[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE
SECURITIES AND EXCHANGE COMMISSION
=======================================================================
HEARING
before the
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 24, 2024
__________
Serial No. 118-111
Printed for the use of the Committee on Financial Services
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
57-173 PDF WASHINGTON : 2026
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRENCH HILL, Arkansas, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking 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
TOM EMMER, Minnesota EMANUEL CLEAVER, Missouri
BARRY LOUDERMILK, Georgia JAMES A. HIMES, Connecticut
ALEXANDER X. MOONEY, West Virginia BILL FOSTER, Illinois
WARREN DAVIDSON, Ohio JOYCE BEATTY, Ohio
JOHN W. ROSE, Tennessee JUAN VARGAS, California
BRYAN STEIL, Wisconsin JOSH GOTTHEIMER, New Jersey
WILLIAM R. TIMMONS, IV, South VICENTE GONZALEZ, Texas
Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DANIEL MEUSER, Pennsylvania RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin RITCHIE TORRES, New York
ANDREW R. GARBARINO, New York NIKEMA WILLIAMS, Georgia
YOUNG KIM, California WILEY NICKEL, North Carolina
BYRON DONALDS, Florida BRITTANY PETTERSEN, Colorado
MIKE FLOOD, Nebraska
MICHAEL LAWLER, New York
ZACHARY NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDREW OGLES, Tennessee
Matthew Hoffmann, Staff Director
C O N T E N T S
----------
Tuesday, September 24, 2024
Page
OPENING STATEMENTS
Hon. Patrick T. McHenry, Chairman of the Committee on Financial
Services, a U.S. Representative from North Carolina............ 1
Hon. Maxine Waters, Ranking Member of the Committee on Financial
Services, a U.S. Representative from California................ 3
STATEMENTS
Hon. Ann Wagner, Chairwoman of the Subcommittee on Capital
Markets, a U.S. Representative from Missouri................... 4
Hon. Brad Sherman, Ranking Member of the Subcommittee on Capital
Markets, a U.S. Representative from California................. 5
WITNESSES
Hon. Gary Gensler, Chairman, U.S. Securities and Exchange
Commission; Hon. Caroline Crenshaw, Commissioner, U.S.
Securities and Exchange Commission; Hon. Jaime Lizarraga,
Commissioner, U.S. Securities and Exchange Commission; Hon.
Hester Peirce, Commissioner, U.S. Securities and Exchange
Commission; Hon. Mark Uyeda, Commissioner, U.S. Securities and
Exchange Commission............................................ 6
Joint Prepared Statement..................................... 8
APPENDIX
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
A Catalyst: Statement on Qatalyst Partners LP................ 94
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses to questions for the record from Hon. Hon. Gary
Gensler 102
Written responses to questions for the record from Hon. Caroline
Crenshaw 129
Written responses to questions for the record from Hon. Jaime
Lizarraga 134
Written responses to questions for the record from Hon. Hester
Peirce 144
Written responses to questions for the record from Hon. Mark
Uyeda 156
LEGISLATION
H.R. 9477, the "SEC Review Act".................................. 168
H.R. 7092, the "Protecting Private Job Creators Act"............. 173
H.R. 6695, the "Due Process Restoration Act of 2023"............. 177
H.R. 9342, the "Securities Enforcement Clarity Act of 2024"...... 180
H.R. 9148, the "Tailoring for Main Street Investors Act"......... 186
H.R. 6623, the "Main Street Growth Act".......................... 190
H.R. 5741, the "Uniform Treatment of Custodial Assets Act"....... 202
H.R. 9578, the "Bridging Regulation and Innovation for Digital
Global and Electronic (BRIDGE) Digital Assets Act"............. 206
H.R. ------, the "Securing Innovation in Financial Regulation
Act"........................................................... 214
H.R. ------, To require the Commodity Futures Trading Commission
and the Securities and Exchange Commission to conduct a study
to assess whether additional guidance or rules are necessary to
facilitate the development of tokenized securities and
derivatives products, and for other purposes................... 225
H.R. ------, To codify the special purpose broker dealer, and for
other purposes................................................. 227
H.R. ------, the "New Frontiers in Technology (NFT) Act"......... 238
H.R. ------, To require the Securities and Exchange Commission,
Commodity Futures Trading Commission, and the Secretary of the
Treasury to jointly carry out a study on decentralized finance. 245
H.R. ------, To amend the Securities Exchange Act of 1934 to
exclude decentralized finance activities from that Act, and for
other purposes................................................. 251
OVERSIGHT OF THE
SECURITIES AND EXCHANGE COMMISSION
----------
Tuesday, September 24, 2024
U.S. House of Representatives,
Committee on Financial Services,
Washington, DC.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn, Hon. Patrick McHenry [chairman of the
committee] presiding.
Present: Representatives McHenry, Lucas, Sessions, Posey,
Huizenga, Wagner, Barr, Williams of Texas, Hill, Emmer,
Loudermilk, Davidson, Rose, Steil, Timmons, Norman, Meuser,
Fitzgerald, Garbarino, Kim, Donalds, Flood, Lawler, Nunn, De La
Cruz, Houchin, Ogles, Waters, Velazquez, Sherman, Scott, Lynch,
Green, Cleaver, Himes, Foster, Beatty, Vargas, Gottheimer,
Gonzalez, Casten, Tlaib, Torres, Garcia, Williams of Georgia,
Nickel, and Pettersen.
Chairman McHenry. The committee will come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time.
The hearing today is entitled ``Oversight of the Securities
and Exchange Commission.''
Without objection, all members will have 5 legislative days
within which to submit extraneous material to the chair for
inclusion in the record.
I will now recognize myself for 4 minutes to give an
opening statement.
OPENING STATEMENT OF HON. PATRICK T. MCHENRY, CHAIRMAN OF THE
COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM
NORTH CAROLINA
I look forward to discussing a lot of issues here today
that are important to the American people. Today's hearing is
to conduct oversight of the Securities and Exchange Commission
based on recent actions taken by Chair Gensler and the
majority.
It is easy to forget the Securities and Exchange Commission
is independent, led by a bipartisan Commission. It is not
solely run by the chair or a single agency head. That is why it
is so critical for Congress and the American people to hear the
diverse viewpoints of the full Commission, which is why we have
the full Commission here today.
Today all five commissioners are testifying before our
committee for the first time since 2019. A lot has changed
since then in our markets, the broader economy, and at the
Securities and Exchange Commission) SEC itself--unfortunately,
not for the better.
Under Chair Gensler, the SEC has become a rogue agency. It
routinely exploits its authority to the detriment of our
capital markets, innovation, and the American people.
Chair Gensler recently said, quote, We at the SEC live
within the laws as Congress passes them, close quote.
Unfortunately, nothing could be further from the truth. Do
not take my word for it. A wide array of Federal judges--
appointed by Presidents from both parties--have noted the
lawless nature of Chair Gensler's tenure by overturning
rulemakings and enforcement actions after enforcement actions
it has overturned.
This includes the proxy advisory rule, the private fund
disclosure rule, the stock buyback rule, the Debt Box rule,
Grayscale, Ripple enforcement issues. The list goes on and on.
It is not just for the courts to opine here, and it is not
just the courts who have taken issue with Chair Gensler's
reckless agenda. More than 250 Members of Congress from both
parties have signed letters--dozens of letters, in fact--
opposing actions taken by the SEC.
Chair Gensler has proposed a slew of major interconnected
rules that exceed the SEC's statutory authority--often with
inadequate justification, economic analysis, and public
engagement.
What stands out in this massive rulemaking agenda is the
fact that Chair Gensler has failed to propose a single rule
focused exclusively on facilitating capital formation--a key
pillar of the Commission's statutory mission.
This is in stark contrast to our committee. We have passed
more than 20 bipartisan bills through the House of
Representatives to strengthen public markets, help small
businesses access capital, increase opportunities for all
investors. Let me repeat: bipartisan bills.
It appears only at Chair Gensler's SEC that capital
formation becomes a partisan priority and that is not the only
area the SEC has ignored the bipartisan consensus of the
American people's elected Representatives.
In May, the House passed FIT21 to create clear rules of the
road and provide robust consumer protections in the digital
asset ecosystem.
More than two-thirds of the House, including 71 Democrats,
rejected Chair Gensler's approach to digital assets by
supporting clarity and consumer protection with the passage of
FIT21.
Yet, true to form, Chair Gensler has doubled down on
regulation by enforcement.
Without the regulatory clarity and consumer protections in
FIT21, the United States will continue to fall behind Europe in
technological innovation and adoption.
This is unheard of in modern history, that the United
States would fall behind Europe in the deployment of innovative
technology.
Bipartisan opposition in Congress, continued rejection by
the courts, and, notably, the end of Chevron deference should
serve as a warning to Chair Gensler: Whether it is digital
assets or climate policy, the SEC cannot unilaterally expand
its authority.
With a record like that, it is clear Chair Gensler's legacy
will be defined by turning the once proud institution of the
SEC into a rogue agency.
I yield back. The chair now recognizes the ranking member
of the committee, the gentlewoman from California, for 4
minutes for the purposes of an opening statement.
OPENING STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE
COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Ms. Waters. Good morning.
I would like to welcome the chair of the Securities and
Exchange Commission, Gary Gensler, along with Commissioners
Peirce, Crenshaw, Uyeda, Lizarraga, all to the committee today.
I would like to start by recognizing the good work the SEC
has done under the leadership of Chair Gensler. Despite
repeated attacks against the agency from my Republican
colleagues, the SEC has lived up to its mission of protecting
investors and ensuring our capital markets remain the envy of
the world.
In fact, since Chair Gensler's tenure began in 2021, the
agency has ensured a fair marketplace for businesses and
investors by holding bad actors accountable.
For example, the SEC brought 784 enforcement actions
leveraged against 5 billion in fines--nearly 5 billion in
fines; importantly, recovered nearly 1 billion for harmed
investors and the Commission has also responded to the
overwhelming number of investors, fully 80 percent, who have
long been urging the Commission to standardize climate risk
disclosures.
So I hope the SEC will also advance additional disclosures,
like human capital and diversity and inclusion metrics, that
are not just what investors want but good for businesses'
bottom line.
While the SEC and the rest of the Biden-Harris
Administration has been doing its job, unfortunately, I cannot
say the same for all of the House Republicans.
The party of Make America Great Again (MAGA) has again
taken us to the edge of a shutdown even though they know they
will need every single Democrat to keep the government open.
Our Nation is tired of the extreme MAGA Republican Party in
Congress.
I want to do something, and I know you do, too. Mr.
Chairman, before the end of this year. I want us to strike a
grand bargain on stablecoins and other long-overdue bills.
Since 2022, we have been working for hours on end to reach
an agreement and have each made concessions. I strongly believe
we can reach a deal that prioritizes strong protections for our
Nation's consumers and strong Federal oversight.
Our bill can have several paths for stablecoins to be
created, but like nearly every other country that has a
stablecoin framework, the central bank, the Federal Reserve,
played a dominant role overseeing this market.
Importantly, stablecoins can only be truly stable if they
are backed by safe and liquid reserves, like short-term
Treasury bills.
I will be honest: With less than 3 months left in the 118th
Congress, we are running out of time to pass this. I know we
can get this done if we focus, so let us make it happen.
In the meantime, Democrats will continue to fight for more
resources for the SEC, including by keeping the SEC and the
rest of the government open so that the agency can support
capital formation, open opportunities for small businesses, and
protect investors.
I thank you again for your testimony, and I am pleased that
the commissioners are here.
I yield back the balance of my time, and I have made a
public statement to you about bipartisanship. Let us see what
you do with it.
[Laughter.]
Chairman McHenry. All right. I thank the ranking member,
and I thank the ranking member for starting the conversation
during her tenure as chair of this committee and got the
committee rolling on digital asset and crypto policy that
resulted in bipartisan legislation in this committee.
It is my hope that we could come to terms on stablecoin
legislation this Congress, but that we can also provide a
little clarity when it comes to digital assets generally. That
is the bipartisan will of this committee.
Now, the nature of how we do that is where things get a
little tougher and the votes are a little tougher, but I thank
the ranking member for the outreach and the public statement of
which she has privately told me in no uncertain terms. Do not
get cornered by Maxine Waters.
So I will now recognize the chair of the Capital Markets
Subcommittee, Ann Wagner of the State of Missouri.
STATEMENT OF HON. ANN WAGNER, CHAIRWOMAN OF THE SUBCOMMITTEE ON
CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM MISSOURI
Mrs. Wagner. I thank you, Mr. Chairman.
Chair Gensler, under your leadership the SEC has
effectively carved the public stakeholders out of the
rulemaking process. Despite many significant and interconnected
rulemakings, comment periods are averaging almost 25 percent
shorter than under the previous chair.
To make matters even worse, on three separate occasions
under your leadership ten-plus proposed rules were
simultaneously open for comment.
The outcome of this rushed approach is resulting in poorly
crafted rules overturned by the courts over and over again,
unnecessary costs being imposed on retail investors, and
increased bureaucratic regimes for all market participants.
It is clear that when it comes to regulating our capital
markets, your agenda at the SEC is to move fast and break
things.
I yield back.
Chairman McHenry. The gentlelady yields back.
I will now recognize the ranking member of the Subcommittee
on Capital Markets, Mr. Sherman, for 1 minute.
OPENING STATEMENT OF HON. BRAD SHERMAN, RANKING MEMBER OF THE
SUBCOMMITTEE ON CAPITAL MARKETS, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Ms. Sherman. Mr. Chairman, this is one of your last
hearings, and I applaud you for using it to bring the whole
Commission to us here so that we could applaud their great
work--protecting American investors and making our capital
markets the envy of the world.
This is a board that has listened to public comment, and
particularly in withdrawing or changing the swing pricing
proposed rule, the custody proposed rule, and the AI data
analytics rule.
On crypto, this is the premier agency to protect investors,
and it has responsibility for virtually every other intangible
investment asset.
We can provide clarity, although I do not think it is
necessary. We could pass an additional statute to clarify that
crypto is a security.
Capitalism means that those with capital get to make the
decisions, and the efforts here in Congress to blind climate
investors by depriving them of the information they want have
been answered by the SEC in requiring that huge group of
investors are allowed to make the decisions they want to make.
I yield back.
Chairman McHenry. The gentleman yields back.
Today we welcome the testimony of Hon. Gary Gensler, Chair
of the Securities and Exchange Commission, and the SEC
commissioners, Hon. Caroline Crenshaw, Hon. Jaime Lizarraga,
Hon. Hester Peirce, and Hon. Mark Uyeda.
Chair Gensler will be recognized to provide an oral
presentation of the Commission's written testimony.
Before we hear the presentation, though, I want to offer
the reminder to those watching that the statements and response
to questions that you are about to hear and the Commission is
about to give are their views only, which do not represent the
views of the SEC or their fellow commissioners.
It is also important to note that this is not a meeting of
the Commission for purposes of the Sunshine Act, and,
therefore, nothing discussed here should be viewed as making a
determination on an action before the Commission.
The Commission is not authorized to discuss ongoing
litigation or enforcement actions, and members will do their
best to steer away from these questions that would call for
answers about ongoing cases, but members have questions.
So, without objection, the written testimony and the
written statement will be made a part of the record.
Chair Gensler, you are now recognized for 5 minutes for an
oral representation of your testimony.
STATEMENT OF HON. GARY GENSLER, CHAIRMAN, U.S. SECURITIES AND
EXCHANGE COMMISSION; HON. CAROLINE CRENSHAW, COMMISSIONER, U.S.
SECURITIES AND EXCHANGE COMMISSION; HON. JAIME LIZARRAGA,
COMMISSIONER, U.S. SECURITIES AND EXCHANGE COMMISSION; HON.
HESTER PEIRCE, COMMISSIONER, U.S. SECURITIES AND EXCHANGE
COMMISSION; HON. MARK UYEDA, COMMISSIONER, U.S. SECURITIES AND
EXCHANGE COMMISSION
Mr. Gensler. Thank you, Chairman McHenry. Good morning
everybody. Ranking Member Waters and members of the committee,
thank you for the opportunity to testify, along with my fellow
commissioners. It is good to be together.
You said the legal part, but I guess our lawyers will tell
me I need to say it, too, maybe. Although all five of us are
here, it is not a meeting of the Commission under the statute
known as the Sunshine Act and as a result, we plan to be
mindful to avoid deliberating on business before the agency.
Each of us will be providing our own views, which do not
represent those of the SEC or our fellow commissioners.
Although we may offer our views, which is a good give-and-
take, and share our concerns on general issues, we will avoid
making any determination as a group during the hearing about
the course of action that the Commission should or will make in
the future on a particular matter and consistent with long-
running practice. We will not comment on pending litigation and
enforcement actions. I think we are reading from the same
script, Chair.
The SEC celebrated earlier this year our 90th birthday. In
the aftermath of the 1929 market crash and the fraud scams and
other observed problems, President Franklin Roosevelt came
together with Congress to enact a series of laws in the 1930s.
Congress and Roosevelt understood how vital our capital markets
are to investors, issuers, and a dynamic and growing economy.
I cannot speak for my fellow commissioners, but I think it
is part of the success in these last 90 years in our economy.
Today the SEC oversees the capital markets and works to
deter and prevent fraud and manipulation, as well as help
ensure that investment advisers carry out their duties to their
clients and that companies and entrepreneurs can access capital
they need to succeed.
The SEC is a remarkable agency. We serve investors building
for a better future and issuers raising money to fund
innovation while overseeing the capital markets where they
meet.
The essence of this is captured in our three-part mission:
protect investors on one hand; maintain the markets in the
middle, fair, orderly and efficient; and facilitate capital
formation. So capital formation meets investors and the markets
in the middle.
Today we oversee over $100 trillion U.S. capital markets,
and they are the deepest, most liquid in the world. To put this
in context, the assets of the entire banking system are just 23
and a half trillion dollars. So our capital markets are more
than four, almost five times that size.
Comprising approximately 40 percent of the world's capital
markets, the U.S. capital markets outpace our roughly 24
percent of our economy. So we kind of punch above our weight
class.
Everyday investors benefit from the U.S. capital markets.
Their investment portfolios fund home purchases, college
education, retirements.
Approximately 58 percent of U.S. households own stocks
directly or indirectly. American households representing nearly
121 million individual investors own registered funds. You know
them as mutual funds and otherwise.
Today registered investment advisers advise 57 million
clients. Our appropriations from Congress are about $2.1
billion. We have been flat-funded, as many agencies across
government are. While we are appropriated, we do fund ourselves
with fees on stock and other transactions. So we are deficit
neutral.
I am proud to say that in 2023 the SEC staff rated us
amongst the best places to work in the Federal Government. We
rank third among midsized agencies.
I thank you for the opportunity to testify. Our written
testimony was joint among the five of us, so it did not have as
many adjectives or superlatives, but it did describe exactly
sort of what we have done in the last 12 months, particularly
the rules that we had adopted, proposed, or are being
implemented.
So I thank you, and I yield back.
[The joint prepared statement from the Securities and
Exchange Commissioners follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman McHenry. Gentleman yields back and that is a
representation of the opening statements for the five
commissioners.
We appreciate you yielding additional time back and for the
rest of the commissioners deferring so we can get into
questions.
I will now recognize myself for 5 minutes.
Chair Gensler, in March, the Agriculture and Financial
Services Committees sent you a letter about the regulatory
treatment for ether, the native token of the Ethereum
blockchain.
In the letter we expressed concern the SEC is using
different terms to describe digital assets. This includes
crypto tokens, crypto security tokens, crypto assets, crypto
asset securities, and digital asset securities that are
investment contracts.
Does the SEC differentiate between crypto tokens and
tokenized securities?
Mr. Gensler. Whether any one offer or sale of an asset is a
security depends on the facts and circumstances.
In terms of the language or nomenclature, it is less about
the terms, it is more about the economics.
It really goes down to a Supreme Court test which is the
law of the land, called the Howey test, and whether an
investment contract is being offered and sold to the public and
that public is looking to others in a common enterprise
anticipating a profit.
So the labels matter less than what the economics are.
Chairman McHenry. They are different terms and words have
meaning and the fact that you have used multiple different
words to explain what seems to be the same phenomenon I think
really raises questions about clarity.
Mr. Gensler. Well, the laws are clear, and it is written by
the Supreme Court, but also----
Chairman McHenry. The laws are clear, but what we are
seeing from the SEC is a lack of clarity. That is what I am
trying to ask you about.
You have no--the direct question is about the different
terms and rather than answering that question, you answered a
separate question. Kudos to you.
Commissioner Peirce, let us get into this question.
Do you think that one reason why multiple terms are being
used here for crypto is that there is no regulatory clarity or
consensus identifying which tokens may or may not be offered
pursuant to an investment contract?
Ms. Peirce. That is absolutely true. We have taken a
legally imprecise view to mask the regulatory lack of clarity.
Chairman McHenry. So this question of an investment
contract, the SEC defines crypto asset securities as an
investment contract represented by the underlying crypto asset.
Yet, tucked away in a footnote on an amended complaint, the
SEC clarified a security is determined by the, quote,
contract's expectations and understanding centered on the sales
and distribution of a digital asset and not that the digital
asset itself is a security.
Is the SEC using inconsistent standards here? I mean, is
that what is happening?
Ms. Peirce. I think what is happening is that we are trying
to be ambiguous because the legal precision carries with it
real implications and this is why people have been coming to us
and saying: We need clarity.
Is the token itself a security, or is it part of an
investment contract? Is it being sold together with an
investment contract? If it is, what is that investment
contract, and how long does it track along with the token?
By using imprecise language, we have been able to sort of
suggest that the token itself is a security apart from that
investment contract, which has implications for secondary
sales, it has implications for who can list it.
I think this is absolutely--we have fallen down on our duty
as a regulator not to be precise.
So tucking into a footnote that, yes, we admit that now,
actually, the token itself is not a security, that is something
that we should have admitted long ago and then started
wrestling with the difficult questions.
Chairman McHenry. Would a statutory definition provide that
clarity for the agency, or is this something the agency can do
itself?
Ms. Peirce. No, we certainly have authority where we can
provide guidance. We can use our exemptive authority. It is
always helpful to have Congress weigh in but there certainly
are some guidelines we could provide in this area that we have
chosen not to provide.
Chairman McHenry. A statutory definition would help?
Ms. Peirce. Well, I always welcome the input of Congress.
Chairman McHenry. That is fantastic. Everybody is writing--
your fellow commissioners are writing that down. We hope to
hear more of that today.
So let us continue with that, this question. You have
highlighted publicly, Commissioner Peirce, concerns the SEC is
devoting a disproportionate amount of time on the digital asset
ecosystem and diverting limited staff resources away from other
mission critical work.
Capital formation, how much work has been put into capital
formation in the last 4 years for your agency?
Ms. Peirce. Nothing on the positive side. I would say we
have done things that are negative to capital formation.
Chairman McHenry. I now recognize the ranking member, Ms.
Waters, for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
Chair Gensler, last Congress our Nation's capital markets
saw huge price swings in so-called meme stocks like GameStop.
As chairwoman, I convened three hearings, including one with
the CEOs from Robinhood, Citadel, and hedge funds. We also
heard from you.
I later released a committee report detailing how
gamification payment for order flow and weak oversight
contributed to investors being fleeced.
Following our hearings, our committee advanced several
pieces of legislation to fix those problems, including my bill
to finalize short selling rules and provide more clarity around
hedge fund positions. You picked up where Congress left off and
implemented some of these bills through rulemaking.
Can you talk about the reforms you passed, as well as what
additional market structure and market integrity reforms did
the SEC work on? How would these reforms increase competition
and reduce conflicts of interest?
Mr. Gensler. Thank you very much.
I would highlight four things that we have done.
Just last week, actually, we unanimously adopted rules that
had been put out to notice and comment about the market
structure itself, promoting greater competition in that market,
and in that case relaxing a restriction in the market that now
markets could quote in tighter increments, call it half a penny
rather than a full penny increment, and lowering the fees in
the market.
Earlier we also proposed, adopted, and implemented
shortening the settlement cycle. So now in America if you sell
your securities on a Monday, you get your cash on a Tuesday.
You used to have to wait till Wednesday and believe it or not,
that matters to a lot of people, to get that cash earlier.
We also pushed Congress' mandate out of the Dodd-Frank Act.
We adopted a rule on some disclosures around short selling, and
we also adopted some rules with regard to disclosure to clients
about the execution quality, the quality in the markets they
get when they sell securities.
So those are the four items that we have done, and I think
it does promote greater competition to allow people to quote
stocks in tighter increments. I do think it also helps capital
formation. If the markets are more efficient, it helps both
sides of the market.
I think that it helps capital formation and investors. I do
not think there is, like, an either-or or a dichotomy. I think
most of what we do has helped capital formation.
Ms. Waters. Well, thank you very much.
I can recall during the time that we got involved in this
issue, particularly looking at the relationship between
Robinhood and Citadel, for example, and calls that we received
about Robinhood cutting off investments and just closing down.
Is that cured or is that common?
Mr. Gensler. The closing down where investors could not
actually buy additional securities happened because of the
relationship with the clearinghouses, and I think this
shortening of the settlement cycle is a big plus to that and
helped limit the chance that could happen again.
So I do think that was a direct result of the hearings that
you had--when was that?--in February 2021.
Ms. Waters. Well, thank you very much.
I have gotten a lot of calls wanting to know what did we
do. They did not seem to know much about the bills that we
passed. I suppose that the general public does not know what
you did and we need to make sure that we get that information
out in some shape or form so people will know that we dealt
with those issues at the time that we experienced them.
Thank you, and I yield back.
Chairman McHenry. The gentlelady yields back.
I will now recognize the vice chair of the full committee,
the gentleman from Arkansas, Mr. Hill, for 5 minutes.
Mr. Hill. Thank you, Mr. Chairman.
Chairman Gensler, Commissioners, we are glad you are with
us this morning.
Chairman, over two-thirds of the members of this committee
have rejected the Commission's approach to regulating digital
assets at the SEC. These bipartisan members collaborated and
voted to pass our fit for purpose FIT21 legislation with
overwhelming bipartisan support in the House of
Representatives, including 71 Democrats.
All the commissioners, I think, need to recognize that our
ongoing legislative work to establish a market structure for
digital assets. While we have been doing that mightily here
over the last 2 years, the Commission has time and time again
chosen to bring numerous enforcement actions in an attempt to
claim authority over secondary markets and front run Congress.
Further, the Commission arguments in regard to several
high-profile Federal court cases in regard to digital asset
oversight have been rejected and in some instances your actions
are called arbitrary and capricious.
So, Commissioner Peirce, this regulation by enforcement
approach, is it really superior to having Congress give you
statutory direction?
Ms. Peirce. It is a very bad approach to trying to regulate
an industry if you are trying to protect investors, if you are
trying to shepherd the Commission's resources well. It is very
inefficient and at the end of the day, it leaves everyone
wondering where the lines of our authority are.
We have lots of areas where our authority is very clear,
and we could spend our enforcement resources there, and we
could spend our regulatory resources trying to provide clarity
about what does not fit within our jurisdiction, and then we
could leave the rest to Congress.
Mr. Hill. Commissioner Lizarraga, you used to work for
former Speaker Pelosi, and you may have noted that the former
Speaker voted to pass FIT21 this past summer.
Do you support this legislation draft and efforts in
Congress to establish a regulatory framework for digital assets
in the United States?
Mr. Lizarraga. Congressman, I defer to Congress on its
judgment as to whether a new framework for overseeing digital
assets is appropriate.
Mr. Hill. Sir, do you think that the existing framework
that the Commission is following is the right way to go, or do
you think there is a gap that could be filled by a statute in
Congress?
Mr. Lizarraga. I think we are following the framework that
is in place in response to violations of the law that we see in
the market.
So I think it is something that we are doing in pursuit of
our mission and in light of the fraud that occurs in that
market and----
Mr. Hill. We all want people to go after fraud. This is
about people who are trying to do the right thing, and they
find that an impossible task with this SEC.
Commissioner Uyeda, the Commission has failed to use its
discretionary authority that the Chairman noted in his opening
statement under section 36 of the Exchange Act to provide some
regulatory clarity in the digital asset ecosystem.
What could they have done? Pick an instance where you think
that--a working example where the Commission could have used
exemptive relief in solving some of these challenges, either
these exchange-traded products (ETP) challenges, these special
broker-dealer challenges, or the Howey test itself to have just
dealt with this at the Commission using exemptive relief.
Mr. Uyeda. Well, thank you.
The Commission has a wide range of existing tools that we
could use to address the lack of clarity, whether it has to do
with the status as a security or whether it pertains to broker-
dealers or exchanges or custodians of these types of digital
assets.
To my knowledge, I am the only commissioner in the history
of the agency who has actually stood before a panel of judges
in oral argument and articulated the Howey test after having
filed a written brief with that court.
One of the things--so the Howey test is an investment of
money in a common enterprise with the expectation of profits
from the efforts of others. That is from the Supreme Court.
Numerous other circuit courts have elaborated what exactly that
means.
The Commission--for instance, I will give you one example--
could have articulated specifically in a context of crypto and
digital assets how you apply this test as to whether or not it
is an investment contract and, therefore, a security.
We have done that before. For instance, to explain what
fiduciary duty means under the Investment Advisors Act. We have
chosen not to go down that path.
Right now I have been with the Commission for 20 years--or
for, I am sorry, 18 years. I have been a securities regulator
for 20 years. We are now entering into our second decade of
thinking about this issue. It first popped up on my----
Mr. Hill. Thank you, Commissioner. My time has expired.
I yield back, Mr. Chairman.
Chairman McHenry. The gentleman yields back.
I will now recognize the gentlewoman from New York, Dr.
Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Chair Gensler, as you know, section 956 of the Dodd-Frank
Act tasked you and five other agencies with promulgating a rule
to ban executive pay that incentivizes inappropriate risk-
taking of financial institutions. Even though the law gave the
agencies an April 2011 deadline to promulgate the rule, we
still do not have one.
Since last year's banking crisis, Senator Van Hollen and I
have written to you twice about this issue. Four out of the six
agencies have moved forward with a new proposal earlier this
year, but the SEC and the Federal Reserve have not.
Why did the SEC not move forward with the four agencies
earlier this year?
Mr. Gensler. Thank you.
I take the mandates of Congress very seriously. When I got
into the job, there were still about ten from the Dodd-Frank
Act, including section 956, not yet done. We have moved on, I
think, all of the others, if I am not mistaken.
On this one, it has to be a joint rule and once the Federal
Reserve told us that--and they have told us at staff level,
they have told us at the chair level that they were not yet
ready to move on it, I thought it was best just to----
Ms. Velazquez. Sir, you said that you have taken this job
seriously. It has been 14 years.
Mr. Gensler. I think----
Ms. Velazquez. Do you think we deserve better?
Mr. Gensler. I think that the American public definitely
deserve that we do this, and I am supportive and have asked
staff to work on it but I understand the Federal Reserve is not
willing at this time to move forward. So it is a matter of
resources.
Ms. Velazquez. On what timeline are you committed to
implementing this rule?
Mr. Gensler. Jointly, as Congress has said, with five other
agencies, when the----
Ms. Velazquez. Let me ask you----
Mr. Gensler. We will not slow the Federal Reserve down. We
will be ready whenever they are ready.
Ms. Velazquez. What progress, if any, has the SEC made this
year to propose a rule?
Mr. Gensler. We have collaborated and talked to all the
other five agencies, and we can only actually propose something
if joint. So we need the Federal Reserve. If they are ready, we
will be ready.
Ms. Velazquez. Commissioner Lizarraga, do you think it is
time for this rule to be promulgated?
Mr. Lizarraga. Yes, Congresswoman. I recently gave a speech
outlining my views about the importance of advancing this
important Dodd-Frank priority. It has been a long time.
Ms. Velazquez. Why do you think the SEC and the Fed are
stalling on this issue?
Mr. Lizarraga. The reality of joint rulemaking, I think, is
part of it. It is complicated. The other component to this----
Ms. Velazquez. We all know that it is complicated, but it
has been 14 years.
Mr. Lizarraga. I hear you. The one thing I was going to
add, though, is that the other agencies, unlike us, do not have
to conduct economic analysis like we do. So that also adds
another layer of----
Ms. Velazquez. By a show of hands, is there anyone who
thinks this rule should not be implemented?
Well, I will remind everyone that Dodd-Frank does not
instruct the SEC or the other agencies to study the rule or
inform Congress about whether they think the rule is a good
idea. The law requires the covered agencies, including the SEC,
to implement the rule regardless of whether or not they think
it is necessary.
It has been 14 years. I find it hard to believe that the
rule is so overly complicated or needs so much analysis that it
will take 14 years.
As I have said before, I will continue to bring this
rulemaking up at every opportunity until the rule is finalized.
Chair Gensler, we continue to hear about the benefits of
tokenization and have seen large asset managers, like Franklin
Templeton, use blockchain to digitize their assets. The SEC has
approved several of these products.
Do you see any evidence that the savings realized by the
asset issuers is being passed on to the consumer?
Mr. Gensler. I am not familiar enough with any one of the
projects.
Regardless of where somebody stores their ledger, if they
tokenize a security, an equity, a bond, or an investment
contract, it is important to make sure that the investors--the
investing public have the disclosures they need.
But token--just putting something on a tokenization on a
blockchain ledger does not change the economics. It is whether
it is a good investment.
Ms. Velazquez. Thank you.
Mr. Gensler. And we stay merit neutral on that.
Ms. Velazquez. I yield back. Thank you, Mr. Chairman.
Chairman McHenry. The gentleman from Oklahoma, Mr. Lucas,
is now recognized for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman, and thank you, Chairman
Gensler and the commissioners, for appearing today.
I would like to begin by focusing on proposed rule 10B-1
regarding security-based swaps positions.
Chairman Gensler, we discussed this proposal before, and I
appreciate your willingness to engage on this rule and to meet
with stakeholders. I know you are familiar with the bipartisan
feedback concerning market liquidity.
Chairman, would you first briefly touch on if the
Commission is still taking the bipartisan feedback into
consideration?
I would also appreciate it if Commissioner Peirce would
offer insight on that as well, but first you, Commissioner.
Mr. Gensler. Yes. Your feedback was very helpful because
you helped write this provision in the original bill. I
remember it because we worked together on some of that
legislation.
So while a comment period closed months ago, if feedback
comes in, just like this discussion here, we continue to
consult and consider that in this.
This is about whether in securities-based swaps there is
some reporting or transparency for the larger positions to the
agency, and, second, whether there is any public reporting of
that.
There were a lot of comments in the comment file to maybe
look to just have the reporting to the agency and not have it
public but we are still considering that record.
Mr. Lucas. Commissioner Peirce?
Ms. Peirce. I mean, I think this project is pretty typical
of a lot of rulemaking projects at the SEC. We go out with
something really broad and very onerous and lacking the data to
form the basis for it, and then we get comment back saying,
``Hey, this is unworkable, it is going to have really adverse
unintended consequences,'' and we pull back.
So we are thinking about it now, and I do not know where we
will come out, but I will say, if we get it wrong, then we
really risk roiling the markets. I hope we will take that
consideration into account.
Mr. Lucas. The SEC recently made significant reforms to
Treasury clearing which plays a vital role for financial
markets in the U.S. economy. Market participants have expressed
the need to extend those timelines for implementation to be
successful.
Chairman Gensler, has there been consideration given to
adjusting this timeline?
Mr. Gensler. We worked very closely with the U.S.
Department of Treasury and the Federal Reserve on, when we
adopted this, about a 2 and a half year timeline.
This is a vital market to the U.S. taxpayers, the $28
trillion Treasury market and it is really to bring greater
efficiency, meaning lowering the cost and lowering the risk
resiliency through central clearing.
The first timeline is on track right now in March of next
year for what is called customer clearing. The ultimate
timelines go all the way through June 2026.
Mr. Lucas. Commissioner Peirce, could you offer your
perspective on Treasury's clearing timeline?
Ms. Peirce. I did not support the rule because I thought we
could have taken a more measured approach but now that the rule
is in place, I am committed to as sound implementation as
possible. I think we should be open to the idea of extending
the timelines.
Also, we should be working closely with industry and other
regulators to make sure we are getting this right. I have
called for setting up a task force to really throw ourselves
into the implementation process and then that will put us in a
place to know whether we need to extend timelines.
Mr. Lucas. As many of my colleagues have discussed during
the past several years, the volume and scope of the SEC
rulemakings have been of concern.
Two examples, the custody rule and the predictive data
analytics rule, both presented major challenges to the market
and both seemed to require major revisions to address the
unintended consequences.
Commissioner Uyeda, could you discuss how the Commission
could better catch these unintended consequences before
reaching the proposal stage?
Mr. Uyeda. One common tool which we have not used in recent
times is to hold roundtables and other fact-finding type
activities that would lay a better predicate before we issue an
actual proposal.
That is one of the challenges, I think, and concerns I have
had about our current proposals, is they are so broad and so
wide.
We have the proposal itself, but many times we will have
dozens, if not scores, of permutations and combinations on
that.
When you have multiple rulemakings all at the same time on
different subjects that affect the same entities, it is really
hard for them to give us thoughtful feedback on that.
So this is one where it is a bit like I think the saying in
construction: Measure twice, cut once. We should think about
doing the same thing with proposals.
Mr. Lucas. Thank you, Commissioner Uyeda.
Yield back, Mr. Chairman.
Chairman McHenry. Gentleman yields back.
I will now recognize the gentleman from Missouri, Mr.
Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Chairman and all of the guests here today, some of you
may have been told when you were kids that paranoia is bad and
we need to avoid that, it is just stuff going on in our heads
but I learned when I was a kid that bad stuff does happen that
you thought about.
So, therefore, I reject any attempt to convince me that I
should not be paranoid about AI. It is a major concern.
I do not know if any of you saw that movie called ``I,
Robot.'' It ought to be required reading for everybody with the
SEC and our financial agencies.
If you look at the movie again, you probably missed it the
first time, but if you look at it now, you are going to find
out that all those robots were White. I start thinking, well,
they should have gotten a couple of Black and Brown robots but
it is not paranoia.
I know that you have been somewhat concerned, Mr. Chairman,
and I agree. I think I agree with what you were trying to say
in an article, that if we are not intentional with rulemaking
we could set ourselves up where powerful AI systems could
dominate human decision making.
What should we be doing as it relates to AI?
Mr. Gensler. I think it is one of the most transformative
technologies of our times, but I share your view that it
presents challenges.
I think of another great movie. It was a romantic comedy,
not ``I, Robot,'' but ``Her.'' You might remember Scarlett
Johansson is the voice of the virtual assistant girlfriend of
Joaquin Phoenix.
Mr. Cleaver. These robots are trying to tell us something.
Mr. Gensler. Yes. Well, at some point in time, she went
offline, but it was 8,316 love interests that she had that all
had broken hearts. It is a good movie.
The point is, we could end up with the same thing. We have
three large cloud providers; 75 percent of the financial
industry relies on two of those cloud providers. Those cloud
providers are the dominant players in artificial intelligence--
are growing, growing to be the dominant.
We could see 75 percent of the banks and broker-dealers and
financial sort of relying on a couple of Scarlett Johansson
virtual assistants, so to speak.
I think that a future chair of a Banking Committee--House
Financial Services Committee, sorry--could be overseeing a
hearing saying, ``What happened? Why did we have the financial
crisis of 2030 or 2035 or something?'' I think that is a risk.
What to do about it? It is hard, because it is across so
many different financial actors. How do you sort of maintain
diversity? This is diversity of computers, diversity of
competition amongst those algorithms.
It is a hard challenge to solve, but I agree with you, it
is a challenge. It is real.
Mr. Cleaver. I am interested in any of our other speakers
or guests, if you have any views on artificial intelligence
that may be of some value to those of us who are in Congress.
Ms. Peirce. I mean, I think skepticism is always warranted,
but I think we also need to look at the promise of the new
technology and ways that it can help us as a regulator to
regulate better and can help the industry to better serve more
people at a lower cost. So we need to balance the skepticism
with the optimism for what the technology can do.
Ms. Crenshaw. Congressman, as a member of the military and
the Securities and Exchange Commission, I think we need to look
holistically at AI across the board and not look at it just
necessarily in the isolated world of financial background or
the military side.
I think we need to learn from each other across the
government and implement something on a holistic basis to allow
technology to grow and to be useful and really transform
possibly, as Chair Gensler said, the world as we know it, but
also learn where we need to put holistic protections in place
and how we can sort of learn from it and adopt appropriately.
Mr. Cleaver. Thank you.
Chairman McHenry. The gentleman from Texas, Mr. Sessions,
is now recognized for 5 minutes.
Mr. Sessions. Mr. Chairman, thank you very much.
Mr. Chairman, I would like to take a minute and to thank
you for your service in the U.S. Congress and this committee.
Quite likely when we come back next time and if we hold another
meeting, you will be a retiring Member of Congress.
During your period of time that you have been here, I have
enjoyed not only your confidence and your friendship, but your
service, and I want to personally thank you for that.
Chairman McHenry. Thank you, Mr. Chairman. Thank you.
Mr. Sessions. Mr. Chairman, you and I have had an
opportunity to deal with each other a couple times, and you
know my comments that I have made to you about the rights of
people who are on the other side that you regulate.
Today I would like to just take a few minutes and tell you
the things that I think are important for the entire Commission
here.
One of them is that I believe that you need more fairness
and balance. I think the SEC does not have fairness, nor
balance.
I think that the SEC is engaged in selective enforcement. I
think they are engaged in selective enforcement perhaps of one
or two or five people in a marketplace that were not really
guilty of anything but simply were someone that you wanted to
make an example of.
I think that you can come up here and hear members say how
proud they are of you for having $5 billion worth of fines that
you have put off of people who have theoretically done
something wrong. That diminishes shareholder value, too. When
you fine a company, it takes away shareholder value.
That is one of the things that your commissioners have
talked about today, that their mission is to ensure shareholder
value and to protect people.
Mr. Chairman, I believe that you should engage, as well as
all the commissioners, in making sure that you do not make
examples of a few select people. Mr. Chairman, I believe you
should look at the mission statement that the SEC has, perhaps
on a daily basis, and make sure that your staff and you live up
to that.
I believe that if you get in trouble, if you did not intend
to get in trouble, you ought to be able to get out of trouble.
You ought to be able to work your way through regulatory morass
instead of waiting for the average of 140 days or whatever it
might be for you to respond back to a person.
Mr. Chairman, I believe that the marketplace is complex. I
believe that things happen that none of us have any real
control over, including bankruptcies or other matters. It is
when you collude to do something or you have insider
information or you fail to do your job properly, due diligence
or whatever.
I can give you examples where the SEC is causing individual
agents in the marketplace who also lost money in certain assets
and the SEC came after them and had them spend $500,000 of
legal counsel to defend themselves against something they, nor
they alone, were engaged in, but it was selective enforcement.
I have seen this across this Biden Administration at the
Department of Justice, at the SEC, and other places, and I
believe that there is some demand put on you or something that
you are doing to cause actions that are neither fair nor
balanced.
I have a minute left. Sir, would you like to engage that
issue and defend that?
Mr. Gensler. I am very proud of the agency and the
hardworking folks of the agency, the 1,300 folks in
enforcement, but all the other lawyers and accountants and
economists and my fellow commissioners that support that
effort. They follow the facts and the law where they take them.
We do bring, as noted, 700 or so enforcement actions a
year, many of them settled actions. We look to people who
cooperate with the agency and really recognize that cooperation
with the agency to try to, as you say, get things right.
By the way, I would concur with you. Markets are complex
and life is complex and people do often make genuine just human
mistakes.
Our Enforcement Division, I could not be prouder of them--
--
Mr. Sessions. I will look forward to testing that theory.
I want to thank each of you for your service, not just to
the SEC, but the American people, and I will challenge you
properly and professionally on this issue.
Mr. Chairman, I yield back my time.
Chairman McHenry. The gentleman from Illinois, Mr. Foster,
is now recognized for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman, and to our witnesses.
Price discovery is critically important to the success of
our capital markets, and it is really foundational to investor
confidence.
However, with the rise of day trading and trading apps,
social media buzz seems to have as much an effect sometimes on
equity pricing as economic fundamentals. This concern gets
amplified when the social media is swamped by inauthentic AI-
generated bot accounts that the social media platforms seem
unwilling or incapable of identifying and removing.
It is obvious that manipulative misinformation can have
long-lasting impacts on companies' reputations and their
ability to raise capital, and perhaps abusive short selling is
the most obvious example where this could happen.
Chairman Gensler, do you think that revisiting short
selling regulations is necessary to prevent the sort of
manipulations that can happen on social media or other false
claims injected into fake media sites, various kinds of
inauthentic, often AI-generated speech?
Mr. Gensler. Let me start with artificial intelligence and
then go to the short selling, if I might.
I think fraud is fraud, and whomever deploys a model has a
responsibility to make sure that they are not using that model
to defraud the public, manipulate the markets, as you say.
I think it will be an interesting challenge over time
whether this committee or judiciary committees across
government will have to sort of address this concept of the
state of mind and what the lawyers call scienter, the model
thinking. The human that deploys them, I believe, has certain
responsibilities, but that may play out in Congress as well.
I think, in terms of short selling, it is an important part
of the markets. It is a very important part of price discovery
that we, in our capital markets, somebody can express a view
that a stock will go up and somebody can express a view that it
is going to go down.
What is critical is that people are not trying to make
false claims, lie to the public, manipulate markets.
Mr. Foster. The issue is the anonymous AI-generated trash
that is appearing on social media and our inability,
apparently, to stop it. That is very different than an opinion
letter in The Wall Street Journal where everyone knows who is
involved. It is a very different----
Mr. Gensler. I can only speak for myself, but I contend
that individual who deploys the model has certain obligations
to ensure that model is not making false claims, misleading----
Mr. Foster. If we can figure out who they are.
Well, separately, I have heard concerns from industry
participants about influencers, bloggers, celebrities, and
others that have used their celebrity status to promote
investments without disclosing that they are, in fact, being
paid to do so.
What is worse is when the person that is paying the
promoter may have a position in the company that they intend to
liquidate alongside the promotion, which is really a classic
pump-and-dump scheme.
There have been some high-profile examples recently in the
crypto space, but I understand there may be issues in just the
over-the-counter markets, as well, where smaller companies
raise capital.
Can you say something about that?
Mr. Gensler. Congress actually spoke of this in our
original statute and thought that when you were advertising or
promoting a stock or security, that you had additional
obligations. So put in place rules, a law, against--if you are
touting, you have to say who paid you and did you get paid. You
cannot just say ``hashtag ad''; you have to say something more
and that was Congress's will.
We have, from time to time, found celebrities who have
forgotten that important law, and we have brought enforcement
actions.
Mr. Foster. Or never learned it. Yes.
So are there gaps in the SEC's authority to pursue these
cases?
Mr. Gensler. I would say, I think the laws are strong. I
mean, it is always gaps in resources.
We get, on average, a year 40,000 to 50,000 tips,
complaints, and referrals. That is, what, 4,000 a month or so,
and we have to prioritize those tips and complaints and
referrals.
Mr. Foster. Okay.
Let us see. I have about half a minute here.
I did not support the FIT21 Act. One of the things that
confused me about it is that it defines a 20-percent threshold
for ownership to be enough decentralized to become a tradable
equity. So this--the problem is, at the same time, it allowed
anonymous self-hosted wallets.
So how would the SEC identify who owns 20 percent?
Chairman McHenry. The gentleman's time has expired.
Mr. Foster. If you could----
Chairman McHenry. We will ask the Chair to respond for the
record.
Mr. Foster [continuing]. yes, respond for the record.
Chairman McHenry. The gentleman from Michigan, the chair of
the Oversight Subcommittee, Mr. Huizenga, is now recognized for
5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman.
I am going to take 1 quick second, and I first want to say
thank you to you for your leadership, your confidence in not
just me but your leadership team as we have tackled some very
tough issues, and, more importantly, your friendship.
Of course, I would appreciate 15 seconds back on the clock,
but it is--it is an important note to say thank you.
I am going to start here--first of all, thank you all, all,
for being here. I think this is an important step. It has been
quite a while since we have seen all of you here at one time.
Commissioner Peirce, you have noted that, in keeping with
the materiality standard informing SEC rulemaking on
disclosures, ``information is material if there is a
substantial likelihood that an objective, reasonable
investor''--by the way, that is language that Thurgood Marshall
used in the 1976 Court case establishing materiality--``would
consider the information important to an investment or voting
decision. All reasonable investors value financial returns, but
they may diverge on which non-economic considerations are
important.''
Could you explain the difference between that, why the
Commission has diverged from this traditional, well-established
materiality standard and we have started hearing, ``decision-
useful'' language? Unpack that a little bit, please.
Ms. Peirce. I think the reason to depart from the
materiality standard and instead embrace this more ambiguous
``decision-useful'' standard is so that we can listen to the
voices of non-investors, people who have non-investment
interests in companies and seeing companies do things. So you
open it up to this wide range of stakeholders who have any list
of non-essential, non-economic interests in a company.
Mr. Huizenga. Do you have concerns with that?
Ms. Peirce. Absolutely. I mean, our job is to get
information to investors to help them make decisions, not to a
random group of stakeholders.
Mr. Huizenga. It seems the courts have had concerns with
that as well.
All right. Chair Gensler, we have seen there be an uptick
in the industry pressure at the court level against the SEC,
but we have also seen the SEC embark on a rulemaking agenda
that some have called frenzied and rushed.
In testimony before the committee, the Chair noted the
number of finalized rules ``is less than a number of my
predecessors' in a comparable timeframe''--essentially, that
your rulemaking onslaught is on par with past Chairs.
Again, to both Ms. Peirce and Mr. Uyeda, although the Chair
might technically be correct on that, is it not true that the
breadth of this rulemaking is indeed historic that you have
seen and how would you respond to those comments about it has
just been business as usual at the SEC?
Ms. Peirce. Yes, the breadth of the subject matter covered,
the number of rules, and the complexity of the rules, and, as
Commissioner Uyeda mentioned, the number of different
alternatives being offered in those rules means that it is a
very difficult lift for the public to respond.
Mr. Huizenga. Mr. Uyeda, quickly?
Mr. Uyeda. Yes. You cannot compare just top-line numbers;
you have to look at the substance and these are very, very
complex and wide-ranging rule proposals under the current
chairmanship.
Mr. Huizenga. Okay.
I want to try and get through two more things here. Chair
Gensler, I am going to turn to you.
I am increasingly concerned the SEC is moving away from
that acting as an independent commission, as it is intended to
be. Obviously, I believe the overreach via the climate
disclosure rule now seems to be extending to companies seeking
accessing U.S. Stock Exchange.
The ability of the Environmental, Social, and Governance
(ESG) activist groups to unduly influence what is supposed to
be an impartial assessment of a company creates a dangerous
precedent. Last week, the House passed my bipartisan piece of
legislation that pushes back on some of these groups who,
frankly, have hijacked our capital-markets process.
Please ``yes'' or ``no,'' as I want to hit one more: Will
you commit to ensuring the SEC will not allow ESG agendas to
drive whether a company that has accurately and fully disclosed
its business operations and risk can be publicly listed in the
U.S.?
Mr. Gensler. Um----
Mr. Huizenga. I do not think that is a confusing question.
It is, are you going to allow ESG activists to influence your
decision whether a company is allowed access or not to be
listed?
Mr. Gensler. Companies, as long as they comply with the
law, can list.
I also want to agree with Commissioner Peirce earlier.
Materiality is about the investors and ``decision-useful''----
Mr. Huizenga. Okay.
Mr. Gensler [continuing]. because they were words I used,
are about investors----
Mr. Huizenga. All right.
Mr. Gensler [continuing]. investors making decisions----
Mr. Huizenga. I have 5 seconds.
Mr. Gensler [continuing]. not non-investors.
Mr. Huizenga. Sorry.
PCAOB--``yes'' or ``no,'' if, as Ms. Ho at the Public
Company Accounting Oversight Board (PCAOB) has said that, ``The
actions may end up breaking the public-company auditing
profession's back, particularly for small firms'' Yes or no, if
we break the profession in the name of investor protection, are
we really protecting investors?
I will ask for a written response on that.
Mr. Huizenga. I appreciate that, Mr. Chairman, and I yield
back.
Chairman McHenry. The gentleman from California, Mr.
Sherman, is now recognized for 5 minutes.
Mr. Sherman. All the money and power in this town is with
the crypto industry. They make money literally by making money.
They put a couple hundred million dollars--that we know
about--into politics just recently. Of course, I say ``that we
know about'' because crypto's one magic skill is the ability to
hide money--hence the name ``cryptocurrency,'' which means
``hidden money.'' If you look at our campaign finance laws,
there is no way to enforce them when a politician accepts
crypto and has really no idea where that money is coming from.
Thank you for standing up to crypto. Thank you for standing
up for the rights of those investors who care about the
environmental impact of their investment.
Let me point out that many courts' decisions have basically
come down to ``materiality is decision-useful information.'' It
is simply a renunciation of capitalism for governments to say,
``Investor, you are wrong. You cannot make decisions based on
the environment. You have to make your decisions only based on
earnings per share.'' Last I heard, government telling the
investors what to do is not the capitalist system.
Commissioner Crenshaw, you have not had a question. This is
something we have discussed, and it particularly concerns me
about the crypto industry.
It is my understanding that you have an ethics rule so
that, if you leave the Commission, you cannot lobby the
Commission for the people who are paying you for another 2
years.
Now, we know crypto is trying to influence Congress, but
there are hundreds of us. It is very inefficient. There are
only five of you and, frankly, they do not really want to
influence you. Us, we want to influence you.
It is my understanding that crypto is free to offer any one
of you a $5-million-a-year, 5-year contract so long as in the
first 2 years you are not going to be lobbying the Commission.
Do I have that right? Is that the rule? Or--I am not
suggesting any career changes here, but are the rules so loose
that any Commissioner could take a $5-million-a-year contract
from crypto?
Ms. Crenshaw. I believe they could take a job at a crypto
entity, and there are ethics restrictions in place that----
Mr. Sherman. And the ethics restrictions do not
differentiate between a quarter-million-dollar-a-year job and a
$50-million-dollar-a-year job?
Ms. Crenshaw. I do not believe so.
Mr. Sherman. Well, maybe you would want to propose at least
some limits on what those jobs could do.
I am concerned, Chair Gensler, about Webull and others who
might have investor information in China.
Is the Commission going to do anything, especially in light
of our concerns here about TikTok, to make sure that when
investor data is in the hands of, say, a brokerage firm, that
it is not accessible to the Chinese Communist Party?
Mr. Gensler. Whether a brokerage firmed is owned by Chinese
or Americans or Europeans, they have to comply with our laws
and they have to protect information, customer information
and----
Mr. Sherman. Does that--as a practical matter, are they
free to comply with those laws by storing the information in
China?
Mr. Gensler. I----
Mr. Sherman. There might be cheap data storage available in
Shanghai.
Mr. Gensler. No. I believe so; as long as they comply with
our laws, they can store it in any geographic----
Mr. Sherman. Well, I would hope the Commission would look
at a requirement that understands that, in reality, if it is
stored in Shanghai, it is not protected from the Chinese
Communist Party. You should require that the data not be stored
in China.
I want to commend you for withdrawing--and I know you are
going to be republishing--rules on swing pricing, liquidity
rule, safeguarding asset--the safeguarding rule and I think you
have really listened to Congress. I think those rules needed
change. On the other hand, I want to commend you for the rules
giving climate investors the information that they need and
deserve.
I want to point out, as you look at the safeguarding rule,
that there--do you see any reason why that would have to deal
with the safeguarding of real estate? I mean, it is hard to
move, and the county records are pretty clear. Are we worried
that--would we need the safeguarding rule to cover real estate?
Mr. Gensler. Again, we put something out for comment; we
got a lot of feedback, including around real estate. I have
asked staff to take all those comments in and make a
recommendation to the five of us on how to move forward on, in
essence, reproposing, taking in consideration the scope of the
assets----
Mr. Sherman. Uh-huh.
Mr. Gensler [continuing]. for instance, this real estate--
but also the requirements. There were many comments about the
requirements and whether to do that which Congress had
originally laid out in Dodd-Frank on this.
Mr. Sherman. Thank you.
Chairman McHenry. The gentlewoman from Missouri, chair of
the Capital Markets Subcommittee, Mrs. Wagner, is now
recognized for 5 minutes.
Mrs. Wagner. Yes. Thank you, Mr. Chairman.
Commissioner Peirce, the SEC continues to extract huge
settlements for enforcement cases relating to, I am going to
call it, off-channel communications. Firms have paid a combined
total of over $3 billion in fines as part of the overall sweep.
Has any fraud or customer harm been found and what is the
SEC basing these fines on?
Ms. Peirce. It certainly has become a cash cow for the SEC.
The typical case is not based on fraud or any evidence of a
problem other than a recordkeeping problem. Now, that is a
serious problem, but I think we need to address it not through
enforcement first but through regulatory work that involves
working with people on the outside, the industry and so forth,
to try to figure out how to make these rules workable and also
effective for our----
Mrs. Wagner. No fraud. No customer harm.
Why did the SEC not issue a risk alert during Coronavirus
Disease (COVID), for instance, when it knew that the whole
world was becoming more reliant on using phones for
communication during this time of abrupt forced remote work?
Why did the SEC wait and play ``gotcha'' after the fact with
enforcement actions?
Ms. Peirce. Yes, I mean, I think you point out that a lot
of this probably did stem from the fact----
Mrs. Wagner. It did.
Ms. Peirce [continuing]. that COVID changed the world and
the way we do things and that is why we should have taken a
regulatory approach first. Then for people who were outliers
and bad actors and were defying the rules, we could have
brought enforcement actions.
Mrs. Wagner. Over $3 billion. It is quite the cash cow.
I would like to enter, Mr. Chairman, into the record the
dissent that Commissioners Peirce and Uyeda released today----
Chairman McHenry. Without objection.
Mrs. Wagner [continuing]. regarding this.
[The information referred to can be found in the appendix.]
Mrs. Wagner. Commissioner Uyeda, retail investors are
statutorily allowed to invest in private investments, including
private funds, via closed-end funds, which are subject to
important protections under the Investment Company Act.
However, SEC staff, through informal guidance, whatever
that is, and not rulemaking, has prohibited a closed-end fund
from investing more than 15 percent of its net assets in
privately offered funds unless the closed-end fund's shares are
available only to accredited investors.
Private funds have grown enormously in number and variety,
sir, in the past three decades, but ordinary investors are
unable to invest in them.
That is why I sponsored bipartisan legislation, along with
Representative Meeks, the Increasing Investor Opportunities
Act, to overturn the informal SEC staff position and allow
closed-end funds to more fully invest in private funds. Earlier
this year, this important legislation passed the House with
significant bipartisan support.
Why has the SEC permitted its staff to deny everyday,
ordinary retail investors the same opportunities for investment
returns from alternative asset classes enjoyed by affluent
investors?
Mr. Uyeda. I find the position taken by the staff to be
frustrating. Those staff positions are under the control,
though, of not the Commission but whoever serves as Chairman.
One thing we have learned is that diversification matters,
particularly for retirement investors.
Mrs. Wagner. Yes.
Mr. Uyeda. For 2\1/2\ years, I was a State securities
regulator. Therefore, I am a member of CalPERS. My portfolio at
CalPERS looks very different, with its allocation to private
equity, venture capital, and private credit, than I can ever
obtain as an ordinary worker trying to seek to save money
through an individual retirement account (IRA) or a 401(k)
plan.
Mrs. Wagner. So you are obviously concerned about the SEC
staff position?
Mr. Uyeda. I am sorry?
Mrs. Wagner. You are concerned about this SEC staff
position?
Mr. Uyeda. Yes, I am.
Mrs. Wagner. Should retail investors have access to these
investments through regulated products such as closed-end
funds?
Mr. Uyeda. I think it would--we need to provide those
opportunities to retail investors, yes.
Mrs. Wagner. Yes, not just the rich and affluent.
There is a bipartisan approach to the SEC swing-pricing
proposal. We have heard a little bit about it. Industry
commenters have claimed that the proposal is both unworkable
and harmful for retail investors and even the Consumer
Federation of America opposes the proposal.
Let me just say, Chair Gensler, do you still intend--
because I am not clear on this--to advance this swing-pricing
rule in the face of overwhelming opposition, sir?
Mr. Gensler. We got a lot of comments, as you mentioned,
about the challenges to that rule. Also, I want to note that
the banking regulators oversee about $6 trillion of collective
investment trusts and what we have said----
Mrs. Wagner. Now----
Mr. Gensler. What I have said is, until we see what the
bank regulators do, I think----
Mrs. Wagner. I am just still not clear.
Mr. Gensler [continuing]. we should put a hold on this.
Mrs. Wagner. I would say to Mr. Sherman and others that
oppose it greatly, along with two of your Commissioners, a
reproposal cure has got fatal flaws too.
I yield back, Mr. Chairman, as my time has expired.
Chairman McHenry. The gentleman from Massachusetts, Mr.
Lynch, is now recognized for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
Very quickly, I understand, Mr. Chairman, this could be one
of your last hearings as a Member of this esteemed body. I just
want to say that, while we spend most of our time arguing, I
still regard you as a good and decent man, and I am pleased to
have served with you.
I also have to confess that there are a handful of your
Republican colleagues that I wish would leave Congress.
However, you are not among them, you are not among them.
So thank you for your service----
Chairman McHenry. Thank you, my friend.
Mr. Lynch [continuing]. to Congress. Really appreciate it.
Chairman Gensler--oh, Mr. Lizarraga, good to see you again.
Welcome back. Welcome back.
Mr. Lizarraga. Thank you.
Mr. Lynch. Mr. Chairman, so on September 3, 2024--let me
shift over here--the Federal Bureau of Investigation (FBI)
issued an alert warning the crypto industry that North Korea
is, quote, conducting highly tailored, difficult-to-detect
social engineering campaigns against employees of decentralized
finance (DeFi), cryptocurrency, and other businesses to deploy
malware and steal cryptocurrency.''
The alert specifically noted that North Korea has, quote,
conducted research on a variety of targets connected to
cryptocurrency exchange-traded funds, which suggests exchange-
traded funds (ETFs) may be a target of North Korea soon.
North Korea, as you well know, is a serious threat to the
United States. I know you have done an awful lot of work on the
crypto ETFs, and I know you are aware that the vast majority of
the hundreds of billions of dollars' worth of funds in these
ETFs are held in custody at a single entity.
Just the structure of this, does this not put investors'
funds--you know, unlike the traditional financial system, does
not this put investors' funds at serious risk if there is a
breach, a cybersecurity incident?
Mr. Gensler. It is one of the sort of structural challenges
with crypto itself, that it is stored on this irrevocable
ledger, that if somebody takes a hack and is able to take it.
So the concentration could be a risk and that is why
competition is good as well. I know there are other service
providers that are looking to provide that service to custody
that crypto as well.
Mr. Lynch. It is ironic that this is supposed to be a
decentralized system but we have this concentration that
introduces so much risk in the system.
Mr. Gensler. No, no, it is most definitely. Finance tends
toward concentration, but the crypto field is not immune to
that. There is quite a bit of concentration.
That FBI alert that went out also noted--it was attached to
a whole report that talked about $4 billion or $5 billion of
investor harm that had happened just in the last year as well.
Mr. Lynch. Right.
The other piece of this, related to that, is the way the
stack works. You have spoken before about the risks of the
vertical integration of crypto, where we have--for example, you
have a single entity, should not be acting simultaneously as an
exchange, then a broker and a dealer and a custodian because
that puts customer funds at risk and presents conflicts of
interest as well, as we saw with FTX.
Can you talk about that? Can you talk about why these are
concerns? Do you take issue with the proposed market structure
legislation under FIT21 that has been introduced and what
changes might you suggest?
Mr. Gensler. I think one of the hallmarks of our capital
markets have been that stock exchanges are separate from
broker-dealers, that they each make money, they each have an
important role, but that conflict is not mixed. We would not
have the New York Stock Exchange actually operating a hedge
fund, operating the dealers on the floor as well. They are kind
of separated.
We have seen in the so-called crypto exchanges commingling
this and also taking custody of their customer funds and, at
times--as you mentioned, the FTX collapse--being fast and loose
with those customer funds.
Mr. Lynch. Yes.
What I worry about is, it seems to be that the crypto
industry and in FIT21 has proposed because this is digitized
and we are going to put this on a blockchain, that we can
sidestep all of the regulations that we have adopted here for
the traditional finance industry.
Mr. Gensler. I think that the time-tested protections are
really important.
I would also say, court after court has actually spoken--it
is to an earlier point, if I can--that this Howey standard is
actually quite clear.
One court said, ``Howey provides a clearly expressed test
for determining what constitutes an investment contract.''
Another court said, the SEC based its claim on ``a
straightforward application of a venerable Supreme Court
precedent.''
I could go on and on and read quote after quote from----
Mr. Lynch. Yes.
Mr. Gensler [continuing]. cases in the crypto field.
Mr. Lynch. Well, thank you.
Thank you for your courtesy, Mr. Chairman, and I yield
back.
Chairman McHenry. Thank you.
We will now recognize the gentleman from Kentucky, Mr.
Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Chair Gensler, you say Howey is clear, but let me tell you
what is not clear. What is not clear is what the rules of the
road are if you are in the crypto business.
Over the past several years, the SEC has brought
approximately 150 enforcement actions related to the digital
asset ecosystem. In 2023 alone, the SEC brought nearly 50, up
53 percent from 2022.
Let me read a description of what your agency is doing to
one particular company, Coinbase.
``Today's Wells notice does not provide a lot of
information for us to respond to. The SEC staff told us they
have identified potential violations of securities law, but
little more. We asked the SEC specifically to identify which
assets on our platforms they believe may be securities, and
they declined to do so. Today's Wells notice also comes after
Coinbase provided multiple proposals to the SEC about
registration over the course of months, all of which the SEC
ultimately refused to respond to.''
So Coinbase repeatedly, 30 times, tried to come in and
register with the SEC, and the SEC refused to respond. They
then submitted a petition for a rulemaking, which was rebuked,
which was completely ignored. Then the SEC identified potential
violations in a Wells notice but refused to identify what those
were.
Howey, in your mind, is very clear. What participants in
the crypto space are telling us is that this is totally
unclear.
Commissioner Peirce, is this moving target, is this
lawlessness by the Commission conducive to investor protection?
Ms. Peirce. No, it is not.
Mr. Barr. Chair Gensler, I think we need not only FIT21 but
we need an SEC that actually establishes rules so that
everybody knows what they are and enforces those rules, instead
of making everything a moving target and refusing to respond to
requests from investors and providers of crypto assets, what
those rules are.
I want to move to another question really quickly.
Over and over again, your administrative actions have been
invalidated by the courts. We have seen it in the proxy
advisory rule, the private funds disclosure rule, the DEBT Box
example, the stock buyback rule, the Grayscale Ripple. Over and
over and over and over again, your administrative actions have
been struck down in Federal court.
Commissioner Peirce, what does this say about the
legitimacy and reputation of the SEC, when the agency is
constantly losing in Federal court?
Ms. Peirce. Well, it certainly says we need to be a little
more careful when we go out with proposals and when we take
actions to make sure that we are acting within the constraints
that Congress gave us.
These are things that, in many of these instances--private
fund advisor rule, for example--we knew ahead of time that
there were legal questions about whether we had the authority
to do what we did, but we moved forward and this is not good
for our institutional integrity.
Mr. Barr. Well, it is, in administrative law, a violation
of the Asset Purchase Agreement (APA), arbitrary and capricious
actions.
Let us go to the basics. The basics is statutory authority
and now we have West Virginia v. EPA and Loper Bright
overturning Chevron.
In light of those decisions, Commissioner, can you identify
any specific statutory authority--Commissioner Peirce, can you
identify any specific statutory authority where Congress has
granted the SEC authority to promulgate regulations that compel
companies to disclose general and immaterial information about
environmental or social issues?
Ms. Peirce. As I pointed out in connection with the climate
rule, I am very concerned about moving beyond materiality. I
think that we are on shaky legal ground when we move away from
financial materiality, which is the touchstone of our----
Mr. Barr. Well, is there any statutory authority at all,
specific statutory authority----
Ms. Peirce. There are instances where Congress has told us
specifically--conflict minerals, for example--where we want you
to go and do something regardless of the materiality.
Mr. Barr. Well, let me ask you this. My colleagues on the
other side of the aisle, Mr. Casten and Mr. Vargas, introduced
the Climate Risk Disclosure Act in the 116th Congress and then
the House passed a version of that in the 117th Congress,
Representative Vargas's Corporate Governance Improvement and
Investor Protection Act.
Those pieces of legislation, to their credit, to my
colleagues' credit, attempted to confer specific statutory
authority to the Commission to do what you did in the climate
disclosure rule. Guess what? The Senate did not pass those
laws.
The fact that this body has proposed statutory authority
but specifically declined to enact it into law, what does that
say about the SEC's authority to promulgate the climate
disclosure rule?
Ms. Peirce. Again, our baseline is materiality. If Congress
wants us to do something in immaterial disclosures, then they
can tell us to do that.
Mr. Barr. The point is, we have not done it. You do not
have the authority to do it.
I yield back.
Chairman McHenry. The gentleman yields back.
The gentlewoman from Ohio, Mrs. Beatty, is now recognized
for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman and Ranking Member and
to our witnesses.
Let me start with you, Chair Gensler. I have a couple
questions I am going to try to get through.
The first one is on proxy advisory firms. As you know,
these firms are contracted by investors to provide them with
independent advice and analysis on proxy votes, which is where
the shareholders are presented with an opportunity to vote on a
whole host or range of matters regarding the company's policy.
Proxy advisory firms also help level the playing field for
those smaller investors who may not have the money, the
resources to conduct such research on their own.
Can you tell me how the SEC's regulations on proxy advisory
firms ensure that these firms are acting in the best interest
of the shareholders?
Mr. Gensler. It is a little bit complicated, because the
prior Commission in 2020 had proposed and adopted a rule on
proxy advisors that then has recently gotten--I guess the word
would be ``vacated,'' but I have to get the right word.
Commissioner Peirce, do I have that right word?
Ms. Peirce. I will defer to you, as the lawyer, on this
one.
Mr. Gensler. All right.
Mrs. Beatty. If this is complicated for you all, then----
Mr. Gensler. No, no, I am just saying, because the rule
that the Commission adopted in 2020 just recently in a court,
in the D.C. Circuit Court, was not upheld.
Mrs. Beatty. Okay.
Mr. Gensler. It was a prior Commission's rule. I do not
think that we have the direct authorities that we once had or
thought we had, but----
Mrs. Beatty. Okay. I will look at what they did, and then
we will come back, because we need to visit that. Because, now,
if you do not think you have the authority, I do not know what
is going on with these smaller investors. Okay.
Let me switch to human capital management disclosures.
Mr. Chairman, the human capital disclosures include
employee salary, as you know, information, training and
development initiatives, as well as talent attraction and
retention metrics, just to name a few.
Investing in these areas can have a significant impact on
company performance. Additionally, by investing in training and
skills--team skills company objectives--have met 90 percent
more often their goals.
Since 1998, I believe firms in the European Union have been
required to report human capital investments in relationship to
all those things--the salaries, the bonuses, and other
benefits. By comparison, the United States, only 15 percent of
S&P 500 firms report this information because it is not
required.
Do companies that disclose this information see any
tangible benefit in terms of their shareholders' values and
returns, in your opinion?
Mr. Gensler. I think that it is important information, but
it ultimately is not what I think; it is whether investors find
it material, back to what Representative Barr was asking
earlier.
Mrs. Beatty. Yes.
Mr. Gensler. We have a disclosure system that is about
investors and what do they find material to their decision
making, or significant, as the Supreme Court calls it, and that
is what is important.
In 2020, the Commission actually adopted new updated
disclosure rules around human capital, and we have seen some of
the experience in the last 3 years of what companies are
disclosing. We have heard from investors that they--many
investors that want more specific information than companies
are currently disclosing.
Mrs. Beatty. That sounds to me like, in my opinion, that it
was of some benefit.
Let me go to another disclosure, in my last seconds, on
diversity and inclusion. We heard our ranking member open with
the value and importance of that.
Across a range of studies, research shows that diverse
boards lead to improved financial results. For example,
companies with the highest-level percentage of women board
directors outperform those with the least by 53 percent when it
comes to return on equity.
Could you talk more about the importance of Diversity and
Inclusion (D&I) disclosures, including the benefits such
disclosures can have on companies' overall performance and what
are you all doing to increase the disclosures with D&I?
Mr. Gensler. I can say this: I find that just at the SEC it
is very beneficial to draw from a diverse population across the
U.S., and I think it has benefited our agency to have senior
leadership from all parts of the American public.
In terms of----
Chairman McHenry. The gentlelady's time has expired.
Mrs. Beatty. Okay. Thank you.
If you want to send something to us in writing about that,
I would appreciate it.
Mr. Gensler. Okay.
Chairman McHenry. The gentleman from Texas, Mr. Williams,
is recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman.
I want to say thanks to all of you again for coming today.
It is important to have you here like this in this forum.
Chairman Gensler, the SEC has been issuing rules and
regulations at an alarming rate, and the scope of the SEC's
regulatory flexibility agenda has been extensive. This has
raised concerns across the financial service industry,
particularly due to overlapping implementation dates, rule
requirements, and compliance periods, which has created
uncertainty about how these regulations will intersect and
impact one another.
So, for small businesses--and I chair the Small Business
Committee, and I am a small business--their growing compliance
burdens can be especially overwhelming, often stretching their
already-limited resources and capacity.
Mr. Chairman, have you consulted with the National Economic
Council or the Treasury Department regarding the effects of
these numerous new regulatory requirements on millions of
investors and retirement savers, and if you have, what feedback
have they provided?
Furthermore, is the SEC considering the significant
resource strains that firms may face when required to implement
these rules simultaneously?
Mr. Gensler. We put each of our rules out with economic
analysis and also a call to small businesses to get their
feedback. We do take it very much into consideration, whether
it is from small businesses, if there were a comment from the
Small Business Administration, for instance, if they had
feedback for us, or, I think you mentioned, the U.S. Treasury
Department.
On a number of our rules--not all of them--on a number of
our rules, we go to them in advance, whether it is about the
Treasury markets or the capital structure. We do not have a--we
do not have a--we are an independent agency from the U.S.
Treasury Department.
Mr. Williams of Texas. Okay.
Commissioners Peirce or Uyeda, do you have a comment on
that?
Ms. Peirce. I think we consistently overlook the
disproportionate effects on small businesses and that has been
very evident in our failure to use accommodations for small
businesses. Occasionally we give them a little more time, but I
think we could do much more.
Mr. Uyeda. I agree. There is a disproportionate impact on
small businesses. In some cases, there are loopholes that allow
us to not consider the effects.
For investment advisors, the rules say you have to give
special consideration if you have $25 million or less of assets
under management. Well, as it stands today, you need to have at
least $100 million of assets under management just to register
with the SEC.
So we conveniently take the position that we do not need to
analyze the effects on smaller investment advisors because we
do not have them registered with the SEC under this $100
million threshold.
Mr. Williams of Texas. All right. Thank you.
In recent years, the expense of entering U.S. public
markets has skyrocketed, with the cost doubling since the
1990s. Consequently, the number of publicly traded companies
has plummeted, with many choosing against initial public
offerings (IPO). So this reduction IPO activity has diminished
investment opportunities and slowed both growth and innovation.
Although the SEC is tasked with fostering capital
formation, its current regulatory efforts have centered on
expanding complex and expensive disclosure requirements rather
than tackling the obstacles that companies face in going
public.
With over 68 regulatory actions on the agenda, not one
directly addresses capital formation, which is key to market
accessibility. Instead, the emphasis on more stringent
regulations has made U.S. markets less appealing, so further
discouraging companies from coming here, particularly small
businesses, and from entering the public sector.
Commissioner Peirce, how has the SEC's focus on increasing
regulatory and disclosure obligations, rather than facilitating
capital formation, contributed to the decline of the IPO
activity and the reduction in the number of U.S. publicly
traded companies?
Ms. Peirce. You are raising such an important issue,
because if companies do not go public early in their lives,
retail investors have a very difficult time getting access to
them.
There are many reasons, but regulatory burdens are one. All
we are doing is adding to that list of requirements for public
companies. We are not thinking about right-sizing it. It is a
real problem and that is why we are not seeing--one of the
reasons we are not seeing companies go public.
Mr. Williams of Texas. In my limited time, another failure
of the SEC under Chairman Gensler has been the inadequate
consideration of opposing viewpoints in the agency's regulatory
agenda.
This practice is particularly risky because excluding
diverse input can lead to regulations that lack real-world
analysis and overlook how they might disproportionately impact
smaller firms, limit investment opportunities, or raise the
cost for market investment.
So it is crucial for any regulatory agency to actually seek
and incorporate feedback from all stakeholders to fully
understand the potential consequence of its actions from every
perspective.
In the limited time, Commissioner Uyeda, has the SEC's
tendency to push forward major rulemaking without adequate
public input increased risk for investors?
Mr. Uyeda. That has been, I think, the biggest problem with
all these overlapping, complicated rulemakings. We are not
getting the input we need to make a good decision.
Mr. Williams of Texas. I yield my time.
Chairman McHenry. The gentleman from California, Mr.
Vargas, is recognized for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman. I want to
thank you and the ranking member for convening this important
hearing.
I want to add my voice to the chorus of those who have been
saying thank you for your service and your fairness. I think
you have treated all of us very fair, and I think it is a big
loss to this institution that you are retiring. Of course, we
all wish you well in whatever your endeavors are after this.
Again, thank you.
I would also thank the Commissioners--the Chairman and the
rest of the Commissioners for being here and for the service
for your country.
Over the past 90 years, the SEC has been fulfilling its
stated mission of protecting investors, maintaining fair and
orderly and efficient markets, and facilitating capital
formation.
Under your leadership, we have seen increased transparency
for investors, increased accountability for those committing
fraud. This makes it so investors get to decide which risk they
would like to take, so long as the public companies hold up
their end of the bargain by providing full, fair, and faithful
disclosure.
I want to blame all of you, and, in particular, Chairman, I
want to blame you, for a very boring meeting today. Very
boring. There is a reason for that and the reason for that is,
there is not a whole gaggle of reporters and camera people here
in the front, because you have done a good job and because the
markets are doing well. If you had messed up, there would be a
whole bunch of reporters here. Even my colleagues are not here.
They all left. A pretty boring hearing. I want to blame all of
you for working so hard to make this such a boring meeting.
I have to say, I do follow politics a little bit, and I
heard in the 2020 election something like this, a prediction:
``The stock market will crash if Biden wins in 2020.'' By the
way, do you know who made that comment? You do not have to
answer. I think you know who made that comment.
Now that same individual says, ``If we lose, we are going
to have a crash like you would not believe.'' He went further,
``The largest stock market crash we have ever had.'' Well, I do
not think that is going to happen either. The other predictions
did not seem to happen. Again, it is because you guys have done
a very good job.
It is interesting here, listening to you--because I
normally read about you; I do not get to see all of you in
person--there is a difference of opinion, clearly and it is
well-articulated by all of you. I think that is healthy and
that is what we should have.
None of you, unless I am not aware of it--do any of you
want to close down the SEC? Are any of you threatening to do
it?
Mr. Chairman, are you threatening to close down the SEC?
Mr. Gensler. No. I think it was a great creation of
Congress and it has helped the American public.
Mr. Vargas. Yes, of course. This is the way things are
supposed to work in America.
I do still believe that we are the best hope for the world,
really, to have a fair and just world, when we can have
discussions that are reasonable. I know they tried to parade
the horribles here earlier, but no one took the bait, because
the truth of the matter is that the markets are working well.
Where is the Dow Jones, by the way?
Commissioner Peirce, where is the Dow Jones today, do you
know?
Ms. Peirce. Well, I have not looked today, but, I mean, the
Dow Jones is doing well if we are looking at numbers.
I do want to say, we get along very well as a Commission,
we work very well as a Commission. We cannot measure the
success of the agency by where the stock market is, but I think
we do have tremendous capital markets in the U.S., and we
really need to preserve them and that is what we are all
fighting to do.
Mr. Vargas. I think you do it very well. You are eminently
brilliant, as are the rest of your Commissioners, and I think
you guys do a good job.
I do want to get--I needed to say that because, again, like
I say, my colleagues try to figure out how to make things sound
bad, but the truth is, the economy is doing pretty well.
Especially after going through a pandemic, especially after all
of the problems that we have had in the world with conflicts,
the United States has been doing very well.
I do want to talk, though, about environment, because I do
think that the rule that you have adopted is a very good one,
but you did not go far enough. We have difference of opinions.
Did you have the authority to do that, Mr. Chairman, to
promulgate and ultimately adopt the rule that you had?
Mr. Gensler. I very much do think so. I think it was
grounded in materiality, very much grounded in materiality to
investors--not to others--solely to investors.
I want to augment something a fellow Commissioner said. I
think we all five do get on pretty well. We have policy
differences, but that is by design. Congress wanted this to be
a robust policy debate. I have chaired a multi-member
Commission twice now, and I really do believe in the give-and-
take that we have.
Mr. Vargas. My time is about up, so, again, I would just
like to thank all of you for your service. Thank you.
Thank you, Mr. Chairman. I yield back.
Chairman McHenry. Thank you.
I now recognize the gentleman from Minnesota, the whip, the
Republican whip, Mr. Emmer, for 5 minutes.
Mr. Emmer. Thank you.
Chair Gensler, leadership comes from the top, correct?
Mr. Gensler. Leadership comes from a lot of things, but the
top matters a lot.
Mr. Emmer. Yes. It is ``yes.'' The answer is ``yes,'' sir.
Under your leadership at the SEC, it appears that you
expect political allegiance not just from the political
appointees but also from the civil servants you hired. Is that
not correct?
Mr. Gensler. That is not correct, sir.
Mr. Emmer. Well, sir, that is yet another deliberate
distortion of the truth.
The House has obtained emails between you and your now-
director of training and markets. He interviewed with you and
then sent you a follow up email reassuring you, sir, that he
aligned with your political views.
So that, to me, seems like you expect political allegiance
from the people that you hire as civil servants at the SEC. The
way you hire and the culture you require encourages your staff
to have loyalty to you, above the law and above the mission of
the SEC.
Which brings us to the DEBT Box case in Utah, where your
attorneys, who no doubt heard your anti-crypto rhetoric, which
is not based in law, went out and deliberately lied to a court
in order to effectuate the commands from their Chair to
prosecute crypto companies.
Chair Gensler, do you know of any other time in history
where the SEC has been sanctioned by a court for material
misrepresentation?
Mr. Gensler. First, if I might say, when we hire folks, we
hire----
Mr. Emmer. No. Reclaiming my time, sir. The answer to that
question is, ``No, it has never happened.''
Let me ask you another one. Does the fact that we are
talking about this today even slightly embarrass you?
Mr. Gensler. Look, the matters in that case were not well-
handled, and----
Mr. Emmer. Reclaiming my time again.
Mr. Gensler [continuing]. we said that to the court.
Mr. Emmer. Reclaiming my time again. The DEBT Box case
should absolutely be embarrassing to you, sir.
Just to be clear, the SEC had to pay, with taxpayer
dollars, nearly $2 million in legal fees for this material
misrepresentation, for this lie. You are aware of that, I am
sure.
Is the DEBT Box case the reason why the SEC's head of
Crypto Asset and Cyber Unit resigned in June, sir?
Mr. Gensler. No. They went to take another job.
Mr. Emmer. Okay, so one in a senior-level position here in
Washington, DC, has been held responsible for this complete
abuse of taxpayer dollars.
The SEC broke the law, your attorneys lied to the court,
and no one in your leadership here in DC has been held
accountable. That tracks: It seems like business as usual here
in Washington.
OK. Switching gears very quickly, it has been recently
reported that Vice President Harris has finally said she would
craft clear rules of the road for the digital-asset space if
she becomes President.
Is this your approach, too, sir? Or do you think she is
rebuking you because she does not think you have done a good
enough job establishing these clear rules over the last 3 years
of her administration?
Mr. Gensler. I think that there are laws in place. If
Congress wishes to change them, they will change them, but we
are enforcing the laws and there are many----
Mr. Emmer. Reclaiming my time.
Mr. Gensler [continuing]. people in this field----
Mr. Emmer. You do not think she is rebuking you.
Mr. Gensler [continuing]. that are not following the laws.
Mr. Emmer. Reclaiming my time. Well, it is very interesting
that you view your performance that way, because we have a
litany of court cases, extraordinary confusion in the
marketplace, and millions of Americans pining for clarity from
you.
You have abused the agency's enforcement tools, and you
have even baited companies eager to comply with you, only to
hit them with enforcement actions. You have retaliated against
businesses and people who have come before this committee to
talk about the next generation of American finance.
Perhaps somehow worst of all, you have made up the term
``crypto asset security.'' This term is nowhere to be found in
statute. You made it up. You never provided any interpretive
guidance on how ``crypto asset security'' might be defined
within the walls of your SEC, yet you made the broad
proclamation that you believe a majority of tokens are crypto
asset securities.
You did this. You deliberately used this made-up term as
the basis for your entire enforcement crusade over the past 3
years, only for your lawyers to retract it in a footnote to a
court just last week.
Your inconsistencies on this issue, sir, have set this
country back. We could not have had a more historically
destructive or lawless Chairman of the SEC.
I yield back.
Chairman McHenry. The gentleman yields back.
The gentleman from Illinois, Mr. Casten, is now recognized
for 5 minutes.
Mr. Casten. Thank you, Mr. Chair.
Thanks, all, for being here.
I want to first follow up on what my friend Mr. Barr raised
earlier about this issue around the ESG rules. When Congressman
Vargas and I had introduced these bills last year, one of our
big concerns was if people do not want to invest in ESG funds,
that is fine, but there is this inconsistency of rating
methodologies and weighting systems, which I think is an issue
when you have these $7-trillion-plus of assets looking to
invest in this asset class.
So I guess I would like to start with you, Commissioner
Crenshaw. Would you be supportive of establishing a regulatory
regime for ESG ratings providers?
Ms. Crenshaw. I am happy to discuss it and certainly open
to thinking about it and would look forward to any proposal
that would come before me.
Mr. Casten. Okay. Well, I would love to follow up, because
I do think we have gotten so politicized in this, but there
still is the issue that we should have--we have clear
accounting rules for other issues; we should have clear
accounting rules there as well. Appreciate it. We will follow
up offline on that one.
I want to shift now to some concerns I have that have come
up a couple times here about merging the functions of the self-
reporting organizations into the SEC, specifically the
Financial Industry Regulatory Authority (FINRA) and the PCAOB.
If I am doing my math right, if we were to merge FINRA and
the PCAOB into the SEC, that would more than double the SEC's
headcount, just looking at the number of employees at those
agencies, and would probably increase your budget by 75 percent
or so.
I think there is a rich conversation about whether the
people who would look to merge would also increase your budget
in order to do that.
Chairman Gensler, I would like to shift to you. In your
view--and I am sorry if I peek around Ms. Williams' head here--
how does FINRA and PCAOB oversight supplement the work of the
SEC? If they were to be merged, could they still do all the
things they do now, or would there be some gaps in what we are
able to do?
Mr. Gensler. I think that Congress could, of course, change
this, but we have self-regulatory organizations, particularly
in FINRA's case that is the regulator--sort of the first line
of regulation for broker-dealers. It goes all the way back to
the late 1930s, something called the Maloney Act that Congress
passed.
That certainly allows industry and the broker-dealers to
get the benefit of that, but then we are the official sector
overseeing the overall industry. That has worked reasonably
well over the decades. There are certainly times where there
has been gaps in that.
The PCAOB--great debates in this Congress 20-some years ago
about taking that and moving it into an agency that was in a
trade association. The American Institute of Certified Public
Accountants (AICPA) used to inspect and set standards for the
auditing field, and better to do it in something overseen by
this five-member Commission. Again, Congress could change that,
but I think that, too, has its benefits to be----
Mr. Casten. Well, I understand, and----
Mr. Gensler [continuing]. outside of the agency.
Mr. Casten [continuing]. I am not asking you to opine on
whether we could do it, but it seems to me that as outside
organizations--you know, FINRA has private enforcement
mechanisms if broker-dealers are violating the rules. I do not
think you would have that ability if you came in, right?
If they were inside the SEC, could you still do private
enforcement, or would you have to--would you have to subpoena
information? Could you take the Fifth?
Mr. Gensler. No, we would have to follow Federal law and do
things in a way that----
Mr. Casten. Exactly. Essentially, bringing them in would
make them weaker as institutions.
Mr. Gensler. I think it would--one of the things that might
make it weaker is also the funding point that you say.
Mr. Casten. Okay.
Mr. Gensler. So both PCAOB and FINRA have funding models
that basically tap into their members. In the PCAOB's case,
Congress approved a funding model that then we annually approve
that budget as a Commission.
Mr. Casten. Yes. No, I share the concern.
Look, we are going to continue to highlight this, in part
because these are lifted directly out of ``Project 2025,'' this
idea that we should weaken organizations, we should put them in
places where others are involved.
I would like unanimous consent to enter into the record
President Trump's right-wing policy map called ``Mandate for
Leadership: The Conservative Promise.''
Chairman McHenry. Without objection or general leave.
[The information referred to was not submitted prior to
printing.]
Mr. Casten. Thank you. We will bring that in.
Again, the concern: We have seen a lot of proposals that
are lifted straight out of that, from Unfair, Deceptive, or
Abusive Acts or Practices (UDAP) hearings, eliminating Consumer
Financial Protection Bureau's (CFPB's) funding, and, indeed,
weakening the SEC. I want to make sure that we address those
issues and understand the importance of investor protections.
So thank you all for doing what you do, for being here.
I yield back.
Chairman McHenry. The gentleman yields back.
The gentleman from Georgia, Mr. Loudermilk, is now
recognized for 5 minutes.
Mr. Loudermilk. Well, thank you, Mr. Chairman, and thank
you all for being here. This is a historic moment, to have
everyone here together. Unfortunately, we only get 5 minutes
apiece. I think we could sit here for a couple of days to
explore some things.
If any of you have followed any of my previous questioning,
you know that my greatest concern is the Consolidated Audit
Trail from a constitutionality, cost, and vulnerability
standpoint. Someone who has spent almost 30 years in the IT
sector, the fact is, it is not if you are going to get hacked
but when. You have to have that mentality if you are ever going
to be safe.
However, I want to first address what I think may be some
misunderstandings that some in the market have over
Consolidated Audit Trail (CAT). Unlike the majority,
overwhelming majority, of the people that contact me that are
opposed to CAT, there is a group out there that are in favor of
it.
I would like to, Commissioner Uyeda, maybe start with you,
if you could just answer really ``yes'' and ``no'' to get my
misunderstanding and to maybe clarify some misconceptions that
others have out there.
The first question is, does the Commission ever plan to
make the Consolidated Audit Trail transaction data base
available to the public?
Mr. Uyeda. There is no current plan to make it available to
the public.
Mr. Loudermilk. Do you conceive that it ever would be made
public?
Mr. Uyeda. It could be. That would be up to a future
Commission.
Mr. Loudermilk. Okay.
What about the Customer and Account Information System data
base containing the sensitive personally identifiable
information (PII)? Will that ever be made public?
Mr. Uyeda. Not presently.
Mr. Loudermilk. Okay. The answer concerns me greatly, that
it is not an absolute ``no,'' as you can understand.
``Yes'' or ``no,'' will the public be able to obtain CAT
PII via a Freedom of Information Act request?
Mr. Uyeda. There are exemptions that might be applicable,
but that is not fully resolved or clear.
Mr. Loudermilk. So you are saying it is possible that,
through Freedom of Information Act (FOIA), you could get
personal identifiable information on somebody who buys a single
stock?
Mr. Uyeda. There is a trade-secret exemption, but, again, I
do not know--I am not a FOIA expert, so I do not know----
Mr. Loudermilk. Okay.
Mr. Uyeda [continuing]. and cannot give you the absolute
assurance that you may be looking for that, it cannot be
accessed by someone filing a FOIA request.
Mr. Loudermilk. Okay. Well, my concerns with CAT are
growing.
Would removing PII in the CAT affect whether a CAT
reporting firm is required to indicate that it is using the Reg
SHO Market-Maker Exemption under SEC Rule 13f-2?
Mr. Uyeda. I do not think it would have any effect.
Mr. Loudermilk. Okay. In other words, removing PII from CAT
collection would not seriously impede short-sale data
collection?
Mr. Uyeda. That is correct.
Mr. Loudermilk. Okay. Thank you.
I will move on to some other a little more open-ended
questions in the time I have.
Commissioner Peirce, the Consolidated Audit Trail is set to
become the largest repository of retail investor information
ever created. It will be a prime target for cybercriminals and,
once breached, will yield the personal financial information
and identity of every American who even has a share of stock.
Knowing that a breach of the CAT is a matter of when, not
if, the--you still refuse to amend the CAT to remove retail
investor PII.
So, in 2019, you stated that the information collected by
the CAT will be so vast that it will be hard to protect from
cybercriminals and state-sponsored hackers.
Commissioner Peirce, have your concerns about the CAT
changed at all?
Ms. Peirce. They have only grown, because we have a data
security amendment that we have proposed but we have not
finalized. So I have even greater concerns than I had back
then.
Mr. Loudermilk. Well, thank you. We share those concerns.
Could the Commission identify and stop market manipulation
without CAT?
Ms. Peirce. We did it for many years without CAT, so, yes.
Mr. Loudermilk. Okay.
Do the beliefs of storing investor PII in a centralized
system, even if encrypted, outweigh the risks?
Ms. Peirce. Absolutely.
Mr. Loudermilk. All right. Thank you.
Chairman Gensler, I want to ask you specifically about the
personal identifiable information being collected under CAT. Do
you share Commissioner Peirce's concern about the CAT's cyber
vulnerabilities?
Mr. Gensler. I share the views.
I also want to say, the answers to your first three
questions were ``no,'' ``no,'' and ``no.'' We cannot release
that information under FOIA.
Mr. Loudermilk. Okay.
Mr. Gensler. I--those earlier questions.
Mr. Loudermilk. Well, thank you for that. It does not
relieve my concerns over CAT but the fact that it may be
considered being made public at some point----
Mr. Gensler. No.
Mr. Loudermilk [continuing]. because--and this is my
concern--then you just open the door for the Chinese to log in.
I see my time has expired, and thank you. I yield back.
Chairman McHenry. The gentlewoman from Texas, Ms. Garcia,
is recognized for 5 minutes.
Ms. Garcia. Thank you, Mr. Chairman, and thank you to all
the Commissioners for being here.
Mr. Chair, it is good to see you again.
First, I want to thank you personally for all the ongoing
dialog that we have had with your office regarding language
access and financial literacy. You know firsthand how
fraudsters and bad actors target vulnerable communities and
that is what I want to talk about this morning.
One way to combat fraud is to educate every American about
how to safeguard their money and how to invest. This is
especially important as investment in stocks has become so easy
that it is as simple as a video game, it seems, because it is
so accessible now through our phones.
Chairman Gensler, as of today, are there fraud tutorials
and consumer resources available in different languages other
than English on your investor.gov?
Mr. Gensler. I believe that they are in Spanish and in
English, but I will have to confirm what other languages. We
could----
Ms. Garcia. No, you are correct. That is what I am being
told, and I just wanted to confirm that.
Mr. Gensler. Okay.
Ms. Garcia. Are you working on adding other languages? I
mean, we are such a diverse United States of America.
Mr. Gensler. I think I would like to get back to you.
``Yes'' is the--I think we ought to try to do that, but it is
also about resource constraints and the like.
Ms. Garcia. Right. Well, I am hopeful that you can continue
heading in that direction, because I think, as it becomes
easier to do, more people will try to do it. If people do not
understand in their own language the consequences of their
investments, they are just going to end up getting in trouble.
So thank you.
What strategies have you taken to best educate our older
populations because I think you and I have discussed also how
seniors are becoming to be a target for a lot of these,
especially through the phone, what I call ``scams?''
Mr. Gensler. No, that is a good word. There is a lot of
affinity fraud, not just targeting the older population but
different parts of our community, so-called affinity fraud, and
we do chase after that. Some of that is also in the crypto
field, to bring this all back together, as well.
What we do is investor education. We try to reach out, we
work with communities to try to get that word out.
Ms. Garcia. Thank you. I think just as we spend time
worrying about small businesses, we need to worry about the
small consumer and that is the point I wanted to make this
morning.
Commissioner Lizarraga, as investment becomes more
accessible, it is important to keep these communities in mind
as we work to protect investors. Not long ago, reports came out
across the country about Bitcoin ATMs strategically located in
communities like mine that include working-class Americans,
immigrants, limited-English-proficiency speakers, and the
underbanked. Consumers may find it convenient, but we end up
with issues and, as I said earlier, scams.
I do not want all of this to become like the modern new
payday lender. What are you all doing to ensure that, as we
move forward with more access, particularly to technology, that
we just do not repeat some of the issues we have had in the
past with banking?
Mr. Lizarraga. Thank you, Congresswoman. A good question
about the importance of protecting vulnerable investors in our
disadvantaged communities.
I think we are exercising our authorities as appropriate--
affinity frauds--targeting frauds wherever they occur. It does
not matter what the nomenclature is. Where we see violations of
securities laws, we have an obligation to protect investors and
to follow the law and enforce it.
So I think we are doing that without fear or favor. I think
there is a very robust process, internal process, of ensuring
that it is a fair process as well. I do think it is an
important priority for us to pursue to ensure that investors
are protected from----
Ms. Garcia. No matter how large or small.
Mr. Lizarraga. Exactly.
Ms. Garcia. Great.
Ms. Peirce, do you agree?
Ms. Peirce. Absolutely. There is a lot of work that we are
doing, and we have more to do.
I think on your point about getting information out in
different languages, we can also work with firms so that they
are able to communicate with people in the language--in their
mother tongue.
Ms. Garcia. Well, yes, I was very shocked to hear from
someone that works for an investment banking firm--I will not
name it--that was actually instructed, as an investment banker,
not to send anything in writing in Spanish. I am going to get
to the bottom of it----
Ms. Peirce. That may be tied to SEC regulation, but I am
happy to look into that.
Ms. Garcia. Well, and I will get back with the Chairman on
that too. It just seems like, especially in Texas----
Chairman McHenry. The gentlelady's time has expired.
Ms. Garcia [continuing]. it seems like an atrocity to do
that.
Thank you. I yield back, Mr. Chairman.
Chairman McHenry. The gentleman from Ohio, Mr. Davidson,
the chair of the Housing Subcommittee, is recognized for 5
minutes.
Mr. Davidson. Thank you, Chairman McHenry, for putting this
historic hearing together, long in the making.
Thank you to our witnesses. It is great to have all five of
you here today.
Today's hearing directs attention to the Commission's
dysfunctions and, frankly, to the Chairman's politicization of
the Commission and its work.
Let me highlight seven failures. Abuse of the rulemaking
procedure, 61 so far. Inappropriately short public comment
periods. Unworkable and unlawful ESG disclosure mandates.
``Hotel California''-style rules for crypto, where they all
have the ability or direction to come check in anytime you
like, but never with the authority to leave with some approval
or clarity. Endless discovery, with no resolution, no clarity,
regulation by enforcement for crypto. An unworkable proposal to
overhauling our equity market structure. A de facto ban on
crypto through proposed custody rule and failure to work with
Congress, frankly, undermining the work that Congress has done
to provide clarity here.
As many of my colleagues have done today at this hearing,
the courts have, even the Department of Justice (DOJ) have
highlighted severe mismanagement. The list goes on, but,
unfortunately, I do have limited time.
Commissioner Peirce, would you say that the SEC's
rulemaking and enforcement agenda reflects the priorities of
the Commissioners as a whole, or has the Commission become an
extension of Chairman Gensler's agenda?
Ms. Peirce. The agenda is the Chairman's agenda.
Mr. Davidson. Do you guys have collaboration? I mean, I saw
one of the Commissioners today look like it might be the first
time he was asked his opinion on something. Just expected to
ratify whatever Chairman Gensler throws out there.
Ms. Peirce. I mean, I think the issue is that Chair Gensler
has a lot of ideas that he is trying to move forward on, and
there are other things that I think we should be spending our
time on that we are not spending our time on. I think that is
the nature of some of our disagreements.
Mr. Davidson. Problems being left unsolved. I appreciate
you for highlighting many of them.
My concern is just that, that by taking the world's best
capital markets--I mean, we did not even have 5 percent of the
world's Gross domestic product (GDP), but we have over 50
percent of the world's invested capital. We are taking
something that works pretty well, that needs clarity and
oversight to continue; instead, we are working with a war, a
declared war by Secretary Warren and other Gary Gensler allies,
to undermine our capital markets and some of the most
innovative companies out there.
For that reason, I propose the SEC Stabilization Act as a
structural reform to deal with our Gary Gensler problem but
also with the structural challenges at the SEC that highlight
it can be exploited by bad actors.
One of the areas that I want to highlight is special-
purpose broker-dealers.
Commissioner Peirce, do you believe that a special-purpose
broker-dealer process could provide a first step toward broker-
dealers handling tokenized securities?
Ms. Peirce. I mean, at the time that it came out, I said it
could be a baby step, but that was 4 years ago and this baby is
not walking yet. So I am not as optimistic as I was back then.
Mr. Davidson. Yes, I am concerned as well. It kind of
creates a separate path where some of Chairman Gensler's
friends and allies could get special permission and the rest of
the market be excluded.
For each Commissioner--maybe we will start down there with
you, Mr. Uyeda: Have you or any member of your staff been
instructed by the SEC staff to direct or otherwise ask FINRA to
avoid approving broker-dealer applications with crypto assets?
Mr. Uyeda. No, I have not.
Mr. Davidson. Commissioner Peirce?
Ms. Peirce. No, but TM is--our Trading and Markets Division
is the one that interacts with FINRA. So it is--I mean, the
issue is that there is a cultural--there is clear messaging
from the SEC that we are not trying to move the crypto industry
forward and that is reflected in this as well.
Mr. Davidson. Thank you.
Commissioner?
Mr. Lizarraga. No.
Ms. Crenshaw. No.
I think I might disagree a little bit with the ``clear
messaging'' point from Commissioner Peirce on the clear
direction. I think there is lots of rhetoric, and we can get
down to brass tacks and look at ways to move forward.
Mr. Davidson. Well, Mr. Gensler, no surprise, many of us
are not fans of your approach to the job.
It does seem that you have abused your authority and that
you seem to kind of gloat. As candidate Harris decides that she
wants to pivot on crypto and say, ``No, no, you can trust us;
we are going to be okay on this,'' it seems like you are
gloating, ``I am still here. I am not going anywhere. The war
on crypto goes on.''
Mr. Gensler. No----
Mr. Davidson. As you highlighted, you meet with the
Chairman of the Federal Reserve regularly. Do you guys discuss
things like Operation Chokepoint 2.0, the way to block and
restrict market certainty for crypto-affiliated firms?
Mr. Gensler. I have never heard that term.
I would also want to say, half of the rules that we have
adopted, 42 rules, half of them have actually been----
Mr. Davidson. Some of the work has been good, but a lot of
it has been bad.
Last question, Commissioner Uyeda: What would it take to
allow distributed ledger to be the official record of ownership
for tokenized securities?
If you could respond in writing, that would be good,
because my limited time has expired.
Mr. Davidson. I yield.
Chairman McHenry. The gentleman yields.
We will now go to the gentleman from New York, Mr. Torres,
for 5 minutes.
Mr. Torres. Thank you, Mr. Chair.
Mr. Gensler, suppose I were to sell you a Yankee ticket and
tell you that the Yankee ticket could appreciate in value and
could be resold at a profit in the secondary market. As is the
case with all sports tickets, suppose the proceeds from the
sale of the Yankee ticket goes toward paying for the Yankee
game.
By selling you the Yankee ticket, am I entering into an
investment contract with you and, therefore, conducting an
unregistered security offering?
Mr. Gensler. I appreciate the question. I do not know all
the facts and circumstances, but I do not think so. I know
where we are headed here, Representative, but I do not think so
in that Yankee----
Mr. Torres. So a Yankee ticket is not--and why is the
Yankee ticket not a security?
Mr. Gensler. Well, it is really a question--and the courts
have been clear on this--is, the offer and sale----
Mr. Torres. Specifically with a Yankee ticket, though,
what--when you are buying a Yankee ticket, what are you
purchasing?
Mr. Gensler. You are buying----
Mr. Torres. Access to a Yankee game. Is that fair to say?
Mr. Gensler. I understand. It has been a while since I went
to a Yankee game, but that is----
Mr. Torres. I know.
Mr. Gensler. I used to live in New York, and my three
daughters were all born in New York.
Mr. Torres. So, in the ``Stoner Cats'' case, the creators
were selling a non-fungible token (NFT) that offered access to
an animated web series.
From the standpoint of Federal securities law, is there a
legal difference between buying a Yankee ticket that offers you
the experience of a Yankee game and buying a NFT that offers
you the experience of an animated web series?
Mr. Gensler. Again, I do not want to comment on any one
specific----
Mr. Torres. Well, there was a settlement, so it is not an
ongoing litigation. You can comment on it.
Mr. Gensler. It is about how is something offered and sold,
and is it offered and sold as an investment contract. Are
individuals looking to a common enterprise, anticipating
profits based on the----
Mr. Torres. No, I am familiar with the definition, and you
are avoiding the question.
See, here is the danger I see with the Gensler theory of
investment contracts----
Mr. Gensler. It is actually the Supreme Court's theory of
investment contract.
Mr. Torres. Well, your idiosyncratic interpretation of the
Supreme Court's theory.
The expectational promise that an object could appreciate
in value or that an object could be sold at a profit in the
secondary market, that expectational profit could be
retrospectively attributed to just about any collectible or any
consumer good or any piece of art or any piece of music.
The trouble with the Gensler theory of investment contracts
is that it is so open-ended that it lacks anything resembling a
limiting principle. It blurs the line between collectible and
security, between art and security.
Ms. Crenshaw, does requiring artists and musicians to
register art and music with the Securities and Exchange
Commission raise a First Amendment concern?
Ms. Crenshaw. I am not a First Amendment expert, but I
would think the only thing that would have to be registered
with the Securities and Exchange Commission are securities. So
that is what I would look to determine whether they have to
register with us.
Mr. Torres. Now, in the ``Stoner Cats'' case, the SEC not
only prohibited the creators from selling NFTs, the SEC ordered
the creators to destroy the NFTs.
Does the destruction of artistic expression by government
fiat raise a First Amendment concern?
Ms. Crenshaw. Again----
Mr. Torres. You are not a First Amendment expert?
Ms. Crenshaw [continuing]. I am not a First Amendment----
Mr. Torres. Do you think artistic expression is protected
under the First Amendment? Do you need to be a First Amendment
expert to answer that question?
Ms. Crenshaw. I think the ins and outs of First Amendment
law are actually very nuance, so I would not want to opine----
Mr. Torres. Okay. Do you think the SEC has an obligation
under the First Amendment to take care not to have a chilling
effect on artistic expression?
Ms. Crenshaw. I think we can work together to advance the
interests of the industry and I think our markets are the
highlight of the world because of the laws that have been in
place for 90 years.
Mr. Torres. You are not answering my question.
In a September 12th court filing, the SEC had to apologize
for using a term it invented out of thin air, ``digital asset
security.'' The fictional term ``digital asset security''
perpetuates the false narrative that digital assets, in
themselves, are securities.
In the Howey case, as you know, Mr. Gensler, the Supreme
Court never held that orange groves, in themselves, were
securities. The Supreme Court held that orange groves can be
part of investment contracts, which are securities.
The same logic applies to digital assets. In my view, using
the term ``digital asset securities'' is as intellectually
dishonest as using the term ``orange grove securities.''
Mr. Gensler, would you ever use the term ``orange grove
securities''?
Mr. Gensler. I do not believe I have.
Mr. Torres. Or would?
Mr. Gensler. Right.
Mr. Torres. Because it gives the impression that orange
groves, in themselves, are securities, and that would be
misleading.
I see my time has expired.
Chairman McHenry. The gentleman from Tennessee, Mr. Rose,
is recognized for 5 minutes.
Mr. Rose. Thank you, Chairman McHenry, and thank you,
Ranking Member Waters, for holding this hearing.
Thank you to our witnesses. It is a pleasure, and we are
honored to have you all here together.
Chair Gensler, earlier this year, the Securities and
Exchange Commission suspended the Consolidated Audit Trail, or
CAT, fee filings to allow for public comment and to evaluate
compliance with Exchange Act requirements.
To circumvent this suspension, the exchanges withdrew those
filings and submitted identical filings in August. Despite its
failure to address any of the concerns raised by commenters,
the SEC has now allowed these identical fee filings to go into
effect.
Chair Gensler, can you identify any changes made in the
August fee filings that addressed concerns raised by commenters
or improved compliance with the Exchange Act requirements?
Mr. Gensler. I could have staff get back to you, but, as I
recall, there were changes in those filings.
Mr. Rose. Chairman Gensler, the truth is that the fee
filings are identical.
Not only did the SEC fail to consider commenters' concerns,
but it appears that the SEC is actively circumventing the
judicial process by allowing these filings to go into effect
while there is pending litigation challenging the CAT's funding
model.
Last week, during the Digital Asset Subcommittee hearing,
former SEC Commissioner and chief legal officer at Robinhood,
Dan Gallagher, testified about the lack of a workable process
for crypto platforms to register with the SEC.
Chair Gensler, are firms that receive approval to operate
as a special-purpose broker-dealer, or SPBD, able to custody
digital asset securities that have not been previously
registered with the SEC or received an exemption, yes or no?
Mr. Gensler. They are not allowed to custody nonsecurities.
Mr. Rose. It was reported in May of this year that
Prometheum had soft-launched its Ether custody service.
Chair Gensler, given that Ether was not registered and did
not receive an exemption, would Prometheum be able to custody
Ether using its SPBD?
Mr. Gensler. I want to be careful here, because I do not
want to comment on one specific registrant but under the
special-purpose broker-dealer regime that was adopted 4 years
ago, to get the benefits of that, the firms are not to custody
nonsecurities.
Mr. Rose. Okay. Well, thank you for the clarity.
Commissioner Peirce, this situation highlights one of my
concerns about how the SEC is approaching digital-asset
regulation. Among members of this committee, we are debating
whether the current rules are sufficient while, at the same
time, the SEC is trying to modify existing rules, albeit not
effectively, in my opinion, to seemingly provide some clarity
to market participants.
Can you describe your concerns with how the SEC has
comprehensively approached digital-asset regulation?
Ms. Peirce. I mean, I think the first problem is that we
have used enforcement as our leading foot instead of using
regulation and that could mean putting out guidance to say,
here is what is clearly outside of the securities laws and here
is what fits within it. It could be initiating a rulemaking
process. It could be working with the Commodity Futures Trading
Commission to figure out where jurisdictional lines lie.
So there is a lot that we can do, but enforcement is not
the way that we should--I mean, of course, when there is fraud,
that is one thing, but we are talking registration violations
of entities that have tried to come in and register.
Mr. Rose. Thank you. I agree, and I appreciate that
perspective.
I want to quickly switch gears. I would like to discuss
your position on the Financial Stability Oversight Council, or
the Financial Stability Oversight Council (FSOC).
Chair Gensler, this is your second time serving on the
Council, right?
Mr. Gensler. That is correct.
Mr. Rose. When I am back home in Tennessee's Sixth
District, my constituents are most concerned by the regional
bank failures caused by interest rate risk, not non-bank
financial intermediation or climate-related financial risk or
Treasury market resilience or digital-asset risk that you and
the Council have claimed are the four major risks to the
financial sector.
Simply put, Chair Gensler, with all the experience and
expertise that you claim to have in finance, you completely
miss the real risks that hurt everyday Americans.
So, Commissioner Uyeda, why is it that the FSOC seems to
care more about politics than policy or people?
Mr. Uyeda. In my view, the regional banking crisis was
precisely the type of event that the FSOC was supposed to be on
alert for. The fact that they did not realize inflation might
trigger a rise in interest rates, which might affect bond
prices, I find not reassuring.
Mr. Rose. Thank you. I agree.
I yield back.
Chairman McHenry. The gentlewoman from Georgia, Ms.
Williams, is recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Mr. Chairman, and thank
you to Chair Gensler and the Commissioners for joining us today
for this important conversation.
You all, I represent Atlanta, which has one of the largest
racial wealth gaps and the widest racial pay gap in the entire
country. These gaps impact Black people's everyday lives and
their ability to participate in the economy, from buying a
home, to opening a small business, to having a comfortable
retirement.
All too often, investors of color, who have worked hard and
saved as much as they could afford, run into obstacles that bar
them from efficiently building wealth.
Many of these investors come from marginalized communities
and cannot afford the sophisticated financial advisors that
others have to help them make informed investment decisions.
The SEC provides essential services to protect these investors,
safeguard their investments, and ensure that they are investing
on an even playing field.
While the SEC's commitment to investor protection is vital
for ensuring a safe and equitable financial landscape, it is
equally important that we focus on enhancing access to capital
for underserved communities, empowering them to invest in their
futures and build lasting generational wealth.
Atlanta boasts a rich tapestry of minority-owned
businesses, particularly in sectors like technology,
entertainment, and healthcare. The SEC's mission--to protect
investors, maintain fair and efficient markets, and facilitate
capital formation--directly impacts the local economy and helps
empower our entrepreneurs in Atlanta.
As the city of Atlanta continues to work toward closing the
racial wealth gap, the SEC's actions are vital for fostering a
sustainable and inclusive economy in the region.
Chair Gensler, by creating a level playing field in
financial markets, how does the SEC's mission enhance access to
capital for minority-owned businesses across the Nation and the
ability of marginalized individuals to make successful
investments?
Mr. Gensler. Well, it is important that all parts of our
great Nation have access to capital. So, to the extent that we
can lower the cost of capital formation and investors on both
sides, that helps those small businesses in your district.
Ms. Williams of Georgia. Thank you.
Addressing the systemic barriers that have historically
limited access to investment opportunities is critical for
fostering economic equity and empowering minority communities.
Promoting equitable access not only benefits individual
investors but also strengthens our economy by fostering a more
diverse and inclusive financial landscape.
Chair Gensler, another question: How does the SEC consider
the impact of its rulemaking on marginalized communities when
carrying out its mission?
Mr. Gensler. We put each of our rulemakings out to comment,
and we include a section on how it affects individual
investors, on the one side, but also small-business formation,
and then we receive comment back from folks in that regard.
Ms. Williams of Georgia. So, in the pursuit of a more
equitable financial system, it is essential for regulatory
bodies like the SEC to consider values of diversity, equity,
and inclusion within their frameworks. Understanding the impact
of these efforts is crucial, as they can play a significant
role in addressing the longstanding racial wealth gap and
fostering economic empowerment for all.
Chair Gensler, how does the SEC prioritize these values
within its regulatory frameworks? In what ways do you believe
these efforts will impact the longstanding racial wealth gap,
particularly in terms of fostering equitable access to
financial resources?
Mr. Gensler. In our own--I will speak just about our agency
itself. In our own agency, the 5,000 people, we reach out and
try to recruit and hire and promote people from all
backgrounds--racial, gender, sexual orientation--and we find
that really helps our agency. That has been the case.
In terms of access to capital, we do, as I said earlier,
just try to make sure that our markets promote access for all
parts of our great communities.
Ms. Williams of Georgia. In doing that, in trying to make
sure that you are promoting access for all communities, how
have the attacks on environmental, social, and governance
disclosures inhibited this important work?
Mr. Gensler. Again, a number of these things are in court,
so I am being careful.
I mean, we really do have a disclosure regime in place
where investors get to decide on their investments. We are not
a climate regulator, we are not an environmental regulator, and
we are not a human capital regulator. We are a securities
regulator, but it is really important that investors get the
disclosures they need to make their investment decisions.
Ms. Williams of Georgia. As these things continue to play
out in court and I continue to do my job in Congress
representing the good people of Georgia's Fighting Fifth, I am
sure we will continue to have these conversations.
Thank you, Mr. Chairman, and I yield back.
Chairman McHenry. The gentlelady yields back.
The gentleman from South Carolina, Mr. Norman, is now
recognized for 5 minutes.
Mr. Norman. Thank you to each one of you for taking the
time to appear today.
Mr. Uyeda and Ms. Peirce, would you all like to respond to
the good lady from Georgia and the comments from Mr. Gensler on
capital formation for underserved markets and, I guess, in
underserved areas of the country?
Mr. Uyeda. I think it is a very significant problem. In
fact, our Office of Small Business Capital Formation just
issued a report. Seventy-eight percent of all small-business
owners said they had problems finding capital.
We need to make sure that we have capital formation on our
agenda and we are thinking about how to provide that capital to
those new entrepreneurs and innovators.
Mr. Norman. By saying a shortage of capital, what is
causing that, and how you are going to fix it?
Mr. Uyeda. We have a very complicated system for raising
capital, both on the equity and debt side. What has powered our
markets has been the fact that we can raise equity capital.
However, there are a lot of cracks and foot faults in our
complicated capital-raising system.
You should not have a system where there are $1,000-an-hour
lawyers that you need to consult before you can raise, say, a
million and a half in equity capital.
Mr. Norman. That is outrageous. How do you fix that or how
can we nix that?
Mr. Uyeda. Well, we can simplify a lot of things. We have a
very basic rule, which is, when raising money, do not lie,
cheat, or steal. For many of these small offerings, I think
that is the only rule you need.
Mr. Norman. How do you enforce that?
Mr. Uyeda. We have an Enforcement Division, and we
routinely take enforcement actions against those who
misappropriate funds in a securities offering or who lie about
their financial status or who have false and misleading
projections.
Mr. Norman. How do you curb back the $1,000-per-hour
lawyers to cut that--to cut that out? That is not making a
loan; that is not making capital available. Now, I guess they
have the expertise. That is one good example of a cure that
needs to be found.
Mr. Uyeda. Yes. It is simplifying our rule book to make it
very easy for a knowledgeable, well-intended entrepreneur to be
able to follow the rule without having to hire the $1,000-an-
hour lawyer.
Mr. Norman. Ms. Peirce, do you have any comment?
Ms. Peirce. Yes, I mean, I think there are a couple
concrete proposals in addition to the simplification.
We could work on finders regulations.
We could work on a micro-offering exemption, which would be
just a pared-back--you can raise $500,000 with no strings
attached except for do not lie, cheat, or steal.
We could work on expanding the ``accredited investor''
definition so that it does not turn only on how wealthy you
are, which I think has been a real problem for people who do
not have a lot of rich friends. They cannot find someone to
invest and so there are other ways we could expand the
``accredited investor'' definition.
Mr. Norman. We may want to follow that ``do not lie, cheat,
or steal'' for Congress too, which is kind of a tall order.
Mr. Gensler, I was just looking over some of the
statistics. In the first 30 months of your tenure, you have
proposed 52 new rules. By contrast, Chairs Clayton and White
proposed 35 and 28 new rules over the same period. Less than a
fifth of the proposals are tied to any statute or any type
mandate.
Can you address this?
Mr. Gensler. Um----
Mr. Norman. I can get specific, more specific, if you need
me to.
Mr. Gensler. No, that is good. I mean, we have adopted 42
rules. I think Chair Clayton did about 60 or 65 in his 4 years,
so----
Mr. Norman. I am talking the 30 months. I am talking about
the 30 months.
Mr. Gensler. No, I understand. I think that it is really
important that we have had success updating our rules around
corporate governance, that insiders now, if they want to sell
their securities, have to wait 3 months and have a plan in
place so that they are not trading on inside information.
I think it is really important that we updated our rules
to, if you sell your securities on a Monday, you get your cash
on a Tuesday. You do not have to wait 2 days.
I think it is important that we updated our rules that you
get a privacy notice if your broker-dealer or investment
advisor gets hacked and your PII is stolen, that for the first
time we will have a Federal standard that investors get that
information.
I am very proud of the record of what we have accomplished.
Mr. Norman. Well, let me--and Chairman McHenry mentioned
letters have been sent from this committee and others, a lot of
letters, and particularly on the SEC proposal and the PDAs, the
predictive data analytics.
We have yet to hear an answer back about how does that
protect an investor. I have 4 seconds, but----
Mr. Gensler. I think it does because there can be an
inherent conflict. You need to put the investor ahead of the
investment advisor and not the other way around.
Mr. Norman. Thank you.
I yield back.
Chairman McHenry. The gentleman from North Carolina, Mr.
Nickel, is now recognized for 5 minutes.
Mr. Nickel. Thank you, Mr. Chairman.
Thank you to our witnesses.
Chair Gensler, to you: Your open hostility toward digital
assets is hurting consumers and setting the U.S. behind the
rest of the world. It is also hurting the Biden-Harris
Administration.
You have single-handedly undermined the administration on
Web3 issues with your war on digital assets. There is a very
strong progressive case for digital assets in blockchain
technology, a technology that is bringing down costs for my
constituents.
This year, crypto policy has received strong, bipartisan
support, with 71 Democrats joining Republicans in support of
FIT21, our digital-asset market structure bill. Unfortunately,
you have not received our message.
The 52 million Americans who own crypto watch the SEC,
under your leadership, Chair Gensler, in shock and disbelief
that you continue to treat their investments as illegitimate,
undermining their efforts to save for retirement and build
innovative blockchain technologies that could drive our economy
into the future.
Now on to Vice President Harris. Just over the weekend,
Vice President Harris made big news, announcing a policy reset
from the current administration on digital assets, putting her
in line with the bipartisan majority in Congress on this issue.
I would also agree with Whip Emmer that, when you read
between the lines, this is certainly a rebuke of your
leadership at the SEC.
I would like to get a ``yes'' or ``no'' answer from
everybody here, starting with Commissioner Crenshaw. Yes or no,
do you agree with Vice President Harris, her statement that the
U.S. should encourage innovative technologies, like digital
assets, while protecting investors and consumers? Yes or no?
Ms. Crenshaw. Yes.
Mr. Lizarraga. Yes.
Ms. Peirce. Yes.
Mr. Uyeda. Yes.
Mr. Gensler. Protecting the investors, I agree with that
for sure. Promoting innovation, yes, but protecting investors.
Mr. Nickel. Yes or no?
Mr. Gensler. Yes. Protect the investors, that is what we
are doing.
Mr. Nickel. Chair Gensler, I hope you understand that your
misguided approach to regulation by enforcement and open
hostility to crypto is hurting our economy and sending American
jobs overseas. You have single-handedly set us back years in
our support for Web3 technology.
I would like to move on to Staff Accounting Bulletin No.
121 (SAB 121). As you know, the SEC overstepped their authority
by issuing SAB1 while also harming investors in the
financial system.
Chair Gensler, I have contacted your office repeatedly
about SAB1 and asked to speak with you about this.
Your office has totally ignored all of our requests, so I am
very glad you are before Congress today to answer my questions.
After watching majorities in both chambers of Congress,
including Democrats like Majority Leader Chuck Schumer, vote to
overturn SAB1, do you have any regrets on supporting
the SAB?
Mr. Gensler. The Office of the Chief Accountant has been
issuing staff accounting bulletins. It is 121 because it is the
121st one in 50 years.
Public companies were asking questions about how to account
for crypto and is it a liability. What we found is, bankruptcy
after bankruptcy--in FTX, in Terraform, in Celsius, in
Voyager--bankruptcy court after bankruptcy court has said it is
a liability of the company.
So I think the accounting that the staff bulletin put out
helped public companies understand that.
Mr. Nickel. Thank you.
The Government Accountability Office, a nonpartisan,
independent agency, was very clear, you lost. The SEC was wrong
to skirt around Congress by issuing SAB1. You are
actually making the digital-asset ecosystem less safe.
Yes or no, Chair Gensler, will you commit to rescinding
SAB1 today?
Mr. Gensler. No. It is a good accounting bulletin that is
out there. If somebody comes in and works with the Office of
the Chief Accountant in a consultative manner where it is
bankruptcy-remote--and a number of banks and broker-dealers
have done this--where, if they are holding the customer's funds
and it truly is the customer's, it is truly remote from
bankruptcy----
Mr. Nickel. Well, reclaiming my time----
Mr. Gensler [continuing]. then it is not a liability.
Mr. Nickel [continuing]. Chair Gensler, yes or no, do you
believe that the one purpose of a SAB is to provide all market
participants with the same information to level the playing
field? Yes or no?
Mr. Gensler. There have been 120 of them. It helps the
public companies. It is just speaking to public companies on
how to account for emerging issues.
Mr. Nickel. Instead of recognizing your failure and
rescinding the guidance, the OCA has worked with certain banks
to remedy the issue behind closed doors.
Do you believe this opaque process really levels the
playing field for all market participants? Is this process as
clear and transparent as possible? I do not believe so. Do you?
Mr. Gensler. It is a consultation process that has existed
for years, where accountants and the public companies can come
in and say, we are going to treat this in this circumstance as
off-balance-sheet; do you object to anything there? These banks
and broker-dealers have shown how it would be bankruptcy-
remote, off-balance-sheet.
Mr. Nickel. Different rules for different folks, right?
Mr. Gensler. It is actually same rules for different folks.
Mr. Nickel. My time has expired. I yield back.
Chairman McHenry. The gentleman from Pennsylvania, Mr.
Meuser, is recognized for 5 minutes.
Mr. Meuser. Thank you, Mr. Chairman.
Thank you to our witnesses.
During this administration, many believe the SEC has rushed
into sweeping rule changes without properly engaging with
industry, the regulators or the public. ``Why is the SEC
pushing reforms without proving they are necessary?'' is a
frequent question that we get.
The custody rule was withdrawn after regulatory objections,
and the predictive data analytics rule was scrapped due to
public backlash. Yet the SEC continues pressing forward,
planning to finalize equity market structure rules without
waiting for critical Rule 605 data. If implemented, these rules
could introduce volatility and possibly harm investors.
So, Chairman Gensler, good to see you. Why is the SEC
rushing these equity market structure changes without waiting
for updated 605 trading data?
Mr. Gensler. It is good to see you as well.
We put forward a number of rules. I am very proud that,
last week, this Commission unanimously voted in--first time in
20 years--changes in the national market system that I think
will lower cost in the system, allowing market makers to,
quote, stocks in a tighter bid-ask spread. This is relieving,
or relaxing, a restriction that was put in the market 20 years
ago and lowering the costs in the markets.
I think the data that you are talking about, for
individuals to get better execution-quality data, is important
but was addressing a separate matter. It was about individual
investors getting better data.
I think that it was time to move forward and update these
rules, these 20-year-old rules. Volume in the market had gone
up fourfold. A lot had changed in the 20 years.
Mr. Meuser. Okay, but getting the rules right using the
current data is more important than just updating, you would
say?
Mr. Gensler. Well, it is also important that the data was
for individual investors to compare and contrast their broker-
dealers.
The second rule that we did last week, unanimously, is
really going to relieve a restriction. This is something that
you and I probably would agree on. You would want to--we were
taking off a restriction that you could not quote in less than
a penny. Now you can quote--well, in November 2025, you will be
able to quote in down to a half a penny.
Mr. Meuser. Do you think you have a consensus out there
that agrees with that?
Mr. Gensler. I am sorry?
Mr. Meuser. Do you think you have a consensus out there
that agrees with your conclusion and assessment?
Mr. Gensler. Well, in last week's update of the National
Market System, there was a broad--we got over 5,000 comments,
but we had very significant support on relieving this
restriction and allowing for lower bid-ask spread and then even
lowering the fees in the field.
I took note even after we voted, I saw something from the
Managed Funds Association, the trade association representing
hedge funds, that supported what we did last week.
Mr. Meuser. All right. Thank you, Chairman.
Commissioner Peirce, do you believe the SEC has addressed
the industry and public concerns over the equity market
structure rules, especially given some of the lack of the
updated data from the 605 market data?
Ms. Peirce. Yes, I mean, I think the point that you are
making is a really important one. I did support last week's
rule because I think it is a net-beneficial rule, but one of
the things that I wanted us to do is to build into that a way
to go back and make sure it is doing what we intended and not
having adverse effects.
We proposed a whole set of equity market structure rules
that will remake the markets if we go forward with them and
what people have been telling us is, you need to slow down; our
markets work quite well.
Mr. Meuser. Right.
Ms. Peirce. So, if you are going to make a change, take a
breath, get the data you need, get the public input you need,
have the roundtables you need, and then move forward.
I do worry that we are rushing forward with equity market
structure changes.
Mr. Meuser. Good, and the volume pricing rule, does it
solve a market problem that exists?
Ms. Peirce. I mean, as I pointed out when we proposed that,
there is volume pricing in lots of different parts of our
markets, and we do not have problems with it in other parts of
the market. So it is not strange to see volume prices in our
equity markets.
Mr. Meuser. All right. Thank you.
Commissioner Uyeda, do you believe the SEC's approach to
finalizing these rules properly balances the market stability
with investor confidence?
Mr. Uyeda. Well, some of the rules I have supported, but in
part because there has been robust comment.
In fact, some of them go back to initiatives under the
Trump Administration. For instance, T+1, that was something
that under the Trump Administration they suggested we look at
moving faster when we went to T+2. Treasury clearing, under
Secretary Mnuchin, he also broached that idea as a----
Mr. Meuser. Thank you. I am out of time.
Thank you, Chairman. I yield back.
Chairman McHenry. We will now recognize the gentleman from
Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
I thank the ranking member and would have the record
reflect that I associate myself with the comments of the
ranking member.
Mr. Gensler, welcome back. You were here about a year ago,
and at that time we were on the brink of a shutdown. Within
days, we could have a similar thing to occur if we do not act.
My question to you--hopefully, it will enlighten a good
many people and help us better understand why shutdowns are
adverse to the best interests of investors.
My question is this: If there is a shutdown, how will it
impact your staffing, the people that have a hands-on
experience with helping investors? How will this impact your
ability to protect investors?
Mr. Gensler. We would be in shutdown mode. I think it is
only about 6 or 7 percent of our staff would be allowed to come
in; 93 percent would not. So we would not be overseeing the
capital markets during that period of time. If somebody was
making filings to go public or to register a security, we would
not have people to answer their questions.
Mr. Green. Well, that is of concern to me.
Let me address another concern. What about the businesses
that connect to you in some way? How will it impact them?
Mr. Gensler. Well, it would impact any business that was
seeking to go public or raise money, file registration
statements. It would affect anybody who was coming in with a
tip, complaint, referral and said that they have a problem,
that somebody is--what were the words that Commissioner Uyeda
said?--lying or cheating or stealing something from them.
We have had shutdowns in the past. I mean, we get through
them, but then there is a backlog, also, after that happens
that we have to catch up on and really help all those
businesses and market participants and investors out.
Mr. Green. Could this impact the direction of the market
itself?
Mr. Gensler. I think it puts uncertainty into the market.
What the market does with that, sometimes--I am in a role and a
job that I am not to predict markets, but it would--it would
put some uncertainty into the market.
Mr. Green. Well, let us move to another question. You have
been accused of being a climate regulator. I think you should
have an opportunity to explain why you are not a climate
regulator.
Mr. Gensler. We are not in the law, and we are not in
practice. Congress has set us up as a securities regulator but,
in practice, what we have found is that, literally, the
majority of the top 1,000 public companies today put out some
disclosures around their climate risks. Some 60 percent, in
fact, put out disclosures around greenhouse gas, and investors,
we find, find it material to their decision making about
investments.
So we put out a rule, the notice and comment, we adopted a
rule grounded in materiality, because investors are using that
information to make decisions--to bring some consistency to
that which was already happening.
Mr. Green. Thank you.
I will close with a statement. Ms. Williams made reference
to this, and I would like to say just a bit more about it. It
has to do with access to capital, especially for people who are
of color and, within that subset, persons who are African-
Americans.
Two-hundred-and-forty-six years of slavery. No access to
capital. Invidious discrimination that was legalized, lawful in
this country; we called it ``segregation.'' It was another form
of racism. No access to capital. To this day, we still
experience discrimination when it comes to lending. Testing has
validated what I am saying.
Closing the wealth gap will require more than having a
methodology by which we impact all small businesses. There has
to be something for the small businesses that have a legacy
associated with invidious discrimination over centuries in this
country.
I would also add this: Women have to be treated in a
special way as well.
Thank you.
Chairman McHenry. The gentleman from Wisconsin, Mr. Steil,
is recognized for 5 minutes.
Mr. Steil. Thank you very much.
Mr. Fitzpatrick. Thank you, Mr. Chair.
Commissioner Uyeda, I would like to get your thoughts on
the SEC's----
Chairman McHenry. If the gentleman will yield, I recognized
the gentleman from Wisconsin, Mr. Steil. Sorry, Mr. Fitzgerald.
Mr. Fitzpatrick. Oh, sorry. Yes, wrong guy. I yield back.
Chairman McHenry. Yes, the other Wisconsin guy.
Mr. Steil. You can never have enough people from Wisconsin
in the room.
Chairman McHenry. Let us make sure the record is clear. The
answer is, yes, you can, okay?
The gentleman is recognized for 5 minutes.
Mr. Steil. Thank you very much, Mr. Chairman.
In 2020, the Securities and Exchange Commission finalized
rules governing proxy advisors under Chairman Clayton. These
rules came from years of consultation and analysis. I supported
the 2020 rules. It worked to really rein in powerful proxy
advisors, in particular the duopoly of Institutional
Shareholder Services (ISS) and Glass Lewis.
I was frustrated when the Securities and Exchange
Commission then effectively ripped up those rules, said they
were not going to enforce it, and began the process anew.
Out of the gates, I will start with you, Commissioner
Peirce, if I can. Do you believe that proxy advisors offer
market-moving advice?
Ms. Peirce. I think we see that often, people start voting
as soon as their recommendations come in.
Mr. Steil. So you view it as market-moving advice?
Ms. Peirce. It is certainly vote-moving, yes.
Mr. Steil. Vote-moving advice.
Commissioner Uyeda, would you agree with that assessment?
Mr. Uyeda. I would agree. They are highly influential in
how a fair number of asset managers vote.
Mr. Steil. Chairman Gensler, would you agree that they
offer market-moving advice or vote-moving advice, the proxy
advisors?
Mr. Gensler. They influence voting, yes.
Mr. Steil. So they influence voting.
We had a rule that was put in place. I will go to you,
Commissioner Peirce. Was there material information that came
to light that would have supported the decision to effectively
gut out Chairman Clayton's proxy advisor rule?
Ms. Peirce. As I said at the time, I think it was basically
a political U-turn.
Mr. Steil. What does that U-turn tell investors? What does
it tell the market?
Ms. Peirce. It was unfortunate, because, as you said, we
had done a lot of work to get to the point where we had some
rules in place, and then they got changed. I think it was very
disappointing for the market to see their regulator working
that way.
Mr. Steil. Whose decision was it to make that U-turn?
Ms. Peirce. Well, it was not mine. It was the majority of
the Commission that voted for it.
Mr. Steil. Commissioner Uyeda, would you agree with that
assessment, the decision was made by the majority? Or was it--
--
Mr. Uyeda. I was not on the Commission at the time, but I
can tell you, as someone who has been with the SEC since 2006,
I have spent a dozen-plus years before 2020 working on this
with my fellow colleagues who are employed there, and this has
been a very, very difficult process. Then, after that, thought
from--I was on detail with Senate Banking at the time--it was
unusual to see a flip that quickly.
It was even more unusual to see a 30-day comment period
that I think started right around Thanksgiving and ended on
Christmas to ask for public comment on the flip.
Mr. Steil. I share the frustration.
I would urge all the Commissioners to review the
legislation that I drafted that was just passed as part of a
larger package on the House floor to really rein in the duopoly
in the proxy advisor market. Because I think it can work to
distort our markets and lower trust and confidence in our
markets, when you see this type of a concentration that is not
being properly regulated by the SEC.
Continuing with you, if I can, Mr. Uyeda, Staff Legal
Bulletin 14L really changed the calculus for excluding non-
germane or duplicative shareholder proposals.
Who is deciding to grant no-action letters and whose
judgment are we relying on to evaluate and implement Staff
Legal Bulletin 14L?
Mr. Uyeda. The decision is solely by the SEC staff, which
reports up to the Chairman.
Mr. Steil. How would that come before you or other
Commissioners or can it, once it is decided at the staff level?
Mr. Uyeda. From a practical standpoint, it does not. There
is a small process--the staff could recommend the Commission
approve or disapprove, but in my entire 18 years at the
Commission, I have never seen that done.
Mr. Steil. So you have never seen it done, so it has always
been implemented at the staff level.
When we look at Staff Legal Bulletin 14L, it could have a
very significant impact, because once the staff is implementing
that staff legal bulletin, then it never comes before the full
Commission.
Mr. Uyeda. That is correct.
Mr. Steil. Okay.
One final question here, cognizant of my time, Commissioner
Uyeda. In response to the proposed rule regarding safeguarding
of advisory client assets, you explained it would create a no-
win scenario for crypto assets.
It is my understanding that several of the proposals create
no-win scenarios for digital-asset ecosystems. In 20 seconds,
can you elaborate on that?
Mr. Uyeda. I am sorry. Could you----
Mr. Steil. Whether or not the proposed rule regarding
safeguarding of advisory client assets creates a no-win
scenario for crypto.
Mr. Uyeda. I think it potentially does and this is
something that we need to think about before we move further.
Mr. Steil. I thank you all for being here.
Mr. Chairman, I yield back.
Chairman McHenry. The gentleman does, in fact, yield back.
We thank you.
I will now recognize the gentlewoman from Michigan, Ms.
Tlaib, for 5 minutes.
Ms. Tlaib. Thank you, Mr. Chair.
Chair Gensler, I was looking--it was, like, from 2010 to
2019, companies spent, what, $6.3 trillion on stock buybacks.
Is that a lot?
Mr. Gensler. Well----
Ms. Tlaib. Like, compared to--I am not in the industry. Is
that a lot compared----
Mr. Gensler. Well, where I come from in Baltimore, when you
are talking trillions, it is always a lot; but over 10 years--
--
Ms. Tlaib. My staff made sure to say ``that is with a
capital T.''
Mr. Gensler. Yes, but over 10 years, I think you said, $600
billion a year, given that we have a $50 trillion equity stock
market----
Ms. Tlaib. Uh-huh. It is a lot, yes.
Mr. Gensler [continuing]. the numbers sound about right.
Ms. Tlaib. Is it true that the average corporate executive
receives a larger share of their compensation in, actually,
stock awards and stock options, more than even their salary?
Mr. Gensler. I believe that to be correct.
Ms. Tlaib. Yes. I think one study showed that the average
executive receives--nearly 27.3 percent of their total
compensation is in salary, but 4.3 in bonuses, then 30.6
percent in stock awards, and about 12.6 in options.
One of the things is about the lack of, like, transparency
in how some of these decisions are made. To make matters worse,
like, some investors in the public have been largely kind of in
the dark about the specifics of stock buybacks, and the reason
to be the companies and how they engage in them.
Given all this, I was really pleased to see last year that
the SEC finalized an important rule bringing much-needed
disclosures, as you know, and transparency to very, very,
again, very murky practice of stock buybacks. We know
unfortunately the Fifth Circuit struck it down.
So, Chair, do you have any commitment that you can share of
whether or not you are going to be reproposing the stock
buyback rule?
Mr. Gensler. I thought it was an important rule and voted
for its adoption. The Fifth Circuit saw it differently. We took
it back to reconsider. It is still on our Unified Agenda as
part of our agenda. We would have to propose a new rule.
Ms. Tlaib. Do you have a timeline?
Mr. Gensler. I do not have a timeline for you.
Ms. Tlaib. Like in a year?
Mr. Gensler. Well, I would hope--again, elections have
consequences, so----
Ms. Tlaib. I know.
Mr. Gensler. But if I am here and so forth. I think this is
an important rule. I think it is important to have greater
transparency. The rule we had adopted was once a quarter the
companies would provide greater transparency on the shares they
bought in the prior quarter.
Ms. Tlaib. Is this a true statement, that not all stock
buybacks are legal, that stock buybacks cannot be used to evade
security laws, for instance?
Mr. Gensler. I can think of hypotheticals where you could
try to do a stock buyback that evaded securities laws, but I
would hope that everybody does them legally.
Ms. Tlaib. They will not unless you force them, Chair. Come
on.
So, if anything, is the SEC doing anything to ensure public
companies' stock buybacks practices are not violating current
law?
Mr. Gensler. We are a cop on a beat. It is part of what we
do. We have robust enforcement. If any of your constituents or
anybody has information or belief that somebody is doing
buybacks that are illegal, bring it to our attention.
Ms. Tlaib. Chair, my favorite section of Dodd-Frank lately
has been Section 956. It has been about, what, 13 years, and we
are still waiting for regulators to finalize this rule
preventing compensation packages that encourage excessive risk-
taking.
It impacts our small businesses recently, and others, when
we, again, do not move forward on what the legislative intent
is.
So several regulators recently proposed a June, I think it
was, 2016 version of the rule, but not all the agencies joined,
as you probably know.
At its discretion, the SEC sometimes performs an economic
analysis or cost-benefit analysis.
So this is to Commissioner Lizarraga.
Do you need all other regulators on board before conducting
such an analysis?
Mr. Lizarraga. I am sorry?
Ms. Tlaib. Basically, this is one thing that the SEC--and
maybe the Chair can help you--can perform what they call
economic analysis on certain rules and cost-benefit.
Mr. Lizarraga. That is a function performed by our Division
of Economic and Risk Analysis. The staff of the Commission is
part of----
Ms. Tlaib. Really quickly, Chair, because we are----
Mr. Gensler. We would need to do an economic analysis, and
we would put it out to public comment in this joint rule.
Ms. Tlaib. Do you need all the companies----
Chairman McHenry. The gentlelady's time is expired.
I will now recognize the gentleman from Wisconsin, Mr.
Fitzgerald.
Mr. Fitzgerald. Thank you, Chair.
Chairman McHenry. Not to be diminished by being the second
Wisconsin member.
Mr. Fitzgerald. Very good. Thank you.
Commissioner Uyeda, I would like to get your thoughts on
the SEC's safeguarding advisory client assets proposal.
the initial proposal, which would impose new custody
requirements for real estate assets, it does not really cite
instances of loss or misuse or theft or misappropriation.
Additionally, it does not acknowledge the existing legal
and regulatory frameworks, including public land records, title
insurance, which obviously protects real estate against theft.
So going from funds and securities to any client assets would
be kind of a dramatic expansion of the custody rule.
Do you believe it is appropriate to include real estate in
the initial proposal, given the potential effect this could
have on residential and commercial real estate and then is the
SEC hearing about this, are you hearing anything about this in
the comments at this point?
Mr. Uyeda. My view is any rule we do needs to be effective,
efficient, and appropriately tailored. At a very high level,
should there be efforts made to safeguard assets that are
entrusted to someone else?
Now, the answer may be yes, but then when you look at each
of the individual assets, you may want very different
treatment. Some of them--as you just pointed out and as
commenters have pointed out, real estate is very different than
securities in a brokerage account.
In fact, the Commission could even conclude that we can
rely on those existing protections and, therefore, do not need
to have a prophylactic rule on that. That is something that is
in the comment file. I really hope that the Commission thinks
hard about that before taking any further steps.
Mr. Fitzgerald. Very good. Thank you.
Commissioner Lizarraga, the predictive data analytics
proposal notes, ``It may be difficult or impossible to evaluate
a particular covered technology or identify any conflict of
interest associated with its use or potential use.''
The proposal then proceeds to give examples and concludes,
``However, a firm's lack of visibility would not absolve it
from the responsibility to use its covered technology.''
So for a given rule, do you believe it is fair to tell
registrants that even though they may not be able to determine
whether they are in compliance with a rule, they are still
liable under the rule?
Mr. Lizarraga. Sir, the predictive data analytics rule, it
is my understanding, is going to be reproposed in response to
comments from market participants. So I think it is premature
for me to prejudge what that is going to look like and the
specific question that you are raising and how that will look.
So I think----
Mr. Fitzgerald. Let me just ask you then, so what are your
concerns in and around that, or what would you be looking for,
I guess?
Mr. Lizarraga. I do not have any concerns with the idea of
ensuring that firms meet their best interest obligations and
that advice to investors is not conflicted when it is provided
through electronic means and so that general principle I agree
with. It is a question of what the details look like.
Mr. Fitzgerald. Okay. Thank you.
The recent proposal by a Fixed Income Clearing Corporation
to adopt SEC requirements, essentially clear U.S. Government
securities, would apply in an extraterritorial way, so that
transactions between a bank's foreign branches and foreign
counterparties where there is no U.S. nexus.
The SEC clearly did not consider whether sponsoring members
could accept foreign counterparties from every relevant
jurisdiction as sponsored members or issues surrounding a
timeframe in which transactions by an entity across the globe
must be submitted for clearing, considering the Fixed Income
Clearing Corporation (FICC) does not operate 24 hours daily.
Commissioner Uyeda, did the SEC consider anything, a more
nuanced approach than the application during the rulemaking
process? The one-size-fits-all is, I think, what we have become
used to. Would you put it in that category?
Mr. Uyeda. We try hard to think about possible consequences
and effects, but we do not always get it right.
In my view, the adoption of a final rule is actually only
the start of a very important process of implementing it. What
happens in that implementation is sometimes we discover
problems that we have not anticipated.
It is up to us as a responsible regulator to say, all
right, if this was not the intended effect, we need to go back
and fix that and address that. If we need to lengthen our
implementation time to get it right, we need to do so.
Mr. Fitzgerald. Thank you, Chair. I yield back.
Chairman McHenry. The gentleman from New Jersey, Mr.
Gottheimer, is recognized for 5 minutes.
Mr. Gottheimer. Thank you, Mr. Chairman. Thank you again
also for your friendship, Mr. McHenry, and for your leadership.
Very grateful.
Thank you, Ranking Member, for working to find an agreement
on stablecoins. Looking forward to helping if I can in that
effort.
Chairman Gensler, thank you for being here.
Our capital markets are the envy of the world because we
have rules that ensure investors have access to real-time and
accurate information.
However, the use of social media by investors raises
critical concerns about the ease with which people and bots can
manipulate and spread false information to make a profit.
I just have a question, why the SEC is not doing more to
stop the spread of false information in this way and being used
to manipulate markets, and why are we allowing abusive short
sellers to proliferate at the cost of those who play by the
rules.
Mr. Gensler. Look, fraud is fraud, whether you are using a
bot, whether you are using artificial intelligence, whether you
are doing it the old-fashioned human way. It is a little bit
more challenging to chase after when it is the modern
technological way.
We have some resource constraints too. I mean, we are flat-
funded. I know lots of agencies come in front of Congress and
say the same thing, but I am saying flat funding definitely
constricts it.
So I would say it is just the challenges of technology and
the challenges of funding.
Mr. Gottheimer. If you see somebody online, some people
purposely manipulating or some handles online purposely
manipulating a pump and dump or reverse pump and dump?
Mr. Gensler. We are going to chase after them, which is
more technically, that is Baltimore street talk. I think you
understand it in New Jersey.
Mr. Gottheimer. I do, but you will and you are.
The SEC, I think to me, needs to send a very clear message
and take appropriate enforcement action against market
manipulators and abusive short sellers. It sounds like I have
your commitment to do that.
Mr. Gensler. Yes.
Mr. Gottheimer. Can I ask each of you, do I have your
commitment to do that?
Ms. Crenshaw. Yes.
Mr. Gottheimer. Thank you.
Mr. Lizarraga. Yes.
Mr. Gottheimer. Thank you.
Ms. Peirce. Yes.
Mr. Uyeda. Yes.
Mr. Gottheimer. Thank you so much.
Mr. Chairman, Chairman Gensler, can you please clarify--and
this is a concern that was brought to my attention during the
process--why the SEC staff refused to provide technical
assistance to the committee on landmark digital asset
legislation, FIT21?
Mr. Gensler. I think we actually did provide technical
assistance to Chair McHenry and to the head of the
subcommittee, Chair Hill. I know I met with Chair McHenry a
number of times personally.
Mr. Gottheimer. I know you did, but my understanding is the
staff refused to provide any kind of technical assistance.
Mr. Gensler. If I recall, there was multiple pages of
written technical--I mean, maybe it is called something
different up here--but there was written feedback.
Mr. Gottheimer. Okay. That is good to hear because it was a
concern that was brought to our attention during the process.
In Article I of the Constitution, as you know well, Congress
erected the independent agency with the expectation that the
agency would provide Congress with technical assistance on
matters.
I assume you see that as part of the responsibility of the
agency, to serve Congress as well.
Mr. Gensler. Yes. We do on both sides of the aisle, in the
Senate and the House, try to give feedback literally 50 to 100
times a year on different legislative initiatives.
Mr. Gottheimer. Okay. Thank you. I just think it is really
important the agency understands that we are here as well.
Sometimes that gets a little lost, in my opinion, but I am glad
to hear that.
I guess I will go broader for a different question.
Ransomware attacks grew 74 percent last year. On average, a
ransomware attack costs a company nearly $5 million. This kind
of attack can put small businesses like those in Jersey out of
business.
Holding the attackers accountable has been a huge priority
for me, which is why I am leading the bipartisan Public and
Private Sector Ransomware Response Coordination Act, to create
a unified response to these threats.
I just want to, if I can, ask how the SEC is working with
other agencies and law enforcement to address ransomware
attacks in the financial sector?
Mr. Gensler. We work across the government, with the
intelligence community as well as the Department of Justice and
Cybersecurity and Infrastructure Security Agency (CISA).
Ransomware is almost uniformly done using cryptocurrency as
well, so it sort of intersects with some of the work that we
are doing in cryptocurrency.
As it relates to public companies, we adopted and now has
been implemented that public companies, if they have a cyber
attack that is material to investors, there is some public
notification. Sometimes those cyber attacks are ransomware
attacks.
Mr. Gottheimer. I appreciate that.
Last question. What kind of discussions are occurring at
the SEC about the impact of the Chevron ruling and how are you
going to handle that, which could really change the way things
go at the agency?
Mr. Gensler. We do what we do according to the laws passed
by Congress and how the courts interpret them. The Supreme
Court has made a number of rulings, not just the Loper Bright
that you referenced but other rulings, and we take that. Of
course, it is the law of the land once the Supreme Court says
it.
Mr. Gottheimer. Thanks, Mr. Chairman. We are excited to
have stablecoins come your way.
Thank you. I yield back.
Mr. Garbarino [presiding]. The gentleman yields back.
I now recognize myself for 5 minutes of questioning.
Chair Gensler, regarding Rule 15c2-11, the only reason
market participants have been able to comply during the past 2
years is the SEC issued a no-action letter that provides a
minimum amount of customization of the rule for fixed income
markets, which, as you know, are very different from equity
markets.
But this no-action letter is set to expire in January, and
the SEC has not done anything to amend rule 15c2-11 so that it
can actually work in fixed income markets.
Letting no-action relief expire could significantly disrupt
those markets, which are critical to funding businesses across
the country, funding consumer lending, like auto and home
loans, and supporting everyone's 401(k) pension or other
retirement and savings plans.
To avoid this unnecessary harm to investors in our
financial markets, can you commit to a permanent extension of
this no-action letter or at least an extension until the SEC
can propose a rule that is tailored to help fixed income
markets work?
Mr. Gensler. The underlying rule was adopted, I think, 4 or
5 years ago. There are many market participants that are well-
aware of that. The Commission did adopt an exemption with
regard to 144 securities, if I recall, and that is what we have
done.
Mr. Garbarino. Are you going to let the letter, the no-
action letter, expire in January?
Mr. Gensler. I am making no commitment here today.
Mr. Garbarino. Thank you.
Last year, Chair, the Commission proposed the Safeguarding
Advisory Client Assets Rule to expand the role of qualified
custodians when registered investment advisers custody assets
on behalf of their investors.
At the time of the proposal, I voiced my concerns that the
proposal is inserting itself into matters at the core of the
banking system, and specifically within the jurisdiction of the
prudential regulators.
As proposed, mandatory cash segregation would significantly
increase the cost for investors, and complexity of providing
custody services and locking up cash deposits would be a major
departure from current banking practices.
Back in May, Chair Gensler, you mentioned that this
proposal would need to be reproposed. Can you provide us with
an updated timeline when we might see a reproposal?
Mr. Gensler. I do not have a specific timeline, but there
were a number of comments, including yours, around cash. There
was also a number of really thoughtful and robust comments
about the documentation and the cost of the documentation.
So we are taking--and the comments about real estate that
were even expressed here earlier--taking all that into
consideration and looking through that. I think it will take
some time, though.
Mr. Garbarino. Do you think some of those comments would
change the--would show up in the reproposal?
Mr. Gensler. I would anticipate--again, I do not want to
prejudge--but I would anticipate the staff's work would be a
revised proposal taking in consideration the cash, the concerns
around cash----
Mr. Garbarino. Segregation.
Mr. Gensler [continuing]. which were certainly heard by
this one commissioner very loudly.
Mr. Garbarino. Okay. Thank you, Chair.
Before I move on, I would like to remind you that banks are
subject to stringent prudential regulation, which requires that
they control risk, hold adequate capital and liquidity, and
have in place workable recovery and resolution plans.
Now I will move over to enforcement.
While I support robust enforcement of our Federal security
laws, there is a concerning trend at the SEC of regulation by
enforcement under current leadership.
As we have seen courts strike down SEC proposals, it
appears that the SEC is turning to greater enforcement actions
to address its rulemaking failures by attempting to institute
regulatory changes outside the formal rulemaking process.
I hope you have made it clear to the exam and enforcement
staff that their responsibilities are to help enforce the laws
as currently written and that it is not to form new ones.
I would now like to shift to the related topic of capital
formation, which has not received nearly enough attention from
the SEC over the last few years.
Commissioner Peirce, would you please speak to whether the
SEC is engaged or plans to engage in any rulemaking that would
facilitate capital formation, which is a foundational pillar to
the SEC tri-part mission? Do you think there is a need for a
return to work on this front?
Ms. Peirce. Absolutely, there are some things that we could
be doing. We could be doing a rule on finders. We could be
doing a micro-offering exemption. We could be expanding what it
means to be an accredited investor beyond wealth and income. We
could be working on crowdfunding to make some changes there.
So there are certainly things we could be doing, and we
have not prioritized them.
Mr. Garbarino. So what would you do with these rules?
Ms. Peirce. I mean, I think these are some of the things
that I would try to tackle, which is we need to look for ways
to make it easier for smaller companies to raise money.
We need to look at the other end of the spectrum--why are
companies not going public?--which is a big problem.
So we need to try to rightsize the regulations on public
companies and allow for smaller and emerging companies to have
a graduated exposure to new regulations as public companies.
Mr. Garbarino. Thank you very much. My time is expired.
I now recognize the gentlewoman from California, Mrs. Kim,
for 5 minutes.
Mrs. Kim. Thank you, Chairman.
It is good to see all of you in front of our committee
today.
I would like to ask my first question to Commissioners
Peirce and Uyeda.
How does the SEC currently account for the overlap between
new and existing rules? Do you ask the commenters to consider
this overlap and is it considered in the cost-benefit analysis
for every new rule that you have proposed or do new rule
proposals receive cost-benefit analysis as if they exist in
isolation from other proposed rules?
Ms. Peirce. We consider existing rules, but we do not
consider rules that are out for proposal. This has led to a lot
of confusion because we are trying to change so many things at
once that when commenters try to comment they do not know what
the state of play is.
Mr. Uyeda. I agree with that. We compare to the existing
rules but when we have simultaneous other proposals out there
and we have multiple versions of what that might look--because
we ask a lot of questions.
We will propose one version, but we will say--but if you do
not do what we propose, what of version A, what of version B,
what of version C, what of version D?
So that can impact the other proposal. How does someone try
to craft an intelligent response when there is significant
interconnectedness between all of these proposals and the
market participants?
Mrs. Kim. Thank you.
I want to point out that thanks to our Chairman McHenry and
Capital Markets Subcommittee Chairwoman Wagner, we passed out
of this committee the REG Act, H.R. 7030.
This will make it a requirement for the SEC to consider the
aggregate cost of regulations, because we simply cannot afford
for the SEC to continue down this path of disregarding the
cumulative cost of regulations on our capital markets.
The SEC has long ensured a clear delineation between its
regulation of private and public markets and their market
participants.
Commissioner Lizarraga, as you know, many industry
participants are concerned that the SEC is increasingly
blurring those lines.
Do you agree that private markets serve an important
function in the capital-raising process and how do you view the
distinction between public and private markets and the SEC's
respective authority on each?
Mr. Lizarraga. Thank you, Congresswoman, for that question.
I think there is an important balance in our markets
between private and public that has to be achieved so that we
do not tilt too much toward the private markets in the sense
that investors have access to more information when they invest
in the markets, just because our disclosure system is much more
robust in our public markets, but it is a question of balance.
Mrs. Kim. How would you address the concerns that the SEC
is expanding its authority to regulate private companies?
Commissioner Peirce, would you like to respond to that?
Ms. Peirce. Yes. I mean, I think we have broken down that
line of division, which is to say there are public markets, and
these are markets that have a lot of rules around disclosure
and so forth, and then in the private markets, people are more
free to negotiate the kinds of disclosures they want.
We have taken the position that we need to erode the
private markets. Instead of making the public markets a place
where more companies want to be, we have taken the position we
will make it as burdensome to be in the private--raise capital
in the private markets, but we are moving it so that it is more
burdensome to raise capital in the private markets. That is not
the answer. The answer is to think about what we have done
wrong in the public markets.
Mrs. Kim. Commissioner Uyeda, I have had the pleasure of
knowing you for many, many years, even some decades, right? We
share much in common. We are both from California. We also
understand firsthand how hard it is for small businesses,
especially from the immigrant communities, to raise capital and
succeed.
As you know, one of the SEC's three-part mission is to
facilitate capital formation. Can you point to any specific
proposals during Chairman Gensler's tenure designed to promote
capital formation?
Mr. Uyeda. Unfortunately, we have not had any capital
formation rule proposals on the regulatory agenda during that
period.
Mrs. Kim. Does the SEC's approach to its capital formation
mandate under Chairman Gensler differ from prior Commissions,
and how so?
Maybe Commissioner Peirce can address that briefly.
Mr. Garbarino. The gentlelady's time is expired.
Mrs. Kim. Thank you.
Mr. Garbarino. The gentleman from Florida, Mr. Donalds, is
now recognized for 5 minutes.
Mr. Donalds. Thank you, Chairman.
Commissioner Uyeda, in October 2021 the special purpose
acquisition company Digital World Acquisition Corporation
announced plans to merge with former President Trump's newly
formed media company, Trump Media and Technology Group.
The SEC then brought its first-ever enforcement action
against a special purpose acquisition company using a novel
legal theory, coincidentally a month later, after Senator
Warren urged the SEC to investigate the merger.
It is also worth noting that in addition to Chairman
Gensler's role as CFO of the then-Hillary Clinton Presidential
campaign, the former head of enforcement at the SEC was married
to Peter Strzok.
The current director of enforcement repeatedly targeted the
Trump Administration as attorney general of New Jersey and the
current general counsel at the SEC. Ms. Megan Barbero litigated
both impeachments against President Trump from former Speaker
Pelosi.
This seems yet another instance of the Biden-Harris'
Administration of lawfare against former President Trump.
Commissioner Uyeda, according to the SEC public records,
you voted against the July 2023 settlement agreement between
the SEC and Digital World Acquisition Corp., which fined DWAC
for $18 million.
Can you elaborate on your decision to vote against the
settlement agreement?
Mr. Uyeda. I was particularly concerned and had problems
with the penalty that was being imposed.
The way the penalty was structured, the only time the
penalty would be imposed is if the Special Purpose Acquisition
Company (SPAC) went through with the merger with Trump Media.
In other words, the very people who we claim to be
protecting, the investors in that entity, would be the ones who
would have to foot the bill and pay that civil penalty, and for
that reason, I had strong objections to the settlement.
Mr. Donalds. Okay. Well, thank you for that. I appreciate
that.
Commissioner Peirce, as a regulatory sandbox advocate, if
you listen to these hearings enough, I think that is where we
should be moving a lot of our regulatory environment, into a
sandbox model.
How would a digital asset sandbox function within the
language of the FIT for the 21st Century Act?
Ms. Peirce. I think what it would allow is for people to
come in on a small scale and try things.
They come in and register that you have heard from the SEC
a lot could be brought to life, because people could actually
come in, say, ``These are the conditions that we are going to
comply with,'' and they could go out and try something. They
would not have to wait to get through an SEC approval process
that never finishes.
Mr. Donalds. Okay. Well, I appreciate that. Thank you for
that.
Commissioner Crenshaw, in 2021 you published a statement
where you emphasized the need for the DeFi industry and the SEC
to collaborate to bring DeFi into the regulatory perimeter in a
way that balances innovation with investor protection.
Would you characterize the SEC's current approach to DeFi
as collaborative thus far?
Ms. Crenshaw. Thank you.
I think there has been a lot of rhetoric on both sides but
what I would really like to see is getting down to brass tacks
and a practical application. I have asked for folks to bring
in, pen to paper, where you are finding challenges.
They know their industry and their business model better
than we ever can. What I would really like to see is, pen to
paper, where you are having challenges.
With that, I think staff would be for it, and I certainly
know that my office would look at it and look to see how we can
move forward.
I think we could. I think there is a lot of flexibility
under the existing regime where there are ways to move forward.
Mr. Donalds. Thank you.
Commissioner Uyeda, I want to go back to you, because I
know what you said earlier, you thought that the settlement
was, frankly, unfair to the investors that the SEC is somewhat
charged with protecting.
Did you find that this entire process to move to a
settlement was outside the norm of the SEC's operations in
previous years?
What I mean by that--and let me clarify--what I mean by
that is, would the SEC engage in the same type of novel theory
if it was dealing with any other enterprise that did not
include former President Trump?
Mr. Uyeda. That is a good question. I do not know the
answer to that.
Mr. Donalds. Hold onto that.
Mr. Gensler. Absolutely.
Mr. Donalds. Mr. Gensler?
Mr. Gensler. Absolutely. It was following the facts and the
law, and there was disclosure violations, and we worked through
those with the company, Digital World Acquisition Company, and
had a resolution of it, a settlement.
Mr. Donalds. Thank you.
Mr. Garbarino. The gentleman's time is expired.
We are going to recess for votes. We expect members to come
back right after.
The committee stands in recess.
[Recess.]
Mrs. Houchin [presiding]. The committee will come to order.
The gentleman from South Carolina, Mr. Timmons, is now
recognized for 5 minutes.
Mr. Timmons. Thank you, Madam Chair, and thank you to the
witnesses for being here today.
Commissioner Peirce, in the interest of time, please do
your best to answer the following questions in a yes-no format.
To your knowledge, does the SEC generally consider the sale
of physical art at an art gallery or auction house a
transaction of a security?
Ms. Peirce. No.
Mr. Timmons. Thank you for that.
Does the fact that art collectors may be purchasing pieces
of art at a gallery or auction house with the expectation that
the art may go up in value change anything in that analysis?
Ms. Peirce. No.
Mr. Timmons. Great.
Now, putting aside art galleries and auction houses, does
the SEC generally consider the sale of physical art on an
online marketplace, like eBay or Etsy, a securities
transaction?
Ms. Peirce. No.
Mr. Timmons. Okay. Thank you.
I do not understand how the SEC appears to be taking the
stance that NFTs, these pieces of digital art and collectibles,
are themselves securities, or that sales of them by online
marketplaces constitute a security transaction. The only
difference I see is that one asset is tokenized and the other
is not.
In the example of physical art that we just discussed,
there are, indeed, many collectors who purchase art with the
intent to profit and artists who market themselves and their
work in order to develop an ecosystem of patrons.
So I fail to grasp the difference here. Is tokenization
enough to transform a nonsecurity into a security?
Ms. Peirce. Again, the facts and circumstances of any
transaction are relevant, but you put your finger on something
that has troubled me, which is that we seem to be treating
digital assets differently than we treat physical assets, and I
think that is problematic.
Mr. Timmons. What exactly is the differentiating factor?
Ms. Peirce. We have moved away from--so when we look at
digital assets, we are saying they are being sold as part of a
securities transaction because there is an investment contract
associated with it.
Yet, pinning down what exactly that investment contract is
has been for me very problematic. It is based on statements,
any statement about something having value or a statement made
by one of the investors that something might go up in value.
As you pointed out, you can have an investor who buys a
piece of art, you can have a person who buys a piece of art and
she expects that piece of art to rise in value, but we do not
change that piece of art into a security because she expects it
to go up in value.
It seems to me that we are doing that on the crypto side,
and it does not make sense to me because I do not see the
parallel on the physical side.
Mr. Timmons. Thank you for that.
I am concerned that this is just an extremely slippery
slope. If the SEC takes the position that most NFTs are sold as
securities, where does it end? The SEC has not been able to
articulate a limiting principle here, because there is not one.
The view threatens not just crypto but many other
industries as well. At this pace, the SEC's actions threaten to
swallow large parts of the collectibles market, the luxury
goods market, musicians and artists of all types, and even the
restaurant and events industry.
Beyond that, the Commission is stifling blockchain
technology as a whole, and it appears Chair Gensler is doing so
intentionally.
Commissioners Uyeda and Peirce, your recent dissent related
to NFTs stated that, quote, The NFTs here are utility tokens,
not securities, and statements by the founders and NFT
purchasers that a successful restaurant would cause the NFT
price to rise do not change that.
So, Commissioners Peirce and Uyeda, in your dissent you two
also aptly state that, quote, The intent of a buyer cannot
transform a nonsecurity into a security, end quote.
I would like each of you to discuss the following
questions. In your view, why has the SEC not provided clarity
to the treatment of NFTs and how could the Commission approach
this differently?
Commissioner Uyeda?
Mr. Uyeda. We identified what is my primary concern: There
is no limiting principle based on what the Commission--what you
might discern from the Commission's enforcement actions.
I have strong reservations whether that is consistent with
the law. I mean, we have talked about the Howey test, but the
Howey test gets implemented by the courts of appeal.
So, for instance, in the Ninth Circuit there is a case
called Glenn Turner Enterprises which said that there needs to
be such essential managerial efforts that lead directly to the
success or failure of the enterprise.
In many of these cases, the artist just creates it. It
exists. There is no subsequent managerial or entrepreneurial
efforts that affect the value. It is all set by supply and
demand.
Mr. Timmons. Thank you for that.
Sorry, we are out of time.
Mr. Chairman, we need to create clear rules of the road
here. This technology is the future and I appreciate anything
you all can do to help create clear rules going forward.
Thank you.
Mrs. Houchin. The gentleman from Nebraska, Mr. Flood, is
now recognized for 5 minutes.
Mr. Flood. Thank you, Madam Chairwoman.
This year the committee has spent lots of time explaining
the deficiencies in Staff Accounting Bulletin 121. Our efforts
culminated in passing my resolution under the Congressional
Review Act (CRA) to repeal the bulletin, with support from
Majority Leader Chuck Schumer in the Senate, before it was
eventually vetoed by the Biden-Harris Administration.
We are now hearing that the SEC's Office of the Chief
Accountant is engaging in conversations with some market
participants on a case-by-case confidential basis to inform
them if they need to comply with SAB 121. It looks like one
firm even received a nonobjection from the bulletin.
It is incredible how big of a hole the SEC has dug itself
into. Yet, despite the backtracking and the rebuke from both
Houses of Congress, earlier today Chair Gensler indicated he
would not rescind SAB 121 in response to a question from my
friend across the aisle, Mr. Wiley Nickel.
Chair Gensler, now that the Office of the Chief Accountant
is picking and choosing who needs to comply with SAB 121, why
would the SEC not simply rescind SAB 121 entirely or issue a
new guidance?
Mr. Gensler. Stepping back, this guidance, it is the 121st.
It is what we have been doing for 52 years. It is guidance
about what happens in bankruptcy, whose assets are there.
In crypto bankruptcy after crypto bankruptcy, the
bankruptcy courts have said it is not the investors, it is the
bankruptcy estate.
That is what that accounting bulletin is about, is it a
liability in bankruptcy, basically. Customers get hurt----
Mr. Flood. Let me reclaim my time, Mr. Chairman.
Commissioner Peirce, what kind of signal does it send when
the SEC is carving out individual firms from its own staff
accounting guidance on a one-off basis? What would be the
approach you would recommend instead of a response to the
problems caused by SAB 121?
Ms. Peirce. The approach I would recommend is we need to go
back to the drawing board. We need to figure out what the right
accounting is in this area and we need to do that involving the
public in a process, not just putting out a staff bulletin and
then applying it. Chair Gensler mentioned earlier it applies to
public companies, and that is true. It applies on its face to
public companies but we have also applied it to broker-dealers.
Now, as you pointed out, we are peeling it back for particular
entities.
There was a question earlier about why there is only one
custodian in the ETP space. One of the reasons is because of
our SAB 121, which makes it very hard for people to be
custodians in this space.
Mr. Flood. And think about the market concentration.
There has been no accounting bulletin from the SEC that has
ever been as fundamentally flawed as SAB 121, nor has there
ever been one that has been considered a rule, according to the
Government Accountability Office (GAO). We certainly have not
seen 60--60--U.S. Senators overturn any of the 120 previous
accounting bulletins either.
Something is amiss here. This does not look right for the
SEC. The situation we are in today is indicative of a failure
of your organization to recognize just how problematic SAB 121
has been.
Chair Gensler, do you believe that SAB 121 has led to
concentration risk because of how few entities are able to
offer digital asset custody services?
Mr. Gensler. I think it is actually the right accounting.
Off-balance sheet accounting is also what, in part, got us into
the 2008 crisis. Just remember, like when people are trying to
hide things and put them off balance sheet, it is not good.
Also----
Mr. Flood. You talk about hiding things, Chairman Gensler.
We do not even know what deals you are cutting on SAB 121 when
you give a no-objection letter to a different firm.
Like, if we are going to talk about hiding things, let us
talk about transparency. Let us talk about how do people in
this country operate under our laws when your Commission is
doing backroom deals with one-off companies and writing them a
no-objection letter. That is not transparent. That is not in
the interest of the American people. You cannot follow rules
that you do not know about.
What is going on?
Mr. Gensler. The accounting bulletin, it is the staff
accounting bulletin is out. Also, for years companies came in,
public companies, and said, ``This is how we are going to
account for something. Do you object?''
In this case, if it is remote from bankruptcy, if a company
is going to go bankrupt and it is truly the customers' funds--
--
Mr. Flood. I am going to hold you there, because I want to
give your colleague a chance.
Commissioner Peirce, I would like to pose the same question
to you. It is market concentration. Is that a risk from SAB
121?
Ms. Peirce. It is a risk and the accounting raises real
questions about whether this is protective of investors or not.
So that is why I think we need to go out with a real process to
try to figure this out.
Mr. Flood. At the end of the day, the SEC has to read the
room. The entire House of Representatives voted on this, and a
majority of Members of the House rebuked SAB 121. The Senate,
led by the opposing party, they passed it with 60 votes,
including the majority leader.
This is not a good look for the SEC. This should go away.
This is bad policy.
With that, I yield back.
Mrs. Houchin. Thank you, Mr. Flood.
The gentleman from New York, Mr. Lawler, is now recognized
for 5 minutes.
Mr. Lawler. Thank you, Madam Chair.
Chair Gensler, nearly 3 years ago the Commission proposed a
rule to require the public disclosure of relatively small
security-based swap positions, Rule 10B-1.
It met significant bipartisan opposition, both within this
committee and on the Agriculture Committee, because of the
significant potential for market disruption, undermining of
shareholder rights and corporate accountability, and
encouragement of dangerous practices like copycatting and
herding that the Commission itself has warned about.
Given the lack of statutory authority to proceed with such
a proposal, its near certainty of being overturned in the
courts, and the vast bipartisan opposition, are you willing to
confirm, yes or no, that you do not intend to proceed with this
harmful proposal that would waste Commission resources and
undermine its future authority?
Mr. Gensler. Still considering comments. We do have
statutory authority under Dodd-Frank.
There was a lot of--you are right--a lot of comments that
said maybe the Commission could collect the information but not
make it public. We are still considering comments.
Mr. Lawler. At this time, you are still willing to proceed
forward?
Mr. Gensler. We are still considering comments. I am not
prejudging where I would come out or where my fellow
commissioners would come out.
Mr. Lawler. Commissioner Peirce?
Ms. Peirce. We heard a lot of feedback, which did not
surprise me, because when we went out we did not have the data
we needed to go out with that rule. We will see how the
Commission decides to move forward but I continue to have real
concerns about the effect it could have on the market.
Mr. Lawler. Chair Gensler, looking back on your tenure at
the SEC, your approach has focused more on quantity than on
quality.
I think one prime example of my point is your track record
in the courts. I also assume if I asked you about your track
record and its impact on the agency, both legally and regarding
staff morale, I would get a 5-minute robust defense of your
rulemaking decisions.
However, I am reminded of your quote that, ``Figures do not
lie, but liars sure can figure.'' The figures show that the
court believes you have overstepped your authority time and
again.
So let me ask Commissioners Peirce and Uyeda their opinions
regarding the impact on the agency and staff morale for the
courts to consistently rule against the chairman and his
hubris.
Ms. Peirce. It certainly is not good for our agency to be
told by courts that we have overstepped the legal authority. I
think it tells us that we need to be more careful because, as
you suggest, staff have put a lot of work in on rulemakings
that have then gotten thrown out because we did not have the
statutory authority to do them.
Mr. Uyeda. These losses to the agency are devastating.
I have been with the agency since 2006. In the late 2000s,
we lost a series of challenges in court to the Commission's
rulemaking.
After that, the mantra became: Never again, we need to be
the gold standard in administrative rulemaking. For a number of
years, that is what we pursued, the gold standard in
rulemaking.
Unfortunately, we have regressed. It is now do what you
need to do that is the minimum required by law. That is why we
are doing 30-day comment periods, not because it makes sense to
have 60 days, which is what has been engrained in me that
entire 18 years, is you start at 60 days, minimum, for a
comment period. Well, 30 is the minimum days required by law.
All the other steps, let us get it out fast, let us cut
corners where we need to, because that is what is the minimum
required by law but that is like saying a D grade is a passing
grade in school.
Mr. Lawler. In your opinion, the SEC under Chair Gensler is
no longer the gold standard?
Mr. Uyeda. I have served under--with six Chairmen.
Unfortunately, our Commission today in rulemaking I would say
is below the average.
Mr. Lawler. I want to follow up on a question from Mr.
Sherman earlier, who expressed his concern with Webull and the
concerns of having trading apps with Americans' financial data
stored in China.
I have written two letters to Secretary Yellen on Webull
and Moomoo on this and the concerns, given that Chinese
companies are required by Chinese law to share data with the
Chinese Government, the Chinese Communist Party.
So following up on Mr. Sherman's points, how can you ensure
these companies are following the law and how can you be
confident the information is not available, given that Chinese
companies are required by Chinese law to share data with the
Chinese Government?
Commissioner Peirce and Commissioner Uyeda?
Ms. Peirce. I mean, I think that the concern that you raise
is a legitimate concern. We want to make sure that brokerage
customers' information is protected and it is something that I
am certainly happy to work with you on.
Mr. Uyeda. I agree. That is a concern that we have with
protecting the customer information.
Mrs. Houchin. Thank you, Mr. Lawler.
The gentleman from Iowa, Mr. Nunn, is now recognized for 5
minutes.
Mr. Nunn. Thank you, Madam Chair.
Thank you for the commissioners, for the Chairman for being
here. I am glad to see so many of you in this room from both
sides of the party aisle.
Our markets are here to support small business, creating
new jobs, farm investments in States like mine in Iowa, and
local governments growing pension funds and instituting
providing cash for home ownership.
Challengingly, under Chairman Gensler's leadership the
Commission hastily and arbitrarily has led to a rulemaking
process that undermines the agency's critical mission, making
decisions at the expense of small businesses and family farms
back home.
Chairman Gensler, during your first 30 months in office
there was a 110 percent increase in proposed rules compared to
the previous two Chairs over the same period of time. Many of
those rules are both complex, I think is easy to say. Some of
them have been inconsistent. Arguably, they have been expansive
in scope, and they diverge from the SEC's historical approach
to many issues that we have come to depend on.
These costs are adding up, $6 billion, an additional 6
million in compliance hours for many of my small businesses and
farms. This should not be too surprising when just one rule is
886 pages long.
This has a tremendous impact on my constituents back in
Iowa. The courts agree with my decision too, because, Chairman
Gensler, they have taken you to court, where you have lost and
then you have lost again, and you have lost again and again and
again.
The courts are piling up in this that you have overreached,
and yet you have refused to take advice--from me, from Iowans,
and, we will hear today, from your commissioners.
I believe the SEC needs to start choosing Main Street over
administrative rule by fiat.
So, Commissioner Uyeda, since Chairman Gensler has not
answered the request that I have in the letter that we sent to
him on June the 13th, signed by many of my colleagues on both
sides of the aisle, I would like to start with you.
You have worked at the SEC in various roles for a long
time. You know the agency well. You are concerned that the
recent wave of legal challenges against the SEC's rulemaking
agenda is a threat to its reputation as a well-regarded
independent regulator.
Would you concur with that statement now?
Mr. Uyeda. Yes, I would.
Mr. Nunn. From that, does the overregulation coming from
the SEC put not only its reputational brand image at risk, but
cause a harm to the people impacted by it, whether it be a
small business, a farm, or others?
Mr. Uyeda. Yes. There are very significant effects. I
would, because of the rapid pace of rulemaking, we have not
fully been able to consider all of those effects, especially
where they are negative on small businesses.
Mr. Nunn. I will note that you are a Republican
commissioner, so I will turn to a Democratic commissioner.
Commissioner Lizarraga, around 1 percent of all venture
capital goes to rural startups. Is that correct?
Mr. Lizarraga. I have not checked the latest figures, but
if that is your understanding then I will agree with it for
purposes of the discussion.
Mr. Nunn. I appreciate that. I think that is actually
information I have received from the SEC.
Could you point to something briefly during your time that
makes it easier for a rural small business to raise capital?
Just one of the things maybe that you have done.
Mr. Lizarraga. I have tried to encourage the Small Business
Office to expand its outreach to underserved communities
throughout the country, including----
Mr. Nunn. I appreciate that, but that is not more than just
saying we would like you to be able to do more, even though we
are only giving you less than 1 percent.
Commissioner Peirce, Commissioner Uyeda, do you have any
thoughts on ways that we could reach out to rural communities
who need this as well?
Ms. Peirce. Well, I think certainly we could--when I travel
I try to talk to as many people as possible, so that is one
thing that we can do.
I think on the rulemaking front, it is exactly what
Commissioner Uyeda said, which is we need to give people time
to think through these rulemakings. You have pointed out we
have these very long rules, and a lot of them, and so we need
to give people time to think through and give us comments.
Mr. Nunn. I would concur.
Commissioner Peirce, I want to speak to you on your public
statements. You have urged digital asset firms, whether they be
issuers, broker-dealers, trading platforms, to come in and
register.
Is it currently feasible for an issuer, a broker-dealer or
a trading platform, to come in and register with the SEC today?
Ms. Peirce. I mean, realistically, it is not. I think the
evidence is in the fact that we have seen so few firms be able
to do it.
Mr. Nunn. I do not want to leave you without the
opportunity to respond, Chairman Gensler. While we have had the
opportunity to write you, and I know your team works hard on
these things, the fact of the matter is we are Congress and we
do provide guidance for you. I think, in my opinion, you have
taken it very far beyond what Congress has provided you
information on.
In June of this year, we raised concerns and got a
surprisingly lackluster response. I will put that on your staff
and your team to hopefully get us back a formidable answer.
I am concerned that my friends across the aisle, as well as
my constituents, your fellow commissioners, all of us are
concerned. Most importantly, Iowans are concerned.
Chairman McHenry. The gentleman's time is expired.
Mr. Nunn. I hope you take the time to answer for us.
Mrs. Houchin. Thank you, Mr. Nunn.
The gentlewoman from Texas, Ms. De La Cruz, is now
recognized for 5 minutes.
Ms. De La Cruz. Thank you, Ms. Chairwoman, for holding this
hearing today.
Thank you to Chair Gensler and to each of the commissioners
for being here today.
Chair Gensler, I share the same concerns that many of my
colleagues do, and especially what Rep. Nunn has just brought
up to the forefront.
This process in rulemaking has gone through your
leadership, and we have all seen many, many concerns.
Moreover, I am concerned about your recent proposals that
stray further and further from the SEC's own mission, which, as
you know, states in part that the SEC should quote/unquote,
protect investors'' and quote/unquote, maintain fair, orderly,
and efficient markets, and facilitate capital formation.
That being said, I am going to turn to Commissioner Uyeda.
Earlier, you said that you have served under how many
chairs?
Mr. Uyeda. Six.
Ms. De La Cruz. Six chairs. How many years is that total?
Mr. Uyeda. Nearly--it will be 18 next month.
Ms. De La Cruz. Eighteen next month and so I imagine that
you have served under both Republican and Democrat leadership?
Mr. Uyeda. That is correct.
Ms. De La Cruz. You said, I wrote here, you said under
Chair Gensler it was ``below average.'' Why did you use that
word ``below average''?
Mr. Uyeda. For a number of years I worked on rulemakings.
We spent a lot of time preparing, for instance, very detailed
summaries of the public comment file. We spent a lot of time
and effort on decision trees of all the points that were raised
in the comment file, what decisions they would be, what
evidence did we have, and what were the course of
recommendations.
I find today now, with a little more than 2 years as a
commissioner, I see none of that work product being presented
to the--or at least for my review--in how I think about the
decisions that need to be made at the Commission level.
In fact, on one early recollection I have, when I became a
commissioner, is I was actually told by the staff, ``Well, we
have not prepared a summary, but you can go read the public
comment files on the SEC website,'' which I found just
astounding.
Ms. De La Cruz. Well, that is obviously very concerning,
because we need to have all of those details and just saying,
``Go read the public comments,'' is dismissive of your tenure
and your experience and the knowledge that you bring to the
table.
What struck me when you said these words--and they are bold
words--is that you say them right in front of basically your
boss sitting three, four chairs away from you.
Mr. Gensler. I am not his boss.
Ms. De La Cruz. Well, the Chairman, the Chairman of this
committee, who is making the rules here.
While you might not be the boss and his boss, you are still
the leader of the SEC, and it is under your leadership that the
rulemaking is coming out.
When you have one of your fellow commissioners just three
seats away from you with 18 years of experience saying, ``Hey,
we have a problem here,'' that is something to be concerned
about, Chairman.
Mr. Gensler. If I might, we have lively disagreements on
policy but the comment summaries that Commissioner Uyeda is
talking about are actually put out to public, and he also gets
those well in advance of a vote. That is what we do. All
commissioners get.
Sometimes the reason that these things are eight and nine
hundred pages long is because we summarize all of those
comments and pull them into a file that commissioners get----
Ms. De La Cruz. Reclaiming my time.
Mr. Gensler [continuing]. and give feedback on.
Ms. De La Cruz. Reclaiming my time. What I would say with
that is this commissioner has 18 years of experience, so it is
not his first rodeo to work under you.
It seems to me that he would have the experience to be able
to look through those files and through those reports to be
able to give substance in a comment.
Would you like to comment back to that, Commissioner Uyeda?
Mr. Uyeda. Well, I know the staff does a lot of work, but
it is one where, in my experience as a commissioner, I am
getting at least initially some very highly, highly summarized
documentation as to what is in the comment file.
Now, it is correct we do have an extensive amount of
discussion in our final rule, but that comes at the very end of
the process.
You need to make early decisions as to where you might be
thinking and where you land and that occurs, I would say, if
not weeks, months before these proposals ever get fully baked.
Ms. De La Cruz. When I hear what you are saying, I think,
highly summarized, it means little fact or very vague, and it
is generally tough to make a decision with that kind of
information.
I yield back.
Mrs. Houchin. Thank you, Ms. De La Cruz.
I now recognize myself for 5 minutes.
Thank you to Ranking Member Waters and to the commissioners
for your testimony today.
I am going to start with just some commentary.
Chair Gensler, under your leadership the SEC has become
less transparent, less objective, and more political than at
any point in recent memory. We need a Commission that advocates
for more options for investors, not fewer.
It is my hope and the hope of many of my colleagues who you
have heard from today that we see the SEC cease with its
partisan rulemaking and return to its statutory mission as an
advocate for investors in our capital markets alike.
I would like to follow up on an exchange with Congressman
Rose. The Chair and the special purpose broker-dealers'
statement was clear: SPBD cannot custody nonsecurity digital
assets. Additionally, the proposals to list and trade exchange
traded products could not have been approved as filed if it had
been determined that ether was a security.
Commissioner Peirce, as part of a recent settlement, a firm
was required to delist the digital assets that the SEC
considers securities. The digital assets that remained were
bitcoin, bitcoin cash, and ether.
Can you share your concerns with how the SEC and the chair
have continued to dance around the classification of ether?
Ms. Peirce. I think this is the problem with our approach
to crypto assets, which is we leave people to read the tea
leaves of our enforcement actions.
Unfortunately, when looking at what we do, it is very
difficult for people to read those tea leaves because we have
been pretty inconsistent in how we treat things. There is
really little for people to rest on and that is not a good way
to regulate.
Mrs. Houchin. Is this approach by the SEC serving the
public and market participants at all?
Ms. Peirce. It is not serving anyone. It is not even
serving ourselves because we are spending so much on
enforcement in crypto that we could be saving by just writing
rules and then enforcing them against the bad actors.
Mrs. Houchin. Or utilizing that for innovation in the
market.
Ms. Peirce. Exactly. We could be working with people who
are trying to figure out how to use the technology in ways that
will be helpful.
Mrs. Houchin. Commissioner Lizarraga, do you think this
approach is serving investors well?
Mr. Lizarraga. I do, because it signals to the market that
when violations occur and investors are harmed we are taking
the steps necessary to protect them.
Mrs. Houchin. In a hearing we had last week, Duke Professor
Lee Reiners, who is outspokenly pro-SEC and anti-crypto, said,
quote, There remains a gap in crypto spot market regulation
that only Congress can close, end quote.
Chair Gensler, why do you insist on trying to close the gap
through regulation by enforcement?
Mr. Gensler. We are actually just enforcing the laws that
are on the books, and as Commissioner Lizarraga said,
protecting the public.
Mrs. Houchin. Chair Gensler, you have stated that of the
10,000 different cryptocurrencies in the market, the vast
majority are securities.
If that is the case, does the SEC plan on bringing
thousands of enforcement actions in a never-ending game of
legal whack-a-mole? Because it sure seems like that is the
approach that the SEC is taking.
Mr. Gensler. We do not have those types of resources.
You are right about one thing: There is a lot of
noncompliance in this field. Without prejudging anyone, look,
if we look at the leading lights 2 years ago in this field,
they are either in jail or they are awaiting extradition, some
of those leading lights. There has been tens of billions of
dollars of losses out in the communities.
Now, that is a worldwide market. Fortunately, it is not all
in the U.S.
Mrs. Houchin. I would like to pivot to Commissioner Peirce
for a second.
So we have this regulation by enforcement, we have whack-a-
mole by the SEC in these enforcement actions, and Chair Gensler
just mentioned some of these who he is calling the bad actors
that have been charged.
Would not a known structure, a market structure, something
that we can actually point to instead of this guessing game
among the industry, would that not be a better approach?
Ms. Peirce. It absolutely would be a better approach. I
think one of the things that has frustrated people who are
trying to do the right thing is that not only are we playing a
game of whack-a-mole on the enforcement side, but the
classification of assets, even from our own perspective, seems
to be changing over time.
I have talked to so many people who are trying to build
things here, and they do not feel confident. That is not what
we want. We want clear rules, and then we can use enforcement
for the bad actors.
Mrs. Houchin. Is there a role for Congress to close it,
close the gap?
Ms. Peirce. Congress can absolutely come in and tell us
what to do and tell us what not to do as well. I always look
forward to hearing from you all.
Ms. Houchin. Thank you.
Now we will go to the gentleman from Tennessee, Mr. Ogles,
who is recognized for 5 minutes.
Mr. Ogles. Thank you, Madam Chair.
There is an alarming absence of stakeholder input during
the rulemaking process. It leads to adverse consequences for
market participants. Reviewing individual rules without
understanding the interconnected impact is impractical, and it
undermines the feedback necessary for rulemaking of this
significance.
Additionally, the SEC has failed to adequately evaluate the
aggregate effects of its proposed disclosure rules on
businesses, investors, and the U.S. economy.
I urge the SEC to put aside partisan politics and put the
American investor first.
Mr. Uyeda, you recently said in a Fox Business article--and
I will quote--Regulations should be efficient, effective, and
appropriately tailored. Facilitating robust capital markets
will also help prevent the need for taxpayer bailouts. These
are some commonsense goals that President Trump adopted during
his first term through an executive order outlining his core
principles on regulating the U.S. financial system.
Can you please elaborate on that? Also, how do we get back
to that gold standard that you mentioned?
Mr. Uyeda. The capital markets are one of America's crown
jewels. We need to be very methodical and thoughtful as we
regulate. We have what I believe are the finest markets in the
world right now.
Under President Trump, he issued an executive order which
set forth his core principles for how we should think about
financial regulation, a number of which you just read.
After that, those core principles were issued, the Treasury
Department--and I was detailed to Treasury as a policy adviser
at the time--undertook a wide-ranging evaluation of approaches
we could take in a coordinated manner among all financial
regulators--banking, capital markets, including the CFTC, even
the Department of Labor in their role in insurance, as well as
States when it came to--I am sorry--Department of Labor in
connection with pensions and the States when it came to
insurance.
Treasury issued a series of reports and recommendations and
then turned it over to the individual agencies for further
consideration.
During this time, a broad spectrum of stakeholders were
consulted from all aspects of the political spectrum, and that
helped formulate a larger global view as to how regulation
should occur in a coordinated manner and how we can improve the
capital markets and the financial system as a whole.
Unfortunately, I have not seen that level of coordination
or even foresight and planning in the current administration.
Mr. Ogles. As we look to the future, and if I will
summarize, you are saying that we need better collaboration
amongst the stakeholders so that it can be fully vetted and
evaluated by said stakeholders.
Also, that provides for--you issue the 30-day window. It
allows a longer period of time for the investor and the markets
to adapt and adjust to said recommendations.
What concerns me is the idea of the gold standard is gone.
Under the current leadership, we have seen an agency go rogue--
that is, overstepped its authority--that has made policies that
have been overturned by the courts. We have seen the investor
pay the price for activist regulation. Enough is enough.
So as we go forward, what are the top priorities? If you
were in charge, what would you do right now to fix this?
Mr. Uyeda. I think what we need to do is make sure--go back
to our core values, which is maintaining fair, orderly, and
efficient markets, protecting investors, and facilitating
capital formation. Those are all three equally important parts,
and I think, to a certain extent, we have been a bit out of
balance.
Mr. Ogles. How much time should--the comment period, how
long do you think that should be as we go forward?
Mr. Uyeda. I think the default should be minimum 60 days,
and for more complex and complicated rulemakings it should be
longer.
When we do have different proposals that interact, we
should think about reopening comment periods. We should also
think about reproposing comment--I am sorry--reproposing
proposals when appropriate because we made certain changes in
our thinking.
Mr. Ogles. Well, I would--we only have a few moments left
or seconds left but I would also argue, there has not been
sufficient cost-benefit analysis in these rules, which is why
you have seen the courts have to step in while the markets have
reacted as such.
Thank you all for being here. I know it has been a long
day.
With that, Madam Chair, I yield back.
Mrs. Houchin. Thank you.
I would like to thank Chair Gensler, Commissioners
Crenshaw, Lizarraga, Peirce, Uyeda for your testimony today.
Without objection, all members will have 5 legislative days
within which to submit additional written questions for the
witnesses to the chair. The questions will be forwarded to the
witnesses for a response. I ask our witnesses to respond as
soon as possible, but no later than October 30.
The hearing is adjourned.
[Whereupon, at 3:13 p.m., the committee was adjourned.]
A P P E N D I X
September 24, 2024
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