[Senate Hearing 115-118] [From the U.S. Government Publishing Office] S. Hrg. 115-118 NOMINATIONS OF DAVID J. RYDER, HESTER M. PEIRCE, AND ROBERT J. JACKSON, JR. ======================================================================= HEARING before the COMMITTEE ON BANKING,HOUSING,AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED FIFTEENTH CONGRESS FIRST SESSION ON NOMINATIONS OF: David J. Ryder, of New Jersey, to be Director of the United States Mint __________ Hester M. Peirce, of Ohio, to be a Member of the Securities and Exchange Commission __________ Robert J. Jackson, Jr., of New York, to be a Member of the Securities and Exchange Commission __________ OCTOBER 24, 2017 __________ Printed for the use of the Committee on Banking, Housing, and Urban Affairs [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Available at: http: //www.fdsys.gov / _________ U.S. GOVERNMENT PUBLISHING OFFICE 27-588 PDF WASHINGTON : 2017 ____________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Publishing Office, Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800 Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio BOB CORKER, Tennessee JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey DEAN HELLER, Nevada JON TESTER, Montana TIM SCOTT, South Carolina MARK R. WARNER, Virginia BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada Gregg Richard, Staff Director Mark Powden, Democratic Staff Director Elad Roisman, Chief Counsel Michelle Mesack, Senior Counsel Elisha Tuku, Democratic Chief Counsel Laura Swanson, Democratic Deputy Staff Director Megan Cheney, Democratic Legislative Assistant Dawn Ratliff, Chief Clerk Jimmy Guiliano, Hearing Clerk Shelvin Simmons, IT Director Jim Crowell, Editor (ii) C O N T E N T S ---------- TUESDAY, OCTOBER 24, 2017 Page Opening statement of Chairman Crapo.............................. 1 Opening statements, comments, or prepared statements of: Senator Brown................................................ 2 NOMINEES David J. Ryder, of New Jersey, to be Director of the United States Mint.................................................... 4 Prepared statement........................................... 35 Biographical sketch of nominee............................... 36 Responses to written questions of: Senator Brown............................................ 98 Senator Rounds........................................... 99 Hester M. Peirce, of Ohio, to be a Member of the Securities and Exchange Commission............................................ 5 Prepared statement........................................... 43 Biographical sketch of nominee............................... 44 Responses to written questions of: Senator Brown............................................ 99 Senator Toomey........................................... 100 Senator Tillis........................................... 101 Senator Menendez......................................... 106 Senator Warner........................................... 109 Senator Warren........................................... 111 Senator Donnelly......................................... 114 Senator Schatz........................................... 115 Senator Cortez Masto..................................... 116 Robert J. Jackson, Jr., of New York, to be a Member of the Securities and Exchange Commission............................. 6 Prepared statement........................................... 74 Biographical sketch of nominee............................... 76 Responses to written questions of: Senator Brown............................................ 118 Senator Toomey........................................... 119 Senator Sasse............................................ 121 Senator Tillis........................................... 129 Senator Menendez......................................... 137 Senator Warner........................................... 142 Senator Warren........................................... 147 Senator Donnelly......................................... 149 Senator Schatz........................................... 152 Senator Cortez Masto..................................... 153 Additional Material Supplied for the Record Wall Street Journal article submitted by Senator Van Hollen...... 155 ``The 8-K Trading Gap'' submitted by Senator Van Hollen.......... 159 (iii) NOMINATIONS OF DAVID J. RYDER, OF NEW JERSEY, TO BE DIRECTOR OF THE UNITED STATES MINT; HESTER M. PEIRCE, OF OHIO, TO BE A MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION; AND ROBERT J. JACKSON, JR., OF NEW YORK, TO BE A MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION ---------- TUESDAY, OCTOBER 24, 2017 U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Washington, DC. The Committee met at 10:02 a.m., in room SD-538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman Crapo. This hearing will come to order. This morning we will consider three nominations: Mr. David Ryder, to be Director of the U.S. Mint; Ms. Hester Peirce, to be a member of the Securities and Exchange Commission; and Mr. Robert Jackson, to be a member of the Securities and Exchange Commission. These nominees, if confirmed, will serve important roles in our Nation's commerce and capital markets. Mr. Ryder is well equipped to oversee the manufacturing and distribution of our Nation's currency, as well as collectible coins, national medals, and precious metals, based on his executive experience in the private sector and extensive Government service. Most recently, Mr. Ryder served as Global Business Development Manager and Managing Director of Currency for Honeywell Authentication Technologies after serving as CEO of Secure Products Corporation. He also has firsthand experience with the U.S. Mint, having served as its Director beginning in 1991 under President George H.W. Bush. His time in Government service also includes serving as Deputy Treasurer of the United States, Assistant to the Vice President, and Deputy Chief of Staff to Vice President Dan Quayle. Raised in Idaho, Mr. Ryder attended Boise State University. Following Mr. Ryder, we will receive testimony from both Ms. Peirce and Mr. Jackson to be members of the SEC. Earlier this year, the Senate confirmed the President's nominee for SEC Chair, Jay Clayton, who now serves with Commissioners Michael Piwowar and Kara Stein. Today we have the opportunity to consider two more highly qualified nominees who, if confirmed, would round out the SEC's five-person Commission. The SEC has an important three-part mission: protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. Each part of the mission is equally important and should not come at the expense of another. Today's nominees have demonstrated a depth of knowledge in securities law and financial markets through their previous experience and body of academic work. Ms. Peirce is a senior research fellow at the Mercatus Center at George Mason University and the director of Mercatus' Financial Markets Working Group. Before joining Mercatus, Ms. Peirce served on the staff of the Senate Banking Committee under Chairman Shelby, served at the SEC as a staff attorney and as counsel to Commissioner Paul Atkins, and worked as an associate at a Washington, DC, law firm. Mr. Jackson is a professor of law and director of the Program on Corporate Law and Policy at Columbia Law School where he has focused on executive compensation and corporate governance matters. Prior to joining Columbia in 2010, Mr. Jackson served as a senior policy adviser at the U.S. Department of Treasury in the Office of the Special Master for TARP Executive Compensation and practiced in the executive compensation department of a New York law firm. I look forward to hearing the priorities of each nominee in their respective positions, as well as their thoughts on the U.S. capital markets or the production of our Nation's currency. Congratulations on your nominations, and thank you and your families for your willingness to serve. Senator Brown. STATEMENT OF SENATOR SHERROD BROWN Senator Brown. Thank you, Mr. Chairman. And welcome to all three witnesses. Good to see you all, some of you for the second time. So nice to see you. David Ryder has been nominated to be Director of the U.S. Mint. Congratulations. Ms. Hester Peirce and Mr. Robert Jackson, Jr., have been nominated to be members of the SEC, as the Chairman said. Mr. Ryder previously served as Director of the Mint in the George H.W. Bush administration. Since that time he has continued to work in the world of currency design and security in the private sector, most recently at Honeywell. His public service and corporate experience have prepared him to lead the Mint in a time of evolving currency design and technology. If confirmed, Ms. Peirce would return to the SEC as a Commissioner. Her time at the SEC and working on the Banking Committee's staff provide her with a broad understanding of the agency's regulatory and legislative issues at a time when technology is transforming the way financial markets work. Mr. Jackson's academic and private sector background will help him weigh the theoretical and practical sides of SEC policy. His scholarship on executive compensation--something very important to this Committee--and corporate governance will be useful as the SEC works to finish, finally, the executive compensation rules required under the years-ago-passed Wall Street Reform Act. The nominees to the SEC will finally bring the Commission to full strength. The SEC has joined corporate America as a cyberattack victim. Not only must the SEC protect the data it collects, it must make sure the public companies that are the engine of our economy are up front with investors and their customers about cyber risks and breaches. I want to emphasize the SEC's investor protection mission is the cornerstone of a well-functioning stock market, and that is something that is very important to remember. The SEC must work tirelessly to ensure integrity and fairness in the capital markets so that investors can believe in the markets and in the regulator. The failure to hold any senior executives responsible for the massive misconduct during the financial crisis stands out as a failure in enforcement and not just at the SEC. Ms. Peirce and Mr. Jackson, this is something that should bother you as well, and if you are confirmed, I expect you to do everything you can to promote a strong enforcement program. Thank you. Chairman Crapo. Thank you, Senator. We will now move to the testimony, and before doing so, we need to place each of you under oath. Would you please rise and raise your right hand? Do you swear or affirm that the testimony you are about to give is the truth, the whole truth, and nothing but the truth, so help you God? Mr. Ryder. I do. Ms. Peirce. I do. Mr. Jackson. I do. Chairman Crapo. And do you agree to appear and testify before any duly constituted committee of the Senate? Mr. Ryder. I do. Ms. Peirce. I do. Mr. Jackson. I do. Chairman Crapo. Thank you. That will do. I will begin the questioning with both you, Ms. Peirce, and Mr. Jackson. While I---- [Pause.] Chairman Crapo. They just reminded me I need to let you make an opening statement. [Laughter.] Chairman Crapo. I guess I will. Senator Brown. This is so much on the Banking Committee's agenda that we just want to dispense with all the formalities. [Laughter.] Senator Shelby. Mr. Chairman, he is from Idaho. You may dispense with it. That is up to you. Chairman Crapo. Actually, I really do want to hear your opening statements. Senator Brown. They put all that work into writing the opening statements, and nobody wants to hear them. Chairman Crapo. OK. My face is red, and we will now start with you, Mr. Ryder, with your opening statement. STATEMENT OF DAVID J. RYDER, OF NEW JERSEY, TO BE DIRECTOR OF THE UNITED STATES MINT Mr. Ryder. Thank you, Mr. Chairman. First, I would like to introduce my family who came here today: my wife of 35 years, Monie; my daughter, Caroline; and my son, Nick Ryder. And my niece, Sarah Ryder, came up from San Antonio, Texas, and is interested in learning more about the Government process, so she came up from San Antonio to be with us today. Thank you, Mr. Chairman, Senator Brown, and distinguished Members of the Committee for allowing me to appear here today. Mr. Chairman, as you said, I am a fellow Idahoan, having grown up in Boise. In fact, my siblings and I still own a small piece of property just outside of McCall, so I do my best to get out to Idaho at least once a year to visit family and spend a little time in what the great State of Idaho has to offer. Chairman Crapo. We appreciate it, and we hope you bring some common sense back with you to your job. Mr. Ryder. Thank you. First, I must say that I am honored that President Trump has nominated me to serve as the 39th Director of the United States Mint. As you are aware, in 1992, I was nominated by President George Herbert Walker Bush to be the 34th Director of the Mint. I received a recess appointment at that time and served for a period of 14 months. When I left the Government in 1994, I became a partner with Secure Products, a new venture spin-off from the Sarnoff Corporation in Princeton, New Jersey, which was formerly the central research facility for the RCA Corporation. Our mission was to develop advanced anti-counterfeiting technology solutions to be primarily used in currency and branded products. After a successful 13 years in business, the Honeywell Corporation acquired Secure Products in 2007. The ensuing 10 years was spent with Honeywell as their global business development manager and managing director of currency. In my role at Honeywell, I worked with Government agencies and central banks around the world to address currency issues. Interestingly, one of my last duties while at Honeywell was a joint project with The Royal Mint of the United Kingdom where we assisted them in the development of the new U.K. one pound coin, which was introduced earlier this year. This new circulating coin is considered to be the most advanced and secure coins in the world today. If confirmed, I would like to make education one of my focal points at the Mint. As the 34th Mint Director, we introduced an initiative called the ``Money Story''. The goal of this initiative was to educate the youth of this Nation on the history of money, both coinage and paper, via a teacher's curriculum and a video co-developed by the U.S. Mint and the Bureau of Engraving and Printing. This packet of information was made available to all teachers for use in the classroom. Teaching our youth early on how to collect coins and other numismatic products, as well as how to start saving their hard- earned money, helps lay the foundation of the importance of money. Over the years, the Mint has continued this excellent tradition via various tools which are located on their website. Having worked in the currency industry for the past 25 years plus, I have developed a strong operational and technical understanding of this tight-knit industry. I respect the men and women who dedicate their lives to this industry. During my time with Secure Products and Honeywell, I was afforded the opportunity to visit and work with many private and Government currency manufacturers in the United States, as well as around the world. I will bring to the Mint Director position a strong understanding of the industry and many of the challenges it faces. If confirmed, I would be honored to once again serve in our Government and work with this Committee. The U.S. Mint has an impressive history, and I look forward to becoming part of that history again. As in all businesses, I am sure the Mint has challenges to address. I look forward to facing these challenges while at the same time fulfilling its mission. Thank you. Chairman Crapo. Thank you. Ms. Peirce, welcome back to the Committee, and you may now start your statement. STATEMENT OF HESTER M. PEIRCE, OF OHIO, TO BE A MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION Ms. Peirce. Thank you. Chairman Crapo, Ranking Member Brown, and Members of the Committee, it is a privilege to be here today with you, and it is an honor to be nominated, alongside Professor Jackson, to be a member of the Securities and Exchange Commission. If I am confirmed, I look forward to working to protect investors, uphold market integrity, and facilitate capital formation--the three interrelated parts of the SEC's mission. As a young girl, when I was in junior high school, I dreamed of being a securities analyst. Now, admittedly, that dream was probably built more on the fact that there was always a Wall Street Journal gracing my father's reading chair, and my mother was always listening to the market news on the radio. And, ultimately, that dream was not to come true, but perhaps it planted the seeds for why I am here today. Ultimately, I went on to study economics at Case Western Reserve University and law at Yale. And following my clerkship, I joined a law firm where I worked in the securities practice group. Ultimately, I found my way to the SEC where I spent 8 years. The first part of my time there was spent as a staff attorney in the Division of Investment Management, after which I joined Commissioner Atkins' office and worked on a broader range of issues. Then I had the privilege of coming to this Committee and working for Senator Shelby, and most recently, I have been at the Mercatus Center, where I have learned much from my colleagues' knowledge about regulation and economics. My desire to return to the SEC is motivated by a belief in the importance of individuals, institutions, and innovation. Every individual has a unique set of interests, talents, knowledge, relationships, and in order for our country to be able to draw on those, we need to make sure that our capital markets function properly. So, for example, an entrepreneur who wants to start a business and has an idea, she needs the money so she can meet investors through the capital markets. And then when those investors invest in her company, she is able to employ other people who can then use their skills and abilities to further the enterprise. And then when the investors get their returns from their investment, they are able to invest it in their own children's education, and those children then become the next generation of entrepreneurs and employees. But no one is willing to trust her fortunes and future to the capital markets unless the institutional framework surrounding them is strong. We need to have clear rules that are enforced carefully, and we need to foster compliance with them. And, of course, everything needs to be done in an orderly way, with impartiality and diligence. In the United States, the SEC is a key part of that institutional framework. It is important for it to set and establish clear rules and modernize them when necessary. And that brings me to my third point, which is innovation. Why is innovation important in financial markets? Not only does innovation lower prices and improve quality, but it expands access to people who have not had access to the capital markets in the past, and it opens up access to companies that have not had the ability to use the capital markets in the past. But sometimes regulation is so inflexible that innovation cannot happen, and so we need to make sure that our rules are flexible enough to accommodate innovation as appropriate. If I am confirmed, I look forward to working with Chairman Clayton and my fellow Commissioners to implement, enforce, and modernize rules to support healthy, dynamic capital markets. Together we can ensure that our capital markets serve individuals and companies across this country, that we build strong institutions, and that we support innovation. Thank you, and I look forward to taking your questions. Chairman Crapo. Thank you, Ms. Peirce. Mr. Jackson. STATEMENT OF ROBERT J. JACKSON, JR., OF NEW YORK, TO BE A MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION Mr. Jackson. Thank you. Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank you very much for the opportunity to join you today. It is my honor truly to be testifying before you regarding my nomination to be a Commissioner of the Securities and Exchange Commission. For me, there is no greater privilege or responsibility than upholding the SEC's mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate access to capital. And to understand why that is so important to me, I thought it might be helpful for me to start today by sharing a bit about myself and my family. I was born in the Bronx, New York, to my two wonderful parents, Maureen and Robert Jackson, and I feel so fortunate that they could be here with me today. My mother was one of nine children; my father was one of five. And of all those people, no one, least of all my parents, would have even dreamed that 1 day they would be sitting behind their son on an occasion like this. You see, the day I was born, my father was working as an encyclopedia clerk--as an accounting clerk at a small encyclopedia company called Funk and Wagnalls. Throughout my childhood, my mother held several part-time jobs, including the early shift at Dunkin' Donuts, just to help make ends meet. They were young, overworked, and sometimes even overwhelmed. But they believed that if they worked hard and saved what they could, their son might someday go to college. So every month my parents plowed their hard-earned paychecks into the market, knowing that if their investments were protected and growing they might someday be able to afford to send me to school. And that is really the only reason that I had the chance to go to college--and the incredible opportunity to be here with you all today. I believe that the SEC's purpose is to protect everyday investors like my Mom and Dad. Because today's markets are so complex, it can be easy to get lost in technical details and forget why those safeguards are so important. But my story shows why protecting America's investors is at the heart of what the SEC does. Safe markets not only encourage investment and entrepreneurship and growth. Safe markets make it possible for two young middle-class parents to transform their lives so that someday their son has the chance to sit before the U.S. Senate as a Presidential nominee. Safe markets are at the core of the American dream, and that is something I have learned by living it. That is why my work--in Government, as a teacher, and as a researcher--has always focused on everyday investors' confidence in our markets. At the Treasury Department during the financial crisis, I was proud to help develop rules that tie top managers' pay more closely to performance and give investors a voice on executive compensation. When my research team at Columbia Law School showed that the SEC's systems were inadvertently giving high-speed traders market-moving information before the public could see it on the SEC's website, I worked with this Committee's staff to help make sure the SEC gave investors the level playing field that they deserve. And when our team helped convince regulators to release additional information about stockbroker fraud, we were proud to help others use the data to expose the brokers most likely to defraud investors. If I have the honor of being confirmed, I intend to bring those tools to bear on the SEC's crucial task. I will be a strong advocate for exploring how new technologies can help make corporate disclosures more reliable and enforcement efforts more effective and efficient. I will encourage the staff and my fellow Commissioners to draw on the SEC's long history of favoring transparency as a means of maintaining investor confidence in our markets. And I will work to implement the corporate governance protections that Congress has enshrined into law so that investors, employees, and communities can be sure that our companies are working to produce the kind of long-term value creation that has been the hallmark of the American economy for generations. Whether protecting retirees from stockbroker fraud, making sure Americans get a fair price when they purchase shares of stock, or uniting an entrepreneur with the funding he or she needs to spur a life-changing invention, the daily meat-and- potatoes work of the Commission and its staff is crucial to the functioning of our economy. It is vital to millions of American businesses and families. That is why my parents' story is such an important reminder to me. You see, my parents' confidence in our markets not only changed my life; it changed their lives, too. My father, the encyclopedia company clerk, retired as the chief accounting officer of a public company. My mother left Dunkin' Donuts, earned her teaching degree, and has been teaching elementary school now for nearly 30 years. None of that would have been possible if my parents had not felt they could safely save for their futures--and mine--in our markets. If I am confirmed, you should know that helping to make stories like theirs possible is what will motivate me every day. That is really what makes the SEC so important--and why I am so honored to be here. Thank you again for the opportunity to appear before you today. I would be delighted, of course, to answer any questions you might have. Chairman Crapo. Thank you, Mr. Jackson. And now we are at the question time, and I will start out. I want to start out with you, Ms. Peirce and Mr. Jackson. And while we all know that the Chairman of the SEC sets the agenda for the Commission, I would like each of you to just discuss one or two or three areas that you think the Commission should focus on and prioritize during the next year. Ms. Peirce, why don't you start out? Ms. Peirce. Thank you. In addition to the rulemaking agenda that is going to be taking up a lot of time, I think there are some important issues to look at, for example, the supervision, the oversight of firms through OCIE. The Office of Compliance, Inspections, and Examinations is an important thing. I want to see how that is working, including the oversight of SROs, such as FINRA. And I also think it is important to take a look at market structure again, not only equity market structure but also fixed-income market structure. I think we need to have a long-term view of how we can address some of the problems that we see cropping up in those areas. And then, of course, the recent events suggest that cybersecurity will be an important area for us to keep an eye on. And, finally, I know that once you get inside an agency, you often see things that you did not see before that need attention. So I will definitely have an open mind to consider other issues that need to be looked at. Chairman Crapo. Thank you. Mr. Jackson. Mr. Jackson. Well, thank you, Senator. I would emphasize three areas in response to your question, and the first would be cybersecurity. I think recent events both at the SEC and public companies have taught us that we have got some work to do, sir, in making sure that our securities rules and our securities regulators have the tools and technologies in place to keep up with the changing marketplace. So I think that is an area we should focus. Second, I would also want to focus on completion of the outstanding rules that the Dodd-Frank Act requires. Sir, I am concerned that some 7 years after the passage of that law, several important investor protections, including protections around executive compensation and the clawback of erroneously awarded pay, still are not finished. I think those are things we should be working on and finishing, and right now the Commission has several proposals before it that I think are worth some attention. And then, finally, I think we should be thinking about enforcement and, in particular, sir, the law of insider trading. I worry that some of the recent events have caused investors to wonder whether or not the SEC is really on top of the job, is really the cop on the beat that we need to make sure that investors are getting a fair deal. I think those enforcement efforts deserve further attention and, if confirmed, I would very much look forward to working on them. Chairman Crapo. Well, thank you. And, Mr. Ryder, similarly, what are some of the top two or three priorities you would like to bring to the U.S. Mint? Mr. Ryder. Well, having not had a Director of the Mint for some 8 years, I think one of the things is to get in and get my hands dirty and understand a lot of the issues that have not been addressed by a Director in the past 8 years, to address some of the EEO issues that may be before the Mint, manufacturing issues with the manufacturing facilities, and make sure they are running smoothly in order to be able to achieve higher revenue for the Government. Last year, the Mint returned some $550 million to the general fund in processes and fees from special coinage programs and from of Seigniorage. I would like to try to increase that revenue. And then, finally, work with the Members in this Committee to ensure that some of these commemorative programs that do earn quite a lot of money for the Government are operated professionally, smoothly, and return the type of value that you all expect. Chairman Crapo. Thank you. And I only have about a minute left, so I would like to ask you to be very brief in your response. This question is for Ms. Peirce and Mr. Jackson. Both of you brought up enforcement in my first question. This question relates to it, and while the SEC does not have criminal authority, it does have civil enforcement authority. To each of you, and, again, briefly, could you describe your views on the SEC's enforcement program as well as your views on bringing actions against individuals and not just regulated entities when appropriate? Ms. Peirce. Enforcement is a key part of what the SEC does. If the SEC is not enforcing rules, then no one will take them seriously. So I think it is really important to focus resources on the right areas. I am glad that the Chairman is focused on retail fraud. And I think that looking at individuals is important. If something has been done wrong, an individual has been involved. So I would like the SEC to make an effort to look for individuals to hold responsible. Chairman Crapo. Mr. Jackson. Mr. Jackson. Mr. Chairman, I think that enforcing the securities laws is critical to maintaining investor confidence. And in particular, what I would be interested to learn more about at the agency would be the degree to which new technology is being used to make those enforcement actions not just more effective but more efficient, so we can make the best possible use of the resources that Congress gives us. Chairman Crapo. Thank you. Senator Brown. Senator Brown. Thank you, Mr. Chairman. Mr. Jackson, senior executives at Wells Fargo and Equifax, both who testified in our Committee recently, they oversaw longstanding problems: fraud pushed from the top at Wells Fargo, undoubtedly, and negligent cybersecurity practices at Equifax. They were allowed to retire after giving up only part of their compensation packages. Equifax CEO Richard Smith, who retired in sort of humiliation, received salary and stock worth $57 million in 2016, could still receive about $90 million for retiring. I suppose that is--57 plus 90 is about a dollar for every person whose information was stolen, if I can personalize it a little bit. Existing clawback rules in the proposal under the Wall Street Reform Act only apply if there is financial fraud. We now have two examples frankly that could be just as bad as cooking the books. Mr. Jackson, how should corporate boards and the SEC encourage sound executive compensation practices and improve accountability? Mr. Jackson. Well, thank you, Senator, and just to begin, I could not agree with you more that corporate accountability and making sure that investors see that when things like this happen executives do not walk out the door with the kinds of payments you are describing are critical. Senator, that is why I would favor finishing the rules that the SEC is currently working through that are mandated by the Dodd-Frank Act. And, in particular, Section 954 of that statute authorizes and requires the SEC to promulgate rules requiring companies to adopt policies or develop policies on the clawback of executive compensation in a variety of circumstances. And I think this would be one that we should be taking a careful look at. It is troubling to me, Senator, that 7 years after the passage of that law, those rules still are not in effect, and I think that is among the first questions I would ask if I were confirmed. Senator Brown. And I think both of you--I do not know either of you well. I have spoken, obviously, privately and publicly in this sense with each of you. I think you both understand how this undermines the public's confidence in the people you regulate and in the Government for the fact that-- you know the litany--nobody of major consequence went to prison. We think it is a victory around here when a CEO who resigns in disgrace gives up his bonus--always a ``his,'' it seems--gives up his bonus, like that is a major give-back even though they have pocketed tens of millions of dollars with no real accountability. And I hope that both of you understand what that does to people's faith in Government, in regulators, and particularly in the financial sector. I want to talk about--let me go with this next question. This will be for Ms. Peirce and Mr. Jackson. I am concerned that companies are failing to disclose information to investors and to the public. Wells Fargo covered up a fake account scandal. They were investigated. They were sued by three regulators. They agreed to a $180 million fine. Cynics and people not so cynical would say that is just a cost of doing business. The company said this was not material. In the meantime, investors and consumers who entrusted Wells Fargo with their money were left in the dark. Equifax waited over a month to disclose the breach that led to the theft of over 145 million Americans' personal information, has never said when or how it determined the breach was material. In the meantime, investors and consumers-- even though executives knew, some of them, the investors and consumers were left in the dark. Ms. Peirce, how can investors be confident they are getting the whole story from companies like Equifax and Wells Fargo that seem--these companies seem to choose when the rules apply to them? Ms. Peirce. Senator, without speaking to any particular company's disclosure, it is really important for companies to think carefully about what material facts they need to disclose. And the SEC staff works intensively with companies and goes back and forth about what is happening at the company. But, of course, ultimately the company knows better than the staff what is material and what is not, and so the ultimate responsibility is on the company. Senator Brown. So you argue that we should leave the decision to the company on what is material? Ms. Peirce. No. My point is just that the SEC is pushing companies on what is material and what is not, but the ultimate responsibility--when omissions are made, the ultimate responsibility lies with the company, not with the staff. Senator Brown. When a company makes a decision like Equifax, they apparently thought it was not material for a period of time. The Equifax stock price dropped 25 percent after it disclosed. That seems material to me. If you are saying that it is up to the company to decide materiality, doesn't that mean company executives should be held accountable when it clearly--maybe they thought it was not material, but certainly the stock market and investors and the public did. Ms. Peirce. Again, without speaking to any particular company's disclosure, it is important to hold companies and individuals responsible when omissions are made. Senator Brown. OK. Mr. Jackson, what can the SEC do to make sure fewer companies make the wrong decisions in terms of materiality especially? What do we do to make sure those companies that make--that they make fewer wrong decisions, if you will, like Equifax and Wells Fargo? Mr. Jackson. Thank you, Senator. I think the way to think about this and the way I think about it is from the point of view of investor protection. The materiality standard asks us to think through what would a reasonable investor think affects the total mix of information about the stock that they are choosing to buy or sell. Now, for me, my concern is that the SEC's rules in this area and guidance on what materiality is is not keeping pace with the changes in our markets and our companies. I think the recent events you talked about are some evidence of that. And for me, this requires the SEC to think through how are the kinds of disclosures companies are making in today's market different from the ones they were making in the market 5, even 7 or 10 years ago? And how do we need to update the way we guide companies about what is important to investors going forward? That would be the way I would think about this issue. Senator Brown. Thank you. Chairman Crapo. Senator Shelby. Senator Shelby. Thank you, Mr. Chairman. Mr. Ryder, on October 16th, the Inspector General of the Treasury Department, Mr. Eric Thorson, provided a memorandum to the Treasury Secretary discussing challenges that the Department is currently facing. In this memo, the Inspector General stated that the U.S. Mint should consider the effect of alternative payment methods and other technological advances. If confirmed, in what ways will you address Inspector General Thorson's concern in the area of cryptocurrency? Mr. Ryder. Thank you, Senator. Having spent the last 25 years primarily with technology-related companies, I certainly appreciate the advancement in technologies. Some of the things that we did for central banks around the world were based on advancements in anti-counterfeiting technology. If confirmed, I do plan on entertaining as many technology companies that want to come to the Mint and present their technology. I think it is important to grow the technology base. Given how old it is, certainly change is necessary in certain cases. So I would welcome the opportunity to do that. Senator Shelby. Could the cryptocurrency be a challenge to a lot of the central banks and so forth that regulate our currency? Mr. Ryder. Probably. Central banks are pretty old institutions that do things one way. Senator Shelby. I know. Mr. Ryder. And they do that for a long time, and it is hard to change. The payment systems, vending machines, all of those apparatuses worldwide would need to be looked at, retrofitted if necessary, but with the proper technology, I think it is possible to certainly entertain it and see where it takes us. Senator Shelby. If you do not, won't the market get ahead of the regulators? Mr. Ryder. That is quite possible. Technology is a pretty slippery slope, and you have to be pretty darn sure of what you are implementing in a market this size that it is going to work, is going to work effectively, and not slow down the payment process. Senator Shelby. Ms. Peirce, I join Chairman Crapo in welcoming you back to the Committee where you spent a lot of time. If confirmed, you will be tasked, as you well know, with protecting everyday investors--you mentioned that--while maintaining the efficiency and integrity of U.S. capital markets. I have long believed that the best way--one of the best ways for the SEC to do these things is to conduct a thorough cost-benefit analysis on all rulemaking. For the U.S. to maintain its longstanding position as having the strongest capital markets, I believe the regulators must ensure that they prevent bad actors from taking advantage of individuals while also not creating an undue regulatory burden. Do you want to speak to that? Ms. Peirce. Yes, I think that the---- Senator Shelby. The cost-benefit analysis. Ms. Peirce. Economic analysis is extremely important. The agency needs to figure out what the problem is it is trying to solve, and then it needs to look at the different methods. Senator Shelby. And also how you do it, right? Ms. Peirce. Exactly. The different methods of solving it and then the costs and benefits associated with each. And it is very important to also build in metrics so that you can look back and see how the rule is working. The SEC has improved its economic analysis in recent years, but there is more room for improvement, and if I am confirmed, I look forward to working on that. Senator Shelby. Mr. Jackson, you had a compelling statement a few minutes ago, and I believe you, along with Ms. Peirce, will be a great addition to the SEC. I have the same basic question to you, because in a 2016 brief I have been told that you filed in the case between MetLife v. the Financial Stability Oversight Council, the FSOC, you stated--and, of course, I know you are an advocate. You stated that using a cost-benefit analysis to designate institutions as systemically important, your words, ``reveals a lack of understanding of basic principles of financial regulation.'' What did you mean there? Or do you disagree with what she said? Mr. Jackson. Thank you, Senator. In that brief, in that particular case, the position we were taking was not that cost- benefit analysis is not important. Senator Shelby. OK. Mr. Jackson. And, Senator, I agree with you that thinking through the costs and benefits of any particular rule is critical to---- Senator Shelby. It is important to all of us, isn't it? Mr. Jackson. Yes, sir. I agree with you. The point we were making in that brief was not that costs and benefits are not important, but that we should know the limits of what we can know about costs and benefits in any particular case, because at the end of the day, Senator, although regulators must work hard to know what costs and benefits are, many of us make policy judgments, including, with all respect, the Congress, not knowing exactly what the implication might be of any particular choice. And that was the point we were making in that case. Senator Shelby. OK. Ms. Peirce, quickly, we have a lot of layers of regulation, sometimes--well, we have laws, too, that are overburdensome and so forth. How will you at the SEC work to look back on some of the regulations and ascertain if they are duplicative, do they make sense--in other words, good oversight? Because I think the SEC should do good oversight, just like we should. Ms. Peirce. Yes, it is very important, and the SEC has been around for a long time, so it does have quite a few years of rules, and I think it makes sense to go back and see how individual rules are working and also see how they are working together and when we need to pare things back or when we need to add things. But we should do it very carefully with being mindful of the overall burden. Senator Shelby. Thank you, Mr. Chairman. Chairman Crapo. Thank you. Senator Reed. Senator Reed. Thank you very much, Mr. Chairman. I was struck, Ms. Peirce and Professor Jackson, that you both identified cybersecurity as one of the key challenges. In that regard, you seem to be closely aligned with Chairman Clayton because he said when he was here for his confirmation, ``I think cybersecurity is an area where I have said previously I do not think there is enough disclosure. In terms of whether there is oversight at the board level that is comprehensive for cybersecurity issues, that is something that investors should know, whether companies have thought about the issues, whether it is the particular expertise of the board or not. But I agree that it is something companies should know. It is a very important part of operating a significant company. Any significant company has cybersecurity risk.'' I assume you agree with the Chairman, Ms. Peirce. Ms. Peirce. I do think that almost every company these days has cybersecurity risk, and I think it is important for them to think about how to disclose that to investors and for the SEC to think about whether it needs to provide additional guidance to help them do that in light of some of the recent changes in recent years and the fact that the threats are greater now than they were even 5 years ago. Senator Reed. Professor Jackson. Mr. Jackson. Absolutely, Senator, I think the risks that companies face on the cybersecurity front today are different than they were even just a few years ago. And my concern is that we make sure that the rules they face and the disclosures they provide to investors keep pace with those changes. I think it is a critical area for the SEC. Senator Reed. Would it help to have some legislative direction so that the SEC could move more expeditiously? Mr. Jackson. Well, Senator, I think it is always helpful to have guidance from the Congress about exactly what the SEC's priorities should be, and I look forward to working with you and your staff on those questions. But I should point out that updating these rules is critical to the SEC's mission more generally, and they can, and I think sometimes they should, do it without legislation. Senator Reed. All right. Another aspect of the SEC's responsibility for cyber is having the resources. In Dodd- Frank, I helped legislate a $50 million per year fund for the SEC for technology improvements and cybersecurity. And, again, I asked Chairman Clayton in September about the fund, and he said essentially, ``We need more money, and we will ask for more money.'' And I would again ask, starting with Professor Jackson, do you think we will need significant resources to get the SEC ready? Mr. Jackson. Yes, and the reason, sir, is that companies are spending--the markets that the SEC hopes to regulate are spending billions of dollars on the latest technology. And for the SEC to keep up, they need to have the kind of resources that you just described. I was very glad to see that provision in Dodd-Frank that provides the SEC the funding, and, sir, I am not sure we can ask the SEC to keep up unless we provide them the resources that allow them to do so. Senator Reed. Ms. Peirce, your view? Ms. Peirce. Funding is obviously an important component of the SEC's ability to oversee the markets, but it is also important that resources be used well. And it is a little bit difficult from the outside to understand how well resources are being used. You know, I can see Inspector General reports that talk about problems on the inside. But it will be much easier to assess that when I am actually there. Senator Reed. My sense, though, is that given what we have read in the newspapers, what we have seen on television, given what your regulated entities spend, particularly the large ones, on cybersecurity, the funds that the SEC is devoting are rather meager. So my instincts would be that we need to reinforce your efforts, in addition to providing more guidance, and we are working on legislation to help you do that. Professor Jackson, you pointed out in your testimony that the purpose of the SEC really is to protect people on Main Street, not people on Wall Street, and because of the complexity of the markets, because of the complexity of products, I wonder if you might expand on those points. Mr. Jackson. Thank you, Senator. Yes, I think it is very easy to be at an agency like this one and talk about and think about these problems in very technical ways. What should the 8- K rules look like? What is the right market structure for us? And for me, the important thing, and what I hope I might be able to do if I am confirmed as a Commissioner, is keep in mind why you do it. And I think the reason that you do it is so that everyday investors can have the kind of story my family had, where they can somehow find a way by plowing away money into safe investments in the American economy, somehow find a way to change their lives. And that certainly would motivate me, if I am confirmed, sir. Senator Reed. Thank you very much. And just for the record, Mr. Chairman, I am not trying to imitate Senator Brown. I have a bad cold. [Laughter.] Chairman Crapo. Well, and you finished within your 5 minutes, also, and I appreciate that. Senator Rounds. Senator Rounds. Thank you, Mr. Chairman. First, I want to thank all of you for meeting with me in my office last week, and I just want to start with Ms. Peirce and Mr. Jackson. We had the opportunity to talk about FINRA at our meetings, and I believe there is room for improvement at FINRA, especially in the area of transparency and in the way that they work with compliance with different companies who are producing products. FINRA must also do, I think, a better job of giving producers an outlet to air their concerns. Sometimes I suspect that the actual companies or the compliance departments want to make sure that producers are absolutely not in front of or involved in any reporting whatsoever of anything that is inappropriate other than directly through a compliance department itself. I am just curious whether or not it is time to take a second look at FINRA and whether or not their directions with regard to compliance is appropriate at this time and whether or not it has to be looked at and reviewed. Ms. Peirce. I do think that FINRA needs to be reviewed. I am encouraged by the fact that they are now under the leadership of Robert Cook, who has made an effort to reach out to a whole range of constituencies to find out their concerns about FINRA. That said, I think it is important for the SEC to oversee that process closely. I worry about transparency, too, and I have heard from small firms that have concerns about their ability to be heard by FINRA. So I think that is important. We are seeing the number of small firms drop pretty dramatically, and so one has to ask: Is that related to the fact that the regulatory burden is just not properly calibrated? But then you also raise an important issue, which is we want to make sure that the communication between FINRA and its regulated entities is such that when someone sees something bad happening in the industry, they can go and tell FINRA without being scared that that is going to train FINRA's attention on a firm that is fully compliant and doing things well. Senator Rounds. Do you think that atmosphere exists today? Ms. Peirce. I worry that the atmosphere now is one just as you described: You keep your head low, and you do your thing, and you are not even willing to raise issues when you see real fraud happening. Senator Rounds. Mr. Jackson. Mr. Jackson. Thank you, Senator. As we discussed in your office, I think it is important that the SEC take a prominent oversight role with respect to FINRA, and as we discussed, I am in particular interested in the part of your question that talks about transparency. One thing that FINRA has been doing is collecting important information and data on the degree to which stockbrokers are engaged in fraud. And one thing that has come to light very recently is that there are a number of repeat offenders in that space, and I am not sure that FINRA has been transparent enough in giving that information to investors so investors can tell the difference between a producer who can help them plan for their retirement and somebody who is going to take their money. So I think there is a lot of work to do in that area. But I am also encouraged by Robert Cook's leadership. I think he understands this, sir, and if confirmed, I very much look forward to working with you. Senator Rounds. Thank you. I think that the Department of Labor's fiduciary rule is fundamentally flawed, and I firmly believe that this should have been done at the SEC in the first place. I think you would have done a better job and you would have understood the need of small investors. In addition to the jurisdictional issues, this rule truly does hurt that small investor by--most of them are going to get priced out of the market based upon the DOL's current fiduciary rule. Chairman Clayton has been active on this issue since starting at the SEC. What are your views on the DOL's fiduciary rule? And what role do you believe the SEC should have in this space going forward? I will begin with you, Mr. Jackson. Mr. Jackson. Thank you, Senator. Let me start by making clear I agree the SEC should have an important role in the development of these fiduciary standards. It is a natural area for the SEC to do rulemaking. And I understand that presently the Chairman is working with the Department of Labor and other regulators to develop the SEC's presence. Without commenting too much on a matter that might come before me if I were confirmed, I want to say my own view is that what is important in developing this standard is to make sure that the market and investors have consistency. Senator, my concern is that someday investors are going to think they have one standard of protection for their retirement assets and another standard of protection for their brokerage accounts. And I think that kind of confusion is not only costly but does not let investors know what they need to know about the protections that they have. Senator Rounds. I am going to run out of time, but Ms. Peirce? Ms. Peirce. I have concerns about the DOL's rule as it is currently written. I am glad that calmer minds have prevailed and people both at DOL and at the SEC are taking a look at it. I think it is important to work with the States as well and try to get everyone in a room to work together for the objective that everyone has, which is to make sure that investors know the type of service they are getting and that they have access to service. Senator Rounds. Thank you. Mr. Ryder, I am out of time, but I will ask one question for the record, but I will submit it to you for the record if that is OK with the Chairman. I think you will do a fine job, sir. Mr. Ryder. Thank you. Senator Rounds. Thank you. Chairman Crapo. Senator Cortez Masto. Senator Cortez Masto. Thank you. I am over here at the children's table. [Laughter.] Senator Cortez Masto. I appreciate it. I am a new Senator from Nevada. I appreciate the conversation we are having here today, and, Mr. Jackson, I just wanted to follow up, and Ms. Peirce, on some of the conversation that I have heard already from Senator Brown and some others with respect to individual executive accountability and what that should look like at the end of the day. Ms. Peirce, what specific steps would you take to bolster executive accountability? I have heard you having this conversation, but what would you actually do when it comes to executive accountability and making sure that the SEC is doing the enforcement necessary? Ms. Peirce. I think a lot of it really does come down to specific cases and asking questions when you get a settlement that only involves a company pushing and saying ``why are we settling only with the company without individuals being involved?'' Because it really is a case-by-case issue. Now, we have to be able to prove the case, obviously, against the individual, but I am worried that too often we are just seeing settlements that are using shareholder money to take the focus off the executives. Senator Cortez Masto. Thank you. Mr. Jackson. Mr. Jackson. Thank you, Senator. My own view about this is that there are two things we should be thinking through. First, to what degree is the SEC pursuing the enforcement actions that it can against individuals? And I agree with what has just been said that we could focus on not only settlements with corporations, but also the individuals who are responsible. And I think it is terrific to ask that question. But I would back up, Senator, and ask a broader question, which is: Do we have the law we need, does the SEC have the tools it needs to bring those cases successfully? Because the standards of proof are extremely high, the cases can be difficult to make, and I am wondering whether the law that we have is the law that we need to hold individuals accountable. And that is something I would very much look forward to working with this Committee and you and your staff on, updating that law to make sure that individuals can be held accountable when things go as wrong as they did in the financial crisis. Senator Cortez Masto. I appreciate those comments, because my next question kind of fits right into that, and you are familiar with the Yates memo, and I specifically am concerned. When I asked Mr. Clayton about the Department of Justice potentially withdrawing the Yates memo from the previous administration, he really could not comment on the potential impact on the SEC's enforcement program. As you know, this memo outlines six key steps prosecutors should take to strengthen the pursuit of individual corporate wrongdoing, and news reports indicate that the Attorney General, Attorney General Sessions, may rescind the memo or scale it back. So if confirmed to the SEC, will you commit to redoubling efforts to hold individuals accountable for corporate wrongdoing, even if the Department of Justice backs away from the previous administration efforts? Ms. Peirce. Ms. Peirce. Yes, the SEC is an independent agency and has its own enforcement agenda to pursue, and an important part of that is looking at individuals. So I will commit to looking at individuals. Senator Cortez Masto. Thank you. Mr. Jackson. Mr. Jackson. I agree with Ms. Peirce, and I share that commitment. The SEC is an independent agency, and whatever the Department of Justice does, I think it is important that the SEC redouble its commitments to enforcement and, in particular, holding individuals accountable. So, yes, Senator, I will commit that to you today. Senator Cortez Masto. I appreciate that. Arbitration clauses, Ms. Peirce, you have written critically about the CFPB's rule limiting forced arbitration clauses. As we know, this rule will give consumers a choice as to whether they want to resolve disputes with financial companies through a rigged arbitration system or have their day in court. Your claim is that the CFPB's rule should be repealed and the market can solve this problem. If consumers do not like the clauses, they simply can refuse to do business with companies that use them. But let us take the two recent examples that we have talked about. With the Equifax data breach impacting 145 million Americans' personal data, the company initially included a forced arbitration clause in its identity theft protection service, only removing it after tremendous public outcry. Meanwhile, other credit reporting agencies still use these clauses, and Equifax still even uses such restrictions in it general terms of service. Wells Fargo continues to maintain in court that forced arbitration clauses apply even to fake accounts that consumers never even requested in the first place. Can consumers ask to be deleted from credit reporting agencies' data bases if they do not like their arbitration clauses? They simply just cannot walk away. And this is data that they do not necessarily own, even though it is their personal information. What rights do they have to vote with their feet when Wells Fargo tries to enforce such a clause on a fake account or Equifax does the same thing with data that is really not their own? So I am curious how you can make that statement and what your actions would be into looking at forced arbitration clauses as SEC Commissioner. Ms. Peirce. So credit reporting agencies are not regulated entities of the SEC, but in general, arbitration can work well for people, but, obviously, the circumstances around it matter. So if I were at the SEC, I would be happy to work with staff and my fellow Commissioners to consider arbitration as it comes up. But I do think that arbitration in general can be actually more beneficial than class-action litigation. Treasury issued a report yesterday, I think, talking about that. So I think it is important to look at the evidence. Senator Cortez Masto. So you would be willing to study it as an SEC Commissioner, forced arbitration clauses and the impact they have on individuals who are really entering into adhesion contracts that do not really have the ability to walk away from if they need service? Ms. Peirce. As that issue comes up on the SEC's agenda, but, as I said, the SEC would not be looking at something like the credit reporting agencies, which are outside its purview. Senator Cortez Masto. My time is running out, and I appreciate your comments. Mr. Jackson, is this something that you think the SEC would be willing to study or take a look at or has a role? Mr. Jackson. I think it should, and let me just say, Senator, that this issue is going to come up again because, increasingly, companies are including mandatory arbitration provisions with respect to shareholder lawsuits against them. And to the degree that these kinds of provisions come up and shareholders are asked to go through arbitration instead of litigation, I will have real questions about the degree to which we are protecting those shareholders. To me, Senator, what is puzzling about that development is we already have some law, the Private Litigation Securities Reform Act, that increases the burdens of proof and tries to deal with nuisance litigation. And, more generally, Senator, I do not have the sense that what we have in corporate America is too much accountability. So for me, I would be skeptical of those clauses, and I want to take a close look at them. Senator Cortez Masto. Thank you. I notice my time is up. Thank you for your indulgence. Mr. Ryder, I have no doubt you will do an incredible job. I appreciate all three of you, really, and your willingness to serve in public service, so thank you. And welcome to your families as well. Chairman Crapo. Senator Kennedy. Senator Kennedy. Thank you, Mr. Chairman. Mr. Jackson, I listened to your comments about everyday investors and transparency, and I agree with you. Have you ever bought a stock? Mr. Jackson. Yes, sir. Senator Kennedy. Before you buy, did you read the prospectus? Mr. Jackson. Well, I reviewed all the disclosures. It was a company that had gone public some time ago, but I read all the relevant disclosures, yes. Senator Kennedy. No. Did you read the prospectus? Mr. Jackson. I do not recall in that particular case, but generally I would want to know all the things disclosed, both in the prospectus and the more recent disclosures. Senator Kennedy. All right. Have you ever bought a bond? Mr. Jackson. Yes, sir. Senator Kennedy. Did you read the prospectus? Mr. Jackson. No. In that case, I do not think so, sir. Senator Kennedy. OK. Ms. Peirce, have you ever bought a stock? Ms. Peirce. I am a mutual fund investor because I realize my limitations. [Laughter.] Senator Kennedy. Before you bought the mutual fund, did you read the prospectus? Ms. Peirce. I did not read the prospectus before I bought the mutual fund, I will admit. Senator Kennedy. I guess my question is: What is the point? I mean, I believe in disclosure. And we all talk about everyday people and ordinary investors. But yet we have made the disclosure documents inaccessible. Now, you are both well-educated, intelligent people, presumably sophisticated investors. You are going to be on the SEC. I mean, what is the point of a prospectus if nobody is reading it? Ms. Peirce. I mean, I think you make an excellent point, which is that especially for things like mutual funds, where it is a retail investor audience that you are going for, it is important to have documents that are tailored for them to read. Now---- Senator Kennedy. Well, I know I am making a good point. What are you going to do about it on the SEC? Ms. Peirce. Well, I think that that is an issue that--for example, the Investor Advisory Committee is a relatively new addition, a Dodd-Frank addition to the SEC, and I think it can be very useful in helping the Commission figure out what kind of disclosure is needed, and also there is more--the SEC is making a greater effort to do investor testing and things like that. And I think that there is real promise there. Senator Kennedy. Well, I can save some time on the investor testing. The lawyers have made the prospectus meaningless. People do not read them. OK? There is your poll. I do not know anybody who reads it. I am not saying we should not have disclosure. We need more disclosure. But what we are doing is not working. Ms. Peirce. I fully agree that we need to revisit disclosures to find out what we can do to make it work. Senator Kennedy. I mean, it looks to me like the only people benefiting are the lawyers. You used to be at Wachtell Lipton. I bet you all charged--I am not saying--look, I believe in free enterprise. But, I mean, what do you pay a law firm to put together a prospectus? Mr. Jackson. I am sure it is expensive, Senator. Senator Kennedy. Yeah. That has always bothered me that the SEC always talks about disclosure, and what I think the SEC does in many cases is undermines it. Let me ask you this: Can we agree, Mr. Jackson, that the recession from 2008 was probably the worst we have had since the Great Depression? Mr. Jackson. Yes, sir. Senator Kennedy. How many people went to jail--well, let me strike that. What caused it? Mr. Jackson. Well, Senator, it is complicated. Senator Kennedy. How about giving me a one-sentence answer? I do not mean to be rude, but I try to stay--how about this: greed? Would you agree with that? Mr. Jackson. I would agree that was an important factor, Senator, absolutely. Senator Kennedy. All right. How many people went to jail? Mr. Jackson. In terms of high-profile, important accountability convictions, I do not think there are any, sir. Senator Kennedy. Did the SEC take a lead in trying to hold real people with beating hearts who were greedy, did the SEC do anything to make them accountable? Mr. Jackson. Well, sir, they did bring some cases in this area, but as you point out, there were no successful convictions at the highest possible levels of corporate management. And if you are asking, sir, did we do enough to hold those people accountable, then, Senator, the answer is no. Senator Kennedy. Ms. Peirce, do you think anybody broke the law on Wall Street in 2008? Ms. Peirce. Certainly. Senator Kennedy. And how many went to jail, again? I forgot. Ms. Peirce. Yes, I mean, individual accountability is important---- Senator Kennedy. Well, where was the SEC? You could not have found them with a search party. Where were they? Mr. Jackson. Well, Senator, as I say, the SEC did bring important cases in that area, but if you are unsatisfied---- Senator Kennedy. And you can count them on this hand. Mr. Jackson. Sir, if you are unsatisfied---- Senator Kennedy. Missing a couple of fingers. Mr. Jackson. If you are unsatisfied, sir, with the job the SEC did in holding those people accountable for the devastation of that crisis, so am I. Senator Kennedy. I mean, we all give lip service to everyday people and transparency, but when it counted, uh-uh. I am over my time, but only by 30 seconds. That is a record. Chairman Crapo. And I appreciate that. Senator Heitkamp, see if you can beat his record. Senator Heitkamp. You know, I am going to follow up on his line of questioning because I think it is critical. We certainly hope those fund managers are reading the prospectus. And we certainly need to make sure that the information is made more accessible in terms of summary data with background information. And so that can be a big challenge for you guys. But I am sure as a general matter you guys need to know if you share my belief that the quickest way to provide a deterrent from insider trading or all kinds of nefarious bad acts is send someone to jail, right? Mr. Jackson. Absolutely, Senator. Enforcement, especially in that area, is absolutely critical. Ms. Peirce. Yes, I mean, sending people to jail is certainly a deterrent. Senator Heitkamp. Yeah, I think there is this sense that people, especially in white-collar crime, there is this sense that if you give someone a big fine--but frequently the profits exceed the fine and the fine is inadequate to deter behavior, and we need to see people go to jail. And if we have got a problem, as I think we do with the mens rea qualification or standard for proof of intent, then we need to fix that. And we expect advice from the SEC on how we can do that. I think I talked about this with both of you when you were in my office. I just wanted to get a couple things on the record. As you know, Senator Heller and I pushed and were successful in getting something called the ``Small Business Advocacy Act'' passed. Now that the SEC has an obligation to put a small business advocate into policymaking at the SEC, I want to know, if confirmed, do I have your commitment to move quickly to set up the new office and appoint that advocate with a background that understands the capital formation crisis that is facing middle America? Do I have your commitment? Ms. Peirce. Yes, I think it is extremely important to get that voice at the SEC. Mr. Jackson. In a word, Senator, yes. Senator Heitkamp. OK. Thank you. And can I also get your commitment that you will work to ensure that the Commission appoints individuals to the Advisory Committee who understand the specific challenges of rural startups in the United States of America? Ms. Peirce. Yes. Mr. Jackson. Absolutely. I think the SEC needs to cast a wide net and make sure that those kinds of individuals are in those positions so we can really find out what those challenges are and we can address them. Senator Heitkamp. This whole bill was never about checking a box and saying look what great thing we did for small business. This is about changing the culture of the SEC as it relates to small business, and so I am glad to have your commitment that you will take that effort very seriously. Under the Model Business Corporation Act Section 8.42(b), there is a passage that I think is very instructive: ``for purposes of establishing knowledge within a corporation of material violations of law or bad behavior.'' The passage covering fiduciary obligations reads you ``must report certain matters to others in the company, including any business information within your sphere of responsibility that you know or have reason to believe to be significant, or concerns actually or probably material violations of the law.'' To my knowledge, not one State has adopted this model guidance into law. Would a more robust duty-to-report requirement such as the one proposed by MBCA with associated criminal fines and penalties help force material information up the chain of command to the board and top executives within a corporation? Ms. Peirce. That does seem to be more of a State-level issue than an SEC issue, but I think that there are some changes that have happened. I think the whistleblower changes in Dodd-Frank also have the effect of helping to force stuff up the chain. So I am hopeful that we will see better compliance. Mr. Jackson. I do think, Senator, the whistleblower part of the Dodd-Frank law has been important in this respect. What I would like to do, if I have the honor of being confirmed, is learn more about how we can encourage that information to get up the corporate chain, whether it is---- Senator Heitkamp. I do not want to just encourage it, because everybody agrees it should go up the chain. I want to mandate it, because I am tired of executives saying, ``I did not know,'' ``Not my business,'' ``Did not look, not my business.'' And we absolutely need to change the culture at the top. And we have tried over and over and over again various iterations of forcing this information up the chain only to be unsuccessful. And so let us not pass the buck to State organizations. Let us just sit down and figure out how we are going to get this accountability at the very highest level of corporate America moving forward. Thank you, Mr. Chairman. Chairman Crapo. Thank you, and almost totally on time. Senator Scott. Senator Scott. I will try to reverse that trend, Mr. Chairman. Thank you very much. [Laughter.] Chairman Crapo. I have a gavel. Senator Scott. Yes, sir. That is a warning. Good morning. Thank you, folks, for being here this morning. I will say to Ms. Peirce and Mr. Jackson your answer to Senator Rounds' question on the fiduciary was a very important answer, and I thank you for your answer. There is no doubt that there is an important opportunity for the SEC to coordinate with the DOL as well as State insurance regulators during this 18-month window, because in South Carolina the average person who is close to retiring only has 1 year of income in their retirement account. So the importance of opening the door for more financial experts to come into households and provide expertise so that those retirees have a chance to use their limited resources in the most effective way cannot be overemphasized. So I appreciate both of you being informed, educated, and, frankly, motivated about making a difference in that space. So thank you both for your answers. I was going to ask that question. Ms. Peirce, I have a different question. You have written about Government regulations that make it nearly impossible for new credit rating agencies to enter the market. I am concerned anytime the Government hinders competition. How can the SEC help change this dynamic, especially with investor guidelines? Ms. Peirce. It is a problem, I think, especially in an area where we have seen the damage when you only have a few large credit rating agencies. So I think that the SEC needs to be willing to work with the credit rating agencies, the smaller agencies, to help them to comply with the rules. And then in terms of investor guidelines, those are private, so it is difficult for the SEC to intervene and force that change. But I think if the SEC allows new credit rating agencies to come up and start, then it is more likely those investor guidelines will change over time. It is important that all of the NRSRO ratings be removed from regulations and statutes. I think that is the start to then getting the investor guidelines to change. Senator Scott. Thank you. Mr. Ryder, we have given you too much time off this morning, so I want to ask you a very important question. There are 10,629 jobs held by South Carolinians because of our $2 billion-a-year scrap recycling industry. I have got folks from Spartanburg to Clinton to Cayce and all the way to the coast in South Carolina sitting on millions of dollars of mutilated coins the Mint will not accept. Is reinstating the Mint Mutilated Coin Redemption Program something you will be working on? Mr. Ryder. Yes, sir. It is a program that was suspended in 2015, for good reason. They needed to review the program. It had been in operation for quite a number of years. Senator Scott. Yes. Mr. Ryder. And they are currently on track to have a new set of rules hopefully introduced by the end of this year. Senator Scott. Thank you. On behalf of 10,629 folks in my State, we appreciate that. Mr. Jackson, some believe that the balance between corporate management and shareholders is tilting too far in one direction. Chair Clayton seems to agree. Do current shareholder proposals' resubmission thresholds further fair and efficient markets? Mr. Jackson. It is a very important question, Senator, so thank you. What we are trying to do, as you point out, is strike a balance between making sure corporate management can run the firm as they see fit to maximize its value, provide jobs and growth; on the other hand, make sure that they are held accountable, sir, for the decisions that they make by the owners of the company. And the shareholder proposal rules are really shareholders' best opportunity to have a dialog with the company, to bring forth ideas and proposals to management, almost always on a nonbinding basis, to guide the management about what the shareholder thinks the right next step for the company is. My own sense is that, with respect to the resubmission proposals, the SEC very well could and should take a look at whether repetitive proposals are furthering that goal. So I am someone who is very focused on dialog between shareholders and management, and I think as long as we can advance that goal but minimize the repetitive proposals that consume corporate management's time and cost, I think that would be a good way forward. Senator Scott. Mr. Jackson, Ms. Peirce, Mr. Ryder, thank you very much for your time. Mr. Chairman, I yield back. Chairman Crapo. I appreciate that 13 seconds. Senator Van Hollen. Senator Van Hollen. Thank you, Mr. Chairman. I thank all of you for your testimony today, and I have some questions to start out with for Mr. Jackson and Ms. Peirce. There has been a lot of talk about insider trading, and when we had a hearing on Equifax, one of the issues that came up is at what point in time did they have an obligation to inform the public about the hack that had taken place which could have an impact on shareholder value? And that is a big issue of what triggers this obligation and materiality. But there should be no dispute that once a company reaches that decision, they have to inform the public; they have to file an 8-K; that after that point in time, in my view, they should not be engaging in trading their own stock. And I know, Mr. Jackson, you have written about this. You have written about the 8-K gap and shown that during this window of time, the reality is that executives and insiders have traded, so far technically legally, and ended up getting a better deal for themselves than would be available to a member of the public who is informed about these developments. Could you comment on that? Because we are working on some legislation, bipartisan legislation, to address at least that window. Mr. Jackson. Thank you, Senator. Yes, you are right. This is an area in which I have written before, and I am very concerned, sir, that corporate management might be engaging in trading right before the announcement of a material public event, but after the event has occurred. And I think this is a troubling pattern, and I was delighted to hear Chairman Clayton at the last hearing say that it really is good corporate hygiene for insiders not to be trading during this period. Senator, I would very much look forward to the opportunity to work with you and your staff on the legislation you described. I cannot understand the case, candidly, Senator, for why insiders should be trading right before they are about to announce important news to the public. Senator Van Hollen. Right. Ms. Peirce, would you agree? You had an exchange a little while ago with the Ranking Member about, you know, what triggers materiality and who makes that determination. But, clearly, once a company has made the determination that they have an obligation to file an 8-K, doesn't it make sense to say that executives cannot engage in trading at that point? Ms. Peirce. Yes, I mean, I thought that Professor Jackson's work on this point was really interesting, and I think there is some useful work to be done in the area, and I look forward, if I am confirmed, to working with you and the other people working on this legislation. Senator Van Hollen. Thank you. Now, Mr. Jackson, you said that one of the purposes of, you know, a company's leadership is to ``maximize value and to promote growth and jobs.'' And, clearly, if a company is making decisions that are in the long-term interests of its long-term shareholders, that is something that can promote growth as they make investments, whether in their workforce or other things, but we also have a lot of short-termism. We have lots of examples where CEOs and the top brass seem to make decisions that benefited them at the expense of the long-term interests of the corporation. And I am interested in beginning to look at some of the incentives that are under the jurisdiction of the SEC in that regard because we are about to embark--we are embarked already on a big debate over tax reform, and as you all may be aware, you know, the Department of Treasury under Secretary Mnuchin removed from the website something that had been there through Democratic and Republican administrations about where the benefit of a corporate tax cut goes, whether it is to workers or to the capital side, shareholders, plus folks who benefit from stock buybacks. And it is going to be a really important question. What you have, I think, at your disposal are some tools that can address this short-termism, and I wondered, starting with you, Mr. Jackson, whether you can talk about issues with respect to CEO compensation in the form of stock that might give them an incentive to look to the long term, not simply short-term profits for themselves. Mr. Jackson. Thank you, Senator. Yes, I think that is an extremely important issue, and we are all concerned, I think, about what short-termism is doing to American companies and the economy more generally. With respect to executive compensation, what I would say is I think it is time for corporate managers who are worried about short-termism to put their money where their mouth is, sir, and to commit to hold the company's stock over much longer periods of time than they currently do, to show investors and communities and employees that the decisions that they are making are long-term decisions. If that is their argument, Senator, if their argument is that we really want to do the right thing for the long term, then it is hard to understand why they do not want to hold the company's stock over the long term. You mentioned buybacks, and if I could just add a point on that, Senator, I share your concern that, to the degree that corporate money might soon find its way back in the United States, if there is some legislation on this point, you know, the previous research on the last time we did this makes very clear that that money, the last time we had a tax holiday of this kind, was spent on share buybacks. And I would be concerned that we have the right rules in place governing stock buybacks to make sure that if that tax change were to happen, companies are prepared and required to explain to investors if they are going to use that money for buybacks. Senator Van Hollen. Thank you. I see my time is up. Mr. Chairman, if I could, just for the record, submit a Wall Street Journal article describing what happened back in the earlier 2000s when we had the tax holiday and which essentially confirms what Mr. Jackson said, that that money essentially went to buybacks, shareholders, and they actually cut their workforce. Thank you. Chairman Crapo. Without objection. Senator Cotton. Senator Cotton. Thank you, Mr. Chairman. And congratulations to each of you on your nomination. Ms. Peirce, Mr. Jackson, I want to raise with you an issue I raised with the Chairman a few weeks ago when he was here and that we have also discussed, which is the audit treatment of small broker-dealers. The Dodd-Frank Act requires broker- dealers to be audited by a Public Company Accounting Oversight Board-registered accounting firm, even when they are small, even when they are not introducing brokers, so they do not take custody of assets. I find that a curious policy since the PC in PCAOB is ``public company,'' not ``small firm.'' It also, it should be said, takes away business from small accounting firms in communities in States, all across a State like Arkansas. So starting with Ms. Peirce, could I get your thoughts on this policy and what the SEC might be able to do, if anything, to give our small broker-dealers as well as our small accounting firms a little bit of relief? Ms. Peirce. I think that the SEC in its oversight capacity of the PCAOB can work with them to understand how they are approaching their supervision of their oversight of broker- dealer auditors and think about whether the scope of that requirement is appropriately tailored. I think, you know, in general, smaller entities that are overseen by the PCAOB have a tough time, and so maybe there are ways that we can help foster compliance to help them try to be compliant rather than coming down on them for problems without essentially forcing them out of the industry, because I think that is the choice that a lot of them are making--that it is just not worth it, so they just get out of that business altogether. Maybe there is a way that we can work with them to foster compliance. Senator Cotton. Mr. Jackson. Mr. Jackson. Thank you, Senator. This broker-dealer auditing program is relatively new, and we are learning some things about it. And as you and I discussed, one of the things we are learning is about the kinds of dynamics and costs when it comes to smaller firms. One opportunity I am wondering about, Senator, is whether or not we can and should distinguish between custodial and noncustodial broker-dealers for this purpose. I look forward to looking into that. I would want to hear more about what the facts on the ground are. But I look forward to working with you and your staff on making sure that those firms can engage in their business and grow. Senator Cotton. Thank you. I appreciate both answers, and I look forward to working together with you and the Chair and the other Commissioners upon confirmation. I do not think there is a question of less oversight or less disclosure. It is just a question of smart oversight and recognizing the difference between, you know, a small broker-dealer with a half dozen or a dozen employees and a giant firm, likewise giant accounting firms and small accounting firms. I would like to now turn to the issue of the consolidated audit trail for which the SEC has asked and just raise the question of, you know, with the SEC's data breach, with the data breach we saw at OPM, is it smart for the SEC to be seeking this information? What is the problem it is trying to solve? And is there away that we could solve that without introducing new risks to sensitive data? Again, we will start with Ms. Peirce and then go to Mr. Jackson. Ms. Peirce. I do have concerns about anytime the SEC is collecting data, I think it needs to ask: Do we need the data? What are we going to use it for? And can we protect it? I am not convinced that those questions have been answered to my satisfaction, but, again, it is difficult to know that without being at the SEC and understanding why they decided on such a broad scope of data. But those are questions, if I were confirmed, that I would want to ask. Senator Cotton. Thank you. Mr. Jackson. Mr. Jackson. Thank you, Senator. I think it is important to remember why we began the consolidated audit trail program in the first place, and it was really motivated by the flash crash and the need to understand exactly what happened in those markets so we can make sure it never happens again. Now, I have the same question that Ms. Peirce just described. I am wondering what degree do we need personally identifiable information to solve that problem, and, sir, coming from the outside, I do not know the answer to that question. SEC staff have been working on it for years. I would want to get a better sense of what they are thinking on that question and how well they feel they can protect that PII before making any decisions. But I do think it is important, sir, that we put the cat in place because flash crash is something that we do not ever want to repeat, and we want to be sure we can protect investors if something like that were ever to happen again. Senator Cotton. Thank you. Mr. Ryder, this will be your second rodeo at the Mint, 25 years on. What are the biggest changes that you have seen at the Mint from when you were the Director 25 years ago? Mr. Ryder. Well, coinage is pretty old, and it does not change much. But at the Mint, I think some of the advances in manufacturing, some of the technology that is used in the industry has been quite interesting. I hope to carry that tradition on and see where we can take the Mint from a technology point of view and advance it to the next century and beyond. So I look forward to that challenge. Senator Cotton. Well, thank you very much for being willing to serve again in a very specialized but very critical role. Mr. Ryder. Thank you. Senator Cotton. Thank you all. Chairman Crapo. Thank you. Senator Warren. Senator Warren. Thank you, Mr. Chairman. The 2008 financial crash exposed serious problems in our securities markets, and in response, as part of the Dodd-Frank Act of 2010, Congress directed the SEC to issue new rules that would protect investors. It is now 7 years later, and the SEC still has not completed more than 20 of these required rules. Think about that. Seven years and 20 rules are still unfinished. The SEC has the worst track record of all the financial regulators. And when the SEC recently released its regulatory agenda for the upcoming year, it did not even include most of these unfinished Dodd-Frank rules. Now, Mr. Jackson, do you think it is all right that the SEC still has not finished so many of the Dodd-Frank rules and apparently has no plans to finish them anytime soon? Mr. Jackson. Absolutely not, Senator. My view is that those protections are critical to preventing the next financial crisis, to making sure investors are protected, and I am especially concerned about the executive compensation protections in Dodd-Frank that are still today not the law. Senator Warren. Good. So we are going to come to those in just a minute here. I just want to be clear on the record. If you are confirmed, will you make it a top priority to get these rules back on the agenda and get them completed as soon as possible? Mr. Jackson. Absolutely, yes. Senator Warren. Thank you. And, Ms. Peirce, same question. If you are confirmed, will you make it a top priority to get these rules back on the agenda and completed as soon as possible? Ms. Peirce. I will work with the Chairman as he sets the agenda to try to get the rules done that are not done. Obviously, sometimes things come up that are not anticipated that have to take precedence, but I will work with him to get the rules completed. Senator Warren. OK. I am a little concerned. The answer seemed to be a little less definitive than Mr. Jackson's because it is the Chairman right now who set the agenda for next year, and he has not even put the rules on the agenda for work. Ms. Peirce. So I think it is important, if I am confirmed, to get to the SEC and to talk with the Chairman to understand what is motivating his decisions about what goes on the agenda. As I mentioned, often when you get inside an agency, you discover that there are other priorities that you did not actually know about on the outside. So I think it is important to remember that the agenda has to follow where the risks really lie. And so, yes, getting rules done that Congress has directed the agency to do is important, but you also have to look at it in context of everything else that is happening at the agency. Senator Warren. Well, Ms. Peirce, I just want to be clear. These rules are not optional. It is not a set of rules that says Congress said write these rules if you all feel like it or if it fits in your agenda. We passed a law requiring the SEC to write these rules, and we did that because they matter. For example, three of those unfinished rules relate to executive compensation. One requires disclosures on why executives are paid what they are paid. Another requires public companies to adopt policies for clawing back compensation from executives. And a third prohibits bank executives from receiving incentive compensation that it could encourage the wrong kind of risk taking. Study after study has shown that the chance to receive giant bonuses pushed executives to take enormous risks in the run-up to the 2008 crash, risks that blew up the whole financial system, and we know it is still happening. In the Wells Fargo fake account scam, executives pushed employees to open new accounts at all costs. Why? Because it made the Wells' stock price go up, and that put millions of dollars in the pockets of the executives. You know, the SEC was told to write these rules 7 years ago. They are central to the SEC's mission of investor protection. So I want to ask the question why you think it is OK for the SEC to continue to ignore them. Ms. Peirce. Having been a staffer on this Committee, I do appreciate the role that Congress plays, which is directing the SEC what to do. And it is the responsibility of the SEC to implement the rules that it has been directed to implement. But, again, part of the reason that those rules are given to the SEC to implement is that it thinks about it in terms of all of the priorities in order to protect investors, facilitate capital formation, and uphold the integrity of the markets. So, yes, it is an obligation of the SEC to do that, and if I get to the SEC, it is something that I will want to understand---- Senator Warren. My time is out here, so let me just ask this. I just want to make sure to get it on the record. Do you believe you have an obligation to complete these unfinished congressional mandates from 2010 before any other discretionary rules or projects? Ms. Peirce. I cannot answer that question without---- Senator Warren. Well, I think that is an answer then. You know---- Ms. Peirce. ----being at the SEC. The SEC is obligated to implement rules that Congress tells it to implement, but I cannot tell you in what order they are obligated to implement them. Senator Warren. Well, but it is supposed to implement the rules. I do not care if you are a Democrat or a Republican. I do not care if you love Dodd-Frank or you hate Dodd-Frank. The SEC is required to follow the law. And if you believe in the American constitutional system, you should demand that the SEC stop this lawless behavior. I am glad you are willing to do that, Mr. Jackson. Thank you, Mr. Chairman. Chairman Crapo. Senator Tillis. Senator Tillis. Thank you, Mr. Chairman. Welcome to all of you and congratulations on your nomination. Mr. Ryder, I am going to ask you the first question, but before I do, I am going to ask Ms. Peirce and Mr. Jackson to think about their answer. One of the things I want you all to do, if you take a look at the mission of the SEC as protecting investors, maintaining a fair, orderly market, facilitating the capital formation, and enforcement. So I would like for you all to talk about your critical assessment of the SEC, whether or not the ratios are right in terms of fulfilling that mission. I will give you a chance to think about that. Mr. Ryder, I have always believed that silence is consent, so the fact that you have not gotten many questions makes me think you are going to do just fine with your confirmation, so you should consider that a good thing. I just have one question for you, and it really has to do with the future of the Mint. You are right, coinage is kind of old or long-serving, but the world is changing. I was thinking the other day, I was at a convenience store, and 20 years ago I would have never pulled out a credit card to make a $2.50 purchase because at the time people would think you just did not have $2.50, that you could not afford it. Now it is completely inverted. I mean, people that carry crash are crazy. I am not one of them, and let any burglars hear that. But where do we go from here? When you start talking about alternate payment methods, first we have got counterfeiting. I want you to talk a little bit about that because I know you have some expertise in that area, anti-counterfeiting, I should say. But then where do we go, I mean, what do we do in terms of the future of coins and dollars? And what does it look like 10, 20, 30 years from now based on the nature of the way people settle payments today? Mr. Ryder. Sure, Senator. Thanks for the question. First of all, I do not think currency is going anyplace anytime soon. I think it is going to be around for quite some time. It may be in a different form, but I think what you see is---- Senator Tillis. And I am getting to the form part. Mr. Ryder. And the dollar bills or the dollar coins or the different forms of the currency, I think they are going to be around for a while. In the coinage industry, that may change with the use of credit cards and so on and so forth, and the vending machines, but the technology that is used to accept those products is also changing because the technology is changing. It gives you a better opportunity to do things that might be a bit more modern, up-to-date. Senator Tillis. And just because I want 2 minutes for 1- minute responses from each of the other two nominees, what is the top priority in terms of an additional role that you all will play in anti-counterfeiting? Mr. Ryder. I think anti-counterfeiting is something that is becoming to be a critical issue. With coinage specifically, the bullion side of the house, with the counterfeitings that are coming out of China and elsewhere that are exceptionally good, I think technology there has to be developed and implemented within the United States Mint, and that is something I look forward to working on. Senator Tillis. OK. And, Ms. Peirce, I asked a question before. I will not be able to do a lot of follow-ups, but give me an idea of your critical assessment of the SEC today and with respect to their mission, whether the ratios and the actions are, in your opinion, just you get confirmed, you want to continue the status quo or not. Ms. Peirce. I think the three parts of the mission too often are thought about as separate parts when they are really interrelated and complementary. So you cannot protect investors if you do not give them investment opportunities. You cannot protect investors if your markets are not working the way they should. And so, unfortunately, I think the SEC has too often taken the view, a very paternalistic view of how to protect investors, which is to limit their options and make sure that nothing bad happens. Instead, I think we should think about investors having access to a portfolio of good investments, because it really is not--you should not think about it--a finance professor would tell you do not think about it on a company-by-company basis. Think about it across a portfolio of companies and give investors access to a broader array, and also make sure that you are allowing companies of all sizes to take advantage of the market. So we may need to make adjustments in order that small companies are better able to access capital. Senator Tillis. Mr. Jackson, do you disagree with any of that? Mr. Jackson. Thank you, Senator. I think Ms. Peirce has quite aptly described a lot of the challenges the SEC faces, but I want to be clear about something, sir. I think the critical question for me, if I am confirmed, will not just be about what the SEC is focused on. It will get the focus on making sure that the SEC uses all the resources Congress has put at its disposal. Let me give you an example of what I have in mind. There is a wonderful and very deep source of market data that the Enforcement Division has at the SEC. It is a critical resources that Congress has helped to fund, and it occurs to me, sir, that other divisions at the SEC should be using and have access to those data. In other words, we should try to keep the SEC from becoming too siloed an organization and instead work together across divisions, as Ms. Peirce described, to achieve all the parts of its mission. So I would look forward to working on that, sir, if I were confirmed. Senator Tillis. Thank you, Mr. Chair. Chairman Crapo. Thank you. Senator Schatz. Senator Schatz. Thank you, Mr. Chairman. Thank you for your willingness to serve. I have a question for Ms. Peirce and Mr. Jackson. A few weeks ago, I asked a question of the Chairman about the disclosures related to severe weather, and I pointed out that there are troubling examples of publicly traded companies that are essentially throwing up their hands and saying because the risk of climate change and severe weather is hard to predict or quantify, we are going to just assume that there is no risk. And I want to read to you an example from Valero Energy's 10-K filing from 2016, and I quote: ``Some scientists have concluded that increasing concentrations of GHG emissions in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, it is uncertain if they would have an adverse effect on our financial conditions and operations.'' And then, at the end of August in 2017, Hurricane Harvey, one of the strongest Atlantic storms in history, shuttered 20 percent of the U.S. oil refinery industry and shut down over a third of Valero's refining capacity over a week. These closed Valero refineries usually produce 1.1 million barrels a day. And so my question, and I will start with Ms. Peirce, is: Risk is risk, whether it is cybersecurity risk, whether it is political risk, whether it is regulatory risk, or whether it is the risk of severe weather. Do you commit to making sure that the Division of Corporation Finance holds companies accountable for adequately disclosing all risk, including the risk of severe weather? Ms. Peirce. Yes, I mean, I think companies need to be thinking of a broad array of risks, and that includes cybersecurity and weather, as you described. And I think it is helpful to have Corp. Fin. looking at disclosures across industries so they can get an idea of a company's ability to disclose particular types of things. You obviously do not want to have speculation in disclosure documents, but you do want shareholders to have a real sense of the whole array of risks that companies face. Senator Schatz. Thank you. Mr. Jackson. Mr. Jackson. Thank you, Senator. As we were discussing earlier, materiality really is the touchstone of the securities laws and the disclosure mandates. And one of the things that we think about when we wonder about whether something is material is whether shareholders are interested in it, whether that is something that shareholders are focused on. And so more and more, shareholders are pressing companies to better understand these risks, and that signals to me that this might be something increasingly important that we need to make sure these companies come forward with disclosures on. So I would very much hope that Corporation Finance is thinking about those questions, and I think it is important to point out that in that back and forth between the Division of Corporation Finance and a company, they really should be pressing and making sure: Have you thought through whether you have material climate risk? And if the answer is yes, sir, that should be disclosed. Senator Schatz. Thank you, and I will stay with you, Mr. Jackson. The question is on stock buybacks. Since the SEC issued Rule 10b-18 in 1982, which effectively removed barriers to stock buybacks, the amount of money companies have put into stock buybacks has ballooned to over $700 billion in 2016. Companies have choices when they decide how to spend their extra cash, and more and more they choose not to spend it on their workforce, on capital investments, or R&D. When they have extra cash, they immediately pass it on to shareholders. This is not a good thing for these companies or for the economy. Looking at the performance of companies on the S&P 500, we see that companies that spent the most on shareholder payouts underperformed companies with the highest spending on capital investments and R&D. We may wonder what has happened to productivity in our economy, but I think the answer, at least partly, has to do with the choices that the SEC made. Do you think that the enormous scale of stock buybacks is a problem for economic growth and the economy generally? Mr. Jackson. Senator, I am worried--I think you are right to raise the concern--that what is happening with buybacks is companies are consistently choosing not to invest in their employees, in their communities, in the future, and I---- Senator Schatz. Just in the interest of time, for both of you, are you willing to reconsider that rule passed, which obviously precipitated a golden age of buybacks? And I have 30 seconds, so I will start with you, Mr. Jackson. Mr. Jackson. Absolutely, sir. Senator Schatz. Ms. Peirce. Ms. Peirce. I am willing to look at the rule, which has been on the books for a while, and so it could be looked at again. Senator Schatz. Thank you very much. Chairman Crapo. Thank you very much, Senator Schatz, and that does conclude the questioning. Before I conclude, although I will wrap up the hearing, I want to again thank each one of you for agreeing to attend and participate in today's hearing and your willingness to serve our country. You are strong candidates, and I believe you will all have the support of the Senate to move into your positions and be confirmed. For Senators, all questions for the record need to be submitted by Thursday, close of business, and for our witnesses, responses to those questions we ask be due by Monday morning. So you will have a little bit of work to do, assuming that there are questions. Usually there are some, and usually they are not overwhelming. But we ask you to get them to us on Monday morning if you can. With that, this hearing is adjourned. [Whereupon, at 11:42 a.m., the hearing was adjourned.] [Prepared statements, biographical sketches of nominees, responses to written questions, and additional material supplied for the record follow:] PREPARED STATEMENT OF DAVID J. RYDER To Be Director of the United States Mint October 24, 2017 I would like to first introduce my family who are joining me here today. My wife of 35 years Monie, our son Nick, and our daughter Caroline Ryder. Thank you, Mr. Chairman, Senator Brown, and distinguished Members of the Committee for allowing me to appear before you today. Mr. Chairman, my siblings and I still own a small piece of land outside of McCall, so I do my best to get out to Idaho at least once a year to visit family and spend a little time enjoying all that the great State of Idaho has to offer. First, I must say that I am honored that President Trump has nominated me to serve as the 39th Director of the United States Mint. As you are aware, in 1992, I was nominated by President George H.W. Bush to be the 34th Director of the Mint. I received a recess appointment at that time and served for a period of 14 months. When I left the Government in 1994, I became a partner with Secure Products, a new venture spin-off from the Sarnoff Corporation in Princeton, NJ, formally the central research laboratories for the RCA Corporation. Our mission was to develop advanced anti-counterfeiting technology solutions to be primarily used in currency and branded products. After a successful 13 years in business, the Honeywell Corporation acquired Secure Products in 2007. The ensuing 10 years was spent with Honeywell as their Global Business Development Manager and Managing Director for Currency. In my role at Honeywell, I worked with Government agencies and central banks around the world to address currency issues. Interestingly, one of my last duties while at Honeywell was a joint project with The Royal Mint of the United Kingdom where we assisted them in the development of the new U.K. One Pound Coin, which was introduced earlier this year. This new circulating coin is considered to be the most advanced and secure coins in circulation today. If confirmed, I would like to make education one of my focal points at the Mint. As the 34th Mint Director, we introduced an initiative called the Money Story. The goal of this initiative was to educate the youth of this Nation on the history of money, both coinage and paper currency, via a teacher's curriculum and video co-developed by the U.S. Mint and the Bureau of Engraving and Printing. This packet of information was made available to all teachers for use in the classroom. Teaching our youth early on how to collect coins and other numismatic products, as well as how to start saving their hard-earned money, helps lay the foundation of the importance of money. Over the years, the Mint has continued this excellent tradition via various education tools which are located on their website. Having worked in the currency industry for the past 25 plus years, I have developed a strong operational and technical understanding of this tight-knit industry. I respect the men and women who dedicate their lives to this industry. During my time with Secure Products and Honeywell, I was afforded the opportunity to visit and work with many private and Government currency manufactures here in the United States, as well as around the world. I will bring to the Mint Director position a strong understanding of the industry and many of the challenges it faces. If confirmed, it would be an honor to once again serve in our Government and work with this Committee. The U.S. Mint has an impressive history and I look forward to becoming part of that history again. As in all businesses, I am sure the Mint has challenges to address. I look forward to facing these challenges while at the same time fulfilling its mission. Thank you. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] PREPARED STATEMENT OF HESTER M. PEIRCE To Be a Member of the Securities and Exchange Commission October 24, 2017 Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank you for considering my nomination. It is an honor to be nominated by the President, alongside Professor Robert Jackson, to be a member of the Securities and Exchange Commission (SEC). I welcome the opportunity, if I am confirmed, to work to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation--the three interrelated and complementary aspects of the SEC's mission. I have spent nearly two decades working on financial regulation. I studied economics at Case Western Reserve University and law at Yale. After a judicial clerkship, I was an associate in the securities practice group of a large law firm. I then spent 8 years at the SEC. I first worked as a staff attorney in the division that regulates mutual funds and investment advisers. As a counsel for Commissioner Paul Atkins, I was able to work on a broader array of issues. Following my time at the SEC, I had the privilege of serving on the staff of Senator Richard Shelby on this Committee. Now I am a Senior Research Fellow and Director of the Financial Markets Working Group at the Mercatus Center at George Mason University, where I have learned much from my colleagues' economic and regulatory expertise. I desire to return to the SEC because I believe that individuals, institutions, and innovation are important to our capital markets and the broader society. Properly functioning capital markets enable our society to draw on each individual's unique set of talents, experiences, relationships, and knowledge. An entrepreneur's vision comes to life because we have markets that enable her to share that vision with others who have money to invest. Investors' funds pay the salaries that unlock the potential of other individuals in society. The returns investors make are used to educate the next generation of entrepreneurs and employees. Individuals trust their fortunes and futures to the capital markets because these markets have grown up within a robust institutional framework. Without strong institutions, people would not use the capital markets. An effective institutional framework establishes reasonable rules, fosters compliance, and swiftly pursues violations when they occur. It does all of these things with an unwavering commitment to due process. The SEC is a key part of our institutional framework. It is therefore incumbent on the SEC to lay out clear rules, enforce them diligently and impartially, and modernize them when necessary. If regulation is appropriately flexible, innovation can bring new investors into the financial markets, lower prices, and improve the quality of financial products and services. Innovation forces existing companies to stay on their toes and pushes them aside when they fail to meet people's needs. A regulatory structure that blocks new firms or prohibits innovation lets existing companies grow complacent to the detriment of the rest of the economy. By contrast, a regulatory system that invites competition ensures that the capital markets work for Main Street. I look forward, if I am confirmed, to working with Chairman Clayton, my fellow commissioners, and the SEC staff to implement, enforce, and modernize rules that support healthy, dynamic capital markets. Together we can ensure that the U.S. capital markets work effectively for individuals and companies across this country, are supported by strong institutions, and accommodate innovation. Thank you. I would be happy to answer your questions. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] PREPARED STATEMENT OF ROBERT J. JACKSON, JR. To Be a Member of the Securities and Exchange Commission October 24, 2017 Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank you very much for the opportunity to join you today. It is my honor to be testifying before you regarding my nomination to be a Commissioner of the Securities and Exchange Commission. For me, there is no greater privilege or responsibility than upholding the SEC's mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate access to capital. To understand why that's so important to me, I thought it might be helpful for me to start by sharing a bit about myself and my family. I was born in the Bronx, New York, to my two wonderful parents, Maureen and Robert Jackson, and I feel so fortunate that they are here with me today. My mother was one of nine children; my father was one of five. No one, least of all my parents, would have even dreamed that one day they might be sitting behind their son on an occasion like this. You see, the day I was born, my father was working as an accounting clerk at a small encyclopedia company called Funk and Wagnalls. Throughout my childhood, my mother held several part-time jobs, including the early shift at Dunkin' Donuts, just to help make ends meet. They were young, overworked and sometimes overwhelmed. But they believed that if they worked hard and saved what they could, their son might someday go to college. So every month my parents plowed their hard-earned paychecks into the market, knowing that if their investments were protected and growing they would one day be able to afford to send me to school. That's really the only reason why I had the chance to go to college-- and the incredible opportunity to be here today with you. I believe that the SEC's purpose is to protect everyday investors like my Mom and Dad. Because today's markets are so complex, it can be easy to get lost in technical details and forget why those safeguards are so important. But my story shows why protecting America's investors is at the heart of what the SEC does. Safe markets not only encourage investment and entrepreneurship and growth. Safe markets make it possible for two young middle-class parents to transform their lives-- so that someday their son has the chance to sit before the United States Senate as a Presidential nominee. Safe markets are at the core of the American dream--something I have learned by living it. That's why my work--in Government, as a teacher, and as a researcher--has focused on everyday investors' confidence in our markets. At the Treasury Department during the financial crisis, I was proud to help develop rules that tie top managers' pay more closely to performance and give investors a voice on executive compensation. When my research team at Columbia Law School showed that the SEC's systems were inadvertently giving high-speed traders market-moving information before the public could see it on the SEC's website, I worked with this Committee's Staff to help make sure the SEC gave investors the level playing field they deserve. And when our team helped convince regulators to release additional information about stockbroker fraud, we were proud to help others use the data to expose the brokers most likely to defraud investors. If I have the honor of being confirmed, I intend to bring those tools to bear on the SEC's crucial task. I will be a strong advocate for exploring how new technologies can make corporate disclosures more reliable and enforcement efforts more effective and efficient. I will encourage the Staff and my fellow Commissioners to draw on the SEC's long history of favoring transparency as a means of maintaining investor confidence in our markets. And I will work to implement the corporate-governance protections that Congress has enshrined into law-- so that investors, employees, and communities can be sure that our companies are working to produce the kind of long-term value creation that has been the hallmark of the American economy for generations. As I mentioned, the SEC's three-part statutory mandate requires the agency to protect investors, maintain fair and efficient markets, and facilitate capital formation. I believe in all three of these noble goals, and in the thousands of SEC Staff across the Nation who work every day to achieve them. Whether protecting retirees from stockbroker fraud, making sure Americans get a fair price when they purchase shares of stock, or uniting an entrepreneur with the funding he or she needs to spur a life-changing invention, the daily, meat-and-potatoes work of the Commission and its Staff is crucial to the functioning of our economy. If confirmed, it would be my privilege to be a part of those efforts. But I also believe it is important to remember why that work is so important. For me, that reason will always be my family's story. You see, my parents' confidence in our markets not only changed my life--it changed their lives, too. My father, the encyclopedia company clerk, retired as the Chief Accounting Officer of a public company. My mother left Dunkin' Donuts, earned her teaching degree, and has been teaching elementary school for nearly 30 years. None of that would have been possible if my parents hadn't felt they could safely save for their futures--and mine--in our markets. If I'm confirmed, you should know that helping to make stories like theirs possible is what will motivate me every day. That's truly what makes the SEC so important--and it's why I'm so honored to be here. Thank you again for the opportunity to appear before you today. I would be delighted to answer any questions you might have. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM DAVID J. RYDER Q.1. Under the advice of the Office of Government Ethics, you have agreed, if confirmed as Director of the Mint, to recuse yourself from any decisions involving your former employer, Honeywell. What types of contracts and other business arrangements does the Mint currently have with Honeywell? If you recuse yourself from a decision involving Honeywell, who will make those decisions in your place? A.1. It is my understanding that the Mint's only business arrangement with Honeywell is a purchase order (about $22K) with Honeywell Safety Products for training at the United States Mint in Philadelphia. If confirmed, I will adhere to all applicable ethics laws, rules, and policies. Should I have a question concerning my ethical obligations, I will seek the counsel of appropriate ethics staff. Additionally, if a situation arises in which the Director of the Mint is recused, it is my understanding that the Deputy Director of the Mint would handle such matters. Q.2. As Senator Scott referenced during your nomination hearing, the Mint suspended its Mutilated Coin Redemption Program in November 2015 amid concerns about unlawful activity in the program. The Mint has since issued a proposed rule that would allow the Mint to add further precertification, documentation, and testing requirements for individuals or companies submitting mutilated coins for redemption. During the 2 years that the program has been suspended, companies have accumulated a significant backlog of mutilated coins that cannot be circulated or disposed of without the Mint. Do you believe the proposed rule will fully address the concerns that the Mint has expressed about the integrity of the program? Will the Mint work with individuals and companies that may have large backlogs to accommodate unusually large redemptions as the program restarts? A.2. On November 2, 2015, the Mint suspended the exchange program to assess the security of the program and develop additional safeguards to ensure the integrity of the United States coinage. A Notice of Proposed Rulemaking was published in the Federal Register on September 19, 2017, inviting the public to comment on proposed revised regulations for the program. I understand an important part of the rulemaking process that remains ongoing is reviewing public comments to further consider the impact of the regulation's measures on addressing security risks while maintaining access to an effective program for participants. Although I have not been part of the rulemaking's development or the upcoming process of evaluating potential comments, I do believe the Mint has taken important steps to strengthen the program. Furthermore, I recognize the importance of resuming the program to individuals and companies that have large backlogs. I support the Mint's intent to expeditiously resume the program, and I look forward to working with you and your staff to ensure the Program remains a cost-effective way for the public to redeem damaged coins. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM DAVID J. RYDER Q.1. Mr. Ryder, I appreciated meeting with you recently. I understand that you previously served as Director of the Mint under President George H.W. Bush, and additionally as the Deputy Treasurer. What do you believe has changed from working as Director under President H.W. Bush and now? Are there any new challenges that you believe the Mint is facing today? A.1. Circulating coin redesign has changed dramatically since 1992, which has contributed millions of dollars to the general fund. I believe that the Mint has also been improving their manufacturing processes which has resulted in fewer errors in coin manufacturing. For example, the Mint has reported that its Mint Quality Index (MQI) went from the low 70s in 2007 to a rating of 99.3 percent in 2014 for circulating coins at the Denver and Philadelphia facilities. Additionally, I believe the Mint's customer service has improved dramatically in the commemorative and bullion sales area. One of my challenges will be the implementation of the Mint's new 5-year strategic plan which focuses on: (1) the work place environment; (2) improving the Mint's management and governance; and (3) integrating technology into operations and support lines. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM HESTER M. PEIRCE Q.1. Although materiality has long been the foundation of the SEC's disclosure requirements, the SEC has, over time, supplemented this standard with specific bright-line rules. For example, the SEC requires disclosure of specified information related to executive compensation, corporate governance, and internal controls. Do you agree that bright-line rules can be useful to both companies and investors by supplementing the traditional materiality standard? A.1. As you note, materiality is the touchstone for companies' disclosure under the securities laws. Bright-line rules can be useful in guiding companies' disclosure efforts, but materiality should be the controlling principle for the SEC in formulating bright-line disclosure rules and disclosure guidance. Q.2. Speaking at NYU's School of Law earlier this year, Chair Clayton said, ``I am not comfortable that the American investing public understands the substantial risk that we face systemically from cyber issues and I would like to see better disclosure around that.'' Two days later, the Equifax breach proved him right. If confirmed, would you commit to working with Chair Clayton and the other Commissioners to revise cyber risk disclosure requirements, including considering a specific 8-K reporting item for cybersecurity breaches that expose personally identifiable information? A.2. I share your and Chairman Clayton's concern that investors need to understand the material cybersecurity risks that companies face. If confirmed, I commit to working with Chairman Clayton, my fellow Commissioners, and the staff of Corporation Finance to consider whether companies need additional guidance for cybersecurity reporting and what form such guidance should take, including potentially a specific Form 8-K reporting requirement. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM HESTER M. PEIRCE Q.1. It is my understanding that Initial Coin Offerings (ICOs) and crypto-currencies have raised billions thus far in 2017. This represents an exponential growth in recent years. I was glad to see the SEC begin to closely examine this market, and I applaud the SEC for its recent issuance of the Investigative Report regarding the DAO. The Investigative Report was an important step in bringing some clarity to the ICO market in explaining how securities laws apply to ICOs depending on the ``facts and circumstances.'' Although the DAO report was helpful, I worry that a continued lack of clarity in ICO regulation will stifle innovation and, most importantly, leave investors at risk. Should the SEC do more to bring clarity to the ICO market? A.1. The SEC's 21(a) report on the DAO was a useful first step in providing clarity in the ICO market. As the report noted, the facts and circumstances surrounding an ICO determine whether and how securities laws are implicated. As it gains more experience with ICOs, the SEC should look for additional opportunities to provide clarity--perhaps through a guidance document--to the market about conducting ICOs in compliance with the securities laws. To the extent the SEC brings enforcement actions in this area, it should identify with specificity how a particular ICO violated the securities laws to give market participants clear examples of what they should not do. Q.2. Aside from enforcement actions, what can the SEC do to provide certainty to the ICO market? Would a proposed rulemaking make sense? A.2. A proposed rulemaking might make sense. Alternatively, the SEC could consider issuing a concept release, conducting public roundtables, or otherwise soliciting input from a broad array of market participants and other interested parties before undertaking a rulemaking. If I am confirmed, I look forward to working with my fellow Commissioners and the SEC staff to assess appropriate next steps regarding ICOs. The SEC also should work with the CFTC to help to clarify when ICOs implicate each agency's regulatory regime. Q.3. The SEC is about to implement the initial operating stage of the Consolidated Audit Trail (CAT). Exchanges will soon begin reporting to what will be a massive database, which will include a significant amount of highly sensitive information. In its second phase, CAT will begin receiving personally identifiable information (PII) of brokerage customers. The recent breach of the SEC's EDGAR database, however, calls into question the security of the SEC's information technology. Will you commit not to collect any PII until you are confident that CAT is not susceptible to a breach? A.3. If I am confirmed, I commit to working with my fellow Commissioners, the SEC staff, and the self-regulatory organizations participating in CAT to ensure that, to the extent PII needs to be collected, it is not susceptible to a breach. Q.4. We usually think of outside hackers when we think of data security, but in numerous cases, individuals trusted with access to confidential data are actually the source of leaks-- Chelsea Manning and Reality Leigh Winner come to mind. How should the SEC control access to CAT data within the agency? Should it allow other agencies or researchers access to CAT data? A.4. I am concerned about both outside and inside compromises of the CAT data. My concerns stem in part from prior incidents at the SEC \1\ and in part from the reality that mistakes happen even when people are well-intentioned. If I am confirmed, I will work with my fellow Commissioners and the SEC staff to understand the protections that are in place for dealing with CAT data, including who is entitled to access the data and how. Intergovernmental data sharing is important, but should be preceded by similar questions about who the agency will allow to access the information and how. If nongovernmental researchers are permitted to have access to the data, additional protections will be necessary, including eliminating PII. Before researcher permissions are granted, the SEC should carefully consider the purpose of allowing such access and whether it justifies the additional risk of leakage. --------------------------------------------------------------------------- \1\ See, e.g., Government Accountability Office, ``Information Security: SEC Needs To Improve Controls Over Financial Systems and Data'' (GAO Report No. 14-419 April 2014), at p.5 (``Although SEC had issued policies and implemented controls based on those policies, it did not consistently protect its network boundary from possible intrusions; identify and authenticate users; authorize access to resources; ensure that sensitive data are encrypted; audit and monitor actions taken on the commission's systems and network; and restrict physical access to sensitive assets.''); Office of Inspector General, ``SEC, Federal Information Security Management Act: Fiscal Year 2013 Evaluation'' (Report No. 522 Mar. 31, 2014), at p.i (describing a number of areas in which previously identified weaknesses in security controls had not been corrected and thus ``could adversely affect the confidentiality, integrity, and availability of the agency's information and information systems''); Office of Inspector General, ``SEC, Report of Investigation into Misuse of Resources and Violations of Information Technology Securities Policies Within the Division of Trading and Markets'' (Case No. OIG-557 Aug. 30, 2012), p.11 (in an investigation of security breaches in the Automation Review Policy Program (ARP), the SEC office charged with overseeing computer networks at self-regulatory organizations, finding that ``staff spent hundreds of thousands of dollars on computer equipment and software that had no checks in place to ensure that the equipment and software purchased were needed or used to further the ARP program mission'' and that ``a significant portion of the equipment and software purchased was never used in the ARP program''). --------------------------------------------------------------------------- ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM HESTER M. PEIRCE Q.1. In brief, what is the SEC currently doing right, what needs to change, and how do you plan on prioritizing your time, should you be confirmed? A.1. Chairman Clayton has set the SEC on the right course by laying out and taking initial steps with respect to important priorities, including facilitating capital formation, combating retail investor fraud, and better identifying and protecting against cybersecurity risks. To pursue these priorities, the SEC will need to shed some bad past habits, including a tendency to limit investor opportunities and unduly constrain access to the capital markets in the name of investor protection. The SEC should work to refocus disclosure requirements so that companies are providing the material information that investors need to make informed investment decisions. The SEC also should work to modernize its rulebook, which--after more than 80 years--has grown fat and unwieldy. If I am confirmed, I will work with the Chairman to improve capital formation, expand investor opportunities, combat retail fraud, strengthen cybersecurity risk management, and tend to the day-to-day business of the SEC. I expect my priorities to include bread and butter issues like EDGAR, the efficacy of the SEC's compliance and enforcement programs, oversight of FINRA and the PCAOB, and consideration of potential changes to the rules governing retail financial professionals and the rules governing market structure. As I noted at the hearing, if I am confirmed, my priorities may change in response to market changes or information I learn from my fellow Commissioners or the SEC staff. Q.2. Do you believe that private capital being put into underperforming companies can improve the company's performance? A.2. Private capital, along with the expertise that often accompanies it, can play an important role in assisting underperforming companies. Q.3. Do you believe that curbing more private investment would help underperforming companies? A.3. Unwarranted restrictions on the ability of companies to raise capital in the private markets diminish the likelihood that companies will survive and thrive. An effective regulatory framework can help to ensure that companies have access to a healthy supply of private capital and the managerial and operational expertise that goes along with it. Q.4. Do you agree that private capital being put into companies leads to more transparency and communications with existing shareholders? A.4. Private providers of capital can and often do condition their provision of capital on the institution of best practices regarding transparency and shareholder communications. Q.5. Do you agree that corporate CEOs are more responsive to the market today than they were in the past? A.5. Among other things, the proliferation of real-time information about companies, the increasing speed with which that information is incorporated into market prices, and compensation plans linking CEO pay to company performance likely have increased corporate CEOs' responsiveness to the market. Q.6. Do you believe that restricting or making it harder for private capital to invest in American companies is a good idea? A.6. Placing unwarranted restrictions on the ability of American companies to access private capital is not a good idea from the perspective of those companies, investors, and the general public. Along with our public markets, private markets are an important source of capital for companies of all sizes. If I am confirmed, I plan to work to help both private and public markets function effectively to help support the dynamism of American companies, the health of the American economy, and the prosperity of American employees and investors. Q.7. Do you believe that private capital should be flexible and adaptive to quickly changing circumstances? A.7. Private capital should be flexible and adaptive to quickly changing circumstances. One of the important features of well- functioning capital markets is that providers of capital are able to react rapidly to developments at particular companies and in the broader economy. A proper regulatory framework can facilitate such flexibility. Q.8. Do you think that the current IPO market is at its peak? What could we be doing to facilitate more entrants into the public markets? What are some determinative factors that companies evaluate when making a decision to enter into the public markets? Do you think that some of these factors have served as preclusive, often determinative factors for a company deciding not to enter the public marketplace? How do public companies affect job creation and economic growth? A.8. Whether the IPO market is at its peak depends on a number of factors, including general economic conditions, the reasonableness of the existing and prospective regulatory framework governing public companies, expectations about the cost of shareholder litigation, and the degree to which public capital is cheaper than private capital. In deciding whether to go public, companies consider these factors along with their own current need for capital, expectations about future growth, and an assessment of the prospects for enhanced stock liquidity. If companies determine that the cost of being public, including anticipated costs due to future regulatory changes, outweighs the benefits of easier access to capital and greater liquidity for shareholders, companies will not take the step of going public. Reluctance of companies to go public has serious implications for our economy, investors, and workers. Ready access to capital markets enables companies to obtain the capital they need to innovate, hire workers, and contribute to economic growth. While some factors that affect the decision to go public are beyond the control of regulators and legislators, the SEC and Congress can take further steps to streamline the process for going public, eliminate requirements that do not protect investors, address concerns about market structure to ensure that the markets work for issuers of all sizes, and commit to a reasonable, effective regulatory regime for public companies. Q.9. Do you think that the SEC should have a formalized retrospective review process, much like prudential regulators have, by which the SEC can take a holistic look at its rules and regulations and decide which ones are outmoded, ineffective, burdensome, etc., or similarly decide which ones need to be changed and modernized? A.9. Retrospective review is an important part of maintaining an effective regulatory framework. If I am confirmed, I would be pleased to work with Congress to develop a statutory retrospective review process similar to that of the prudential regulators, but the SEC already has the ability to develop an effective process internally. The SEC has shown an increasing commitment to economic analysis, and retrospective review should be part of that commitment. As part of ongoing efforts to further improve economic analysis, the SEC could make a practice of including metrics in its rules that can serve as the basis for future retrospective review. Moreover, the SEC's plan to revisit Regulation NMS, among other rulemakings, will help to set an agency precedent for retrospective review. Q.10. How do you plan on working with the CFTC to address harmonization issues? A.10. Harmonization efforts by the SEC and CFTC in the derivatives markets are important. Domestic harmonization, in turn, will facilitate better international cooperation. SEC- CFTC relations have not always been smooth, but Chairmen Clayton and Giancarlo have exhibited an interest in building interagency cooperation. If I am confirmed, I look forward to working with the CFTC to harmonize rules governing swaps and security-based swaps, efficiently oversee dually registered entities, monitor the markets, and develop effective regulatory frameworks for new technologies that potentially implicate both regulatory regimes. I already have the pleasure of knowing Chairman Giancarlo, Commissioner Quintenz, and CFTC nominee Stump and look forward to getting to know Commissioner Behnam. Q.11. With regard to cyber infrastructure and enforcement actions, what do you think the SEC is doing right and what would you change? A.11. Chairman Clayton appropriately has expressed a strong commitment to cybersecurity at the SEC and in regulated entities and public companies. His early, public prioritization of this issue sent an important message to regulated entities and public companies. If confirmed, I will be better able to assess what the SEC is doing in terms of cyber enforcement. The SEC should create a collaborative environment to facilitate efforts by the private sector, the SEC, and other Government agencies to identify and address cyberthreats. If the SEC fails to address its own problems in cybersecurity, I am concerned that regulated entities will likewise cut corners. Q.12. The Treasury Capital Markets report touched on potential changes to best execution and potential changes to market structure issues, particularly in the context of Reg. NMS. Can you give me your thoughts on what you view as potential areas for reform within the context of Reg. NMS? A.12. Regulation NMS attempted to reshape the equity markets according to a particular view of how those markets should work. In doing so, the SEC more deeply entrenched itself in decision making, constrained the options of issuers and investors, and added new layers of complexity to the markets. Potential reforms could make it easier for trading venues to tailor themselves to meet the needs of particular issuers or investors, rather than the current one-size-fits-all approach. If confirmed, I look forward to working with my fellow Commissioners, SEC staff, the Equity Market Structure Advisory Committee, and this Committee to identify ways in which market structure regulation is not working and consider potential reforms to ensure that our markets serve the full range of investors and companies. Q.13. Some have argued that our market structure systems have become increasingly complex and that the layered regulations have created incentives to game the system. Can you help me understand your views on reforming our domestic market structure and can you commit to this body that you will work with the Committee in tackling some of the languishing issues that have been pervasive in market structure over the last 10+ years? A.13. Our equity markets are the best in the world, but reforms would help to ensure that they stay that way. Mindful of the fact that the Chairman sets the rulemaking agenda, I look forward to working on such reforms with my fellow Commissioners and with this Committee. I share your concern about the system's complexity and the gaming such complexity breeds. I also am concerned about the role that SEC regulation plays in determining how, where, and when orders are executed. Many problems we see in today's markets seem to have their origin in well-intentioned SEC attempts to structure the markets. In contemplating reforms, the needs of investors and companies should dictate. Q.14. IT modernization enables financial services firms to protect constituent financial information. In an environment of increasing cybersecurity threats, how will you use your role at the SEC to promote IT modernization across the financial services sector and at the SEC? A.14. If I am confirmed, I will work with Chairman Clayton, my fellow Commissioners, and the SEC staff to understand and address weaknesses in the SEC's information technology infrastructure, policies, and practices. Getting the SEC's house in order will send an important message to financial firms to do the same. The SEC's compliance examiners also play an important role in monitoring how financial firms are doing and where weaknesses may lie. If confirmed, I look forward to working with the SEC staff to ensure that the oversight program fosters healthy IT modernization practices. Q.15. How will you ensure that regulations set by the SEC do not impede progress on IT modernization? A.15. IT-intensive regulatory initiatives such as Regulation NMS, the Volcker Rule, and the Department of Labor's fiduciary rule likely divert industry resources away from IT modernization initiatives. I plan to take such opportunity costs into account in assessing future regulatory changes. In addition, it is important for the SEC to write rules in a way that ensures regulated entities have the flexibility to shift to newer and better ways of doing things. In the past, SEC rules have sometimes inadvertently cemented historical information technology by being overly prescriptive. Q.16. With regard to corporate disclosures, what standard should be used to determine whether or not something is disclosed? A.16. The appropriate standard for corporate disclosure is materiality. Corporations should disclose information ``if there is a substantial likelihood that a reasonable shareholder would consider it important'' in making an investment decision. \1\ That standard avoids ``bury[ing] the shareholders in an avalanche of trivial information.'' \2\ --------------------------------------------------------------------------- \1\ TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). \2\ Id. at 448. Q.17. On February 24, 2017, President Trump signed an Executive Order on Enforcing the Regulatory Reform Agenda, part of which focused on identifying regulations that are ``outdated, unnecessary, and ineffective.'' Given recent technological advances, one area of particular focus should be regulations requiring paper-based communications as the default delivery method in communicating with investors and consumers. Such regulations are prime examples of regulations that were first adopted decades ago and have failed to evolve with the times. If confirmed, will you work to ensure that the SEC identifies and modifies outdated regulations regarding paper- based communications? A.17. If confirmed, I will work to eliminate or modernize outdated regulations. Without prejudging the issue about paper- based communications, the subject of an outstanding proposal, I intend to work to ensure that technology can be used appropriately and consistent with investor protection to meet disclosure requirements. Q.18 Do you believe the recent action by the SEC regarding MiFID II was appropriate? If you do not, how would you have addressed this issue? A.18. While I have not had the opportunity to consult with the staff that worked on the MiFID II resolution, I was pleased to see that the SEC took concrete steps to provide guidance and legal clarity on a matter of such importance. If I am confirmed, I look forward to working with my fellow Commissioners, the SEC staff, and international counterparts on a longer-term resolution, should it be necessary. Q.19. Do you think that the U.S. and the SEC should import standards from other countries? A.19. The SEC should draw lessons from other countries' regulatory successes and failures, but the SEC needs to develop regulations that work for the American markets. Moreover, wholesale importation of foreign standards does not comport with the Administrative Procedure Act. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM HESTER M. PEIRCE Q.1. A preliminary report released this week found the SEC collected $127 million in corporate civil penalties in 15 cases from February through September 2017, in comparison to $702 million in 43 cases from February through September 2016. \1\ --------------------------------------------------------------------------- \1\ https://www.politicopro.com/financial-services/story/2017/10/ corporate-penalties-have-dropped-at-sec-since-trump-took-office-163857 --------------------------------------------------------------------------- Are you concerned that these numbers may reflect a shift in enforcement priorities? A.1. I am committed to a strong enforcement program--one that sends a clear message that rules will be enforced impartially, swiftly, objectively, and fairly. It is, however, very difficult to assess the effectiveness and priorities of the SEC's enforcement program by looking only at a single statistic, such as the number of cases in which corporate penalties were assessed or the amount of penalties. The nature and complexity of cases are also important, and these factors might not reflect a shift in enforcement priorities. For example, an enforcement action that stops a retail fraudster in her tracks before she can harm a lot of investors is an important matter, but might yield relatively small penalties. Q.2. If confirmed, what recommendations will you make to Chair Clayton to strengthen the ability of the enforcement division to hold accountable those that violate Federal securities laws? A.2. If confirmed, I will recommend that Chairman Clayton empower the Enforcement Division to pursue enforcement matters--regardless of whether they generate big headlines-- that go to the core of investor protection and market integrity. Retail and accounting fraud matters can be difficult to investigate, but are important. I also will recommend that the Chairman not allow routine compliance matters to take valuable enforcement resources away from pursuing intentional violations. I also will work with the Chairman foster a culture within the SEC that encourages staff to raise concerns and suggest changes. Because much of the enforcement work is conducted outside Washington, DC, I will also recommend that Chairman Clayton build strong relationships with the regional offices to ensure that all of the agency's enforcement resources are being used productively. Q.3. In response to a question from Chairman Crapo, you identified cybersecurity as a top priority. If confirmed, what recommendations will you make to Chair Clayton related to cybersecurity both at the Commission itself and in the securities markets at large? A.3. Cybersecurity must be an SEC priority. The recently revealed breach at the SEC is a stark reminder that the SEC has valuable, personally and commercially sensitive information. Unfortunately, this last breach was not the SEC's first problem in the cybersecurity area. As indicated by Chairman Clayton's September 20, 2017, public statement on cybersecurity, he takes these issues extremely seriously. I will support the Chairman's efforts, including by recommending that the SEC act more quickly than it has in the past to implement recommendations by the SEC's Inspector General and the Government Accountability Office to address cybersecurity weaknesses. To be able to do this, the SEC will need to recruit and retain information security experts. The establishment of a culture at the SEC that encourages employees at all levels to be on the lookout for problems can help to ensure that problems are identified and elevated promptly within the SEC. As you note, cybersecurity is an issue not just for the SEC, but for the securities markets as a whole. By taking aggressive action to address its own problems, the SEC can set a powerful example for the securities markets. I also will recommend that the Chairman work collaboratively with regulated entities and other regulators to identify and combat cyberthreats. Q.4. In response to a question from Senator Reed regarding resources and cybersecurity, you said ``it will be much easier to assess that [resources] when I am actually there.'' I am concerned that the SEC does not have the resources it needs to appropriately protect itself from cybersecurity threats. What specific steps will you take to investigate whether the SEC has sufficient cybersecurity resources? A.4. If I am confirmed, I will talk with the Chairman, my fellow Commissioners, and staff in the Office of Information Technology to understand what resources are devoted to cybersecurity now, how cybersecurity resources have been used in the past, and what projected needs are for the future. Past reports suggest that some of the SEC's problems may be due to mismanagement of resources, \2\ so I would want to understand whether resource management has improved since the period covered by those reports. An objective outside analysis of the SEC's cybersecurity infrastructure could be useful in understanding what the SEC's resource needs might be in coming years. I also hope to get a better understanding of how other similarly situated agencies are managing cybersecurity threats. --------------------------------------------------------------------------- \2\ See, e.g., Government Accountability Office, ``Information Security: SEC Needs To Improve Controls Over Financial Systems and Data'' (GAO Report No. 14-419 April 2014), at p.5 (``Although SEC had issued policies and implemented controls based on those policies, it did not consistently protect its network boundary from possible intrusions; identify and authenticate users; authorize access to resources; ensure that sensitive data are encrypted; audit and monitor actions taken on the commission's systems and network; and restrict physical access to sensitive assets.''); Office of Inspector General, ``SEC, Federal Information Security Management Act: Fiscal Year 2013 Evaluation'' (Report No. 522 Mar. 31, 2014), at p.i (describing a number of areas in which previously identified weaknesses in security controls had not been corrected and thus ``could adversely affect the confidentiality, integrity, and availability of the agency's information and information systems''); Office of Inspector General, ``SEC, Report of Investigation into Misuse of Resources and Violations of Information Technology Securities Policies Within the Division of Trading and Markets'' (Case No. OIG-557 Aug. 30, 2012), p.11 (in an investigation of security breaches in the Automation Review Policy Program (ARP), the SEC office charged with overseeing computer networks at self-regulatory organizations, finding that ``staff spent hundreds of thousands of dollars on computer equipment and software that had no checks in place to ensure that the equipment and software purchased were needed or used to further the ARP program mission'' and that ``a significant portion of the equipment and software purchased was never used in the ARP program''). Q.5. If you conclude that the SEC does not have sufficient cybersecurity resources, will you make that finding clear to --------------------------------------------------------------------------- both Chair Clayton and Members of Congress? A.5. Yes. Q.6. I remain concerned that the current lack of transparency around short selling enables manipulative trading behaviors that harm growing companies and discourages long-term investment. I raised this concern to former SEC Chair Mary Jo White in a letter in January 2017. In my view, the current lack of transparency of short positions has a trifold impact on the securities market--it deprives investors of information critical to making meaningful investment decisions; it denies issuers of insights into trading activity and inhibits their ability to interface with investors; and it withholds crucial information from the market, ultimately impeding efficiencies and diluting transparency. There are currently two petitions for rulemaking pending before the SEC requesting that it promulgate rules to require disclosure of short positions in parity with the existing required disclosure of long positions (File No. 4-689 and File No. 4-691). In your opinion, should the SEC act on these pending rulemaking petitions or consider any alternative options, in order ensure fair disclosure of short positions? A.6. To avoid pre-judging the issue, I cannot speak to the particular petitions. If I am confirmed, however, I look forward to working with my fellow Commissioners and SEC staff to assess transparency concerns associated with short selling and potential avenues for addressing those concerns without unduly curtailing socially beneficial short selling. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM HESTER M. PEIRCE Q.1. The Citizens United v. FEC ruling allowed, among other things, corporations to contribute independent political expenditures. Public companies are active participants in our elections, yet their shareholders do not know the role that they play because the SEC has been reluctant or handcuffed from requiring firms to disclose their political contributions. Do you believe shareholders have a right to know whether a company they've invested in is making contributions in their best interest? A.1. I understand that some shareholders and other interested persons have expressed an interest in corporate political contributions. Under current securities law, however, companies are not required to disclose information regarding political contributions unless that information is material. Q.2. What should be the threshold for determining when a company discloses their political spending? A.2. Materiality is the appropriate standard for all corporate disclosures. Companies should disclose political contributions that are important to a reasonable investor's investment decision. Q.3. What policy levers does the SEC have to promote long-term value creation? A.3. The SEC has several policy levers relevant to long-term value creation. Adjustments to the regulatory framework governing capital formation can ensure that innovative and growing companies can obtain the capital they need to create long-term value. The SEC's disclosure regime can promote long- term value creation by providing investors the information they need to assess companies' long-term value. Adjustments to the regulatory regime governing market structure can ensure liquid markets for the shares of companies of all sizes, which in turn helps those companies to attract investors and build long-term value. Q.4. Do you believe companies are engaging in too many stock buybacks and dividend payments and not spending enough on corporate growth? A.4. I share a desire to see corporate growth, but assessing whether there are too many buyouts and dividends would require a case-by-case, fact-specific assessment. Manipulative buyouts, of course, should not occur at all. Buybacks and dividends, if properly and legally used, can contribute to corporate growth. For example, a company without productive uses for cash might conclude that it should return cash to shareholders through a stock buyback or dividend. The shareholders can then invest that money in companies with productive uses for it. Other companies might contribute to corporate growth by choosing to refrain from buybacks and dividends in order to invest in new projects. Q.5. Is there a way to center less attention on quarterly earnings? A.5. Some market participants and companies cite quarterly earnings pressure as a reason that companies cannot focus on long-term value. I am aware of some private sector efforts to find ways for companies to expressly embrace a long-term view. If confirmed, I look forward to working with my fellow Commissioners and SEC staff to consider whether regulatory or statutory changes are necessary and appropriate to allow such efforts to move forward. Q.6. The disclosure of innumerable hacks over the past few years, recently punctuated by hacks of the SEC and Equifax, has made clear that we all need to raise our cybersecurity game. Given the important role broker-dealers play in the formation and distribution of capital in the United States, do you think it's appropriate for FINRA, in its examination of broker dealers, to perform cyber-vulnerability assessments of registered broker dealers? A.6. Broker-dealers' cybersecurity is an important matter given their central role in the capital markets. FINRA looks at registered broker-dealers' cybersecurity policies, practices, and risk management. If confirmed, I look forward to working with my fellow Commissioners, the SEC's FINRA inspection office, and FINRA to understand the scope of FINRA's existing cyber assessments and whether additional oversight of broker- dealers' cyber vulnerabilities by FINRA or the SEC is necessary. Q.7. On Oct. 15, 2014, the Treasury market flash rally occurred, where the yield on the benchmark 10-year U.S. Treasury traded in a 37-basis-point range (0.37 percent), only to close six basis points below its opening level. Principal trading firms (PTFs) account for a majority of trading in inter-dealer Treasury markets, which represent half of all trading in Treasuries. Due to a loophole, PTFs, including many that use algorithmic strategies, have not been required to register as brokers. This allows them to escape oversight and reporting requirements. Will you commit to ensuring that PTFs are required to register as brokers? A.7. If confirmed, I will consult with my fellow Commissioners, SEC staff, and the Department of Treasury to consider whether, in light of recent market developments, a rulemaking to extend broker-dealer registration and reporting requirements to principal trading firms in the Treasury markets is appropriate. Q.8. Under current law, Regulation ATS's basic regulatory standards for exchanges and other financial markets are designed to ensure market resilience, integrity and adequate operational risk controls. But trading venues that facilitate the exchange of Government securities are excluded from Regulation ATS. And by excluding them from Regulation ATS, they are also excluded from Regulation SCI's cybersecurity requirements. Will you commit to closing the loophole that permits Government-securities trading venues to avoid these basic requirements? A.8. It is crucial that our Government securities markets function well and are resilient. The SEC's 2015 proposal on Regulation ATS asked for comment on whether regulatory changes are appropriate for Government-securities trading venues If confirmed, this issue may come before me in connection with the adoption of changes to Regulation ATS. In considering the appropriate regulatory framework (including cybersecurity requirements) for Government-securities trading venues, I will review relevant comments and consult with my fellow Commissioners, SEC staff, the Department of Treasury, and banking regulators. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM HESTER M. PEIRCE Q.1. You have written extensively on the problems at the Financial Industry Regulatory Authority (FINRA). You previously said that you're ``not sure that FINRA serves anyone well in its current form,'' and that ``investors feel they're not getting the protection they need.'' \1\ And yet, despite the SEC having the tools to oversee it, ``in practice FINRA operates with substantial independence from the SEC.'' \2\ As you put it, ``FINRA rules do not typically attract close attention from the SEC's commissioners.'' \3\ --------------------------------------------------------------------------- \1\ ``FINRA Plays `Gotcha' With Brokers, Short-Changes Investors: Hester Peirce'', Think Advisor (Mar. 17, 2017) (online at http:// www.thinkadvisor.com/2017/03/17/finra-plays-gotcha-with-brokers-short- changes-inve?slreturn=1509052996). \2\ Hester Peirce, ``The Financial Industry Regulatory Authority: Not Self-Regulation After All'', Mercatus Center 19 (Jan. 2015) (available at https://www.mercatus.org/system/files/Peirce-FINRA.pdf). \3\ Id. --------------------------------------------------------------------------- Given your statements on FINRA and the lack of oversight from the SEC, can you commit to reversing that trend and conducting formal reviews of all FINRA actions going forward? A.1. As you note, I have concerns about FINRA's accountability. If I am confirmed, therefore, I will actively review FINRA actions. Q.2. Will you commit to initiating a review of FINRA's investor protection practices? A.2. Investor protection is central to FINRA's role. I look forward to working with my fellow Commissioners and SEC staff to review FINRA's investor protection practices. Q.3. At your hearing, you stated that you ``worry about transparency'' at FINRA. \4\ FINRA meets behind closed doors and is not required to release information to the public unless it deems it necessary. FINRA is not subject to the Freedom of Information Act, its hearings are not public, and ``there is virtually no public information currently available about how FINRA specifically uses [its] revenues[.]'' \5\ --------------------------------------------------------------------------- \4\ Greg Iacurci, ``SEC Nominees Jackson and Peirce Blast FINRA's Transparency During Hearing'', Investment News (Oct. 24, 2017) (online at http://www.investmentnews.com/article/20171024/FREE/171029976/sec- nominees-jackson-and-peirce-blast-finras-transparency-during). \5\ Mark Schoeff, Jr., and Bruce Kelly, ``FINRA: Who's Watching the Watchdog?'': Investment News (Sept. 2, 2017) (online at http:// www.investmentnews.com/article/20170902/FEATURE/170909996/finra-whos- watching-the-watchdog). --------------------------------------------------------------------------- Do you think FINRA should be subject to the same transparency and due process requirements that Government agencies are subject to? If not, which requirements should and should not apply to FINRA? A.3. Self-regulatory organizations (SROs) have traditionally not been subject to the same transparency and due process requirements as Government agencies. Given FINRA's quasi- governmental nature, I and others have asked whether FINRA's transparency and due process requirements should look more like those applicable to Government agencies. I have not reached a definitive conclusion on how FINRA's transparency and due process requirements should be reformed. As I mentioned at the hearing, I am hopeful that some positive change may come from within FINRA in response to the review that CEO Robert Cook initiated. If I am confirmed, I look forward to exploring with my fellow Commissioners, SEC staff, Members of this Committee, investors, member firms, and other interested parties whether the SEC or Congress also need to act to increase transparency and procedural protections at FINRA. Q.4. If confirmed, will you review transparency and due process at FINRA? If necessary, will you work with both your fellow Commissioners and the Congress to reform FINRA? A.4. If confirmed, I intend to work with my fellow Commissioners and the SEC staff to look at transparency and due process at FINRA. If necessary, I will work with my fellow Commissioners and Congress on reforming FINRA. Q.5. Despite refusing to disclose most of their finances, FINRA pays it several of its seven of its executives more than $1 million per year. Given its failure to protect investors, do you think it is appropriate for FINRA to pay its executives several times more than typical Government regulators? A.5. I am aware of concerns about the high salaries of FINRA executives, particularly because these salaries are paid by broker-dealers and, ultimately, investors who have little input in setting them. The SEC is not in a position to set salaries at FINRA, but, should I be confirmed, I will work to hold FINRA accountable for how well it is fulfilling its role as the frontline regulator of broker-dealers. A piece of this consideration is likely to be how effectively FINRA is spending its resources. Q.6. On June 1, 2017, the SEC solicited public comments from retail investors and other interested parties on revising its standards of conduct for investment advisers and broker- dealers. In this request for comments the SEC asked ``If the commission were to proceed with a disclosure-based approach to potential regulator action, what should that be?'' \6\ --------------------------------------------------------------------------- \6\ Jay Clayton, ``Public Comments From Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers'', Securities and Exchange Commission (June 1, 2017) (online at https://www.sec.gov/news/public-statement/statement- chairman-clayton-2017-05-31). --------------------------------------------------------------------------- Do you believe that the financial incentives that create conflicts of interest in the retail investment market that harm investors can be eliminated by enhanced disclosure alone? A.6. A key part of investor protection is ensuring that investors have access to the information they need to make investment decisions, including decisions about working with a financial professional. Disclosing conflicts of interest can help investors to choose an appropriate financial professional, even if some conflicts remain. Q.7. If not, what steps will you take to directly tackle problematic incentives that lead to conflicts of interest that harm investors? A.7. As you noted, Chairman Clayton recently sought comment from retail investors and others about revising the standards of conduct for financial professionals. I look forward to reviewing these comments, working with my fellow Commissioners and SEC staff in the Divisions of Investment Management and Trading and Markets, and consulting with the Department of Labor, the SEC's Investor Advocate, the Investor Advisory Committee, and State regulators to consider whether regulatory changes are needed and what those changes should look like. Among other issues that I will consider are the role that incentives play in the provision of retail financial services. Q.8. If so, how do you design a disclosure regime that eliminates problematic financial incentives? A.8. If I am confirmed, until I have consulted with my fellow Commissioners, relevant staff, the Investor Advisory Committee, the Department of Labor, State regulators, and other interested parties, I cannot commit to supporting a particular regulatory approach in this area. Q.9. If the commission proceeds with a disclosure-based approach to potential regulator action, what user tests will the commission conduct to prove that all investors, not just the most sophisticated, fully understand and appreciate the nature and extent of the conflicts of interest and make a truly informed decision as a result? A.9. As your question suggests, investor testing can be an important tool for the SEC in designing disclosures so that retail investors are able to understand them and readily find in them the information that is critical to making good investment decisions. If confirmed, I look forward to drawing on the work the Office of the Investor Advocate's Policy Oriented Stakeholder and Investor Testing for Innovative and Effective Regulation (POSITIER) initiative. The empirical research produced and aggregated as part of this initiative is likely to be relevant to rulemaking efforts regarding the provision of retail financial products and services and many other SEC rulemaking initiatives. The research also will help the Commission to explore how different types of investors understand and respond to disclosures and how other types of regulation affect investors. Q.10. Will you consult the extensive economic analysis the Department of Labor put together for their rulemaking on the fiduciary standard, including analysis on the incidence and cost of conflicts of interest in the financial services industry and on how these financial conflicts influence adviser recommendations? A.10. If confirmed, as part of considering any potential rulemaking in this area, I will consult the Department of Labor's work in connection with its fiduciary rulemaking, including its economic analysis. Q.11. What will you do to ensure that broker-dealers do not call themselves advisers? How can investors distinguish between sellers and advisers if sellers are allowed to call and market themselves as advisers? A.11. I am aware of concerns that the use of the ``adviser'' title by broker-dealers is a source of investor confusion. If I am confirmed, I look forward to working with my fellow Commissioners and the SEC staff to consider how this source of confusion can best be addressed. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR DONNELLY FROM HESTER M. PEIRCE Q.1. In previous conversations with Mr. Jackson and Ms. Peirce, we have discussed my concerns that the wave of stock buybacks in recent years has been at the expense of the long-term health of companies, their workers, and their communities. Are you concerned that the increase of stock buybacks in recent years has been at the expense of investments in American workers? A.1. I share your desire to see companies investing in American workers, and the SEC should monitor stock buybacks. To the extent that a company is repurchasing its shares to return cash that it cannot productively use, buybacks can drive funds to companies that are eager to hire workers. One important way the SEC can help to protect American workers is to ensure that companies of all sizes can raise money in our capital markets, which they can then use to hire workers, expand production, and invest in research and development. If capital markets are healthy, share buybacks may occur less frequently and any associated layoffs will take less of a human toll as new and expanding companies will have the funds to hire laid-off workers. Q.2. What actions can or should the SEC take to better monitor stock buybacks and to increase transparency? What about requiring more immediate disclosure (as opposed to quarterly, as currently required)? A.2. Particularly given the large number of stock buybacks in recent years, the SEC should monitor stock buyback activity for compliance with the safe harbor conditions of rule 10b-18, if relevant, and to ensure that repurchases are not fraudulent or manipulative. If confirmed, I look forward to consulting with my fellow Commissioners and SEC staff regarding whether the current disclosure about stock buybacks is adequately meeting investors' needs or whether more frequent disclosure would be appropriate. Q.3. Mr. Jackson, your written testimony includes this excerpt: ``I will work to implement the corporate-governance protections that Congress has enshrined into law--so that investors, employees, and communities can be sure that our companies are working to produce the kind of long-term value creation that has been the hallmark of the American economy for generations.'' I agree that companies should produce long-term value creation, but unfortunately ``short-termism'' has become a disease; Wall Street pressure results in corporate management making decisions based on the next quarter as opposed to the next decade. Ms. Peirce, do you share similar concerns about ``corporate short-termism''? What actions can or should the SEC take to combat this problem and encourage long-term value creation? A.3. I am aware that many market observers and market participants have expressed concern that short-termism is driving decisions that are not value-maximizing in the long- term. While I believe that market prices generally reflect the long-term value of companies, it is important to ensure that the capital markets work for investors and companies with a long-term focus. One way the SEC can do this is by ensuring that disclosures are focused on items material to issuers' long-term value. I look forward to exploring--with my fellow Commissioners, SEC staff, investors, issuers, and this Committee--additional regulatory and statutory changes that would make it easier for companies to explicitly and purposefully embrace a long-term approach. Q.4. Mr. Jackson, in our meeting, I mentioned the Carrier layoffs and the heart-wrenching video where a corporate executive told hundreds of workers their jobs were going to Mexico. In response, I crafted the End Outsourcing Act to keep jobs in America by restricting tax breaks and Federal contracts for companies that ship jobs to foreign countries. It is difficult, however, to track when and where outsourcing occurs. I believe the SEC can take modest steps in this regard by requiring public corporations to disclose country-by-country employment. This would help investors determine which companies employ American workers and better understand where outsourcing has occurred. To both witnesses, do you support requiring corporations to disclose employment on a country-by-country basis to help increase transparency of outsourcing and American employment? A.4. I share your concern about the elimination of jobs in this country. The most important step the SEC can take to help to address this problem is to ensure that our capital markets are functioning properly so that we have a dynamic economy in which companies compete vigorously for workers all across this country. My assessment of an SEC mandate to disclose workers' locations, as with other disclosure requirements, would turn on its materiality. In addition, the details of how such a mandate is structured would be relevant to my decision of whether to support such a mandate. In considering such a mandate, I would want to consult with my fellow Commissioners and staff in the Division of Corporation Finance and Division of Economic and Risk Analysis. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM HESTER M. PEIRCE Q.1. I am very concerned about legislative proposals to dramatically increase the threshold for submitting shareholder proposals. Shareholder proposals are an important way for shareholders to communicate with management. They have been instrumental in improving corporate governance, such as requiring that independent directors make up at least a majority of corporate boards. Shareholders submit proposals on emerging risks, such as cybersecurity and consumer data protection. I also worry that the SEC may respond to pressure from companies that do not like dealing with shareholder proposals and raise the threshold on its own. Do you think shareholders should have a voice in the companies they own? A.1. Shareholders should have a voice in the companies they own. Although most contours of shareholders' interactions with companies are governed by State law, the SEC's Division of Corporation Finance is actively engaged in the shareholder proposal process. The process can be costly to shareholders and the SEC. If, in light of these burdens, the SEC revisits shareholder proposal thresholds, that reconsideration must be undertaken with the benefit of the SEC staff's expertise and input from, interested parties, including the shareholders whom any changes would affect. Q.2. Do you think it would a problem if the threshold for submitting proposals was set so high that it blocked all but the biggest and wealthiest shareholders from submitting proposals? A.2. It is important that any changes in this area balance the beneficial role that shareholder proposals can play in informing companies of small and large shareholders' concerns with the costs that shareholder proposals can impose on nonproposing shareholders. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM HESTER M. PEIRCE Q.1. If confirmed, what specific steps would you take to bolster individual executive accountability, consistent with what Chairman Clayton has advocated for? A.1. Holding individuals accountable for their violations of the securities laws is a key part of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. If confirmed, I plan to explore with my fellow Commissioners and staff in the Division of Enforcement on a case-by-case basis whether the facts and law dictate that individuals should be charged instead of or in addition to corporations. Q.2. Ms. Peirce, you worked at the SEC starting in 2002, and then for a Commissioner from June 2004 to August 2008. As you know, during that time, tremendous risk built up in the financial system. Large investment banks like Lehman Brothers and Bear Stearns accumulated hugely risky positions that went unchecked by the SEC. For example, the SEC's Inspector General in 2008 found eleven separate failings at the Commission related to Bear Stearns, including \1\: --------------------------------------------------------------------------- \1\ https://www.sec.gov/files/446-a.pdfAllowing Bear Stearns' concentration in toxic mortgage-backed securities to surge past even the --------------------------------------------------------------------------- firm's internal limits; Allowing leverage to go virtually unchecked under what was known as the Consolidated Supervised Entity (CSE) program, a voluntary regulatory regime; and Allowing internal audit staff, rather than external auditors as required by SEC rules, to perform critical oversight work. Key regulators from that time period--from Christopher Cox at the SEC, to Hank Paulson, the Treasury Secretary, to Alan Greenspan, the past Fed Chair--have all acknowledged that voluntary supervision and industry ``self-regulation'' didn't work. Has your experience at the SEC during the build-up to the financial crisis made you look at the world any differently? If confirmed, how will you internalize the lessons of this time period and apply them to your new tenure at the SEC? A.2. My experience at the SEC has made me look at the world differently. Being inside a regulatory agency allowed me to understand the breadth of the challenges that regulators face and the potential for regulatory mistakes to harm the markets, the economy, and individual Americans. The crisis taught me the importance of asking questions about trends in the market--why are firms engaging in a particular type of activity and what will happen if market conditions change? One of those important lessons from the crisis period is that well-intended regulations can have devastating unintended consequences. \2\ A seemingly small change in the law can lead to dramatic changes in asset holdings and risk taking. Regulation can homogenize firms' risk profiles, which then causes widespread, uniform vulnerability to shocks to the financial system. Another important lesson that was all too evident during the financial crisis is that when firms are able to shift the consequences of poor risk management to taxpayers, they are less careful than they would be if they were responsible for their own mistakes. The crisis also taught lessons about the danger of Government- granted monopolies, such as the credit rating agencies. --------------------------------------------------------------------------- \2\ See, e.g., Stephen Matteo Miller, ``The Recourse Rule, Regulatory Arbitrage, and the Financial Crisis'', (Mercatus Center at George Mason University Working Paper, Aug. 3, 2017). --------------------------------------------------------------------------- If I were to be confirmed, these lessons would be at the front of my mind in crafting regulation and monitoring the market for potentially harmful activity. I will be cognizant of the interaction between regulation and industry decision-making and advocate for necessary modifications to rules to ensure that they are achieving their intended objectives without inserting new risks into the system. Q.3. Ms. Peirce, you have, in your previous writing, dismissed the notion that some financial executives got off the hook for wrongdoing that occurred in the lead-up to the financial crisis. \3\ You wrote, ``lost in the blind bloodlust targeted at financial institutions and their employees is an appreciation for the complexity of many of the laws and regulations they face.'' \4\ You also noted, ``in my experience, Government attorneys don't need any encouragement-- beyond the prospect of resume bling--to bring big cases.'' \5\ --------------------------------------------------------------------------- \3\ https://www.usnews.com/debate-club/are-banks-becoming-too-big- to-jail/for-real-reform-we-must-move-past-too-big-to-jail-hype \4\ Ibid \5\ Ibid --------------------------------------------------------------------------- In my view, State and Federal prosecutors were often outgunned and outspent, and many times, executives would invoke systemic importance or ``collateral consequences'' as to why prosecutors shouldn't bring cases. Do you still hold your view that the notion of ``Too Big to Jail'' was mere ``hype?'' \6\ --------------------------------------------------------------------------- \6\ Ibid A.3. No person or corporation--regardless of influence or market power--is above the law. Strong enforcement is a key part of ensuring the integrity of our securities markets. Financial institutions and their employees should be held responsible for violations of the law. Too often, however, the discussion around enforcement issues is not focused on facts and law, but on emotion. If I am confirmed, I will work to ensure that the SEC takes an objective approach to enforcement matters, fosters a culture of compliance with its rules, diligently and consistently punishes securities law violators, and uses its enforcement resources efficiently. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM ROBERT J. JACKSON, JR. Q.1. Although materiality has long been the foundation of the SEC's disclosure requirements, the SEC has, over time, supplemented this standard with specific bright-line rules. For example, the SEC requires disclosure of specified information related to executive compensation, corporate governance, and internal controls. Do you agree that bright-line rules can be useful to both companies and investors by supplementing the traditional materiality standard? A.1.Yes. As I have previously written, the Commission's disclosure rules have consistently evolved over time in response to changing investor interests, market dynamics, and Congressional mandates. As your question points out, the Commission's rules regarding executive compensation, for example, were developed in response to significant investor interest in those matters. It is an essential part of the SEC's task to ensure that the Commission's disclosure rules continue to evolve appropriately in order to make sure that investors have the information they need in order to evaluate the companies that they own. If confirmed, I will work with my fellow Commissioners and the Staff to ensure that these rules keep pace with investors' needs. Q.2. Speaking at NYU's School of Law earlier this year, Chair Clayton said, ``I am not comfortable that the American investing public understands the substantial risk that we face systemically from cyber issues and I would like to see better disclosure around that.'' Two days later, the Equifax breach proved him right. If confirmed, would you commit to working with Chair Clayton and the other Commissioners to revise cyber risk disclosure requirements, including considering a specific 8-K reporting item for cybersecurity breaches that expose personally identifiable information? A.2. Yes. Recent events have taught us that the threat that American investors and consumers face from cybersecurity breaches is far more serious than we might have imagined even just a few years ago. Like Chairman Clayton, I am concerned that our disclosure rules, and in particular the rules governing current reports on Form 8-K, have not kept pace with these developments--and do not make clear to public companies the urgency of disclosures related to cybersecurity breaches. If confirmed, I will work with the Chair, my fellow Commissioners, and the Division of Corporation Finance to update these rules in a fashion that makes clear the importance of cybersecurity risk to public- company investors. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM ROBERT J. JACKSON, JR. Q.1. It is my understanding that Initial Coin Offerings (ICOs) and crypto-currencies have raised billions thus far in 2017. This represents an exponential growth in recent years. I was glad to see the SEC begin to closely examine this market, and I applaud the SEC for its recent issuance of the Investigative Report regarding the DAO. The Investigative Report was an important step in bringing some clarity to the ICO market in explaining how securities laws apply to ICOs depending on the ``facts and circumstances.'' Although the DAO report was helpful, I worry that a continued lack of clarity in ICO regulation will stifle innovation and, most importantly, leave investors at risk. Should the SEC do more to bring clarity to the ICO market? A.1. I share the concern that this rapidly growing market deserves immediate and close attention so that the SEC can help protect investors in this area. Like you, I was glad to see the SEC carefully examining the ICO market in its Investigative Report--and like you, I agree that the Investigative Report should only be the beginning of the SEC's work to protect investors in these markets. As an outsider to the Commission, I cannot say what steps the SEC can or should take to bring more clarity to this market. I can say, however, that the Commission should consider whether its existing rules provide sufficient guidance regarding these markets and, if not, what further guidance can be provided without impeding the innovations that are occurring in this important area. If confirmed, I would work with the SEC's Staff, my fellow Commissioners, and this Committee to ensure that the SEC takes all of the steps necessary to protect the investors participating in the ICO market--and to ensure that the innovations that can help unite entrepreneurs with willing capital are encouraged rather than impeded. Q.2. Aside from enforcement actions, what can the SEC do to provide certainty to the ICO market? Would a proposed rulemaking make sense? A.2. Again, as an outsider to the Commission, it is difficult for me to say what particular steps the SEC should take to address the issues in this important new area. The Commission should, however, be considering whether the evidence the SEC currently has about the use of these offerings, the likelihood of fraud, and the potential for continued growth in this area suggests that a rulemaking is necessary to protect investors. If confirmed, I would look forward to working with my fellow Commissioners and Staff on more fully understanding ICOs' evolving place in our markets and whether and when a rulemaking would be appropriate. Q.3. The SEC is about to implement the initial operating stage of the Consolidated Audit Trail (CAT). Exchanges will soon begin reporting to what will be a massive database, which will include a significant amount of highly sensitive information. In its second phase, CAT will begin receiving personally identifiable information (PII) of brokerage customers. The recent breach of the SEC's EDGAR database, however, calls into question the security of the SEC's information technology. Will you commit not to collect any PII until you are confident that CAT is not susceptible to a breach? A.3. The Consolidated Audit Trail was developed in order to make sure that the flash crash of 2010--a period of trading in which prices and volume swung uncontrollably, introducing volatility into markets around the world--never happens again. To do that, the SEC must have a detailed understanding of trading activity. That's why the CAT project is so important to the SEC's mission. To ensure fair and orderly markets, the Commission needs to know much more about trading patterns and the risks they might pose for our markets. I absolutely share your concern that any breach of any SEC system, and in particular the CAT, would have significant consequences for the safety and stability of our capital markets. That's particularly true if such a breach were to occur after the CAT began to store PII of American investors. And that's why, during my hearing, I indicated that the SEC's own cybersecurity would be among my top priorities as a Commissioner. Before coming to any conclusions regarding the CAT and its storage of PII, however, I would need more information regarding the years-long development of the CAT inside the SEC. In particular, I would need to better understand why the SEC's Staff concluded that having PII would be helpful in understanding the risks that gave rise to the flash crash--and what evidence and research might support that conclusion. However, as we discussed during the hearing, I do wonder to what degree PII is necessary to fulfill the objectives of the CAT. I understand that the Staff has been working on this technology for a number of years, and if confirmed, I would seek to understand the rationale for the design decisions of the CAT--and how that design can both protect investors and any PII that the system collects. Q.4. We usually think of outside hackers when we think of data security, but in numerous cases, individuals trusted with access to confidential data are actually the source of leaks-- Chelsea Manning and Reality Leigh Winner come to mind. How should the SEC control access to CAT data within the agency? Should it allow other agencies or researchers access to CAT data? A.4. I share your concern that losing control of CAT data-- whether through an outside hacker or a Government leaker--is unacceptable. As I mentioned at my hearing, the security of the SEC's own data would be among my highest priorities as a Commissioner--for just that reason. While I am familiar with the general specifications of the CAT, as an outsider I do not have sufficient information regarding the operational details of the system, including the internal controls and information-sharing policies that the Staff have already developed. If confirmed, I will work with the SEC's Staff and this Committee to gain deeper knowledge of what data will be gathered, analyzed, and stored as part of the CAT process--and make sure that any protocols governing sharing such information with outsiders serve the paramount goal of protecting information entrusted to the SEC. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM ROBERT J. JACKSON, JR. Q.1. How can the SEC better define the scope of lawful trading- related activity defined in its rulemakings? Where is clarity most necessary? A.1. As I mentioned during the hearing, Congress and the SEC should be working to be sure the law of insider trading is keeping pace with our markets. For two generations, American insider trading law has been developed by judges on a case-by- case basis. While there are benefits to this approach, there are downsides, too. One is that the law develops slowly--too slowly, some have argued, to keep pace with insider trading in today's markets. With respect to an area in which clarity would be most helpful, recently courts have questioned the type of proof the Government must have with respect to the benefits an insider must receive in connection with leaks of material nonpublic information to traders. \1\ Uncertainty with respect to such a fundamental question is, in my view, a serious problem. The SEC can and should frequently clarify its view of the meaning of the insider trading laws. The Commission has not updated those rules for nearly 20 years, and in my view it is time for the Commission to look at these matters again. \2\ --------------------------------------------------------------------------- \1\ Salman v. United States, No. 15-628, 137 S. Ct. 420 (2016); see also United States v. Martoma, 869 F.3d 58 (2d Cir. 2017). \2\ See Securities and Exchange Commission, supra note 6. Q.2. How can the SEC increase its use of informal guidance to provide better clarity about the scope of unlawful trading- --------------------------------------------------------------------------- related activities? Where is clarity most necessary? A.2. There are a wide range of tools available to the SEC for making its view of insider-trading law clear to the markets. One, of course, is working with Congress to develop legislation that more clearly establishes the rules of trading in your own company's stock. Another--and one the SEC has used historically, but not recently--is to engage in formal rulemaking that clarifies the SEC's view of insider-trading law in light of recent developments in the courts. \3\ Another, as your question notes, is by providing guidance to companies and others regarding the SEC's expectations with respect to insider-trading activity. --------------------------------------------------------------------------- \3\ See Securities and Exchange Commission, ``Proposed Rules: Selective Disclosure and Insider Trading'', Release Nos. 33-7787, 34- 42259, IC-24209, 17 CFR 230 (January 10, 2000). --------------------------------------------------------------------------- My research has previously pointed to time periods, and especially the periods before major corporate announcements, where companies and insiders should consider prohibiting trading activity. \4\ In this and other areas, companies could benefit from guidance from SEC Staff regarding the questions raised by insider-trading activity. This kind of clarity would help investors, companies, and insiders understand what the SEC expects of them when executives trade in their company's stock. If confirmed, I would look forward to working with the Staff and your office to ensure that market participants know what the law of insider trading requires--and can expect that law to be vigorously enforced. --------------------------------------------------------------------------- \4\ Alma Cohen, Robert J. Jackson, Jr., and Joshua Mitts, ``The 8- K Trading Gap'' (Columbia Law and Economics Working Paper) (2015). Q.3. I'd like to learn more about your approach to securities regulations. Is there a risk that regulations can give large incumbent firms a competitive advantage over smaller farms? If --------------------------------------------------------------------------- so, what can be done to mitigate this risk? A.3. Yes: there is always some risk that regulatory intervention can give large, incumbent firms an advantage over smaller firms, just as there is always risk that a failure by regulators to intervene might leave investors unprotected from fraud. Indeed, as an empirical scholar of law and economics, I have a deep appreciation for the fact that the laws and regulations we promulgate often have both intended and unintended effects--and that regulators must pay attention to both. The best way to address this problem is for regulators developing new rules to pay careful attention to the needs of smaller businesses in developing those rules. That's why, if I am confirmed, I so look forward to helping to stand up the SEC's new Office of the Advocate for Small Business Capital Formation, which will better help Commissioners understand the perspective of smaller firms when developing new rules. Q.4. Is it appropriate--in the words of former Chair Mary Jo White--to ``effectuate social policy or political change through the SEC's powers of mandatory disclosure''? A.4. Disclosure is at the heart of the SEC's mission to protect investors, and the Commission's disclosure rules have consistently evolved over time in response to changing investor interests, market dynamics, and Congressional mandates. In the remarks you refer to in your question, Chair White questioned whether certain mandates in the Dodd-Frank Act reflected an undesirable incorporation of ``social policy'' or ``political change'' into the securities laws. \5\ --------------------------------------------------------------------------- \5\ Mary Jo White, Chairman, Securities and Exchange Commission, ``The Importance of Independence'' (Sommer Lecture at Fordham Law School) (Oct. 3, 2013). --------------------------------------------------------------------------- The SEC is an administrative agency, charged with enforcing and implementing the law that Congress and the President see fit to enact. It is not for particular Commissioners, even a Chair, to speculate about the motivations behind the statutory mandates that Congress has chosen. Regardless of a Commissioner's view of the wisdom of Dodd-Frank--or any law, for that matter--the SEC's obligation is to implement the will of the Congress. If confirmed, I intend to urge the Chairman and my fellow Commissioners to follow the law. Q.5. Is there a danger that disclosure requirements become so voluminous that they become unhelpful to investors? If so, what can be done to avoid this problem? A.5. Making information easier for investors to digest is an important part of the SEC's mission. But it's important to distinguish those efforts from simply reducing the amount of information available to investors. For generations, the Commission has followed Justice Brandeis's famous maxim that ``sunlight is said to be the best disinfectant.'' \6\ In my view, that rule has served investors well. --------------------------------------------------------------------------- \6\ Louis D. Brandeis, ``Other People's Money--And How Bankers Use It'', 22 (1914). --------------------------------------------------------------------------- Nevertheless, a great deal can and should be done to make sure investors have the tools necessary to find the information they need to evaluate the companies they own. In particular, technology may allow us to rethink how we structure our disclosure regime in a way that ensures investors have better access to high-quality information without letting firms avoid disclosing inconvenient material facts. In addition, in order to better structure disclosures in a way that serves investors, we need to learn more about how different types of investors--from smaller retail investors to large mutual funds and pension funds--consume the information that companies give them. A series of recent initiatives, including some led by the Office of the Investor Advocate, have begun to shed important light on those questions. \7\ If confirmed, I would look forward to working with the Staff and my fellow Commissioners to better understand how investors consume the information companies give them. And I would look forward to working with your office to ensure that disclosures are as helpful to investors as possible. --------------------------------------------------------------------------- \7\ See Securities and Exchange Commission Office of The Investor Advocate, ``Core Functions'' (2017) (describing the Office's efforts to assist retail investors and study investor behavior). Q.6. What role, if any, does the SEC have as a prudential --------------------------------------------------------------------------- regulator? A.6. The SEC's primary regulatory priorities are set forth in the agency's principal enabling statutes. Those priorities include the protection of investors, the maintenance of fair and orderly markets, and to facilitate capital formation. However, as we learned from the financial crisis--an event that devastated millions of American families and even today undermines investor confidence in our markets--modern financial institutions often cut across regulatory boundaries. When they do, gaps in regulatory oversight can have devastating consequences for our markets. For that reason, it's important for the SEC to engage, where appropriate, with prudential regulators such as the Federal Reserve Board of Governors, Federal Deposit Insurance Company, and Office of the Comptroller of the Currency. If confirmed, I would work with Chairman Clayton and those regulators to make sure that the kind of devastation American families suffered during the last financial crisis never happens again. Q.7. Is it ever appropriate for the SEC to engage in the ``merit review'' of investment choices, where the SEC would elevate its evaluation of a particular investment over the evaluation of a private investor? A.7. In general, the SEC has long eschewed reviewing the merits of any particular investment choice. For example, in 1979, the Commission famously declined to engage in reviewing the fairness of any particular going-private transaction. \8\ Instead, in that case and many others, the Commission has relied on a disclosure-based regulatory framework that depends on investors and issuers to evaluate the merits of investment decisions. That approach has generally served the Commission, and our Nation, well. --------------------------------------------------------------------------- \8\ See, e.g., Randal J. Brotherhood, Note, Rule 13e-3 and the ``Going Private Dilemma: The SEC's Quest for a Substantive Fairness Doctrine'', 58 Wash. U.L.Q. 883 (1980) (describing the SEC's initial proposal to have the Commission itself evaluate the substantive fairness of a going-private transaction, and the Commission's eventual decision to require only disclosure of the issuer's views regarding the fairness of such transactions). --------------------------------------------------------------------------- But it's essential to that approach that the SEC's disclosure rules evolve in light of changing investor interests, market dynamics, and external events in order to make sure that these rules give investors the information they need to make their own judgments about the substantive merits of any particular investment choice. If confirmed, I intend to work with my fellow Commissioners and the Staff to ensure that our disclosure rules keep pace with investors' needs in order to best support the SEC's disclosure-based approach to securities regulation. Q.8. In 2014, former SEC Commissioner Dan Gallagher said that ``issues specific to small business capital formation too often remain on the proverbial back burner. This lack of attention doesn't just harm small business; it also harms investors and the public at large.'' Do you agree? A.8. Yes. Congress and the SEC should always be thinking about how best to unite small businesses with the investors they need to grow their enterprises and our economy. Facilitating capital formation and the ability to access that capital has been one of the great catalysts of American entrepreneurship. Making sure that small businesses have a voice at the SEC is critical to the Commission's mission. Q.9. How will you work to improve small business capital formation and respond to our economy's near-historic low levels of firm creation? A.9. There are many explanations for recent changes in the number of public companies, and I think all of them are especially relevant to small businesses. For example, the capital-markets fees that a company must pay to go public are far higher in the United States than in other markets, giving entrepreneurs--and especially the kinds of small companies that lack market power over investment bankers--pause before listing their shares. And extensive acquisition activity over the past two decades has worked to combine thousands of public companies, reducing the number of listings on American exchanges, and putting smaller companies who choose to stay independent at a disadvantage. The SEC should consider all of these developments when examining how to make sure small business owners get the capital they need--and have incentives to create the companies that will power our economy for generations to come. In addition, recent legislation, and especially the JOBS Act, has been directed toward ensuring that entrepreneurs have access to the capital they need. The SEC's rules related to JOBS Act mandates are still relatively new, however, and it is too soon to tell whether they are working--and how they might be improved to help small businesses grow and better protect investors. The SEC will need to understand how markets and investors have responded to the JOBS Act before taking those steps. If confirmed, I would look forward to working with my fellow Commissioners and the Staff to make sure that the JOBS Act and related SEC rules do everything possible to unite entrepreneurs with the capital they need to grow our economy--while making sure investors are protected. Q.10. The SEC Small Business Advocate Act of 2016 created the Office of the Advocate for Small Business Capital Formation. If confirmed, will you work closely with this advocate and seriously consider the Office's recommendations? A.10. Yes. As I mentioned during the hearing, I think this Office will give small businesses a critical voice at the SEC, and if confirmed I will carefully consider its recommendations. Q.11. The SEC Small Business Advocate Act of 2016 also created the Small Business Capital Formation Advisory Committee, which will issue recommendations on improving small business capital formation. Unfortunately, the SEC has traditionally largely ignored these sort of recommendations, such as those of the annual Government-Business Forum on Small Business Capital Formation. While the SEC is required to respond to the recommendations of the Advisory Committee, it is not required to follow them. If confirmed, will you strongly consider supporting the recommendations of the Advisory Committee? A.11. Yes. The Commission's Advisory Committees should always play a critical role in Commissioners' deliberations. The reason is that those Committees often bring perspectives-- whether experience as a shareholder, on the board of a public company, or running a broker-dealer entrusted with Americans' retirement savings--that Commissioners should consider before making any decisions. Because my research and work has always emphasized the facts on the ground--the real effects that law has on investors and companies--I expect to give great weight to the recommendations of these Committees if I am confirmed. In particular, the Small Business Capital Formation Advisory Committee and its recommendations will provide invaluable insight into the needs and concerns of small and emerging companies seeking capital. If confirmed, I look forward to working with my fellow Commissioners and the Staff to make sure that these voices are heard. Q.12. Does anything need to be done to improve the use of cost- benefit analysis at the SEC? If so, will you commit to advocating for these steps? A.12. Yes. I believe that understanding the costs and benefits of any particular regulatory or deregulatory choice is critical to the SEC's mission. Common sense demands that policymakers do whatever they can to understand the implications of their policy choices before they make their decisions. And so does the law: the courts have made clear that the SEC has an obligation to analyze costs and benefits to the degree possible in connection with rulemakings. \9\ --------------------------------------------------------------------------- \9\ See, e.g., Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011). --------------------------------------------------------------------------- As I noted at the hearing, however, I believe it is equally important for policymakers to be candid and clear about the limits of cost-benefit analysis. All of the potential costs and consequences of a decision--in law and in life--simply cannot be known in advance, and that fact should not be used as a basis for the SEC to fail to fulfill its mission. As an empirical scholar of law and economics, I am very familiar with the benefits--and limits--of cost-benefit analysis. If confirmed, I look forward to working with the Division of Economic and Risk Analysis to better understand its approach to cost-benefit analysis and to ensure that such analysis continues to play an important role in the SEC's work. Q.13. I'd like to discuss more about cybersecurity at the SEC. What--if anything--does the SEC need to do to improve its operational cybersecurity in light of recent events at the SEC? A.13. I share the concern that recent news of a breach of the SEC's EDGAR system could reflect significant issues with the SEC's operational cybersecurity. Without understanding the facts behind that and other recent developments, I am not in a position to assess the current State of the SEC's cybersecurity. However, as I mentioned at the hearing, if confirmed the SEC's cybersecurity would be among my highest priorities as a Commissioner. The Commission cannot fulfill its mission--nor can it expect public companies to take cybersecurity seriously--unless its operational cybersecurity is beyond reproach. If confirmed, I would look forward to working with my fellow Commissioners, the Staff, and Congress to make sure the SEC has the resources and subject-matter experts it needs to get this right. Q.14. The Consolidated Audit Trail (CAT) has been called the ``Fort Knox of Wall Street.'' \10\ What value do you see in fully implementing the CAT? --------------------------------------------------------------------------- \10\ Bob Pisani, ``Here's What Really Terrifies Wall Street About the SEC Hack'', CNBC.COM (Sep. 21, 2017). A.14. The Consolidated Audit Trail was developed in order to make sure that the flash crash of 2010--a period of trading in which prices and volume swung uncontrollably, introducing volatility into markets around the world--never happens again. To do that, the SEC must have a detailed understanding of trading activity. That's why the CAT project is so important to the SEC's mission. To ensure stable and fair markets, the Commission needs to know much more about trading patterns and the risks they might pose for our markets. The data that the CAT will make available to the SEC would help the Commission keep pace with the rapid changes in our markets. It will help us understand what caused the flash crash--and how to prevent one in the future. In addition, combining these data with recent advances in data science will help both policymakers and private companies craft measures that will improve the functioning of markets. I look forward to working with my fellow Commissioners and the Staff on this important initiative. Q.15. Are you worried that a breach of the CAT could compromise the confidential investment strategies of trading firms, particularly if the trade information could be reverse engineered or pose a broader systemic risk? A.15. Yes. I am concerned that any breach of any SEC system, and in particular the CAT, would have significant consequences for the safety and stability of our capital markets. As your question points out, one of those consequences might be the revelation of trading strategies with systemic consequences for our markets. Another unacceptable consequence could be that personally identifiable information (PII) might be compromised. That's why, during the hearing, I indicated that the SEC's own cybersecurity would be among my top priorities as a Commissioner. And that's why these questions will be among the first I will ask Chairman Clayton if I am confirmed. Q.16. Should the SEC explore alternatives to maintaining PII in the CAT? For example, would the SEC be able to fulfill its policy aims by requesting PII from individuals only when it is necessary for the SEC to fulfill its oversight duties? A.16. As an outsider it is difficult for me to know whether and why SEC Staff concluded that it was necessary for the CAT to collect PII. In particular, I cannot say why the Staff concluded that having PII would be helpful in understanding the risks that gave rise to the flash crash of 2010--and what evidence and research might support that conclusion. However, as we discussed during the hearing, I do wonder to what degree PII is necessary to fulfill the objectives of the CAT. I understand that the Staff has been working on this technology for a number of years, and if confirmed, I would seek to understand the rationale for the design decisions of the CAT--and how that design can both protect investors and any PII that the system collects. Q.17. In response to questions for the record from Senator Tillis during his confirmation process Chairman Clayton stated that `` . . . we should be mindful that cybersecurity risks are continuously evolving, and regulation in this area should take into account its dynamic nature, including that, in such circumstances, specific requirements may be appropriate but also have the risk of becoming outdated . . . .'' Do you agree? Is there a risk that Regulation SCI could create some cybersecurity risk by introducing an incentive for companies to focus more on complying with the regulation, instead of leveraging private sector resources to implement innovative cybersecurity techniques? If so, what steps should the SEC take to mitigate this risk? A.17. Cybersecurity risks are a constantly evolving threat and pose a fundamental risk to our markets. That's why, at the hearing, I described addressing those risks as among my top few priorities if I am confirmed as a Commissioner. And that's why I believe that the SEC should consider augmenting Regulation SCI in light of recent developments like Equifax. In particular, those changes should encourage exchanges to make the investments necessary to protect themselves and investors from the risk of a cybersecurity breach. I am aware of the concern that certain parts of Regulation SCI might hinder exchanges from making use of the latest technologies to protect themselves from cyberthreats. As an outsider to the Commission and its work, I am not yet able to assess the evidence underlying that concern--and what the SEC might do about it. If confirmed, I look forward to learning more about the Staff's experience in administering Regulation SCI. And I would be delighted to work with you and your office to ensure that Regulation SCI gives exchanges the incentives they need to protect investors from cyberthreats. Q.18. Some have proposed expanding the number of entities that should comply with Regulation SCI while others have proposed increasing transparency over which market centers are complying with Regulation SCI. What considerations would you take into account when evaluating this question? A.18. Without commenting on any particular question that might come before me as a Commissioner if I am confirmed, I want to be clear about what will motivate me when addressing issues like these. When it comes to cybersecurity, my priority will be the protection of our investors and our markets from cyberthreats that undermine the stability and growth of our economy. As an outsider to the Commission and its work, I cannot say whether expanding the reach of Regulation SCI or permitting widely-disclosed departures from those standards will achieve that goal in any particular case. To know the answer to that question, the SEC will need to study the risk to the broader economy of exchanges having inadequate cybersecurity defenses, the costs associated with exchanges adapting to new cybersecurity regulations, and especially the risks that consumers will face if firms handling sensitive personal data have lax cybersecurity protections. If confirmed, would I look forward to learning more about the Staff's experience on these questions. And I would look forward to working with you and your office to make sure investors and markets are protected from cybersecurity threats. Q.19. Should the SEC update its cybersecurity disclosure guidelines for public companies? A.19. Yes. I agree with Chairman Clayton that cybersecurity is an area where there is not enough disclosure. I'm particularly concerned that the rules governing current reports on Form 8-K have not kept pace with these developments--and do not make clear to public companies the urgency of disclosures related to cybersecurity breaches. Our markets, and the American public, need swift and clear disclosure when their personal information is compromised in cybersecurity breaches. If confirmed, I will work with the Chairman, my fellow Commissioners, and the Division of Corporation Finance to update these rules in a fashion that makes clear the importance of cybersecurity risk to public- company investors. Q.20. How should the SEC ensure that any cybersecurity disclosure guidelines for public companies require only timely and material disclosure instead of that which is extraneous and untimely? A.20. The best way to make sure our disclosure rules serve investors is to make sure they are updated to reflect the reality investors face in modern markets. Cybersecurity issues are a dynamic and evolving threat, and require dynamic rules to make sure investors get the information they need about those threats--which is why I favor reassessing whether these rules adequately address cybersecurity. The materiality standard, which governs disclosures of this type, requires us to ask whether a reasonable investor would think the information relevant to the total mix of information they consider when making investment decisions. Use of this standard has, for decades, helped ensure that corporate disclosures are relevant and timely. If confirmed, I look forward to working with my fellow Commissioners to ensure that critical cybersecurity risks are promptly disclosed to investors and the American public. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM ROBERT J. JACKSON, JR. Q.1. In brief, what is the SEC currently doing right, what needs to change, and how do you plan on prioritizing your time, should you be confirmed? A.1. The breadth and depth of the SEC's mission--protecting investors in the largest, deepest capital markets in the world--reflects an enormous privilege and responsibility. As an outsider to the agency, it is clear that the SEC has taken important steps to improve its effectiveness in the years since the financial crisis. But, as we discussed during the hearing, there is still a great deal of work to do. If I am confirmed, I would focus my time on the following three priorities. The first is cybersecurity. As I mentioned during the hearing, I think recent events both at the SEC and public companies have taught us that we have a long way to go in making sure that our securities regulators have the tools and technologies they need to keep up with the changing marketplace. The SEC cannot fulfill its mission if it cannot assure investors that both its own systems, and the systems of the public companies it regulates, are protected from cybersecurity breaches. I hope to work closely with Chairman Clayton, my fellow Commissioners, and the Staff to make sure that the information that Americans entrust to the SEC and to public companies is better protected. Second, I would focus on finishing the rules required by Dodd-Frank. The SEC's failure to do so in the 7 years since the passage of that law has harmed investors, companies, and the morale of the SEC Staff itself. It has also exposed investors to risks that Congress has ordered be addressed, for example by failing to make sure that public companies have clawback policies in place that require executives to give back pay they were awarded by mistake. If confirmed, I would urge the Chairman and my fellow Commissioners to follow the law and finish these rules. Finally, I would focus on holding individuals accountable for financial fraud. In particular, the SEC should be thinking about how to modernize the law of insider-trading to deal with the changes that have occurred in securities markets over the last two decades. The SEC should also work with FINRA to ensure that investors have better information on the stockbrokers most likely to commit fraud. Making sure that individuals who engage in insider trading or investor fraud pay the price is critical to the SEC's mission, and more can and should be done on that front. Q.2. Do you believe that private capital being put into underperforming companies can improve the company's performance? A.2. As I have previously written, there is significant evidence that investors like these can help hold corporate management's feet to the fire, especially at underperforming companies--and that this work can be good for all investors and the economy more generally. \1\ There is also evidence, however, that these investors can engage in counterproductive tactics that undermine long-term value creation. \2\ --------------------------------------------------------------------------- \1\ See, e.g., Lucian Bebchuk and Robert J. Jackson, Jr., ``The Law and Economics of Blockholder Disclosure'', 2 Harv. Bus. L. Rev. 39 (2012). \2\ See, e.g., Leo E. Strine, Jr., ``Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System'', 126 Yale L.J. 1870 (2017). --------------------------------------------------------------------------- Capturing the benefits of private capital--the corporate accountability and growth that have so often been associated with such investments--while minimizing the costs of those tactics is critical to ensuring the growth of the American economy. If confirmed, I would very much look forward to working with my fellow Commissioners, and your office, to ensure that our securities laws are up to that task. Q.3. Do you believe that curbing more private investment would help underperforming companies? A.3. No. Private investment in underperforming companies is an important source of accountability. Corporate management knows that, if the firm performs poorly, a private investor may well intervene and demand better performance on behalf of all shareholders. This knowledge--even, and perhaps especially, for managers who are never the target of such an investment-- encourages executives to do everything they can to ensure that the company performs well. Q.4. Do you agree that private capital being put into companies leads to more transparency and communications with existing shareholders? A.4. Private investors often encourage other investors to pay attention to particular issues that are undermining the company's performance. \3\ Because private investors usually cannot force change at public companies by themselves, they must persuade other shareholders that their ideas are best for the company. That process can often improve transparency and communication among all of the company's shareholders--as well as the company's management, who also has an opportunity to persuade investors that their strategy is right for the company over the long term. --------------------------------------------------------------------------- \3\ See, e.g., Ronald J. Gilson and Jeffrey N. Gordon, ``The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights'', 113 Colum. L. Rev. 863 (2013). Q.5. Do you agree that corporate CEOs are more responsive to --------------------------------------------------------------------------- the market today than they were in the past? A.5. Yes: recent corporate governance reforms, including those regarding director independence, executive pay, and shareholder proposals have encouraged CEOs to be increasingly responsive to shareholders. But let's be clear: there is still a great deal of work left to do. As I indicated during the hearing, it is not my sense that what corporate America is suffering from is too much accountability. Q.6. Do you believe that restricting or making it harder for private capital to invest in American companies is a good idea? A.6. No: in general, the benefits that private investors offer--by holding corporate managers' feet to the fire and making sure they are working hard for all investors--are critically important to the health of American companies and the broader economy. Making it harder for private investors to do that work is unlikely to be beneficial for the investors who depend on the growth of the economy to fund their child's education and their retirements. However, it is also important to acknowledge that these investors can engage in counterproductive tactics--like using undisclosed derivative positions to attack unsuspecting companies and their constituents--that deserve immediate attention from the SEC. If confirmed, I look forward to working with the Chairman, my fellow Commissioners, and the SEC's Staff to ensure that American investors continue to receive the benefits of private investment in their companies--while reducing the costs of some investors' counterproductive behavior. Q.7. Do you believe that private capital should be flexible and adaptive to quickly changing circumstances? A.7. Yes. One of the many benefits of private investments in public companies is that private capital can often respond quickly to the changing needs of the company and the economy. As I have previously noted in my research, these benefits are especially valuable when private capital is invested in companies over the longer term. \4\ In those cases, the presence of private capital can help make sure that corporate management is working toward the kind of long-term value creation upon which investors, employees, and our economy rely. --------------------------------------------------------------------------- \4\ Robert J. Jackson, Jr., ``Private Equity and Executive Compensation'', 60 UCLA L. Rev. 638, 658 (2013) (documenting the relationship between CEO incentives to maximize firm value and long- term private-equity investments in companies that the investor has taken public). Q.8. Do you think that the current IPO market is at its peak? What could we be doing to facilitate more entrants into the public markets? What are some determinative factors that companies evaluate when making a decision to enter into the public markets? Do you think that some of these factors have served as preclusive, often determinative factors for a company deciding not to enter the public marketplace? How do public --------------------------------------------------------------------------- companies affect job creation and economic growth? A.8. There are a wide range of reasons why many companies today are choosing not to go public, and all of them deserve the SEC's attention. For example, we now have deeper and more robust private capital markets than ever before, which allows companies to stay private for far longer than they once could. For another, the capital-markets fees that a company must pay to go public are far higher in the United States than in other markets, giving entrepreneurs pause before listing their shares. And the pressure public companies face to meet quarterly earnings estimates, rather than to grow the company over the long term, no doubt can encourage some companies to stay private rather than go public. Public companies are critical to job creation and the long- term economic growth of our Nation, and I am committed to ensuring that we are doing all we can to encourage companies to go public in American markets. Chairman Clayton has made clear that this issue is a priority for him, and I look forward to working with the Chairman and my fellow Commissioners to help encourage companies to raise capital in our public markets--and make sure that investors are protected in the process. Q.9. Do you think that the SEC should have a formalized retrospective review process, much like prudential regulators have, by which the SEC can take a holistic look at its rules and regulations and decide which ones are outmoded, ineffective, burdensome, etc., or similarly decide which ones need to be changed and modernized? A.9. I believe that the Commission should consistently review its rules to make sure that those rules give investors the information they need about the companies they own. To the degree that SEC rules are outmoded, ineffective, or burdensome, modernizing those rules is a critical task, and several rules have gone far too long without needed updates. \5\ --------------------------------------------------------------------------- \5\ For example, as I have noted in my research, the rules governing current disclosure on Form 8-K--that is, the rules that govern the rapid updates that investors depend upon to learn about new corporate developments--have not been carefully examined for more than a decade. See, e.g., Alma Cohen, Robert J. Jackson, Jr., and Joshua Mitts, ``The 8-K Trading Gap'' (Columbia Law and Economics Working Paper) (2015); see also Securities and Exchange Commission, Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release Nos. 33-8400, 34-49424, 17 CFR 228 (Aug. 23, 2004). --------------------------------------------------------------------------- As an outsider to the Commission and its work, it is difficult for me to say whether formalizing the retrospective review process would be beneficial. To know the answer to that question, the SEC should investigate, among other things, why so many key rules have gone so long without modernization or revision and what Staff resources are available for that work. If confirmed, I would look forward to working with the Staff and my fellow Commissioners to answer those questions--and to make sure our rules are keeping up with the demands of modern markets and investors. Q.10. How do you plan on working with the CFTC to address harmonization issues? A.10. Because the SEC's and CFTC's work has so often overlapped--especially in light of the activities in today's markets that cut across traditional regulatory boundaries-- coordination and harmonization among the agencies' rules is critical to maintaining fair and orderly markets. I am aware that the Staff of both agencies have worked extensively to take steps toward better harmonization in the past, including with respect to the regulation of investment advisers, \6\ and have also reviewed the joint report on harmonization that both agencies prepared in the wake of the financial crisis. \7\ --------------------------------------------------------------------------- \6\ See, e.g., Commodity Futures Trading Commission, ``Harmonization of Compliance Obligations for Registered Investment Companies Required To Register as Commodity Pool Operators'', RIN 3038- AD75, 17 CFR Part 4 (Aug. 12, 2013). \7\ Commodity Futures Trading Commission and Securities and Exchange Commission, ``A Joint Report of the SEC and the CFTC on Harmonization of Regulation'' (Oct. 16, 2009). --------------------------------------------------------------------------- Although this work has been important, I understand that there is more to be done to address the sometimes-overlapping regulations governing the work of the SEC and CFTC. If confirmed, I would look forward to working with my fellow Commissioners, the Staff, your office, and Commissioners at the CFTC to ensure that the agencies provide consistent and clear guidance to market participants. Q.11. With regard to cyber infrastructure and enforcement actions, what do you think the SEC is doing right and what would you change? A.11. As an outsider to the agency and its work, I am not in a position to assess the SEC's cybersecurity infrastructure. As we discussed during the hearing, however, I am deeply concerned by the recent revelations regarding the cybersecurity breach of the SEC's EDGAR system--so much so that I have placed securing the SEC's systems among my top few priorities. If I am confirmed, the first question I will ask Chairman Clayton is exactly what happened that made the SEC's systems vulnerable to such a breach--and what we need to do to make sure it never happens again. With respect to enforcement, while taking care not to speculate regarding particular enforcement actions that may come before me if I am confirmed as a Commissioner, I want to be clear: the SEC can and should make far better use of data science to make its enforcement efforts more efficient and effective. My previous research has used those technologies to show how the SEC could more easily identify potential cases. \8\ I believe that these techniques could help us to better understand the circumstances and larger trends behind where we'll find bad actors--and make it easier for us to hold them accountable. --------------------------------------------------------------------------- \8\ See, e.g., Alma Cohen, Robert J. Jackson, Jr., and Joshua Mitts, ``The 8-K Trading Gap'' (Columbia Law and Economics Working Paper) (2015). Q.12. The Treasury Capital Markets report touched on potential changes to best execution and potential changes to market structure issues, particularly in the context of Reg. NMS. Can you give me your thoughts on what you view as potential areas --------------------------------------------------------------------------- for reform within the context of Reg. NMS? A.12. Fundamentally, the SEC's role in the regulation of capital markets more generally--and trading venues in particular--is to make sure that American investors get the level playing field they deserve, and pay a fair price when they buy shares of public companies. Regulation NMS was an important step toward reducing trading costs and increasing liquidity in our equity markets, both important goals. But Regulation NMS is now over a decade old, and I am aware of the concerns that the rule has added complexity to our capital markets--and that these markets are now characterized by fragmentation that harms investors. In light of the rapid changes in these markets, it may well be time for the SEC to reassess the degree to which these rules continue to be sufficient to protect investors. The Equity Market Structure Advisory Committee has provided important guidance to the Commission in this respect. \9\ If confirmed, I would look forward to working with my fellow Commissioners, the Staff, and your office to explore the degree to which Regulation NMS needs to be modernized. --------------------------------------------------------------------------- \9\ See, e.g., SEC Equity Market Structure Advisory Committee, ``Recommendations Regarding Modifying Rule 605 and Rule 606'' (Nov. 29, 2016). Q.13. Some have argued that our market structure systems have become increasingly complex and that the layered regulations have created incentives to game the system. Can you help me understand your views on reforming our domestic market structure and can you commit to this body that you will work with the Committee in tackling some of the languishing issues that have been pervasive in market structure over the last 10+ --------------------------------------------------------------------------- years? A.13. Yes: If confirmed, I will work with the Committee to tackle any market-structure issues that are keeping our market venues from offering American investors a fair price. As your question points out, our markets are rapidly evolving, and that is especially true in the area of market structure, where frequent updates to SEC rules may be needed to ensure our law keeps pace with the markets. In particular, I am aware of the concern that legal changes and other factors have led to fragmentation that harms investors. In light of the rapid changes in these markets, it may well be time for the SEC to reassess whether these rules continue to be sufficient to protect investors. Separately, although a great deal of time and regulatory attention has been given to the structure of our equity markets, millions of Americans--especially those at or near retirement--also rely on the structure of our debt markets to give them the best possible price for their investments. Although these debt markets are crucial to American families, they have received relatively scant attention. That is why I was delighted to see Chairman Clayton announce his interest in forming a Fixed Income Market Structure Advisory Committee. \10\ If confirmed, I would work with the Chairman and my fellow Commissioners to make sure that American investors can rely on the structure of our debt markets to help them prepare for and fund their retirement plans. --------------------------------------------------------------------------- \10\ See Jay Clayton, Chairman, Securities and Exchange Commission, Remarks at the Economic Club of New York (July 12, 2017). Q.14. IT modernization enables financial services firms to protect constituent financial information. In an environment of increasing cybersecurity threats, how will you use your role at the SEC to promote IT modernization across the financial --------------------------------------------------------------------------- services sector and at the SEC? A.14. I share your concern that, in a world with increasing cybersecurity threats, SEC rules must evolve in a way that promotes information-technology modernization. That's why I agree with Chairman Clayton that cybersecurity is an area where there is not enough disclosure--and, as your question suggests, that is especially true at financial-services firms entrusted with millions of Americans' financial information. In particular, I'm concerned that our disclosure rules, and especially the rules governing Form 8-K, have not kept pace with these developments--and do not make clear to public companies the urgency of disclosures related to cybersecurity breaches. If confirmed, I will work with the Chair, my fellow Commissioners, and the Division of Corporation Finance to update these rules in a fashion that makes clear the importance of cybersecurity risk to public-company investors. Regarding IT modernization at the SEC itself, I share the concern that recent news of a breach of SEC systems reflects significant issues with the SEC's operational cybersecurity. Without understanding the facts behind that and other recent developments, I am not in a position to assess the current State of the SEC's information-technology resources. However, as I mentioned at the hearing, if confirmed the SEC's cybersecurity would be among my highest priorities as a Commissioner. The Commission cannot fulfill its mission--nor can it expect public companies to take cybersecurity seriously--unless its own house is in order. Q.15. How will you ensure that regulations set by the SEC do not impede progress on IT modernization? A.15. I share your concern that SEC rules in this area must encourage, rather than impede, corporate investments in the kind of information-technology infrastructure that can protect Americans' data from cybersecurity threats. That includes not only the disclosure rules you referred to in your previous question, but also Regulation SCI--which, some have argued, may inadvertently discourage exchanges from adopting the latest technology to defend against cyberthreats. As an outsider to the Commission and its work, I am not yet able to assess the evidence underlying that and other concerns in this area--and what the SEC might do about it. Factors the SEC should be focused on, however, include the risk to the broader economy of cybersecurity breaches, the costs associated with adapting to new cybersecurity regulations, and the risks consumers face if those handling sensitive personal data have lax cybersecurity protections. If confirmed, I look forward to learning more about the Staff's experience in administering these rules. And I would be delighted to work with you and your office to ensure that all of the SEC's rules--including those governing Form 8-K and Regulation SCI--give American companies the incentives they need to protect investors from cyberthreats. Q.16. With regard to corporate disclosures, what standard should be used to determine whether or not something is disclosed? A.16. As I mentioned during the hearing, the concept of materiality is the touchstone of our Federal disclosure rules. This standard--which asks whether particular information would be relevant to the total mix of information a reasonable investor would use when making an investment decision--has served American investors and public companies well for generations. As I have written before, the best way to know whether something is material--that is, whether it's important to investors--is to ask investors. That's certainly what the Commission has done in the past. For example, the SEC's rules regarding executive compensation were developed in response to significant investor interest in those matters. \11\ Our markets have evolved rapidly over the past 10 years, and I'm concerned that the Commission's disclosure rules haven't kept pace with investors' needs. --------------------------------------------------------------------------- \11\ See Securities and Exchange Commission, Executive Compensation Disclosure, Release No. 33-6940, 57 FR 29,582 (1992) (listing the shareholder-proposal activity related to executive pay at several large, public companies as a basis for promulgating disclosure rules on executive compensation). --------------------------------------------------------------------------- It is an essential part of the SEC's task to ensure that the Commission's disclosure rules continue to evolve in order to make sure that investors have the information they need to evaluate the companies that they own. If confirmed, I will urge Chairman Clayton, my fellow Commissioners, and the Staff to update our disclosure rules to give investors that information. Q.17. On February 24, 2017, President Trump signed an Executive Order on Enforcing the Regulatory Reform Agenda, part of which focused on identifying regulations that are ``outdated, unnecessary, and ineffective.'' Given recent technological advances, one area of particular focus should be regulations requiring paper-based communications as the default delivery method in communicating with investors and consumers. Such regulations are prime examples of regulations that were first adopted decades ago and have failed to evolve with the times. If confirmed, will you work to ensure that the SEC identifies and modifies outdated regulations regarding paper- based communications? A.17. I believe that the Commission should consistently review its rules to make sure that those rules give investors the information they need about the companies they own. To the degree that SEC rules are outmoded--as many rules requiring paper-based communications may be today--modernizing those rules is a critical task. While I would not want to comment on any specific proposal that may come before me as a Commissioner if I am confirmed, I would look forward to working with SEC Staff, fellow Commissioners, and this Committee to identify any outdated regulations--including regulations mandating paper-based communications--that may no longer serve investors. Q.18 Do you believe the recent action by the SEC regarding MiFID II was appropriate? If you do not, how would you have addressed this issue? A.18. I understand that the Division of Investment Management and the Division of Trading and Markets recently issued time- limited no-action letters in this area. Because these matters may well be raised before the full Commission in the future, I hesitate to comment specifically on questions that may come before me as a Commissioner. Nevertheless, I want to be clear: it is crucial that American investors know who pays for research on public company stocks and what those researchers' financial incentives are. The European approach to this problem--that is, MiFID II-- reflects one way to give investors that information. But it is not the only way to make sure that investors know who is producing equity research and who is paying for it. If confirmed, I look forward to working with the Staff in both the Division of Investment Management and the Division of Trading and Markets to understand the reasoning behind their recent letters--and their thinking about longer-term solutions in this area. Q.19. Do you think that the U.S. and the SEC should import standards from other countries? A.19. When considering how best to develop new legal standards, my approach is often to draw on as much data and experience as possible. While the experience of other countries can be helpful in this respect, it is always important to keep in mind that one size does not fit all--and that American markets are truly unique. We are fortunate to have the largest, deepest and most diverse capital markets in the world. Lessons from other jurisdictions may be useful in informing the way we think about our own law, but at bottom American securities law must be the right fit for American investors and companies. Nevertheless, it is essential that U.S. regulators engage with international counterparts and make sure our positions are made clear on a wide range of regulatory questions that apply across national boundaries. The SEC, through its Office of International Affairs, has an important voice in international standard-setting bodies, and if confirmed I look forward to working with Staff, my fellow Commissioners, and our international counterparts to help make sure that American investors' interests are protected in capital markets around the world. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM ROBERT J. JACKSON, JR. Q.1. In your testimony, you highlighted enforcement and prosecution of insider trading as top priorities. If confirmed, what recommendations will you make to Chairman Clayton to strengthen the ability of the enforcement division to hold accountable those that violate Federal securities laws? A.1. I believe that holding corporate executives accountable when they violate the law is critical to maintaining trust in our financial system. There are two specific enforcement- related areas that deserve attention at the SEC. First, if confirmed I will work with Chairman Clayton and the Division of Enforcement on using data science to make the process of identifying and litigating securities-fraud cases more efficient. My previous research has used those technologies to show how the SEC could more easily identify potential cases. I believe that these techniques could help us to better understand the circumstances and larger trends behind where we'll find bad actors--and make it easier for us to hold them accountable. \1\ --------------------------------------------------------------------------- \1\ See, e.g., Alma Cohen, Robert J. Jackson, Jr., and Joshua Mitts, ``The 8-K Trading Gap'' (Columbia Law and Economics Working Paper) (2015). --------------------------------------------------------------------------- Second, as I noted during the hearing, I think it is time for the Commission and the Congress to consider whether the law of insider trading in particular is keeping pace with our markets. One reason that so few corporate insiders are held accountable is that the burdens of proof the Government faces in these cases were designed by common-law judges decades ago. The last time the SEC proposed updates to its rules in this area--updates that were designed to address uncertainty created by the courts--was nearly 20 years ago. \2\ The scope and nature of corporate fraud has changed a great deal since then, and it may well be time for the SEC and Congress to clarify and strengthen our insider trading laws. --------------------------------------------------------------------------- \2\ See Securities and Exchange Commission, Proposed Rules: Selective Disclosure and Insider Trading, Release Nos. 33-7787, 34- 42259, IC-24209, 17 CFR 230 (January 10, 2000) (noting that those rule proposals, like those that could be advanced by the SEC today, ``clarif[ied] two unsettled issues under current insider trading law.''). Q.2. In response to Chairman Crapo's questions, you raised the law of insider trading and you highlighted a concern that recent events may have caused investors to wonder whether the SEC is ``really the cop on the beat we need to make sure that investors are getting a fair deal.'' Can you expound on this? In your opinion, does Congress need to codify insider trading law or make other changes to our Federal securities laws to ensure the SEC has the necessary authority to hold wrongdoers --------------------------------------------------------------------------- accountable? A.2. Yes: Congress and the SEC should be thinking about updating the law of insider trading. For two generations, American insider trading law has been developed by judges on a case-by-case basis. There are many well-documented benefits to this approach, including drawing on the extraordinary wisdom of the judges who sit on our Nation's Federal bench. One downside of this regime, however, is that the law develops slowly--too slowly, some have argued, to keep pace with modern markets. In particular, a recent series of cases have raised questions regarding the Government's burden of proof with respect to the benefits an insider must receive in connection with leaks of material nonpublic information to traders. \3\ Uncertainty with respect to such a fundamental question of an insider's obligations to investors is, in my view, a serious problem. The SEC can and should frequently clarify its view of the meaning of the insider trading laws. As noted above, the Commission has not done so for nearly 20 years, and in my view it is time for the Commission to look at these matters again. \4\ --------------------------------------------------------------------------- \3\ Salman v. United States, No. 15-628, 137 S. Ct. 420 (2016); see also United States v. Martoma, 869 F.3d 58 (2d Cir. 2017). \4\ See Securities and Exchange Commission, supra note 6. Q.3. The concept of ``materiality'' is defined by the SEC as information that a reasonable investor could find important in determining whether to buy or sell securities. Can you explain how you think about the definition of materiality and whether you see emerging ``material'' areas--namely environmental, social, and governance topics--where the SEC should be --------------------------------------------------------------------------- increasing disclosure? A.3. My view is that one way to know whether something is material--that is, whether it's important to investors--is to ask investors. That's certainly what the Commission has done in the past. For example, the SEC's rules regarding executive compensation were developed in response to significant investor interest in those matters. \5\ Our markets have evolved rapidly over the past 10 years, and I'm worried that the Commission's disclosure rules haven't kept pace with investors' needs. --------------------------------------------------------------------------- \5\ See Securities and Exchange Commission, ``Executive Compensation Disclosure'', Release No. 33-6940, 57 FR 29,582 (1992) (listing the shareholder-proposal activity related to executive pay at several large, public companies as a basis for promulgating disclosure rules on executive compensation). --------------------------------------------------------------------------- In particular, as your question suggests, investors have recently expressed extensive interest in matters that companies are often not disclosing. For example, information regarding a company's spending on politics has been the most common subject of shareholder proposals over the last decade. \6\ As recent events have made clear, companies have not consistently taken the view that cybersecurity breaches demand prompt disclosure. And shareholder proposals asking companies to disclose the risks related to climate change are receiving ``historically high levels of support.'' \7\ --------------------------------------------------------------------------- \6\ ``Sharkrepellent Dataset of Factset Research Systems, Inc.'', Proxy Proposals, available at https://www.Sharkrepellent.net. \7\ Thomas Singer, ``Environmental and Social Proposals in the 2017 Proxy Season'', Harv. F. on Corp. Gov. and Fin. Reg. (Oct. 26, 2017). --------------------------------------------------------------------------- It is an essential part of the SEC's task to ensure that the Commission's disclosure rules continue to evolve in order to make sure that investors have the information they need to evaluate the companies that they own. If confirmed, I will urge Chairman Clayton, my fellow Commissioners, and the Staff to update our disclosure rules to give investors that information. Q.4. I worked to include a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act to require publicly listed companies to disclose in their annual filing the ratio of their CEO's total compensation to their median worker's compensation. In August 2015, after 5 years of delays, I was pleased to see the SEC finally adopted a rule implementing 953(b) of Dodd-Frank. If confirmed, will you commit to ensure that this rule is properly implemented? Will you work to ensure that provisions included by the Commission to facilitate compliance do not inadvertently open loopholes for companies looking to evade this requirement? A.4. Yes. I have long shared your concern that the Commission took far too long to implement the rules required by Dodd- Frank, including the provision requiring disclosure of the ratio between the CEO's compensation and that of the median employee. As I noted at the hearing, Dodd-Frank is the law of the land--and has been for 7 years. It is time that the SEC and public companies comply with the law, and I'm delighted that this Spring American companies will finally disclose these ratios to the public. As companies prepare to file those disclosures this Spring--and every year going forward--it will be critical to ensure that the Division of Corporation Finance carefully monitors compliance with the rule, and directs companies to give clear, concise and candid information. If confirmed, I will absolutely work to make sure investors get that kind of information. Q.5. In light of the sweeping good faith efforts flexibility provided to companies by the Commission's September 2017 interpretive guidance, will you commit to supporting enforcement actions against companies that fail to provide disclosures in compliance with the requirements of the rule? A.5. Yes. Without commenting on any particular matter that may come before me as a Commissioner if I am confirmed, I can say without reservation that I would support enforcement actions against companies that fail to comply with the law--including the requirement that firms disclose the ratio between the CEO's and their median worker's pay. Disclosure rules like these, and the transparency they give investors, have been at the heart of the SEC's mission for generations. We have to take these rules seriously, and that means aggressively enforcing the securities laws when companies or individuals fail to comply with SEC rules. Q.6. As you know, the SEC adopted a rule in 2009 requiring publicly traded companies to disclose more information on director selection and diversity. Many, including former SEC Chair White, have expressed concerns that the current rule may be inadequate and that shareholders need more comprehensive information to make informed investment and voting decisions. How does the disclosure of specific details about the diversity of corporate boards assist shareholders in making informed investment and voting decisions? A.6. As your question points out, disclosure regarding the diversity of corporate boards is not only the right thing to do, but it's the law: the SEC has required such disclosure for years. The reason is that investors have long argued that understanding a company's approach to boardroom diversity--and the benefits it can bring--helps make sure the board has the expertise and perspectives it needs to run the firm well. \8\ --------------------------------------------------------------------------- \8\ See, e.g., Ryan Vlastelica, ``Vanguard Calls for More Diverse Corporate Boards, Better Climate-Change Disclosures'', Marketwatch (Sept, 1, 2017). --------------------------------------------------------------------------- I share former Chair White's concern that existing SEC rules on this issue have proved inadequate. Women and minorities are astonishingly underrepresented on the boards of U.S. public companies, to the dismay of investors and employees alike. At a minimum, the SEC should make sure that companies are giving investors basic information about how the companies they own have considered diversity when assembling their directors. If confirmed, I will absolutely work with the Division of Corporation Finance to make certain that our rules give investors that information. Q.7. One of the problems identified with the 2009 rule is the Commission's decision not to define diversity. Do you think the failure to define diversity in the rule undermines the value of the information provided in the current disclosure regime? A.7. While I understand that the Staff declined to define diversity in order to allow issuers to use the definition most suited to its business model, time and experience have shown that the lack of guidance in this area has left both companies and investors without the information they need regarding boardroom diversity. In fact, the SEC Advisory Committee on Small and Emerging Companies recommended nearly a year ago that the SEC provide guidance on this issue, and the SEC's failure to do so has made it unnecessarily costly for investors and companies to comply with the law. \9\ --------------------------------------------------------------------------- \9\ Securities and Exchange Commission Advisory Committee on Small and Emerging Companies, Recommendation Regarding Corporate Board Diversity (February 16, 2017). --------------------------------------------------------------------------- More importantly, the Commission's failure to enforce its own rule in this area has raised real questions among issuers and investors about the SEC's commitment to board diversity. Nearly 5 years, ago an empirical study of these disclosures revealed that more than half of them failed to comply with the most basic aspects of the SEC's rule on disclosure related to boardroom diversity. \10\ If the Commission wants its commitment to boardroom diversity--and the rule of law--to be taken seriously, it must do a better job of consistently enforcing its disclosure rules in this area. If confirmed, I will work with my fellow Commissioners and the Staff of the Division of Corporation Finance to ensure that companies and boards can expect diversity-disclosure rules to be enforced to the letter of the law. --------------------------------------------------------------------------- \10\ Note, ``The Glass Boardroom: The SEC's Role in Cracking the Door Open so That Women May Enter'', 2013 Colum. Bus. L. Rev. 801 (2013). Q.8. In January 2016, former Chair White instructed staff to review existing company disclosures to determine whether the SEC should require companies to provide more specific details about their diversity practices. In June 2016, former Chair White announced that staff was preparing a recommendation to the Commission to propose amending the rule to require companies to include in their proxy statements more meaningful disclosures on their board members and nominees. \11\ The current status of that project is unclear. --------------------------------------------------------------------------- \11\ Mary Jo White, Chairman, Securities and Exchange Commission, ``Focusing the Lens of Disclosure To Set the Path Forward on Board Diversity'', Non-GAAP, and Sustainability (Jun. 27, 2016). --------------------------------------------------------------------------- In December, the SEC's Advisory Committee on Small and Emerging Companies recommended the SEC amend the disclosure to require issuers to describe, in addition to any policy they may have with respect to diversity, the extent to which their boards are diverse. \12\ If confirmed, will you commit to investigating this issue and taking steps to determine whether the SEC should revise its rule on director selection and diversity? --------------------------------------------------------------------------- \12\ Securities and Exchange Commission Advisory Committee on Small and Emerging Companies, supra note 13. A.8. Yes. Given the consistent complaints from investors that the rule is not working, the statements from former Chair White to that effect, and, as your question notes, the recommendation from the Advisory Committee on Small and Emerging Companies, I am puzzled that this project has not moved forward, and concerned that it was not featured on the SEC's most recently announced regulatory agenda. If confirmed, among my first questions for Chairman Clayton would be to ask why the Commission has not yet moved forward on this long-awaited project. I hope very much to work with the Chairman and my fellow Commissioners to ensure that investors receive the information they need to understand boardroom diversity in the companies they own. Q.9. In your testimony, you highlighted the importance of completing outstanding Dodd-Frank rulemakings, and particularly those that relate to executive compensation and clawback policies. I agree that this should be a top priority for every single member of the Commission. Can you explain how failure to complete these rulemakings harms the market, disadvantages investors, and may encourage senior executives to make excessively risky decisions? A.9. The Commission's failure to complete Dodd-Frank's mandated rules 7 years after its passage has been harmful to investors and companies. It reflects a troubling failure to follow the law at the Commission that I hope will be quickly rectified by Chairman Clayton and, if I am confirmed, my fellow Commissioners. For 7 years, neither investors nor public companies has had any ability to know whether and when these rulemakings will actually become law. The result is that both parties spend enormous amounts of shareholder money to predict whether and when they will have to comply with these rules. That's good for lobbyists and lawyers, but hardly anyone else, and especially not the investors. As I mentioned at my hearing, ordinary, everyday investors are still waiting for basic, common-sense protections like rules requiring clawback of erroneously awarded executive pay to take effect. Without such rules, executives continue to have the incentives they had before the financial crisis to take excessive risk. I cannot see why those rules have not been implemented 7 years after Dodd-Frank's passage. If confirmed, I will urge Chairman Clayton and my fellow Commissioners to finish the rules mandated by the Dodd-Frank Act. If the Commission wants public companies to take its commitment to the rule of law seriously, the SEC must be prepared to follow the law itself. Dodd-Frank is, I know, a controversial law. But it is the law, and the SEC is required to follow it. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM ROBERT J. JACKSON, JR. Q.1. The Citizens United v. FEC ruling allowed, among other things, corporations to contribute independent political expenditures. Public companies are active participants in our elections, yet their shareholders do not know the role that they play because the SEC has been reluctant or handcuffed from requiring firms to disclose their political contributions. Do you believe shareholders have a right to know whether a company they've invested in is making contributions in their best interest? A.1. The bedrock principle of securities-disclosure rules is the materiality standard. That standard asks us to consider what a reasonable investor would think affects the total mix of information about the stock that they are choosing to buy and sell. One way to evaluate that standard is to see whether investors express interest in particular kinds of information through the shareholder-proposal process. For decades, that is how the SEC has helped ensure that disclosure rules are evolving to keep pace with changes in market conditions and investor interests. \1\ --------------------------------------------------------------------------- \1\ See, e.g., Securities and Exchange Commission, Executive Compensation Disclosure, Release No. 33-6940, 57 FR 29,582 (1992) (developing executive-compensation disclosure rules, in part, in response to shareholder proposals on that subject at large public companies). --------------------------------------------------------------------------- As I have written previously, the case for rules requiring public companies to disclose their spending on politics is strong. \2\ Over the past decade, requests for information about political spending have been the most common subject of shareholder proposals at large public companies, so it is clear that investors have a great deal of interest in these matters. Moreover, under current law, public companies are not required to give shareholders detailed information on political spending. Thus, to the degree that public companies are spending shareholder money on politics in a way that diverges from investors' interests, standard mechanisms for corporate accountability and oversight can work only if investors have the information they need to evaluate political spending at the companies they own. --------------------------------------------------------------------------- \2\ See, e.g., Lucian A. Bebchuk and Robert J. Jackson, Jr., ``Shining Light on Corporate Political Spending'', 101 Geo. L.J. 923 (2013). Q.2. What should be the threshold for determining when a --------------------------------------------------------------------------- company discloses their political spending? A.2. As I have previously written, the development of any rules in this area would raise a series of regulatory questions that would require close consultation with the SEC's Staff. As an outsider to the Commission and its work, it is difficult for me to say whether and how the evidence currently available to the Staff suggests that there should be a particular threshold for determining when a company must disclose their spending on politics. Nevertheless, as I have indicated in previous research on this subject, a de minimis exception to rules in this area might appropriately balance the benefits of disclosing corporate spending on politics with the costs of disclosing small amounts of spending that are unlikely to be important to investors. As I have said before, the SEC's existing regulatory framework for such exceptions, such as SEC rules on disclosure of related-party transactions, may serve as a sound starting point for such an exception. \3\ --------------------------------------------------------------------------- \3\ See id. (citing 17 CFR 229.404(a) (2012) (exempting from the SEC's disclosure rules for related-party dealings transactions with a value of $120,000 or less)). Q.3. What policy levers does the SEC have to promote long-term --------------------------------------------------------------------------- value creation? A.3. There are at least three tools at the SEC's disposal to encourage companies to focus on long-term value creation. The first is an area I have written about a great deal: executive pay. Current practice requires most public-company executives to hold their stock-based pay for only 3 years, so it is unsurprising that those executives often pursue short-term stock-price increases rather than long-term value creation. As I mentioned during the hearing, it is time for corporate executives complaining about short-termism to put their money where their mouths are. SEC rules should encourage executives to hold their stock for far longer periods than they currently do. This would give executives powerful incentives to invest for the long term. Second, the SEC should consider taking steps that would allow companies and investors to choose voting structures that favor shareholders who commit to hold shares for the long term. \4\ The SEC should consider how to encourage and enable public companies and their investors to choose these voting arrangements if they see fit. Those arrangements, if appropriate for the particular company and investor base, could help ensure companies favor the interests of long-term investors over short-term speculators. --------------------------------------------------------------------------- \4\ See, e.g., Patrick Bolton and Frederic Samama, ``L-Shares: Rewarding Long-Term Investors'' (ECGI Finance Working Paper) (2012). --------------------------------------------------------------------------- Finally, SEC rules governing stock buybacks--which allow corporations to return cash to investors today rather than invest for the long term--have not been updated since 2003. That was a very different time for our markets, our economy, and our country. \5\ Given the importance of this issue to making sure that public companies invest for the long term, I believe these rules now deserve another look. Better disclosure of stock buybacks would require managers to explain the basis for their decision to investors and to the public, and allow markets to price the buyback properly. That kind of disclosure is absolutely worth considering, and if confirmed I would look forward to working with your office on this issue. --------------------------------------------------------------------------- \5\ See Securities and Exchange Commission, ``Purchases of Certain Equity Securities by the Issuer and Others'', Release Nos. 33-8335; 34- 48766; IC-26252, 17 CFR 228 (2003) (providing a safe harbor from certain securities-law liability for stock buybacks affected in a particular manner). Q.4. Do you believe companies are engaging in too many stock buybacks and dividend payments and not spending enough on --------------------------------------------------------------------------- corporate growth? A.4. On several occasions in recent years, companies have foregone long-term R&D investments, operational expansion, and strategic opportunities in order to return money to shareholders. Shareholders and stakeholders alike are right to question if authorizing buybacks or dividends payments help or harm the long-term health of the company and the economy. As noted above, one way for the SEC to address this issue is to modernize its disclosure rules governing stock buybacks. I believe that doing so is especially important in light of the possibility that new legislation may soon encourage public companies to return cash now held overseas to the United States. The last time Congress enacted a corporate tax holiday, in 2004, American companies used a significant amount of that money for a wave of stock buybacks. \6\ If tax law changes again to permit corporate cash to come home, I want to be sure that companies are prepared and required to explain to investors what they plan to do with that money--especially if they are going to use it for buybacks. --------------------------------------------------------------------------- \6\ See Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes, ``Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act'' (NBER Working Paper No. 15023) (2009); see also Thomas J. Brennan, ``Where the Money Really Went: A New Understanding of the AJCA Tax Holiday'' (Northwestern Law and Economics Working Paper) (2014). Q.5. Is there a way to center less attention on quarterly --------------------------------------------------------------------------- earnings? A.5. Yes: the SEC has several tools at its disposal to help companies focus on long-term value creation rather than quarterly earnings. For one thing, SEC rules should encourage corporate executives to put their money where their mouth is and hold their stock-based pay for lengthier periods of time. Managers who cannot sell their stock holdings in the next quarter--but instead have to wait for years to cash in on their holdings--have far fewer incentives to manage to quarterly earnings. Second, the SEC should consider allowing companies and investors to choose voting structures that favor shareholders who commit to hold shares for the long term. Those arrangements, if appropriate for the particular company and investor base, could help ensure that companies favor the interests of long-term investors over short-term speculators. I share your broader concern about short-term pressures that compel companies to focus on meeting quarterly earnings targets. I'm concerned when companies are distributing earnings as dividends or driving up stock prices through buybacks while cutting back on R&D, capital expenditures, and other investments. If confirmed I would look forward to working with the Staff, my fellow Commissioners, and your office to encourage corporate management to focus on the long term. Q.6. The disclosure of innumerable hacks over the past few years, recently punctuated by hacks of the SEC and Equifax, has made clear that we all need to raise our cybersecurity game. Given the important role broker-dealers play in the formation and distribution of capital in the United States, do you think it's appropriate for FINRA, in its examination of broker dealers, to perform cyber-vulnerability assessments of registered broker dealers? A.6. I absolutely share your concern that broker-dealers--who are entrusted with the personal financial information of millions of American families and play critical roles in our securities and derivatives markets--must take every possible step to protect themselves against cybersecurity threats. And I agree that all regulators--including the SEC and FINRA--must prioritize responding to a rapidly evolving cyberthreat. As an outsider to the SEC, FINRA, and their work, I am not in a position to know whether FINRA should initiate an examination program of the kind described in your question. The SEC should, however, be asking whether FINRA's current examination programs encompass this type of review, what existing data FINRA and the SEC has about brokers' vulnerability to cyber-related threats, and what steps the SEC or FINRA can take to make sure that investors have as much information as possible about the broker's cybersecurity preparedness. If confirmed, I would look forward to working with SEC and FINRA Staff, my fellow Commissioners, and your Office to make sure FINRA takes whatever steps are necessary to protect broker-dealer customers from cybersecurity threats. Q.7. On Oct. 15, 2014, the Treasury market flash rally occurred, where the yield on the benchmark 10-year U.S. Treasury traded in a 37-basis-point range (0.37 percent), only to close six basis points below its opening level. Principal trading firms (PTFs) account for a majority of trading in inter-dealer Treasury markets, which represent half of all trading in Treasuries. Due to a loophole, PTFs, including many that use algorithmic strategies, have not been required to register as brokers. This allows them to escape oversight and reporting requirements. Will you commit to ensuring that PTFs are required to register as brokers? A.7. The Treasury market plays a vital role in our financial markets and economy, providing a risk-free benchmark to investors around the world and financing the critical work of our Government. Like so many modern markets, the Treasury market has seen a number of significant technological changes over recent years, including the increased prominence of PTFs. I am familiar with the Joint Staff Report on the events of October 15, 2014, produced by the staff of the Treasury, Federal Reserve Board of Governors, Federal Reserve Bank of New York, SEC, and CFTC, and I share your concerns regarding data and oversight gaps of PTFs. \7\ If confirmed, I look forward to working with the Staff, fellow regulators, and Congress to ensure there is appropriate oversight and transparency in the Treasury market and, more broadly, that the financial regulatory community prioritizes preserving confidence in the world's deepest and most liquid market. --------------------------------------------------------------------------- \7\ See U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, Securities and Exchange Commission, and Commodity Futures Trading Commission, The U.S. Treasury Market on October 15, 2014 (July 13, 2015). Q.8. Under current law, Regulation ATS's basic regulatory standards for exchanges and other financial markets are designed to ensure market resilience, integrity and adequate operational risk controls. But trading venues that facilitate the exchange of Government securities are excluded from Regulation ATS. And by excluding them from Regulation ATS, they are also excluded from Regulation SCI's cybersecurity requirements. Will you commit to closing the loophole that permits Government-securities trading venues to avoid these --------------------------------------------------------------------------- basic requirements? A.8. Because of the importance of the Treasury market to the functioning of the financial markets that millions of Americans depend upon each day, I share your concerns about trading venues that focus on Government securities. Participants in these venues must have advanced cybersecurity protections to ensure that these crucial markets are not susceptible to cyberthreats. As an outsider to the Commission and its work, I am not familiar with the Staff's full basis for concluding that exchanges of this type may be excluded from Regulation SCI's cybersecurity requirements. When determining whether that exclusion is appropriate, however, the Commission should focus on other cybersecurity requirements that may apply to these trading venues, the degree to which the exclusion exposes these markets and investors to unacceptable risks of data breaches, and existing cybersecurity protections in place at these venues. If confirmed, I will work with my fellow Commissioners and the Staff to understand why these venues have been excluded from the reach of Regulation SCI. And I would look forward to learning more about the Staff's experience in administering Regulation SCI in evaluating whether further efforts are needed to promote the resilience and integrity of trading venues. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM ROBERT J. JACKSON, JR. Q.1. On June 1, 2017, the SEC solicited public comments from retail investors and other interested parties on revising its standards of conduct for investment advisers and broker- dealers. In this request for comments the SEC asked ``If the commission were to proceed with a disclosure-based approach to potential regulatory action, what should that be?'' \1\ Do you believe that the financial incentives that create conflicts of interest in the retail investment market that harm investors can be eliminated by enhanced disclosure alone? --------------------------------------------------------------------------- \1\ Jay Clayton, Chairman, Securities and Exchange Commission, ``Public Comments From Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers'' (June 1, 2017). A.1. I share the concern that retail investors must be protected from money managers who act contrary to their fundamental duties to their customers. When American investors entrust their savings to one of these institutions--whether an investment adviser or broker-dealer--they need to know that those who manage their money have clear obligations to their customers. Disclosure lies at the heart of our securities laws, and has often served as an effective first line of defense when protecting American investors from those who would defraud them. But it is not the only tool in the SEC's toolkit, and I am deeply skeptical that disclosure alone can eliminate conflicts of interest in the retail investment market. My general approach to questions of this type is to let the facts--evidence from the behavior of retail investors and their advisors--tell us what kinds of regulatory approaches are most likely to succeed. In this case, a considerable body of research--some commissioned by the SEC--makes clear that disclosure is often necessary but not sufficient to address conflicts of interest in the retail investment market. \2\ The evidence tells us that the complexity of financial products and compensation structures often makes disclosure ineffective for many retail investors. And the data also suggest that disclosures may be least effective for the investors who need protection the most. --------------------------------------------------------------------------- \2\ See Securities and Exchange Commission, Comments on Duties of Brokers, Dealers, and Investment Advisers, Release Nos. 34-69013, IA- 3558, File No. 4-606. --------------------------------------------------------------------------- As I noted at the hearing, I believe that the SEC has an important role to play in this area. But it is critical that, whatever steps the Commission takes, American families who entrust their savings to others can rest easy in the knowledge that those who manage their money have an obligation to protect their clients from conflicts. Q.2. If not, what steps will you take to directly tackle problematic incentives that lead to conflicts of interest that harm investors? If so, how do you design a disclosure regime that eliminates problematic financial incentives? A.2. It is important to me that I be careful to avoid comment on a matter that may come before me if I am confirmed as a Commissioner. Moreover, as an outsider, I have not been privy to the ongoing work at the SEC on matters related to financial advisers' duties to their clients--and, thus, am not in a position to comment on what particular regulatory approaches the SEC might be considering. However, it is critical to create a regulatory structure that ensures that firms do not reward advisers for working against their clients' best interests. If confirmed, I would look forward to working with my fellow Commissioners and this Committee to create those kinds of protections. Q.3. If the commission proceeds with a disclosure-based approach to potential regulator action, what user tests will the Commission conduct to prove that all investors, not just the most sophisticated, fully understand and appreciate the nature and extent of the conflicts of interest and make a truly informed decision as a result? A.3. As an outsider, I have not been privy to the ongoing work at the SEC on matters related to financial advisers' duties to their clients--and, thus, am not in a position to comment on what particular regulatory approaches the SEC might be considering. I have also not had the benefit of consultation with the Staff now working on this issue--or the opportunity to ask them about the user tests they might be considering to ensure that disclosures are designed to protect investors. But let me be clear: any disclosure-based approach in this area should be grounded in evidence that proves it will be effective in arming investors with the information they need to make a truly informed decision. That evidence should carefully consider the different effects that disclosures might have on investors with different backgrounds, expertise, and financial objectives. And disclosure-based policy prescriptions should take those differences into account when designing the rules governing adviser disclosures. Poorly designed disclosures are unlikely to mitigate conflicts of interest--and may risk further confusing investors already overwhelmed by the complexity of financial advice. Moreover, as noted above some conflicts are so complex that I believe they are unlikely to be mitigated through disclosure alone. If confirmed, I would work with the SEC's Staff and my fellow Commissioners to ensure that the SEC's work in this area is effective at ensuring that retail investors are made aware of any conflicts of interest their broker-dealer faces. Q.4. Will you consult the extensive economic analysis the Department of Labor put together for their rulemaking on the fiduciary standard, including analysis on the incidence and cost of conflicts of interest in the financial services industry and on how these financial conflicts influence adviser recommendations? A.4. Yes. As noted above, my approach to these questions will be evidence-based, and I will absolutely consider the substantive economic analysis produced by both Government agencies and outside entities on the incidence and impact of conflicts of interest, including the Department of Labor's economic analysis of the fiduciary rule. I would also be delighted to consult with current Department of Labor personnel who have worked on that Department's rulemaking in this area. Q.5. How will you ensure that broker-dealers do not call themselves advisers? How can investors distinguish between sellers and advisers if sellers are allowed to market themselves as advisers? A.5. I share your concern that investors need to have absolute clarity about what types of financial professionals they are working with and what services they are providing. Anyone who represents himself or herself as providing financial advice should be subject to duties appropriate to that role. As the SEC Staff noted in a 2011 report, ``[d]espite the extensive regulation of both investment advisers and broker- dealers, retail customers do not understand and are confused by the . . . standards of care applicable to investment advisers and broker-dealers when providing personalized investment advice and recommendations about securities.'' \3\ If confirmed, I would be delighted to engage with firms, consumer and investor advocates, and other stakeholders to determine whether any additional steps should be taken to ensure that investors understand the difference between broker-dealers and advisers. --------------------------------------------------------------------------- \3\ Securities and Exchange Commission, ``Study on Investment Advisers and Broker-Dealers'' (January 2011). --------------------------------------------------------------------------- ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR DONNELLY FROM ROBERT J. JACKSON, JR. Q.1. In previous conversations with Mr. Jackson and Ms. Peirce, we have discussed my concerns that the wave of stock buybacks in recent years has been at the expense of the long-term health of companies, their workers, and their communities. Are you concerned that the increase of stock buybacks in recent years has been at the expense of investments in American workers? A.1. Yes. To the degree that stock buybacks are occurring because corporate executives are failing to make important and productive investments in their employees and their communities, this is an issue that concerns me--and should concern all Commissioners. Shareholders and stakeholders alike are right to question whether buybacks help or harm the long- term health of the company, the long-term performance of its stock, and the long-term well-being of its employees. As we discussed, the SEC's rules governing stock buybacks were last substantially updated in 2003--a very different time for our markets, our economy, and our country. \1\ Given the importance of this issue to investors and employees, I believe these rules now deserve another look--and should be updated in a way that gives the stakeholders in these companies full transparency as to the reasons why the company has chosen to buy back shares. --------------------------------------------------------------------------- \1\ See Securities and Exchange Commission, ``Purchases of Certain Equity Securities by the Issuer and Others'', Release Nos. 33-8335; 34- 48766; IC-26252, 17 CFR 228 (2003) (providing a safe harbor from certain securities-law liability for stock buybacks affected in a particular manner). Q.2. What actions can or should the SEC take to better monitor stock buybacks and to increase transparency? What about requiring more immediate disclosure (as opposed to quarterly, --------------------------------------------------------------------------- as currently required)? A.2. These proposals, and several others that would improve transparency around repurchases, deserve close consideration as the SEC works to modernize its rules governing stock buybacks. When the SEC last considered these rules in 2003, the scale and scope of stock buybacks--and their importance to the economy as a whole--were far smaller than they are today. Better disclosure of stock buybacks would require managers to explain the basis for their decision to investors and to the public, and allow markets to price the buyback properly. That kind of disclosure is absolutely worth considering, and if confirmed I would look forward to working with your office on this issue. Moreover, as we discussed during the hearing, I'm especially concerned that current rules are not sufficient if new legislation encourages repatriation of corporate profits from overseas. We know that the last time Congress enacted a corporate tax holiday, in 2004, American companies used a significant amount of that money for a wave of stock buybacks. \2\ If tax law changes again to permit corporate cash to come home, I want to be sure that companies are prepared and required to explain to investors what they plan to do with that money--especially if they are going to use it for buybacks. If I'm confirmed, I would look forward to working with my fellow Commissioners and the Staff to make sure our securities laws give investors the information they need if Congress enacts another tax holiday. --------------------------------------------------------------------------- \2\ See Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes, ``Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act'' (NBER Working Paper No. 15023) (2009); see also Thomas J. Brennan, ``Where the Money Really Went: A New Understanding of the AJCA Tax Holiday'' (Northwestern Law and Economics Working Paper) (2014). Q.3. Mr. Jackson, your written testimony includes this excerpt: ``I will work to implement the corporate-governance protections that Congress has enshrined into law--so that investors, employees, and communities can be sure that our companies are working to produce the kind of long-term value creation that has been the hallmark of the American economy for generations.'' I agree that companies should produce long-term value creation, but unfortunately ``short-termism'' has become a disease; Wall Street pressure results in corporate management making decisions based on the next quarter as opposed to the next decade. Ms. Peirce, do you share similar concerns about ``corporate short-termism''? What actions can or should the SEC take to combat this problem and encourage long-term value creation? A.3. There are at least three areas in which the SEC should consider action to encourage companies to focus on the long term. The first is an area I have written about a great deal: executive pay. Current corporate practice requires most public-company executives to hold their stock-based pay for only 3 years, so it is unsurprising that those executives often pursue short- term stock-price increases rather than long-term value creation. As I mentioned during the hearing, it is time for corporate executives complaining about short-termism to put their money where their mouths are. SEC rules should encourage executives to hold their stock for far longer periods than they currently do. This would give executives powerful incentives to invest for the long-term rather than manage to quarterly earnings targets. Second, the SEC should consider taking steps that would allow companies and investors to choose voting structures that favor shareholders who commit to hold shares for the long term. Academics have argued that permitting these structures can be beneficial, and other jurisdictions have long permitted their use. \3\ The SEC should consider how to encourage and enable public companies and their investors to choose these voting arrangements. Those arrangements, if appropriate for the particular company and investor base, could help ensure companies favor the interests of long-term investors over short-term speculators. --------------------------------------------------------------------------- \3\ See, e.g., Patrick Bolton and Frederic Samama, ``L-Shares: Rewarding Long-Term Investors'' (ECGI Finance Working Paper) (2012). --------------------------------------------------------------------------- Finally, SEC rules governing stock buybacks--which allow corporations to return cash to investors today rather than invest for the long term--have not been updated since 2003. That was a very different time for our markets, our economy, and our country. \4\ Given the importance of this issue to making sure that public companies invest for the long term, I believe these rules now deserve another look. Better disclosure of stock buybacks would require managers to explain the basis for their decision to investors and to the public, and allow markets to price the buyback properly. That kind of disclosure is absolutely worth considering, and if confirmed I would look forward to working with your office on this issue. --------------------------------------------------------------------------- \4\ See Securities and Exchange Commission, ``Purchases of Certain Equity Securities by the Issuer and Others'', Release Nos. 33-8335; 34- 48766; IC-26252, 17 CFR 228 (2003) (providing a safe harbor from certain securities-law liability for stock buybacks affected in a particular manner). Q.4. Mr. Jackson, in our meeting, I mentioned the Carrier layoffs and the heart-wrenching video where a corporate executive told hundreds of workers their jobs were going to Mexico. In response, I crafted the End Outsourcing Act to keep jobs in America by restricting tax breaks and Federal contracts for companies that ship jobs to foreign countries. It is difficult, however, to track when and where outsourcing occurs. I believe the SEC can take modest steps in this regard by requiring public corporations to disclose country-by-country employment. This would help investors determine which companies employ American workers and better understand where outsourcing has occurred. Do you support requiring corporations to disclose employment on a country-by- country basis to help increase transparency of outsourcing and American employment? A.4. Thank you for the opportunity to discuss this issue in our meeting--and for urging me to view the video mentioned in your question, which I watched the next day. \5\ Witnessing the devastating impact of Carrier's decision firsthand helped me understand the importance of this issue--and, if confirmed, I will keep those pictures and those people closely in mind each day I work at the SEC. --------------------------------------------------------------------------- \5\ See YouTube, ``Carrier Air Conditioner Moving 1,400 Jobs to Mexico'' (Feb. 11, 2016), available at https://www.youtube.com/ watch?v=Y3ttxGMQOrY. --------------------------------------------------------------------------- Whether the kind of disclosure rule described in your question would be appropriate depends upon whether the information in question would be material to investors--that is, whether it would alter the total mix of information that shareholders would consider when investing in the company. As I have written before, one way to know whether certain information is material is to ask whether shareholders have expressed interest in that information. Many significant investors--including large pension funds and mutual funds--have recently expressed interest in the information described in your question, both in their public statements regarding these matters and through shareholder proposals. For this reason--and because this issue is so critical to the future of millions of Americans--I would welcome the opportunity to work with the Commission and your office to investigate whether SEC rules should be updated to require disclosure of these matters. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM ROBERT J. JACKSON, JR. Q.1. I am very concerned about legislative proposals to dramatically increase the threshold for submitting shareholder proposals. Shareholder proposals are an important way for shareholders to communicate with management. They have been instrumental in improving corporate governance, such as requiring that independent directors make up at least a majority of corporate boards. Shareholders submit proposals on emerging risks, such as cybersecurity and consumer data protection. I also worry that the SEC may respond to pressure from companies that do not like dealing with shareholder proposals and raise the threshold on its own. Do you think shareholders should have a voice in the companies they own? A.1. Yes. My research, teaching, and previous Government service have long focused on making sure that investors have the tools they need to express their views to corporate management. As I noted in my testimony, for example, I am especially proud to have worked on the Treasury Department's proposals to give shareholders a voice on executive pay. Giving investors the ability to express their views help hold management's feet to the fire, demanding accountability on issues that shareholders believe are important to the success of the company. The SEC's shareholder-proposal process has, for decades, encouraged helpful dialogue between managers and investors in just this way. That process allows shareholders to guide management on what they believe the right direction is for the company--almost always on a nonbinding basis. While I am open to the possibility that those rules, which have not been revisited for some time, might be modernized, my focus during any such process will be to ensure that the rules encourage investors to express their views to corporate management. Corporate accountability is critical to the future of our companies and the economy, and I am deeply skeptical of making changes to these rules that would make it harder for shareholders' voices to be heard. Q.2. Do you think it would a problem if the threshold for submitting proposals was set so high that it blocked all but the biggest and wealthiest shareholders from submitting proposals? A.2. Yes. I would have serious concerns regarding any proposal to limit shareholder proposals only to the largest or wealthiest investors. The shareholder proposal rules are shareholders' best opportunity to have a dialogue with the company and to bring forth ideas and proposals to management. Limiting that process to the largest or wealthiest shareholders would deprive American companies of the views of their owners and reduce management's accountability to shareholders--steps that make little sense for an agency charged with protecting investors. ------ RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM ROBERT J. JACKSON, JR. Q.1. If confirmed, what specific steps would you take to bolster individual executive accountability, consistent with what Chairman Clayton has advocated for? A.1. I believe that holding executives accountable when they violate the law is critical to maintaining trust in our financial system. Specifically, there are at least two areas that deserve greater time and attention. First, I will make certain that in any particular case the Division of Enforcement has explored every alternative related to bringing proceedings against responsible individuals--not just companies. Although I cannot at this time comment on any particular enforcement matter that may come before me as a Commissioner, I assure you that, where the Division of Enforcement recommends action against a company but not responsible individuals, if confirmed my first question will be to ask what can be done to ensure that corporate insiders are held accountable for their actions. Second, I will urge Chairman Clayton and my fellow Commissioners to adopt the rules mandated by Section 954 of the Dodd-Frank Act, which require public companies to develop policies regarding the clawback of executive compensation. Those rules would help ensure that executives do not reap financial rewards while making decisions that harm American investors. As I mentioned during the hearing, 7 years after the passage of Dodd-Frank, it is time for the Commission to finalize the rules that Congress mandated in that law. That's especially true for Dodd-Frank's clawback rules--which would help hold corporate executives personally accountable for causing harm to American investors. Q.2. Some observers like to point to the Sarbanes-Oxley Act of 2002 or the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as to why there's been a drop in public companies since the mid-1990s. But a flood of private capital since that time has caused merger and acquisitions (M&A) activity to surge. Bankers enjoy the fees that industry consolidation brings in, and with an average CEO tenure of 3 years, executives benefit from a short-term boost in stock prices. On top of that, Congress has passed legislation such as the JOBS Act, which makes it easier for companies to stay private for longer. What do you make of this argument that regulations are to blame for a drop in public company formation? Or is it more likely that a whole set of public policy choices make it easier for incumbent firms to buy-up innovative start-ups, and make it easier for private companies to stay that way for longer? A.2. There are many explanations for recent changes in the number of public companies, and all of them deserve the SEC's attention. For one thing, the emergence of deeper and more robust private capital markets than we have ever had before allows large companies to stay private for far longer than they once could. For another, the capital-markets fees that a company must pay to go public are far higher in the United States than in other markets, giving entrepreneurs pause before listing their shares. And extensive acquisition activity over the past two decades has worked to combine thousands of public companies, reducing the number of listings on American exchanges. American capital markets can and should remain the envy of the world. Chairman Clayton has made clear that this area is a priority for him, and if confirmed, I would work closely with the Chairman, my fellow Commissioners, and the Staff to ensure that the Commission takes the steps necessary to keep our capital markets competitive. Q.3. What about the fact that investment banks' fees to underwrite initial public offerings has consistently clustered at seven percent over many decades? Why hasn't competition driven down the price to take young companies public, and if confirmed, will you seek to study this issue? A.3. The fees bankers earn for taking companies public are higher in the United States than in most other jurisdictions, and these fees are often the most important factor in the decision to go public. Scholars have long noted that investment banker fees have clustered around seven percent for a wide range of companies over a period of decades. \1\ The fact that American entrepreneurs are required to give up some seven percent of their creation in order to take their companies public seems to me to be an important factor in any assessment of the changing rates of IPOs in our markets. --------------------------------------------------------------------------- \1\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, ``The Seven Percent Solution'', 55 J. Fin. 1105 (2000) (``Investment bankers readily admit that the IPO business is very profitable, and that they avoid competing on fees because they don't want to turn it into a commodity business.''). --------------------------------------------------------------------------- To be sure, there are many reasons why companies choose not to go public today, and they all deserve attention--including the factors described in your question. If confirmed, I would look forward to working with your office to study this issue further--and take whatever actions are necessary to ensure that America's capital markets remain competitive. Additional Material Supplied for the Record WALL STREET JOURNAL ARTICLE SUBMITTED BY SENATOR VAN HOLLEN [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ``THE 8-K TRADING GAP'' SUBMITTED BY SENATOR VAN HOLLEN [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]