[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE SEC'S AGENDA,
OPERATIONS, AND FY 2015
BUDGET REQUEST
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
APRIL 29, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-75
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
April 29, 2014............................................... 1
Appendix:
April 29, 2014............................................... 55
WITNESSES
Tuesday, April 29, 2014
White, Hon. Mary Jo, Chair, U.S. Securities and Exchange
Commission..................................................... 8
APPENDIX
Prepared statements:
White, Hon. Mary Jo.......................................... 56
Additional Material Submitted for the Record
Huizenga, Hon. Bill:
United States Court of Appeals for the District of Columbia
Circuit, No. 13-5252, National Association of
Manufacturers, et al., v. Securities and Exchange
Commission, et al.......................................... 81
National Law Review article entitled, ``Federal Appeals Court
Holds Securities and Exchange Commission (SEC) Conflict
Minerals Rules Violate Free Speech''....................... 110
Joint Statement on the Conflict Minerals Decision by SEC
Commissioners Daniel M. Gallagher and Michael S. Piwowar,
dated April 28, 2014....................................... 112
Lynch, Hon. Stephen:
``High-Frequency Trading: A Regulatory Strategy,'' by Charles
R. Korsmo, dated December 16, 2013......................... 114
Moore, Hon. Gwen:
Letter to SEC Chair Mary Jo White from various Members of
Congress, dated April 21, 2014............................. 201
White, Hon. Mary Jo:
Written responses to questions for the record submitted by
Representative Ellison..................................... 203
Written responses to questions for the record submitted by
Representative Fitzpatrick................................. 213
Written responses to questions for the record submitted by
Representative Garrett..................................... 214
Written responses to questions for the record submitted by
Chairman Hensarling........................................ 232
Written responses to questions for the record submitted by
Representative Hurt........................................ 238
Written responses to questions for the record submitted by
Representative Murphy...................................... 240
Written responses to questions for the record submitted by
Representative Posey....................................... 243
Written responses to questions for the record submitted by
Representative Sinema...................................... 251
Written responses to questions for the record submitted by
Representative Wagner...................................... 252
OVERSIGHT OF THE SEC'S AGENDA,
OPERATIONS, AND FY 2015
BUDGET REQUEST
----------
Tuesday, April 29, 2014
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Bachus, Royce,
Capito, Garrett, Neugebauer, McHenry, Pearce, Posey,
Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hurt, Stivers,
Fincher, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner,
Barr, Cotton, Rothfus; Waters, Maloney, Velazquez, Sherman,
Capuano, Lynch, Scott, Green, Cleaver, Moore, Perlmutter,
Himes, Peters, Carney, Sewell, Foster, Kildee, Delaney, Sinema,
Beatty, Heck, and Horsford.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time.
Today's hearing is entitled, ``Oversight of the SEC's
Agenda, Operations, and FY 2015 Budget Request.'' I now
recognize myself for 5 minutes to give an opening statement.
This morning, we welcome Securities and Exchange Commission
Chair Mary Jo White back to the committee. I wish to note at
the outset for the record, contrary to many, if not most
Administration witnesses, she has been most accommodating with
her schedule, and she is timely with the submission of her
testimony, so Madam Chair, you are especially welcome before
this committee. We appreciate your cooperation in the
congressional oversight process.
This committee is indeed committed to conducting vigorous
oversight of the SEC, to make certain that it is accountable in
fulfilling its mission of maintaining transparent and efficient
capital markets, protecting investors, and promoting capital
formation. By holding today's hearing, we hope to better
understand the progress the Commission is making in fulfilling
its statutory mission and to have a better understanding of
Chair White's relative priorities.
A number of members on this committee have maintained that
the SEC has insufficient resources with which to carry out its
mission. I will always have an open mind on the issue, but it
is not an empty mind. The SEC's budget has grown substantially
in recent years. In fact, the SEC's budget has increased by 80
percent in the last 10 years and by nearly 300 percent since
the year 2000. I again note that when my Democratic colleagues
were in the Majority, even after the passage of the Dodd-Frank
Act, they never called for the dramatic budget increases they
are calling for now. Not many other agencies throughout the
entirety of the Federal Government have seen such hefty budget
increases during this same period of time, and I don't know
many folks in Texas' 5th Congressional District, which I have
the honor of representing, whose family budget has seen an 80
percent increase in the last 10 years.
In addition, as we see the national debt clock regrettably
continue to turn at the pace that we have observed, this is
something that must loom large over all of our budgetary
decisions. I know that some have considered the placement of
the clock to be ideological. I personally never knew that math
was ideological. Many of us believe that the SEC has given
short shrift historically to capital formation. The bipartisan
JOBS Act was an attempt to help remedy past SEC inaction on
capital formation initiatives.
Even President Obama, with whom I rarely agree, called the
law a game changer for entrepreneurs in capital formation.
Regrettably, the SEC remains behind schedule in implementing
the JOBS Act. It is important that the implementation of the
JOBS Act go forward.
Regrettably, we still live in an economy where 1 in 6
people are on food stamps. We have the lowest labor force
participation rate in a generation where 15 percent of our
fellow country men are at the poverty level in median family
income, having fallen every year in the Obama Administration.
Clearly, we have millions of our fellow countrymen unemployed
or underemployed, who could benefit from the full
implementation of the JOBS Act.
During the same period when SEC budgets increased so
dramatically, regrettably, there were numerous examples of the
agency's financial mismanagement, squandered resources, and
mission failure. I hasten to add that almost all of these
examples predate Chair White's tenure, but it does underscore
that in Washington it is not always how much money you spend
that counts, but how you spend the money.
Even though the SEC, I believe, had ample resources and
ample authority leading up to the 2000 crisis, clearly somebody
was asleep at the switch. Whether it was the failure to
properly administer the now defunct consolidated supervised
entities program, regrettably not doing anything about the
credit rating agency oligopoly and the role that played in the
crisis, or the failure to uncover the Madoff and Stanford Ponzi
schemes, notwithstanding the warnings received from multiple
market professionals.
In addition, regrettably, and notably for an agency that is
entrusted with policing financial markets and enforcing
accounting standards, the SEC has repeatedly failed audits of
its own financial statements and internal controls conducted by
the GAO, which begs the question, how will asking for more
funding necessarily prevent future fumbles? How the SEC spends
its budget is a legitimate concern, and so is how the SEC
spends its time. According to one report, the SEC has finalized
less than half of its required rulemakings under Dodd-Frank
nearly 4 years after the law was enacted.
We continue to need to hold Washington accountable. We need
to ensure that Washington uses resources wisely and
efficiently, and we need to ensure that we repeal any
unnecessary, ill-conceived Washington regulations that hurt our
economy and kill jobs.
I look forward to listening to Chair White's testimony and
continuing to hear about some of the pressing issues of the day
concerning the SIFI designations of non-bank entities through
FSOC, the fiduciary duty versus the suitability standards of
broker-dealers, issues relating to market structure, and issues
regarding whether the presence of a robust cost-benefit
analysis will ultimately benefit some many of our Americans who
remain unemployed and underemployed.
I now recognize the ranking member for 4 minutes.
Ms. Waters. Thank you, Mr. Chairman, for holding this
important hearing this morning.
And thank you to Chair White for appearing before the
committee and offering your overview of the agenda and
operations of the SEC.
It has been nearly 4 years since the passage of the
historic Dodd-Frank Wall Street Reform and Consumer Protection
Act, and we have come a long way. The Commission has completed
critical work, and we now have in place the registration of
hedge fund and other private fund advisors, the appointment of
an investor advocate, and the finalization of the Volcker Rule,
among other accomplishments.
Even in the face of near constant attempts by my friends on
the opposite side of the aisle to roll back the Dodd-Frank
reforms, not to mention the SEC's inadequate funding, the
Commission is moving forward on this essential work, but much
more remains to be completed. Most notably, the SEC still has
to adapt final versions of most of the substantive swap rules
under Dodd-Frank. Given the number of these rules still
awaiting completion, as well as the legal challenges facing the
Commodity Futures Trading Commission (CFTC), I remain very
concerned that our swaps markets will remain a source of
shadowy unregulated risk, and as it relates to the JOBS Act, I
also urge the Commission to move expeditiously to finalize the
amendments to Rule 506 offerings that they proposed in July of
last year.
Given that private offerings with general solicitation and
advertising are currently taking place, we must also move to
put in place reasonable investor protections that will guard
against fraud. I am also going to hear from Chair White on her
view of the SEC's Fiscal Year 2015 budget and how the
Commission would use the additional resources they have
requested.
In particular, I agree with the Chair, who knows that there
is an immediate and pressing need for significant additional
resources to permit the SEC to increase its examination
coverage of registered investment advisors. I hope that the
Chair can further elaborate on this need and also weigh in on
the Investor Advisory Committee's recommendation that Congress
authorize the Commission to impose user fees on SEC-registered
investment advisors in order to fund and enhance the
examination program. This recommendation is consistent with my
bill, H.R. 1627.
Finally, I remain very interested in how the Enforcement
Division at the Commission selects which cases to pursue, and
how the Commission is responding to criticisms that it relies
too heavily on deferred prosecution agreements, and neither-
admit-nor-deny settlement.
The Chair came into this position at the SEC with a
reputation as a tough litigator, and I would like to hear more
about the Commission's enforcement program during her tenure.
Obviously, the Commission has a lot on its plate, and I
commend the Chair for taking on this important work and for
being with us today, and I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, the chairman of our Capital Markets and GSEs
Subcommittee, Mr. Garrett, for 3 minutes.
Mr. Garrett. Thank you, Mr. Chairman, for holding this
important oversight hearing.
And thank you, Chair White, for joining us and for your
testimony.
Lately, there has been a lot of news attention surrounding
the Nation's equity markets, and I want to thank you, Chair
White, for prioritizing the examination of this issue long
before the recent media outcry, and for you and your staff's
work in this area as well. I believe that you and your staff
are approaching the ongoing review of our equity markets in
just the way that it should be, taking a look at the entire
marketplace, examining how the rules require various market
participants to interact, and using empirical data and robust
analytical tools to drive any potential decision-making.
It is critical that you and your agency do not fall into
the trap of adopting some half-baked potential changes in order
to publicly respond to sensationalized and overhyped media
narratives. The SEC has to be the grownup in the room in this
very important decision-making. So this committee now has been
approaching this very important issue in the same manner. In
June of 2012, we held the first of a series of events to more
closely examine our Nation's equity markets and study how they
operate, understand which rules govern them, and explore ways
to make them function more efficiently and effectively.
In May of 2013, Ranking Member Maloney and I hosted a
roundtable in New York City with some of the most knowledgeable
people in the country, including the SEC's new Director of
Trading and Markets, to review the entire evolution of the
statutory and regulatory history governing our equity markets.
And most recently, at the end of February this committee held
an extensive review of Reg NMS, which is the predominant SEC
rule governing how the market centers and market orders are
required to interact.
This hearing raised important fundamental questions
challenging some of the current assumptions that are taken for
granted today. Now that this issue is gaining significantly
more media attention, I welcome any other policymaker or
commentator to jump on the bandwagon with us. There is still
plenty of room, to be sure. But I do urge caution to the
latecomers. This is a very complicated and multi-dimensional
issue, and it does not lend itself to easy undertaking or quick
fixes.
I hope that everyone will do their homework as the SEC and
this committee have, and continue to do so, instead of turning
to simple sound bites. Another top priority of mine that I look
forward to discussing in more detail with the Chair is the
recent push by some of FSOC and other international regulators
to expand the government's safety net and potential regulation
approach to those in the asset management business. This is of
grave concern, and I hope that this committee and all of its
members will work together to send a strong message to FSOC to
not go any further down this road.
Now, FSOC has become an unaccountable and nontransparent
black hole where potential regulators in the Executive Branch
are trying to impose their will on supposed independent
regulators. This committee must remain diligent in its
oversight, and persistent in its commitment to rein in the
FSOC.
And finally, I want to publicly thank Chair White for
posting the OFR's study on asset management on their Web site
and allowing the more knowledgeable people around the country
to correct many of their inaccuracies and their falsehoods as
well.
So I thank you for that, and I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, the ranking member of our Capital
Markets and Government Sponsored Enterprises Subcommittee, Mrs.
Maloney, for 2 minutes.
Mrs. Maloney. Thank you, Mr. Chairman.
And I would like to particularly welcome Chair White, who
is from the great City of New York, and I believe I speak for
all New Yorkers when I say that we are so proud of you and your
distinguished career.
The SEC has an enormously important role in our economy
because it is responsible for overseeing and regulating our
Nation's capital markets. The SEC must simultaneously encourage
capital formation by businesses that are seeking to grow;
ensure that investors in these companies are adequately
protected; and maintain fair, orderly, and efficient markets.
Balancing all of these objectives is a difficult job, but I
believe the SEC has performed admirably under Chair White.
Importantly, just as the markets are constantly evolving
and innovating, sometimes in response to new regulations, so
must the SEC. In this respect, I am pleased that all five SEC
Commissioners have publicly committed to a thorough review of
market structure issues. I am also encouraged by the SEC's
commitment to a data-driven approach on these complex market
structure issues which is evidenced by their new market
information data analysis known as MIDAS. This will allow the
SEC to analyze trading data to determine where the problems are
and what needs to be fixed.
I would also like to note that trading volume in the equity
markets has more than doubled to $71 trillion since 2001, and I
would welcome any comments on how the SEC's budget for
overseeing the equity markets, whether or not it has kept pace
with this enormous, enormous increase in responsibility. I
would also welcome any discussion on how the lack of resources
has impacted the Commission's oversight in this area and other
areas.
You have an incredibly important job to do. I look forward
to your comments on these issues and others. Welcome.
Chairman Hensarling. The Chair now recognizes the gentleman
from Virginia, the vice chairman of our Capital Markets and
GSEs Subcommittee, Mr. Hurt, for 2 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
Mr. Chairman, thank you for holding today's committee
hearing on the SEC's agenda and Fiscal Year 2015 budget
request.
I firmly believe that one of the foremost responsibilities
of this committee is to provide the appropriate oversight and
scrutiny of the Federal agency budgets under our jurisdiction,
especially at a time when our national debt surpasses $17
trillion. Federal agencies must learn to work smarter and do
more with less. I am, however, encouraged by Chair White's
recent comments regarding several of the SEC's upcoming
priorities, including the need to engage in comprehensive
reviews of equity market structure and disclosure requirements.
As she noted, the problem of disclosure overload is having
a negative impact on investors, public companies, and the SEC
itself. Streamlining our disclosure regime will lead to
benefits for both businesses seeking capital in the public
markets and investors seeking information to make informed
decisions. In addition to these reviews, it is imperative that
the SEC remember to advance its third and equally critical
mission, which is facilitating capital formation.
Congress has provided the SEC with broad discretion to
amend and to improve securities laws and regulations without
sacrificing key investor protections, and the SEC must take the
lead in promoting capital formation that will spur growth and
opportunity for our Nation and for the people I represent in
Virginia's 5th District.
I would like to thank our distinguished witness, Chair
White, for appearing before this committee today, and I look
forward to your testimony.
Thank you, Mr. Chairman, and I yield back the balance of my
time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Georgia, Mr. Scott, for 1 minute.
Mr. Scott. Thank you, Mr. Chairman.
And welcome, Ms. White. I am over here. It is good to have
you here.
I hope that in your discussion, you will talk about market
structure timeline. That is extraordinarily important because a
lack of order competition under the current structure is a
major concern of mine. I hope that we will deal with that and
also examine what you feel are some of the present conditions
that could lead to an excessive amount that would have and
tends to have a rather negative impact on excessive
competition. So it is sort of a delicate balancing act we have
to reach. I look for your comments on that.
And also, I am very interested in knowing how you and the
CFTC are making progress on the harmonization, particularly in
cross border, as you implement Title VII of Dodd-Frank.
And then, there is the fiduciary rule that you and the
Labor Department seem to be having some trouble with. I would
certainly appreciate your comments on that.
Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, the ranking member of our Oversight and
Investigations Subcommittee, Mr. Green, for 2 minutes.
Mr. Green. Thank you, Mr. Chairman.
Mr. Chairman, the SEC, in my opinion, is not a burden to
taxpayers; it is a benefit to taxpayers. And if we look at a
true cost-benefit analysis, we can see that in recent years the
SEC has taken almost twice as much in when you juxtapose that
to its budget as it is budgeted, and these monies come in, in
terms of fees, so the SEC is of great benefit to taxpayers. It
oversees more than 25,000 market participants, including over
11,000 investment advisors, approximately 10,000 mutual fund
and exchange traded funds, approximately 4,500 broker-dealers,
approximately 450 transfer agents, and approximately 18
securities and exchanges.
The SEC has responsibility for reviewing the disclosure and
financial statements of approximately 9,000 reporting
companies. It has new expanded responsibilities over
derivatives, an additional 2,500 reporting advisors to hedge
funds and other private funds. It has expanded responsibilities
over nearly 1,000 mutual advisors, 10 registered credit card
rating agencies, and 7 registered clearing agencies. The SEC
plays a critical role in overseeing our capital markets and
protecting our investors from fraud. I do not see it as a
burden. I see it as one of the benefits that we have, and I
think that what happened with Bernie Madoff is clear evidence
that a better funded can make a greater difference. I am
supportive of what is being done, and I support totally what
the chairman is doing as well.
I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from Ohio, Mrs. Beatty, for 1 minute.
Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member
Waters, and thank you, Chair White, for your testimony today.
It has been nearly 6 years since the foreclosure crisis
sparked a financial crisis that rocked our Nation. In the
aftermath of the Great Recession, Congress passed comprehensive
legislation to reform all aspects of the financial services
industry. The Dodd-Frank Act, an important law, although not
perfect, was designed to address the catastrophic failures that
led to the Black Swan events of 2008.
Adding in the JOBS Act, the SEC has been assigned more than
100 new mandatory and discretionary rulemakings in the past 4
years. All of these new regulatory and oversight
responsibilities are critical to minimizing the risk of future
financial market shock but cannot be properly exercised without
appropriate funding for the SEC.
I believe an adequate appropriation, even if increased,
would not impact our Federal deficit in any way. I look forward
to discussing with you some of the important new activities the
Commission is undertaking as a result of the Dodd-Frank Act.
Thank you, and I yield back.
Chairman Hensarling. That concludes our opening statements.
We will now turn to our witness. Today, we welcome the
testimony of the Honorable Mary Jo White, Chair of the U.S.
Securities and Exchange Commission. This is Chair White's third
appearance before our committee, so I believe she needs no
further introduction. Without objection, Chair White, your
written statement will be made a part of the record. Chair
White, again, welcome, and you are now recognized for your
remarks.
STATEMENT OF THE HONORABLE MARY JO WHITE, CHAIR, U.S.
SECURITIES AND EXCHANGE COMMISSION
Ms. White. Thank you, Chairman Hensarling, Ranking Member
Waters, and members of the committee for inviting me to testify
regarding the SEC's agenda, operations, and our fiscal 2015
budget request.
The agency's mission is critical to investors, the markets,
and capital formation as well as our economy more broadly. Now,
more than ever, we will need a strong, vigilant, and adequately
resourced SEC. To put the SEC's extensive responsibilities and
budget request into context, from fiscal 2001 to fiscal 2014,
trading volume in the equity markets, as has been noted, more
than doubled to a projected $71 trillion. The complexities of
financial products and the speed with which they are traded
increased exponentially. Assets under management of the mutual
funds grew by 131 percent to $14.8 trillion, and assets under
management of investment advisors jumped almost 200 percent to
$55 trillion.
Today there are, as has been noted, over 25,000 registrants
overseen by the SEC, including broker-dealers, clearing agents,
transfer agents, credit rating agencies, exchanges, and others.
During this time of unprecedented growth and change, the SEC
also has been given significant new responsibilities for over-
the-counter derivatives, private fund advisors, municipal
advisors, crowdfunding portals, and more.
The President's $1.7 billion budget request would enable
the SEC to address our critical priorities. As you know, the
SEC's funding is deficit-neutral, which means the amount
Congress appropriates does not impact the deficit, the funding
available for other agencies, or count against caps in the
congressional budget framework. Nonetheless, I fully recognize
Congress' oversight responsibilities and my duty to be an
effective and prudent steward of the funds we are appropriated.
I believe our accomplishments this past year and the
improvements the agency has made should give Congress and the
public the confidence that we will fulfill this responsibility.
Since my arrival in April 2013, the Commission has adopted or
proposed more than 20 significant rulemakings across the
regulatory spectrum, including many mandated by the Dodd-Frank
and JOBS Acts. We are more aggressively enforcing the
securities laws, requiring for the first time admissions to
hold wrongdoers more publicly accountable and obtaining orders
for penalties and disgorgement of $3.4 billion in fiscal 2013
alone, the highest in the agency's history.
We have intensified our data-driven disciplined approach to
analyzing and appropriately addressing complex market structure
issues, including those relating to high-frequency trading and
dark pools. We are now focused on completing the money market
reform rulemaking we proposed last year to address redemption
risk and resiliency concerns related to this important
investment product. The Commission is also working to complete
the rulemakings under the Dodd-Frank Act which were required in
response to the financial crisis, and those under the JOBS Act
which were designed to facilitate capital formation for smaller
businesses.
The staff has begun a comprehensive review of our public
company disclosure rules in an effort to make them more
effective for investors. Importantly, our budget request would
permit the SEC to increase its examination coverage of
investment advisors that everyday investors are increasingly
turning to for investment assistance for retirement and family
needs. While the SEC has made the most of its limited
resources, we nevertheless were only able to examine 9 percent
of registered investment advisors in fiscal 2013.
In 2004, the SEC had 19 examiners per trillion dollars in
investment advisor assets under management. Today, we have only
eight. More coverage is clearly needed, as the industry itself
has acknowledged. This budget request would also allow us to
continue to strengthen our Division of Economic and Risk
Analysis, our fastest growing division, by adding financial
economists and other experts to assist with economic analysis
and rulemaking, risk-based selection for investigations and
examinations, and structure data initiatives. The agency has
made great strides to enhance our technology, including
developing tools that permit us to better understand and
protect our markets and building the technological foundation
for unified access to SEC information applications and data
across the agency.
We are at a critical point in the deployment of more
sophisticated technology tools and platforms to assist in these
efforts, and it is vital that we have the resources necessary
to continue modernizing our IT systems and infrastructure. I am
pleased with the agency's accomplishments, but much more
remains to be done. I firmly believe that the funding we seek
is justified by our progress and by our important and growing
responsibilities to investors, companies, and the markets.
Your continued support will allow us to build on the
significant progress the agency has achieved, which I am
committed to continuing and enhancing.
I am happy to answer your questions. Thank you.
[The prepared statement of Chair White can be found on page
56 of the appendix.]
Chairman Hensarling. Thank you, Madam Chair.
The Chair now recognizes himself for 5 minutes for
questions.
I want to follow up on some comments made by the chairman
of our Capital Markets Subcommittee. Many have called the asset
management industry part of the shadow banking group, which is
obviously a pejorative term. As Chair of the SEC, are asset
managers regulated, from your vantage point?
Ms. White. Yes, they are, and they have been for many
years.
Chairman Hensarling. So, they are regulated?
Ms. White. They are regulated.
Chairman Hensarling. In your opinion, does your Commission
lack any authority that it needs to adequately regulate the
asset management industry?
Ms. White. Obviously, we are always looking to see whether
that is the case, but I do not believe we lack that authority,
Mr. Chairman. In other words, we have the authority we need.
Chairman Hensarling. Okay. Madam Chair, one thing that you
and I may have in common is that some people might accuse us of
being vertically challenged. Notwithstanding that, you managed
to poke your head way up to put out for comment the OFR asset
management study when others would not. I want to thank you,
along again with our chairman of our Capital Markets
Subcommittee, for doing that.
We know that FSOC has moved already on several non-bank
SIFI designations on what I might call part of the shadow
regulatory process, as FSOC continues to be a rather opaque
organization, if you will, using a rather amorphous process. Be
that as it may, from your perspective, how do asset managers
differ from traditional--how are they different from
traditional banks and bank holding companies?
Ms. White. They are different in many ways. I think that
the most fundamental difference is that they are an agent, and
they, therefore, manage others' monies. You have to make
certain to distinguish that when you are looking at any
systemic risk issues. We are not talking about positions on the
balance sheet, but we are talking about acting as agents in the
spaces that they act in.
Chairman Hensarling. We know that designating a firm as an
SIFI imposes increased cost upon an entity or an organization,
in this case, potentially this could be imposed upon investors
in mutual funds, people who are saving for retirement, maybe a
downpayment on a home, maybe to send their kids to college. Do
you believe that the evaluation of asset managers for an SIFI
designation should take into account the economic cost that
ultimately could be borne by our Nation's hardworking
investors?
Ms. White. Without getting into discussions I can't because
they are confidential when we deal with FSOC with any potential
designation--
Chairman Hensarling. Which may be part of the problem, but
continue.
Ms. White. FSOC is focused on the issue of transparency and
enhancing transparency, I think, but it is also important to
recognize that the discussions of potentially systemically
important institutions contain a lot of confidential data as do
some of the other discussions, which you would not want to be--
and I don't believe anyone would want to be--made public.
I think that the primary focus and really the primary
congressional mandate given to FSOC is to focus on identifying
and addressing systemic risk to the broader financial system,
and while any consideration of any decision an organization
makes should take into account all facts and circumstances and
impacts, we can't lose sight of the main mission.
Chairman Hensarling. What do you see as the systemic threat
specifically posed by the mutual fund industry?
Ms. White. The answer--that has obviously been studied and
is continuing to be studied by FSOC, of which I am a member.
Clearly, the SEC also is the primary regulator of the mutual
fund industry and asset managers, and I think our regulations
do address, and frankly, increasingly, any potential systemic
risk that that industry or any particular member of it might
pose.
Chairman Hensarling. What are the Dodd-Frank Act, non-bank
SIFIs which potentially could be assessed to help pay for the
resolution of a failing financial institution, which I believe
could have the consequence, if you designate a mutual fund as
an SIFI, it means that individual fund investors, many of whom
have entrusted their retirement savings to a mutual fund, they
could be on the hook for bailing out large financial
institutions, is that your understanding, and do you think this
is an appropriate consequence for moderate income mutual fund
investors?
Ms. White. I think it remains to be seen just how the
designations play out, and indeed how even enhanced regulation
is exercised if there is to be a designation. But plainly, the
concerns that you note are real ones.
Chairman Hensarling. The Chair now recognizes the ranking
member for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
Chair White, you recently stated in a speech to the
Consumer Federation of America that protecting investors
underlies everything the SEC does, and I know that you and your
colleagues are currently giving thoughtful consideration to a
significant investor protection issue, namely the extension of
a uniform fiduciary rule, to broker-dealers under Section 913
of Dodd-Frank. The rulemaking enjoys broad support from
investor advocates, advisor groups, and even the major broker-
dealer trade association.
As I understand it, the SEC's Investor Advisory Committee
submitted a unanimous recommendation to you that the Commission
move forward with such a rulemaking. Can you provide me with a
timeline of when you expect to be able to respond to the
committee's recommendation?
Ms. White. I can give you an approximate timeline. First
let me say that, speaking for myself, I think this is an
extraordinarily high priority for the Commission to decide, and
under Dodd-Frank, we are given the authority to decide and then
authority following that, depending upon our decision, whether
to impose a uniform fiduciary duty standard on broker-dealers
and investment advisors. What I have done is to prioritize that
issue with the staff because of how important I think it is,
and they have come back to me and I have gone back to them on
the range of options and considerations. It is a priority of
mine to have the Commission reach this very important issue
this year.
Ms. Waters. Thank you very much. On a similar point, I have
a bill, H.R. 1627, the Investment Adviser Examination
Improvement Act, which would authorize the SEC to levy user
fees to cover the cost of an increase in the frequency of
examinations of investment advisors. The Investor Advisory
Committee of the Commission has endorsed this legislation,
which was one of the recommendations that the SEC staffer
originally provided in the study that was required in Section
914 of Dodd-Frank.
From your perspective as Chair, do user fees represent a
scaleable and workable way for the Commission to improve
investor protection?
Ms. White. There is no question in my mind that one of the
most significant resource investor protection issues we face is
our examination function of investor advisors. Increasingly,
retail investors in particular are making use of investment
advisors. As I think I alluded to in my oral testimony--it is
certainly in my written testimony--given the resources we have
now, we are only able to cover 9 percent of those investment
advisors last year, and that is using very smart risk-based
methods to identify where we should be going based on risk.
And this budget request prioritizes our receiving
resources, I think 240 additional positions, which is as many
we believe we could hire smartly and train very well, to deploy
exactly in that space.
So, with respect to the user fee proposals and other
proposals that have been made in Congress, my priority is to
have the funding to be able to carry out my job, which I do not
have now.
Ms. Waters. Thank you very much. Section 911 of the Dodd-
Frank Act provides that each time the Investor Advisory
Committee submits a finding or recommendation to the
Commission, the SEC shall promptly issue a public statement
assessing the finding or recommendation of the committee and
disclosing what action, if any, the SEC intends to take with
respect to the recommendation. Does the Commission plan on
responding to this recommendation from the Investor Advisory
Committee?
Ms. White. We have had a number of discussions with the
Investor Advisory Committee about how best to respond, and
essentially what Dodd-Frank calls for is a Commission response.
We try to give as much information as we can even if the
Commission hasn't reached a decision on an issue.
So, as I mentioned before, it is a priority of mine to have
the Commission reach a decision on what to do in this space. At
times, the response, or the full response at least to the
Investor Advisory Committee is based on what we go forward with
or we don't go forward with, but I do try in other ways to
inform the Investor Advisory Committee of the progress, the
staff briefings that are occurring and that kind of thing on
the way to a decision.
Ms. Waters. Thank you very much. I think it is extremely
important, and I am very pleased that you have reiterated that
this is a high priority and your staff is very much involved
with this recommendation, and I am pushing very hard for H.R.
1627, so thank you very much.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, Mr. Garrett, the chairman of our Capital
Markets and GSEs Subcommittee, for 5 minutes.
Mr. Garrett. And again, thank you, Mr. Chairman.
So, Chair White, you have heard all the stories in the
paper and in the news. Can you tell us, are the markets rigged?
Ms. White. The markets are not rigged. The U.S. markets are
the strongest and most reliable in the world. That is not to
say they are perfect, and obviously one of our continuing high
priorities is to increase market quality.
Mr. Garrett. So, just following along that line, I don't
know if you have read it or not, but if you have seen stories
on it, was there any factual or substantive information in
those reports and in Michael Lewis' book that was new to you or
new to the SEC? Or has your agency basically known that
information, I will say, for years?
Ms. White. I am not in a position to give a book review on
it, but clearly the issues with respect to the greater speed in
our markets, including those obviously employed by high-
frequency traders are issues that have been discussed for
years, examined for years. We are obviously dealing with a
marketplace that has changed dramatically over the last decade
and the last 5 or 6 years, continuously evolves, and then one
thing I think is important to keep in mind is when you say
``high-frequency traders,'' which is where most of the
discussion has occurred lately, that is not a single phenomenon
as our new MIDAS Web site that has been alluded to makes very
clear. There are very different kinds of strategies and
approaches that are used by high-frequency traders, but these
are issues that our experts in Trading and Markets and the
Commission more broadly have been focused on really
continuously as the market has developed.
Mr. Garrett. Okay. And so part of that, I will say the
allegation that deals with the issue of what you call inside
information, so if there is a market impact because of a
publicly executed trade, which is what trades are, is it using
inside information to adjust your trade or your bid and offer
across the market because of that executed trade?
Ms. White. If we are talking about the legal concept of
that--
Mr. Garrett. Yes.
Ms. White. At least as I understand your question.
Mr. Garrett. Yes.
Ms. White. It is not, as I understand the question--
Mr. Garrett. Yes.
Ms. White. And as it has been described, it is not unlawful
insider trading. I think there has been some confusion, too,
between do you have earlier access to order information, that
is to say what the order is, versus, can you more quickly react
to executing based on that public information. I think then
there has been confusion about that.
Mr. Garrett. Yes, and that sort of segues somewhat into my
last question. Does the use of what you call exchange data
feed, right, which is approved by the SEC to make changes to
your bids, does that constitute insider trading?
Ms. White. If properly used, no.
Mr. Garrett. Right. Changing topics here to what the
chairman was talking about with regard to FSOC and asset
management and SIFI designation, if you look at a series of
recent actions taken by FSOC, and I am going to run down them,
and the bank of regulators, there seems to be a pattern here.
First, you have FSOC intervene on money market fund reform;
next you have the OFR release, which I talked about before, and
a much maligned asset management report; then you have banking
regulators put forth a liquidity coverage ratio (LCR) proposal
that basically ignores the SEC's existing liquidity regime; and
next, you have FSOC announce it is hosting an upcoming
conference on systemic risk posed by, of all things, asset
managers; and finally, last week there were reports that two
asset managers advanced to FSOC's second stage of SIFI review.
In all of these cases, you have banking-regulator-dominated
entities proposing what I will call potential-like regulation
and potentially extending their taxpayer safety net, which
means all of us potentially can be on the hook and then
therefore the subsidies on what? On security products and the
firms, and so, as you can tell, I am concerned about this. So,
as the head of the agency with expertise in this area and with
authority in this area, are you concerned about it as well?
Ms. White. I am very concerned. I think you distinguish,
too, between FSOC's duties, authorities, most of which I think
encompass the data points you just mentioned. And then
separately, to some extent, the Fed's powers by virtue of the
Bank Holding Company Act that touch on these issues, for
example, the liquidity ratio regime. It is extraordinarily
important for FSOC, which is charged under the statute, for
identifying systemic risk and addressing them within their
authorities, that they obviously carry that out.
Mr. Garrett. But why would we want to extend the taxpayer
subsidy and bailout safety net to capital markets and asset
management?
Ms. White. I am not suggesting for a moment that we
should--
Mr. Garrett. Okay.
Ms. White. --do that. But what I do think is very important
is for FSOC, as it carries out the duties given to it, that it
has the expertise, listens to the expertise at the table, as
well as drawing on external sources of expertise, particularly
when FSOC gets beyond banking regulated space.
Mr. Garrett. Yes, I saw that gavel coming, so thank you.
Chairman Hensarling. The gavel did come. The time of the
gentleman has expired.
The Chair now recognizes the gentlelady from New York, the
ranking member of our Capital Markets and GSEs Subcommittee,
Mrs. Maloney, for 5 minutes.
Mrs. Maloney. Thank you very much.
Madam Chair, there has been a great deal of discussion
about market structure issues recently and the fairness of the
current market structure, in particular. One issue that stands
out to me as a problem is that not everyone has equal access to
market data at the same time, giving some an unfair advantage.
Some market participants can buy access to private data
feeds that are significantly faster than the data feeds that
are available to the public, and even some of the big
institutional investors have said that this ``tying gap''
creates an unlevel playing field, and have called for action to
address it. Do you agree that these private data feeds create
an unlevel playing field?
Ms. White. I think the issue that you mentioned, and that
has been discussed recently and obviously historically as well,
is certainly one that we are looking at. I think it is
important to point out that under the current regulatory
regime, the SROs are required to provide to the proprietary
feeds and the consolidated data feed the information at the
same time. That doesn't answer the question how fast,
therefore, can it be used and absorbed, obviously, and so some
of the questions that have been raised about potential
unlevelness of the existing playing field go to that area.
But I think it is important to focus on the complexities in
this, area, and one of the things we want to be sure that we
maintain is that we are very data-driven and disciplined in
deciding what to do with respect to any aspect of our current
market structure which is, as a whole, I think, working quite
well. That doesn't mean it is perfect by any means, but it is
certainly one of the issues that we are looking very closely
at.
Mrs. Maloney. It really throws up a red flag when BlackRock
and Goldman Sachs and some of these other large institutional
investors are calling for some type of regulation to address
the timing gap between the unlevel playing field that, in their
materials, they talk about between the private data feed and
the public getting access to it.
So, would eliminating this timing gap between private and
public data feeds lead to fair markets? I think it would. Don't
you think eliminating that timing gap between private and
public feeds and data would eliminate an advantage there to
some?
Ms. White. It is clearly, as I said before, an issue we are
quite focused on. Let me be clear, I think you have had a
number of different issues raised, and frankly, different
people have different views on them in the public arena, too,
in terms of what would increase market quality and both the
fact and appearance of fairness in a level playing field, and
they are both extraordinarily important.
I think the issue you raise and others is extraordinarily
important in and of itself, as well as any perception of
unfairness, so that is certainly a priority issue for us.
Mrs. Maloney. Has the SEC taken any actions to try to stop
abusive practices or create a more level playing field?
Ms. White. No question about that. I think one thing to be
very clear about--
Mrs. Maloney. But have you taken any actions? Have you done
anything about it?
Ms. White. I think we have done--
Mrs. Maloney. Have you disciplined anybody? Have you done
anything? Have you made any changes?
Ms. White. I think we have done a number of things.
Clearly, to the extent that there are unlawful inappropriate
practices engaged in by whether it is high-frequency traders,
dark pools, or any other market participant, our enforcement
and our examination functions, in particular, have responded to
those. I have said publicly--
Mrs. Maloney. Can you give examples?
Ms. White. I have said publicly before that we have a
number of ongoing investigations as to practices by high-
frequency trading firms and dark pools. One example of
enforcement action that we brought at the end of 2012 was
actually I believe the first action where there was a penalty
assessed. There was a $5 million penalty against the New York
Stock Exchange based on precisely the issue of providing that
market data first to the proprietary customers rather than the
public consolidated feed. There is no question about the
seriousness and significance of that issue. We brought a number
of others similar to that as well.
Mrs. Maloney. I would say that any practices which seek to
manipulate the market or disadvantage investors is going to
have a devastating effect on the markets. I know people now who
don't want to trade in the markets because of the high-
frequency trading, and they don't feel they are treated fairly,
that there is an advantage to the insiders, and I feel this is
extremely important.
My time has expired. Thank you for your service.
Ms. White. And I agree with that. I think the appearance
issue is also important, as well as the fact.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Alabama, our
chairman emeritus, Mr. Bachus, for 5 minutes.
Mr. Bachus. Thank you.
I would assure Mrs. Maloney that there is very good staff
at the SEC on market structure and they have been looking at
this issue for some time, and it is rather complicated, but it
is not something that they are not aware of and have not been
addressing.
Chair White, you gave up a job where you were compensated
10 times more than you are now being compensated as a public
servant, and I want to compliment you. I think you have shown
your independence, you have stayed above politics. At times you
have displeased both sides, but I think you have shown a
balance, and it is in the best interest that we have an
independent strong agency, and I think you have done a good
job.
You have toughened enforcement. You should be given credit
for that. And you have addressed a backlog of regulatory
issues, so I compliment you on that.
One of the regulatory issues is the JOBS Act, and a
bipartisan achievement of this committee during my tenure as
chairman was the JOBS Act, and I think that this committee and
its members can take a lot of credit for Steve Case, American
Online cofounder, who published in the Washington Post earlier
this month an article entitled, ``Hey, Washington, the JOBS Act
you passed is working,'' and the SEC deserves credit for
helping to translate many of the provisions of that Act into
workable regulations.
As you go forward, it is my hope that you won't become too
prescriptive, so prescriptive that it discourages innovation
that we are trying to inspire, and let me quote Steve Case:
``Protections against fraud are important and safeguards should
be put in place, but overprotection led to a stifling
environment that slowed growth and limited opportunity. The
JOBS Act reflects a more classical American acceptance of risk
and its rewards.''
Can you tell us how the SEC will approach the
implementation of the remaining provisions of the JOBS Act to
make sure it achieves its full potential?
Ms. White. Yes, sir. And again, completing those JOBS Act
rulemakings as well as the mandated Dodd-Frank ones remains a
very high priority for me in this year's agenda. I think the
provisions do vary as they were given to us by Congress. Some
have built-in investor protections, I think, in terms of the
crowdfunding intermediaries portals mechanism, for example.
Others may not, for example, the lifting of the ban on general
solicitation we talked about earlier.
So our perspective on this is to plainly carry out the
statutory mandates that we have been given in the optimal way
we can, and by that I mean we want the rule to be workable.
Obviously, we always have in mind investor protections.
It is a balance that I think should not be inconsistent but
nevertheless is one that we have to engage in. We clearly
engage in economic analysis of the choices that we make. Some
of the choices may be made for us in the statute, and obviously
we need to be faithful to those, but we certainly want these
rules to work. That is the point. In order to encourage that
capital formation and JOBS, that is the intention of it.
Always having in mind investor protection, one of the
things I have done with the--not just the JOBS Act rulemakings,
but frankly, we will do it even more broadly, is when the new
marketplace opens, and I don't believe it will have any
stifling effect, that we are really ready to kind of look at it
in real time, is it working, is it not working, is there an
uptick in fraud as some are concerned about? If so, we should
be all over it, and I think that is investor protection, and I
think it is also wise in terms of facilitating capital
formation.
Mr. Bachus. Thank you.
I know that Ranking Member Waters mentioned this, but I
have long had an interest in making sure that there is proper
oversight of our registered investment advisors, and you have
expressed a concern about that in your opening statement, and
of course, for any of us who went through the Bernie Madoff
case, that really came home to us. A lot of people were hurt.
Last Congress, some of us worked on an SRO proposal, and
that was just one approach, and I know Ms. Waters has
reintroduced H.R. 1627, which is a user fee, and the investment
advisor community seems to have embraced that.
I would just urge you to continue to--I know your
examinations--you are not examining but 9 percent of them, and
I urge you to continue to keep this as a priority and that all
of us will work together to resolve this so we get a more
frequent schedule of examinations.
Ms. White. Thank you very much, and I will.
Mr. Bachus. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Chair White, the Volcker Rule provided the financial
industry with many exemptions, including on certain
collateralized loan obligations (CLOs). However, some in the
industry are asking for broader relief arguing that the current
rule will restrict access to capital. Can you explain what
risks non-exempt CLOs pose and how the rule has affected the
CLO market so far?
Ms. White. I think that is something we will continue to
look at. The rule itself became--the Volcker Rule itself became
effective, I think, on April 1st, but a lot of the
effectiveness of it in terms of conformance period doesn't kick
in for some time. On the CLO issue, I did concur and approve of
what the Fed recently did, which was to extend the conformance
period for CLOs that may hold securities, and that is kind of
the key. If a CLO doesn't hold securities, then there is an
exemption, but if not, the agency has determined that there was
not, but what the Fed has done is to extend that conformance
period to give a greater period of time to adjust to the rule
requirements.
Ms. Velazquez. So far, $32 billion in CLOs have been issued
this year, so it looks like it hasn't slowed down.
Ms. White. Yes, and what we are talking about now, the
legacy CLOs, yes, and some of the CLO market is an active one,
the current CLO market.
Ms. Velazquez. Chair White, investing can be very risky, we
all know that. Easing SEC reporting and registration
requirements for crowdfunded security, as required under the
JOBS Act, will therefore expose tens of thousands of investors
to increased risk. How does the SEC plan to inform ordinary
investors of the risks while not burdening small businesses and
restricting capital access?
Ms. White. On crowdfunding, we have made that proposal. I
think the comment period closed, if I am remembering it right,
in February. We have gotten a lot of comments. Some of the
investor protection provisions, as I mentioned a little bit
earlier, are built into the statute. Extraordinarily important
to that is the intermediary structure of the funding portal or
the broker where there are, either by statute or to some extent
by our proposal, requirements to inform investors of the risks
and make sure they are educated on exactly what the investments
are about, not releasing the funds until the targeted amount is
achieved.
But we have gotten a lot of comments, frankly, from both
sides, which is not unusual in terms of do we have enough
investor protections built in, some thinking we have too many
built in and therefore will stifle this means of raising
capital that is prescribed by the statute, so we are very
carefully considering those comments before we move to
adoption.
Ms. Velazquez. Thank you.
Chair White, the SEC cost estimates for crowdfunding do not
look promising for smaller issuers. Has the SEC investigated
ways to reduce these costs without impacting investor
protection?
Ms. White. Certainly, an integral part of all of our
rulemakings is intended to weigh impacts and weigh costs and
cost-benefits. Again, within the framework we are given by a
particular statute.
The other method that I have tried to adopt on our
rulemakings is to try as they come out the door frankly, to
monitor the new marketplace in this instance that is created,
so that we can see if it is working. If it is not, we would be
in a position to make adjustments so that it would work without
compromising investor protection.
Ms. Velazquez. So, do you anticipate a way for new
businesses jumping into the market once the JOBS Act is fully
implemented?
Ms. White. On the crowdfunding provision, certainly there
remains a lot of excitement about doing just that. You can't
really tell until it is actually activated, but certainly there
is a lot of excitement about that.
Ms. Velazquez. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the
gentlelady from West Virginia, the chairwoman of our Financial
Institutions Subcommittee, Mrs. Capito, for 5 minutes.
Mrs. Capito. Thank you, Mr. Chairman, and thank you, Chair
White, for being with us today.
I know you are very familiar with the reporting guides that
the SEC requires for specific industries, and you actually made
a speech, I think last year, talking about the importance of
disclosure, which we certainly agree with and the need to keep
these disclosure standards up to date. You mentioned also in
that speech that the mining industry's guidelines have not been
updated since 1982, and I was wondering if you have any plans
to update those? They are quite short in the reporting
document, and I was wondering what the holdup was and what your
plans are for that?
Ms. White. The industry guides in general are part of what
we are doing as part of the comprehensive review of our
disclosure program, and there are a number of them that I think
fairly could be said to be outdated, and we are certainly
looking very closely at those. I can't be more specific now,
but I'm happy to report back when I have a better sense of what
the status is, but clearly that is included in what we are
reviewing.
Mrs. Capito. Do you have any kind of timeline on that?
Ms. White. It is, what we engaged in, and what I have
instructed the staff to engage in is a comprehensive review,
which I think is really quite important to our disclosure
regimes which that is a part of.
Mrs. Capito. Right.
Ms. White. What that doesn't necessarily mean, however, is
that as part of that review we will not do certain discrete
things. We won't wait to do certain discrete things, but I
don't really have a timeline on it for you as I sit here today.
Mrs. Capito. I understand it is a problem in terms of
international standards that we are sort of getting left behind
there.
Another question I have is on the pension fund issue, with
MAP-21, and I am going to have to refer to my notes here
because it is kind of in the weeds. It has a provision that
allows companies to use average discount rates when calculating
their pension differences. This is especially important in the
current low interest rate environment. What steps do you see
the SEC taking to work with FASB to ensure that these
companies, if they are using this average, are in compliance
with their financial reporting?
I have written a letter to you and to others making sure
that these companies know that they are accurate in their
reporting and that it is reflective of whether it is
overfunding or underfunding their pensions.
Ms. White. What I can say to that at this point, and I may
be able to say more later, and I know we do have I think a
letter from you on this.
Mrs. Capito. Right.
Ms. White. Is that FASB is studying this, and I expect to
receive a briefing in fairly short order from our chief
accountant's office who works with them on this.
Mrs. Capito. I think that provision probably will expire
shortly, so I think that we--
Ms. White. I'm aware of that.
Mrs. Capito. Yes, thank you.
I noticed--well, two quick questions. I have a bill out
that says that before you can put a whole lot of rulemaking on,
and Mr. Meeks and I are on this together, where you have to
really look at what kind of duplicative efforts are already
there, your old rules or regulations that are antiquated,
instead of just piling on. You did mention cost-benefit
analysis in your rulemaking; are you scrubbing this at the same
time?
Ms. White. Certainly with respect to any rulemaking we are
focused on now, we certainly scrub what is out there, whether
it is in our agency or other agencies to try to avoid that
duplication. Frankly, there might not be a need, or there might
be a different need based on that analysis.
Mrs. Capito. Right.
Ms. White. In terms of actually reviewing our rules, what I
think is the most constructive way to do that rather than on a
sort of project basis, we certainly do reviews of what is
called retrospective review under the Reg Flex Act and so
forth, and that is important, but I also think that as they
come out the door, we should be and I think are, but I am
trying to enhance this, we are really reviewing the impact of
those rules as we go forward and making changes that we think
we should make. We have also--
Mrs. Capito. I think--
Ms. White. I'm sorry--
Mrs. Capito. I was going to say, because I think we are
finding in some spaces that there can be conflicts there, too.
You have a new rule that comes up that really conflicts with
not an entire previous rule that may be a certain part of that
rule. I am certain you are looking at that. It certainly would
lead to confusion and could lead to litigation and other
things.
Ms. White. Certainly, that should not be occurring. I am
not suggesting it doesn't occur obviously. One of the things we
have encouraged our various advisory committees frankly to do
is also to bring to our attention any examples that may be
occurring or even if not a conflict where something is outdated
or not optimal, but we encourage all constituencies to do that.
And we get a lot of feedback. It is not as if once our rule
goes out we don't--
Mrs. Capito. I bet you do.
Ms. White. --we don't hear back all right, so we do. We are
trying to be more proactive in getting that feedback so.
Mrs. Capito. Thank you. And just in conclusion, I would
like to thank you for your service, and I thank you for your
very crisp and concise answers. Thank you very much.
Chairman Hensarling. The Chair now recognizes the gentleman
from Massachusetts, the ranking member of our Housing and
Insurance Subcommittee, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
And thank you, Madam Chair, for being here.
Madam Chair, 6 years ago we had a humongous financial
crisis, the greatest in my lifetime, and hopefully the last in
my lifetime but we will see. Five years ago, we passed a
significant law to try to address some of the things that
caused that crisis. Three years ago, the SEC passed some
proposed regulations, adopted proposed regulations, relative to
credit rating agencies that came out of that Dodd-Frank bill.
Three years later, those rules are still not finalized.
A few years ago, the Supreme Court made a ruling that
corporations are people, and they can spend money anywhere they
want in political stating which is fine. Many of us asked the
SEC to address that issue to simply require corporations who
make political donations to simply publicize them, and the SEC
has now taken a walk on that request after several years of
being asked.
Recently you had one of your long-term attorneys, whom I
understand is well-respected within the agency, retire. At his
retirement party he basically criticized the SEC's approach
over the last several years as being too timid relative to
enforcement actions against some of the biggest names on Wall
Street, therefore leading to an attitude on Wall Street of,
``What is the big deal? We can get away with it. Maybe pay a
small fine relative to the rewards we reap.''
And now recently we have had a book comes out by a well-
respected author, whether you agree with all the details or
not, it certainly raises questions, serious questions, as to
whether the whole market is rigged, especially against small
investors. Even if there is nothing illegal being done, I think
certainly most people would think that when they push the
button to make a trade, that is going to happen and nobody is
going to interfere with that in a matter of a split millisecond
between the time they push the button and the trade is actually
executed.
After all these things that the SEC really hasn't done much
about, I will tell you that I understand full well that the SEC
is understaffed, and I will tell you that I hope you recognize
this, I have been one of the greatest supporters of fully
staffing and adequately paying the employees of the SEC, and I
think that you will find that most of that support is on this
side of the aisle.
We agree with that comment, but nonetheless, that is the
fact. To me, that raises lots of questions about focus and
priorities of what is left. Fully understanding you are
understaffed, what are you going to have a limited staff do?
And in my opinion, the SEC's most important function is
providing confidence for investors in the general public, that
there is a level playing field, that they will be protected
from shysters, and that the market will be an honest and free
market.
In the last several months, lots of things have happened to
raise that question, and I simply want to ask you, do you agree
with the things I have commented about, not necessarily the
details, but the seemingly constant erosion of confidence in
the SEC to actually do the job, the main job it is required to
do, not in the fact that you are doing in the details of this
regulation or that, but the fact that whether we believe you
are doing it enough?
If we don't believe it, you may as well not exist, and it
doesn't matter what your funding level is. And I will tell you
that from my end of the table, that is certainly what I am
starting to see, one drip at a time, and I would just like to
hear your reaction to that concern.
Ms. White. Plainly, it is a significant concern if that is
your perception or anyone else's or more broadly the market's
perception, and so it is something that I think we have to be
very cognizant of. I think when I was answering the questions
before on our work on the market structure issues, that even
if, in fact, some piece of that may not be a problem but it is
perceived to be even as unfair or creating an unlevel playing
field, that, in and of itself, is a significant issue.
I do think that the SEC and our experts in particular in
trading and markets, are intensively and with great expertise
and increasingly sophisticated use of data addressing those
issues, but I recognize what is somewhat a separate issue of
making certain that there is confidence in that work or any of
those conclusions as well as we proceed.
I think there are virtual consensuses out there but you
still have the questions being raised which makes it a problem,
is that the current market structure, including the advances of
technology, have actually benefitted in particular the retail
investor. I am not saying they haven't benefitted the
institutional investor in terms of decreased costs and
narrowing of the spreads and greater liquidity, but if the
retail investors don't think that is the case, that is a
problem. There is no question about that. I might note, and I
don't want to overstate it, but you have actually had certainly
in recent months, the recent past, more retail investors coming
back into the markets, which I think is a very good thing; but
we have a constant duty to ensure people that we are really on
all those jobs that you have mentioned. I am happy to follow-up
on the specifics.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, the chairman of our Housing and Insurance
Subcommittee.
Mr. Neugebauer. That you, Mr. Chairman. Chair White, thank
you for being here this morning.
As you know, the Financial Stability Oversight Council,
FSOC, recently designated Prudential Financial as a non-bank
SIFI that will be now subject to enhanced prudential standards.
Unfortunately, this was over the strong objection of voting
members who have insurance expertise, and one of those members,
Director John Huff, a State Insurance Commissioner who actually
regulates the businesses of insurance, stated, ``FSOC's
misguided overreliance on banking concepts is no more apparent
than in the FSOC's basis for the designation of Prudential
Financial.'' He went on to say that, ``the basis for this
designation was grounded in implausible and even absurd
scenarios.'' What is your reaction to Mr. Huff's remarks?
Ms. White. And this is on Prudential, I think I heard you
say? That happens to be a case that I am actually recused on,
so I don't want to talk about the specific case, but I think I
can talk generically and be responsive which goes back to
obviously there are 10 voting members of FSOC, so decisions
when they are taken are taken by those votes, and it is
extraordinarily important that before any decision is made,
that FSOC have and listen to the expertise in the particular
industry. I am not commenting on the specific decision at all,
but I think that is critical.
Mr. Neugebauer. I think, based on what you just said, then
the people who were in the room when this decision was made,
who actually had more expertise in insurance regulations, spoke
in opposition to it. Should that be troubling to us that we are
trying to let people who have not necessarily had experience in
regulating insurance companies have such a large say in this
issue?
Ms. White. Again, obviously if FSOC was created as it was
by statute, I do think FSOC, its primary purpose, which I think
is an extraordinarily important and positive one, is to bring
together the financial regulators from across market spaces, if
I can call it that, so that you can sit in the same room I am
seeing this, I am seeing that and react to it.
But I also think again, that you want your decision-making
to be optimal. It doesn't mean just because one particular
expert who may be a voting member says X, therefore X is the
right answer necessarily, but it does mean you should listen to
that expertise, and and I am not suggesting that FSOC doesn't
do this because it certainly does to a degree, bring in
external sources of expertise as well. But get that expertise
at the table, particularly when you are in areas beyond the
members' particular expertise.
Mr. Neugebauer. I do understand that you recused yourself
because of your previous ties to Prudential, but now that the
decision has been made, do you agree with that decision?
Ms. White. Because I am recused, I don't think I should
comment on the specific decision, and it is one that I would
not have therefore studied either in obviously the same way.
Mr. Neugebauer. I want to commend you and your fellow
Commissioners for committing to a data-driven, holistic review
of our U.S. equity markets structure. Can you kind of give a
little snapshot of how you see this review proceeding and some
of the next steps and timelines?
Ms. White. And it has been proceeding. It is something, by
the way, that even before I became Chair, and at my
confirmation hearing, I identified as one of my three immediate
priorities, in addition to completing the mandated rulemakings
and enhancing the enforcement function, making certain that the
SEC and its experts had the data they needed to fully
understand all of the market structure issues and then respond
appropriately if there is a need to respond.
And so, I am very personally close to the work that is
being done there, in really constant discussion with the senior
folks in Trading and Markets, and we are proceeding in a data-
driven disciplined way. I think the knowledge base of the
Commission has been enhanced significantly by being able to
bring on the MIDAS technology, when the CAT technology comes on
board even more so, and again that will help us, all of us,
make certain that we fully understand all of those issues.
But it is a very high priority. It is proceeding actively.
I can't tell you specifically when you will see a particular
product come out of that review, but I assure you that when it
ought to come out, it will come out as we proceed with that
review.
Mr. Neugebauer. And you are committed to looking at the
whole space, and nothing is off the table; is that correct?
Ms. White. Without any question. And that includes our own
regulations as well. All the issues of speed, disbursement,
volatility, but including also, has NMS contributed in ways
that were unintended, or over time they may have contributed in
ways that are unintended? It is a comprehensive review where
every issue is on the table.
Mr. Neugebauer. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman, and thank you, Madam
Chair, for your willingness to help the committee with its
work.
I want to go back to the point raised by Mrs. Maloney and
also Mr. Capuano earlier. I am concerned about high-frequency
trading, and there are a number of elements that have been
raised in Mr. Lewis's book and also by some other writers, for
example, Charles Korsmo, who wrote a very thoughtful article
that I would like to ask unanimous consent to enter into the
record.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Lynch. Thank you.
One of the red flags that I thought came out in Mr. Lewis's
book was the fact that in many cases, these high-frequency
traders are maintaining positions for just a matter of seconds,
oftentimes less than a minute, and at the end of the day they
are balancing out their trades. They don't maintain positions
for very long, and there was one high-frequency trader, Virtual
Financial, which publicly boasted that in 5\1/2\ years, they
had one day of trading losses, and they attributed that to
human error.
So, when you say the market's not rigged, I just have to
say that there seems to be a definite advantage for a firm that
can operate for 5\1/2\ years with only one day of trading
losses. It is incredible in itself, but I just think we need to
go deeper on this, and I think that there are some major
questions that have been raised here by Mr. Lewis's book and
others. The Order Protection Rule and regulation NMS which
significantly fragments liquidity and provides some slow market
arbitrage opportunities for high-frequency traders, and are you
looking at that?
Ms. White. The answer is, we could not be doing a more
intensive review of all the issues, and I agree that there are
a number of questions that have been raised and not just
recently or by a book. These are real questions that we are
looking into and will respond appropriately when we have
completed that review. I do think--
Mr. Lynch. I sure hope so, and this is not on you. This is
not on you, Madam Chair, because you are relatively new, but
the co-location and technological strategies that allow
computerized traders to front run trades by virtue of proximity
and speed, that has been out there for a while.
This firm has been doing this for 5\1/2\ years. So-called
maker-taker policies at exchanges that distort market behavior
by confusing trading activity with useful liquidity,
discrepancies between how fast traders can trade and how
quickly exchanges recognize those price changes across
fragmented equity markets, and those are all concerns.
And the other question I have is, what is going on in dark
pools? At least the suggestion from the evidence provided by
Mr. Lewis, that investors who are going to dark pools are also
being taken advantage of, and I know that you have some
authority, the SEC has some authority under ATS to look at
those dark pools to tell us whether or not those trades are
being made at an optimum advantage for those investors or
whether they are being taken advantage of much in the same way
some of these other trades are being front run. Do you have any
intent of looking at these dark pools?
Ms. White. No question about that. We are looking at the
dark pools. I think I also mentioned that we, and I can't say
more than this because of the nature of it, but we have
investigations involving practices in dark pools on the
enforcement and examination side, and each issue that you
mentioned raised significant questions. For example, maker-
taker pricing. There are different views about whether they are
benefitting market quality or they are deteriorating or
diminishing market quality.
Mr. Lynch. I appreciate that. I only have 8 seconds left.
Have we prosecuted anybody for any of this, up to this point?
Ms. White. We have certainly brought cases on the civil
side. We don't prosecute in the criminal sense, but there have
been some criminal actions as well. Certainly, front running is
not allowed if appropriately described, and we have certainly
brought front running cases, and we have brought cases
involving really the spectrum of market participants.
Mr. Lynch. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, the chairman of the House Foreign Affairs Committee, for
5 minutes
Mr. Royce. Thank you, Mr. Chairman.
And thank you, Chair White, very much. Thank you for your
testimony here today.
You briefly described your view as the difference between
asset managers versus banks and other financial institutions,
and there was the OFR's report on the potential for SIFI
designation, and as you explained this, it seems as though the
SEC and the OFR were not necessarily on the same page in terms
of the way you perceived it at the SEC.
And I was going to ask you, was there collaboration between
the OFR and your staff in preparing this or not in terms of the
final report because you are the primary regulator, and so at
the end of the day there should be, when you are not in
concurrence with the view, some way to express that, maybe it
would be to have a dissenting opinion in terms of the OFR
position, but I was just going to ask you about that.
Ms. White. I'm sorry, I guess the first point would be that
actually nothing has been presented for any kind of decision
yet to this point, and my understanding, and this does precede
my time as Chair, but in I think late-ish at least 2012, FSOC
actually commissioned, asked OFR--
Mr. Royce. Right, originally.
Ms. White. --which is its research arm, and obviously meant
to well inform FSOC's deliberation to undertake this study in
terms of the SEC's staff's participation, it is an OFR study.
The Commission itself did not participate but the SEC staff did
provide throughout the process of the report its technical
expertise and comments. At the end of the day, some of those
comments were taken and some of those were not taken, and
essentially the staffs agreed to disagree. But in the end, it
really is OFR's study. And in response to an earlier question,
OFR actually publicized its own study, and I think everyone
expected public reaction. What the SEC did was to open a page
so that those comments could be collected there because I think
anything is improved by getting input.
Mr. Royce. Right. I recall you opening the page. But I just
wondered on the asset management report if there might be a way
to actually attach the views of the SEC, of the primary
regulator, in a situation like this? It was just one idea.
Ms. White. I appreciate the idea. I think it is their
study, and that is clear. Obviously, the SEC is free to speak
in other ways.
Mr. Royce. Let me ask you another question. As you know,
Section 165 of Dodd-Frank requires the Federal Reserve to
tailor prudential rules for non-bank SIFIs to account for
differing business models including insurers. However, the
Federal Reserve says it is required to impose Basel bank-
centric rules on nonbank SIFIs. That is due to the Collins
Amendment. Given that the Fed has taken the position now that
Collins constrains their ability to tailor rules for nonbanks,
would it not be prudent for FSOC to postpone further
designations of insurers and other nonbanks until the Collins
issue is resolved?
Ms. White. Again, in terms of what I can discuss, that is
certainly an issue about which there is awareness on the part
of the FSOC members, and there has been discussion about that
which I expect to continue.
Mr. Royce. My last question is about the FSOC process and
whether voting members meet with firms before or after a notice
of proposed designation. It is my understanding that the
process does not include an opportunity for a firm to make
their case that they are not systemic to the voting members of
FSOC. They can't make that case themselves prior to FSOC voting
to designate the firm. It seems obvious to me that potential
designated firms should have an audience either with FSOC
members, or as a group. Can you think of any reason why you
would not meet with a firm prior to voting on their notice of
proposed designation?
Ms. White. Again, those protocols were set before my time,
but, there certainly is input, as I understand it. There
certainly is input that the companies give in advance--
Mr. Royce. To make their case.
Ms. White. To the deputies who are actually doing the day-
to-day work.
Mr. Royce. Yes, but not to those who are making the final
decision, and, Chair White, that was the point I was going to
make.
And thank you very much, Mr. Chairman. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Georgia, Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman.
Chair White, it is good to have you here, and I just
commend you. You all have a very difficult job in having fair
trading. You are sort of like the baseball umpire, but this
year for the first time baseball umpires have what they call
instant replay, causing quite a bit of consternation. But I
want to ask you for an instant replay here. Do you or do you
not at the SEC have an action plan for order competition in the
market structure?
Ms. White. Do we have an action plan?
Mr. Scott. Yes, for a timeline?
Ms. White. I'm sorry. In terms of our review of the market
structure issues, including the order types and so forth?
Mr. Scott. Right.
Ms. White. The answer is we don't have a specific timeline,
but since I became Chair, as I mentioned before, this set of
issues was in my list of top three immediate priorities, and I
have been driving the staff very hard on all of the market
structure issues.
Mr. Scott. May I take this as an opportunity to--
Ms. White. And therefore I hope to move it quickly.
Mr. Scott. --stress to you to please get an action
timeline. Order competition, if we lose order competition and
you have all of this excessive competition that comes in, that
brings all of this complexity with it, and that is what leads
us to the dark side, to these dark pools.
If we allow our investment process to move into these dark
pools, we are in serious trouble. And so, my concern is that a
lack of this is very pressing, and this isn't the first time
that I have brought this issue up. So I sense that you don't
have a sense of urgency here. Do you? Am I going down a wrong
hole here? Am I going down a dark hole? Don't you see a need
for order competition, and if we don't have it, it will lead to
these dark pools?
Ms. White. There are a lot of issues in your question.
First, we have a sense of urgency. I meant what I said that we
are data-driven and disciplined, and we are doing a
comprehensive review, which I think is the right way to do
this. But that is not inconsistent with bringing a sense of
urgency and intensity to all of these issues. In terms of the
order types, they are, indeed, submitted by the SROs. If they
have a new order type, they make a representation in terms of
that in their judgment promote just and equitable principles of
trade. Competition is one of the objectives of those order
types. They are obviously reviewed by the SEC, and a finding
needs to be made with respect to them. So these are things that
are--and, again, that does not mean that one wants to make sure
that the order as described, the objectives as they are given
to improve market quality are, in fact, being used in that way
and not in some other way. So, yes.
Mr. Scott. Okay. Thank you.
I just want to urge you to really move in that direction.
But I do have a couple more questions. One is on this fiduciary
rule. What is the problem here? My feeling has always been that
that is under your jurisdiction as the Securities and Exchange
Commission, so why is the Labor Department meddling in your
bailiwick?
Ms. White. There are two different statutory regimes where
that issue--there are probably more than two, but certainly the
Department of Labor under the ERISA statute has that issue
before it with respect to what is under its jurisdiction. We
obviously are focused on the issue from the perspective of
whether a uniform fiduciary duty should be imposed on brokers
and investment advisors in our space.
Mr. Scott. Wait, one point. How close are you to working
this out, because we have the business community that is in a
state of limbo here?
Ms. White. What I can say is--
Mr. Scott. It is not fair to them.
Ms. White. Yes, and again, at the end of the day I have to
say there are two different agencies with two different
statutory regimes. But having said that, I fully recognize the
importance of notice to those who may be impacted and
consistency.
Mr. Scott. Okay. My final point I have to--
Ms. White. I am in touch with Secretary Perez. Our staffs
are in touch.
Mr. Scott. I have to get this in about the CFTC and you and
harmonization, but apparently I will not.
But, thanks to the chairman.
Chairman Hensarling. Hold that thought for the next
hearing.
The Chair now recognizes the gentleman from Michigan, the
vice chairman of our Monetary Policy and Trade Subcommittee,
Mr. Huizenga, for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. And it is with great
pleasure I get to not only welcome Chair White but my 13-year-
old daughter who is here with her mom and might be getting a
little embarrassed right now. But I will do my best, sweetie--
not you. Sorry, Chair White. My sweetie in the back.
Ms. White. That is okay.
Mr. Huizenga. Sorry. Sweetie in the back. Now we are both
embarrassed, all right, Allie.
Chairman Hensarling. Do we need to strike anything from the
record?
Ms. White. It is the nicest thing I have been called in a
long time.
Mr. Huizenga. I know this is confusing and complicated and
I will try to explain it later. But the truth is most people
here don't understand everything that we are talking about
either. So, this isn't the only reason why dad leaves home.
But I do want to touch a little bit on conflict minerals,
and I have a couple of things here. First, no one wants to see
conflict in the central African area, especially the DRC, and
we need to work towards stopping any of those atrocities.
But my first question is, is does Section 1502 actually
stop it? I have had a number of conversations with missionary
contacts, NGOs, long-term business people in the area, who at
best have mixed reviews about whether we are actually getting
at the problem with Section 1502.
My question is, is this a workable, practical way to attack
the problem? And as I hear from manufacturers throughout
Michigan and throughout the country, they are very concerned.
The compliance costs are estimated on the low end, $3 billion
to $16 billion according to NAM, and then in light of the
ruling from the D.C. Court of Appeals, and Mr. Chairman, I
would love to submit this for the record.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Huizenga. Why not take Commissioners Gallagher and
Piwowar's joint suggestion on staying that, and Mr. Chairman, I
would like to put that into the record as well.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Huizenga. And while I am on a roll, can I do a third
one? This is from the National Law Review about how the Federal
Appeals Court holds Securities and Exchange Commission Conflict
Minerals Rules--
Chairman Hensarling. The gentleman is pressing his luck,
but without objection, it is so ordered.
Mr. Huizenga. All right. Thank you.
What are your intentions, first of all? Are you still
planning on moving ahead? The Wall Street Journal had a
headline which basically stated that you are planning on moving
ahead with everything other than maybe a narrow section which
was identified out of the Court of Appeals, and I am curious
why?
Ms. White. In response to your earlier comments, obviously
this is a rulemaking that was mandated for us to proceed with,
so we proceeded with it. Recently the D.C. Circuit has--and I
have studied this very, very carefully--upheld the vast
majority of that rulemaking and really quite clearly so.
They have invalidated the portion that in effect requires
the disclosure that something is not non-DRC, I think it is,
and so the intentions are, and I think the reason you saw the
joint statement coming out yesterday from Commissioners
Gallagher and Piwowar, and there probably will be guidance from
the Division of Corporation Finance, whether today or tomorrow,
that reporters under that set of regulations would be required
to report as to the portions of that rule that have been
clearly upheld by the Court's decision.
As to the aspect that has not been upheld, clearly there
would be no requirement to make those disclosures.
Mr. Huizenga. My understanding though, and I have started
my way through the ruling, but according to this National Law
Review, there are certainly other areas and other directions
this may be going, and while this is hanging out there and this
major question that has huge economic impact is unanswered, why
not hit the pause button?
Ms. White. In my judgment, obviously, the Court went out of
its way to uphold, and there is a severability provision in the
regulation, so the fact they invalidated that one portion
clearly did not invalidate and went out of their way to say
they did not invalidate the other portions. Clearly, there may
be other things going forward that affect the invalidated piece
of that rulemaking, but the rest of it stands on its own.
Mr. Huizenga. It sounds like it is a mixed view at best,
and there are others--including this National Law Review
article that I would actually encourage people to read--who
seem to think that may not be the case, that there are going to
be major parts.
So with that, Mr. Chairman, I yield back. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman.
Let me associate my comments with those earlier stated by
my colleague, Mr. Capuano from Massachusetts, and I do
understand that you are not in the criminal division of the
Justice Department. However, it is troublesome that a 17-year-
old page a few years ago stole $12 worth of things out at
Crystal City, was kicked out of the page program, went through
the justice system, and there are institutions, in fact, one I
am thinking of now that has been convicted of fraud twice.
Now I am not one of the attorneys in this room, but it
seems to me that fraud requires intentionality, that you didn't
slip and do it. It is like the tongue; it is not an involuntary
muscle. When you speak, even though people say I didn't mean
what I said, the tongue pretty much says what we think. And so
when you commit fraud, it is intentional. You were deceptive.
You did criminal things, and yet nobody goes to jail. So what
do you tell a 17-year-old kid who steals $13 worth of
merchandise and his life is almost kicked to the curb while fat
cat violators who almost sent this country over the cliff
economically are guilty of billions and billions of dollars of
fraud and nothing happens. They pay a fine, it is the cost of
doing business. So it is one of those things that troubles me,
and hopefully it troubles a lot of people.
Can you go through your admission policy that you have in
your statement on Page 4? You make reference to this in your
comments?
Ms. White. Yes, and essentially I agree with what you just
said and very strongly so in fact. Obviously, we can't
prosecute. We can't put anyone in jail at the SEC, but if the
evidence is there, I think it is the responsibility of both
prosecutors, which I used to be, and civil enforcers, or the
civil authorities, to take the evidence as far as it leads up
the chain and very aggressively so.
And, again, one of my three immediate priorities when I
first took this job was to make certain that we were being bold
and unrelenting to the extent that we have the enforcement
powers, and I think the SEC has actually a very strong record
on the financial crisis cases in terms of CEOs and senior
executives.
One of the first things that I did when I got here was to
change the SEC's no-admit no-deny settlement protocol in order
to try to increase public accountability in certain cases. Now,
we have specified a number of parameters, including
egregiousness of the conduct, risk to the public, a particular
need in a particular case for public accountability, and I
think so far we have, in major cases actually, achieved
admissions. I think in seven cases, both institutions and
individuals. The no-admit no-deny settlement protocol used by
all civil law enforcement agencies to actually very good ends
including the SEC, no litigation risk, you get there faster,
you get money back to harmed investors faster, will always be
part of our arsenal.
But I think it is enormously important that law enforcement
have credibility as to its strength and the strength of its
deterrent message, and that is why I changed that protocol, and
I think it will continue to evolve.
Mr. Cleaver. Okay. Because I only have 50 seconds left, the
other issue I wanted to get into was your efforts on conforming
and complying with the Office of Minority and Women Inclusion,
and I don't think we have enough time.
So I am going to yield back, Mr. Chairman, the remainder of
my time.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from North Carolina,
the chairman of our Oversight and Investigations Subcommittee,
Mr. McHenry.
Mr. McHenry. Chair White, thank you for being here today.
Now, you put out the OFR Asset Manager Report for comment.
What was your reason for putting out the proposal for comment?
Ms. White. I think transparency, and I think that any
study, any proposal, benefits tremendously by input from the
public.
Mr. McHenry. Yes, and I would say Congress has gained a
tremendous amount through the comment process in the JOBS Act,
and I have learned quite a bit in particular about the JOBS
funding, sorry the crowdfunding section from industry leaders,
and so I think it is important that we note the comment period.
I also want to commend my colleagues on the other side of
the aisle: Mrs. Maloney, for her work with the JOBS Act and
crowdfunding; and Ms. Velazquez for her questions about the
cost challenge within crowdfunding.
So generally speaking, what is your view of the JOBS Act?
Is this something you think is a wise and prudent change to
securities law?
Ms. White. That is a broad question. Certainly, I think the
objective of the JOBS Act is one that we all should subscribe
to, which is to facilitate capital formation by, in particular,
smaller and to some degree start-up companies.
I think one has to always have investor protections in mind
when you do any kind of capital formation both for the sake of
the investors, but also for the sake of the credibility of the
method you are using to raise the capital. It won't be raised
to the extent that you would like it to be if there is not
credibility in the protections as well.
Mr. McHenry. Did the SEC have the legislative authority?
Did they have the authority in law to do basically what the
JOBS Act legislated?
Ms. White. You mean before the JOBS Act legislated it?
Mr. McHenry. Yes.
Ms. White. I think the answer--I would have to go back and
actually look at it all. Certainly, in some of those spaces I
would say, yes. In other spaces, no. I would have to go back
and analyze it, though.
Mr. McHenry. Right. So Reg D as well Reg A, those two
things the SEC could have done unilaterally; right?
Ms. White. I would have to get back to you on the legal
authority to do--
Mr. McHenry. Yes, the legal authority is there. In terms of
this, your answer to Ms. Velazquez, you said that you are going
to keep reviewing Title III, the crowdfunding portion, you are
going to keep reviewing how the regs work in the marketplace;
is that correct?
Ms. White. Once it is a live market, yes.
Mr. McHenry. Okay, now in your view, if you look at the
legislative text, the law for crowdfunding, is this a workable
law in your view?
Ms. White. I think obviously our objective is to make it
workable. I think to some extent you can't tell how workable
things are until they are actually rolled out and work or don't
work as well as you would like them to, which is one of the
reasons that I am trying to set up the interdivisional working
groups to look at these markets as they come out the door.
Mr. McHenry. So in terms of comments that the SEC has
gotten, I have read many of them, met with a lot of the folks,
in the tech world, in the securities law world, and they say
that the cost of it is a challenge. The cost structure is the
challenge; do you concur?
Ms. White. There is no question that there are some cost
challenges and certainly a number of commenters have raised
those, and we certainly are attending to those comments.
Mr. McHenry. Which ones?
Ms. White. All the comments frankly, but we are always
going to be attending to those that raise--
Mr. McHenry. What are the concerns in particular about the
audited financials?
Ms. White. Some commenters have actually commented on
audited financials. There are comments on other aspects as
well.
Mr. McHenry. Do you concur with that?
Ms. White. I have to study the comments.
Mr. McHenry. We are 2 years in. We are 2 years in, and we
passed the JOBS Act 2 years and 2 weeks ago. The President
signed it into law. You have been now at the SEC for a full
season, if you will. You have had plenty of time to take a look
at this, and so that is why I am asking these questions.
I have deep concerns, based on the comments, about the
structure of the law, and with the over 690 pages of
regulations the SEC has written. And additionally, I have a
concern because, look, I know you want to take a pragmatic
approach to this, and I just encourage you to do this and to
follow-up with this so that it, and the rest of the JOBS Act,
can be implemented faithfully as Congress directed.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore.
Ms. Moore. Thank you so much, Mr. Chairman, and thank you,
Madam Chair, for all of your service.
I have some clean-up duties to do here. Being so late in
the questioning period, I would like to ask unanimous consent
from the chairman to include in the record a letter to Chair
White with regard to Section 1502 of Dodd-Frank which relates
to conflict minerals.
Chairman Hensarling. Without objection, it is so ordered.
Ms. Moore. Thank you so very, very much.
Also, I am asking you, Madam Chair, how you are doing given
the $25 million of your reserve fund which was basically
cancelled, and how has that shifted your priorities? My
colleague here was about to ask where implementation of the
Women and Minorities Provision was in your chain of priorities
given the shortfall that you are experiencing through the
appropriations process as well as this.
Ms. White. Let me say as to our OMWI office, we have, it
will be fully staffed and it is a priority, and I think there
is some very good progress that is been made there, not enough
and more to go with respect to that.
With respect to the reserve fund, this is an
extraordinarily important funding mechanism for our mission-
critical, long-term IT projects. That is what we have decided
and in consultation with Congress to use it for, and we want to
use it wisely.
When you are dealing with long-term IT projects and really
trying to keep pace with Wall Street and the markets, they are
complex contracts with complex procurement rules, and you want
to get it right, but you sure want the funding to be able to
carry out this EDGAR modernization. It is all of our risk-based
data tools, the enterprise data warehouse, which really brings
all of the information the SEC has access to in one spot.
Ms. Moore. Thank you so much, Madam Chair.
Questions that several people have asked, including my good
friend and colleague, Mr. Scott, with regard to implementation
under Section 913, the Fiduciary Duty Rule, I was on a panel
with one of your colleagues, Commissioner Daniel Gallagher, and
I will ask you sort of the same questions I asked him. I
understand the dual responsibility, but it seems to me the
Labor Department is plowing ahead.
It is my opinion that there is more expertise within the
SEC for this final rule, and it ought to, of course, be
harmonized. And I am wondering, do you want them to take the
lead? Can you just tell us a little bit about your interaction
with them that would reassure us that your expertise is not the
tail wagging the dog?
Ms. White. I think it was before I arrived, but certainly I
can speak to after I arrived. This was an issue that I was
obviously apprised of for the first time during my confirmation
process, providing our expertise as to impacts on the broker
model has been going on. It is critical to do. I have ratcheted
up, if I can say it that way, the discussions between our
staffs in providing that technical expertise to the Department
of Labor. I have personally met with the Secretary, twice in
person and once by phone, Secretary Perez, to try to make
certain that the staff's expertise is being fully understood
and brought to bear.
Again, at the end of the day we are different agencies, but
it is extraordinarily important that that expertise be
understood, brought to bear, and that there be consistency.
Ms. Moore. Thank you. I just have one more question. On
Thursday, I read a story in the Wall Street Journal indicating
that asset managers Fidelity and BlackRock were already at
Stage 2 of SIFI designation, so there is a meeting on May 19th.
What is the point and purpose of that meeting if you have
already gone ahead, and what are the indicators that they ought
to be designated as SIFIs without this analysis, prior to this
analysis?
Ms. White. I think, again, I can't comment on any
particular company whether it is or isn't in the FSOC process.
FSOC hasn't commented as well. I am aware of the media reports
that you mentioned. There certainly is a process to gather
information. I do believe the Treasury Department, when the OFR
study came out, said that is a data point, but we are
collecting more information about the industry.
I actually welcome the conference on May 19th, which is a
public conference, to get further input, and I hope it is a
constructive conference.
Ms. Moore. Thank you for your indulgence, Mr. Chairman.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Virginia, Mr.
Hurt, the vice chairman of our Capital Markets and GSEs
Subcommittee.
Mr. Hurt. Thank you, Mr. Chairman.
And thank you again, Chair White, for joining us today.
Before I ask a question, I wanted to say just following up
on Mr. Cleaver's line of questioning, as a former prosecutor I
certainly appreciate the perspective that you have brought with
respect to the no-admit no-deny policy. I really do believe
that is important to fostering public trust and public
accountability in our markets.
Your agency has been very helpful to Representative Delaney
from Maryland and me in crafting the College Savings
Enhancement Act. This legislation would update definitions for
the accredited investors and qualified institutional buyers
definitions to include State-run prepaid 529 plans. Obviously,
they are very important to families who are saving for future
college expenses, and I was wondering if you could comment on:
first, whether you think it is important for us to encourage
that college savings; and second, do you believe that these
plans are suited to be considered QIBs and AIs, similar to
other plans such as State-run pensions?
Ms. White. Obviously, the objective is quite important. I
share that. As part of our review, which is ongoing, of the
definition of accredited investor, this is obviously part of
that. I think our staff from the Division of Corporation
Finance has actually met with several representatives of the
Section 529 plans to discuss the idea, whether through guidance
or rulemaking, but they are very focused on the issue.
Mr. Hurt. Okay, thank you. Also, as I indicated in my
opening remarks, I think that some of the comments that you
have made relating to disclosure overload are so important, and
you have indicated that obviously you are trying to review this
regime and trying to come up with proposals that protect
investors, don't overburden investors and confuse investors and
also look for ways to reduce unnecessary costs for issuers.
I guess my question is, how is that review proceeding, and
are there specific things that you can think of that should be
top priorities for the SEC in trying to scale disclosure
requirements down the road?
Ms. White. I think that in terms of the status of it, as
you know, our SK report was filed at the end of last year which
really does trace our entire disclosure regime and tees up the
issues.
Following that, I directed the Division of Corporation
Finance to, again, make this a very high priority. I think our
Director has recently given a speech on this to a gathering in
terms of path forward. We are seeking views quite deliberately
from all constituents, issuers, lawyers who deal with
disclosure, and investors, to try to make sure we have maximum
information.
Obviously, you focus on intelligibility. You focus on
unnecessary redundancies. You focus on whether we contributed
to the issue by our comment process, which I think is
enormously important for both issuers and investors to get good
disclosure, but have we perpetuated some of the issues with
redundant disclosure or unnecessary disclosure in a particular
instance.
The overall goal, I suppose there is more than one, but it
is clear that to make the disclosure regime more effective,
more effective for investors but obviously to do it in a way
that does not create unnecessary cost for issuers.
Mr. Hurt. Do you have a timeframe for--an aspirational
timeframe here?
Ms. White. It is a large project. Let me say that it is one
that I really am committed to getting us through, and we have
embarked on this before in the history of the agency, so I
don't have an end time date for it, but I also believe there
are things we can do along the way to finishing it, so I would
hope to see some product coming out of it. I don't know if will
be--I would hope it would be this year that you will see some
product come out of it, but I can't guarantee that.
Mr. Hurt. Excellent.
I don't think I have time for another question, so I will
yield back the balance of my time. Thank you.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Illinois, Mr.
Foster, for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman.
I was wondering if you believe that there may be some
transparency initiatives that might increase investor
confidence and allow the market to sort out a lot of these
issues about which venues or brokers are providing the best
deals for their customers? An example of this, for example,
might be that when a trade is made public, along with the
price, size and time stamp, that you actually make public the
venue, which I take it is done in some countries. We do it I
guess for exchange trades but not off-exchange trades. That
might provide some transparency here.
Another example might simply be to allow or mandate that a
retail customer as part of their order confirmation gets a
history of all the trades made in that thing that they bought
or sold or was bought or sold on their behalf for a few seconds
on either side of the time their order actually got executed,
so they have some idea of whether their order was filled at
somewhere near the midpoint of the market and if you are
looking at transparency initiatives like this, that will
hopefully allow the market to sort things out.
Ms. White. We are certainly looking at the transparency and
at ways to enhance that transparency in an optimal way.
Again, we want to make sure we are doing what is optimal to
do, but that clearly is an area that we are quite focused on,
and not only to in fact enhance that transparency but also to
deal with the investor, confidence in the markets, issues we
were talking about earlier.
Mr. Foster. And does the SEC or should the SEC take a
position on the optimum balance between lit and unlit exchanges
or markets? What do you personally think about this, and how do
you think the SEC should get involved in this issue?
Ms. White. The SEC, in a sense, is involved by being
obviously the overseer of our equity market structure, and the
idea is to have an optimal equities market that works fairly
and efficiently and competitively for the marketplace and
investors bringing together those who wish to raise capital and
investors and making sure it is a safe place.
I think the intent of NMS was to increase that competition,
to increase market quality, and you have seen a fair amount of
dispersion that has occurred. I think some of that was expected
to occur, but it has obviously proceeded and has been fairly
extensive, and so I think as part of our data-driven, very
comprehensive review, we want to see whether there are any
changes we should make from the regulatory side that might
affect that or might not.
But again, I think we have to be very carful that we are
not fixing a problem that isn't or not optimally addressing a
problem by a change in the rulemaking but very focused on all
of the questions.
Mr. Foster. Given the explosion in the number of venues, do
you think there is adequate uniformity in the safety,
soundness, volatility, and cybersecurity requirements that are
placed on all of these?
Just as a simple example, it is my understanding that there
are fairly uniform circuit breaker requirements at all trading
venues but not as uniform limit up and limit down type
requirements.
Ms. White. This is what I call the systems issues, which
obviously include any cyber problems with that, and are
extraordinarily important to the reliability and strength of
our markets.
The SEC has taken a number of actions already with respect
to those issues, the limit up, limit down rules, the market
access rules, all designed to make the marketplace more
resilient. It is interconnected. It is obviously electronic and
very high speed. Our proposed rule SCI would require even
further enhancements of the system. It would apply beyond just
the exchanges. It would also apply, if it is adopted as
proposed, to ATS's of certain sizes in order to try to bring
more into that regulatory regime which I think will enhance the
markets.
Mr. Foster. One of the effects, as you increase out things
like very strict cybersecurity requirements, to make sure that
you are robust against that, that is going to impose costs on
all of the trading venues, and I think that ultimately that is
probably going to be a force that drives toward consolidation
for the same reason that small banks are faced with
cybersecurity costs.
It is one of the issues that they look at and one to see
whether they should merge or be acquired. And you are going to
be facing the same thing, and I imagine that may drive some
consolidation in this business, and so I was wondering if
that--how do you view and balance that when you are doing
things that will impose almost a head cost, a capitation cost
on these trading venues?
Ms. White. It is interesting. Certainly with respect to the
comments we have gotten on SCI, the proposed rule that I
mentioned, those are among the kinds of costs that have been
cited to us, consequences that have been cited to us. Our
economic analysis and our economists look very closely at that.
Obviously, you have proponents of having a less dispersed
market, so you have to weigh the benefit of that as you go
through it, so we look at all of those factors.
Mr. Foster. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from South Carolina,
Mr. Mulvaney, for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
Chair White, thank you for being here. I have a couple of
different questions on a couple of different topics.
Thank you, by the way, for making yourself so available. It
does allow us sometimes to follow up on conversations we have
had previously, and I want to do a little bit of that, but I
want to start with a general question briefly about SEC
investigations.
When you all investigate a particular entity, I don't care
who it is, is it part of your practice to contact the clients
of that entity to tell them about the fact that you are
investigating that entity?
Ms. White. Not as a sort of invariable step. Now, you could
have witnesses who are clients, so as part of your--
Mr. Mulvaney. I am not worried about witnesses. Would it be
unusual for you, if you are investigating Mr. Stutzman's
company, to during the investigation, call all of his clients
and say, by the way, we just want to let you know we are
investigating Mr. Stutzman's company, that would not be
ordinary course of business for you folks?
Ms. White. That would not be, or it should not be ordinary
course of business. It is not ordinary course of business if
that is the purpose. Now, the caveat is there only because--and
I think you excluded witnesses or people who might have
relevant knowledge.
Mr. Mulvaney. Sure.
Ms. White. Because obviously that can happen as a result of
that.
Mr. Mulvaney. I want you to contact witnesses, obviously,
we all would. So you are saying it is not ordinary course of
business to reach out to regular clients and so forth?
Ms. White. Not as you have described it.
Mr. Mulvaney. And we recognize how damaging that could be,
especially if the investigation turns up that no wrongdoing
took place. Thank you for that.
You were here, separate topic, back in February as part of
a larger panel. We had you, we had Governor Tarullo, and some
folks from the OCC, the CFTC and the FDIC, and I tried very
hard to lay out a circumstance under the Volcker Rule to try
and draw some attention to the possible overlap of
jurisdiction, and I tried my best.
I am not sure I got everybody in the example, but the
example that I gave was a large broker-dealer who was also a
bank, trading at interest rate swaps in its banking subsidiary,
and I asked him who would have jurisdiction over that, and I
think I got most everybody at least having some jurisdiction,
but you took the position that as the SEC, you all would be
first. You all would go first and have primary jurisdiction,
and I believe Governor Tarullo agreed. In fact, what he said
and I am going to read you his testimony, was that whoever--
Ms. White. I wrote that down when he said it actually.
Mr. Mulvaney. So did I, and so did a lot of other people,
because I think it was news to a lot of folks. He said whoever
is the primary regulator of that entity has, by congressional
delegation, the regulatory authority over them. He went on to
say that if it is a broker-dealer and the SEC is okay with what
practice the broker-dealer is pursuing, then no, then we don't
have, none of the rest of us has the authority under the
Volcker Rule and the statute to say, no, that is incorrect. He
went on to finally say there is not really shared jurisdiction
over a particular trade.
Is it your understanding that he was right in saying that?
Are there limitations? Are there caveats? Are there exceptions
to this, or is that the general policy of the SEC, the FSOC,
the Treasury, and everybody?
Ms. White. That is how it should work where it is clear who
the primary regulator is, and I think it is in that example,
the broker-dealers would be the SEC. What I actually did add, I
guess I have to fess up, at the hearing, when you asked it
before, though, is that you are clearly trying to also have
consistency among the agencies as to some of the interpretive
issues that may, in other situations, spill over to some other
kind of entity where the primary regulator is someone else.
Mr. Mulvaney. Right. But, and again, that is fine. There
may be certain exceptions. I am painting with a broad brush
now. If there are circumstances where everybody seems to agree
that the SEC is the primary regulator and you say--you bless
some practice, some security program, some software for your
broker-dealers over how to deal with the Volcker Rule, the OCC
or the CFTC can't come in later, in other words, and say no,
that is not acceptable?
Ms. White. That would certainly be my understanding.
Mr. Mulvaney. Good. Thank you very much for that.
Last one, and I am trying to go quickly because I only have
a minute left. I want to follow up very briefly on a question
that Ms. Moore asked before she left dealing with the ongoing
analysis for the systemic classifications for asset managers,
mutual fund companies, those types of things. I understand that
BlackRock and Fidelity came under some scrutiny because of the
size of some of their assets.
Would you agree with me generally that by the nature of the
business, asset managers will be less likely to pose systemic
risks than large financial institutions and banks that do
investment work?
Ms. White. Again, I can't comment on what stage this
analysis is--
Mr. Mulvaney. I am not asking about this. I am talking
about in general context.
Ms. White. --with an FSOC, but I think it is an
extraordinarily important difference that the asset managers
are based on an agency model from the point of view of systemic
risk.
Mr. Mulvaney. Will your analysis of asset managers
generally, not BlackRock and Fidelity specifically, but
generally, will your analysis vary because of what you just
said and your recognition that the risks that they face are
different or less likely to pose risk than those of other
financial institutions?
Ms. White. It is certainly a highly relevant factor.
Mr. Mulvaney. Have you all developed the metrics yet for
doing the stage 3 analysis of asset managers?
Chairman Hensarling. Quick answer, please.
Ms. White. I really can't comment on that because of the
FSOC--
Mr. Mulvaney. Again, I am not asking about specifics. It
was just general.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Kildee, for 5 minutes.
Mr. Kildee. Thank you, Mr. Chairman, and thank you, Chair
White, for your candor.
I haven't been able to catch the entire hearing. I watched
a lot of it on television, so hopefully some of the questions--
a couple of the questions that I might ask you, you may have
answered in some form or another, but I would like to just
focus on a couple of particular areas.
One is somewhat more of an operational question but it does
affect the mission. With some regularity here at this committee
and at other places, the issue of whether the SEC has the
necessary resources to support and carry out its regulatory and
enforcement obligations does come up from time to time,
especially after the 2008 crisis and the reforms that followed,
we saw your responsibilities, your agency's responsibilities
significantly increased, and while there may be legitimate
disagreement over the question of your authority and what the
legislation provides for, I think, I would hope that we would
find more agreement on providing the necessary resources in
order to execute whatever your mandate is.
I know something about this, having been 25 years in local
government in a very distressed community, I was the county
treasury, I had to continually figure out ways to meet my
obligations with fewer and fewer resources, so I have some
empathy.
And so I wonder if you could comment, as you consider the
challenge of having to do more with less, can you talk about
some of the choices, presumably realignments or other sort of
judgments that you have had to make in order to meet your
regulatory obligations in the period of this sort of post-
crisis world, and additionally, if you could comment on another
aspect of your work, the enforcement function, particularly
since it can, in some cases, generate revenue through punitive
fines, whether additional resources would allow the SEC to
investigate more quickly more allegations of wrongdoing within
the securities field. If you could just sort of touch on the
general subject of resources and how it affects your mission,
that would be good.
Ms. White. That bottom line is that I sincerely believe we
are underresourced for the responsibilities that we have, and
it is of great concern to me. I think on the enforcement side,
which is our largest division, and I believe I cited the figure
in my oral testimony of just last year the Enforcement
Division's work actually yielded orders to return $3.4 billion
in disgorgement or civil penalties, and our Fiscal Year 2014
budget is $1.3 billion. Of that $3.4 billion, I think we have
already collected almost $2 billion. That is just a metric, but
it gives you some perspective on that.
We didn't get--in our budget last year, we had sought 450
additional positions for exam and enforcement. I have talked
before and it is the one that just kind of hits you between the
eyes of needing to adequately cover the examination of
investment advisors, so important to all investors, and we just
do not have the resources to do that.
We are trying to be smarter about it. As I mentioned
before, we are using risk-based tools to go to the places of
greatest risk. If you think about doing things like moving
resources, let's say, from the broker-dealer exam side over to
the IA side, the problem there is you look at what we find when
we go to the broker-dealers and we find deficiencies and
problems almost everywhere we go, a lot of those broker-dealers
are also migrating to the IA side.
At least some would say because it is actually, we are not
there as much, and the industry knows that, and as I say, you
have very responsible members in the industry kind of saying
the same thing. Our industry needs the SEC to have more
resources in order to be able to make this industry safer and
have more credibility with the investors.
Mr. Kildee. So help me understand a little bit what that
means, how that translates to the interest of a consumer, just
to put it in plain language. What does that mean when you are
not able to pursue some of cases that might come before you,
what are the potential consequences that a consumer might face
as a result?
Ms. White. Frauds can go absolutely undetected, or on the
exam side, again, when we actually go to the exam site,
particularly when you are talking about investment advisors to
retail, but we see it on the institutional investors, too.
We find a large percentage of problems. Ponzi schemes, we
find situations where fees have been misallocated. One benefit
we get from, I think since Fiscal Year 2012, just because we
were there, no action taken at all, we pointed out a problem,
and $28 million was returned to investors. If we weren't there,
that wouldn't have happened.
Mr. Kildee. My time has nearly expired, so I will yield
back my remaining 5 seconds.
Thank you very much.
Chairman Hensarling. The chairman will kindly take your 5
seconds.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
And thank you, Chair White. We appreciate your testimony
today.
I would like to ask you, in a February speech you suggested
that regulators should be distinguishing between prudential
risk and other types of risk and that regulators should avoid
taking a rigidly uniform regulatory approach based on the
banking concept of safety and soundness. Could you kindly
elaborate on these points?
Ms. White. Yes. The concern that I have is, obviously, as a
capital markets regulator, it is built on different structures.
Our sense of what capital is needed, our net capital rule is
built on making certain that if a broker does fail, that the
customers' monies and securities are safeguarded, and I think
when all of us, frankly, and the SEC is also addressing
systemic risk, as we should be, we need to be very careful,
also true of market structure issues, that one size doesn't
necessarily fit all.
And I think one thing we have to be very careful about as
we do more of the systemic risk regulation is we are looking
very closely at the impacts on the capital markets, for
example, and on the liquidity of the markets and so forth, so
that is what I meant by it.
Mr. Pittenger. Thank you. Chair White, according to the SEC
staff estimates I have read, the SEC employs 59 economists, at
the same time it employs 1,750 attorneys. One measure that
illustrates, in my perspective, the limitation of prioritizing
economic analysis and the rulemaking is the ratio of economists
versus lawyers at the SEC.
It seems to me that the SEC should rely upon economic
analysis to decide not to propose or adopt a regulation and to
do so only after considering the costs and benefits. If
empirical evidence, economic theory, and compliance cost data
are essential to cost-benefit analysis, is it reasonable to
expect that lawyers who are not trained in such matters should
be responsible for carrying out the cost-benefit analysis of
the agency's rulemaking?
Ms. White. Our cost-benefit analysis is primarily done
through our division of economic risk analysis, which is where
our economists are and--
Mr. Pittenger. Would you say, Madam Chair, that the use of
economists would be a more prudent use and the likely source
than the larger amount of attorneys that you have?
Ms. White. I think you have to--again, the fastest growing
division is our division of economic risk analysis where our
economists are housed. They are enormously useful to the agency
even beyond rulemaking. They really are.
So I am all for increasing the number of economists we
have, the number of other kinds of market experts we have. And
by the way, we have, I think the Enforcement Division has over
20 now who are market specialists, which I think is essential.
You don't want just lawyers doing that, but we are also
obviously a law enforcement agency charged with enforcing and
assuring compliance with the Federal securities laws, and we
review the financial filings of companies, and so naturally you
are going to have a lot of--you are going to need a lot of
lawyers in those spaces, but I take your point.
Mr. Pittenger. A lot of attorneys.
Ms. White. It is a lot of attorneys.
Mr. Pittenger. Yes.
Ms. White. Good ones.
Mr. Pittenger. Madam Chair, does the SEC evaluate whether
specific regulations tailored to impose the least burden on
society, including market participants, individuals, different
size businesses and other entities, including State and local
governments?
Ms. White. We certainly try with all of our regulations to
have them be cost-effective. Obviously we have to--if we
identify something we need to achieve, there may well be costs
with respect to achieving that set of benefits, as we see it.
But what you are clearly trying to do is do it in the most
cost-effective way for all constituents.
Mr. Pittenger. Thank you.
I yield back my time.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. Thank you.
The debt markets do a lot more to finance business
enterprise than the stock market. A bond manager who doesn't
get the highest rate of return with the bonds with the highest
rating is going to be an ex-bond manager. So the key to the
flow of many trillions of dollars that finance business and
local government is the credit rating agency.
In Dodd-Frank, there was the Frank and Sherman Amendment
that dealt with the issue of the enormous conflict of interest,
where the people selling the bonds, pick and pay the bond
rating agency. And as I said here before, if I could pick and
pay the umpire, I would have statistics better than Babe Ruth.
So, the law requires that you either implement a system in
which the SEC picks the umpire, the credit rating agency, or
that you come up with something better. Where do you stand on
that? What is the progress?
Ms. White. First, I think it is an enormously important
area to address. In terms of the conflicts of interest, I
think, at least as we read this statute, we need to determine
after our work if it is in the public interest and then we make
the choice that you are indicating is there.
One thing I will say on the credit rating agencies, alluded
to earlier in a question, is the 2011 corporate governance, I
will call them, proposals to enhance disclosure and other
governance mechanisms surrounding conflicts. That is a
rulemaking priority in 2014 but that is not what you are
talking about.
Mr. Sherman. I regard that all as window dressing. I am
focusing--
Ms. White. I hope it will be more than window dressing
because I am spending a lot of time on it.
Mr. Sherman. Let's focus on it for a--
Ms. White. I am not avoiding your question at all, because
I think it is enormously important. We had our roundtable last
year. I met with the staff several times on this, and it is
something that we are proceeding with, but I cannot tell you--
proceeding with meaning making a decision as to what we should
do, what findings we should make. All I can tell you, as I sit
here now, because it is still in discussion with the staff and
my fellow Commissioners, is I think it is enormously important
to address it effectively. I know that--
Mr. Sherman. I will just tell you that the American and
National Leagues have the league picking the umpires.
Ms. White. I got you.
Mr. Sherman. And it works better.
Next issue, the Securities Exchange Act of 1934 has a
provision where you are supposed to determine what is in
financial statements, the format, et cetera. You have delegated
that all to the FASB. You have outsourced that power, and maybe
that is a good idea, but I don't think it relieves you of an
obligation to at least look at what they are doing.
I don't know if you focused on their proposal to capitalize
all leases. The effect of that would be to add $2 trillion to
the balance sheet of American businesses, $2 trillion in
assets, and $2 trillion in liabilities. The effect of that
would be to cause about half of all small businesses and
medium-sized businesses to be in violation of their loan
covenants because the ratio is not just assets to liabilities,
the ratio is liabilities to owner's equity, so if you add
trillions of dollars to balance sheets, everybody's ratio is
off.
The effect would be to penalize any business that signs a
long-term lease. Normally, I would say what is the FASB should
be left to the FASB, but the people in power, Congress, we
empower you, and you have empowered a group in Norwalk,
Connecticut, that nobody has ever heard of, and the effect this
is going to have on our economy is enormous. I don't know if
you would prefer to respond for the record or whether this is
an issue you focused on.
Ms. White. I am aware of the issue. I probably ought to
give you a further response for the record, and I agree that we
retain that ultimate responsibility also.
Mr. Sherman. Given the effect this will have on small
business and on real estate, please don't say, that is somebody
else's responsibility. We delegated it to you, you are
responsible.
And finally, I have 11 seconds. I will yield them back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Ohio, Mr. Stivers, for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
Chair White, thank you for being here. I appreciate all
your time and your candor today.
I am going to try to get to four topics, but we will see
how that goes: asset managers; money markets; market structure;
and municipal advisors. I will have to be quick.
On the OFR report, it seems to me that the OFR failed to
look at risk, or activities. They only looked at size of the
money management industry, so I have some yes-or-no questions I
wanted to run by you that would help me understand.
Did the Securities and Exchange Commission interact or
collaborate with the FEC on the asset management report?
Ms. White. As I mentioned, we provided our technical
expertise and provided some comments, some of which were taken,
some of which were not.
Mr. Stivers. So, some of the comments were taken, some were
not. I guess that gives me a little bit of concern because the
FSOC is dominated by banking regulators that have no real
experience with asset managers, so my next question is, has the
FSOC created a forum for the SEC that regulates money managers
to educate the other FSOC members about money managers? I know
they are having this May 19th half-day forum, but have they
engaged you in any formal way to educate the other FSOC
members?
Ms. White. We certainly have done that at the deputies
level, and that work does continue. OFR actually did this study
and provided it to FSOC, all the members of FSOC, but that is
on ongoing process.
Mr. Stivers. So I know OFR is supposed to educate the FSOC
or research for the FSOC, but if they don't do their research
correctly, it impacts the outcome of the FSOC, and I am
concerned. I know Ms. Moore talked about the May 19th forum. It
concerns me that they moved forward with the designation
process before they did their education. It seems to be a
designate first, ask questions later mentality, and I hope you
will go back to the FSOC and share my concern and the concern
of many of us about that designate first and ask questions
later mentality.
Given that you only have one vote on the FSOC, do you think
Congress should consider amending the FSOC structure so that
independent regulators like yourselves and the SEC have a
multifaceted voice?
Ms. White. Again, I think that is ultimately Congress'
judgment. I think it is enormously important that independent
expertise be fully listened to, but I think that is Congress'
judgment how to structure FSOC.
Mr. Stivers. I appreciate it. And that leads me to my
second question, because I do think that the FSOC is bullying
some regulators and has a history of bullying the SEC, my
example there is on money market mutual funds. And Commissioner
Piwowar wrote a Wall Street Journal editorial on February 28th
entitled, ``Give Investors Money Fund Choices,'' where he
talked about a choice proposal. Have you looked at that, and do
you think that would satisfy the FSOC's concerns about money
markets and allow the SEC to have the independent jurisdiction
it has currently and is given from Congress?
Ms. White. Let me say the SEC is proceeding with its
proposal independently, and we have an outstanding proposal.
Comments have come in and we are in active discussion
between the staff and the Commissioners. I am aware of
Commissioner Piwowar's thinking on this, and obviously,
everything will be discussed, but just as a bottom line, we
believe our proposal was robust, I expect our final rule to be
robust, and it is the SEC proceeding independently.
Mr. Stivers. I hope you will take the choice proposal
seriously because I think it allows for folks to run their
businesses the way it makes sense, yet provides some structure.
You don't need to comment on that, but I hope you will take
that seriously.
With regard to market structure, you said earlier to the
chairman of our Capital Markets Subcommittee that the market is
not rigged, but the market certainly does what it is told to
do, and under Reg NMS from 2005 till today, it has forced
behaviors in the markets, and I hope, and I guess I am asking,
are you willing to open up Reg NMS and take a serious look at
how that is driving behaviors in the marketplace and how it is
affecting consumers and especially mom and pop consumers?
Ms. White. The answer to that is yes, it is part of the
comprehensive review in terms of all the impacts that
regulation may have had.
Mr. Stivers. I have 15 seconds left. My municipal advisors
bill--I appreciate you enacting most of it by rule. We sent you
a letter on January 9th asking for a few changes, and I hope
you will take a serious look at those. I know you have
responded, but I would ask you to take a serious look at
completing your work so that we don't have to act.
Thank you. I yield back my nonexistent time.
Chairman Hensarling. The Chair recognizes the gentleman
from Michigan, Mr. Peters, for 5 minutes.
Mr. Peters. Thank you, Mr. Chairman.
And Chair White, thank you for your testimony and for all
your work implementing both the Dodd-Frank and the JOBS Acts.
Today, I would like to ask about the Commission's authority
to determine the standards of conduct for broker-dealers, and
investment advisors. As you know, during the debate of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, I
advocated for an approach that would reduce systemic risk and
transparency and certainty in the markets. I believe that any
new regulatory framework for broker-dealers, and investment
advisors must protect the interest of retail investors,
retirement plan participants, and sponsors from unfair and
deceptive practices as they seek investment advice.
While robust investor protections are critical, any new
framework should be crafted very carefully to avoid limiting
access to investment education and information for working
families. This could ultimately result in worse investment
decisions by participants and would in turn increase the cost
of investment products, services, and advice that are
absolutely critical parts of sound investment strategy for
consumers.
I believe that it is critical that any new fiduciary rules
issued by any agency follow guidelines as were set forth in the
Dodd-Frank Act. Those guidelines were carefully structured to
ensure that working families continue to have access to
investment assistance, and additionally, recognize the
importance of having a single uniform fiduciary standard to
avoid any potential investor confusion.
As you know, I wrote to you earlier this year urging that
the SEC move forward on this issue as intended under Dodd-
Frank, and ensure that any rulemaking is completely harmonized
with efforts by any other regulators. And I appreciated your
very timely response in which you mentioned that the Commission
staff is coordinating with and providing technical assistance
to the Department of Labor staff as they consider potential
changes to the definition of fiduciary.
My first question, ma'am, is beyond providing technical
assistance to the Department of Labor, could you elaborate on
other current efforts around this issue at the Commission
currently?
Ms. White. Yes. I think it is an extraordinarily important
issue. I prioritized it for the staff for this Fiscal Year, and
I think it is extremely important that the Commission get to a
point of deciding how to proceed in that timeframe.
In terms of--I am not sure if you are asking about the
Department of Labor. I have actually increased, I think, our
staff's providing of technical and expert assistance to the
Department of Labor and have actually gotten personally
involved in several discussions with the Secretary of Labor on
that as well, but to ensure that our expertise is being
understood and that there is no sort of mistranslation, I just
want to make sure we are providing all the expertise we can. At
the end of the day, obviously, they are a separate agency than
we are, but we understand the consistency concern.
Mr. Peters. Let me drill down a little bit on that comment,
if I may. So in Dodd-Frank, Congress directed the SEC to study
whether having different standards of care for broker-dealers
and registered investment advisors could create some confusion
for investors. So, if the Department of Labor moves forward
with its new definition, there very likely will be very
different standards for the care of an IRA versus non-
retirement retail accounts. Is there anyone at the Commission
currently studying whether that would cause harmful confusion
specifically?
Ms. White. We certainly are looking at all of those issues
and those potential impacts. I don't know--I would have to get
back to you as to whether there was sort of a formal study of
that. I am not sure it is a formal study, but obviously we have
a lot of knowledge in that space.
Mr. Peters. It would be nice if you could, if you would,
ma'am, get back to us specifically if someone is working on
that in particular, and also, on a follow-up, what about
studying the economic interactions of the SEC project in the
Department of Labor, how they may impact the economy?
Ms. White. That is certainly part of the discussion, and we
are also having our economist talk to their economist kind of
about the broad range of possible impacts.
Mr. Peters. Would you mind following up with me as well on
specifics on that?
Ms. White. I would be happy to do that.
Mr. Peters. Great. Thank you so much. I yield back my time.
Chairman Hensarling. The gentleman yields back. The Chair
now recognizes the gentleman from Illinois, Mr. Hultgren, for 5
minutes.
Mr. Hultgren. Thank you, Mr. Chairman. And Chair White,
thank you so much for being here. I understand the SEC is close
to finalizing new regulations on money market mutual funds
which provide a unique and widely used municipal cash
management product and help create liquidity in the municipal
bond market through its purchases of municipal bonds. I am
really concerned about the impact of a floating NAV and what
that could have on municipal financing in a time when many
State and local government budgets are already stressed. I am
concerned because these bonds are a key lifeline to cities and
towns, a tool that invests in the future and has a significant
impact on State and local infrastructure.
Your proposed rule would exempt Treasury and other
government funds from the floating NAV under the rationale that
these funds didn't exhibit major outflows during the financial
crisis. But just as those funds were stable, municipal money
market funds were very stable during the 2008 financial crisis
as well and during other periods of market stress, is the
Commission considering treating municipal funds the same as
Treasury and other government funds, and have you adequately
considered the impact of floating NAV on State and local
governments?
Ms. White. That is certainly one of the issues that we are
acutely focused on. There were certainly a number of commenters
who have discussed that in very useful and constructive ways,
and we are quite focused on that. There is also, at least as
proposed, if we were to go the floating NAV route, an exemption
for retail which would not completely absorb that field but
would, to some extent, but we are certainly focused on exactly
the issue that you teed up.
Mr. Hultgren. Thank you. Registered investment companies
are highly regulated by the SEC and use little to no leverage
and don't fail like other financial institutions, given the
assets they manage are not on their balance sheets. They also
are one of the most heavily regulated participants in the
financial markets, subject to extensive regulation and
supervision by the SEC. Yet, the Office of Financial Research's
asset management report only briefly references the regulatory
regime to which mutual funds and other asset managers are
subject, and the FSOC has turned its sights to reviewing these
registered investment companies for systemic designation.
How significant a role is the SEC playing in the FSOC's
review of asset managers, and shouldn't your agency's voice be
paramount as the only securities regulator on the FSOC?
Ms. White. The answer is that we are playing a very active
role in the process--processes, I guess I should say, as they
go forward, particularly at the deputy's level and specifically
with respect to making certain that the full range of the
existing regulatory regime is understood as we go forward. We
are certainly trying, and really have from the beginning. It
was decided by FSOC as a group that this is an industry that
needed to be looked at. They asked OFR to do the study we have
talked about before. I have explained what the SEC's role was
in that, but as we go forward, we are continuing to provide
really quite extensive input.
Mr. Hultgren. Okay. I would also like to discuss Section
913 which authorizes but does not require the SEC to extend the
fiduciary standard of conduct applicable to investment advisors
to broker-dealers when providing advice about securities to
retail customers. I am concerned that imposing a fiduciary duty
on broker-dealers could limit investor choices and restrict
products and services that are available to customers. I know
that the Department of Labor is also considering imposing a
fiduciary standard that could impact broker-dealers and
investment advisors. I wondered, should the SEC consult and
coordinate with other Federal agencies and State regulators
before deciding to move forward with rules--implement Section
913? Do you believe that the Department of Labor should suspend
its rulemaking until the SEC completes a Section 913
rulemaking?
Ms. White. Again, I don't think I can tell the Department
of Labor what to do. I think there is a good constructive
recognition by the Department of Labor and the SEC of how their
rules could differ or may not differ, but the importance of
consistency there. We certainly, with respect to our own
judgment under Dodd-Frank, are trying to get maximum input from
all constituents, and we did put out a request for information
I think last--I want to say last March, it might have been--I
think it was last March, we got a lot of very useful responses
to that.
Mr. Hultgren. Even if investors are confused about the
differences between broker-dealers and investment advisors, is
the only solution to impose a fiduciary standard of care on
broker-dealers? Could investors be better served and better
protected through additional disclosure?
Ms. White. And that is one of the critical issues as to how
far can disclosure go to deal with the issue as it is
perceived, plainly part of the discussion, the thinking and
thinking about alternatives as well.
Mr. Hultgren. Thank you, Chair White. My time has expired.
I yield back. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Washington, Mr.
Heck.
Mr. Heck. Thank you, Mr. Chairman.
Madam Chair, thank you for your service. And thank you for
your presence today. There have been a lot of questions about
high-frequency trading. I especially appreciated Mr. Garrett's
very direct question, is the game rigged?
With just about anything in society, you are going to have
those who believe thusly--a significant percentage of the
population believes Elvis is still alive, but at least in that
case, there wasn't anybody as reputable as Mr. Lewis writing
what is seemingly a very well-researched book, so in all of the
back and forth with all the questioners, I never heard you
categorically state that the small investor is not at a
competitive disadvantage.
And so, I am asking, first, if you are willing to do that,
and second, if you are, don't talk to us as if we are talking
to the camera, to the small investor, say in terms they can
understand that they are not at a competitive disadvantage and
here is why.
Ms. White. And I appreciate all those questions actually. I
don't want to speak beyond where I should or can, but I want to
be very clear that--and I think you have seen, including in the
commentary after the book has come out by a number of different
investor constituencies, that there are market metrics that
most agree with that would suggest that the current market
structure, which obviously includes the technology and the
speed issues that have been talked about, redound to the
benefit of the individual retail investor.
Now, that doesn't necessarily tell you whether there are
other things we might do to increase market quality even
further for the individual retail investor, but I want to be
very clear that the market metric suggests that the retail
investor really is well-served, very well-served by the current
market structure.
Mr. Heck. So, on an unrelated topic, the Commission
proposed a regulation in January including, I think, what could
only be characterized as a sweeping preemption of State
regulation for small issuers.
It seems to me that State regulation of small issuers is
kind of in their wheelhouse because it is a more intimate, as
it were, face-to-face backyard kind of an endeavor, and I
understand the concerns about 50 different rules, but as you
know, they have entered into a memorandum of agreement to
completely avoid that, and given what you have said about the
resource constraint you are under, I do not understand why you
would sweepingly preempt State regulators from, in effect,
partnering with you to ensure appropriate practices in the
market unless you are just completely opposed to any State
regulation.
So, where are you on that, Madam Chair?
Ms. White. First of all, our State regulators are
extraordinarily important partners of ours and are protectors
of investors, so let me be very clear about that. In terms of
what we call the Reg A-plus proposal, our goal, maybe their
goal, is to make it a workable rule with strong investor
protection, and so one of the things that we considered and
continue to consider is there is a GAO report and other data
which suggests that one of the reasons that the current Reg A
exemption, it goes up to 5 million, is essentially not used,
and it is not just the 50 States or the possibility of 50
States review, but that is a significant factor in terms of why
it isn't used.
One of the things we did in that proposal was to tee up
very clearly the coordinated State review, which I think we
have made a lot of progress on. Our staffs are meeting about
exactly where that stands, what that means, how we should
consider that as we go forward. That is something that we would
continue to watch closely to see whether that might not
ameliorate some of these issues.
Mr. Heck. Are you saying that you would consider walking
back the sweeping preemption?
Ms. White. Basically, we are considering all comments. That
is obviously a very significant issue. One thing that should be
clear--obviously, the States have their antifraud powers, they
can require notice filing under the proposal as it exists now
of anything filed with the SEC. Fees, filing fees can be
charged on that, but what we are really talking about is that
substantive review of offerings that could be in multiple
States that have been shown not to be workable, but we are
working on it.
Mr. Heck. Thank you, Madam Chair.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania, Mr.
Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman, and thank you, Chair
White, for your attendance here today and for letting us have
some time with you. Mr. Stivers and Mr. Ross touched on the
money market fund. I just want to touch on that a little bit.
Can you tell where the SEC stands right now with respect to the
final rule, when we might be seeing that come out?
Ms. White. I can tell you that it is in active discussion
between the staff and the Commissioners in terms of a final
rule. I would expect it to reach a final stage in the near
term. I don't want to be more specific than that, but we are
working very hard on it. It is an extraordinarily important
rulemaking, and I expect it to be in the near term of the
Fiscal Year.
Mr. Rothfus. And you are not willing to define ``near
term'' for us today?
Ms. White. I am not willing to define any further than
that. I am not sure I used that phrase with other things yet,
but I would expect it to be in the next--I better leave it at
near term.
Mr. Rothfus. Can you tell us whether the Commission is
taking into account the report language included in the recent
omnibus that directs the SEC to consider how any proposal would
impact borrowing costs on businesses and local governments and
returns for investors?
Ms. White. No question that this rule is taking into
account those impacts or potential impacts, other costs, other
benefits, obviously, but our economists have been working on
this rule for a very long time, these sets of issues, and
continue to do so. In fact, we put some recent studies into the
comment folder.
Mr. Rothfus. One of the things I read recently was that
between 1985 and 2008, people who used money market funds,
whether they be small businesses, pensions, counties, cities,
or municipalities, in the aggregate have earned $450 billion
more than they otherwise would have by virtue of having the
money market funds there, and there is considerable concern
with the floating NAV proposals, and I think you received 1,442
comments on the proposal rule, and 1,387 were opposed. That is
96 percent opposed to the floating NAV proposal. And I look
back at an additional $450 billion that could have gone to
investors, savers, counties, municipalities, and that, to me,
that would be a concern, and I am wondering if the SEC shares
those concerns?
Ms. White. The SEC certainly is looking at and taking
seriously all of those comments, all of the possible impacts
from whatever final rule we agree upon. I think we study all
the comments in every one of our rulemakings, but this is one
the SEC has been studying for a very long time and very deeply,
and we continue to do it.
Mr. Rothfus. Mr. Pittenger talked a little bit about some
cost-benefit analysis that the SEC may engage in, and I think
he raised a point about different-sized entities, and I think
you responded something to the effect that you are trying to be
cost-effective, generally speaking. I guess my follow-up
question to that is, does the SEC take a look at a regulation
and analyze its impact on the ability for a large firm to
comply, and then separately analyze the ability of a small firm
to comply?
Ms. White. We do. We do look at it in those ways, and we
also look for ways in all of our other requirements, whether it
be our disclosure regime, or as we think about possibly doing
the tick-size pilot. We are constantly thinking in those
directions.
Mr. Rothfus. What about taking into account a particular
regulation's impact on jobs and wages? Is there a specific
analysis of that? And I am not talking about a job that might
be created because somebody has to hire somebody to comply with
the regulation.
Ms. White. Yes. The answer is we look at all--I have to see
how formalized those factors are, but we do look at all of the
impacts from our rules. I probably ought to respond further
with more specificity.
Mr. Rothfus. I would be--specifically with respect to jobs
and wages because we see insufficient job growth out there and
insufficient wage growth. Also, the impact--I am wondering if
you look at how a regulation may impact on investor choice and
liquidity.
Ms. White. We certainly do look at that.
Mr. Rothfus. Okay. I thank you for being here, and I yield
back my time.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the newest member of the
committee, the gentleman from Nevada, Mr. Horsford, who is
either moving very far or very fast to be in the ranking
member's chair. It is very late in the proceeding today. The
gentleman is recognized for 5 minutes.
Mr. Horsford. Thank you very much, Mr. Chairman. Thank you
for this informative session, and thank you, Chair White, for
testifying before this committee. I want to touch on just three
quick issues. The first is regarding cybersecurity. Before
joining this committee, I served on the Homeland Security
Committee's Subcommittee on Cybersecurity, and we know that a
cyber attack on an exchange or other critical market
participants could have broad consequences that impact a large
number of public companies and their investors.
So, besides hosting these important roundtable discussions
that I understand that you had recently, can you talk about
what the SEC is doing with regards to mitigating cybersecurity
risk?
Ms. White. Two sort of primary areas. One is in 2011, our
Division of Corporation Finance put out a disclosure guideline
in terms of what issuers ought to be attending to in terms of
their disclosures of the risk factor of cyber events. With
respect to the reg SCI proposal that is pending, that is a
proposal essentially to require SROs and alternative trading
systems and others to enhance their systems from possible
disruptions really from any source but including specifically
on the cyber side.
One of the--by the way, I thought one of the purposes of
our roundtable, and I think it may have succeeded in this, was
to bring together people from different parts of the government
so that it wouldn't be you are doing this and you are doing
that but who actually has the ticket for certain things, so one
of the issues that comes up in the disclosure space is that we
basically require issuers to disclose what is material. They
are worried about giving a roadmap to the next hacker, but that
doesn't mean that information shouldn't go somewhere else,
confidentially, and it also doesn't mean our government
shouldn't be providing information to the private sector to
better protect us all.
Mr. Horsford. Thank you. My second question deals with the
list of regulatory priorities for 2014. I noticed that a
rulemaking requiring publicly traded companies to disclose
information on political spending to its shareholders was not
on the list. Can you discuss why this issue is not on the list
of priorities for 2014?
Ms. White. I think what you are referencing is the Reg Flex
Agenda for this Fiscal Year. When I prepared that agenda, I put
such items on the agenda that I thought the Commission could
accomplish in that time period for the remainder of the Fiscal
Year. A number of items, including the one you reference on
political contributions, was taken off under that standard. If
you look at our agenda, it is also--a large percentage are
congressionally-mandated rulemakings, which I have prioritized
at the Commission.
Mr. Horsford. Okay. My final question deals with the SEC
enforcement. As many of my colleagues have discussed today,
there is a common perception that the SEC pursues lesser
violations of the securities laws rather than major violations
such as those that contributed to the financial crisis or more
recent scandals. Recently, the SEC just yesterday, I guess, on
a 3-2 vote granted a waiver so that a bank can continue to
benefit from the well-known seasoned issuer (WKSI) status,
despite that bank's involvement in Libor manipulation.
Congress has passed numerous bad actor provisions intended
to both serve as a deterrent to others as well as better
protect investors, and yet as Commissioner Stein notes, the
SEC's Web site is replete where waiver after waiver for the
largest financial institutions and that some firms may just be
``too big to bar.''
Are you concerned at all that the Commission continues to
grant these waivers, and are you concerned that it is easier
for a large firm to receive these waivers than some smaller
firms?
Ms. White. First as to the SEC's record on--and during the
financial crisis and the recent scandals, again, we can't put
anyone in jail as I have said, but if you look at the record of
enforcement, it is an extraordinarily impressive one, I think
both in terms of the complexity of the cases, the names of the
institutions, the largest banks being included in those, I
think 70 CEOs and other senior executives, so I really think
our enforcement program is extraordinarily strong and it is
important that it be very strong. In terms of, sorry--
Chairman Hensarling. Continue.
Ms. White. Okay. So that is enforcement, on the enforcement
side. I think what you are referencing with respect to the so-
called WKSI waiver, it is not an enforcement remedy, but it can
be a consequence of an enforcement action whether by us at the
SEC or of the Department of Justice. I can't talk about
specific cases, but we apply the policies that pertain to that
particular space and do it very faithfully and vigorously.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce.
Mr. Pearce. Thank you, Mr. Chairman. And thank you, Chair
White. I appreciate your straightforward and honest answers
here. As I look at the appropriations bill coming out MILCOM,
VA, vet funds, buildings, things to--quality of life for our
soldiers and they are getting a 33 percent cut according to the
President's budget, you are requesting a 30 percent increase to
$1.9 billion. You think that is justified in the budget that we
are facing seeing that our soldiers are probably going to have
less facilities and less pay?
Ms. White. I, of course, would advocate fully resourcing
and taking care of our soldiers without any question about
that. I do think our budget request is fully justified.
Obviously, I have written the justification for it. I described
earlier, I think, our extensive and really growing and new
responsibilities to carry out what Congress has mandated we
carry out for the market investors and capital formation. I
think we need and we have been surgical about that request. We
are deficit-neutral.
Mr. Pearce. Okay. I appreciate that, and we could get into
a very good discussion about if our soldiers were allowed to
charge the customers they protect, they could be budget-
neutral. We could also say that if the Administration wasn't
shutting down mines, the increase in oil production on Federal
lands is only 6 percent, private land, 61 percent in last year,
so we could have a very interesting discussion there, but that
is not really where I want to go.
During the time that we saw Bear Stearns, Lehman Brothers'
collapse, Bernie Madoff, Allen Stanford, and MF Global, the
charts show us that the SEC budget actually went up by almost 5
times, and so during a period of tremendous budget growth, we
are finding that the SEC was doing very little more in the
first place.
JPMorgan was just assessed 1.7 or 8 billion, billion
dollars fine for not reporting Madoff. Was that justified?
Ms. White. Again, that is a Department of Justice case. I
am actually recused on JPMorgan cases, so I don't think I can
appropriately comment on that.
Mr. Pearce. I would like to make a comment that, so
JPMorgan was fined a lot, and yet Perry Mecarpolis brought in
to you, the SEC, in 2000--2001, 2005, he just reports it, and
it wasn't like--and so we are talking budget. We are talking
priorities, the same thing Mr. Capuano talked about. We are
talking about the priorities. He said it took him literally
minutes. They were trying to figure out how to pull away a
customer, and he pulls up the prospectus for Madoff and says in
minutes, so it doesn't require another billion dollars' worth
of budget for more lawyers.
In minutes, he said, I realized it couldn't be true. He
said it actually took me 4 hours to realize they were going to
have to sell more trades than existed that whole year, and yet
no one in the SEC, during a time that they are increasing their
budget by triple and quadruple and more, no one took the 4
minutes to say, this can't be true. And in fact, it took
multiple efforts to report Madoff and still they would just
whisk it away. The same thing was going on with Mr. Stanford
that--and one guy who used to work for the SEC was out stalling
off the entire agency, a guy named Showbloom. He was out there
advising, and he was able to stall you off for 20 years, and so
how is a budget going to improve your performance when you have
people like Mr. Barasch who says anytime the lower levels were
pushing the investigation up on Stanford saying, no, we are not
going to let at that go. How is it going to improve your
performance to go 20 times your budget if you have a culture
inside that turns and looks the other way?
Ms. White. I don't think we have that culture inside at
all. Obviously--
Mr. Pearce. Then let me interrupt because you had people
sitting in the room with Mr. Corzine as he allegedly, according
to Ms. O'Brien says--Ms. O'Brien says that he gave the order
for me to transfer $200 million. You had people sitting in the
room, according to Mr. Robert Cook, his testimony in front of
Congress says, yes, we were sitting in the room. We became
alarmed at MF Global. We were sitting in the room and yet those
things were allowed to occur.
So, you say that the culture doesn't exist, but it was able
to go on for 20 years with Mr. Stanford. It was able to go on
with Mr. Madoff for even longer. Why do you say that no culture
exists that it looks--
Ms. White. I don't think there is that culture, but I
certainly would not dispute that those raise serious issues and
challenges at the SEC, before my time, but hopefully as I
continue, we will have addressed those issues. One of the
things in our budget--
Mr. Pearce. If I could take the last second or two. You
have already heard two, Mr. Cleaver and you heard Mr. Lynch say
nobody goes to jail. Nobody in the agency is ever responsible.
You haven't fired anybody. You haven't terminated anybody for
their failures in these cases. These 65 billion on Madoff and--
in years and no one in the agency is ever responsible. You are
hearing back and forth. Thank you, Mr. Chairman. You have been
very gracious.
Chairman Hensarling. Unless another Member walks into the
room in the next 30 seconds, we will close the hearing. They
better walk fast. If not, I would like to thank Chair White for
her testimony today. I thank her for the seriousness with which
she takes the congressional oversight process and for being
accommodating with her schedule.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place her responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
This hearing stands adjourned.
[Whereupon, at 1:00 p.m., the committee was adjourned.]
A P P E N D I X
April 29, 2014
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