal is 
other than the rule is overly broad and----
    Mr. Steil. But it will increase costs to lenders. That is 
my concern.
    Mr. Bentsen. I think it----
    Mr. Steil. Cognizant of the time, I yield back.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the ranking member of the Full Ccommittee, the 
gentlewoman from California, Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you, Madam Chairwoman. Ms. Borrus, you 
represent the Council of Institutional Investors, whose members 
are pension funds managing trillions on behalf of working 
families and retirees. The Council, among other pro-investor 
issues, is focused on Federal and State policies that protect 
the rights of shareholders to offer proposals on company 
ballots and to receive independent proxy advice, ensure 
investors receive the best execution of their orders on any 
order by order basis, and encourage disclosures around climate 
change, diversity, and key workforce metrics. Can you set the 
record straight? Has the SEC, under Chair Gensler, done a good 
job of living up to those priorities that working families and 
retirees care about? Specifically, I am wondering if any 
particular rulemakings come to mind that positively address the 
issues of proxy voting market structure and climate 
disclosures?
    Ms. Borrus. Thank you, Ranking Member Waters, for the 
question. I am very pleased to answer in the affirmative. As 
you indicated, CII member funds include major long-term share 
owners with a duty to protect the retirement assets of millions 
of workers and their families throughout the United States, 
including pension funds with more than 15 million participants. 
These are the true mainstream investors through their pension 
funds, and we believe these workers and their families have 
benefited from the pro-investor rulemaking that has 
characterized Chair Gensler's SEC.
    With respect to the three rulemakings that you referenced, 
Chair Gensler's 2022 rule on proxy voting advice, we think 
appropriately rolled back certain provisions of the 2020 rules 
that most investors and many other market participants believe 
were unwarranted, and would have unnecessarily increased the 
cost of proxy research. And that additional cost would have 
reduced the benefits available to retirement funds of many 
workers and families.
    With respect to market structure, we generally support the 
SEC's proposed rule on Regulation Best Execution. Consistent 
with CII policies, we agree with Chair Gensler that a best 
execution standard at the Commission level rather than at the 
Federal level could lead to better execution and lower costs 
for institutional investors and the workers and families who 
are beneficiaries of those funds.
    Finally, with respect to climate disclosures, many CII 
members and many, many other market participants believe 
climate change is a critical systemic risk that long-term 
institutional investors must address as part of their fiduciary 
duty to the beneficiaries of those funds. Investors need 
consistent, comparable, and decision-useful information about 
climate risks and opportunities to inform their investment and 
proxy voting decisions. We would note that these market 
structure proposals and climate disclosure proposals are just 
that: their proposals.
    CII and other market participants have written comment 
letters to the SEC describing how those proposals could be 
improved, and we are confident that the SEC, under Chair 
Gensler, will carefully consider those comment letters and make 
appropriate improvements to the proposals before issuing final 
rules.
    Ms. Waters. Thank you. As the witness has stated, Chair 
Gensler has indeed done a great job of protecting investors 
through rulemakings on proxy voting and market structure, and 
even climate change with the disclosures. I have a few more 
seconds here.
    The SEC previously approved a rule regarding corporate 
board diversity for all companies listed on the Nasdaq Stock 
Exchange. This rule requires companies listed on the exchange 
to disclose the diversity of the board of the company, and 
those that do not have at least two diverse board members have 
to explain the company's reasons for not meeting this diversity 
objective. This rule was upheld by the Fifth Circuit Court of 
Appeals just last week. As a long-time champion of diversity in 
the financial services space, and the corporate world more 
broadly, I welcome the Fifth Circuit's affirmation of the 
Nasdaq diversity rule. Do you agree that this Nasdaq rule is a 
good thing?
    Ms. Borrus. Yes, I do. CII has supported the Nasdaq rule, 
more diversity listing standard, including participating in the 
filing of an amicus brief on the Fifth Circuit, defending the 
actions of the Nasdaq and the SEC. Like the Fifth Circuit 
decision in favor of the standard, we concluded that the 
standard is a standard. It doesn't establish a quota. Rather, 
it is a disclosure requirement that provides standardized 
information on board diversity. And as I said before, many 
investors consider this information as an important factor when 
voting on nominees for corporate board seats or casting or 
making investment decisions.
    Ms. Waters. Thank you. I yield back.
    Chairwoman Wagner. The ranking member yields back. The 
Chair now recognizes the gentleman from Pennsylvania, Mr. 
Meuser, for 5 minutes.
    Mr. Meuser. Thank you very much, Madam Chairwoman. And 
thank you all very much for being here. We know you are quite 
busy. Clearly, there are a lot of new, complex regulatory 
proposals coming down the path, over 60, I understand, from 
safeguarding, to climate rules, the predictive data analytics 
rule, and the volume-based pricing rule. As stated very often 
by everyone, the comment periods are too short, making it hard 
for the industry as a whole to keep up.
    I was in business for over 20 years myself. The level of 
unpredictability and day-to-day operations, certainly long-term 
strategic planning, and obviously, a more balanced approach, 
more thoughtful approach, and more inclusionary approach, 
talking with industry stakeholders and even the Commissioners 
along the way in order to carry out the mission to protect 
investors, maintain fair and orderly and efficient markets, and 
facilitate capital formation. And I just, no matter how I look 
at it and in conversations with Chairman Gensler, I just don't 
know. I think he is dedicated and hardworking certainly, and 
smart, but what is the goal here? If that is the mission, why 
is not it being accomplished? Why is it that virtually 80 
percent, 90 percent of the stakeholders I have talked to, and 4 
out of 5 are here, have some constructive criticism of what is 
being done on a daily basis.
    And let's just talk for a minute about the volume pricing 
issue. Mr. Bentsen, I will cast this one to you. Is it a good 
plan? It doesn't seem like it is going to really benefit whom 
it is intended to, whom it is portrayed that it is actually 
going to benefit.
    Mr. Bentsen. Thank you, Congressman, for that question. 
Yes, this is the latest, the fifth SEC equity market structure 
proposal, and it would affect how they rebate and access fees 
that exchanges charge to dealers who utilize the exchange. It 
is not clear to us that it will serve the purpose. The SEC 
seems to feel that small broker-dealers are somehow 
disadvantaged by it. We do not see the evidence of it, and I 
think it is actually more indicative to your point of, and Ms. 
Borrus and I agree that these are proposals that are put out 
there, just proposals. But proposals are like live ammunition. 
They are not like concept releases where you put in idea. They 
are not like a roundtable. And as I said in my comments, when 
the SEC developed the bedrock foundation of our equity market 
structure today in 2005, it did so after this committee--and I 
served on this committee during part of that time--had multiple 
hearings on this.
    There were roundtables, there were multiple concept 
releases put out, and then, we ended up with Reg NMS. Reg NMS 
is old, but it still works and it does need changes. All of us 
have said that. But to put out very serious proposals which 
could become final rules, we have to look at that, like, that 
can be there, so this is a case where you really need to think 
about what the impact is. And even the SEC's own cost-benefit 
analysis on the equity market structure rule said they, 
``cannot with any certainty determine what the cost or benefit 
will be because they do not know how market participants will 
react to the rules.'' That is a quote from their cost-benefit 
analysis. They are really going too fast on this particular 
item, but we have to treat it as if this is going to become a 
rule in some form or fashion.
    Mr. Meuser. I agree, and your analogy to live ammo, 
absolutely, it could go off, so, therefore, we need to prepare 
in the appropriate long-term manner for first survival and then 
good business. I really appreciate your responses.
    Mr. Quaadman, not to skip over anyone else, but would you 
comment on it as well, and why is there such a blind eye? Is it 
because they are not speaking to the stakeholders? Is it 
because they are not including the other Commissioners? Why is 
it that the Fed has such a blind eye to Basel III, for 
instance, and how that is now affecting banks as of today? 
Meanwhile, as you said, Mr. Bentsen, it is only a proposal.
    Mr. Quaadman. Thank you for that thoughtful comment. First, 
we just released a couple of days ago, a corporate treasury 
survey that actually outlines how some of these proposals, both 
from the SEC and from the banking regulators, are actually 
going to increase financing costs.
    To get to your other point as well, this SEC is not engaged 
in roundtables. It is not engaged in soliciting feedback in a 
thoughtful way, which is why as, an example, we think there are 
very significant flaws with the cyber disclosure rule, as an 
example, but it even plays out with a cost-benefit analysis. 
One is on the climate rule. The SEC estimates that the 
compliance costs with that will be $6.3 billion in initial 
costs. All-in disclosure costs today are $3.9 billion with the 
Sarbanes-Oxley Act (SOX). The SEC was off by $100 on its costs.
    Mr. Meuser. Thank you. I am out of time.
    Chairwoman Wagner. Sorry.
    Mr. Quaadman. Sorry.
    Mr. Meuser. I yield back, Madam Chairwoman.
    Chairwoman Wagner. The gentleman's time has expired. I 
didn't mean to drop the gavel. The Chair now recognizes the 
gentleman from New York, Mr. Lawler, for 5 minutes.
    Mr. Lawler. Thank you, Madam Chairwoman. Dr. Kothari, I 
noticed a comment letter from Professor Boyd from VCU in the 
predictive data analytics proposal common file that highlighted 
the woefully inadequate economic analysis done by the SEC on 
this rulemaking. Professor Boyd previously served as Financial 
Analyst and Consultant to the Office of the Chief Economist at 
the Commodity Futures Trading Commission. Like you, she has 
extensive experience in economic analysis.
    Her letter points out three fatal flaws in the SEC's 
economic analysis: number one, it doesn't meaningfully analyze 
or quantify the existing benefits for investors that technology 
provides; number two, it underestimates the cost of complying 
for broker-dealers and investment advisors; and number three, 
it fails to attempt to quantify the cost to investors in the 
likely event that the proposal causes firms to reduce or 
eliminate technologies that otherwise benefit investors.
    Can you elaborate on the points that Professor Boyd made? 
Are you concerned that this rule has completely ignored all of 
the benefits that technology provides retail investors, like 
real-time updates on corporate actions, investor education, 
relevant news articles, et cetera? Professor Kothari?
    Mr. Kothari. I am not entirely familiar with that, but in 
general, the economic analysis has been deficient in coming up 
with the cost estimates as well as, especially, the benefits, 
because with benefits, oftentimes, there is an externality. And 
they have been quite difficult to estimate, but Chair Gensler 
and the Division of Economic and Risk Analysis (DERA) have been 
rather insufficient in their depth of analysis, and that is 
what I have commented on in some of the other disclosure and 
order competition in those proposals.
    Mr. Lawler. Ms. Blass, in your previous role as Director of 
Investment Management, how did you engage the public and gather 
input from everyday investors before embarking on significant 
rulemakings? Did you employ any non-mandatory activities, 
beyond the Administrative Procedure Act, to gain market 
insights and feedback from stakeholders?
    Ms. Blass. Absolutely, and thank you for this question. We 
actually did several outreach initiatives, investor outreach 
initiatives, director outreach initiatives. We engaged in 
roundtables. I led the interdivisional team that did the 
standards of conduct. We conducted roundtables not just in 
Washington, D.C., but in several other cities to make sure that 
we expanded the scope, concept releases, a request for 
information, even at the staff level, and, frankly, one other 
tool. When you propose something that does not work, you re-
propose it. You don't just go to adoption. We used lots of 
tools.
    Mr. Lawler. Are you aware of the current Division of 
Investment Management voluntarily engaging in any activities to 
gather feedback and enhance market understanding before 
introducing the swing pricing, hard close, and liquidity risk 
management rules?
    Ms. Blass. Thank you, Congressman, for this question. I 
want to start by saying that the Division staff is extremely 
talented. They are incredible professionals, the career staff, 
who are really dedicated to the agency and its mission. The 
rulemaking staff is very small. There are about 20-some 
individuals. And if you look at the number and scope and 
breadth of rules that they have pushed out, quite frankly, it 
is kind of hard for them to do exactly what you asked. They are 
doing their best in trying to push out and meet an agenda that 
is incredibly aggressive.
    Mr. Lawler. Given the fact that they are advancing a lot of 
different rules and given your prior experience, do you think 
what they are currently doing is adequate in terms of the 
activities that go beyond the Administrative Procedure Act?
    Ms. Blass. The Chair of the Commission is the person who 
sets the agenda and the staff executes it. Given what they have 
been tasked to do in pushing this agenda out, I don't think 
they have had the time necessary that they usually would have 
had, definitely that we would have had, to make sure that they 
solicit the relevant stakeholder input, not just to the comment 
process, but also from regulators. You have seen that 
deficiency in the safeguarding proposal. There are lots of 
things that could be done, that have not been done.
    Mr. Lawler. Thank you. I yield back.
    Chairwoman Wagner. The gentleman's time has expired. The 
Chair now recognizes the gentleman from Iowa, Mr. Nunn, for 5 
minutes.
    Mr. Nunn. Thank you very much, Madam Chairwoman, and I 
appreciate this august group coming forward to talk about the 
SEC and what its impact is to small agricultural States, like 
mine in Iowa, that consistently outcompetes its coverage both 
in the financial sector and in the agriculture area. During SEC 
Chairman Gensler's watch, he has put forth, an unprecedented 
number of rule proposals that you have all highlighted. And in 
attempts to implement his rulemaking agenda before the 2024 
election, meaning the Administration, not Congress, is the one 
leading the charge on this or attempting to. These market-
altering proposals have been pushed by the Chair's own agenda, 
contrary to any input from industry and a lack of real economic 
analysis being done. Further, the Chair has proposed 63-plus 
sweeping new rulemaking regulations that are increasingly 
interconnected, in conflict, and oftentimes impractical.
    The SEC has failed to evaluate the aggregate effects of 
these proposed disclosures on business, on investors, and on 
the overall U.S. economy. In fact, the SEC's own staff 
highlighted several of these same concerns with the Chair's 
aggressive agenda and a shortened comment period, that ability 
to really frame what we are trying to do here, and the 
Inspector General's statement on the SEC's management 
performance challenges from last year. But still, the Chair has 
plowed forward with a plan that could be very dangerous to 
Americans.
    Any oversight questions of his agenda, even when presented 
by our own chairwoman, and bipartisan Members, both Republicans 
and Democrats, have gone unanswered on things like swing 
pricing, and lackluster responses are an affront, not only to 
Congress, but to my folks back in Iowa. If Congress cannot get 
an answer, I do not understand how Americans are supposed to 
get an answer.
    I would like to begin with Dr. Kothari. Your experience as 
Chief Economist and Director of the Division of Economic and 
Risk Analysis, I think is relevant. When I asked Chairman 
Gensler about his custody proposal last month, he claimed that 
he coordinated with the CFTC, the group that does commodity for 
agriculture, before proposing his rulemaking, and I highlighted 
to Chair Gensler that in the custodial proposal mentioned, he 
only talks about agriculture one time--one time with the CFTC 
in a 432-page proposal. In your opinion, sir, do you think that 
there was any coordination between the SEC Chair and that of 
the CFTC?
    Mr. Kothari. Let me begin by saying that I am a proud 
Hawkeye, too.
    Mr. Nunn. Go Hawkeyes.
    Mr. Kothari. I went to the University of Iowa for my Ph.D., 
so I had my first exposure to the U.S. when was in Iowa, and I 
am eternally grateful for that.
    As far as the coordination with other agencies, it seems to 
be much less these days. When I was at the SEC, we routinely 
had meetings with the Fed, with the Treasury, with the Council 
of Economic Advisers, with the FTC, and with the Department of 
Justice, and also on Regulation Best Interest, it was with the 
Department of Labor multiple times, so we had very regular 
collaboration and contact with other agencies. And I have 
experienced that in this case, in that particular proposal, 
especially with CFTC with only one mention of agriculture, that 
seems on the low side. And CFTC is, with the commodities 
entrusted with that agency, entrusted with regulation 
surrounding commodities, and having only one reference on an 
important matter like that seems on the low side.
    Mr. Nunn. Mr. Kothari, I would agree with you. Not only on 
the coordination of the SEC, but the disregard for other 
agencies, even under the Administration, becomes very 
concerning. It is very disappointing to blow off Congress. It 
is another thing to bully your way through the rest of the 
Administration.
    Mr. Bentsen, I would like to ask you a similar question 
here about the custody proposal. Your firm was one of many that 
met with Chairman Gensler regarding overly-expansive 
definitions when it relates to custody and assets. Can you 
explain how the proposal put forth by the SEC Chair could 
impact my constituents' ability to hedge on their grain, corn, 
soybeans, and other agriculture issues?
    Mr. Bentsen. Thank you for the question, Congressman, and, 
yes, we have met with the Chair and with members of the staff. 
We had multiple meetings and hope to have more because of our 
concerns about the overly-broad nature of the rule proposal. 
And to your point, it does conflict with how futures commission 
merchants deal with custody issues in the futures markets, 
which, of course, agriculture risk management is the bedrock of 
our futures industry in the United States. And I agree with Dr. 
Kothari that I think the lack of coordination really has 
resulted in almost inadvertently bumping into these other 
rules, but that ends up making bad rulemaking and has negative 
consequences for the end users, like the agriculture community.
    Mr. Nunn. I want to thank you very much, and I thank the 
chairwoman for leading the charge on this. I yield back my 
time. And hopefully, we can get some answers from the SEC.
    Chairwoman Wagner. I thank you, and the gentleman yields 
back. I want to really thank our witnesses for their testimony 
today. This wraps up and culminates our capital formation 
progress that this committee has made on a bipartisan basis, 
with some 36 bills, and many, many hearings on, I don't know, 
somewhere between 50 to 60 rapid-fire rules and regulations 
that have been put out by the SEC. We appreciate your expertise 
on both sides of the aisle.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 12:29 p.m., the hearing was adjourned.] 
    
    
    
    
    
    
    
    
    
    
    
    

                            A P P E N D I X





                           November 2, 2023

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