[Senate Hearing 118-580]
[From the U.S. Government Publishing Office]
S. Hrg. 118-580
FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS FOR FISCAL YEAR 2025
=======================================================================
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
on
H.R. 8773/S. 4928
AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND
GENERAL GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER
30, 2025, AND FOR OTHER PURPOSES
__________
Commodity Futures Trading Commission
U.S. Department of the Treasury
U.S. Securities and Exchange Commission
__________
Printed for the use of the Committee on Appropriations
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-299 PDF WASHINGTON : 2025
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COMMITTEE ON APPROPRIATIONS
PATTY MURRAY, Washington, Chair
DIANNE FEINSTEIN, California \1\ SUSAN M. COLLINS, Maine, Vice
RICHARD J. DURBIN, Illinois Chair
JACK REED, Rhode Island MITCH McCONNELL, Kentucky
JON TESTER, Montana LISA MURKOWSKI, Alaska
JEANNE SHAHEEN, New Hampshire LINDSEY GRAHAM, South Carolina
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
CHRISTOPHER A. COONS, Delaware JOHN HOEVEN, North Dakota
BRIAN SCHATZ, Hawaii JOHN BOOZMAN, Arkansas
TAMMY BALDWIN, Wisconsin SHELLEY MOORE CAPITO, West
CHRISTOPHER MURPHY, Connecticut Virginia
JOE MANCHIN, III, West Virginia JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland CINDY HYDE-SMITH, Mississippi
MARTIN HEINRICH, New Mexico BILL HAGERTY, Tennessee
GARY PETERS, Michigan KATIE BRITT, Alabama
KYRSTEN SINEMA, Arizona \2\ MARCO RUBIO, Florida
DEB FISCHER, Nebraska
Evan Schatz, Staff Director
Elizabeth McDonnell, Minority Staff Director
------
Subcommittee on Financial Services and General Government
CHRIS VAN HOLLEN, Maryland, Chairman
RICHARD J. DURBIN, Illinois BILL HAGERTY, Tennessee, Ranking
CHRISTOPHER A. COONS, Delaware Member
JOE MANCHIN, III, West Virginia JOHN BOOZMAN, Arkansas
MARTIN HEINRICH, New Mexico JOHN KENNEDY, Louisiana
MARCO RUBIO, Florida
Professional Staff
Ellen Murray
Maddie Dunn
Diana Gourlay Hamilton
Dan Brandt (Minority)
Winnie Chang (Minority)
Administrative Support
Maria Calderon
Alex Shultz (Minority)
\1\ Died September 29, 2023.
\2\ Appointed to Committee October 18, 2023.
\3\ Appointed to Subcommittee November 2, 2023.
C O N T E N T S
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hearings
Tuesday, June 4, 2024
Page
U.S. Department of the Treasury.................................. 1
Thursday, June 13, 2024
U.S. Securities and Exchange Commission.......................... 45
Commodity Futures Trading Commission............................. 45
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back matter
List of Witnesses, Communications, and Prepared Statements....... 89
Subject Index:
Commodity Futures Trading Commission......................... 105
U.S. Department of the Treasury.............................. 105
U.S. Securities and Exchange Commission...................... 105
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2025
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TUESDAY, JUNE 4, 2024
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 2:39 p.m., in room SD-138, Dirksen
Senate Office Building, Hon. Chris Van Hollen (Chairman),
presiding.
Present: Senators Van Hollen, Murray, Coons, Manchin,
Hagerty, Collins, and Kennedy.
UNITED STATES DEPARTMENT OF THE TREASURY
opening statement of senator chris van hollen
Senator Van Hollen. Good afternoon, everybody. This hearing
will come to order.
And I will begin by making an analogy. The Ranking Member
of this subcommittee, Senator Bill Hagerty, my colleague and
partner, we and our staff have maintained a solid working
relationship based on mutual respect.
And Senator, I look forward to continuing our good work
together this year.
Madam Secretary, welcome. Welcome back to this
subcommittee. You, of course, are here to talk about the fiscal
year 2025 budget request, but I want to first thank you for the
work you and your team did on the fiscal year 2024 request,
because the input and discussions between our teams, both
Senator Hagerty's team, and my team, and your team, helped us
deal with a tight budget, I think, in the best way we could. So
I want to thank you and your team for that.
As we look to this year's budget request, fiscal year 2025,
the Treasury Department requests $14.4 billion, which is an
increase of $180 million, or 1 percent over the last fiscal
year.
I look forward, Madam Secretary, to hearing more from you
today about how this request can advance the Treasury
Department's important missions here at home and abroad. The
Department of Treasury plays a central role in supporting a
strong economy and promoting opportunity for all Americans, and
it does this through a variety of efforts and initiatives.
Madam Secretary, I do want to commend you and the President
for your efforts to address the lack of affordable housing, a
challenge that predates the pandemic, but continues with us to
this day. The lack of housing supply has driven up costs to
where now nearly half of all renting households spend more than
30 percent of their income on housing costs. So I was pleased
to see the Treasury Department continue to take and propose
steps as recently as March to increase the stock of affordable
housing and lower costs through a variety of proposals,
including tax credits.
With respect to the IRS, which, of course, is a major part
of the overall Department of Treasury budget, the request this
year is for $12.3 billion in discretionary funds, essentially
flat funding with last year. Of course, the Inflation Reduction
Act did provide substantial resources to the IRS, and I am
pleased to see those additional resources are already making an
important difference.
And I know, Madam Secretary, you will talk a little bit
more about them, but they include, in summary: Dramatic
improvement to taxpayer services, really beginning to modernize
antiquated IRS systems, and of course, utilize the resources to
make sure that very, very wealthy people, millionaires,
billionaires, and big corporations pay more of the taxes that
are already due and owing on the enforcement side.
On the taxpayer services front, the IRS has made a number
of improvements: reducing call wait times for taxpayers, adding
more customer service representatives, reducing the backlog of
paper returns, and staffing up taxpayer assistance centers. I
want to thank you and the team at the IRS for your efforts to
do that.
I also do want to salute you for the success of the
recently concluded year-long Direct File Pilot Program, which
allowed taxpayers in 12 States the option of filing their
Federal tax returns online for free directly to the IRS, and I
was pleased to see the announcement of the plan to extend that
nationwide. All Americans deserve a free and easy filing
option, and I am pleased to see the progress the IRS is making
on that.
On the enforcement side, we have estimates ranging from
$500 billion to a trillion dollars a year that are due and
owing but not paid. To be clear, this is not about going after
small businesses or households earning less than $400,000 a
year, and you have made that very clear, Madam Secretary.
The Inflation Reduction Act, of course, has also made a big
investment in our clean energy objectives, helping generate
over $850 billion in clean energy and manufacturing investment
from the private sector. And I want to thank you and your team
for the work that you are doing to implement the provisions of
that legislation.
On the global front, and Senator Hagerty and I have worked
together on a number of global initiatives, I want to applaud
your continued efforts to implement tough sanctions on Russia,
including the price cap to reduce Russian oil revenues as Putin
continues his attacks on the people of Ukraine. I would like to
highlight your commendable work implementing the Rebuilding
Economic Prosperity and Opportunity for Ukrainians, or REPO,
Act. You have made it clear that the United States will work to
build consensus with our G7 allies on a plan to utilize the
value of immobilized Russian sovereign assets to help address
the issues within Ukraine.
There is much more, of course, to talk about on the
international front, as well as the domestic front, which we
will get to in questions. But let me end where I began by
thanking you, Madam Secretary. Thank you and your team. It is
wonderful to have you back.
And let me turn over now to Senator Hagerty for his opening
statement.
opening statement of senator bill hagerty
Senator Hagerty. Well, Chairman Van Hollen, I want to thank
you for holding this hearing. And I look forward to having many
more during the course of this fiscal year.
The agencies within the jurisdiction of this subcommittee
have a far-ranging impact on the American economy and on the
operations of the Federal Government. As the Ranking Member of
the subcommittee, I look forward to working alongside you and
our colleagues to conduct rigorous oversight to strengthen U.S.
financial institutions, and ensure that the dollars the
taxpayers have entrusted to us are spent responsibly.
I also want to welcome our witness, Secretary Yellen. Thank
you for appearing before the subcommittee, Secretary. It is a
critical time for our economy, and I am glad to see you here
today.
The Department of the Treasury has a fundamental role in
managing our Nation's debt and collecting its taxes. The
President, with the advice and consent of the Senate, has
conferred upon you a great responsibility and obligation to
provide sound economic guidance. At the same time, it is your
duty to respect the rights of taxpayers who rely on you to
treat them fairly.
The Department has a deep impact on a broad range of
issues, from issuing debt to reviewing foreign investments to
imposing sanctions. Sanctions under the Trump Administration
worked, but they are not working now because this
administration has deliberately relaxed enforcement.
When I served as U.S. Ambassador to Japan, I helped
implement the Maximum Pressure Campaign against Iran. In
particular, because Japan was a major buyer of Iranian oil, I
persuaded then Prime Minister Abe to support U.S. secondary
sanctions and stop buying Iranian crude oil. President Trump's
maximum pressure campaign against Iran yielded powerful
results. Iran's revenue from the export of crude oil products
dropped from $60 billion in 2018 to below $20 billion in 2019,
to below $8 billion in 2020.
President Biden, however, has abandoned the Maximum
Pressure strategy, under the Biden administration, Iran's
revenue from exports of oil products has risen to over $100
billion. Iran is the world's biggest State sponsor of
terrorism, and they have used this financial windfall to
increase funding and support for Hamas, for Hezbollah, and for
the Houthis. Think about the Houthis that are attacking ships
in the Red Sea, Hezbollah, Hamas, menacing our ally, Israel,
every day. Sanctions only work when they are enforced.
Another area that I am deeply concerned about is that the
Department may have let politics influence the amount of debt
issued and the manner in which the Treasury issues its debt.
Any action that fails to provide stability and minimize risk to
taxpayers deviates from the Department's core mission, and I am
concerned about the risk that this presents.
In regard to the IRS, I am concerned about their spending
decisions. The IRS is using one-time funding to hire 1,700
people on a permanent basis, staff that it can't afford and
would need to furlough without a new transfer authority from
this Committee. The current IRS budget assumes this one-time
spending would be made permanent. That forces Congress to make
a difficult decision in the future, either provide billions of
dollars of more funding or potentially fire hundreds, if not
thousands, of IRS employees.
The IRS needs to figure out how to operate within the funds
that Congress has already appropriated and within the authority
that Congress has already authorized.
Another shell game that the IRS is playing is with Direct
File, the IRS, the General Services Administration, and the
U.S. Digital Service, jointly, developed the Direct File, but
the IRS either cannot or will not share the total cost of
Direct File with Congress. The IRS reported its own cost at
only $24 million. Still, that works out to be $179 per
successfully filed return, but that excludes the cost to GSA
and to the USDS.
When combined, the total cost to the U.S. Government, and
that is not just the IRS, of a successfully filed return could
easily exceed the most expensive commercial off-the-shelf tax
preparation software. It doesn't look like a good economic
result for American taxpayers.
Additionally, 3.3 million taxpayers were curious enough at
least to inquire about Direct File. They actually began the
eligibility screening process, but of those 3.3 million
taxpayers, only 140,000 actually succeeded in filing a return.
Yet, the IRS isn't curious about why the other 3.2 million
didn't complete the Direct File process, and they don't seem to
have any plans to ask why. I don't understand why you would
agree to make Direct File permanent without understanding why
the program has only a 4 percent adoption rate.
Finally, I think American taxpayers would also like to
understand why the IRS leaker, Charles Littlejohn, who has
started serving his prison sentence, was charged with only one
count of unlawful tax return disclosure. He stole more than
8,000 tax returns over a period of 2 years. He did it for the
purposes of damaging his victims' reputation, and affecting the
outcome of the presidential election.
Based on the sentencing hearing transcript, the lack of
charges seemed to frustrate the judge, and it is certainly
baffling to me.
Secretary Yellen, I hope you will address these and other
concerns, and I look forward to your testimony. Thank you.
Senator Van Hollen. Thank you, Senator.
Secretary Yellen, you are well known to this Committee, so
I am going to keep my introduction very brief. Secretary Yellen
is the first person to have led the White House Council of
Economic Advisors, the Federal Reserve, and the Department of
Treasury. Madam Secretary, the floor is yours.
STATEMENT OF HONORABLE JANET L. YELLEN, SECRETARY, U.S.
DEPARTMENT OF TREASURY
Secretary Yellen. Thank you, Senator Van Hollen.
Chairman Van Hollen, Ranking Member Hagerty, and Members of
the Subcommittee; thank you for the invitation to testify, and
for your support of the Treasury Department.
Over the past 3 years Treasury has helped drive a historic
economic recovery and put our economy on a strong path for the
medium and long term. GDP growth has been strong, growing 3
percent over the past four quarters. Inflation has declined
substantially since its peak, even as we have more work to do
to address high costs, and give families more breathing room.
The labor market is remarkably healthy, and companies have
announced over $850 billion in clean energy, and manufacturing
investments since the start of this administration, including
in places that historically had not received significant
investment, or where investment had declined.
To support this, Treasury has played a leading role in
implementing the American Rescue Plan and the Inflation
Reduction Act. We have also been focused on taking action
beyond our borders to strengthen America's economic leadership
and national security.
I am heartened that Congress passed crucial support for
Ukraine and for other allies. Treasury continues to impose
sanctions to constrict Russia's ability to wage war, and we are
working with our partners to unlock the economic value of
immobilized Russian sovereign assets. Treasury is also using
the tools at our disposal to respond to conflict in the Middle
East and to responsibly manage the U.S.-China economic
relationship, including making sure that American workers and
firms can compete on a level playing field, and protecting our
national security.
Let me now highlight several key requests in the
President's fiscal 2025 budget that will enable Treasury to
continue advancing America's economic interests.
First, the budget requests $12.3 billion in discretionary
resources for the Internal Revenue Service. Thanks to IRA
funding and annual appropriations, we have already seen
unprecedented improvements. This filing season we made it
easier for taxpayers to file their taxes and get the credits
they are owed, including by providing 11,000 additional hours
of in-person assistance.
140,000 taxpayers saved millions in tax preparation fees
through the pilot of Direct File, an easy and free way to file
taxes, online, directly with the IRS. We have also increased
enforcement to make sure wealthy taxpayers and large
corporations pay their fair share, collecting millions in
unpaid tax debt from millionaires.
We need resources so that we can continue saving the
American people time and money and helping reduce the deficit.
The IRS is inviting all States to participate in Direct File as
soon as next filing season and intends to expand it to support
all of the most common tax situations over the next few years.
And we will keep working to close the tax gap driven by
wealthier Americans, which costs us over $600 billion a year.
Second, the budget requests funds to allow Treasury to
address emerging threats, such as $312 million for Treasury's
Departmental Offices, including to support investment security
in sensitive technologies and the stability of the financial
system, and $150 million to enhance cybersecurity and protect
our systems against intrusion by malign State actors.
And third, the budget requests $231 million for the Office
of Terrorism and Financial Intelligence, which provides
critical financial intelligence and sanctions-related economic
analysis, including to support sanctions related to Hamas,
Iran, and Russia. It also requests $216 million for the
Financial Crimes Enforcement Network to protect the financial
system and combat illicit finance.
Thank you. I am happy to now take your questions.
[The statement follows:]
Prepared Statement of Hon. Janet L. Yellen
Chairman Van Hollen, Ranking Member Hagerty, and Members of the
Subcommittee: Thank you for the invitation to testify and for your
support of the Treasury Department.
Over the past 3 years, Treasury has helped drive a historic
economic recovery and put our economy on a strong path for the medium-
and long-term. GDP growth has been strong, growing 3.0 percent over the
past four quarters. Inflation has declined substantially since its
peak, even as we have more work to do to address high costs and give
families more breathing room. The labor market is remarkably healthy.
And companies have announced over $850 billion in clean energy and
manufacturing investments since the start of this Administration,
including in places that historically had not received significant
investment or where investment had declined. To support this, Treasury
has played a leading role in implementing the American Rescue Plan and
the Inflation Reduction Act.
We've also been focused on taking action beyond our borders to
strengthen America's economic leadership and national security. I am
heartened that Congress passed crucial support for Ukraine and for
other allies. Treasury continues to impose sanctions to constrict
Russia's ability to wage war and we are working with our partners to
unlock the economic value of immobilized Russian sovereign assets.
Treasury is also using the tools at our disposal to respond to conflict
in the Middle East and to responsibly manage the U.S.-China economic
relationship, including making sure that American workers and firms can
compete on a level playing field and protecting our national security.
Let me now highlight several key requests in the President's FY
2025 Budget that will enable Treasury to continue advancing America's
economic interests.
First, the budget requests $12.3 billion in discretionary resources
for the Internal Revenue Service. Thanks to IRA funding and annual
appropriations, we have already seen unprecedented improvements. This
filing season, we made it easier for taxpayers to file their taxes and
get the credits they're owed, including by providing 11,000 additional
hours of in-person assistance. 140,000 taxpayers saved millions in tax
preparation fees through the pilot of Direct File, an easy and free way
to file taxes online directly with the IRS. We have also increased
enforcement to make sure wealthy taxpayers and large corporations pay
their fair share, collecting millions in unpaid tax debt from
millionaires.
We need resources so that we can continue saving the American
people time and money and helping reduce the deficit. The IRS is
inviting all states to participate in Direct File as soon as next
filing season and intends to expand it to support all of the most
common tax situations over the next few years. And we will keep working
to close the tax gap driven by wealthier Americans, which costs us over
$600 billion a year.
Second, the Budget requests funds to allow Treasury to address
emerging threats, such as $312 million for Treasury's Departmental
Offices, including to support investment security in sensitive
technologies and the stability of the financial system, and $150
million to enhance cybersecurity and protect our systems against
intrusion by malign state actors.
Third, the Budget requests $231 million for the Office of Terrorism
and Financial Intelligence, which provides critical financial
intelligence and sanctions-related economic analysis, including to
support sanctions related to Hamas, Iran, and Russia. It also requests
$216 million for the Financial Crimes Enforcement Network to protect
the financial system and combat illicit finance.
I am happy to now take your questions.
Senator Van Hollen. Thank you, Madam Secretary. And we will
do 5-minute rounds, 7-minute rounds; 7-minute rounds per
member.
I do want to start on some of your more recent work with
respect to meeting with our G7 partners and others to address
what seems to be an increase or ongoing transfer of technology
from China to Russia to support Putin's war machine efforts. I
think that while China has not provided any direct military
support in the form of weapons, we have seen, according to
American assessments, a large surge of Chinese sales to Russia
of machine tools, microelectronics, and other technology that
Moscow is using to produce missiles, tanks, aircraft, and other
weaponry for use in the war against Ukraine.
I know the President and our allies a number of years ago
made it clear that any direct military support from China to
Russia would be seen as a red line. While this is not direct
military transfers, and I do want to make that clear based on
what we know today, what is happening is clearly benefiting the
Putin war machine.
So Madam Secretary, can you talk about how we can work with
our allies, whether we collectively impose sanctions on Chinese
companies that are engaged in this kind of transfer? Or other
options on the menu that you are looking at?
Secretary Yellen. Yes. We, as you noted, are very
concerned. There are substantial exports. We have seen an
increase in exports from China to Russia, and particularly of
certain dual-use goods that may be critical to Russia's war
effort. And let me say that I have been extremely clear at the
highest levels of the Chinese Government that this is something
we will not tolerate, and that we intend to sanction this
activity.
We are putting sanctions both in place on firms that are
engaged in this activity, and a new executive order allows us
to sanction financial firms that are promoting the export of
these dual-use items or military goods to Russia.
We know that our sanctions will be most effective if we
work closely with our allies, and this is something I have
discussed with all of our--all of my Finance Minister
colleagues, the need for us to coordinate our sanctions
behavior.
I know that this set of concerns was recently conveyed by
President Macron, by President von der Leyen, and by Chancellor
Scholz in their recent engagements with President Xi, and while
I don't have anything to preview today, I will just say, we are
committed to working closely with our allies on this issue, and
believe it is essential to reduce the flow of these goods to
Russia.
Senator Van Hollen. Well, I appreciate that update, and I
do hope action will be taken soon, because the trajectory, as
you indicated and as I outlined, is clearly in the wrong
direction. And these dual-use items, as you described them, are
being put to use by Putin directly to advance and support of
the war against the people of Ukraine. So I think concerted
action is necessary to be effective, and I hope it will be
taken soon.
On a related matter, we, the United States, have worked
with our allies to try to prevent the transfer of very high-end
technologies to China in the first place, whether they be very
high-end semiconductors, AI, or other technologies, and part of
that strategy has been implemented through the Department of
Commerce. But another component of that, as you well know, to
put in place some outbound investment screening to prevent U.S.
companies, some of the companies are allied countries, from
investing in China in areas that could then be used by the PRC
for military purposes.
That, too, of course, requires joint action in order to be
effective. So Madam Secretary, can you just speak to where we
are in the effort to develop very clear boundaries and
guidelines when it comes to outbound investment, number one?
And number two, our progress in coordinating with our key
allies?
Secretary Yellen. So you know, we completed an advanced
notice of proposed rulemaking on outbound, we have received
many comments which we are digesting, and preparing, as soon as
possible, to release a Notice of Proposed Rulemaking. And
really over year, or more, we have been involved in discussions
with our allies, about the necessity of doing similar kinds of
investment screening. And this would apply both to inbound
investment screening, something similar to our CFIUS process,
and also outbound screening.
And we have ongoing discussion. Our allies are looking at
this carefully, working on their own systems. I think all of us
recognize that this is something where joint action is more
effective, and we continue to focus on trying to help our
allies get up to speed on this as well.
Senator Van Hollen. Well, I appreciate that. You know
better than anybody that capital flows can move really at the
speed of light across border. So joint action, collective
action is going to be essential for that to be successful.
Senator Hagerty.
Senator Hagerty. Secretary Yellen, one of the most
important jobs of the Treasury Secretary, is to issue and
manage US debt. Given rising deficits, this is an increasingly
difficult task. Nonetheless, proper management of our Nation's
debt keeps our funding costs low, and maintains the dollar
status as the world's reserve currency.
In light of this, I am very concerned about the recent rise
in the issuance of Treasury bills. The Treasury Borrowing
Advisory Committee T-bills comprise 15- to 20 percent of the
total U.S. debt. But right now, T-bills supply is 25 percent
above that range.
This means that the Department has issued more than one
trillion in short-term bills that normally would have been
issued as longer-term notes and bonds. This surge in bill
issuance severely impedes the market's ability to price risk.
It also, typically, only occurs during recessionary periods.
And I am perplexed by this decision to issue so much on the
short end of the curve while yields are inverted.
Given current yields, excessive reliance on bills cost
taxpayers more money in interest expenses, because of the need
to roll over short-term financing at elevated rates. It also
constrains our country's ability to respond to future economic
shocks.
And perhaps most alarmingly, this approach to debt
management undermines the Treasury's credibility because it
creates the perception that the administration could be easing
financial conditions for political purposes.
This chart will help us visualize what I am talking about.
[Chart display on poster board:]
Senator Hagerty. What you can see here is during the 2008
crash, a spike in the issuance of short-term bills. Again in
2020, you see the next spike in short-term bill issuance right
here. Again, we got the pandemic in 2020. We have got the Great
Recession in 2008, and now we see the spike here.
Madam Secretary, are we in a recession?
Secretary Yellen. No. No, we are not in a recession.
Senator Hagerty. I thought you might say that. Then that
begs the question, as I see it, there only three reasons, why
the Treasury could be issuing so much on the short end of the
curve.
One, it could be that you are concerned about inadequate
demand for longer term treasuries. I hope that is not the case.
Second, it could be that you are waiting to lock in longer-
term issuances until the Fed has cut rates, if that is the
case, I would like to know what informational basis you might
be using to time the market in this manner.
But the most dangerous could be that you are suppressing
rates in order to ease financial concessions--sorry--to ease
financial conditions for President Biden in an election year
leading up to November. And I think that creates an extreme
concern. Which one of these three would it be, Secretary
Yellen?
Secretary Yellen. Well, first of all, let me say we never
time the market, a tenet of Treasury debt management is that
issuance should be regular and predictable, and that is
appropriate over time to enhance the government----
Senator Hagerty. And yet it is spiking, you can see from
the chart that it is spiking right now.
Secretary Yellen. Well, we had a substantial increase in
the deficit in connection with the pandemic.
Senator Hagerty. But what underlies the decision to do it
so much weighted toward the short end while the yield curve is
inverted?
Secretary Yellen. Well, actually, if you look at history,
the weighted average maturity of Treasury debt overall is about
71 months, and that is above the long-run average, which is
shorter, at 61 months. And issuance of bills, in spite of what
you are showing there, is in line with historical averages as a
percent----
Senator Hagerty. Well, it is certainly above the
recommended range Madam Secretary.
Secretary Yellen [continuing]. As a percent of overall
issuance, Treasury bills with a maturity of 1 year, or less,
currently represent just under 22 percent of Treasury debt, and
the long-run average is 22.4. It is very close to being in line
with the guidelines suggested by market participants who take
part in the Treasury Borrowing Advisory Committee and the
primary dealers.
Senator Hagerty. I would very much like to get a better
understanding of this. And I have introduced legislation that
would have the Treasury report to us, report to this Committee
on the debt issuance process and how you are thinking about it,
so we can get a better understanding, because the concerns that
I raised are real, I hear them very often, and I think it would
be quite helpful for us to clarify this.
Secretary Yellen. I think we would be glad to do that.
Senator Hagerty. Thank you. Thank you. Let us turn our
discussion to sanctions now, Secretary Yellen. Iran is the
world's foremost state sponsor of terrorism. They send hundreds
of millions of dollars per year to terrorist proxies like
Hamas, Hezbollah, and the Houthis who have murdered scores of
American citizens, and who desire to wipe Israel from the face
of the map.
And Secretor Yellen, is it the policy of the Biden
Administration to minimize revenue that Iran derives from
illicit oil sales?
Secretary Yellen. Yes, it is. And I agree with what you
just said, it is our priority to sanction Iran to diminish its
ability to export oil. We are taking----
Senator Hagerty. But you have said--you have said it is a
priority. However, I just went through the results of the
Maximum Pressure Campaign. We had Iran down to below 8 billion
in exports in the previous administration. In this
Administration, the sanctions enforcement has failed miserably.
They are back up over a $100 billion. What has changed there?
And if the policy hasn't changed, what has?
Secretary Yellen. Well, we have continued to take action
against those in Iran who are facilitating the export of oil.
There is a shadow fleet that it has proven difficult for our
sanctions to touch. Our sanctions are most effective when they
target financial institutions. But we continue to take
sanctions actions. We are very active in addressing terrorist
financing by the Iranian regime and its proxies.
Senator Hagerty. I am running short of time, Madam
Secretary. I would just like to close with this comment. I have
been involved in the imposition of sanctions. It is hard work.
The program right now is not working, obviously, because what
we have seen is illicit oil sales dramatically increase under
this administration. I understand that there are complex
reasons why that may be the case. But it requires difficult
work, hard work. And I encourage this Administration to take
its sanctions enforcement seriously because we are failing
right now. Thank you.
Thank you, Mr. Chairman.
Senator Van Hollen. Thank you. Thank you, Senator Hagerty.
Senator Coons.
Senator Coons. Senator Van Hollen; Chairman Van Hollen,
thank you. Thank you, thrilled to see your leadership here at
FSGG, Ranking Member Hagerty.
Madam Secretary, thank you for the chance to work closely
with you in the last year in my role as chair of State and
Foreign Operations. We had a great partnership in meeting our
commitments to the multilateral development banks in unlocking
21 billion to the IMF through the PRGT, and in finding ways to
help developing countries deal with the consequences of COVID,
of heightened debt, of the consequences of Russia's aggression
in Ukraine, and principally meet competition from the PRC,
which is seeking to capitalize on the vulnerabilities of
developing countries.
So I look forward to working with you on continuing that
work. I just returned from a trip to Southeast Asia where I got
to meet with the leadership of the Asian Development Bank, and
look at how the Luzon Economic Corridor may well be a key part
of our Indo-Pacific strategy.
Focusing on the issues before as for this year's
appropriation, though, for your Committee--your Department when
Congress passed the CHIPS and Science Act, a key part of our
goal was revitalizing American semiconductor manufacturing. I
was just in Taiwan, and the Philippines, and met with leaders
in semiconductor manufacturing. I am concerned about Treasury's
implementation of tax credits, and making sure that they reach
upstream players in the semiconductor industry.
I was encouraged by your recent remarks in a House Hearing
that Treasury and Commerce are working together to cover the
entire supply chain. But when do you think we could expect
final rules that would make credit available to manufacturing
facilities that are producing semiconductor materials that are
critical component parts of the semiconductor supply chain?
Secretary Yellen. So this is an issue that we are working
on very hard. We are trying to get the final rules out as
quickly as possible. This is an issue that we explicitly have
far up the supply chain to go. We ask for comment on this. We
have received a great deal of feedback, we understand the need
for certainty on the part of businesses, and we will try to get
the regulations out just as soon as possible.
But we are working closely with the Department of Commerce.
They have direct funding, and we want to make sure that we are
providing adequate support.
Senator Coons. And I respect and understand, and I have
talked to the Secretary, the role that Commerce has in the
grant funding for Fabs. My concern is that we also support the
other businesses and industries that are part of semiconductor
manufacturing.
Let me move on. There are some key decisions also not yet
made in terms of 45V Rulemaking. There are, I think, seven
regional hydrogen hubs that have been chosen through the
Inflation Reduction Act that will help support regional
economic renewal across the country. My concern is that we need
to hit the right balance in 45V to actually provide the
opportunity for takeoff for a future hydrogen industry in the
United States.
I do not think that it is assured that that will happen.
The hubs, which were selected 8 months ago, can't move ahead
without certainty about how this investment profile will look.
Does Treasury need more resources in order to finalize the 45V
Rulemaking? Is that part of the limitation in terms of getting
these rules out?
Secretary Yellen. It is not a matter of resources; it is
really a matter of the complexity of the issues that are
involved here and the working through. I believe there were
over 40,000 comments received on the guidance that we put out
on 45V. We recognize the issues that the hydrogen hubs face and
are working hard, we are working jointly with the Department of
Energy and also with EPA to try to figure out how to address
this.
Senator Coons. Well, I know----
Secretary Yellen. We have received a lot of comments making
suggestions, which we are taking seriously.
Senator Coons. I know some of the comments you have
received are from my region, from Delaware, from Pennsylvania,
from New Jersey, where the MACH2 Regional Hub leadership is
very concerned about what impact the Treasury rules will have
on whether or not they are going to be viable. So I would urge
careful consideration of those comments.
Secretary Yellen. I understand, and we will.
Senator Coons. Let me conclude, if I could, with an issue I
think of real interest to both of us, which is financial
inclusion, and the development of a national strategy. Too many
Americans still lack access to basic financial services, and
those with access are unable to effectively reap the benefits
of access to financial services.
This is something the financial services, and some of the
consumer advocacy groups in my State have long been passionate
about. Treasury, I think, is nearing the completion of the
strategy that was required in last year's bill. It is an
opportunity to make sure Federal agencies are coordinating with
each other, with the private sector, with State and local
governments, with nonprofit groups. And Treasury will have to
keep leading in the implementation of this strategy for
financial inclusion.
What do you see as the most important steps in finalizing
and implementing your financial inclusion strategy, and how
could we be helpful in Congress?
Secretary Yellen. So you have been extremely helpful. Let
me say how much I appreciate your leadership on this issue. We
have made a lot of progress. We have been engaging in robust
public and stakeholder outreach and engagement. We have met
with over 150 stakeholder organizations, and we are hoping to
finalize these recommendations this summer.
Senator Coons. Well, thank you, Madam Secretary. We are
going to have a very busy summer finalizing some rules, some
strategy, and then moving forward with them. And I appreciate
the opportunity to partner with you across these three
important areas.
Secretary Yellen. Thank you, Senator.
Senator Manchin. [Presiding] Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Madam Secretary,
always good to see you.
Secretary Yellen. Likewise.
Senator Kennedy. Right now, in our current fiscal year, by
``our'', I mean the Federal Government, we are running about--
it looks like about a $1.1 trillion deficit; is that correct?
Secretary Yellen. About $1.6, I believe.
Senator Kennedy. $1.6 trillion? I am sorry, it is even
worse than I thought. And that of course means that we are
spending $1.6 trillion more than we are taking in, in revenues;
is that right?
Secretary Yellen. That is correct.
Senator Kennedy. Okay. And we are filling the hole by
borrowing money; is that correct?
Secretary Yellen. That is correct.
Senator Kennedy. Now, if you personally were borrowing
money, would you rather pay 5.4 percent interest or 4.4 percent
interest?
Secretary Yellen. The less, the better.
Senator Kennedy. Ma'am?
Secretary Yellen. The less, the better.
Senator Kennedy. Okay. Then why aren't you doing that with
Federal borrowing?
Secretary Yellen. Well, in Federal borrowing our objective
is to issue at least cost over time and not to try to time the
market.
Senator Kennedy. Yes. But you are timing the market, you
issued a press release back in November that you were going to
try to time the market. I mean, right now you can issue 3-month
Treasuries, these are yesterday's yields, at roughly 5.4
percent?
Secretary Yellen. Yes.
Senator Kennedy. But you could issue a 10-year Treasury
note for 4.4 percent and save--let me finish--and save the
taxpayer a lot of money. And then last November, you said--you
issued a press release you said: We are going to start
borrowing more short-term debt than we normally would. At the
beginning of 2023, our short-term debt was about 15 percent,
and last November, you said, we are going to increase that. And
now it is about 22-23 percent.
Secretary Yellen. Correct.
Senator Kennedy. You are costing the taxpayers billions.
Why are you doing that?
Secretary Yellen. So Senator, you say it costs 5.4 percent.
That is what it costs this year.
Senator Kennedy. No. That is what it cost yesterday.
Secretary Yellen. Yes. But when you issue 10-year bonds,
you are locking in the 10-year rate over 10 years, and that 10-
year rate, the reason that holders of 10-year Treasury bonds
are willing to accept a 4.3- 4.4 percent yield is because when
those same individuals could be investing at 5.4 percent they--
--
Senator Kennedy. Madam Secretary?
Secretary Yellen. No. I am sorry. I would like to----
Senator Kennedy. But Madam Secretary that is just--no
offense--that is double talk.
Secretary Yellen. It isn't double talk because----
Senator Kennedy. Here is my----
Secretary Yellen [continuing]. It is expected----
Senator Kennedy. Let me--maybe it is my fault.
Secretary Yellen [continuing]. It is expected for
interest----
Senator Kennedy. Maybe it is my fault.
Secretary Yellen. No----
Senator Kennedy. Today, you can borrow for 3 months at 5.4
percent, but instead you are choosing----
Strike that.
Today you can borrow for 10 years at 4.4 percent; instead
you are choosing to borrow at 5.4 percent.
Secretary Yellen. Market participants believe that----
Senator Kennedy. That makes no sense.
Secretary Yellen. Market participants believe that short-
term interest rates will come down, and they will come down to
a level substantially below----
Senator Kennedy. So you are trying to time the market?
Secretary Yellen [continuing]. The current 10-year rate,
and so----
Senator Kennedy. You are trying to time the market?
Secretary Yellen. No, it isn't a question of timing the
market. It is, we issue across the curve in a regular and
predictable way----
Senator Kennedy. Well, you know--you announced last
November----
Secretary Yellen [continuing]. And the reason that we----
Senator Kennedy [continuing]. You announced last November,
I can show you the press release, where you said that: We have
decided to start issue--start issuing an inordinately large
amount of short-term debt; didn't you?
Secretary Yellen. We did make an announcement of that.
Senator Kennedy. And because of the inverted yield curve,
that means that you are going to pay more in interest on short-
term debt than, say, 10-year debt.
Secretary Yellen. Only for a short time.
Senator Kennedy. Now, that is a fact. Okay, you can go
check the numbers of Treasuries yesterday. First, that costs
taxpayers a lot more money in interest. And number two, you are
working at cross purposes with the Federal Reserve, because
what you are doing is stimulating the market. You are pumping
money into the economy, and Jay Powell is over here beavering
away trying to reduce inflation. And you are beavering away
trying to increase it by paying an interest rate----
Secretary Yellen. There is nothing that we are doing that
is----
Senator Kennedy [continuing]. That is 100 basis points
higher than you would have to pay. And the only way I can--
reason I can figure that you all are doing that is, is to try
to give the economy a sugar high, 5 months before an election.
Why else would anybody want to borrow at 5 percent when you can
borrow at 4 percent?
Secretary Yellen. Well, there is a good reason that
investors are willing to accept just over 4 percent on a 10-
year Treasury bond when they can earn 5.4 percent on a 1-year
Treasury bill.
Senator Kennedy. I am not worried about the investor.
Secretary Yellen. Well, the same----
Senator Kennedy. I am worried about the investor. I am
worried about the taxpayer.
Secretary Yellen [continuing]. It is the same--it is the
same market----
Senator Kennedy. Okay. And let me ask you again, because I
am going to run out of time and you--look, you are smarter than
me. I know that. But I can grasp this concept. You are
borrowing at 5 percent when you could borrow at 4 percent to
deficit spend.
Secretary Yellen. If I borrow at--if I----
Senator Kennedy. And it makes absolutely no sense to me why
you would do----
Secretary Yellen. I am sorry. If I borrow--the reason is--
--
Senator Kennedy [continuing]. Other than to try to
artificially stimulate the economy----
Secretary Yellen. If I borrow at 4 percent----
Senator Kennedy [continuing]. And help Joe Biden get
reelected.
Secretary Yellen [continuing]. If I borrow at 4.5 I am
locking in that cost over 10 years. If I borrow----
Senator Kennedy. But you just said you weren't trying to
time the market.
Secretary Yellen [continuing]. Well it----
Senator Kennedy. You are just trying to time the market.
Secretary Yellen. It isn't trying to time the market,
because this is something that is a regular part of our policy.
When short-term rates are high, and long-term rates are lower,
the reason for that is that market participants expect short
rates to go down. And they expect them to decline over 10
years, to substantially under 4.5 percent, so even if we pay
more this year than it would cost to borrow at a 10-year rate
of 4.5 percent the expected cost over the 10-year life of that
borrowing can be the same or less than it would be if we issued
a 10-year note.
Now, we are not trying to time the market we have a policy
that we want to hold the issuance of short-term bills in line
with recommendations of the Treasury Borrowing Advisory
Committee, and if----
Senator Kennedy. May I say something now? Madam Secretary,
I am going to say it again, you are a lot smarter than me, but
my mama didn't raise a fool and if she did it was one of my
brothers. And what you are doing, you know it and I know it,
and all those people sitting behind you know it, you are paying
5 percent to borrow money when you could pay 4 percent to
borrow money. You announced you were going to do that back in
November 2023. You are working cross purposes with Jay Powell.
Secretary Yellen. We are not working at----
Senator Kennedy. And the reason you are doing this, the
reason you are doing this is try to give the economy a sugar
high 5 months before an election. Now, you know that and I know
that.
Secretary Yellen. There is nothing about issuing short-term
debt that creates a sugar high----
Senator Manchin. Senator?
Senator Kennedy. I am out of time.
Secretary Yellen [continuing]. For the economy.
Senator Kennedy. Well, my Chairman says I am out of time.
It is good to see you.
Senator Manchin. He is such affable--he is just very nice.
Madam, I am going to continue with the questioning now, if
I may. I am going to go ahead and start. But anyway it is good
to have you. Thank you for your service.
And first of all, I want to talk about the Bureau of Fiscal
Service, as far as the office in Parkersburg, West Virginia.
Okay. The employees are not coming back to work. Now, Senator
Romney and I have introduced a piece of legislation that would
say that at least 60 percent of the time they have to be in
their office at work, okay, and I think that basically, a
relatively small increase above the 50 percent mark mandated by
the Office of Management and Budget, OMB.
I don't know if you know this or not, but that office in
Parkersburg, West Virginia, the people only have to be there 2
days a pay period. Two days a pay period. What they end up
doing: they come at the end of the first pay period, stay 2
days, the beginning of the second pay period, stay 2 days.
There are 4 days out of a total of two pay periods. It is
ridiculous, absolutely ridiculous. And it is destroying the
economy, and the people that should be coming to work. They are
living anywhere, and they fly in.
And this has got to stop. And you have to stop it, Madam
Secretary, because it is not going to happen unless you clamp
down tight. The rules from OMB say, at least 50 percent, we
will accept 50 percent. At least they are getting 10 days out
of 20. Okay?
Secretary Yellen. I appreciate the problem that this is
causing, and I know that you have written a letter to Treasury
and that is----
Senator Manchin. Well, we have specifics now we can help
you all with. And now my next round is going to be--I want to
be as respectful as I can, because I totally disagree with what
you all are implementing the EV credits.
Secretary Yellen. The?
Senator Manchin. The EV credits, electric vehicle credits,
I know that because we wrote the bill, my Committee wrote the
bill completely.
Secretary Yellen. I know.
Senator Manchin. And we wrote the intent of the bill. We
have all the findings of what we did and how we did it. But let
me just show this right here, Madam Secretary.
[Chart display on poster board:]
Senator Manchin. The Bill was very much written so that we
would bring America back, bring manufacturing back to America,
that we would not be relying, we would not be relying on
unreliable supply chains, especially four countries of concern:
China, Russia, Iran, and North Korea. And as we know, Russia
has--I mean China has dominated the critical minerals industry.
But here is what you all have done, your permanent rules,
these are your permanent rules, it came from you all, this is
how we wrote the Bill, it is in the Bill specifically. First
year, 2023, 40 percent; and you all cut it in half to 20.
Secretary Yellen. I am sorry. I can't see that.
Senator Manchin. Okay. This is, here, this is 40 percent.
Let us get it closer.
Secretary Yellen. What are you----
Senator Manchin. Let us get closer. Let us get it up here
closer. You can see how it does, okay, first year, second year,
third year, you have cut everything in half, everything in
half. It makes no sense, because you are going to get sued on
all of this from people who have been damaged. The
manufacturers that are investing money that thought that they
would not be inundated with lower prices and unfair
competition, especially from China. You have given them a--you
have given the ability to come after them now. Okay? You can
see this all the way through.
Secretary Yellen. So why do you think we have cut this in
half? You are talking about the----
Senator Manchin. This is your rule.
Secretary Yellen [continuing]. The requirements from----
Senator Manchin. The requirements of what should be from--
--
Secretary Yellen [continuing]. Batteries and battery
components and for minerals----
Senator Manchin. Processing, mineral sourcing, and
processing. You have even tried to change the definition of
processing, to where some of the manufacturing can be done and
considered in processing. You have done that, we have all of
that. The only thing I am trying to show, and to be very
respectful, you are going to be sued. And we are going to do an
amicus brief, to help the people that are suing you.
Because this is how we wrote the Bill, we wanted it to be
America. We wanted it to be with Free Trade Agreement
countries. We wanted not to be relying on China. This
absolutely allows China in the market and staying in the market
for the entire extent of the IRA.
Secretary Yellen. I am sorry, you know, we put out the FEOC
restrictions that pertain to China, and those restrictions mean
that this year you can't have battery components that are made
in China, and next year a vehicle can----
Senator Manchin. Why cut it in half then? Why did you cut
it in half?
Secretary Yellen. Cut what?
Senator Manchin. You cut basically requirement of how much
had to come from where. This had to come from America Free
Trade Agreements, this can come from non-free, anywhere else in
the world, this is what is happening. I can go into it in
detail, but this is--I have been raising absolutely ``holy
Cain'' from day one.
Now, we wrote the IRA as a very balanced Bill to have
energy, as far as basically--if we are going to basically
change our entire transportation mode, it is the first time in
the history of the United States of America we cannot,
basically, provide all the components for a transportation
mode. We are willing to be relying on, especially, of China
which had a total lock on the EVs.
Secretary Yellen. We share the objective that you have
which is to rid ourselves of dependence on China, and I----
Senator Manchin. You and your staff changed this in half,
and I would say----
Secretary Yellen. I am not sure. I am not sure--I think we
need to have a technical discussion on this, because----
Senator Manchin. We have been calling you about it. Did
anybody here--did any of you all work on this?
Secretary Yellen [continuing]. Because I believe that the
rules we wrote are in accord with what is in the statute that
we have acquired----
Senator Manchin. And again, I want to be--I am trying to be
as respectful as I can, they absolutely are not, and I am
encouraging every manufacturer to sue you.
Secretary Yellen. Well the----
Senator Manchin. And I will do the amicus brief on their
behalf and we will show you exactly how we wrote the Bill, the
intent of the Bill. And you will lose every suit. I know that.
So in order to avoid all of that: Why can't we just basically
implement the Bill the way it was written? And I have said
this, you all, and basically the administration, and these are
people I have known forever, you are trying to implement a Bill
you never passed. This is not the BBB, this is the IRA.
Secretary Yellen. Well, we share the objective that you had
in writing the Bill.
Senator Manchin. I know----
Secretary Yellen. And I believe we have implemented it in
accordance with the--what is in the law.
Senator Manchin. Let us go one step further, if I may.
Senator Coon is based on the Hydrogen Hub. Okay. Now, let me
explain to you. The Hydrogen Hub, we wrote that in the
Bipartisan Infrastructure Bill, and then we came back and
funded it in the IRA. This is how we wrote. This is how we
wrote the Bill, this is how we wrote it, and we are happy to
share all this with you. I think, hopefully, some of your staff
knows this.
Where did additionality come in? Where did time matching
come in? Where did regionality come in? Who made that up?
Secretary Yellen. Well----
Senator Manchin. We never had one iota of a word in that
written, and we wrote the Bill. But then all of a sudden these
are the conditions to get the credits. Now with that, where is
the other one, let me show you this one.
[Chart display on poster board:]
Senator Manchin. This is from the seven hubs, every one of
the hubs have written to you all. Now, can you have the
California Hub and a West Virginia Hub that agree? Something is
wrong. We must be on the right track. But you all, every hub to
agree said, it is no longer commercially viable if you do what
you are doing, the implementation of the Hydrogen Rules. This
is what we are dealing with, it is killing us. We shouldn't be
fighting within ourselves.
Just implement, write the rules the way the Bill was
intended to write, we wrote it.
Secretary Yellen. Well, the Hydrogen Rule has to abide by
the Clean Air Act definition of lifecycle, emissions----
Senator Manchin. And the whole thing is basically----
Secretary Yellen [continuing]. And that means taking
account of indirect emissions, which is where the complications
come into play.
Senator Manchin. The complication is, that this
administration doesn't want anything that comes out of the
ground. I am fighting them tooth and nail. We are producing
more energy than ever in the history of the United States of
America. If it wasn't for that, your inflation would be sky
high, prices of gas would be at $5, and what we are doing,
because we are using blue hydrogen, is where they are going
nuts on. That is it. But you are going to have to have it in
this mix or we will not be energy independent.
Secretary Yellen. We recognize that there is an issue with
respect to the hydrogen hubs, and we have asked explicitly, in
the guidance we put out, how people suggest addressing it, and
we are reviewing the comments and----
Senator Manchin. And I am out of time. But I would love to
sit down. We were trying to give you the benefit of the doubt
and so many things, trying to work with you, but it just seems
that is impossible because they are hell-bent on implementing
things that were never intended in the Bill, and were not
written in the IRA or any of the Bipartisan Infrastructure
Bill. And we are going to continue to fight to make sure that
they can confirm----
Secretary Yellen. Well, I would like to have a----
Senator Manchin. We will be happy to do that.
Secretary Yellen[continuing]: Understand why you think we
have halved.
Senator Manchin. Well, we can definitely show you word by
word. And I hope that whoever is in this audience with you
right now, or whoever wrote some of these things, I would like
to have them in the room too.
Secretary Yellen. Yes. I agree.
Senator Manchin. All right. I am sorry.
Senator Van Hollen. Madam Secretary, I apologize. I had to
leave to chair a--to join a hearing with FBI Director Wray. It
is good to be back.
And I recognize the Chair of the Full Committee, Senator
Murray.
Senator Murray. Thank you very much, Chair Van Hollen.
Thank you, Secretary Yellen, for joining us. We all know
that Treasury plays a pretty crucial role keeping our economy
strong and stable, and strengthening our families' financial
security as well, and it plays an indispensable role in keeping
our country safe. That is why I have been insisting that we
find a solution to address the extremely tight spending caps we
are facing, and that any increase in defense spending is at
least matched by a much-needed boost in domestic priorities
here at home.
For starters, Treasury is responsible for absolutely vital
sanctions enforcement work to choke off funds to our
adversaries like Russia, and Iran, not to mention drug cartels
and traffickers. It also regulates banks to keep our economy
sound, protect our families, and prevent Main Street from
paying for Wall Street's mistakes.
So I want you to know I am going to keep working with my
colleagues to underscore the need to increase vital nondefense
resources at Treasury and so many other agencies.
So with that, I do have some questions for you. I wanted to
ask you about the Inflation Reduction Act, invested significant
resources in the IRS to improve and modernize the Agency, and
we have seen immediate benefits like call-wait times decreasing
from 28 minutes to 3 minutes, new enforcement initiatives to
ensure large corporations and their ultra-wealthy are paying
their fair share, and new tools like the Direct File, which has
made it easier than ever for people to file their taxes, and
get their refunds.
Nearly 14,000 people in Washington State used Direct File
for their taxes this year, and I am really excited that the IRS
is going to be expanding it to all 50 states next year. It is
paramount we preserve these achievements through the annual
appropriations process now. So I want to ask you, how does the
fiscal year 2025 budget request build upon the success of IRA
investments?
Secretary Yellen. Well, Direct File was made possible by
resources in the Inflation Reduction Act. They enabled us to
invest in the IRS and deliver world-class service and develop
the Direct File. And we intend to continue using those
resources to support Direct File. We have recently decided to
make it permanent, will extend to all 50 States, hopefully they
will all want to partner with IRS, and that those resources
will be critical to covering the cost.
Senator Murray. Did your budget request--does your budget
request allow--enable you to be able to expand it to all 50
States?
Secretary Yellen. Yes, in the sense the request includes
both in appropriation, annual appropriations, and also an
increase in mandatory funding for the IRS, and that combination
would enable us to do that.
Senator Murray. Okay. Very good. The Inflation Reduction
Act has tasked the Treasury Department with an indispensable
role in fighting the climate crisis. That law included a suite
of clean energy tax credits, including the 45V for the
production of clean hydrogen. Now, unfortunately, your proposed
45V Rulemaking has thrown up some major roadblocks which a vast
coalition, including States, industry, labor, have made very
clear they are not workable.
Washington State is home to one of the cleanest grids and
some of the strongest State climate legislation in the country,
and is already seeing some of the investments put on hold as a
result of the proposed rule. It is no exaggeration to say that
getting this rulemaking right may deliver tens of thousands of
high-wage jobs while reducing emissions.
So I want to ask you, how you plan to address the concerns
you are hearing and make sure that the final 45V Rule helps
rather than hinders the development of clean hydrogen projects?
Secretary Yellen. Thank you for that question. We have
heard a great deal of input on the issue of hydrogen hubs. We
asked for input when we issued proposed regulations on how we
could identify circumstances where there is minimal risk of
significant induced grid emissions, and one of the issues there
is how to take account of State policies. So we have received
input, and we are going to take that input into account as we
revise the regulation.
Senator Murray. Okay. So can you assure me when the final
regulation comes out, we will see a better regulation to make
sure our States can actually use these investments?
Secretary Yellen. We will certainly try to address this
issue.
Senator Murray. Okay. I will look forward to seeing that.
It is really critical for our hydrogen Hub.
Secretary Yellen. I hear you.
Senator Murray. Two years ago, I helped pass a sweeping
Bipartisan Retirement Bill, SECURE 2.0 Act. It is really
important to me that Americans can retire with dignity. So I
want to thank you for Treasury's guidance on the emergency
savings. I know stakeholders are anxiously awaiting further
guidance on provisions like the student loan match. Do you have
at Treasury sufficient resources to implement these popular
bipartisan measures?
Secretary Yellen. Yes, we do. And we appreciate the support
that you provided us this fiscal year, and we don't need
additional resources. This is something we are going to get
done.
Senator Murray. Okay. Very good. And finally, in the
American Rescue Plan, Democrats expanded the Child Tax Credit
and lifted 5.3 million people out of poverty. That expansion
nearly cut child poverty rates in half from the previous year,
but that progress is being reversed with the expiration now of
the CTC.
I helped reintroduce that, Childcare Tax Credit, which
would expand and make it permanent. Can you talk about the
immediate and long-term benefits expanding the CTC would have
on working and middle-class families?
Secretary Yellen. Well, I think it would be dramatic. And
as you pointed out, in 2021 CTC is credited with having--it is
the leading driver behind a 46 percent reduction in child
poverty. There were record lows in Black, Hispanic, Native
American, and Asian, and White child poverty.
And you know, beyond the immediate reduction in child
poverty, research also suggests that this kind of income
support brings long-term gains in children's health, education,
and earnings. So I think this is something that can have a
profound effect on children and their well-being and futures.
Senator Murray. Talk a little bit about how the President's
budget request addresses child poverty?
Secretary Yellen. Well, the President has requested in this
budget request to expand the Child Tax Credit and to make
permanent full refundability and also advanceability. So we
certainly would like to see the amounts increased and full
refundability.
Senator Murray. Okay. I really appreciate it. Thank you
very much.
And thank you, Mr. Chairman.
Senator Van Hollen. Thank you, Madam Chair.
And now we will hear from the Vice Chair of the Full
Appropriations Committee, Senator Collins.
Senator Collins. Thank you very much, Mr. Chairman.
Welcome, Madam Secretary.
Secretary Yellen. Thank you, Senator.
Senator Collins. The IRS is relying on automation very
heavily to answer taxpayers' questions. This filing season,
about half of the callers received an automated response, while
the other half were able to speak with a customer service
representative. Now, I understand that there are certain
taxpayer service functions that can be automated, and that can
be an efficient and good way to serve the customer. But many
taxpayers want to have contact with a live person, want to not
deal with going through a menu trying to figure it out, or they
may have a more complex system.
So how can the IRS increase the availability of customer
service representatives to those taxpayers who want to speak
with someone rather than go through a complicated menu that may
not answer their question?
Secretary Yellen. So I will confess, I am not sure exactly
how people are routed when they call the main number. But what
I can tell you is that the amount of resources, the number of
customer service representatives, and the service that has been
achieved through the IRA investments, many, many people--more
people are reaching live operators who answer their questions.
Call wait times have declined, on average, to 3 minutes.
And a standard metric that IRS uses, the level of service,
increased above 85 percent, which is just a vast improvement
from where we were 2 years ago. Taxpayer assistance centers are
being staffed. There is a great deal more available in terms of
customer service. You know, I am not positive just what happens
when people reach an automated thing, but I can look into that.
Senator Collins. Thank you. I would appreciate that. Let me
bring up a related issue. As of May 5, the IRS expects its
employees to return to the office for half of all their
workdays. My first question would be, why only half?
Secretary Yellen. Well, you know, the guidelines that we
have put in effect for all Treasury employees, including IRS,
conform with OMB and Administration guidance, which is half.
Now, in many cases, and this certainly applies to IRS
employees, I mean, what is required for many people is to be
there full time. And this is true for large numbers of IRS
employees.
It is true for our employees who work in the Bureau of
Engraving, and Printing, and for the mint and manufacturing
processes. So this differs. It is only half, if that is
something that is compatible with getting the job done. So our
guidance throughout Treasury employees is, we need to see what
is necessary to effectively serve the American public. And only
when telework is compatible with that, is it permitted.
Senator Collins. Well, I looked at the latest data from the
Treasury Inspector General for Tax Administration, and the
Inspector General found that IRS employees teleworked 22
percent of the time, worked in person 37 percent of the time,
and engaged in some sort of hybrid work 40 percent of the time,
on average, during the first quarter of the fiscal year.
So I am trying to reconcile the data that is reported by
the Inspector General to the IRS's goal of having its employees
work half of their workdays in the office. It seems to me that
the Inspector General found that they are not working half of
their workdays in the office.
Secretary Yellen. Your Honor, some of the employees are
covered by collective bargaining agreements. They are members
of the Union. And to enforce those rules requires an agreement
with the Union.
Senator Collins. Let me just ask you one final question.
And let me suggest that I think those contracts need to be
renegotiated with the taxpayers' interest in mind.
Secretary Yellen. Agreed.
Senator Collins. Let me ask you about the Main Treasury
Building. It has been identified as an underutilized building
by the GAO in July. And I apologize if this has already been
brought up by anyone. By GAO's estimate, less than 50 percent
of the usable space was being utilized.
Now, I understand that is an historic building, and that
may limit--that may pose some challenges to using the entire
building. But it concerns me that we are paying for a costly
building if it is being so dramatically underutilized, when
less than half of the building is being utilized. Is that due
to the fact that people are working from home? Does the
Treasury Department need to downsspace its offices, or bring
more people back? What are your comments on that?
Secretary Yellen. We are looking at our space requirements
carefully. There are some programs that are growing and need
more space, and some that need less. I believe that we have, as
the leases expired, I need to get back to you with the details.
But have relinquished one Treasury building, the Main Treasury
Building, I am not aware. My impression was that it was fully
utilized, but I will get back to you with details on that.
We are certainly looking at our space needs, but it is not
simple because there are programs that are growing, while
others are shrinking, their needs are shrinking.
Senator Collins. Thank you. Thank you, Mr. Chairman.
Senator Van Hollen. Thank you, Madam Vice Chair.
And Madam Secretary, I have a few more questions here that
I would like to get to. We talked a little bit earlier about
your ongoing efforts to implement the REPO Act, the Rebuilding
Economic Prosperity and Opportunity for Ukrainians Act, using
some of the Russian assets to help the people of Ukraine. Could
you just update the Committee on where that effort stands in
discussions with our partners, with the G7, and elsewhere?
Secretary Yellen. Yes. Well, I personally believe that it
is necessary and urgent for our International Coalition to find
a way to unlock the economic value of those immobilized Russian
Sovereign assets to support Ukraine. And the REPO Act was an
important step. It enables us to do a whole variety of useful
things. We want to work, if possible, and I believe it is
possible, with our partners in the G7 and the European Union to
settle on a coordinated way to unlock the value of these
assets.
And the G7 leaders will be meeting in June, in just a
couple of weeks, in Apulia, in Italy, and we are working
together to try to find a way forward. Now, the European Union
has taken a very important step. That there are substantial
assets at Euroclear, which the assets are frozen, they are
Russian sovereign assets.
Euroclear is earning interest on these assets. It doesn't
belong to Russia, and it had been accruing to Euroclear. And
the European Union has now taken action to take that, it is
called the windfall profits, and to dedicate most of it for
Ukraine. So that is a flow that amounts to somewhere in the $3-
to $5 billion range per year, and will accrue as long as they
remain immobilized.
We have been discussing the possibility of giving Ukraine,
the G7, a loan and allowing the windfall, this flow of windfall
profits to be used to pay off those--the loans that would be
given. And this is an approach that seems to be commanding
considerable support, so we are hopeful that this can be worked
into something to be presented to the leaders at the G7, the
upcoming G7 Meeting.
Senator Van Hollen. Well, I want to commend you and the
Deputy Secretary, and others, on coming up with these creative,
innovative proposals.
Secretary Yellen. Thank you.
Senator Van Hollen. To garner the support of other
countries that we need to work with as part of this effort.
Another ongoing effort, as you know, which was launched a
number of years ago now, was to put a price cap on Russian oil
in order to reduce Russian oil revenues, overall, without
impacting the global market price for oil. Those efforts have
been, I think, somewhat successful. I think there is room for
improvement. But could you provide a very brief update on where
that effort stands?
Secretary Yellen. Yes. So first year, the price cap, I
think, was very successful. We saw a 40 percent decline in the
Kremlin's oil revenues. And as you mentioned, the second goal
is to keep the market well supplied. Russia continued to sell
oil. Now, Russia was able, after that, to build up a fleet, a
so-called shadow fleet, and to find ways, often, to provide
services like insurance that Western--had been provided by
Western companies. And by providing those services, they were
able to continue selling oil, particularly to India and China.
This was a considerable expense for Russia to have to do
that. And there remains a significant discount on Russian oil.
So essentially, although the oil continues to be sold, we
forced Russia to make a hard choice, either abide by the cap
and sell at a very low price, or invest massively resources,
drawing money away from the war effort.
One estimate is that Russia has to pay $36 a barrel to
actually export a barrel of oil. So even if they are getting
more than the $6 price cap, their expenses are considerable.
Recently, their top oil official, the Deputy Prime
Minister, attested that price cap enforcement, which we have
made stricter recently, has been costly to Russian energy
exports and is driving down their profits. So we do have the
Russians saying that they are being harmed by this. We have
upped our sanctions activity. We sanctioned Russia's largest
shipping company with required stricter enforcement by Western
service providers that they are abiding by the price cap, and
those steps seem to be effective.
So I would describe the price cap as continuing to be
somewhat effective at limiting Russia's revenue, and that
includes driving up their expenses to sell this oil.
Senator Van Hollen. Thank you, Madam Secretary. I also have
one question, which I think will be a simple yes or no. But
there is a lot of misinformation going around with respect to
the Biden administration's effort to use some of the resources
from the Inflation Reduction Act to go after only very high-
end, very wealthy people who have not paid their taxes that are
due and owing.
So I just want to confirm for the record that your
direction to the IRS was that audit rates are not to increase
relative to historic levels for small businesses or households
earning less than $400,000 a year.
Secretary Yellen. That was my directive, and Commissioner
Werfel has committed that he will not increase audit rates for
families earning under $400,000 or small business taxpayers,
they will not rise above 2018 levels.
Senator Van Hollen. And does the administration have any
future plans to alter that very clear direction?
Secretary Yellen. No. That the resources are intended to go
after wealthy individuals who are not meeting their tax
responsibilities, complex partnerships, and corporations, which
is where most of the tax gap is estimated to originate.
Senator Van Hollen. Well, thank you for that. I do have one
final area that I just want to convey some thoughts about, and
then maybe you and your team can get back to me later.
Secretary Yellen. Sure.
Senator Van Hollen. I want to applaud you and the Biden
Administration for issuing the executive order on imposing
certain sanctions on persons undermining peace, security, and
stability in the West Bank. This was the executive order issued
by the President, February 1st of 2024.
The Chairman of three committees with jurisdiction over
this area, Senator Cardin on the Foreign Relations Committee,
Senator Reed, Armed Services Committee; Senator Warner on the
Intelligence Committee, have all written to the administration
commending this action and urging you, and the President, and
the Secretary of State to consider further actions with respect
to addressing extremist settler violence on the West Bank,
which, as you know, has created a very, very dangerous and
combustible situation. ``Combustible'' is actually not the
right word because it is already combusting.
And I really hope that the administration will use its
authorities to send very clear signals as to what is acceptable
and what is not.
In that regard, though, I would just bring to your
attention a New York Times Magazine piece from May 16. It is
the cover story. It goes into great detail, not only about
extremist settler violence but the conditions under this very
extreme Netanyahu Government that have allowed a lot of that
violence to continue.
And it especially talks about the actions of Mr. Smotrich,
who wears two hats; one is as the Minister of Finance, where as
you know, he has really tried to prevent the Palestinian
Authority's own tax revenues that are collected by Israel from
being returned to the Palestinian Authority. Thank you for your
efforts to keep the pressure on, because that just creates more
and more instability.
The PA, as you know, actually works with the United States
and Israel on security cooperation, among other things, and so
undermining and under--and unfunding them obviously creates an
even more unstable situation. But in addition to that, that hat
that he wears as Minister of Finance, Smotrich also has a very
important portfolio overseeing the West Bank.
And in this New York Times Magazine piece, which, by the
way, was written by two veteran investigative reporters,
including an Israeli investigative reporter, it says, and I
quote, ``One document describes a meeting in March when Major
General Yehuda Fox, the Head of Israel's Central Command
responsible for the West Bank, gave a withering account of
efforts by Bezalel Smotrich, an ultra-right leader and the
official in Prime Minister Benjamin Netanyahu's Government with
oversight over the West Bank, to undermine law enforcement in
the occupied territory.''
''Since Smotrich took office'', Fox wrote, again Fox is
with the IDF of Central Command; ``Since Smotrich took
office'', Fox wrote, ``The effort to clamp down on illegal
settlement construction has dwindled 'to the point where it has
disappeared'''; unquote. ``Moreover'', Fox said, ``Smotrich and
his allies were thwarting the very measures to enforce the law
that the Government had promised Israeli courts it would
take.''
So Madam Secretary, my point is this, as I read this
executive order, and what actions qualify to be sanctioned, it
says: Those covered actions include directing, enacting,
implementing, enforcing, or failing to enforce policies that
threaten the peace, security, or stability of the West Bank.
And by my reading, Mr. Smotrich's actions clearly meet that
definition and that test.
So I would urge the administration to consider imposing
these sanctions on Mr. Smotrich. I think it is the right thing
to do to send a signal that the kind of instability that he is
creating both through his efforts to cut off all funding to the
PA, and I will say that he said in a letter to Prime Minister
Netanyahu, with respect to the Palestinian Authority, this a
quote, ``We must bring about its downfall.'' That is in direct
contradiction and violation of U.S. policy, and at least my
understanding of the policy of the Government of Israel.
And yet you have this individual taking those actions
against the Palestinian Authority, which the President,
President Biden, of course, has seen as a partner in a
Government once we get the hostages freed, and bring about a
ceasefire in Gaza, as a partner with respect to governance in
Gaza.
So I would suggest that these actions he is taking, both to
quote, ``Dismantle the PA,'' as well as to encourage and enable
extremist settler violence and the expansion of settlements
that are deemed illegal under even Israeli law, it seems to me
it is an action that the administration should consider. And I
would recommend it taking.
I don't expect an answer today, but I would, Madam
Secretary, ask you for your commitment to meet with me and my
team to talk about this issue.
Secretary Yellen. I would be glad to do that. And let me
say, we share your concerns about what is happening in the West
Bank. As you mentioned, we have taken some actions. I have been
very disturbed about the withholding of these revenues. And I
think it was week before last, our G7 Finance Ministers
meeting, our communique expressed joint concerns about this.
I have written a letter to Prime Minister Netanyahu
expressing my concerns about this, and the general
deterioration of economic conditions in the West Bank. And I
would be glad to have follow-up conversations with you and your
staff on this matter.
But please know that we are also deeply, deeply concerned
by, and disturbed by what is happening here.
Senator Van Hollen. Thank you, Madam Secretary. I have been
following and appreciate the efforts you have taken, and look
forward to continuing to work with you and your team on this.
Thank you, of course, for being here today.
ADDITIONAL COMMITTEE QUESTIONS
[The following questions were not asked at the hearing, but
were submitted to the agencies for response subsequent to the
hearing:]
Questions Submitted to The Honorable Janet L. Yellen Secretary of the
Treasury
Questions Submitted by Senator Patty Murray
Question 1. Native communities have some of the highest barriers to
accessing capital and financial services. In Washington state, Native
Community Development Financial Institutions play a major role in
supporting Native-owned small businesses and economic growth in Tribal
communities. How does the President's fiscal year 2025 budget request
support economic development in Tribal communities?
Answer. Treasury works on Tribal economic development matters
through its Office of Tribal and Native Affairs (OTNA), the Community
Development Financial Institutions (CDFI) Fund, and the State Small
Business Credit Initiative (SSBCI). OTNA advises on Treasury's programs
and policies that have Tribal implications and manages the Department's
Tribal consultation process. This includes work on Tribal tax matters
and the $30 billion in Tribal recovery set-asides.
For fiscal year 2025, Treasury has requested approximately $1.6
million to fund staff positions. For the CDFI Fund, the President's
Fiscal Year 2025 budget request supports economic development in Tribal
communities by including a $25 million request for the Native American
CDFI Assistance (NACA) Program. The NACA Program provides two types of
monetary awards--Financial Assistance (FA) awards and Technical
Assistance (TA) grants. Native CDFIs lend where other mainstream
financial institutions do not and often serve the most financially
distressed individuals, families, and businesses in Native communities.
In addition, the NACA Program provides training to increase the
capacity and expertise of Native CDFIs. Further, Native CDFIs are
eligible to apply for and receive awards from other CDFI Fund-
administered programs that are included in the President's Fiscal Year
2025 budget request.
On SSBCI, the majority of Tribal SSBCI capital program applications
have been approved as of October 2024. These approvals correspond to a
majority of funding available to Tribes, with up to $522 million for
234 Tribes approved as of October 11, 2024. The SSBCI program is now
refocusing resources from Tribal application support to Tribal program
implementation. Tribal governments have been supported by robust
outreach staffing on the SSBCI team. SSBCI is offering a combination of
in-person and virtual meetings to Tribal governments to explain
possibilities with the program, identify hurdles, answer questions from
Tribal governments and partners, and convene financial institutions
that are critical to the success of Tribal SSBCI. Earlier this year,
Treasury and the Federal Reserve co-hosted the first Tribal SSBCI
conference, and several Tribal governments attended the SSBCI Midwest
regional conference at the Federal Reserve Bank of Kansas City.
Question 2. In response to a Government Accountability Office (GAO)
report (GAO-12-560) in 2013, the IRS identified more than 15.6 million
taxpayers who did not seem to be claiming the American Opportunity Tax
Credit or Lifetime Learning Credit despite having received a 1098-T,
Tuition Statement. Updated information would be helpful to the
Committee in determining the efficacy of IRS outreach to these
taxpayers. For each of the previous five tax years, including tax year
2023, please provide an estimate of the total number of tax filers who
received a Form 1098-T and A) filed taxes and/or B) had an associated
Form 8863, Education Credits (American Opportunity and Lifetime
Learning Credits), respectively.
Answer. Eligible educational institutions must file a Form 1098-T
for each student they enroll and for whom a reportable transaction is
made. Not all students receive a Form 1098-T. A Form 1098-T does not
need to be filed for:
--Courses for which no academic credit is offered, even if the
student is otherwise enrolled in a degree program;
--Nonresident alien students, unless requested by the student;
--Students whose qualified tuition and related expenses are entirely
waived or paid entirely with scholarships administered by the
school; and
--Students for whom the institution does not maintain a separate
financial account and whose qualified tuition and related
expenses are covered by a formal billing arrangement between
the institution and the student's employer or a governmental
entity, such as the Department of Veterans Affairs or the
Department of Defense.
There are three main reasons why a taxpayer who has a student who
receives a Form 1098-T does not claim an education credit. First, not
all Form 1098-T recipients are in tax units that are eligible for an
education credit. For example, the American Opportunity Tax Credit
(AOTC) is allowed only for the first 4 years of postsecondary education
and is allowed for a tax year only if the student is enrolled at least
half time for at least one academic period beginning in the tax year.
In addition, tax units whose modified adjusted gross income (modified
AGI) exceeds certain amounts may not claim education credits.\1\
Second, students who receive a Form 1098-T whose tax units are eligible
only for a nonrefundable education credit may not have enough tax
liability to use a nonrefundable credit, and thus the tax unit may
choose to not file Form 8863. Third, the student may have additional
scholarship income in excess of their eligible expenses or be paying
their eligible expenses with tax preferred savings.\2\
---------------------------------------------------------------------------
\1\ The AOTC may not be claimed if the tax unit's modified AGI is
more than $90,000 ($180,000 in the case of a married couple filing a
joint return). For tax year 2019, the Lifetime Learning Credit (LLC)
could not be claimed if the tax unit's modified AGI was more than
$68,000 ($136,000 in the case of a married couple filing a joint
return). For tax year 2020, the LLC could not be claimed if the tax
unit's modified AGI is more than $69,000 ($138,000 in the case of a
married couple filing a joint return). For tax years 2021-2023, the LLC
could not be claimed if the tax unit's modified AGI was more than
$90,000 ($180,000 in the case of a married couple filing a joint
return).
\2\ Generally, any given dollar of educational expenses may receive
at most one tax preference (no ``double dipping'').
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Question 3. Please summarize recent IRS activities within the last
three tax years to identify taxpayers potentially eligible for the
education credits, or students in higher education who could benefit
---------------------------------------------------------------------------
from tax filing, and to conduct outreach to these populations.
Answer. The Internal Revenue Service (IRS) regularly conducts
studies on how to improve the participation rate for refundable
credits. The IRS also partnered with the U.S. General Service
Administration and a four-year public university to learn about
effective communication strategies to increase uptake of the American
Opportunity Tax Credit (AOTC). Also, the IRS understands the important
role tax professionals play in assisting taxpayers claim refundable
credits for which they are eligible. Therefore, the IRS strategy
entails outreach to tax professionals because of their significant
influence on taxpayer uptake. The IRS's outreach efforts to tax
professionals include the annual IRS Nationwide Tax Forum (NTF), which
is held in five cities over the summer, where sessions are conducted on
refundable credits eligibility requirements, including education
credits. The IRS also conducts similar seminars at the annual Latino
Tax Festival (LTF) to help expand its outreach to Hispanic communities.
Furthermore, during the 2024 NTF and LTF, the IRS hosted focus group
sessions with tax professionals on ways to increase the use of
refundable credits. The findings from these sessions may help the IRS
identify additional populations that may be eligible for education
credits.
The IRS conducts webinars, symposia, and working group sessions on
refundable credits with tax professionals and other stakeholders. At
the start of the filing season, the IRS conducts a webinar on
refundable credits to provide tax professionals with information they
need to assist their clients claim education credits. The IRS hosts
`Back-to-School' symposia to encourage our outreach partners to promote
education credits. The IRS meets with stakeholders and external
organizations through quarterly working group sessions to relate
current refundable credit outreach activities, identify underserved
populations, share research findings, and brainstorm strategies for
improving uptake.
The IRS continues to share information about education credits with
taxpayers through traditional and new media. The IRS provides
publications to its outreach partners. The IRS also promotes the
education credits webpage on IRS.gov that provides information on
eligibility requirements, a benefits comparison chart between the AOTC
and the Lifetime Learning Credit, access to marketing publications, IRS
tax tips, and an interactive tool to help taxpayers determine whether
they are eligible for education credits. The IRS also promotes
education credits to various professional organizations.
Question 4. Please provide an update on conversations between the
U.S. Departments of the Treasury and Education regarding the
establishment of a data-sharing agreement to conduct outreach to
financial aid applicants in higher education about tax benefits for
which they may be eligible, such as the Earned Income Tax Credit, Child
Tax Credit, or education credits, as authorized under Section 483(c)(3)
of the Higher Education Act.
Answer. The IRS is always interested in partnering with Federal,
state and local agencies, including the Department of Education, to
identify and collaborate on outreach efforts to underserved
populations. The IRS maintains numerous resources directed toward
students, including Publication 970, Tax Benefits for Students, as well
as a resource center on tax benefits for education. I would refer you
to the IRS Commissioner for more information about the IRS's work to
educate taxpayers about tax benefits for which they may be eligible, as
well as its work with the Department of Education.
Question 5. Please provide an update on conversations between the
U.S. Departments of the Treasury and Education regarding the
establishment of an interagency coordination plan to increase the
application for Federal financial aid from individuals who file Federal
tax returns, as specified under Section 485E(c)(2)(A)(i) and Section
485E(c)(2)(C) of the Higher Education Act.
Answer. The IRS does not maintain a data-sharing agreement with the
Department of Education to conduct outreach to financial aid applicants
and does not have plans at this time to establish an agreement of this
type. I would refer you to the IRS Commissioner for more information
about the IRS's work with the Department of Education.
Question 6. The U.S. Department of Education has recently indicated
publicly that it has not resolved the remaining data-exchange issues in
the Free Application for Federal Student Aid (FAFSA) which prevent
students and contributors without Social Security Numbers (SSNs) from
matching their data with the IRS, thereby preventing them from directly
retrieving their tax data. Please provide an update on the timeline for
resolving this issue, including when the IRS expects full functionality
of the data-matching and data-retrieval processes for individuals
without SSNs and whether these issues will be fully resolved for the
upcoming 2025-26 FAFSA cycle.
Answer. We are aware of the prior limitations on the Department of
Education's FAFSA system for students and contributors without SSNs,
but note that Education posted a notice on August 2, 2024, that the
issue was resolved.
Update on August 2, 2024: The Department is revising this
announcement to reflect the extension of a process change that
allows those without an SSN to immediately access the online
FAFSA form after creating a StudentAid.gov account, as
announced in the July 30, 2024 electronic announcement
(GENERAL-24-95).
This issue was a limitation of the FAFSA system, not with the IRS
data retrieval or exchange process. Individuals are required to furnish
an identifying number, either an SSN or an Individual Taxpayer
Identification Number (ITIN), to file a tax return with the IRS. Each
request for tax data to the IRS must include an SSN or ITIN to retrieve
the individual's tax records. If the student or contributor does not
have an SSN or ITIN, then the IRS would not have any tax information to
provide.
______
Questions Submitted by Senator Richard Durbin
Question 1. With the passage of the Inflation Reduction Act (IRA),
Democrats provided unprecedented support for climate-smart
technologies. Through a tech-neutral, tax incentive-based approach, the
IRA has unlocked hundreds of billions of dollars in public and private
investment for wind and solar energy, heat pumps, electric vehicles,
and other energy efficient technologies. The IRA supports one of those
technologies, clean hydrogen, through the creation of the Clean
Hydrogen Production Tax Credit, also known as 45V. When produced with
power from a zero-emissions energy source--like wind, solar,
hydropower, or nuclear--hydrogen offers a powerful tool to reduce
emissions in hard-to-decarbonize sectors like shipping and heavy
manufacturing. With the 45V credit, Congress intended to supercharge
the United States' nascent hydrogen production industry and support a
suite of projects, including the Department of Energy's (DOE) Regional
Clean Hydrogen Hubs. However, in December 2023, Treasury proposed rules
for the implementation of 45V that would place strict limits on which
projects can qualify for the credit, including by restricting projects
that rely on existing sources of clean energy. This ``additionality''
limitation all but prohibits hydrogen produced using nuclear power from
qualifying for the credit. If these proposed rules are maintained,
hydrogen producers and the nuclear industry have indicated they will
downsize or outright cancel projects across the country, including
those in the DOE Hydrogen Hubs. Without these projects, the United
States is unlikely to reach the DOE's goal of producing 10 million
metric tons of clean hydrogen annually by 2030.
a. Does Treasury support the DOE's goal of producing 10 million
metric tons of clean hydrogen by 2030?
Answer. The Section 45V Clean Hydrogen Production Credit is an
important tool for building out a clean hydrogen industry in the United
States, complementing other Federal programs. Together, the Inflation
Reduction Act and Bipartisan Infrastructure Law represent by far the
most ambitious policy support globally to enable the development of a
clean hydrogen industry and realize the potential of clean hydrogen to
reduce emissions in hard-to- abate sectors.
In developing guidance under section 45V, Treasury has worked in
concert with other Federal agencies including the Department of Energy
and the Environmental Protection Agency given their expertise. The
Notice of Proposed Rulemaking (NPRM) that Treasury and IRS issued in
December 2023 was aimed at providing guidance to enable projects to
move forward while ensuring the environmental safeguards firmly
established in the law. The NPRM sought public input on many issues
including on how generation from existing clean generators could be
considered to meet the incrementality requirement.
As we continue to review and evaluate the nearly 30,000 comments
received on the proposed rules, we are working to include appropriate
adjustments and additional flexibilities to help grow the industry and
move projects forward, while adhering to the law's emissions standards,
including the requirement to consider indirect emissions.
b. If so, how does Treasury believe this goal can be met while
prohibiting the use of nuclear energy to produce clean hydrogen under
its proposed guidance for 45V?
Answer. See response to Question 1a (above).
c. Does Treasury support the projects outlined by the seven DOE
Regional Clean Hydrogen Hubs?
Answer. See response to Question 1a (above).
d. If so, how will Treasury work with these Hubs to ensure their
success given that all seven have indicated that the strict
additionality requirements proposed in 45V will hamper their efforts?
Answer. See response to Question 1a (above).
______
Questions Submitted by Senator Joe Manchin, III
Question 1. Fossil fuel communities have historically broken their
backs mining coal, pumping oil, and powering our homes, hospitals,
factories and cities. Those communities that powered our nation to
greatness are now the biggest economic losers in this energy
transition, and they deserve to be first in line for reinvestment.
That's why we included a bonus for power generation projects located in
these energy communities--to drive new investment and jobs in the
communities that need it most. So, I was appalled when Treasury
extended the bonus to cover expensive offshore wind projects that, by
their very nature out at sea, cannot be located in this type of
community. Let me be clear--this bonus wasn't intended to sweeten the
deal for the struggling offshore wind industry, it was intended to help
communities like mine in West Virginia that have been left behind.
a. Do you plan to fix this interpretation?
Answer. The energy communities bonus is critical to our efforts to
ensure all Americans benefit from the growth of the clean energy
economy by driving investment in communities that have often been
overlooked.
Treasury and IRS issued initial guidance on the energy communities
bonus in April 2023 and additional guidance, Notice 2024-30, in March
2024. Among other clarifications, Notice 2024-30 clarifies that an
offshore wind project can qualify for the bonus if the supervisory
control and data acquisition (SCADA) equipment used to remotely monitor
and control the project's operations is located in an energy community
as defined by the law. Under the guidance, the SCADA equipment must
also be located in a port that is used either full or part- time to
facilitate maritime operations necessary for the installation or
operation and maintenance of the project, and have a significant long-
term relationship with the wind project, with staff and contractors
performing functions essential to the operations of the wind project
based there. This clarification reflects the fact that onshore SCADA
equipment at ports is critical to offshore wind projects and that
offshore wind projects make significant investments and create jobs at
these ports over the duration of the projects.
Treasury and the IRS welcome additional feedback as we implement
this important provision of the Inflation Reduction Act.
b. Do you think your guidance will drive up the cost of the bonus
tax credit or will it instead shift investment offshore and away from
struggling communities?
Answer. See response to Question 1a (above).
Question 2. The Organization for Economic Cooperation and
Development (OECD), in conjunction with you and this Administration,
has been working to implement a new, global tax regime that would,
among other things, require countries to implement a qualifying
corporate tax rate of at least 15%. While many countries and
jurisdictions have agreed and have already begun implementing these
rules, there are a number that haven't, including the United States.
Madam Secretary, I am concerned about the rules that this
Administration agreed to, without direct input from Congress. We have
no guarantees that our existing tax framework, including the newly
created 15% Corporate Alternative Minimum Tax, will serve as a
qualifying tax for this agreement. We have no mechanisms in place to
prevent the implementation of these rules until all countries have
established the appropriate tax frameworks, which will negatively
impact the U.S. revenue base and U.S. based multi-national enterprises
(MNEs). And we have no guarantees that some of the world's largest
economic players, specifically China and India, will ultimately put
this agreement into practice.
a. Why did the Administration exclude Congress when negotiating
with the OECD and its members on this agreement?
Answer. Congressional input has been valuable in developing our
negotiating positions, and that input is reflected in the current
substance of the OECD/G20 Inclusive Framework Two- Pillar Solution,
including the ``Pillar Two'' global minimum tax rules and related
guidance. Our Office of Tax Policy staff has briefed Congressional
staff on a bipartisan, bicameral basis throughout the negotiations, and
we will continue briefing Congress to develop the negotiating positions
we put forward in the future. Among other issues, our Congressional/
Executive partnership has resulted in outcomes that promote broad
compatibility with the U.S. system on topics such as the allocation of
Global Intangible Low-Taxed Income (GILTI) taxes, tax equity
partnerships, and transferrable credits.
b. What assurances have you been given that the existing US tax
regime satisfies some portion of the OECD agreement?
Answer. As noted above, the Administration is committed to working
with Congress to ensure that Pillar Two-related policy, both in the
form of guidance and potential legislation, is compatible as possible
with the U.S. tax code. Already the Administration has secured
consensus agreement that, as currently drafted, tax paid by U.S.
taxpayers under GILTI will be taken into account in determining whether
the required 15% tax rate has been paid, preventing double taxation. To
achieve further compatibility, the Fiscal Year 2025 Greenbook's
proposal on a modified GILTI regime presents one way to approach Pillar
Two-related reforms that are based on the existing tax regime. We will
continue to work with both Congress and our negotiating partners in the
Inclusive Framework on these issues.
c. How confident are you that nations like China and India will
ultimately implement the OECD tax agreement?
Answer. While we broadly recognize domestic tax sovereignty as a
key principle in all of our negotiations, we continue to seek
commitments and monitor Pillar Two adoption and implementation status
across all jurisdictions that have joined the October 2021 Statement on
a Two-Pillar Solution to Address the Tax Challenges Arising from the
Digitalization of the Economy. We understand that Pillar Two will be
most successful if implemented broadly and in a way that focuses on
protecting the integrity of the existing Pillar Two Model Rules, which
are aimed at preventing inefficient and unfair tax competition. The
global minimum tax was crafted to achieve the goal of ending the race
to the bottom on corporate tax rates even if not every country adopted
the rules into their domestic law. We will continue to work with our
Inclusive Framework negotiating partners on to encourage widespread and
consistent implementation.
Question 3. As you are well aware, under the Inflation Reduction
Act, Congress provided $80 billion to the IRS for activities ranging
from taxpayer services, to tax enforcement, to business system
modernization. Under the Fiscal Responsibility Act and related
agreements, roughly $21 billion from the amounts provided to the IRS
under the IRA were rescinded, with the majority being repurposed for
funding other programs in fiscal years 2024 and 2025. Nevertheless,
nearly $60 billion remains for the IRS to continue to strive and
provide excellent customer service to American taxpayers, update the IT
systems of the agency, and ensure that everyone is following the tax
code as written.
a. Has the investment Congress provided to the IRS begun to yield
the intended revenue effects, as estimated by the Congressional Budget
Office?
Answer. The IRA's investment in the IRS has provided the agency
with the resources it needs to rebuild enforcement capacity with
respect to large corporations, complex partnerships, and high-income
and high-wealth individuals. This work is already paying dividends:
--In February 2024, the IRS launched an initiative to pursue 125,000
high-income, high-wealth taxpayers who have not filed taxes
since 2017. These are cases where IRS has received third party
information--such as through Forms W-2 and 1099s--indicating
these people received income between $400,000 and $1 million or
more than $1 million, but failed to file a tax return. In the
first 6 months of this initiative, nearly 21,000 of these
wealthy taxpayers have filed, leading to $172 million in taxes
being paid.
--In fall 2023, the IRS launched a new initiative to pursue high-
income, high-wealth individuals who have failed to pay
recognized tax debt, with dozens of senior employees assigned
to these cases. This work is concentrated on taxpayers with
more than $1 million in income and more than $250,000 in
recognized tax debt. After successfully collecting $38 million
from more than 175 high-income, high- wealth individuals last
year, the IRS expanded this effort last fall to around 1,600
additional high-income, high-wealth individuals. Nearly 80% of
these 1,600 millionaires with delinquent tax debt have now made
a payment, leading to over $1.1 billion recovered.
The revenue effects from the IRA's investment in the IRS will
continue to grow over time, consistent with CBO's analysis of the
legislation at the time it was enacted.
b. Your Department and the IRS recently announced that it was
making the IRS Direct File Program permanent. You will recall that
under the text of the IRA, the IRS was only authorized to study the
feasibility of creating Direct File not to establish it as a permanent
program. Do you plan to utilize IRA resources to establish this now
permanent program? If not, how do you expect to fund it?
Answer. The IRS allocated some IRA funding for Direct File in
fiscal year 2025. The total costs of Direct File will depend on the
scope of the product and service offered as well as the number of
filers that elect to use it. The IRS is in the process of preparing
Filing Season 2025 cost estimates to share.
Question 4. We cannot allow incentives Congress provided in the IRA
for domestic manufacturers and our Free Trade Agreement partners to be
hijacked by adversaries engaging in ``mineral laundering.'' I am also
concerned that the Administration is exploring limited trade agreements
with countries like Indonesia where Chinese investment in the nickel
sector reached $3.6 billion in the first half of 2022. Indonesia is not
an FTA partner and to go behind Congress' back and give them
eligibility just because they produce a lot of nickel is a slap in the
face to those of us who wrote the law to secure our supply chains.
a. Do you agree it is a bad idea to allow minerals from countries
like Indonesia, where China controls the supply chain, to qualify for
the consumer EV tax credit?
Answer. The section 30D regulations are strengthening domestic
supply chains for batteries and safeguarding our national security so
that the U.S. leads the clean vehicle transition. Under the final
rules, as under the statute, starting in 2024, if a vehicle's battery
has battery components manufactured or assembled by a foreign entity of
concern (FEOC), the vehicle is not eligible for the section 30D Clean
Vehicle Credit. Starting in 2025, batteries cannot contain critical
minerals that are extracted, processed, or recycled by a FEOC.
Treasury's final rules detail how automakers must comply with those
restrictions, including the due diligence they must undertake and the
certifications they must provide under penalty of perjury. The final
rules also provide an upfront review process to ensure that
manufacturers are submitting robust information to verify compliance
with the section 30D FEOC rules.
The definition of ``foreign entity of concern'' for the IRA's Clean
Vehicle Credit is based on the Bipartisan Infrastructure Law
definition, and specifically, the battery grant program that the
Department of Energy administers. Under DOE's interpretive guidance,
the government of China and companies controlled by the government of
China are foreign entities of concern.
Congress is a key partner in efforts to strengthen our supply
chains and reduce our reliance on China for critical minerals. The
Office of the U.S. Trade Representative and Treasury have engaged
extensively with Congress on this issue. The term ``free trade
agreement'' is not defined in the IRA or elsewhere in statute.
Consistent with the final regulations, the Secretary will carefully
consider specific criteria in identifying whether a country is one with
which the United States has a free trade agreement in effect for the
purposes of the section 30D credit. These factors include whether an
agreement between the United States and a country reduces or eliminates
trade barriers on a preferential basis and reduces or eliminates
restrictions on exports, including exports of critical minerals.
Question 5. I was frustrated to see that the final rule for the EV
credit creates several loopholes that will allow China to benefit from
the EV tax credit by weakening the Foreign Entity of Concern
restrictions. First, the rule will allow vehicles with battery
components sourced from Foreign Entities of Concern to still be
eligible by ignoring the content of an individual vehicle and allowing
automakers to claim prorated credits based on the amount of FEOC
materials across their supply chain. The rule also creates an unlawful
exemption from FEOC requirements for battery materials they consider to
be ``low-value'' or ``hard to trace'' until 2027. The most egregious
exemption is for graphite contained in anode materials, even though
``graphite'' is explicitly listed as an applicable critical mineral in
the law. I don't understand how this Administration could give up so
easily and continue to let foreign nations control America's
transportation.
a. Where did these loopholes come from?
Answer. The section 30D Clean Vehicle Credit, together with other
provisions of the IRA, is helping spur a boom in U.S. manufacturing and
strengthening energy security by building secure, resilient supply
chains with our allies and partners. Companies have already announced
$173 billion in battery and EV supply chain investments in America
since President Biden took office. The section 30D regulations are
strengthening domestic supply chains for batteries and safeguarding our
national security so that the United States leads the clean vehicle
transition. Under the final rules, as under the statute, starting in
2024, if a vehicle's battery has battery components manufactured or
assembled by a foreign entity of concern (FEOC), the vehicle is not
eligible for the section 30D Clean Vehicle Credit. These regulations,
which were developed in close consultation with the Department of
Energy, provide temporary transition rules to facilitate the transition
of battery and EV supply chains to meet the statute's requirements. We
anticipate that the development of detailed traceability mechanisms and
the production of certain impracticable-to-trace battery materials such
as domestic graphite will ramp up in preparation for the sunset of
these temporary transition rules.
Moreover, although battery suppliers may be able to trace the
origin of all of their battery materials, critical minerals may be
commingled during processing such that manufacturers and their
suppliers cannot physically track specific masses of minerals to
specific battery cells or batteries. The approach in the final
regulations limits manufacturers to claiming the credit only to the
degree they have fully compliant critical minerals, while still
acknowledging existing practical limitations regarding tracking and
supply chain management.
The definition of ``foreign entity of concern'' for the IRA's Clean
Vehicle Credit is based on the Bipartisan Infrastructure Law
definition, and specifically, the battery grant program that the
Department of Energy administers. Under DOE's interpretive guidance,
the government of China and companies controlled by the government of
China are foreign entities of concern.
b. Are you concerned this sends a message that we are OK with
allowing China to benefit from taxpayer dollars?
Answer. See response to Question 5a (above).
Question 6. One of the other most important benefits of the IRA--as
I know you will agree--is that it will help the IRS process tax returns
in a timely manner and provide better customer service. One of the
biggest issues I continue to hear about from West Virginians is that
they struggle to receive answers to some of the most basic questions
about taxes and tax refunds. West Virginia residents, like many of
those living in rural areas, rely on IRS walk-in centers for many of
their pressing tax questions, particularly during filing season which
recently began. Unfortunately, many of our assistance centers have been
unable to fill vacant positions, meaning there are minimal in-person
resources for taxpayers in those communities. While I applaud the
Department and the IRS for opening a number of assistance centers in
the last 2 years, the fact of the matter is that they are still
woefully under-staffed and unable to tend to the needs of my
constituents.
a. Will you commit to working with the IRS and the Taxpayer
Advocate Service to prioritize staffing rural customer service
facilities?
Answer. I am committed to working with the IRS and the Taxpayer
Advocate Service to prioritize customer service and support for rural
communities. As you know, in Filing Season 2024, the IRS opened or
reopened 54 Taxpayer Assistance Centers using Inflation Reduction Act
funding. The IRS achieved more than 11,000 additional hours of service
at Taxpayer Assistance Centers, exceeding its goal of providing more
than 8,500 hours additional hours of service. Overall, the IRS served
more than 170,000 additional taxpayers in-person at Taxpayer Assistance
Centers than Filing Season 2023. The IRS also increased the number of
taxpayers receiving free tax preparation through volunteers by around
200,000 returns, exceeding its goal of 50,000.
Looking forward, in Filing Season 2025, the IRS is committed to
expanded staffing levels at TACs and expanding utilization of ``Pop-up
Live Assistance Centers'' to serve rural areas and other areas not
located near a TAC. They will also expand service through Volunteer
Income Tax Assistance (VITA) partnerships and provide free tax return
preparation assistance through community partners, as well as leverage
outreach channels to increase taxpayer awareness of all available
credits and benefits, boosting uptake for those eligible including
rural communities.
b. What are other steps is Treasury taking to ensure that improved
IRS customer service reaches rural communities?
Answer. See response to Question 6a (above).
Question 7. I have always said that the strict sourcing
requirements in the EV credit are tough but achievable. The reason I
say they are achievable is because in addition to the EV credits, the
IRA also included the 45X Advanced Manufacturing Production Credit
which incentivizes extraction and processing right here in the U.S. So,
I was disheartened to learn that the guidance released in December for
45X has excluded all material costs from eligibility, such as mining
costs or the cost of chemicals and materials needed for mineral
processing. This greatly reduces the usefulness of the credit to U.S.
critical mineral producers and processors and will ultimately result in
them looking to move their projects outside of the U.S.
a. Are you planning to address this issue in the final guidance for
this credit?
Answer. Expanding production of critical minerals in the United
States is an Administration priority, and the section 45X Advanced
Manufacturing Production Credit is a key part of our strategy to do
that. On October 24, 2024, Treasury and the IRS issued final
regulations on section 45X that provide clarity and certainty to
taxpayers and include changes to further accelerate the buildout of
domestic critical mineral supply chains.
Notably, the final regulations allow taxpayers to include both
direct and indirect materials costs and domestic extraction costs, in
the calculation of production costs for applicable critical minerals
and electrode active materials, provided certain conditions are met.
Included direct and indirect materials costs must not relate to the
purchase of an existing eligible component, and included domestic
extraction costs must be incurred by the taxpayer that claims the
credit for the applicable critical mineral or electrode active
material. These requirements maximize the incentive for domestic
critical mineral production, while safeguarding against potential abuse
and over-crediting.
We carefully considered all feedback, including yours, before
issuing final regulations.
Question 8. Madam Secretary, I am concerned about the treatment of
matured, unredeemed debt (MUD) accounts, otherwise known as the
unclaimed U.S. savings bond. In previous years, this Committee, along
with the Finance Committee, has passed legislation to fund the
digitization of MUD account records and directed Treasury to share the
information with the states, therefore allowing states to utilize their
Unclaimed Property Administration and policies to help find
bondholders. However, it appears that to this point the records have
not been shared, seemingly due to the interpretation of language
included from the SECURE 2.0 Retirement Savings Act.
a. Can you provide an update as to when Treasury plans to share
these digitized records with relevant states?
Answer. Following the passage of the Setting Every Community Up for
Retirement Enhancement (SECURE) 2.0 Act of 2022, which directs Treasury
to share matured unredeemed bond information with the states, Treasury
published a Notice of Proposed Rulemaking (NPRM), requesting public
comments within 60 days of publication. Treasury is currently working
to review the comments received in response to the NPRM and publish a
final rule. Treasury is also developing the technical solution which
will be used to share the savings bond records with the states. The
estimated date for completion is approximately late summer 2025.
b. Can you speak to the importance of ensuring that unpaid
bondholders are able to redeem their bonds?
Answer. Treasury values the importance of reuniting the public with
their matured, unredeemed bonds. To bring awareness to these bonds and
encourage customers to redeem them, Treasury leverages data matching,
provides an online search tool, and has conducted an outreach campaign.
As a result of these initiatives,
--Treasury mailed over 845,000 letters to veterans (and spouses/
dependents). To date, nearly 667,000 bonds have been redeemed
worth more than $264 million.
--To date, there have been over 3.4 million searches with nearly
829,000 matches through the Treasury Hunt website, the
Department's online search tool that allows people to search
for their bonds.
--Treasury's outreach campaign, which ran from April 2024 through
June 2024, included organic social media posts, publishing two
news articles, running Google Ads, and holding an interview
with ABC Cleveland (has not yet aired). Treasury also delivered
113,000 emails to targeted MUD bondholders which resulted in
the redemption of nearly 32,000 bonds worth over $24.5 million.
______
Questions Submitted by Senator John Boozman
Question 1. A constant complaint I hear from Arkansans is how long
Employee Retention Credit (ERC) returns are taking to process.
a. I appreciate the IRS trying to stop abuse, but my casework team
can't even get IRS liaison's to pick-up the phone or update them.
Sometimes it takes 75 days just for the liaison to call us back. Will
you commit to raising the issue with the IRS Commissioner and working
with him to try and address this backlog?
Answer. Commissioner Werfel takes the challenges of administering
the ERC seriously. On October 10, 2024, the IRS announced that it was
accelerating work on ERC claims, with processing underway on about
400,000 claims, including about $10 billion of eligible claims.
Question 2. I wrote to the banking regulators with House Ag Chair
Thompson about the Basel III proposal and its impact on client clearing
services in derivatives markets.
a. Basel III will make client clearing more expensive, which will
ultimately make it more expensive for end-users to access the markets.
We have seen fewer and fewer banks offering client clearing services,
and I'm concerned the Basel III proposal will only make that worse.
Related to that, as you know the SEC recently mandated central clearing
for U.S. Treasuries. So we'll have cash US Treasuries being cleared,
but we'll also have fewer banks clearing in treasury futures because of
capital requirements. Are you concerned that these proposals would work
at odds with each other in a way that could ultimately harm the
functioning of the U.S. treasury market?
Answer. Treasury believes that strong bank capital and liquidity
levels promote a healthy financial system that supports continued
economic growth. We support the banking regulators' work to implement
the final Basel III standards here in the United States and believe
that the regulators are best placed to decide on the optimal method of
implementation. Vice Chair Barr recently highlighted significant
revisions to the Basel III Endgame proposal that the banking agencies
are currently contemplating.
Question 3. The SEC is significantly reforming how capital markets
are regulated, whether we're talking about equities, derivatives,
Treasuries, or fixed income.
a. I'm concerned we don't really have a handle on the impact that
all of these major rule changes will have on markets, particularly if
these SEC rules and the Basel III proposal come at the same time. My
worry is that all of these coming at once will change the role that
banks play in providing liquidity and resilience to global markets,
which could lead to market turmoil. I know you don't head the SEC or
banking regulators, but you do head FSOC. Secretary, what is FSOC doing
to look at the cumulative effect of all of these proposals, and the
effect they will have on the functioning of U.S. capital markets?
Answer. The Federal Stability Oversight Council (FSOC) remains
focused on continuing to carry out its mandate pursuant to the
Dodd?Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). The Dodd-Frank Act charges FSOC with responsibility for
identifying risks to financial stability, promoting market discipline,
and responding to emerging threats to the stability of the U.S.
financial system. Treasury strongly supports the Council's work to
bring together its member agencies to identify and address potential
risks to financial stability.
The Council will continue to run a coordinated process among our
member agencies to advance our mission of identifying, evaluating, and
responding to potential risks to financial stability, such as those
described in detail in the Council's recent annual report. We take that
mission seriously and will continue to bring regulators together to
promote the resilience of the financial system.
______
Questions Submitted by Senator John Kennedy
Question 1. Is it the position of the Treasury that in 2022,
Congress preempted the states' right to escheat savings bonds that have
been abandoned by the citizens of that state? Please answer yes or no.
a. If no, where does Treasury find the congressional intent to
prohibit states from using the information to escheat the bonds for the
benefit of trying to find the bondholder or their rightful heir?
Answer. Section 122 of the SECURE 2.0 Act of 2022 (SECURE 2.0),
requires Treasury to share certain information about certain unredeemed
savings bonds with the states. Section 122 expressly limits the purpose
for which a state may use the information to facilitate a state's
efforts to locate the owner of a matured and unredeemed savings bond
with a last known address in that state. SECURE 2.0 did not authorize
the states to escheat or take possession of the savings bonds, nor did
it override Treasury regulations that do not allow states to escheat
savings bonds not in a state's possession.
______
Questions Submitted by Senator Bill Hagerty
Question 1. Please provide an itemized list of the IRS Standard
Operating Plan's 42 initiatives and 475 projects. For each initiative
and project, provided the estimated cost, FTE, and timeline from
development to deployment; the outcome and key results; the funding
source by Treasury appropriation fund symbol(s); a map tracing the
interdependence among the initiatives and projects; and estimated
outyear operation and maintenance costs.
Answer. In May 2024, the IRS released an update on the Strategic
Operating Plan (SOP), which includes outcomes for priority efforts in
2024-2025 under each objective outlined in the SOP. It also includes
estimated IRA spending (Table 3) and FTEs (Table 4) through fiscal year
2031 and a deeper dive on business systems modernization and operations
support mandatory funding through fiscal year 2025 (Table 7).
Question 2. What is the current estimated total cost of fully
implementing the IRS Standard Operating Plan?
Answer. The ultimate cost of the initiatives outlined in the SOP
plan will be refined, and the specific estimates of the funding
required to achieve our vision may change over time. In the absence of
additional funding, the IRS estimates that its business systems
modernization (BSM) account is currently short by nearly $3 billion
through fiscal year 2031 which means the IRS will only partially
modernize, leaving a sizeable legacy footprint that will prevent the
IRS from enabling a near real-time tax processing system that provides
taxpayers with instant account updates, faster refund processing and
payment posting, and near real-time status updates. The cost to operate
and maintain the IRS technology will continue to rise having to manage
both modern and legacy systems, requiring tradeoffs that will likely
impact taxpayer services and enforcement of the tax law. The legacy
technology that remains will operate inefficiently and with greater
risks of outages affecting access to taxpayers and IRS employees. The
President's fiscal year 2025 budget proposal to extend the IRA funding
through fiscal year 2034 is critical to the IRS's ability to better
serve taxpayers. With this additional funding, the IRS will be able to
enable better functionality and improve overall data security as well
as hire sufficiently to meet the taxpayer services and enforcement
goals outlined in the SOP.
Question 3. Which of the IRS Standard Operating Plan's 42
initiatives and 475 projects are considered transformational?
Answer. The SOP outlines a vision for a transformed IRS where ``All
taxpayers can meet all of their responsibilities, including all
interactions with the IRS, in a completely digital manner if they
prefer'' and ``Noncompliant taxpayers, in particular the largest and
most complex filers, pay what they owe because the IRS has the
workforce and advanced technology needed to enforce fairness in the tax
system and narrow the tax gap.''
The IRS is focused on critical work across the agency, including
shoring up its core technology infrastructure to enable better
functionality and improve overall data security. Modernized technology
will significantly improve not just the underlying systems but
ultimately customer service and the employee experience. With
integrated data systems that update customer service representatives on
customer questions in near real-time and through one system, taxpayers
who reach out to the IRS will get prompt and near real- time
information through the phone or digital solution that works best for
them. IRS will also use advanced analytics, new compliance treatments,
and near real-time data to identify high-risk filings and pursue exams
that are more likely to uncover tax evasion. Along with modernizing
systems, IRS technology delivery will itself be transformed into a
product- and platform-centric service. This transformation enabled by
resources provided through the Inflation Reduction Act (IRA) will
ensure that the systems we are investing in today will remain
persistently modern for many years to come.
Question 4.
a. Is reducing IRS call wait times from 28 minutes to 3 minutes
considered transformational?
Answer. Filing Season 2024, exceeding its goal of call wait times
of five minutes or less on the agency's main taxpayer helpline during
filing season. During Filing Season 2022--prior to receiving Inflation
Reduction Act resources--call wait times averaged 28 minutes. This
achievement is in a broader context of transformational investments in
taxpayer services. For example, this Filing Season, taxpayers
benefitted from important updates to the ``Where's My Refund?'' tool,
which is the most popular IRS customer service tool. Taxpayers have
used ``Where's My Refund'' 275 million times this Filing Season, with
around 31 million views of the new and improved status updates as of
April 6, 2024. Prior to this Filing Season, ``Where's My Refund''
provided limited information, often leading taxpayers to call the IRS
to inquire about their refund status. The updates to ``Where's My
Refund'' allowed taxpayers to see more detailed refund status messages
in plain language. These updates have also ensured ``Where's My
Refund'' works seamlessly on mobile devices. Taxpayers often see a
generic message stating that their returns are still being processed
and to check back later. With the new and improved ``Where's My
Refund,'' taxpayers see clearer and more detailed updates, including
whether the IRS needs them to respond to a letter requesting additional
information. The new updates reduce the need for taxpayers to call the
IRS for answers to basic questions about their refund.
b. Is the 3 minutes specific to 35 accounts management phone lines?
Answer. The IRS three-minute average wait time refers to the
agency's main taxpayer helpline during filing season.
c. What was the average wait time for the IRS's 55 other types of
phone lines, especially the ones for collections and taxpayer
protection?
Answer. The National Taxpayer Advocate 2023 Annual Report to
Congress includes Level of Service (LOS) figures for a range of IRS
phone lines, including the top ten IRS enterprise telephone lines by
volume of calls (figure 2.4.2).
Question 5. Please provide a table of the full cost of the
government of Direct File by Federal agency, including a break out of
development and operation and maintenance activities by cost. Please
provide a list of the private sector partners that contributed to
Direct File and estimated market value of these contributions.
Answer. Through April 20, 2024, the IRS spent $24.6 million on
Direct File, which includes $11.6 million in costs for the development
of last year's report to Congress. Of the $13.0 million spent on pilot
development and implementation, $10.6 million is technology and product
development costs and $2.4 million is operational costs (customer
service, cloud computing, user authentication, etc.). The limited
design of the pilot means that the IRS was not able to benefit from
economies of scale. If the number of Direct File users were to
increase, the cost per return would decrease.
These totals include costs associated with vendor support and an
interagency agreement with GSA's 18F. To build and run the pilot, the
IRS also engaged 29 employees from the U.S. Digital Service (USDS) to
supplement the IRS employees and other team members. The USDS costs are
not included in the $24.6 million spent on Direct File. The IRS
estimates that the annualized cost for the USDS team is $7.2 million.
Question 6. Please provide the data, data source(s), and
methodology for the estimated $5.6 million in tax preparation fees
saved by using Direct File for the 2024 tax filing season and $9.04
average cost per return using Direct File for the 2024 tax filing
season.
Answer. Treasury's estimate of $5.6 million in tax preparation fees
saved due to the 2024 Direct File pilot is based on the $40 out-of-
pocket cost estimate for 1040EZ filers for tax year 2017, which is the
last year before that form was discontinued. The costs of the 1040EZ
are used since both the 1040EZ and the 2024 Direct File pilot cover a
narrow scope. As such, Treasury estimates that the 140,803 taxpayers
who filed their returns via the 2024 Direct File pilot saved an average
of $40 each, or $5.6 million total, in Federal tax preparation fees.
Question 7. Please provide the estimated cost of further
developing, deploying, and operating Direct File for the 2025 tax
filing season.
Answer. Total costs for Direct File for Filing Season 2025 will
depend on the scope of the product and service offered as well as the
number of filers that elect to use it. The IRS is preparing estimates
to share and will continue to share cost information each year as it
becomes available.
______
Questions for Submitted by Senator Marco Rubio
Question 1. Since the early days of the Biden Administration in
2021, there has been one undeniable difference between the Department
of Treasury's leadership and other major Federal agencies. In general,
other key Secretaries have, at the very least, rhetorically emphasized
the existential national security and economic threats posed by the
Chinese Communist Party's (CCP) strategic takeover of critical
industries through repeated trade abuses and non-market strategies.
Yet, you have appeared to downplay the threats posed by the CCP at
several critical junctures. Throughout 2022, for example, you took
great care to describe the U.S.'s economic posture toward the People's
Republic of China as a state of ``competition,'' not ``conflict.'' In
April 2023, when you delivered remarks before the Chinese Embassy in
Washington, you argued that the U.S. and communist China had a
responsibility ``to find a way to live together and share in global
prosperity.'' In January 2023, you urged Chinese Vice Premier Liu He
``to closely communicate'' with the U.S. ``on global macroeconomic and
financial conditions,'' suggesting that the solution to this economic
``competition'' is to increase communication, cooperation, and
complacency with a genocidal communist regime. Yet, despite this track
record, of diminishing the threat of the CCP's trade abuses and
attempts to flood the U.S. market with artificially cheap critical
goods, you appear to have shifted rhetoric recently. For example, in
your early April visit to the PRC, you issued a strong warning to
Chinese Vice Premier He Lifeng over the CCP's ``overcapacity'' of clean
energy goods and dumping of fentanyl precursor chemicals into the U.S.
and Mexico. Within the context of these dialogues, you argued that the
U.S. would not accept additional ``decimated industries'' as a result
of the CCP's trade abuses.
a. What prompted this stark shift in your posture toward U.S. trade
with the PRC?
Answer. My views have been consistent over time and fully aligned
with President Biden's priorities. The Administration's approach to the
economic relationship between the United States and China secures our
national security interests and those of our allies and partners, seeks
a healthy economic relationship contingent on a level playing field for
our workers and businesses, and allows for cooperation on the urgent
global challenges of the day. We continue to advance these goals
through a combination of steadfast competition and engagement, often
undertaken in parallel with one another. Throughout this process, we
have been candid with the American people, our partners and allies, and
indeed our Chinese counterparts about the harmful effects of China's
non-market policies and practices.
b. Considering that the CCP has a long track record of achieving
non-market advantages over critical U.S. industries (such as steel,
automobiles, and solar) through significant state subsidies, financing
incentives, tax breaks, slave labor, and intellectual property theft,
was there any new information or industry analysis that prompted your
perspective on trade issues to change so quickly?
Answer. See response to Question 1a (above).
Question 2. The Cuban system notoriously lacks transparency, with
scant regulatory oversight. Examples of this can be seen daily though
frequent cash shortages, currency conversion challenges made worse by
highly fluctuating exchange rates, ineffective anti-corruption measures
that preserve and enrich the ruling class, and the lack of access to
government records and information. This enables illicit financial
activities to go unnoticed, posing a significant risk to institutions
engaged in financial transactions with Cuban entities. It is clear that
Cuba's financial framework falls short of international standards. The
Financial Action Task Force (FATF) has consistently pinpointed
deficiencies in Cuba's Anti-Money Laundering (AML) laws and
enforcement, underscoring the risks involved in transactions with Cuban
financial institutions.
a. What is the rationale behind your agency's changes to U.S.-Cuba
policy as reflected in the amendments to the Cuban Assets Control
Regulations, (31 CFR Part 515), which allow certain Cuban nationals to
open bank accounts in the U.S.? How will these changes address the lack
of Financial Oversight and Transparency in the Cuban financial system?
Answer. The U.S. Department of the Treasury (Treasury) shares your
goal that changes to U.S. policy should genuinely benefit the Cuban
people and not inadvertently support the Cuban government or its
backers. On May 28, 2024, Treasury's Office of Foreign Assets Control
(OFAC) amended the Cuban Assets Control Regulations (CACR), 31 CFR part
515, including to update and clarify authorizations to support
independent Cuban private sector entrepreneurs and access to the
Internet, and expand access to certain financial services for the Cuban
people. These regulatory changes were crafted following extensive
consultations with the Department of State, which engaged with Cuban
independent private sector entrepreneurs and the U.S. private sector to
identify which specific changes would most benefit independent private
sector entrepreneurs in Cuba while maintaining restrictions against the
Cuban government and its military, intelligence, and security services.
Regarding authorizations for certain Cuban nationals to open
accounts with U.S. banking institutions, the May 28, 2024 amendment to
the CACR included a narrowly scoped authorization in the general
license at 31 CFR Sec. 515.584(h)(2) for U.S. banking institutions to
open and maintain accounts solely in the name of Cuban nationals who
are independent private sector entrepreneurs, as defined in 31 CFR
Sec. 515.340, for the purpose of conducting only authorized or exempt
transactions under the CACR. These U.S. banking institutions bring the
rigor of AML/CFT (Combatting the Financing of Terrorism) controls to
any bank account opened by them. Pursuant to 31 CFR Sec. 515.340, the
definition of an independent private sector entrepreneur continues to
exclude any Cuban national who is a prohibited official of the
Government of Cuba, as defined at 31 CFR Sec. 515.337, and prohibited
members of the Cuban Communist Party, as defined at 31 CFR
Sec. 515.338. This authorization serves to facilitate new opportunities
for independent private sector entrepreneurs in Cuba, while continuing
to deny benefits to the Cuban government or its backers.
b. What changes has your agency seen regarding Cuban AML mechanisms
that give you reason to believe that U.S. AML standards, and other
related financial crime laws, will be followed in Cuba?
Answer. The Financial Action Task Force (FATF) leads global action
to tackle money laundering, terrorist and proliferation financing. The
FATF publishes reports and case studies on money laundering and
terrorist financing, promotes global standards to mitigate the risks,
and assesses whether countries are taking effective action. As a FATF
member, the United States plays an active role in developing and
promoting FATF standards.
Cuba is part of the Financial Action Task Force of Latin America
(GAFILAT), a FATF-Style Regional Body, where it is subject to a mutual
evaluation review of its AML/CFT compliance with the FATF standards.
The Mutual Evaluation is a comprehensive review of a country's AML/CFT
framework and a key gauge to assess a country's illicit finance risks
and effectiveness in combating illicit finance threats. Cuba's most
recent mutual evaluation review was adopted in July 2015 and the next
mutual evaluation assessment is expected to be conducted in 2026. The
mutual evaluation will provide a comprehensive overview of Cuba's
compliance with FATF standards, which are designed to promote
transparency in a country's financial system.
Cuba regularly provides follow-up reports on its progress in
addressing deficiencies identified in its mutual evaluation. For
example, in a January 2024 follow-up report, Cuba addressed measures to
identify and assess money laundering and terrorist financing risks
associated with new technologies, such as virtual asset service
providers (VASPs). The GAFILAT report concluded that Cuba has made
efforts through the approval of various regulations related to virtual
assets and VASPs, which establish a regime to conduct risk assessments,
licensing, supervision or control, sanctions, preventive measures and
AML/CFT obligations for VASPs. The FATF is a key mechanism for the
United States to monitor Cuba's compliance with international standards
on money laundering.
c. The Cuban economy is heavily influenced and controlled by
regime-owned enterprises, which are fertile grounds for corruption and
misuse of funds. This environment provides ample opportunities for
money laundering, particularly given the integration of MIYPMES into
the regime-controlled licensing system. How will your agency measure
corruption in a regime-dominated economy?
Answer. Treasury shares concerns related to state-owned enterprises
facilitating corruption and other misuse of funds. As noted previously,
Cuba is part of GAFILAT and is assessed on its compliance with the FATF
standards. The FATF standards include assessment of a country's top
money-laundering risks. The 2015 mutual evaluation of Cuba found that
the top money laundering risks were drug trafficking, embezzlement,
bribery, and fraud. Treasury will continue to monitor money-laundering
risks associated with state-owned entities.
Furthermore, the CACR broadly prohibits financial activity with
Cuba from the United States, which limits the potential linkages of
this activity to the U.S. financial system.
d. Given the predominantly cash-based nature of the Cuban tourism
sector and its implications for money laundering through various
hospitality and tourism-related businesses, how do you plan to address
the additional complexity this adds to AML efforts?
Answer. Due to the broad prohibitions on Cuba-related activities by
persons subject to U.S. jurisdiction in the CACR, there is limited
permissible financial activity in Cuba and limited categories of
permissible travel by U.S. persons to Cuba. Treasury monitors follow-up
reporting required of Cuba by GAFILAT. Treasury intends to hold Cuba to
compliance with FATF standards.
e. Considering the high risk of MIYPMES being exploited to
circumvent U.S. sanctions, and given the lack of transparency and
oversight in Cuba's financial system along with the regime-controlled
nature of the economy, how do you plan to mitigate the potential for
sanctions evasion?
Answer. OFAC takes seriously concerns related to Cuban government
involvement in the private sector and expects banking institutions to
conduct due diligence commensurate with their overall risk profile and
internal compliance policies and procedures with respect to
transactions involving Cuba or a Cuban national, including transactions
under general licenses that authorize certain dealings with independent
private sector entrepreneurs. Further, our recent Cuba regulatory
amendment does not authorize transactions prohibited by other sanctions
programs.
We also take allegations of possible sanctions violations
seriously. While we do not comment on possible or pending
investigations, Treasury regularly investigates activity that might
undermine the integrity of our sanctions. We will not hesitate to take
action against persons who violate our sanctions authorities or who
engage in sanctionable conduct, when appropriate.
f. Given the combination of a weak AML framework, a regime-
controlled economy, and a cash-intensive tourism sector that creates an
environment ripe for exploitation by criminal elements, how do you plan
to address the risk of MIYPMES being exploited, whether knowingly or
unknowingly, to launder money or facilitate other illicit activities?
Answer. Treasury will continue to hold Cuba to compliance to the
FATF standards. The future mutual evaluation of Cuba will provide the
best assessment of possible risk associated with MIYPMES or the tourism
sector, as well as the controls Cuba has implemented to mitigate
illicit-finance risk.
Due to the comprehensive nature of the CACR prohibitions on
transactions with Cuba, there is very limited connectivity of the U.S.
financial system to Cuba.
Question 3. The U.S. Department of Treasury has established the
Outbound Investment Security Program to implement President Biden's
executive order on outbound investment, ``Executive Order on Addressing
United States Investments in Certain National Security Technologies and
Products in Countries of Concern.'' While any effort by the United
States to limit the Chinese Communist Party's access to U.S. capital
and industry knowledge is positive, there are several reasons for
concern regarding Treasury's implementation of this executive order.
a. The Departments of Treasury and Commerce are tasked with
implementing the order. What steps, if any, have you taken to
coordinate with the Department of Commerce over implementation of this
executive order, and what specific roles will the Department of
Commerce play in the Outbound Investment Security Program?
Answer. Treasury, Commerce, and other departments and agencies are
working closely on the implementation of Executive Order 14105. The
Executive Order directs Treasury to consult with Commerce on the
implementing regulations and industry engagement and analysis of
notified transactions, among other things. Commerce has been a key
partner in shaping the proposed regulations to implement the Executive
Order, drawing upon its industry and technical expertise to provide
input on the implications for military, intelligence, surveillance, or
cyber-enabled capabilities of covered national security technologies
and products, and has conducted extensive stakeholder engagement
alongside Treasury. Commerce will continue to be closely involved in
the Outbound Investment Security Program, including working with
Treasury to periodically review the effectiveness of the regulations
that were issued on October 28 and assessing aggregate sector trends
evident in notifiable transactions and related capital flows in covered
national security technologies and products under the Executive Order.
b. Your agency has repeatedly failed to sufficiently enforce
sanctions with private investment firms such as Sequoia Capital
investing in PRC drone maker, DJI. How will you ensure that private
investment firms like Sequoia comply and restrict access to private
equity and venture capital?
Answer. The Treasury Department's final rule, issued on October 28,
places obligations on U.S. persons to notify the Treasury Department
regarding certain transactions and prohibit certain other transactions.
As noted in the final rule, the Treasury Department plans to
monitor compliance by leveraging a variety of data and information
sources, both internal and external. After identifying an instance of
apparent non-compliance, the Treasury Department may initiate outreach
to the relevant parties, or work with other agencies with equities,
including law enforcement equities, to investigate the apparent non-
compliance or initiate an enforcement action.
c. Your agency has previously indicated that it will rely on
investors to disclose whether or not their investment in the PRC is
prohibited and that disclosure must be within 30 days after the
investment has been made. What steps are you taking to effectively
monitor and prohibit investments flowing to the PRC?
Answer. The Treasury Department's final rule places obligations on
U.S. persons to notify the Treasury Department regarding certain
transactions and prohibit certain other transactions. More
specifically, the final rule requires that a transaction requiring
notification be filed with the Treasury Department no later than 30
days after the transaction is completed.
As noted in the final rule, the Treasury Department plans to
monitor compliance by leveraging a variety of data and information
sources, both internal and external. After identifying an instance of
apparent non-compliance, the Treasury Department may initiate outreach
to the relevant parties, or work with other agencies with equities,
including law enforcement equities, to investigate the apparent non-
compliance or initiate an enforcement action. The Treasury Department's
investigation of potential violations and enforcement of the final rule
will, as appropriate, also involve coordination with law enforcement
agencies.
d. How will you prevent outbound investments in Artificial
Intelligence, Semiconductors, and Quantum Technology if it is relying
on investors to self-certify? Have you established any mechanism to
independently validate the information U.S. investors provide?
Answer. As noted above and in the final rule, the Treasury
Department plans to monitor compliance by leveraging a variety of data
and information sources, both internal and external. Additionally, the
Treasury Department will work closely with the Commerce Department on
industry engagement and analysis of notified transactions, pursuant to
the Executive Order.
Further, as noted above, after identifying an instance of apparent
non-compliance, the Treasury Department may initiate outreach to the
relevant parties or work with other agencies with equities, including
law enforcement equities, to investigate the apparent non- compliance
or initiate an enforcement action. The Treasury Department's
investigation of potential violations and enforcement of the final rule
will, as appropriate, also involve coordination with law enforcement
agencies.
Question 4. National Students for Justice in Palestine's (NSJP) is
a national umbrella network that represents more than 250 university
chapters of Students for Justice in Palestine (SJP) across the United
States and Canada. Both NSJP and SJP have led pro-Hamas, antisemitic
protests on campuses since October 7, 2023. They're at the forefront of
antisemitic activity on campus, coordinating student organizations,
working with radical, pro-Hamas faculty, and distributing propaganda on
campus. Some campuses across the country have banned or suspended their
chapters, but that's only served as a band-aid to the spew of
antisemitic hatred from our elite universities. Neither NSJP nor SJP
are 501(c)(3) tax-exempt organizations, but NSJP benefactors are. NSJP
and SJP supporting entities include Westchester Peace Action Committee
(WESPAC); American Muslims for Palestine (AMP), an organization with
ties to pro-Hamas individuals and organizations; and Americans for
Justice in Palestine (AJP), which is the Virginia attorney general is
investigating whether it has provided support to terrorist
organizations.
a. How concerned are you about the wave of antisemitic protests
that have swept U.S. Institutions of Higher Education since October 7,
2023?
Answer. Since Hamas' atrocious terrorist attacks on October 7,
2023, murdering 1,200 innocent civilians and taking over 200 hostages,
there has been a concerning growth in antisemitic incidents and
harassment. As a part of the U.S. National Strategy to Counter
Antisemitism, Treasury will continue to engage with financial
institutions to assist with identifying financial activity associated
with violent extremists. Treasury will continue to work to counter the
financing of all violent extremists, regardless of ideology, but also
recognizes the broad protections provided by the First Amendment and
other rights secured by the U.S. Constitution.
b. In what ways is your department cracking down on antisemitic
terrorist activity and support of such activity?
Answer. The Treasury Department works to actively identify and
disrupt terrorist financing in all forms, regardless of ideology. In
the year since October 7, 2023, Treasury has embarked on a sustained
pressure campaign to counter Hamas financing and has targeted numerous
sources of funding, financial facilitators, and complicit actors in
their financial enterprise, releasing eight tranches of designations
related to Hamas, some in coordination with international partners.
Treasury has also released several advisories for financial
institutions on Iran and its proxies, including Hamas. Treasury
continues to work with partners to take collective public or private
actions against Hamas' financing across the globe.
c. On May 9, 2024, colleagues and I sent a letter to IRS
Commissioner Werfel asking for an investigation to determine whether
NSJP supporters have engaged in conduct warranting revocation of their
tax-exempt statuses. Will you remove the tax-exempt status of anti-
Semitic entities that provide material support to foreign terrorist
organizations, and thus breaking Federal law?
Answer. On June 26, 2024, Commissioner Werfel responded to you and
your colleagues thanking you for your May 9 letter and acknowledging
your concerns. As his letter explains, the IRS takes seriously any
information that a tax-exempt organization is not in compliance with
applicable tax laws. Commissioner Werfel's letter details the actions
taken with respect to referrals regarding exempt organizations.
d. Will you commit to investigating NSJP benefactors, including
those mentioned in my letter and those in this recent report? Please
describe to what extent your department has already investigated these
benefactors.
Answer. Treasury cannot comment on ongoing or potential
investigations.
e. Given the recent lawsuit in the U.S. District Court for the
Eastern District of Virginia filed against AJP and NSJP that claims
that AJP serves as Hamas' propaganda division in the U.S. and the
Virginia attorney general's October 2023 investigation into AJP on
whether it used funds raised for providing support to terrorist
organizations, do you think that there should be heightened scrutiny of
this organization?
Answer. Treasury will continue to work with the interagency and law
enforcement colleagues to ensure Hamas is not abusing the U.S.
financial system in any form. This includes working closely with U.S.
law enforcement and interagency partners to hold individuals and
entities accountable if they are engaged in illegal conduct such as
materially supporting a terrorist organization.
f. Do you share my concern over pro-Hamas demonstrators on campuses
who have claimed that they are Hamas?
Answer. Treasury will continue to utilize all tools available to
target and disrupt Hamas' financial capabilities, to limit their
capabilities to raise funds, carry out further terrorist attacks, and
threaten U.S. and Israeli security interests in the region.
g. How do demonstrators' claims that they are Hamas play into the
department's investigations of organizations' support of Hamas, a
foreign terrorist organization?
Answer. OFAC regularly and aggressively investigates cases of U.S.
persons who engage in prohibited activities involving Hamas and other
sanctioned terrorist organizations. OFAC also retains the ability to
sanction persons for material support or other sanctionable activity
involving such an organization. OFAC considers all sources of
information as part of its investigations for violations of OFAC-
administered sanctions and for possible designations for supporting
designated terrorist groups and works closely with interagency
partners, including the Department of Justice, in holding accountable
those who engage in conduct that contravenes U.S. sanctions. OFAC does
not sanction persons for their engagement in activities subject to U.S.
constitutional protection such as protected speech or religious beliefs
and practices; nor do U.S. persons violate OFAC sanctions for engaging
in such constitutionally protected activity.
h. The founder of AMP, Hatem Bazian, is linked to the charity
``Kindhearts,'' which had its assets frozen and a prohibition on
transactions with Americans by the department because it has provided
support to Hamas. Do you agree that there should be heightened scrutiny
of AMP?
Answer. OFAC regularly and aggressively investigates cases of U.S.
persons who engage in prohibited activities involving Hamas and other
sanctioned terrorist organization. OFAC also retains the ability to
sanction persons for material support or other sanctionable activity
involving such an organization. OFAC does not comment on possible or
pending sanctions actions or investigations regarding specific targets.
Question 5. Secretary Yellen, the Chinese Communist Party has
identified Light Detection and Ranging (LiDAR) as a critical technology
and is leveraging a growing Chinese LiDAR sector to support its
national defense and military industry. There is also evidence of
Chinese LiDAR sensors being used for surveillance activities in the
Xinjiang region. That same technology has flooded the U.S. market,
undercutting American companies through unfair market practices. The
Department of Defense (DoD) recently found that the leading Chinese
manufacturer of LiDAR sensors is a ``Chinese Military Company''
operating directly in the United States. That same manufacturer, Hesai,
is trading on a U.S. stock exchange, enabling U.S. investors to
potentially fund a company that supports the People's Liberation Army.
Through a mixture of PRC government support theft of US technology, and
access to US capital, Hesai has captured 47 percent of the global LiDAR
market by sales revenue. I find it extremely troubling that the
Treasury Department has not done anything to prevent U.S. investments
from supporting LiDAR companies, like Hesai, that undermine the
national security of the United States by directly supporting the
military ambitions of foreign adversaries.
a. Given these facts, why hasn't your agency added Chinese LiDAR
companies, including Hesai, which the DoD recognizes as a ``Chinese
Military Company,'' to the Chinese Military Industrial Complex List to
cut off their access to U.S. financial support?
Answer. Treasury shares your concerns regarding the flow of
investment to certain companies in the People's Republic of China
(PRC), including those that operate or have operated in the defense and
related materiel sector or the surveillance technology sector of the
economy of the PRC. While we do not comment on possible or pending
investigations regarding specific targets, OFAC will continue to use
the full range of tools at our disposal, including economic sanctions,
to combat these activities. We welcome information, including sources,
on potential sanctions and look forward to our ongoing work with
Congress to support U.S. interests and address national security
threats.
SUBCOMMITTEE RECESS
And the hearing record will remain open until Tuesday, June
12, to allow Senators to submit additional questions for the
record. Thank you again for joining us. Thank you for your
service.
[Whereupon, at 4:07 p.m., Tuesday, June 4, the subcommittee
was recessed, to reconvene subject to the call of the Chair.]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2025
----------
THURSDAY, JUNE 13, 2024
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 10:05 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. Chris Van Hollen (Chairman),
presiding.
Present: Senators Van Hollen [presiding], Durbin, Hagerty,
Boozman, and Kennedy.
U.S. SECURITIES AND EXCHANGE COMMISSION
COMMODITY FUTURES TRADING COMMISSION
OPENING STATEMENT OF SENATOR CHRIS VAN HOLLEN
Senator Van Hollen. This hearing of the FSGG Subcommittee
the Appropriations Committee will come to order.
Welcome everyone. My partner on this Committee, Senator
Hagerty, and I have agreed to forego opening statements in the
interest of allowing more time for questioning.
So I will introduce both of our witnesses, and if you could
make sure you provide your testimony within 5 minutes, your
full statements will be provided for the record. We will
proceed from there and then have 7 minutes of questioning by
members, in one or two rounds.
So let me introduce our witnesses here. We have the
Chairman of the Securities and Exchange Commission, Gary
Gensler, who was sworn in as Chairman in April 2021. Before
joining the SEC, Mr. Gensler has had a variety of positions in
and out of Government. He was formerly the chair of the U.S.
Commodities Future Trading Commission, CFTC. He also served as
Under Secretary of the Treasury for Domestic Finance and as
Assistant Secretary of the Treasury from 1997 to 2001. He also
did a stint at MIT teaching cryptocurrency and other related
matters.
Prior to his public service, Chairman Gensler worked at
Goldman Sachs as a partner in the Mergers and Acquisition
Department. He received his undergraduate degree in economics,
and his MBA from the Wharton School at the University of
Pennsylvania. Welcome, Chairman Gensler.
Chairman Ross Behnam was sworn in as Chairman of the CFTC
in January 2002. His arrival at the CFTC follows extensive
experience in financial and agricultural markets. Before
joining the CFTC, Chairman Behnam served as senior counsel to
our colleague, Senator Debbie Stabenow of Michigan, who is the
Chair of the U.S. Senate Committee on Agriculture, Nutrition,
and Forestry.
During his time in the Senate, Chairman Behnam advised on
and helped implement The Dodd-Frank Wall Street Reform and
Consumer Protection Act. Chairman Behnam is a graduate of
Georgetown University and Syracuse University's School of Law.
Colleagues, I am proud to say both of these gentlemen live
in the great City of Baltimore.
With that, let me turn it over; first to you, Chairman
Gensler.
STATEMENT OF HONORABLE GARY GENSLER, CHAIR, U.S.
SECURITIES AND EXCHANGE COMMISSION
Mr. Gensler. Thank you. Good morning, Chair Van Hollen,
Ranking Member Hagerty, Senator Kennedy. Thank you for inviting
me to testify today on the SEC's fiscal year 2025 budget
request. As is customary, I would like to note that my views
are my own, as the Chair of the SEC. I am not speaking on
behalf of my fellow Commissioners or SEC staff.
I also want to thank you. I think I was with you last year
at this time, but also I was with you 12 years ago, and I was
in Chair Behnam's seat, because I was with Chair Mary Schapiro.
So I have done one of these partner hearings once before.
Last week at the SEC, we had our 90th birthday. Congress
and President Roosevelt set our agency up June 6, 1934, in the
aftermath of the Great Depression to ensure that our capital
markets work for investors and issuers alike. They knew this
was critical to restoring trust in the markets, promoting the
economy. The SEC they created serves investors building for a
better future, and issuers raising money to fund innovation
while overseeing the capital markets in the middle. But it is
really about the issuers and the investors.
The SEC is a cop on the beat, watching out for the
investing public and those issuers. I believe the Securities'
laws, and the agency set up by Roosevelt and Congress have been
a significant contributor to our economic success in those 90
years. I also think it is a key agency in terms of our standing
around the globe.
Our $110 trillion capital market is 40 percent of the
world's capital market, even though our economy is only about
23 percent of the world's capital market. So we punch above our
weight class, and I think this gives us certain advantages as a
Nation, and for investors and issuers.
But I don't think we can take the leadership for granted.
Today, our limited resources contrast against tremendous growth
and change in our markets. In the face of the significant
growth in registrants' complexity, individual investor
engagement in the markets that are outlined in the written
testimony, I think that you might think that had grown, but in
fact, the SEC actually shrank between 2016 and 2022.
With Congress' help, we were authorized to hire 400 people
in 2023, on about a base of 4,600, so to get back to
approximately 5,000, to bring us back just modestly above 2016.
While our funding was kept flat in 2024, growth in the
market activity was anything but flat. We are losing pace with
an ever-increasing scale of the capital markets' transaction
volume, just to name one thing, in the equities market doubled
in the last 5 years, tripled in the last 17 years.
Today, we have 15,000-plus registered investment advisors
advising 57 million clients. Just 6 years or 7 years ago, it
was 12,000 and only 43 million. So you can see all this growth
in the markets. I would note also that the $32 trillion mutual
fund business, registered funds, the $30 trillion private
funds, each in and of themselves are bigger than our entire
banking system, which is only 23 trillion.
Such growth and rapid change also means more possibility
for wrongdoing. We have seen the number of tips, complaints,
and referrals, we get climbed from 16,700 just 5 years ago, to
40,000 last year.
Allow me to put flat funding into context: 70 percent of
our budget is for staff, 15 percent for technology, about 5
percent for facilities, 10 percent for everything else. So
staff is the bulk of it. Flat funding means cutting staffing,
technology, and real estate. It is pretty straight math. We
have paused on nearly all job postings and backfilling
departing staff since last September. We currently have about
325 positions that were authorized that we are not filling.
While the agency's rule set gets outsized attention, and I
am sure we will talk about some of that rulemaking, the vast
majority of our staff work on oversight of the markets,
responding to inquiries, and collectively we get tens of
thousands of those a year. And without additional resources, I
think the markets and our oversight are at risk, our ability to
find bad actors are at risk, our responsiveness to market
participants is at risk, I think capital formation and
innovation are at risk.
So as this Committee continues to work, I know our funding
is also deficit neutral, because we have these Section 31 fees
that we charge, so that is a good thing. Sorry, Ross, but we do
have that built in.
I am glad to take your questions. And thank you.
[The statement follows:]
Prepared Statement of Gary Gensler
Good afternoon, Chair Van Hollen, Ranking Member Hagerty, and
members of the Subcommittee. Thank you for inviting me to testify today
on the Securities and Exchange Commission's Fiscal Year (FY) 2025
budget request. As is customary, I'd like to note that my views are my
own as Chair of the SEC, and I am not speaking on behalf of my fellow
Commissioners or the SEC staff.
the sec at 90 years
At the SEC, we had our 90th birthday just one week ago.
After the 1929 market crash, President Franklin Roosevelt signed
the first of the Federal securities laws in 1933. He followed a year
later with the passage of the Securities Exchange Act--making June 6,
1934, our birthday at the SEC.
The SEC was created to ensure that the markets worked free of fraud
and manipulation--and that investment advisers carried their duties to
the clients they advised.
Congress and Roosevelt understood how important our capital markets
are to investors, issuers, and more broadly our economy. Today, the
$110-plus trillion U.S. capital markets are the deepest, most liquid in
the world. At 40 percent of the world's capital markets,\1\ they
outpace our roughly 24 percent of the world's economy.\2\ The U.S.
capital markets also play an integral role in the dollar's
dominance.\3\
We cannot, however, take this leadership for granted.
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 to protect investors, facilitate
capital formation, and maintain fair, orderly, and efficient markets.
The SEC is the cop on the beat watching out for the investing
public and issuers. The dedicated staff of this agency does
extraordinary work with limited resources.
growth and change in the markets
Our limited resources contrast against the tremendous growth and
change in our markets. The U.S. capital markets benefit from
significant engagement from everyday investors.
About 58 percent of U.S. households own stocks, up from 52 percent
in 2016.\4\ More than half of American households, representing nearly
121 million individual investors, own registered funds.\5\
The U.S. has long benefitted from robust competition between
nonbanks and banks. The Commission plays a key role in overseeing many
aspects of the nonbank sector. Each of the registered funds and private
funds sectors surpasses the size of the banking sector.
Further, U.S. debt capital markets facilitate 75 percent of debt
financing of non-financial corporations. In Europe, the U.K., and Asia,
only 12-29 percent is raised in capital markets.\6\
Today, more than 15,400 registered investment advisers advise 57
million clients.\7\ This includes advising on more than $32 trillion in
registered funds,\8\ $30 trillion in private funds,\9\ and nearly $50
trillion in separately managed accounts.\10\
At the end of 2016, by comparison, 12,000 registered investment
advisers advised 43 million clients.\11\
Let me put this in context. The entire U.S. banking system is $23
trillion.\12\ Thus, the capital markets are nearly five times the size
of our banking sector.
The Commission has a role in both public and private markets, each
of which offer investors and companies opportunities. Our public
markets have approximately 7,400 actively reporting issuers, of which
more than 4,000 companies list on U.S. exchanges.
We now oversee approximately 40,000 entities--including more than
13,000 registered funds, more than 15,400 investment advisers, more
than 3,300 broker-dealers, 24 national securities exchanges, 103
alternative trading systems, 10 credit rating agencies, 33 self-
regulatory organizations (SROs), and six active registered clearing
agencies, among other external entities.
The SEC oversees the Public Company Accounting Oversight Board
(PCAOB), the Financial Industry Regulatory Authority (FINRA), the
Municipal Securities Rulemaking Board (MSRB), the Securities Investor
Protection Corporation (SIPC), and the Financial Accounting Standards
Board (FASB).
Technology is rapidly transforming markets and business models.
These changes range from electronic trading and the cloud to artificial
intelligence and predictive data analytics, just to name a few. There
has been dynamic change in communications to and among investors, from
Reddit forums to celebrity influencers. Further, we've seen the Wild
West of the crypto markets, rife with noncompliance, where investors
have put hard-earned assets at risk in a highly speculative asset
class. Many of those investments have disappeared after a crypto
platform or service went under due to fraud or mismanagement, leaving
investors in line at bankruptcy court.
Today, there are more than 54 million separately managed accounts;
in 2018, there were 37 million.\13\ Transaction volume in listed
equities has doubled in the last 5 years and tripled in the last 17
years.\14\
Such growth and rapid change also mean more possibility for
wrongdoing. We've seen the number of tips, complaints, and referrals we
get at the SEC climb from about 16,700 in 2019 to more than 40,000 in
2023. As the cop on the beat, we must be able to meet the match of bad
actors.
Despite the increasing workload, the SEC staff again has rated us
among the best places to work in the Federal government; this year we
ranked third among midsized agencies.\15\ Our attrition this fiscal
year is at historically low levels, so far averaging around 3 percent
at an annualized rate.
budget request
I am pleased to support the President's FY 2025 request of $2.594
billion for SEC operations in support of 5,621 positions and 5,073
full-time equivalents (FTEs). In addition, we've requested $8.4 million
for needs supporting General Services Administration (GSA)-led real
estate projects. As this Committee considers this request, it's worth
noting the SEC's funding is deficit- neutral; our appropriations are
offset by transaction fees.
In the face of significant growth in registrants, complexity, and
individual investor engagement in markets, one may have thought that
our agency would have grown over the last 8 years. Unfortunately, the
reverse was the case--the SEC actually shrank between 2016 and 2022.
With Congress's help, we were authorized to hire 400 people in FY 2023
to bring us just modestly above where we were in 2016.
While our funding was kept flat for FY 2024, the growth in market
activity was anything but flat. We are losing pace with the ever-
increasing scale of the capital markets we oversee.
Allow me to put flat funding into the context of the SEC's overall
budget. Approximately 70 percent of our budget is for staff, about 15
percent is for technology, 5 percent is for facilities, and 10 percent
is for everything else. This agency doesn't give out grants or other
programmatic money. Thus, given year-over-year price and wage
increases, flat funding means cutting staffing, technology, and real
estate.
At the start of FY 2024, we paused on nearly all job postings and
backfilling for departing staff. As a result, we are currently more
than 300 positions below the level authorized by Congress for both FY
2023 and FY 2024.
While the agency's rules get outsized attention in the media, it's
worthwhile noting that the vast majority of the SEC's staff works on
day-to-day oversight of the markets and responding to public and
registrant inquiries. We collectively review tens of thousands of
filings a year.\16\ More than 10 percent of the agency reviews
disclosure documents, more than half of the agency is within the
Divisions of Enforcement and Examinations, and 13 percent of the agency
is in support operations. Shrinking any of these efforts will
inevitably mean that the agency will be less responsive to the public
and less able to protect the public.
As it relates to technology, we cut IT spending by roughly a
quarter in FY 2024. These reductions in technology spending will delay
transitions to the cloud, investments in data analytics, modernizations
of key systems, and important enhancements to our technology
infrastructure. As a result, we are scaling back our technology
programs at a time when the markets we oversee are growing more
technologically complex with each passing year.
As it relates to facilities, in fiscal years 2021 to 2024, we will
have shed 275,000 usable square feet from the SEC's real estate
footprint. This includes vacating one of our three headquarters
buildings in Washington, DC, at the end of FY 2023, resulting in
approximately $14 million per year in savings. Furthermore, the SEC
announced it will close our Salt Lake City office early in FY 2025.
As it relates to other expenses, we also have reduced spending on
contracts that support mission critical efforts. An example includes
our ability to update and improve the Division of Enforcement's
document management and review systems--tools that are critical to
reviewing massive document productions during the course of
investigations and litigations.
If we are again flat funded, there will be significant further
implications on our ability to monitor the markets, maintain SEC
programs, adequately resource technology, and meet the agency's
critical mission.
Without additional resources, the oversight of markets is at risk.
Our ability to find bad actors is at risk. Our responsiveness to market
participants is at risk. American capital formation and innovation are
at risk as issuers will have to wait longer to hear from us.
The SEC currently has 30 Divisions and Offices across our 11
regional locations\17\ and Washington, DC, headquarters. I'm
summarizing below the budget requests for our six Divisions and will
briefly touch on technology and real estate. For further details as
well as a review of the other offices of the SEC, please reference the
FY 2025 Congressional Budget Justification.\18\
enforcement and examinations
As I mentioned, the Divisions of Enforcement and Examinations
account for more than half of the SEC's staff. Without examination of
our registrants and enforcement of rules and laws when they are broken,
we can't instill the trust necessary for our markets to thrive.
Stamping out fraud, manipulation, and abuse lowers risk in the system.
It means that fewer bad actors will get away with misconduct. It
protects investors and reduces the cost of capital. The whole economy
benefits from that.
Division of Enforcement
As I noted, in FY 2023, the SEC received more than 40,000 separate
tips, complaints, and referrals from whistleblowers and others, a 13
percent increase over FY 2022.
Even with limited resources, the Division brought 784 enforcement
actions in FY 2023, a 3 percent increase over fiscal year 2022. When
looking only at the 501 original, or ``stand- alone,'' enforcement
actions we file--whether settled or litigated--it's an 8 percent
increase over the prior fiscal year. Our actions resulted in orders for
$4.9 billion in penalties and disgorgement. The SEC distributed $930
million to harmed investors in FY 2023.\19\
Meanwhile, rapid technological innovation in the financial markets
has led to misconduct in emerging and new areas, not least in the
crypto space. Further, the complexity of the frauds we are
investigating--and the sophistication of the fraudsters--is ever
increasing.
Addressing this requires new tools, expertise, and resources. When
the cars become faster and the highways more congested, you want more
cops, not fewer.
This year's request would grow the team by 27 FTEs to 1,447. The
additional staff will provide the Division with more capacity to meet
these challenges, investigate misconduct on a larger scale, accelerate
the pace of enforcement investigations to resolution, and represent the
Commission and protect investors in increasingly complex litigations.
Division of Examinations
The Division of Examinations serves a critical role in helping to
ensure firms comply with the law.
In FY 2023, we conducted more than 3,100 examinations across our
tens of thousands of registrants. From investment advisers to broker-
dealers to exchanges, the Division helps ensure that registrants are
following their legal obligations to customers and clients, including
seniors and other vulnerable investors.
Importantly, the Division is the first line of defense for the
investing public relying on investment advisers. It is responsible for
examining and overseeing a growing registrant population, including
more than 15,400 investment advisers and approximately 800 investment
company complexes.
Further, we work in parallel with SROs to examine the more than
3,300 broker-dealers with roughly 150,000 branch offices.
This stretches thin the limited resources of the Division.
Our FY 2025 request would help the Division grow 20 FTE to reach
1,156 FTEs.
These additional resources are the minimum just for the Division to
stay abreast of the growth in market participants and make key
investments to help protect the American public regarding emerging
cyber and information security risks.
programmatic divisions
Next, I will turn to our three programmatic Divisions.
Corporation Finance
The Division of Corporation Finance oversees the disclosures of new
issuers and public companies so that investors can make informed
investment decisions. It's important for investors to receive useful,
timely, and accurate disclosure. It's important that issuers can get
timely feedback on their registration statements and other filings.
Today, there are more than 7,400 active reporting companies, up from
about 6,800 in 2020.
In FY 2023, the Division reviewed the filings of more than 3,700
reporting companies and new issuers.\20\
The 2025 budget request would grow the team to 447 FTEs. With this
increase of 16 FTEs, the Division would still be 30 FTEs under the 2016
level.
Additional resources would allow the Division to serve investors
and issuers more ably as markets grow and evolve.
Investment Management
The Division of Investment Management oversees the 13,000
registered funds and 15,400 investment advisers that steward nest eggs
for 57 million clients. At the end of 2016, by comparison, 12,000
registered investment advisers advised 43 million clients.
As noted earlier, both the registered funds market and the private
funds market are each bigger than the banking sector, and we've seen
significant growth in both. More than half of American households,
representing more than 115 million individual investors, own registered
funds. When I started on Wall Street 45 years ago, household
penetration was less than 6 percent.
In FY 2023, the Division reviewed more than 4,200 annual and
periodic reports as well as more than 8,600 total portfolios and
insurance contracts.\21\
Given this growth in the markets, we've asked to grow the division
by nine FTEs to a total of 237.
Trading and Markets
The Division of Trading and Markets serves on the front line for
maintaining fair, orderly, and efficient markets. Market monitoring and
supervision are essential parts of the Division's activity--especially
during times of market stress.
The Division oversees 24 national securities exchanges, 103
alternative trading systems, more than 3,300 broker-dealers, 51
security-based swap dealers, six active registered clearing agencies,
and more than 200 transfer agents, among other entities.
In FY 2023, the Division responded to more than 16,000 public
inquiries. In FY 2023, the Division also reviewed more than 660 filings
of broker-dealers as well as more than 1,700 SRO proposed rule changes
and advance notices.\22\
As market centers, broker-dealers, and clearance and settlement
systems continue to grow in size and activity, so does the need for
robust supervision of these entities and intermediaries.
In FY 2025, we've requested 14 additional FTEs, for a total of 293,
to support this important function of the Commission.
economic and risk analysis
Economic analysis is critical to all of the agency's work. The
Division of Economic and Risk Analysis provides impartial economic
analyses that consider the costs and benefits of our rules as well as
their effects on efficiency, competition, and capital formation.
We get feedback from the public on these economic analyses, which
benefits our rulemaking. Our economic analyses also benefit the markets
broadly because making data available creates a public good.
In the Enforcement context, the Division's staff is instrumental in
assisting Enforcement staff with identifying potential wrongdoing,
assessing ill-gotten gains, and working to return funds to harmed
investors.
DERA assists the Commission in its efforts to identify, analyze,
and respond to economic and market issues, including those related to
new financial products, investment and trading strategies, systemic
risk, and fraud.
Given the critical nature of the Division's work, for FY 2025,
we've asked for funding to support 196 FTEs total, just one additional
FTE.
additional matters
Technology
Technology and data continue to fuel rapid change in our markets.
The rise of big data, algorithms, and AI in our markets has put more
pressure than ever on the SEC to keep pace. For example, the data
processing by the Division of Enforcement alone has grown 20 percent
year over year for the last 3 years. Cyber threats represent an ever-
increasing threat to the agency and our markets alike.
Yet, as I mentioned, the SEC is cutting its IT program by about a
quarter this fiscal year because of budget pressures. We have had to
delay technology upgrades, some migrations to the cloud, and
enhancements in data analytics. For example, we cut back significantly
our investments in Enforcement case management; Enforcement, Exams, and
DERA analytics capabilities; implementation of the government-wide Zero
Trust security program; and the workflow system supporting the Division
of Corporation Finance's disclosure review program.
Thus, we have requested $457 million for information technology.
This would help support the Commission's cybersecurity, migration to
the cloud, modernization of key systems like EDGAR, implementation of
the Financial Data Transparency Act, and other critical IT needs. This
request assumes full use of an additional $50 million from the SEC
Reserve Fund for multi-year IT projects and programs. To put these
figures in context, this spending is dwarfed by what some of the
biggest market participants spend in a month on technology.
Facilities
We currently have offices in Washington, DC, and 11 regional
offices. The total facilities cost in FY 2024 is only 5 percent of our
budget. We continue to work with GSA to manage it prudently,
significantly reducing our space footprint as I described earlier.
Part of the SEC's FY 2025 request is $8.4 million for lease
procurements managed by GSA. This amount represents the additional
funds needed for GSA's recompete of the lease for the SEC's Chicago
Regional Office.
We will continue looking for opportunities to achieve cost savings
across our leasing footprint in the years to come.
conclusion
The U.S. capital markets are the deepest, most liquid in the world.
We cannot, however, take this leadership for granted. The SEC needs to
be funded to meet the match of the growing and evolving markets we
oversee. I thank the Committee for providing me the opportunity to
summarize this budget request.
I am pleased to take your questions.
---------------------------------------------------------------------------
\1\ See Securities Industry and Financial Markets Association,
``2023 Capital Markets Fact Book'' (July 2023), Page 7, available at
https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-
Markets-Factbook.pdf.
\2\ See Carol Bertaut et al., ``The International Role of the U.S.
Dollar'' (June 23, 2023), Figure 1, available at https://
www.Federalreserve.gov/econres/notes/feds-notes/the-international-role-
of-the-us-dollar-post-covid-edition-20230623.html.
\3\ See Gary Gensler, ``Exorbitant Privilege: Responsibilities and
Challenges'' (Dec. 4, 2023), available at https://www.sec.gov/news/
speech/gensler-prepared-remarks-council-foreign-relations-12042023.
\4\ See Federal Reserve Board, ``Changes in U.S. Family Finances
from 2019 to 2022'' (October 2023), Page 19, available at https://
www.Federalreserve.gov/publications/files/scf23.pdf.
\5\ See ICI, ``2024 Investment Company Fact Book,'' Page 2,
available at https://www.icifactbook.org/pdf/2024-factbook.pdf.
\6\ See SIFMA, ``2023 Capital Markets Fact Book'' (July 2023), Page
6, available at https://www.sifma.org/wp-content/uploads/2022/07/2023-
SIFMA-Capital-Markets-Factbook.pdf.
\7\ See Investment Adviser Statistics (Tables 1.1 and 3.2),
available at https://www.sec.gov/files/im-investment-adviser-
statistics-20240515.pdf.
\8\ See Securities and Exchange Commission, ``Registered Fund
Statistics'' (Table 2.1), available at https://www.sec.gov/files/im-
registered-fund-statistics-20240418.pdf, See also Securities and
Exchange Commission, ``Money Market Fund Statistics'' Table 2),
available at https://www.sec.gov/files/investment/mmf-statistics-2024-
03.pdf.
\9\ Latest numbers are $23.557 trillion reported by RIAs + $6.954
trillion reported by ERAs = $30.511 trillion in private fund gross
assets reported on Form ADV, Section 5 of Investment Adviser
Statistics.
\10\ ADV statistics report (Table 4.1).
\11\ See Investment Adviser Statistics (Tables 3.2 and 2.1),
available here https://www.sec.gov/files/im-investment-adviser-
statistics-20240515.pdf.
\12\ See Board of Governors of the Federal Reserve System, ``Assets
and Liabilities of Commercial Banks in the United States,'' available
at https://www.federalreserve.gov/releases/h8/current/default.htm.
Total assets of approximately $23 trillion as of week ending May 29,
2024 (Table 2, Line 33).
\13\ Investment Adviser Statistics (Table 3.2).
\14\ See CBOE ``Historical Market Volume Data,'' available at
https://www.cboe.com/us/equities/market_statistics/
historical_market_volume/.
\15\ See Partnership for Public Service, ``2023 Best Places to Work
in the Federal Government'' available at https://bestplacestowork.org/
rankings/detail/?c=SE00.
\16\ See Securities and Exchange Commission, ``Fiscal Year 2025
Congressional Budget Justification'' (Tables on Pages 24-33), available
at https://www.sec.gov/files/fy-2025-congressional-budget-
justification.pdf.
\17\ When the Salt Lake City office closes in FY 2025, there will
be 10 regional offices.
\18\ See Securities and Exchange Commission, ``Fiscal Year 2025
Congressional Budget Justification'' available at https://www.sec.gov/
files/fy-2025-congressional-budget-justification.pdf.
\19\ See Securities and Exchange Commission, SEC Announces
Enforcement Results for Fiscal Year 2023'' (Nov. 14, 2023), available
at https://www.sec.gov/news/press-release/2023-234.
\20\ See Securities and Exchange Commission, ``Fiscal Year 2025
Congressional Budget Justification'' (Page 24), available at https://
www.sec.gov/files/fy-2025-congressional-budget-justification.pdf.
\21\ See Securities and Exchange Commission, ``Fiscal Year 2025
Congressional Budget Justification'' (Page 32), available at https://
www.sec.gov/files/fy-2025-congressional-budget-justification.pdf.
\22\ See Securities and Exchange Commission, ``Fiscal Year 2025
Congressional Budget Justification'' (Pages 27 and 28, filings with
regard to broker-dealers filing form 17-H, risk supervision of
alternative net capital broker-dealers, and over-the-counter
derivatives) available at https://www.sec.gov/files/fy-2025-
congressional-budget-justification.pdf.
Senator Van Hollen. Thank you, Chairman Gensler.
Chairman Behnam.
STATEMENT OF HON. ROSTIN BEHNAM, CHAIRMAN, COMMODITY
FUTURES TRADING COMMISSION
Mr. Behnam. Thank you, Chairman Van Hollen, Ranking Member
Hagerty, Senator Kennedy; great to be with you today.
Appreciate the opportunity to testify before you today on the
President's fiscal year 2025 budget for the Commodity Futures
Trading Commission. And as with Chair Gensler, these views are
my own.
For over a century, derivatives markets have played a key
role in the U.S. economy, promoting economic growth and
contributing to financial stability and the predictability of
prices that impact all Americans.
This October, the CFTC will commemorate its 50th
anniversary, and this milestone provides a natural inflection
point as we consider how the past 50 years will impact the
next. I have witnessed the massive expansion of the CFTC's
jurisdiction through Title VII of the Dodd-Frank Act, also
organic growth in our historic markets, the introduction of new
products, including the Digital Commodity Asset Class, and the
significant expansion of market participants, both
institutional and retail.
Given this exponential global growth, I have prioritized a
collaborative working relationship with our domestic and
international regulatory partners to ensure regulatory
harmonization, market efficiency, and reducing unintended and
negative consequences to U.S. derivatives markets.
For fiscal year 2025, the Commission is requesting a total
of $399 million, and 725 FTE. The request for its operational
budget was developed with the Fiscal Responsibility Act of 2023
in mind. We have sought to focus on the most critical areas to
reach this number that represents about a 2.9 percent decrease
below the fiscal year 2024 budget request and just over a 9
percent increase above the fiscal year 2023 and 2024 enacted
budget.
As Chair, I have focused on: Identifying and addressing
regulatory gaps and uncertainty, strengthening the agency
organizationally so that we are an operationally effective,
diverse, and competitively attractive employer, better
understanding and incorporating the digital asset ecosystem,
artificial intelligence, and cybersecurity into our
decisionmaking, and addressing the needs for guidance regarding
emerging product and market structures such as voluntary carbon
credit derivative contracts and vertical integration.
To date, and thanks to my fellow Commissioners and the
incredibly hardworking staff of the CFTC, the agency has stayed
on course following an agenda I outlined in early 2023. I
describe the action items by themes, including risk management
and resilience, customer protections, efficiency and
innovation, reporting and data policy, duplicative regulatory
requirements, and international comity.
Fundamental to all of these topics is the need to update
our rule set to address the derivatives industry's current
course, which is driven by technology and seeks to both
leverage and, in some instances, move away from traditional and
familiar models. The dominant disruptors of our current era
raise important questions about conflicts of interest, the
strength of capital, margin and segregation requirements, the
role and responsibilities of self-regulatory organizations,
affiliate risk management, and of course, customer protections.
As the CFTC's Chair, I have made very conscious and
intentional decisions aimed at ensuring that we not only
exemplify good stewardship of taxpayer dollars but also provide
genuine organizational support for our valued employees. My
first priority included directing an agency-wide strategic
approach to human capital management focused on rebalancing and
upskilling our workforce through succession planning and
building a bench of future expertise through pathways, and
recruiting that brings diversity of thought, experience, and
background.
It has been over 4 years since our people left their
offices and we assumed an expansive telework posture. I believe
that while we have been productive and achieved success in
certain mission-critical areas, we are keenly aware of the
benefits of being together, in person, in the office.
In addition, I have led reforms in how the Commission
collects, interprets, and reports on market data. This data
connects our infrastructure security, surveillance, analytical
and enforcement needs and duties, and will significantly impact
how we meet our mission in the tech-driven future.
The CFTC has moved to the cloud, achieved significant
advancement in cybersecurity protections, reorganized,
increased the visibility of and added new leaders, including
our Division of Data. And our goal is the long game, building
capabilities over time toward organizational maturity and
technical achievement.
Additionally, I am proud to say that under my direction,
the CFTC's new AI Task Force issued a request for comment on
the use of AI in CFTC-regulated markets. The proposed budget
reflects the minimum resources needed for the CFTC to perform
its role as a primary regulator of the U.S. futures, swaps, and
options markets; and to properly enforce the law to protect
markets and market participants.
It provides the resources we need to ensure that the agency
has the appropriate and necessary capabilities to keep up with
innovation shaping our markets in 2024 and beyond. It optimizes
resources to ensure the protection of market data we receive
and keeps the agency systems and infrastructure shielded from
emerging risks and cyber threats. It funds oversight and
surveillance responsibilities generated by an increasing number
of derivatives exchanges offering products that require
consideration of new and emerging risks.
Additionally, the budget ensures that our enforcement
program continues its proactive approach in identifying and
addressing misconduct within our ever-expanding and
transforming markets. This is especially critical in light of
growing retail participation and the need for greater
protections in the digital asset space.
As we move through 2024, I am proud of the CFTC's
undeniable record of using regulation, innovation, and
collaboration to ensure our markets function well, and
providing risk management and transparency for all
stakeholders, including and most notably, America's commercial
end users who rely on derivatives markets to manage risk.
More than ever in these uncertain times, both domestically
and internationally, we need thorough and thoughtful regulation
to ensure confidence and accountability in the derivatives
markets, to continue delivering results to the derivatives
markets and American public, we need consistency and certainty
so that we can allocate resources towards critical and multi-
year investments.
Thank you again for the opportunity to appear before you
today. And I look forward to your questions.
[The statement follows:]
Prepared Statement of Rostin Behnam
Thank you, Chairman Van Hollen, Ranking Member Hagerty, and members
of the Subcommittee. I appreciate the opportunity to testify before you
today on the President's fiscal year 2025 budget request for the
Commodity Futures Trading Commission (CFTC or Commission).
For over a century, derivatives markets have played a key role in
the U.S. economy, promoting economic growth and contributing to
financial stability and the predictability of prices that impact the
daily lives of all Americans. This October, the CFTC will commemorate
its 50th anniversary as an independent agency with exclusive
jurisdiction over futures trading in all commodities. This milestone
provides a natural inflection point as we consider how the past 50
years will impact the next.
Over the last nearly 15 years, I have witnessed the massive
expansion of the CFTC's jurisdiction through Title VII of the Dodd-
Frank Act, organic growth in our historic markets, the introduction of
new products, including the digital commodity asset class, and the
significant expansion of market participants, both institutional and
retail as a result of technological disruption. To put a number on it,
trading volumes in exchange-traded futures and options have more than
doubled; and the swaps market is now over $350 trillion,\1\ which is
approximately half of the estimated $715 trillion global market. Given
this exponential global growth, and working individually, through our
operating divisions, and the Office of International Affairs (OIA), I
have prioritized a collaborative working relationship with our domestic
and international regulatory partners to ensure regulatory
harmonization, market efficiency, and reducing unintended and negative
consequences to U.S. derivatives markets.
As Chairman, I am focused on: identifying and addressing regulatory
gaps and uncertainty; strengthening the agency organizationally so that
we are an operationally effective, diverse, and competitively
attractive employer; better understanding and incorporating the digital
asset ecosystem and artificial intelligence (AI) into our
decisionmaking; and addressing the need for guidance regarding emerging
product and market structures such as voluntary carbon credit (VCC)
derivative contracts and vertical integration.
Today, technology is driving change in the financial markets, and
the CFTC must keep pace in order to fulfill its mission and
Congressional mandate. Our work centers on customer protection and
market resiliency, while supporting continued growth and innovation
that will take the agency into the next 50 years.
To date, and thanks to my fellow Commissioners and the incredibly
hardworking staff of the CFTC, the agency has stayed on course
following an agenda I outlined in early 2023 to consider and vote on
roughly 30 new regulatory and policy matters in addition to all
proposed rules and orders from the prior year. I bucketed these actions
into themes that address: risk management and resilience; customer
protections; efficiency and innovation; reporting and data policy;
duplicative regulatory requirements; and international comity.
Fundamental to all of these themes is the need to update our ruleset to
address the derivatives industry's current course, which is driven by
technology and seeks to both leverage and, in some instances, move away
from traditional and familiar models. The dominant disruptors of our
current era raise important questions about conflicts of interest, the
strength of capital, margin, and segregation requirements, the role and
responsibilities of self-regulatory organizations, affiliate risk
management and customer protections.
As the CFTC's Chairman, I have made very conscious and intentional
decisions aimed at ensuring that we not only exemplify good stewardship
of taxpayer dollars, but also provide genuine organizational support
for our valued employees. My first priority as Chairman included
directing an agency-wide strategic approach to human capital management
focused on rebalancing and upskilling our workforce through succession
planning and building a bench of future expertise that brings diversity
of thought, experience, and background. It has been over 4 years since
our people left the confines of their offices and we assumed an
expansive telework posture. I believe that while we have been
productive and achieved success in certain mission critical functions,
we are keenly aware of the benefits of being together in person in the
office. In fact, we have heard from some of our staff and supervisors
their desire to return to the office. A resolution to the impasse in
our negotiations will allow staff to plan their lives accordingly. The
CFTC has always been a place that valued its peoples' needs to balance
work and home life, and we will continue to do so as we negotiate the
next steps.
In addition, I have led reforms in how the Commission collects,
interprets and reports on market data. This data connects our
infrastructure, security, surveillance, analytical, and enforcement
needs and duties, and will significantly impact how we meet our mission
in the tech-driven future.\2\ The CFTC has, under my direction, moved
to the cloud, achieved significant advancement in cybersecurity
protections, reorganized, increased the visibility of, and added new
leaders to, our Division of Data (DoD)--including our first Chief Data
Scientist who will lead our AI training and implementation-- and
launched a CFTC-wide technical training initiative. Our goal is the
long game: building capabilities over time towards organizational
maturity and technical achievement.
Additionally, I am proud to say that under my direction, the CFTC's
new AI Task Force issued a request for comment (RFC) on the use of AI
in CFTC-regulated markets.\3\ The AI RFC is part of a greater vision to
advance analytical capabilities through building talent, leveraging the
cloud, and developing a forward-looking culture. We have a process in
place for exploring AI use cases to help the agency better monitor,
regulate, surveil, identify pockets of stress, and enforce compliance.
We are currently reviewing the RFC comments to better understand what,
if any, policy changes are needed. Further, the Office of Customer
Education and Outreach (OCEO), the agency's education arm, issued a
Customer Advisory in January warning the public about emerging AI-
driven fraud and scams.\4\ Consistent with mandates by the
Administration and OMB guidance, I recently announced that our Chief
Data Officer and DoD Director will serve as the CFTC's first Chief
Artificial Intelligence Officer responsible for promoting the agency's
use of AI and guide us in managing AI risks.\5\
Said a bit differently, my goal is to modernize the CFTC to ensure
our continued success well into the future. We are seeing changes in
market structure and in the demographics of market participants. I
believe that institutions, products, and processes that prove valuable
enough to producers, consumers, investors, and the general public--
however such value is determined--will inevitably find a way to
integrate with established regulatory systems. It is our role to ensure
market safety and integrity by enforcing existing standards under our
governing statute and regulations, and by determining new approaches
when warranted and consistent with the law.
The proposed budget before you today reflects the minimum resources
needed for the CFTC to perform its role as the primary regulator of the
U.S. futures, swaps, and options markets, and to properly enforce the
law to protect markets and market participants. It provides the
resources we absolutely need to ensure that the agency has the
appropriate and necessary capabilities to keep up with technological
innovation shaping our markets in 2024 and beyond. It optimizes
resources to ensure the protection of the market data we receive and
keeps the agency's systems and infrastructure shielded from emerging
risks and cyber threats. It funds oversight and surveillance
responsibilities generated by an increasing number of derivatives
exchanges offering products that require consideration of new and
emerging risks. Additionally, the budget ensures that our enforcement
program continues its proactive approach in identifying and addressing
misconduct within our ever expanding and transforming markets. This is
especially critical in light of growing retail participation and the
need for greater protections in the digital asset space. The planned
prioritization in these areas will help the CFTC fulfill its mission in
a rapidly changing marketplace.
the cftc's budget request for fiscal year 2025
The Commission is requesting a total of $399 million and 725 FTE
for FY 2025. The request for its operational budget was developed with
the ``Fiscal Responsibility Act of 2023'' in mind. With the
understanding that the budgetary challenges we are currently addressing
will likely bleed into the coming year, and that some difficult
decisions will be made, we have sought to focus on the most critical
areas to reach this number that represents about a 2.9 percent decrease
below the FY 2024 budget request, and just over a 9 percent increase
above the FY 2023 and 2024 enacted budget.
division of enforcement (doe)
The Commission requests $74 million and 163 FTE to protect the
public and preserve market integrity by detecting, investigating, and
prosecuting violations of the Commodity Exchange Act (CEA) and
Commission regulations through the activities of its Division of
Enforcement. This is an increase of $5.5 million over the FY 2024
enacted budget.
The Commission's exercise of its enforcement authorities to address
misconduct that has a direct impact on CFTC jurisdictional markets,
affects the larger economy, causes public harm, or interferes with
market integrity is one facet of our approach to innovation and the
evolution of financial markets. This increase will, among other things,
support the development of innovative approaches utilizing cutting edge
technologies and upskilling of Commission staff with the goal of
identifying misconduct earlier and addressing bad actors expediently.
A review of the filings for FY 2024 demonstrates that while digital
asset related cases are rightfully demanding significant attention,\6\
DOE is ensuring that we take necessary action in all of our directly
regulated markets and in the retail fraud space involving precious
metals and forex (foreign exchange). We are also building even stronger
networks and partnerships through cooperative enforcement efforts with
other civil and criminal agencies domestically and internationally.
Looking at the matters that have stood out this fiscal year, several in
the agricultural, energy, and financial sectors exemplify our
unwavering commitment to ensuring that registrants meet their
regulatory obligations, that customers receive the protections they
deserve, that our markets remain free from manipulation and fraud, and
that misconduct in the digital asset space receives swift attention.
Nowhere have we been more active than in the digital asset space.
In FY 2023, we brought 47 actions involving conduct related to digital
commodities, representing more than 49 percent of all CFTC actions
filed during that period. A staggering statistic given the fact that no
Federal agency retains any direct regulatory authority over the
underlying (or cash) digital commodity asset market. We can only act on
digital asset fraud or manipulation when we uncover or discover
anomalies through regulated market surveillance and oversight, or
through tips and complaints we can pursue. With many agency resources
which are not considered in our budget appropriation being allocated to
an unregulated market, I fear the current trajectory is unsustainable.
Namely, we will continue to see rampant fraud and manipulation in the
digital asset market that will hurt American customers, and possibly
infect the traditional financial markets.
To date, FY 2024 is demonstrating a similar cadence. The lack of
legislation addressing the regulatory gap over the digital commodity
asset spot market has not hindered the public's enthusiasm for digital
assets, and I continue to believe Congress must act, as the 2022 FSOC
(Financial Stability Oversight Council) report highlighted,\7\ and as I
have mentioned publicly on multiple occasions.\8\ Until such time, the
Commission will continue to use its expertise and the tools it has to
protect our markets and the public.
division of market oversight (dmo)
The Commission requests $36 million and 88 FTE for the Division of
Market Oversight to continue its commitment to maintaining the
integrity of the markets as it reviews new applications and monitors
ongoing compliance with core principles and regulatory requirements.
DMO is expecting growth in 2024 and 2025 given the growing interest
in offering novel, innovative, and increasingly complex products.
Currently, there are seven exchange or DCM (designated contract market)
applications in review. Each registration application requires both
intra-divisional and inter-divisional teams of staff to review the
application and the applicant's planned operations, and determine
compliance with the CEA and Commission regulations. The Division will
need to train and dedicate additional staff to registrations as the
number and variability of applicants continues to grow.
In FY 2025, the Commission's system safeguards examinations--an
essential component of the examination program for DCMs, SEFs (swap
execution facilities), and SDRs (swap data repositories)--will remain
crucial to economic stability. Effective cybersecurity practices and
system safeguards of regulated entities requires increased direct
surveillance and vigilance for the scope of examinations conducted each
year.
With respect to rule and product filings, in FY 2023, the
Commission continued to receive a diverse array of product filings from
exchanges seeking to meet market participants' varying needs, including
many innovative products. The number of filings and the diversity of
product offerings require additional resources to ensure Division staff
can complete their reviews, and stay abreast of market developments and
the technological advancements underlying these new products and
attendant rules. For example, since 2021, there has been a significant
uptick in the number of event contracts listed for trading by CFTC-
registered exchanges. From 2006 through 2020, DCMs listed for trading
an average of approximately five event contracts a year. In 2021, this
number increased to 131, and the number of newly-listed event contracts
per year has remained at a similar level in subsequent years.
With respect to rulemakings, in FY 2024 the Division continues to
plan and undertake rulemakings to amend Commission rules, as
appropriate, to address changes in the constantly evolving derivatives
markets. The Division expects efforts in proposing, adopting, and
implementing rules to ensure the Commission's regulatory framework
keeps pace with recent market innovations, to continue in FY 2025.
division of clearing and risk (dcr)
Market events and the volatility in the global financial markets
linked to geopolitical issues, continued pandemic recovery and
reformation, weather and climate-related risk, and monetary and fiscal
policy consistently raise challenges related to liquidity and margin
requirements. These factors also fuel active debate on the need for
additional tools and resources to manage risks, including collateral
management. Given the importance of clearing to the financial system,
and the role of U.S.-regulated central counterparties (CCPs) as among
the strongest in the world, the Commission requests $35.6 million and
86 FTE for the Division of Clearing and Risk. These funds are necessary
to maintain current capabilities and expand examination and
surveillance of activities that will impact clearing markets, credit,
liquidity, and modeling risks, enhance cyber and operational
resilience, and support the safety and soundness of derivatives
clearing organizations (DCOs).
Currently, the CFTC has ten registered DCOs in the United States,
including two DCOs that have been designated as systemically important
by FSOC. In addition, the Commission regulates five registered DCOs
located outside the United States, including some that have a direct
impact on U.S. markets, given the volume of swaps and futures cleared
for U.S. entities. DCO examinations, which are time and staff resource
intensive, help the Commission identify issues that may affect a DCO's
ability to identify, manage, and monitor its risks. DCOs represent
single critical points of managing risk in the global financial system
where the failure or disruption to the functioning of these DCOs could
create or increase the risk of liquidity or credit problems spreading
among other financial institutions.
There are four DCOs outside the United States exempted from
registration by the Commission that are permitted to clear proprietary
swap transactions for U.S. entities. Although the CFTC relies
principally on foreign authorities for oversight, it does engage in
limited monitoring and surveillance of these exempt DCOs. The
Commission maintains an active, data-driven quantitative risk
surveillance function. It expects to continue investing additional
resources in human capital, data, and technology to improve its current
analytical capabilities and keep up with growth in both the scale and
complexity of risk transmission in the derivatives markets--both
cleared and uncleared.
market participants division (mpd)
The Commission requests $28.5 million and 69 FTE for the Market
Participants Division to maintain effective oversight of registered
market participants using current delegated authorities and improved
cooperative oversight policies. The CFTC oversees the registration and
compliance of thousands of derivatives market participants, including
swap dealers (SDs), major swap participants (MSPs), Futures
Commissioners Merchants (FCMs), retail foreign exchange dealers
(RFEDs), introducing brokers (IBs), commodity trading advisors (CTAs),
commodity pool operators (CPOs), floor brokers, and floor traders. MPD
also oversees the self-regulatory organizations (SROs), including the
Chicago Mercantile Exchange (CME) and the National Futures Association
(NFA), by assessing whether the SROs' compliance programs over member
firms meet established regulatory standards.
Regulated market participants are a cornerstone of the Commission's
regulatory framework. To date, 62 registered FCMs hold more than $474
billion in customer funds, and 106 registered SDs collectively transact
hundreds of trillions in notional value swap contracts annually,
serving as a vital source of liquidity for financial institutions and
commercial end users seeking to hedge their risk. As such, the CFTC
directs its registration and compliance resources to provide critical
policy and regulatory guidance to registered market participants, both
directly and in coordination with the SROs. In addition, the Commission
oversees the National Futures Association (NFA) in its role
implementing delegated authorities to register and oversee compliance
by registered market participants. The Commission ensures that
registration rules, standards, and reporting requirements continue to
be responsive to the needs of the evolving marketplace.
division of data
The Division of Data develops and implements the CFTC's enterprise
data strategy, providing the specialized technical, analytical, and
related services necessary for the Commission to standardize, acquire,
process, examine, govern and exploit mission critical market and
industry data. As the agency's designated authority on data issues, DoD
provides CFTC regulatory and enforcement staff with the data and
analytical capabilities needed to perform mission work, develops and
oversees data sharing and protection agreements with external entities,
and enables policymakers to make data-driven decisions for overseeing
the U.S. derivative markets. In accordance with this mission, the
responsibilities of DoD include establishing the Commission's data
strategy, data standards, data architecture and governance, and
building/maintaining the agency's core data infrastructure. The
Commission requests $42.1 million and 41 FTE to continue leveraging
cloud and other new technology to enhance and transform its ability to
collect, analyze and draw informed conclusions from market data to both
conduct and support effective enforcement actions, oversee rapidly
evolving markets, and formulate sound regulatory policy.
whistleblower incentives and protection
A key to the effectiveness of our enforcement division is the
CFTC's whistleblower program. The Dodd-Frank Act established the
Customer Protection Fund \9\ that supports our Whistleblower Program
\10\ and the OCEO. As of FY 2023, the Whistleblower program has issued
41 orders granting awards totaling almost $350 million since its
inception in FY 2010.\11\ In fiscal year 2024, the program has, thus
far, awarded $18 million to whistleblowers. The total sanctions ordered
in all whistleblower-related enforcement actions has surpassed the $3
billion milestone.
As this Committee knows, the overwhelming success of the
Whistleblower Program has unintentionally led to the potential for
disruptions in these two vital offices due to their funding mechanisms.
In addition to the importance of a long-term fix to avoid depletions
greater than the total balance of the fund, I believe Congress should
amend the statutory provisions to clarify the permitted uses of the
Customer Protection Fund by the OCEO.\12\ This change would allow the
Commission to implement a host of new investor protection programs and
provide information aimed at ensuring American families have the
knowledge and tools to not only protect themselves from fraud and
manipulation, but to more fully engage with the Commission and the
markets we oversee.
conclusion
I know I speak for all the Commissioners when I thank CFTC staff
for their commitment to the agency and its mission. My team and I are
working closely with staff and their union representatives in order to
find a suitable work posture, post-pandemic, that honors the importance
of being present and together in the office with appropriate
flexibility, and ensures our accountability as good stewards of
taxpayer money. The agency's long-term health and success depend on it.
As we move through 2024, I am proud of the CFTC's undeniable record
of using regulation, innovation, and collaboration to ensure our
markets function well, and of providing risk management and
transparency for all stakeholders, including, most notably, America's
commercial end-users who rely on derivatives markets to manage risk.
More than ever, in these uncertain times both domestically and
internationally, we need thorough and thoughtful regulation to ensure
confidence and accountability in the derivatives markets. To continue
delivering results to the derivatives markets and American public, we
need consistency and certainty so that we can allocate resources
towards critical and multi-year investments.
Thank you again for the opportunity to appear before you today. I
look forward to your questions.
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\1\ CFTC, Weekly Swaps Report, Weekly Swaps Report | CFTC.
\2\ See, e.g., See Rostin Behnam, Chairman, CFTC, Keynote of
Chairman Rostin Behnam at the 2023 U.S Treasury Market Conference (Nov.
16, 2023), Keynote of Chairman Rostin Behnam at the 2023 U.S. Treasury
Market Conference | CFTC.
\3\ See Press Release Number 8853-24, CFTC, CFTC Staff Releases
Request for Comment on the Use of Artificial Intelligence in CFTC-
Regulated Markets (Jan. 25, 2024), CFTC Staff Releases Request for
Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets
| CFTC.
\4\ See Press Release Number 8854-24, CFTC, CFTC Customer Advisory
Cautions the Public to Beware of Artificial Intelligence Scams (Jan.
25, 2024), CFTC Customer Advisory Cautions the Public to Beware of
Artificial Intelligence Scams | CFTC.
\5\ See Press Release Number 8903-24, CFTC, Chairman Behnam
Designates Ted Kaouk as the CFTC's First Chief Artificial Intelligence
Officer (May 1, 2024), Chairman Behnam Designates Ted Kaouk as the
CFTC's First Chief Artificial Intelligence Officer | CFTC.
\6\ See, e.g. Ian McGinley, CFTC, Remarks of Enforcement Director
Ian McGinley at the City Bar White Collar Institute: ``Trends in the
CFTC's Recent Crypto Enforcement Actions'' (May 23, 2024), Remarks of
Enforcement Director Ian McGinley at the City Bar White Collar
Institute: ``Trends in the CFTC's Recent Crypto Enforcement Actions'' |
CFTC.
\7\ Financial Stability Oversight Council, Report on Digital Assets
and Financial Stability Risks and Regulation (Oct. 2022), Report on
Digital Asset Financial Stability Risks and Regulation 2022
(treasury.gov).
\8\ See, e.g., Rostin Behnam, Chairman, CFTC, Keynote of Chairman
Rostin Behnam at the ABA Business Law Section Derivatives & Futures Law
Commission Winter Meeting (Jan. 26, 2024), Keynote of Chairman Rostin
Behnam at the ABA Business Law Section Derivatives & Futures Law
Committee Winter Meeting | CFTC.
\9\ CEA Sec. 23(g), 7 U.S.C 26(g).
\10\ COMMODITY FUTURES TRADING COMMISSION WHISTLEBLOWER PROGRAM,
CFTC's Whistleblower Program | Whistleblower.gov.
\11\ See CFTC, FY 2023 Whistleblower Program & Customer Education
Initiatives 2023 Annual Report (Oct. 2023), FY 2023 Whistleblower
Customer Education Report to Congress.pdf.
\12\ See CEA section 23(g)(2); 7 USC 26(g)(2).
Senator Van Hollen. Thank you, Chairman Behnam.
So I am going to start with you, Chairman Gensler. You
summarize well in your written testimony the mission of the SEC
as, quote, ``The cop on the beat watching out for the investing
public and issuers.'' That sums up, I think, the mission well.
And just to emphasize a point that you closed on, you do that
without taxpayer dollars; is that right?
Mr. Gensler. Yes, we have been able to charge fees, called
Section 31 Fees, and another small fee, and then that goes to
the Treasury, so basically we are about neutral.
Senator Van Hollen. Right. And so I am looking at our House
counterparts, that FSGG Subcommittee in the House and the
actions they have taken, which include significant cuts to the
enforcement budget, to the cop on the beat, and a provision
that would prohibit the SEC from implementing the Consolidated
Audit Trail, in terms of your enforcement efforts.
As I look at it, the consequence of these actions could
be--significantly weaken the cop on the beat who is looking out
for the investing public. Could you describe what the impact of
these actions would be if they were implemented?
Mr. Gensler. I think on each, they would significantly
impinge upon our ability to be that cop on the beat, but also
to answer questions. We get tens of thousands of filings from
mutual fund companies, from companies wanting to go public,
seeking accounting guidance, things like that. It is the day-
to-day bread and butter of our agency. About half our agency is
either examination or enforcement, another 10 or 15 percent is
this disclosure review, and in every place, it would be
constrained, and we literally have 40,000 tips, complaints, and
referrals per year.
Now, we can't pursue all of them, but right now in this
public figure, we generally run about 1,500 to 2,000
investigations at any one time that are happening.
In terms you asked about the Consolidated Audit Trail, this
is a really important source of information for the self-
regulatory organizations, for the stock exchanges, so to speak,
and the agency to piece together whether somebody, for
instance, is front-running a market, or trading on insider
information, that we can see patterns in the trading and the
security, so both are critical to our mission.
Senator Van Hollen. It has been said that the Consolidated
Audit Trail discloses very sort of sensitive, personal
information. Could you respond to that claim?
Mr. Gensler. So that is an important sensitivity that
everything that we deal with at our agency, could be
confidential market-moving information. But in terms of
personal information, under Chair Clayton, he actually skimmed
back the collection of any personal information. And the only
information that goes into this Consolidated Audit Trail is a
name, address, and birth year. No other social security
information, no other details about it. It is just to know who
is behind the account. I mean, if we are going to look at
insider trading, for instance, you have got to know is it Joe
or Jane.
Senator Van Hollen. Thank you. I am going to ask if you can
give me an update on a provision in law that Senator Kennedy
and I actually teamed up on years ago, the Holding Foreign
Companies Accountable Act. The idea was to make sure that
companies, no matter where they are in the world, that are
accessing our markets and using our exchanges, play by the same
rules as American companies here. We had concerns, especially
about what was happening in China, with companies in China.
More recently, Senator Kennedy introduced, and I am pleased
to be his co-sponsor, legislation to make sure that companies
and executives of companies, no matter where they are
operating, comply with the same processes for disclosure
regarding insider trading, as we have in the States. Could you
give us an update on implementation of the first, and your
views on the second?
Mr. Gensler. I am glad to. First, a shout out to both of
you, because I think it was with that bill, the Holding Foreign
Companies Accountable Act, that the SEC and the PCAOB were
given the sufficient leverage to negotiate an arrangement with
the Chinese authorities, Ministry of Finance, and Chinese
Securities Regulatory Commission, a statement of protocol in
the summer of 2022, where they would give the complete access
to inspect those auditors, and also bring investigations.
In 2021 and 2022 the Public Company Accounting Oversight
Board went over to Asia, actually in Hong Kong, and inspected
numerous auditors there. Right now, in China, I can't remember
if it is in Beijing or Shanghai, but they are in China right
now doing this for the third year. And for the third year, the
Chinese authorities are allowing that access.
Now, I would say one cautionary note: the auditing there is
not as high quality as the auditing here in the U.S. or in
Europe, but they are giving the full access to conduct the
inspections. And that wouldn't have happened, I think, without
the leverage you gave us to negotiate that.
On the bill itself, I did take a quick look. I know that
our staff has given you technical assistance, but as I
understand the bill, the Holding Foreign Insiders Act, is to
close a gap, because foreign private issuers, and there is
about 1,000 companies that have that designation, about 1,000
European, Asian, South American issuers that have that
designation. If you are a foreign private issuer, you don't
come under Section 16(a) of the Securities and Exchange Act,
which has to do, simply put that directors, and officers, and
10-percent holders have to file within 2 days if they are
selling stock. And you are closing that gap, so that if you
want to have access to the U.S. markets, you have to comply
like U.S. issuers do.
Senator Van Hollen. That is exactly right. It is just to
make sure that we have a complete, even playing field again to
protect the investing public, and that everyone has got to play
by the same rules. We appreciate your summary of it. That is,
that captures what it does, and we hope to get it done.
Senator Hagerty.
Senator Hagerty. Thank you, Chairman Van Hollen, and
welcome to the two chairmen today.
Mr. Gensler, I want to start with you. You may recall that
last September, in a Banking Committee meeting, you and I
discussed the SEC is tortured, in my view, legally baseless
interpretation of Section 913 of Dodd-Frank. And you have
relied on Section 913 to justify, I think, some of the most
controversial rulemakings you have done, notably: The Private
Funds Rule, the Predictive Data Analytics Rule.
Just last week, the Fifth Circuit struck down the Private
Funds Rule. It acknowledged what I think many market
participants had warned about, other commissioners had warned
about, Members of the Senate had warned about.
Yet, you are back now asking for $2.6 billion for fiscal
year 2025, and it concerns me that SEC staff resources are
being wastefully deployed on rulemakings that wind up not
affecting the markets as you would hope.
In fact, they are way outside of your remit. I would like
to ask you, Mr. Chairman, how many SEC employees, you mentioned
70 percent of your budget is people, I would like to understand
what percentage of the staff have been tied up working on the
Private Funds Rule, the Predictive Data Analytics Rule, the
Climate Disclosure Rule, the Dealer Rule, the Safeguarding
Rule, the Stock Buyback Rule, the Best Execution Rule, and the
Order Competition Rule? Can you tell me how many of your staff
resources have been dedicated to these more partisan, baseless,
in my view, interpretations of the law?
Mr. Gensler. I thank you, and I do remember the
conversation. If I might say, what we did in that rule, I
think, was to help investors in private funds get quarterly
statements on their fees, performance, and any side deals with
other investors. And it was based upon, as you rightly said, a
new provision in Dodd-Frank from 12 or 14 years ago, from Dodd-
Frank. We thought and believed that it was within the law. The
Fifth Circuit found----
Senator Hagerty. I think you found that it wasn't----
Mr. Gensler [continuing]. Found otherwise, and we respect,
you know, we do things within the law and how courts interpret
it. On your general question about staffing, I think it is less
than probably 5 percent of our 5,000 people at any given time
that are working on rulemaking. It is people in our Chief
Economist Office, people in our Office of General Counsel,
people in the various policy divisions, of course, the
Commissioners themselves.
But on the order of magnitude, you know, it could be 200,
it could be 300 people in the whole agency that, in part, are
working on it. They are not full-time. The economists are
working on other things as well, of course.
Senator Hagerty. Well, let us go back to how you prioritize
resources, because instead of staffing resources outside of the
remit, which I think that full litany of rules that I just
read, are outside of your boundaries and outside of your remit,
you are also not prioritizing staff, and you are not
prioritizing rulemaking for areas that desperately need it.
And here I am talking about setting in place a constructive
set of rules of the road for the crypto industry, this is an
innovative industry. It is an industry that the United States
should be leading on. Yet other jurisdictions in other
countries are setting up rules for their ecosystems. Yet what
happens here with the SEC, and with the CFTC is constant
roadblocks and a lack of certainty.
And what is happening is that this innovative industry is
finding itself increasingly pushed offshore. I don't think that
is the result that we want to have here in America. And I
certainly think a far better allocation of resources, rather
than putting it against the Private Funds Rule, or Predictive
Data Analytics Rule, would be to focus on setting in place
rules of the road for innovative markets like this.
I want to take, for example, the years-long process that it
took to approve bitcoin's ETF, and that only happened recently,
and it happened in the wake of a court finding that your
grounds for disapproval was warrantless. And I am just very
puzzled then, in light of the most recent court ruling, why we
haven't fully approved the issuance of Ether ETFs.
Chair Behnam, I want to turn to you. Is Ether a commodity?
A yes or no answer will do.
Mr. Behnam. Yes.
Senator Hagerty. Chairman Gensler, the same question. Is
Ether a commodity?
Mr. Gensler. Senator, we actually, as an agency, did
approve Ethereum exchange-traded funds----
Senator Hagerty. Only partially, it is not--the approval is
not complete.
Mr. Gensler. Well, we address ourselves to the filings in
front of us, and we approved it and----
Senator Hagerty. So you are saying that all Ether
applications have been approved by the SEC, they have been----
Mr. Gensler. The Ethereum exchange-traded product of
filings that were in front of us from stock exchanges, I think
there were eight or nine of them, were all jointly approved.
Individual issuers still are working through the registration
process. That is working smoothly, and I would envision
sometime over the course of this summer, they will--you know,
those are just disclosure kinds----
Senator Hagerty. That is great news. If you are committing
to me that those applications will be approved by the end of
the summer. I appreciate that. We have got to get this market--
--
Mr. Gensler. Yes. We have already approved, and if I can
say just a little bit further, the Ethereum exchange-traded
product, we actually, last summer, had already--based upon a
well-regulated market--the Chicago Mercantile Exchange has
Ethereum futures contracts that are 3 or 4 years old already,
based upon that well-regulated market, even last summer we had,
there were Ethereum exchange-traded products, that was called
ETFs, based upon those Ethereum futures, last summer. That has
already happened.
Senator Hagerty. Well, I take it from your answer then that
the applications that are still pending for Ether, this would
be very helpful to the marketplace to get this clarified. Are
you are ready to approve those, and you will get before the
summer is----
Mr. Gensler. Well, again, that is done at a staff level,
but it is just disclosure and registration, and those
registration statements have to have the proper disclosures and
go through before they go, what is called effective. But we
have already----
Senator Hagerty. Well, the point if you have approval that
was supported----
Mr. Gensler [continuing]. The Commission has already
approved the (crosstalk)----
Senator Hagerty [continuing]. Ether needs to be approved as
well, completely. I am going to move quickly on to another
question here that I have got, and that has to do with--and
Chairman Van Hollen brought this up, the Consolidated Audit
Trail Data.
And I think this is a concern, Mr. Chairman, that a number
of us feel it is an extensive amount of data, billions of
dollars' worth of equity and option trading data, and it does
have personally--excuse me--personally identifiable information
on investors associated with that, as you mentioned, Mr.
Chairman.
But I think all of us are concerned, if we look at other
agencies, for example, the IRS. The IRS has had a very, very
terrible track record of being able to maintain and protect
individual taxpayer's data. There is a person sitting in jail
right now, who disclosed thousands of taxpayer returns and
their data just so they could go after political enemies.
If you think about the FISA context, we found out that in
2021, the number was 278,000 times in 2021, there was
unauthorized access of Americans' personal data, including
political figures. And so there is a deep concern there about
this type of data availability, and what is being done to
protect it. You mentioned at any time, you have got 1,500 to
2,000 investigations underway, presumably relying on this data.
What are you doing to protect it? And what law requires you to
protect it and to penalize anybody that might disclose it?
Mr. Gensler. It is a very important matter to us. First,
only a limited number of people at the SEC even have access
to----
Senator Hagerty. Can you give us the numbers, Mr. Chair, to
give a sense for that?
Mr. Gensler. It is less than 3 or 4 percent of the agency.
We can come back to you and give you, but it is in that 100 to
200 range. So it is not even the whole 1,300 people in
enforcement, to give you a sense. It is a much narrower group
of people, and that is a really, they all go through particular
training, and so forth, of how to access it.
Senator Hagerty. How did they get permission to access it?
Senator Van Hollen. With respect, so we have seven minutes
allocated for colleagues. If we are about a minute 45 seconds
over here in terms of exchange, if you wouldn't mind just a
quick answer, because I just want to make sure we get to other
members. And we are going to have another round.
Senator Hagerty. Okay.
Senator Van Hollen. Just, I have 7 minutes, so people could
have plenty of time.
Mr. Gensler. And I am also willing, Senator, to meet with
you later today, or tomorrow, or to get on the phone and chat
this through with you, or any matter with you.
Senator Hagerty. Yes.
Senator Van Hollen. We can come back to it on the second
round, too. I just want to make sure.
So let me, let me pick up, if I could, Chairman Gensler,
Senator Hagerty raised the issue of crypto assets,
cryptocurrency, obviously, this is an area where Chairman
Behnam has been involved as well. And we all are very aware of
the fact that there is a big debate going on Capitol Hill right
now regarding whether these things are fish or fowl, and which
agency should have jurisdiction.
But I would hope that we would all be able to agree on a
couple things, which is that we want to protect consumers and
the public, number one, and number two, however we move
forward, we deal with the anti-money laundering equivalent part
of this, making sure that these assets cannot be used for
nefarious purposes.
So again, our House subcommittee counterpart included a
provision, Chairman Gensler, regarding SEC crypto regulation,
and specifically, it reads, ``None of the funds made available
by this Act may be used to carry out an enforcement action
related to a digital asset transaction except for enforcement
actions related to fraud or market manipulation.'' And last,
and it goes out and sets out some conditions; could you speak
to what the consequences would be with respect to the goal of
protecting consumers and the public if this were adopted?
Mr. Gensler. It would seriously undercut our efforts. While
not all crypto are crypto securities, some are under Chair
Behnam's jurisdiction, those that are have an obligation to
disclose to the public, it is called a registration, to
disclose to the public full, fair, and complete information. We
would lose that.
Secondly, intermediaries, so-called exchanges, broker-
dealers, and the like, register, and then the public gets
protection. For instance, a really key protection is that your
funds are segregated and protected. And so our securities laws
are not solely about fraud manipulation. Stamping out fraud
manipulation is really important, but it is also about, if you
register, in this case, a crypto security token, you have to
then give disclosure so the investing public gets the benefit
of that.
If you register a crypto broker or crypto exchange, you get
the benefit of things like segregation, you get the benefit of
a rulebook on the exchange, like we have on, let us say, the
New York Stock Exchange. There is a lot of benefits, but it
would also undercut ongoing current cases that we have in front
of courts right now. And we have been very successful in a
number of these cases where, at least on the law, on motions to
dismiss, and so forth, the judges have found we have got the
appropriate reading of the law, and then they will move on to
the fact part of the cases.
Senator Van Hollen. So just to be clear on that last point,
this would interfere directly in ongoing cases?
Mr. Gensler. It would interfere directly on ongoing cases
that we have in front of various circuits--or various district
courts.
Senator Van Hollen. Thank you. Chairman Behnam, I mentioned
the importance of making sure that these assets, currencies,
cannot be used for nefarious purposes, and the need to apply
the equivalent of the anti-money laundering standards to these
assets. Regardless of how we decide to treat them, would you
agree with that? And what measures should we use? Should we
just simply apply existing AML provisions to these currencies?
Mr. Behnam. Senator, thanks for the question. You know,
from a CFTC perspective, and as I have said publicly for many
years now, it is a legal authority issue, we, to Chair
Gensler's point, in the earlier question, have anti-fraud and
anti-manipulation authority for digital commodity assets. So we
have been quite successful over the past 10 years, really, in
bringing enforcement cases.
But the weakness that we have, or the shortcoming, is that
we have to rely on folks coming to us, providing tips, and
complaints. We don't have those traditional regulatory tools,
registration, custody, surveillance, oversight that have really
made American capital markets and derivatives markets so
strong. As it relates to AML, KYC, again, it is a legal
authority issue. If Congress were to move on some authority for
the CFTC, certainly that would be a key component of this,
given what we have seen and experienced in this digital asset
space around AML and KYC.
I don't think we need to stray too far from existing law. A
lot of AML, KYC enforcement is conducted through the Treasury
Department. We work very closely with FinCEN on certain
authorities we have, but it is limited in scope, but I would
think, you know, the current AML, KYC structure, at a bare
minimum, is adequate. I do think that technology would require
some rethinking of how we need to consider both anti-money
laundering and know your customer.
Senator Van Hollen. Thank you. Chairman Gensler, any
comment on that?
Mr. Gensler. Yes. One of the real challenges is that these
crypto tokens are transferable outside of the traditional
financial sector on what is called permissionless ledgers. And
so one of the real challenges is, it is not as easy to apply
the anti-money laundering law. So for instance, bitcoin is the
token of choice by ransomware attacks. I mean, that is, you
know, ``Pay us in Bitcoin.'' And you can imagine there is a
whole cottage industry in, you know, Eastern Europe preying
upon U.S. companies.
Senator Van Hollen. So Chairman Behnam, you know, last
year, I joined with several of my colleagues here to send you a
letter urging you to reject a pending proposal by a private
prediction market operator that could allow for illegal
gambling on U.S. elections and their outcomes. I was pleased to
see the CFTC reject this proposal shortly after. I understand
this is an ongoing matter. But could you just speak to the
potential harms of legalized election gambling, given all the
challenges we are already facing to our democracy today?
Mr. Behnam. Thanks, Senator. And, you know, you make the
point directly. There is a lot of issues around election
integrity, and you know, from an agency perspective and from an
existing legal perspective, there are certain parts or products
that are prohibited to be traded on CFTC-regulated exchanges.
Quickly, anything that has to deal with war, assassination,
terrorism, anything that is against Federal or State law,
against the public interest, or, as you point out, something
like gaming. So the Commission has long held a position that
prediction markets, or derivatives contracts on elections are
illegal. We have faced a number of entities, as you suggested,
that continue to want to list these contracts.
We have stayed them in certain circumstances. We are facing
litigation in other circumstances. But more recently, just a
few weeks ago, we proposed a rule that would ban prediction
markets on election contracts.
And I think the one thing this Committee should know, and
your colleagues throughout the Senate, is as we pointed out in
the digital asset space, our authority over non-traditional
assets or assets we don't have direct oversight over in the
cash or underlying market, is limited to fraud and
manipulation.
So in an instance where you had a derivative contract that
was based on an election, local, State, or Federal, if there
was allegations of fraud or manipulation, whether it was a news
story alleging a candidate was ill, or was not running, or some
news story that wasn't necessarily accurate, a voting machine
perhaps was broken and sort of deterred folks from voting, we
then, the CFTC, because of that allegation of fraud or
manipulation, would have to police that market. We would have
to police that allegation because that allegation, whether true
or not, could have an impact on the markets we regulate.
So to your point about election integrity, I think the last
thing we need right now is sort of commoditizing elections. But
again, more clearly, this, in my view, is clearly against
existing law, and we are taking steps to make sure they are
banned.
Senator Van Hollen. Thank you. And I see we went over a
little bit here as well.
Senator Kennedy. Mr. Chairman
Senator Van Hollen. Are you next, Senator Kennedy, or
Senator Boozman.
Senator Kennedy. No. I think Senator Boozman is, but I just
want--I love you like a brother, Chris, but John and I would
like a chance to ask questions.
Senator Van Hollen. Well, that is what I am getting to now.
Senator Hagerty. No.
Senator Hagerty. I think the question is, that the order,
if there is not another Democrat here, I think it was my staff
just raised it with me, too. We should let the other
Republicans go before----
Senator Van Hollen. Oh. Okay. Let me----
Senator Hagerty [continuing]. Are you going to go back and
forth?
Senator Van Hollen. Let us figure this out. Well, whoever
is going to go next, is going to go next. I mean the normal
pattern is to go back--well, we want to be accommodating the
members.
Senator Kennedy. Yes.
Senator Van Hollen. So who is next on your side? Senator
Kennedy.
Senator Kennedy. Okay. I will try to be as quick as I can.
First, Mr. Chairman and Mr. Chairman, welcome. You know, thanks
for being here. You are both looking well.
Chairman Gensler, do you remember--do you remember, I know
you do, back in October 2020, Ant Group, a subsidiary of
Alibaba, announced an IPO, and everybody was all a titter, you
know, to go and invest in this extraordinary IPO because
Alibaba is such a successful company. And the CEO of Alibaba
got crossways with President Xi, and unsurprisingly, President
Xi won, and he cancelled the IPO, ``he'' meaning President Xi,
for Ant Group, subsidiary of Alibaba.
And of course, after the announcement of the cancellation
was made, Alibaba stock dropped about 8 percent. Do you
remember that? I did some checking and 2 days before the
announcement that the IPO was cancelled, a bunch of insiders at
Alibaba dumped about $150 million worth of Alibaba stock,
therefore avoiding an 8 percent loss which other investors who
didn't know about the IPO cancellation had to swallow; insider
trading; and I said, how can this be?
Well, our law provides, I am not blaming it on you, this is
Congress' fault, our law says that if you are the CEO of an
American company and you sell your stock, you have got to
report it to the SEC within 2 days of the sale, and you have
got to report it electronically. You can't use snail mail. And
you post it there, in front of God and country on your
Internet, on your website.
But a foreign executive doesn't have to do this. The
foreign executive, he has weeks to inform you that he has
executed an insider trade and he can then send it to you by
snail mail, and it is not even posted on the website.
So Senator Van Hollen and I have a bill to basically say
the foreign investors and the foreign executives have to follow
the same rules as the American executives. I mean, insider
trading is insider trading. Will you support that? We talked to
my Democratic colleagues?
Mr. Gensler. I think that you are addressing something,
Senator Van Hollen, and you are addressing a gap in our current
regime. We have about a thousand of these foreign private
issuers, and you are right that they don't have to currently
file within 2 days electronically their trades, and I think
that would help close a gap.
There is another gap that is actually a 25-year-old rule
and I have asked staff to look at called Regulation Fair
Disclosure, or FD, when it was under Chair Levitt, some years
ago that he put in place. It is a simple concept, if you share
material nonpublic information to analysts, or Wall Street, or
to the press, you have got to put it out to everybody, and it
has helped protect the public, fair disclosure.
But guess what? There is an exemption there for foreign
private issuers as well. So I have asked staff to take a close
look. We would have to go through Notice and Comment rulemaking
to change that.
Senator Kennedy. It is a good idea, a good idea. Well, we
are going to try to move our bill by usually unanimous consent.
I can't imagine anybody who will object, but I have seen it
happen before. So any help you can give us.
I wanted to ask, last weekend, I know, I need to get a
life, but I sat down and read Judge Engelhardt's opinion in
the--I forget the name of the case--National Association of
Private Funds Managers v. SEC. It is the private funds rule
case, and I thought the opinion was, regardless of what you
think about the result, I thought it was well-reasoned, well-
written, far-reaching, and what I wanted to get your thoughts--
and I know the Fifth Circuit en banc, can change it, and the
Supreme Court might review it, but I wanted to get your
thoughts about the consequences of the holding in that case,
holdings, on your other rulemaking procedures?
Mr. Gensler. I am glad that you read the case, and of
course if it is in the Fifth Circuit, that is in New Orleans.
Senator Kennedy. Yes.
Mr. Gensler. But we are still reviewing and thinking about
our next steps. But I think that what it said, and Senator
Hagerty and I were talking about it, is this new provision 14
years ago, in Dodd-Frank, Section 913 of that which----
Senator Kennedy. Which is part of the Adviser's Act?
Mr. Gensler. Part of the Adviser's Act, you might remember,
and it is 211(h) of the Adviser's Act, that talks about new
authorities about investors, the court read that to be just
about retail investors, and so we are looking at that but, you
know, if you are asking me, that means that narrows that
authority. Of course, we do everything within the law and how
courts interpret it, but we are still--we are still thinking
about the next steps, but it would narrow that authority to, I
think as they read it, I am using a colloquial word, ``retail''
investors.
Senator Kennedy. One of the things, Mr. Chairman, that got
my attention, and you can debate whether it is part of the
holding or not, but the court seemed to seize on the fact that
in terms of your fraud rule based on the SEC's experience, out
of the thousands and thousands of these private funds, you have
only found 0.5 percent, not 5 percent, 0.5 percent instances of
fraud, but yet the requirement to comply with the private funds
rule was going to cost the private funds industry over $5
billion a year. Obviously, it was a cost-benefit analysis. That
made sense to me. What do you think?
Mr. Gensler. Well, with all respect to any court and so
forth, we put certain things in a filing and so we listed, I
don't remember, a couple dozen examples there, exemplars, we in
our enforcement and what we do in enforcement is we have cases
when it comes to our attention and we pursue that fraud and
then we either settle or we litigate, and so we were giving
some of those examples.
But again, we are still looking at that case, we are
looking at the opinion, trying to determine next steps. But I
think that in any area in the law if we have examples of fraud
that is to help protect the public, and it is not whether there
is tens of thousands of them but, you know, in that case, a
couple dozen real cases, real cases that we were able to point
to.
Senator Kennedy. But the question was being raised--and I
am going to shut it down, Chris, cost-benefit, okay, and the
court was saying that there are only 0.5 percent, half of 1
percent instances of fraud based on SEC experience. But the SEC
issued a rule that was going to cost everybody $5 billion a
year, and does that make sense? And I think he was raising that
issue.
Mr. Gensler. Well, we address ourselves to cost-benefit I
think in a very serious way as to what problem we are trying to
solve. In this case, what we were trying to solve is
information for the limited partners investing in private
funds, and behind those limited partners, of course, are
pension funds, endowments, your State pension funds probably,
in your State, to have quarterly reports to them on the
performance fees, and arrangements with other investors.
And this was not meant to be public information. It was
just to provide information to those. I think that would
promote greater competition and efficiency in that market but
again, the court had a different view on this important Section
913.
Senator Kennedy. Thank you, Mr. Chairman.
Senator Van Hollen. Thank you, Senator Kennedy.
Senator Durbin, and then Senator Boozman.
Senator Durbin. Thank you, Mr. Chairman. It is good to see
you both. Most people know, but it bears repeating that the
CFTC, in particular, has a special connection to my State and
the City of Chicago. Mr. Gensler, having served in that
capacity, you know that full well, and the SEC, of course, is a
highly respected institution as well; thank you for being here
today. There is a difference between the way that your two
agencies are funded, is there not?
Mr. Gensler. As I understand it, but having had Ross' seat
and having once had that special relationship with the Senator
from Illinois, we are fully funded or budget neutral because of
fees we can assess on transactions.
Senator Durbin. Chairman Behnam.
Mr. Behnam. We do not have a user fee appropriated on an
annual basis by Congress.
Senator Durbin. And as I understand it, in the President's
request, $2.6 billion for the SEC, $399 million for the CFTC;
is that about right?
Mr. Behnam. Yes.
Mr. Gensler. Yes.
Senator Durbin. I raise that point as my initial
observation because I want to join the chorus in asking about
the future of crypto. This is an amazing phenomena, 88 percent
of the American people have heard about it, one in five have
invested in it, 75 percent say they are not confident in the
safety and reliability of crypto, 45 percent report that their
investments have performed worse than they had expected, and
most do not realize that there is no insurance involved in
this, no Federal guarantee. You are on your own when you go
into crypto, correct?
Mr. Behnam. Yes.
Mr. Gensler. Yes. It is a field that is rife with abuse and
fraud and, at least in the--those tokens that are crypto
securities are not properly giving people the disclosure that
you would get for any other offering.
Senator Durbin. You have been quoted, Mr. Gensler, saying,
``It is rife with fraud, scams, and abuse.'' I think you just
about repeated that?
Mr. Gensler. Yes. And some of the leaders, 2 years ago, in
this whole field are either in jail, about to go to jail, or
awaiting extradition. I mean, tens of billions of dollars have
been put at risk.
Senator Durbin. Despite the House Bill, Chairman Behnam, we
have those who worry that CFTC is biting off a hell of a lot
more than it can chew when it says they want to play in crypto
and regulate the industry, at least some aspects of it. What in
the world makes you think that you can get into this fast-
moving, capacious world and be effective as a regulator?
Mr. Behnam. Senator, you know, using the word ``play'', I
think I would sort of disagree with that respectfully. This is
our responsibility, this is my responsibility as chair to make
observations about commodity markets, and to relay what I
observe to all of you. And currently, there is a gap in
regulation over non-security commodity tokens.
Our enforcement record at the CFTC, I think, demonstrates
our success and our expertise. Over the past 10 years, we have
brought 135 crypto cases. We have brought in billions of
dollars, and we have successfully policed a market where we
don't have direct authority or jurisdiction, which ultimately
leads to all of this fraud, and rampant abuse in markets, and
ultimately, public mistrust, lack of confidence, and loss of
funds.
So, we are one of two market regulators in the U.S.
financial system. We are adequately equipped to oversee the
markets that we traditionally oversee----
Senator Durbin. Let me stop you there.
Mr. Behnam. Yes.
Senator Durbin. What makes you think you are adequately
equipped to deal with this market?
Mr. Behnam. Finishing that statement, we are adequately
equipped to oversee the markets we are mandated to oversee. But
if we were to be given authority over crypto markets, I would
certainly expect there to be an increase in our budget.
Senator Durbin. Let me ask you, Chairman Gensler, having
lived the life of Chairman of the CFTC, do you think that
agency is capable of handling the responsibilities we are
talking about?
Mr. Gensler. I am going to be conditional. I think it
depends on what they are given. I think that the Congress'
wisdom was to have an agency to oversee disclosure-based
markets where issuers are asking the public to buy and sell
their securities, and are investing in those--and most of the
crypto market is that--there is 15- to 20,000 of these tokens,
and without prejudging any one of them, most investors
expecting to benefit from the efforts of others, that
disclosure-based regime has not been set up at the CFTC. The
CFTC, I love, it is a great agency, but it was set up to do the
derivatives. There is not disclosure for instance, mandated,
required, nor as Congress suggested, own corn, wheat, oil, or
interest rates.
So it is this disclosure-based regime that we have at the
SEC. And I would say that largely the crypto field has been
thumbing its nose at it and been non-compliant.
Senator Durbin. And the differences are not as significant
when it comes to the investigative resources and mission of the
SEC as opposed to the CFTC.
Mr. Gensler. I think, having had the honor to chair both, I
mean, they are both great agencies. We have about, I don't
know, maybe nine times the staff or so, roughly. So we have got
a greater remit. And also our standards and rules around
exchanges, and protecting the public that there is not as many
conflicts, you know, and the New York Stock Exchange can't
trade against their customers and run a hedge fund on the side,
as sometimes happens in this crypto field, for instance.
And so the New York Stock Exchange can't actually also run
a hedge fund on and trade against their customers, or make
markets ahead of their customers. But in the crypto field, that
is what is happening on a lot of exchanges. That they are
commingling all these functions, they are taking the customer's
assets. So they are taking custody. They are often then using
those assets and trading against them. I mean, it, it was very
public what happened in FTX.
But that is not unique. It has happened in multiple places
that there is this commingling. The intermediaries are really
presenting themselves as exchanges, but they are doing an awful
lot of other things to put their interest ahead of their
customers.
Senator Durbin. So they are telling their customers, go
long. They are telling their internal investors, go short?
Mr. Gensler. They may be, depending upon the company,
depending upon the day, they may also be buying into the tokens
and then listing them. And when you list a token, you get a pop
in the value of the token. And so that is good for the
intermediary in the middle as well.
Senator Durbin. It seems it is like a chia pet. It looks
like a good idea for a gift until you buy it.
Mr. Gensler. It is really, it is really, this is a field
that is not serving the public well right now.
Senator Durbin. Mr. Chairman, I yield.
Senator Van Hollen. Thank you, Senator Durbin.
Senator Boozman.
Senator Boozman. Well, thank you. That is hard to follow.
We appreciate you all being here very much. I would like to
start with the CAT, and my understanding is, you know, prior to
the Consolidated Audit Trail, and the sense bought a stock,
that information remained with her or her broker. Now, it is
going to, to you, the SEC and FINRA. That seems to be very much
Big Brother. My main concern is, I don't think the SEC has the
authority to set up the CAT, but I am also concerned that SEC
and FINRA don't have the ability to secure it.
When I was working with you when you are at CFTC, we had
the OPM breach. We had the SEC breach. The list goes on and on.
And again, I don't see any special ability of yours to secure
that information, nor is the need for that information to be
brought to a central depository, unless you have got a problem.
And then, you know, you can subpoena it or do whatever you want
to do
On top of that, there is no accountability, no oversight,
which is a huge problem given their pay scale and remote work
schedule. So we are going to be writing a letter about that and
see if we can dig into some of those things.
I was going to ask the question about how many people
work--how many people have access? But you mentioned 100, 200,
you don't even know, you know, how many people have access to
the data that is coming in? So maybe you can tell us how often
they are using the CAT data and how many enforcement cases have
been used as a result of the CAT data.
Mr. Gensler. I thank you for the question, reminding me
about when we worked together when I was in that chair.
Senator Boozman. Right.
Mr. Gensler. But in 2010, when I was in that chair, there
was something called the ``flash crash'' and one of the things
that happened as a result is that CFTC within 24 to 48 hours
understood all the movements in the futures, or at least had
the data, we had to analyze it. Good staff, it takes time. I
was struck when I was in Ross' job--in Chair Behnam's job at
the time, the SEC did not have that ability to have the data to
assess what happened. It took months of special calls and
getting the data.
So that is what Chair Shapiro tried to address back then,
and wrote a rule, Notice-and-Comment Rulemaking long ago. I
came in in 2021 and the Consolidated Audit Trail had already
been stood up. There is a National Market System plan on that.
In terms of your specific question, it is a narrow group.
And I did say to Senator Hagerty, we can come back to the
specifics. I just didn't want to misstate if it is 122 or 142.
And there is a lot of limitation on people using the data and
tapping into the data, even at the SEC, in enforcement. It is
not everybody in enforcement, it is not everybody in our
trading and markets, it is very limited.
But the reason that it is important information is we have
a market system that has--and I might be off like 15 to 20
different exchanges. I mean we all know the big ones, like New
York Stock Exchange, and NASDAQ, and Chicago Board, but there
is multiple exchanges, and trades can go across these different
venues and so it is tying it together, thus called the
Consolidated Audit Trail, something that Chair Behnam had, you
know, the Chicago Mercantile Exchange and could get that data
more readily, as I remembered 14 years ago.
So that is where it helps us, in terms of the number of
enforcement matters. From time to time we do include that in a
public release. I mean there are some notable ones in insider
trading where the data itself helped us understand what was
happening in the markets.
Senator Boozman. How many? How Many?
Mr. Gensler. I want to be careful because I have to think
about how many have we publicly disclosed in the enforcement
matter that some of the information came from CAT, which is a
smaller number than actually has been used? So I think I am
just going to have to be careful and come back to you, but it
is an important tool that is used by our market oversight. And
also if I might say, the stock exchanges, and there is eight
different stock exchange groups that use it for their market
surveillance.
Senator Boozman. Well, we could eliminate a lot of problems
if we knew what everybody was doing all the time, but we have
protections, you know, in place or should have protections in
place as to prevent, again, this 100, 200 people having the
ability to pour through data. And then the other concern is the
security, and I think that is a huge issue, and I don't think--
I simply don't think you have the ability to do that.
Chair Behnam, interest rate volatility is up and U.S. firms
want to hedge their interest rate risk through derivatives
clearing houses. I know you agree that incentivizing clearing
is a good thing but U.S. customers are prohibited from clearing
rates in several foreign jurisdictions, including Japan and
elsewhere. The problem is that foreign customers aren't
prohibited so U.S. customers are at a disadvantage. Will you
commit to allowing U.S. customers the ability to hedge their
global interest rate risk to ensure a level of playing field?
Mr. Behnam. Thanks, Senator. We have a very clear
regulatory structure around access to U.S. customers, this is
all driven around customer protections and bankruptcy
protections, and as we at the agency evaluate non-U.S. clearing
houses who have the ability to register with the CFTC fully, or
fall under an exempt clearing house model which was created in
Dodd-Frank 14 years ago, we have to respect those boundaries of
bankruptcy protections and customer protections, which I think
you and your colleagues can agree are the sort of pinnacle of
what we do, and what we care about.
So as it relates to U.S. customers and access to foreign
markets, certainly commit to working with other jurisdictions,
other institutions who want to register with us fully or fall
within an exempt classification, but I feel very strongly that
whatever we do with respect to non-U.S. entities who want
access to U.S. markets, we have to ensure that the same
protections that apply for U.S. entities, whether it is a U.S.
Clearing House, or U.S. broker in FCM, or U.S. exchange, apply
to those non-U.S. entities.
And there are certain jurisdictions that don't necessarily
have parallel bankruptcy law, or parallel regulations that
would either allow them to register with us fully, or provide
those bankruptcy protections which are paramount to U.S.
derivatives laws.
Senator Boozman. Thank you. Thank you, Mr. Chairman.
Senator Van Hollen. Thank you, Senator Boozman. So for
those interested, we will do one more round, and the way we are
going to do it, is we will have Senator Hagerty, Senator
Kennedy, Senator Boozman, if he wants to stay, and then I will
ask my round of questions last and close out the hearing.
Senator Hagerty.
Senator Hagerty. Thank you. I am going to come back to the
exchange Chair Gensler that you just had with Senator Durbin. I
think it raises an interesting question. It may seem like a
broken record, but this is a serious concern of mine. You were
describing the circumstances around FTX in its ability to do
many things that they could upset most regulators, that it
should, the Wild West manner in which they are performing.
But I think there is a root issue here. In what
jurisdictions did FTX choose to domicile itself?
Mr. Gensler. They had legal entities here in the U.S., they
had legal entities overseas, and this is I think, you have
hit----
Senator Hagerty. Who were in Hong Kong and Bahamas?
Mr. Gensler. Yes.
Senator Hagerty. That is where their operations were
located. The presence here in the United States was minimal and
I think that was intentional.
Mr. Gensler. But they were offering and selling securities
to Americans here in the U.S. You could access through
websites. And this is the case for a number of these other
crypto exchanges as well. They are trying to paper it and layer
to make it harder for agencies, both of our agencies to bring
the--be the cop on the beat. But American investors are
accessing them here in the U.S. and under our authority.
Senator Hagerty. I know, that is a grave concern. I just
think that the important thing here is that FTX chose to avoid
the U.S. market because we don't have certainty here, we don't
have regulatory clarity here that would allow these exchanges
is to come and operate clearly. And as I mentioned in our first
discussion, it is a matter of resource allocation in my view at
the SEC and allocating resources to put in place a clear and
constructive framework for the ecosystem to exist here, to have
the resources necessary to do what you described to Senator
Durbin, I think would be very big help.
Mr. Gensler. I appreciate what you are saying but I am--
with all respect, I am going to differ with you, they did not
avoid U.S. jurisdiction. I mean, Sam Bankman-Fried is in jail
right now. So they didn't avoid U.S.--they might have been
trying to, and----
Senator Hagerty. But they harmed the U.S.----
Mr. Gensler [continuing]. Did in other crypto exchanges, I
believe, are putting at risk Americans. But it is not about
just jurisdiction, it is----
Senator Hagerty. But had they been subject to a set of
laws, and enforcement provisions right here, I think we have
been on top of it much sooner.
Mr. Gensler. They are currently subject to Congress' laws
written over 90 years, called the Securities Laws, Commodity
Exchange Act Laws. I am not going to leave you out, Ross. They
are subject to those laws. As it relates to crypto security
tokens which again, without prejudging anyone, I think the vast
majority of these are, they are subject to the laws right now
and they are not giving the proper disclosure to your
constituents and the crypto intermediaries are improperly
comingling, and we are in court right now pursuing those, and I
believe Americans would be better protected.
So it is not about--there is nothing about crypto that is
inconsistent with the security laws.
Senator Hagerty. It is the exchanges, and exchanges can't
get through the process here, because it has become so
difficult. It has been made so difficult for crypto exchanges
to flourish here, to register here, and to operate and I am
encouraging----
Mr. Gensler. That is because--and with all respect, that is
because they are choosing to try to not comply with U.S. law
that so well protects our capital markets. And I would go a
little further, we have taken up and written some rules in this
area where we think it was appropriate and talked about the
application whether it is in custody, whether it is what is
called dealers, and when are you a dealer and so forth.
And so we have, in certain circumstances, done that but in
the main, whether it is stored on an accounting Ledger called
blockchain technology, or stored on a notepad, it doesn't
matter, it is the economics that matter, it is the investing
public investing anticipating profits based on the efforts of
other----
Senator Hagerty. What actually does matter is having
clarity here in this marketplace, and that does not exist. I
can tell you from talking to many market participants we don't
have adequate clarity, and they can't get answers out of the
SEC. So again I am going to finish this line of questioning and
move to something else, but this is something I want to
encourage you to focus on. This industry needs to have a proper
ecosystem here in America so that we are not shoving it
offshore.
Mr. Gensler. If I can say, breaking the law and not liking
the law are different than lack of clarity. And with all
respect, I think that is what we have a lot in this field,
Senator Hagerty. And we also have a lot of uncertainty, and
a lot of--a lot of lack of clarity coming out of the SEC, in
terms of how these applications are being evaluated. There is a
lot of mystery around it. It need not be that way.
To come back to another point that Senator Kennedy raised
regarding the Fifth Circuit ruling, it raises a question in my
mind, is how you balance the risk at the SEC of losing, in
court, versus the allocation of resources that it takes to
undertake these rulemakings, that I think you probably know are
going to be subject to the type of scrutiny and the type of
resistance, because of the controversy they raise?
Mr. Gensler. It is on my mind on a very real basis, sir,
and has been for my whole 3 years in the job. But I really do
think it is such a privilege to serve and the important thing
we do is we look out for 330 million Americans, and in this
field, this ever growing field $30 trillion of assets under
management, more than the whole U.S. banking system, what we
believe and I still believe that to have greater transparency
so that once a quarter investors know their fees, performance,
and your arrangements with others, that will help promote
greater competition, and efficiency, lower the cost----
Senator Hagerty. We are talking about very sophisticated
investors, with respect to private funds rule, there are
sophisticated players in the marketplace, and plenty
competition, as noted by how many thousands of funds exist
there. Last question I would like to ask you, and this gets to
a concern I think we have for many of the agencies here in
Washington. And that is the effort to get people to come back
to their office.
And in April of last year the OMB issued a directive to get
50 percent of the staff back into their offices. And I think
the OMB in the White House expects this to occur, and I am
interested in how the Commission is thinking about compliance
with this rule. Where are you, and to let you just wrap it up.
Are there real estate implications for this that we need to be
considering?
Mr. Gensler. All very good questions. When I was honored to
take over the Commission, we were in mandatory remote, and we
then--Chair Clayton had done that because of COVID. We then
entered into negotiations with the bargaining unit, the Union,
and went to impasse, there is a Federal Impasse Panel, and as a
result of that we have an arrangement through 2026 so it was
entered into in 2023, that staff have to come in 2 days a pay
period, you can think of it on average 1 day a week. That was a
result of the impasse and that runs through the end of 2026.
In terms of real estate, we have been shedding real estate.
We shed one of the buildings here in D.C. we had three
buildings, saves about $14 million a year. We have shed a space
in New York, I think we are going through something in Chicago
right now, and we also just announced last week that we would
be closing the real estate in our Salt Lake City Office as
well.
Senator Hagerty. Gentlemen, thank you. Thanks Mr. Chair.
Senator Van Hollen. Thank you. Thank you Senator Hagerty,
Senator Kennedy.
Senator Kennedy. That is not me, go ahead.
Senator Van Hollen. No. Go ahead, I am going to wrap it up.
Senator Kennedy. Huh?
Senator Van Hollen. I am going to wrap it up at the end.
Senator Kennedy. Are you sure?
Senator Van Hollen. Yes. Thanks.
Senator Kennedy [continuing]. To the National Association
of Private Funds managers meet the SEC the Fifth Circuit
opinion. And again and I realize it could change in an en bank
hearing, and I realize the Supreme Court could make changes.
But I was reading, and sir, really this weekend, and then I was
reading a bunch of the analyses on the Internet. The court gave
a very narrow interpretation of sections of the Investment
Advisers Act, and I am thinking about sections 2 of 64 and
211(h), I know that is kind of inside baseball, but I know you
know those.
The narrow interpretation of those sections your proposed
Predictive Data Analytics Rule, what effect, if any, do you
think the Fifth Circuit opinion will have on that rule.
Mr. Gensler. Again I think you would appreciate if I would
say that our staff is still reviewing the Fifth Circuit and we
will give advice to the five-member Commission under General
Counsel Barbero's leadership. I also want to note for you, you
may not be aware, we have got a robust comment file on the
Predictive Data Analytics Rule. A lot of people for, a lot of
people against, and it is raising different issues about the
scope of that rule.
And I had already asked staff to consider whether we should
either reopen or re-propose that rule given the breadth, and we
even did, and I say this Chair Behnam might not be aware, we
did that on a Safeguarding Rule as well and we had been talking
a lot. I have asked staff should we reopen or re-propose that
Safeguarding Rule as well.
So while we are considering that on the predictive data
analytics we will also get the best advice from our General
Counsel around the Fifth Circuit opinion.
Senator Kennedy. Do you ever issue a rule where everyone
says this is just splendid, and we are all happy?
Mr. Gensler. You know, we----
Senator Kennedy. Do you generally get a comment about that?
Mr. Gensler. I would say to get my vote. I am only one of
five.
Senator Kennedy. I understand.
Mr. Gensler. I really strongly believe in our
constitutional system do it by the law, and how the courts
interpret the law, and we present ourselves to the American
public and that is important to the trust in the system, but if
the courts see it otherwise, we adjust.
Senator Kennedy. Sure. What about the impact of the Fifth
Circuit ruling on your outsourcing rules?
Mr. Gensler. Again, I am going to defer to getting the best
advice from our office of General Counsel, our Division of
Investment Management, sorting through that, and in any, not
just this Fifth Circuit, any ruling by a court sometimes not
even related to the SEC we take a look at it, does it have an
effect on something that we have already put out there, and do
we adjust.
Senator Kennedy. Yes.
Mr. Gensler. And I just think that is part of our great
democracy.
Senator Kennedy. So you just can't say yet; would that be
fair?
Mr. Gensler. That would be correct, on the Outsourcing
Rule.
Senator Kennedy. Okay. Well, the language that Fifth
Circuit use, is also present in the Exchange Act of '34; isn't
it?
Mr. Gensler. If you are referencing Section 913 of Dodd-
Frank----
Senator Kennedy. For the language interpreted, yes, and----
Mr. Gensler [continuing]. Put the similar language in the
Exchange Act, both in what is called 211(h) of the Investment
Advisers Act, and a compendium similar language in the Exchange
Act.
Senator Kennedy. Yes, I misspoke. I should have said the
language that the court interpreted also appears in the
Exchange Act.
Mr. Gensler. One of the provisions, the 211(h).
Senator Kennedy. Well, that language that the court
interpreted in the Fifth Circuit also appears in Sections 9(j),
14(e), and 15(c) 2(d) of the Exchange Act of '34. So it could
implicate your rulemaking authority under those provisions too,
couldn't it?
Mr. Gensler. Again, I am going to look to General Counsel
Barbero and her team and, of course, the Divisions of Trading
and Markets and Investment Management for good advice, and all
five of us will.
Senator Kennedy. Okay. Does the Commission know yet what it
is going to do? Are you going to ask for an en banc hearing, or
appeal, or have you decided yet?
Mr. Gensler. The commission has not yet.
Senator Kennedy. Would you tell me if they had?
Mr. Gensler. Yes.
Senator Kennedy. Of course. Of course.
Senator Kennedy. Thank you, Mr. Chairman. I enjoyed talking
to you.
Thank you, Mr. Chairman.
You are doing such an extraordinary job. I didn't have any
questions. Van Hollen told me to say that.
Mr. Gensler. That is good. You know, when I was here 12
years ago, Mary Shapiro got all the questions, too.
Senator Van Hollen. Thank you, Senator Kennedy.
So Chairman Behnam, a couple of times it has been
referenced that the funding mechanism for the SEC is different
than for the CFTC. The SEC collects some fees from those that
it oversees and regulates, CFTC does not. I think the
President's budget includes a provision that would include at
least a component of the funding from fees. Do you have a view
on that as the Chair of the CFTC?
Mr. Behnam. Well, I think certainly it would provide
consistency more so than what the agency has dealt with over
the past 15 years. I think, given our constituency of market
users, we would have to be--Congress would need to be careful
about how they craft the language with the user fee to ensure
that we are not impeding or creating essentially barriers for
commercial end users to be using our markets.
As I mentioned earlier and as you noted, these markets are
critical for risk management, which has a direct impact on our
economy, economic growth from agriculture, energy, financial
services, and whatnot.
So I think as Congress continues to contemplate this
because this is an issue that has been going on for, I think,
four decades across both Republican and Democratic
administrations, whatever is considered would need to be
carefully crafted to ensure it is not having a negative or
unintended consequences.
Senator Van Hollen. Thank you. I appreciate that. It is
something, obviously, we are talking about but would obviously
also talk to the authorizing committees and with you before we
pursued anything like that.
Chair Gensler, just a couple more topics. One has to do
with insider trading rules. And thank you for your leadership
at the SEC with respect to the 2022 rules amending the 10b5-1
provisions of insider trading, Safe Harbor provisions, I have
worked with Senator, on a bipartisan basis here, on trying to
make sure we tighten those. You have obviously heard about
Senator Kennedy's and my bill with respect to applying the same
rules to entities conducting business overseas.
I did see that in April, the SEC secured a jury verdict in
your first shadow trading action, shadow trading being when a
corporate insider trading shares on economically linked--on an
economically linked company while in possession of material
non-public information about the insider's own company. Are
there other additional areas that we should be looking at
together with respect to insider trading abuse of the Safe
Harbor Rules, other provisions that you think that we should be
taking a look at?
Mr. Gensler. It is a very good question and because it goes
to the core of like how do you have trust in markets if there
is material information, material nonpublic information that
somebody is trading on and others who aren't. As I mentioned
earlier in the exchange with Senator Kennedy, I have already
asked staff to consider a 24-year-old decision that was made by
the Commission on Regulation Fair Disclosure that, you know, at
that time that it didn't apply to foreign private issuers, and
we would have to go through Notice and Comment Rulemaking to
change that. But I think that that is one area that I think is
ripe to be looked at.
I think also, if I might say, artificial intelligence, just
if I can say, which it is interesting, a whole hearing and it
hasn't come up, I think yet, Chair Behnam raised it about how
it is affecting the markets. But I think in the context of the
real transformative power of Predictive Data Analytics, it is
also going to raise new challenges about how people are using
information, and where is that line as to what is material
nonpublic information, if you are using data and assessing
things.
Of course, this hearing itself is probably being analyzed
by predictive data analytics, and your smile right there might
be analyzed as to what law you will support, but I am talking
about if it is inside information.
Senator Van Hollen. Yes.
Mr. Gensler. And I think there will be new challenges in
that field, and of course fraud is fraud regardless of whether
it is a human doing it, or it is a computer doing it.
Senator Van Hollen. No, I appreciate that. In fact,
hearings in another Committee I serve on, the Banking and
Housing Committee, have raised those issues, AI issues in
connection with market manipulation. I think it is a really
important point you are raising that.
Chair Behnam, do you have any comment on that,
specifically? And then I have one last question for Chair
Gensler.
Mr. Behnam. Yes, we have--as I mentioned in my opening
statement, and Chair Gensler alluded to, we put out a request
for comment on artificial intelligence. It is not new to
financial markets. These are some of the most sophisticated
companies in the world, and they are using data and predictive
analytics to get an edge. The question is now, with our
existing suite of laws and regulations, is it appropriate as AI
continues to evolve and become more present in everyday life,
especially in markets. And it is going to be--it is going to
bridge gaps between retail investors and institutional
investors, and it is going to create, I think, blurry lines
about how we are able to oversee markets.
And we, as a regulator, in addition to seeking feedback
from the market about what we need to do from a policy
perspective with the existing authorities we have, we have
actually been quite successful using data analytics, predictive
analytics, and AI generally in our enforcement and surveillance
program. Some very basic things, but first steps and I think
foundations for what will really catapult the agency to, as
best we can, keep parody with a really fast-moving market.
Senator Van Hollen. Well, no, I am pleased to hear that,
and clearly the CFTC, SEC, can make good use of AI tools to
better do your jobs as well.
So Chairman Gensler, this has not come up either other than
Senator Hagerty referenced it in passing, but I was pleased to
see you and the SEC move forward with the climate risk rules.
Could you just very briefly describe why it would be important
to an investor to have these kinds of disclosures with respect
to climate risks?
Mr. Gensler. It is important to investors because investors
think it is important to them. We are a merit-neutral
regulator. We are not a climate regulator, not an environmental
regulator. But what is interesting is, in our capital markets
today, of the top thousand companies by size, by market value,
90 percent of them right now already make some form of
disclosure around climate risks. 60 percent disclose their
greenhouse gas emissions, a smaller percent disclose what is
known as Scope 3, but it is 60 percent for Scope 1 and 2,
investors find it is material--investors are finding that they
are using that information to think about their purchases and
sales of securities.
So that is where we have a role to play as a non-
environmental regulator, non-climate regulator. But that is our
role in what we put out as a final rule earlier this year. It,
too, is being challenged in court on authority. I look at it,
and I think it is fully within the law and how courts have
interpreted the law, because it is consistent with nine decades
of disclosure regime around material information, what a
reasonable investor is finding significant in their investment
decisions.
Senator Van Hollen. That is pretty straightforward, that is
the intent, and I applaud you and your fellow Commissioners on
the process you went through in crafting this provision.
So let me thank both of you for being here today. Thank you
for your service. Thank you for your testimony.
ADDITIONAL COMMITTEE QUESTIONS
[The following questions were not asked at the hearing, but
were submitted to the agencies for response subsequent to the
hearing:]
Questions Submitted to Honorable Gary Gensler, Chair, U.S. Securities
and Exchange Commission
Questions Submitted by Senator Joe Manchin, III
Question 1. Mr. Chairman, as you know, I have raised serious
concerns about the SEC's Climate Disclosure Rule since it was first
proposed. I was glad to see that the final Rule avoided the inclusion
of Scope 3 requirements, which could have required small and even
private companies far down the supply chain to face burdensome
compliance costs. Still, the rule deliberately targets the fossil fuel
sector. American energy production is keeping gas prices down and
helping our European allies weaken their dependence on Vladimir Putin,
something we should be championing. Instead, this rule threatens
American economic and energy security and goes far beyond the SEC's
traditional mandates. How is the SEC ensuring that the fossil fuel
industry is not deliberately targeted by this Rule?
Answer. The climate-related risk disclosure rules would provide
investors with more consistent, comparable, and reliable information
about registrants' material climate-related risks to better inform
investors as they make investment and voting decisions. As discussed in
final rule adoption, it applies to certain publicly reporting companies
and does not target any particular industry. Disclosure regarding risks
that a registrant has determined will likely materially impact its
business, results of operations, or financial condition--whether
climate- related or otherwise--falls within the authority conferred by
Congress in the Securities Act and the Exchange Act.
On April 4, 2024, the Commission issued an order staying the
climate-related risk disclosure rules. This delayed the effective date
of those rules pending the completion of judicial review of
consolidated Eighth Circuit petitions for review. See Order Issuing
Stay, Release No. 34-11280 (Apr. 4, 2024) [89 FR 25804 (Apr. 12,
2024)].
Question 2. Chair Gensler, I continue to remain concerned about ESG
rules from the European Union that could harm American businesses. The
Corporate Sustainability Reporting Directive (CSRD), which was adopted
in 2022 and entered into force in 2023, requires more in-depth carbon
emission reporting from companies operating in the EU.
When reporting, companies will be subject to the ``double
materiality'' standard, meaning they must disclose the material ESG
risks facing their business as well as the material ESG risks posed to
society and the environment as a result of their actions. Further,
companies that are beholden to CSRD will be required to disclose plans
to ensure they are helping limit global warming to 1.5 degrees Celsius.
Beginning this year, multi-national enterprises--including those
headquartered in the United States--are beholden to those rules, and in
2025, they will be required to publish reports detailing their
compliance.
a. Will you commit to working with the Biden Administration, as
well as your EU counterparts, to ensure that publicly-listed U.S.
companies are not subject to overly burdensome and duplicative
reporting standards?
b. Does the SEC expect that its new Climate Disclosure Rule will
satisfy some of the CSRD requirements for U.S. businesses?
Answer. Given the globalization of markets, engagement with foreign
counterparts is important to the SEC's ability to carry out our three-
part mission to protect investors; maintain fair, orderly, and
efficient markets; and facilitate capital formation. We regularly
engage with foreign counterparts across the globe, including European
counterparts, both in multilateral and bilateral forums, on a wide
range of capital markets issues, including reporting standards. Our
goals for international engagement with foreign counterparts on policy
matters include advancing the SEC's mission through promoting the
adoption of high-quality regulatory standards worldwide, identifying
regulatory risks and other issues of common concern, understanding how
foreign legal and policy developments may impact the U.S. securities
markets and market participants, and identifying potential legal
conflicts between the Federal securities laws and foreign regimes.
In the adopting release for the climate-related risk disclosures
rules, the Commission stated that, among other factors, modeling the
climate-related disclosure requirements on the Taskforce on Climate-
Related Financial Disclosures framework could help to mitigate the
compliance burden of the final rules, particularly for registrants that
are already providing climate-related disclosures based on such
framework or soon will be doing so pursuant to other laws and
regulations. With respect to the EU's Corporate Sustainability
Reporting Directive, the Commission explained that, because reporting
requirements for non-EU companies operating in the EU are still being
developed, the Commission cannot assess the extent to which disclosures
under those requirements would overlap with the SEC's rules.
Please note that on April 4, 2024, the Commission issued an order
staying the climate-related risk disclosure rules. This delayed the
effective date of those rules pending the completion of judicial review
of consolidated Eighth Circuit petitions for review. See Order Issuing
Stay, Release No. 34-11280 (Apr. 4, 2024) [89 FR 25804 (Apr. 12,
2024)].
______
Questions Submitted by Senator John Boozman
Question 1. I am particularly concerned about the implications of
the proposed Reg ATS. Specifically, the incredibly expansive definition
of `exchange' would capture ordinary course investment management
functions that bear no resemblance to the exchange-like activity
contemplated by the Exchange Act that you claim authorizes this
rulemaking. The activities that the proposed rule would effectively
prohibit through exorbitant and ill-suited compliance requirements and
would ultimately cast the burden of increased compliance on clients of
investment advisors, every day American citizens, and result in little
to no benefits to such investors.
a. Are the Commission and staff working to address these concerns
raised by industry?
b. Would your staff and division staff be willing to come in and
brief my teams on the proposal?
Answer. Engagement with interested parties is a critical component
of our rulemaking process, and we take the feedback we receive on our
proposed rules seriously. Staff and I have had robust engagement with a
broad range of stakeholders representing diverse viewpoints on the
Commission's proposed rulemakings. I believe these conversations
improve staff recommendations as well as the decisions and reasoning of
the Commission.
The Commission has received comments from and engaged with industry
participants who have expressed some of the concerns you highlight.
Staff will carefully consider all comments received as it evaluates
potential recommendations for the Commission's consideration. Our
subject matter experts would be happy to provide a briefing for you and
your staff and answer your questions.
Question 2. Chair Gensler, when we had you here last, we called
attention to concerns related to your rapid-paced regulatory agenda and
the harm done to industry and the American public in having 60+
proposals with short comment periods. With the stay of the climate
rule, and last week's decision by the Fifth circuit on the private fund
adviser rule, actions for both tied directly to the SEC's exceeding its
statutory authority, how are you re-thinking your remaining regulatory
agenda?
Answer. Technology, markets, and business models constantly change.
Thus, the nature of the SEC's work must evolve as the markets we
oversee evolve. The agenda of SEC rulemakings reflects a long tradition
of updating our rules to meet new challenges. Further, the agenda
includes rulemaking items that we have been directed by Congress to
implement. Our ability to fulfill our mission depends on having an up-
to-date rulebook--consistent with our mandate from Congress, guided by
economic analysis, and shaped by public input. We act within the law
and how the courts interpret our laws. As the courts address issues, we
take that into consideration as well.'' The most recently published
agenda of SEC rulemakings is available at https://tinyurl.com/Spring-
2024-Agenda.
Question 3. I know you've heard a lot of concerns about the
potential impact of applying the SEC's Rule 15c2-11 to fixed income
markets. We appreciate the no-action letter you issued in November of
2022, because it struck a good balance between providing investors
additional protections, without imposing impractical requirements that
could damage the market for certain types of bonds. As you know,
though, that relief expires in January. Will you consider extending or
even making that no-action relief permanent--as you did for 144A
bonds--to facilitate the healthy functioning of the credit markets?
Answer. The Commission continually monitors the operations of
securities markets, including fixed- income markets. The fair, orderly,
and efficient functioning of the U.S. credit markets are part of our
three-part mission.
Question 4. The Basel 3 endgame proposal will increase capital for
banks offering clearing services by over 80%. At the same time, the
number of banks offering these services has decreased by half in the
last 20 years, creating constraints on capacity for clearing in the
market. But I note that the industry is also preparing for the SEC's
clearing mandate for Treasuries beginning in 2025. It would seem that
the Basel proposal's treatment of clearing will be at cross purposes
with the goals of both your agencies to move more of the markets into
central clearing. Can you comment on this?
Answer. Given the magnitude, leverage, and importance of the
Treasury markets, as policymakers, we cannot ignore the repeated
tremors in these markets. There have been significant changes in the
technology and business models of these markets. Thus, the SEC has been
coordinating on reforms with our partners at the U.S. Treasury, Federal
Reserve, Federal Reserve Bank of New York, and Commodity Futures
Trading Commission. The goal of these reforms is to promote the
efficiency and the resiliency of these markets. The rules promote
efficiency through access, transparency, competition, and facilitating
all-to-all trading. Doing so lowers costs on behalf of U.S. taxpayers.
The reforms promote resiliency by bringing more transactions into
central clearing. We continue to believe that central clearing brings
benefits to the market, as discussed, for example, in the Commission's
recent Treasury clearing rule.
Question 5. Data protection issues have been a concern for many
years. I commend the CFTC for setting up the Division of Data to
prioritize these issues. However, I am concerned with the MOU between
the CFTC and SEC as it relates to Form PF. I'm hearing a lot of
uncertainty here. Uncertainty about a safe means for transferring this
sensitive data. Uncertainty about the costs and benefits. It seems
pretty certain to me that we need to slow down here.
a. How can we trust that you all have the best means to transfer
sensitive proprietary data between agencies?
b. But no means has been proven yet, correct? I think you need to
pause until you're able to do that--will you?
c. Are you at all concerned that the two Commissions are creating
material enterprise risk for market participants without having
demonstrated an actual need for the collection of all of this new data?
d. Isn't it likely that the costs will significantly outweigh the
benefits?
Answer. The SEC shares data with other member agencies of the
Financial Stability Oversight Council, including the CFTC, where
appropriate and only after obtaining assurances that any data provided
will be sufficiently protected. Under the SEC-CFTC Memorandum of
Understanding (MOU) re the use of Form PF Data, the CFTC must establish
policies and procedures to limit access to Form PF data and ensure such
data is stored, accessed, and handled securely. In addition, any CFTC
system used to store, process, or transmit Form PF data must have a
FIPS 199 Security Categorization of either Moderate or High and a valid
authorization to operate in accordance with the Federal Information
Security Modernization Act of 2014. The CFTC also must notify the SEC
if the CFTC's systems lapse in accreditation or if there is
unauthorized access, use, and/or disclosure related to Form PF data as
required by the MOU.
______
Questions Submitted by Senator Bill Hagerty
Question 1. When Congress appropriates funding to the SEC, it also
authorizes the agency to collect an equal and offsetting amount of
fees. Since 2012, Congress has appropriated $20.3 billion to your
agency. During this period, the SEC has only managed to collect $19.7
billion in transaction fees, resulting in a significant $553 million
deficit.
a. In the SEC's FY25 budget justification to Congress, the SEC
claims to be a deficit- neutral agency. Given that the SEC is operating
at a deficit, is it accurate to state that the SEC is contributing to
the growing Federal deficit? Why or why not?
b. Is there any reason why the SEC should not be held accountable
for the $553 million deficit it created? What would be the agency's
plan if Congress were to require the SEC to pay the deficit?
c. Are there any current unobligated balances at the SEC that
Congress could rescind to offset this growing deficit?
Answer. Setting a new fee rate each year based on full-year
Congressional appropriations involves projecting future dollar volume
of securities transactions, which is an intrinsically complicated and
uncertain exercise. As required by the law, we also consult with the
Congressional Budget Office (CBO) and Office of Management and Budget
(OMB) on the methodology used to determine the adjusted fee rates. This
challenge is further exacerbated by the historical timing of the annual
appropriation, since the law does not permit the SEC to set a new fee
rate until we receive a full-year appropriation. Furthermore, the
statute gives the SEC minimal opportunities to adjust the rate during
the year.
We are happy to discuss possible statutory changes that would allow
us to reset the rate at a different schedule, or with a bit more
frequency to better reflect market changes that may affect overall
collections.
Question 2. During the hearing, you and I discussed the creation of
the Consolidated Audit Trail (CAT) data base to collect data on
billions of daily equity and options trades and investors' personally
identifiable information (PII). As I mentioned, I'm of the belief that
the SEC should protect investors, not compile and put at risk their
personal information. Unfortunately, the government has a track record
of mishandling Americans' sensitive information. Take, for example, the
IRS. By law, the IRS is required to protect the confidentiality of tax
return information and can charge individuals with a crime. This did
not stop the ProPublica leaker, who stole and disclosed thousands of
tax returns. I'm concerned that the CAT database may be a cyber
security catastrophe waiting to happen, and it undoubtedly has the
potential for widespread abuse.
a. How many SEC employees have access to CAT? What requirements or
criteria are required before an SEC employee is granted access to the
information collected in the CAT?
b. Given the recent mishandling of sensitive information, what
action is taking place at the SEC to ensure similar leaks don't happen
at your agency?
c. If Congress were to impose stricter punishments to deter
unauthorized disclosures by Federal employees and contractors, what
recommendations might you provide?
d. Please provide, in detail, the current protections that have
been put in place by your agency to protect investors' information in
the CAT.
Answer. Access to CAT data for regulators is limited by the CAT
National Market System (NMS) Plan. The Plan requires a comprehensive
information security program that is regularly evaluated to ensure it
remains ``consistent with the highest industry standards for the
protection of data.'' See 81 Fed. Reg. 84722, 84753. The Self-
Regulatory Organizations and the Commission may access CAT data
``solely for the purpose of performing their respective regulatory and
oversight responsibilities.'' Id. at 84724, 84758. While broker-
dealers submit personal information to CAT, such information is limited
to the name, address, and birth year of investors. See 85 Fed. Reg.
16152, 16156 (2020). This limited set of personal information is stored
separately from all other CAT data, and access to it is restricted to a
limited set of authorized individuals on a need-to-know basis. See 81
Fed. Reg. 84724-25, 84767-68.
The SEC maintains a variety of technological controls to block
unauthorized users from gaining access to CAT data within the secure
analytics environment where it is kept. In addition, access is only
provided to an employee after management approval is received and
training is completed. Staff who are approved for access to CAT data
have a mandatory requirement to annually complete training in the
safeguarding of PII and information technology security practices in
general. CAT also maintains a full record of PII access that is subject
to daily inspection. CAT NMS Plan, App. D-14. SEC policy stipulates
that unauthorized disclosure of Non-Public Information by employees or
contractor personnel may result in administrative, civil, or criminal
action as appropriate, including termination of employment. Finally,
the SEC has been developing ``zero trust'' controls over CAT data in
line with government-wide requirements.
Question 3. The SEC is currently considering multiple key market
structure proposals, including rules concerning tick sizes, volume-
based pricing, and daily options. While the matters governed by these
proposals are closely interconnected, the SEC has neither researched
nor tested how the effects of these proposals may interact or overlap
when the proposals are implemented at the same time. Pilot programs
would help assess the effects of complex, overlapping market structure
reform. Why has the Commission not implemented pilot programs to test
the impact of market structure proposals in a real-world, albeit
controlled, environment to determine whether a particular market
structure reform will bring about its intended effect?
Answer. Engagement with interested parties is a critical component
of our rulemaking process, and we take the feedback we receive on our
proposed rules seriously. Staff and I have had robust engagement with a
broad range of stakeholders representing diverse viewpoints on the
Commission's proposed rulemakings. I believe these conversations
improve staff recommendations as well as the decisions and reasoning of
the Commission.
As we implement the Federal securities laws, we continue to welcome
feedback and comments from the public. This helps to ensure that we
fulfill our obligations under the Administrative Procedure Act and
other applicable requirements. Further, it helps to ensure that our
final rules reflect appropriate consideration of public input.
______
Questions Submitted by Senator Marco Rubio
Question 1. Chairman Gensler, in February I wrote to you requesting
to Securities and Exchange Commission (SEC) to carefully investigate
the initial public offering (IPO) filing of SHEIN by requiring
stringent disclosures about its operations and risks in the People's
Republic of China (PRC). In that letter I expressed serious concern
about the potential risks U.S. investors would be unwittingly exposed
to if the company successfully filed for an IPO on a U.S. stock
exchange. I cited evidence of the Chinese Communist Party's control
over SHEIN's financial data and operations, as well as several credible
accounts of serious labor violations by SHEIN and connections to forced
labor in the Xinjiang Uyghur Autonomous Region (XUAR). I also described
how SHEIN's business model has built its success on circumvention of
U.S. customs enforcement and duties collection through exploitation of
the ``de minimis'' loophole, and that there is bipartisan momentum
behind fixing this loophole. It appears the SEC carefully weighed my
concerns. Your agency has not approved a SHEIN IPO on U.S. stock
exchanges, and SHEIN has apparently given up on launching one. The
company recently announced that it would change strategy and seek an
IPO on the London Stock Exchange. The U.S. and United Kingdom have long
shared a special relationship, and I fear that UK investors will face
the same risks that threatened American investors when SHEIN sought to
list on our stock exchanges. Earlier this week, I wrote to HM Treasury
Chancellor Jeremy Hunt out of a duty of friendship to repeat the same
warnings I shared with you earlier this year, and urge caution before
the United Kingdom allows SHEIN to list in London.
a. Mr. Gensler, did you share my concerns over the fundamental
risks SHEIN posed to American investors when it sought to list on U.S.
exchanges?
b. Though the SEC has not formally approved SHEIN's IPO in the
United States, your agency also has not publicly rejected the IPO. Are
you able to confirm that the SEC will not approve SHEIN's IPO in the US
unless the company complies with extraordinary disclosure requirements
regarding its structure, interactions with the CCP, and the risks of
doing business in the PRC?
c. Do you believe that UK investors would face the same fundamental
risks as American investors if SHEIN succeeds in listing on the London
Stock Exchange?
d. If you were advising Chancellor Hunt as he weighs whether to
allow SHEIN to list in London, what information would you share?
e. The United Kingdom has made tremendous progress in recent years
in advancing legislation that counters the existential threat posed by
autocratic regimes that seek to undermine the West's democratic values
and fair system of trade. The UK's Financial Conduct Authority retains
the ability to block listings on UK securities exchanges that pose a
significant threat to the UK's national security. The SEC currently
lacks this authority. Are you concerned that the SEC lacks necessary
tools to protect American investors from unwittingly financing
adversarial entities that pose a major risk to the safety and security
of our people; for example, a company devoted to expanding communist
China's military technology?
Answer. I share your concerns that U.S. investors should have
access to full, fair, and truthful disclosure about investment risks,
including the risks related to investments in China-based issuers. I
have spoken publicly about those risks and the SEC's Division of
Corporation Finance staff has issued statements concerning the
disclosure obligations of China-based companies. We regularly engage
with our UK counterparts, as well as other foreign counterparts, on a
wide range of capital markets issues and share information and concerns
as appropriate.
Question 2. Chairman Gensler, as you know, the Fifth Circuit Court
of Appeals vacated the SEC's rule ``Share Repurchase Disclosure
Modernization,'' which the SEC adopted in May of 2023. The SEC rule
expanded the disclosures that publicly-traded companies must provide
when they repurchase their own stock, including by requiring daily
disclosures of share repurchases as well as the objective and rationale
for this activity. As you know, share repurchases have risen
significantly in recent years, eclipsing total capital raised by public
companies and coinciding with a period of relative decline in corporate
investment in tangible assets. This rise has arguable reversed
longstanding roles in the interactions between companies and securities
markets, with greater focus on increasing valuations than stimulating
capital investment. I was pleased the SEC sought to increase
transparency the role that rising share repurchases have played in
reducing capital investment. The Fifth Circuit's ruling to vacate the
SEC rule concluded that the SEC failed to conduct an adequate
quantitative analysis of the rule's economic impact. This was a simple
clerical error. Considering that the fundamental trends in corporate
investment have not shifted since the SEC first proposed to improve
share repurchasing disclosures, does the SEC plan to re-propose this
rule, along with a more thorough and complete economic impact analysis?
Answer. As you note, the U.S. Court of Appeals for the Fifth
Circuit vacated the Share Repurchase Disclosure Modernization Rule
(``Repurchase Rule'') on December 19, 2023. While there are issuer
share repurchase disclosure requirements that pre-date the Repurchase
Rule and continue to apply, I appreciate your point about the
additional transparency that the Repurchase Rule would have provided.
We will take this, as well as views others have provided, into
consideration as we contemplate the agenda of SEC rulemakings.
Question 3. Chairman Gensler, investments in assets and companies
under the thump of the Chinese Communist Party (CCP) carry significant
risks for U.S. investors due to communist China's unpredictable and
capricious regulatory environment, rampant government intervention,
intellectual property theft, and restrictions on the sharing of basic
financial data. Geopolitical tensions further exacerbate the hazards
associated with doing business in the People's Republic of China (PRC).
Ever since Congress took actions to create some level of regulatory
parity with respect to investments in publicly traded PRC-based
issuers, the CCP has moved to restrict Western access to financial
data. The China Securities Regulatory Commission has since barred
companies from making prospectus statements that ``misrepresent or
disparage laws and policies, [the] business environment and judicial
situation'' in the PRC. Now, CCP authorities are shutting off live
trading data and directing institutional investors to not sell stocks
to stabilize the country's embattled stock market. While you have
previously directed SEC staff to conduct `targeted' reviews of issuers
associated with PRC-based operations to, ostensibly, increase
transparency, these efforts have done little to hold the PRC and its
companies accountable for flagrantly violating U.S. laws and
deliberately misleading American investors.
a. Can you provide any updates regarding the SEC's efforts to
increase disclosures with respect to variable interest entities (VIEs)?
b. Is the SEC doing anything to require PRC-based issuers and PRC-
based VIEs from disclosing if future activities by the PRC government
could significantly impact the company's financial performance and
enforce contractual agreements?
c. Will the Commission consider additional disclosures for PRC-
based issuers requiring them to disclose their dealings with PRC
regulators or the CCP?
d. Considering that U.S. companies operating in the PRC face an
opaque and hostile regulatory environment designed to force the
transfer of intellectual property or erode their ability to compete
with PRC companies, do you think that investors in U.S. companies ought
to be made aware of any agreement with a PRC government official or
regulatory body?
Answer. I share your concerns that U.S. investors should have
access to full, fair, and truthful disclosure about investment risks,
including the risks related to investments in China-based issuers. I
have spoken publicly about those risks and the SEC's Division of
Corporation Finance staff has issued statements concerning the
disclosure obligations of China-based companies, including obligations
that may trigger additional disclosures about VIE structures and
material impacts that intervention or control by the PRC in the
operations of China-based issuers has had or may have on their business
or the value of their securities. As part of its filing review process,
staff has issued comments to China-based issuers, including when their
disclosure does not adequately address China-specific risks, such as
risks related to intervention or control by the PRC government. SEC
staff will continue to monitor disclosure by China-based companies for
compliance with the Federal securities laws. In addition, issuers have
obligations under existing rules to disclose material agreements and
material effects of governmental approvals and regulation. Staff have
and will continue to comment on disclosures to ensure these disclosure
obligations are met.
Question 4. Following the Russian Federation's invasion of Ukraine,
the SEC sent a sample letter to companies regarding their Russia-
related disclosures and related supply chain issues. The letter
recommended that affected companies provide detailed disclosures
regarding to their direct or indirect exposure to Russia, Belarus, or
Ukraine and the impact of both the sanctions and the war on their
assets and operations.
a. As geopolitical tensions between the U.S. and the PRC rise over
General Secretary Xi Jinping's support for Russia, export controls,
sanctions, restrictions on outbound investment, and the possibility of
an invasion of Taiwan, will the SEC preemptively require any issuer
with a presence in the PRC to meet similar reporting requirement?
b. Will the SEC produce and make publicly available a report on the
potential economic impact of a sudden loss of market access and the
various types of geopolitical, regulatory, and informational risks
assumed by investors who hold assets either within the PRC or in PRC-
based issuers and VIEs?
Answer. Under the Federal securities laws, companies may have
disclosure obligations related to the direct or indirect impact that
events in their geographic areas of operations have had or may have on
their business. Many of the items discussed in the sample letter to
companies regarding disclosures pertaining to Russia's invasion of
Ukraine may be applicable to other geopolitical situations.
CONCLUSION OF HEARINGS
Senator Van Hollen. The hearing record will remain open
until Thursday, June 20, to allow senators to submit additional
questions for the record.
And the hearing is now adjourned.
[Whereupon, at 11:31 a.m., Thursday, June 13, the
subcommittee was recessed, to reconvene subject to the call of
the Chair.]
LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS
----------
Page
Behnam, Honorable Rostin, Chairman, Commodity Futures Trading
Commission:
Prepared Statement of........................................ 55
Statement of................................................. 53
Boozman, Senator John, U.S. Senator From Arkansas, Questions
Submitted by
Durbin, Senator Richard, U.S. Senator From Illinois, Questions
Submitted by................................................... 30
Gensler, Honorable Gary, Chair, U.S. Securities and Exchange
Commission:
Prepared Statement of........................................ 47
Questions Submitted to....................................... 81
Statement of................................................. 46
Hagerty, Senator Bill, U.S. Senator From Tennessee:
Opening Statement of......................................... 3
Questions Submitted by
Kennedy, Senator John, U.S. Senator From Louisiana, Questions
Submitted by................................................... 36
Manchin, Senator Joe, III, U.S. Senator From West Virginia,
Questions Submitted by
Murray, Senator Patty, U.S. Senator from Washington, Questions
Submitted by................................................... 26
Rubio, Senator Marco, U.S. Senator From Florida, Questions
Submitted by
Van Hollen, Senator Chris, U.S. Senator From Maryland, Opening
Statement of
Yellen, Honorable Janet L., Secretary, U.S. Department of
Treasury:
Prepared Statement of........................................ 6
Questions Submitted to....................................... 26
Statement of................................................. 4
SUBJECT INDEX
----------
Page
COMMODITY FUTURES TRADING COMMISSION
Conclusion....................................................... 60
Division of:
Clearing and Risk (DCR)...................................... 58
Data......................................................... 59
Enforcement (DOE)............................................ 57
Market Oversight (DMO)....................................... 58
Market Participants Division (MPD)............................... 59
The CFTC's Budget Request for Fiscal Year 2025................... 57
Whistleblower Incentives and Protection.......................... 60
__________
DEPARTMENT OF THE TREASURY
Additional Committee Questions................................... 26
Questions Submitted by Senators:
Boozman, John............................................ 35
Durbin, Richard.......................................... 30
Hagerty, Bill............................................ 37
Kennedy, John............................................ 36
Manchin, Joe, III........................................ 31
Murray, Patty............................................ 26
Rubio, Marco............................................. 38
__________
U.S. SECURITIES AND EXCHANGE COMMISSION
Additional Committee Questions................................... 81
Questions Submitted by Senators:
Boozman, John............................................ 82
Hagerty, Bill............................................ 84
Manchin, Joe, III........................................ 81
Rubio, Marco............................................. 86
Additional Matters............................................... 52
Budget Request................................................... 49
Conclusion....................................................... 53
Economic and Risk Analysis....................................... 52
Enforcement and Examinations..................................... 50
Growth and Change in the Markets................................. 48
Programmatic Divisions........................................... 51
The SEC at 90 Years.............................................. 47
[all]