[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                       GAME STOPPED? WHO WINS AND
                       LOSES WHEN SHORT SELLERS,
                        SOCIAL MEDIA, AND RETAIL
                      INVESTORS COLLIDE, PART III

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

                            VIRTUAL HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 6, 2021

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 117-22
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                              __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
44-837 PDF                 WASHINGTON : 2021                     
          
-----------------------------------------------------------------------------------  

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York           BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            ANN WAGNER, Missouri
ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
JIM A. HIMES, Connecticut            ROGER WILLIAMS, Texas
BILL FOSTER, Illinois                FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio                   TOM EMMER, Minnesota
JUAN VARGAS, California              LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York             JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts      BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina           LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan              WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania         VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York   PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 6, 2021..................................................     1
Appendix:
    May 6, 2021..................................................    69

                               WITNESSES
                         Thursday, May 6, 2021

Bodson, Michael C., President and Chief Executive Officer, The 
  Depository Trust & Clearing Corporation (DTCC).................     6
Cook, Robert W., President and Chief Executive Officer, Financial 
  Industry Regulatory Authority (FINRA)..........................     8
Gensler, Hon. Gary, Chairman, U.S. Securities and Exchange 
  Commission (SEC)...............................................     5

                                APPENDIX

Prepared statements:
    Bodson, Michael C............................................    70
    Cook, Robert W...............................................    76
    Gensler, Hon. Gary...........................................    89

              Additional Material Submitted for the Record

Williams, Hon. Nikema::
    Written responses to questions for the record from Hon. Gary 
      Gensler....................................................    96

 
                       GAME STOPPED? WHO WINS AND
                       LOSES WHEN SHORT SELLERS,
                        SOCIAL MEDIA, AND RETAIL
                      INVESTORS COLLIDE, PART III

                              ----------                              


                         Thursday, May 6, 2021

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 12 p.m., via 
Webex, Hon. Maxine Waters [chairwoman of the committee] 
presiding.
    Members present: Representatives Waters, Maloney, Sherman, 
Meeks, Scott, Green, Cleaver, Perlmutter, Himes, Foster, 
Vargas, Gottheimer, Lawson, Axne, Casten, Torres, Adams, Tlaib, 
Dean, Garcia of Illinois, Williams of Georgia, Auchincloss; 
McHenry, Lucas, Posey, Luetkemeyer, Huizenga, Wagner, Barr, 
Williams of Texas, Hill, Zeldin, Loudermilk, Mooney, Davidson, 
Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil, 
Timmons, and Taylor.
    Chairwoman Waters. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    As a reminder, I ask all Members to keep themselves muted 
when they are not being recognized by the Chair. The staff has 
been instructed not to mute Members except when a Member is not 
being recognized by the Chair and there is inadvertent 
background noise.
    Members are also reminded that they may only participate in 
one remote proceeding at a time. If you are participating 
today, please keep your camera on, and if you choose to attend 
a different remote proceeding, please turn your camera off.
    Today's hearing is entitled, ``Game Stopped? Who Wins and 
Loses When Short Sellers, Social Media, and Retail Investors 
Collide, Part III.''
    I now recognize myself for 4 minutes to give an opening 
statement.
    Today, this committee convenes for part three of our series 
of hearings focused on market volatility related to GameStop 
and other stocks. In our first hearing on those events, we 
received testimony from the CEOs of trading app, Robinhood; 
Wall Street firms, Citadel and Melvin Capital; and social media 
company, Reddit; as well as Keith Gill, a trader involved in 
WallStreetsBets on subreddit. We heard directly from those 
involved in the short squeeze and volatility and we got the 
facts.
    In our second hearing, we received testimony from a number 
of capital markets experts and investor advocates to hear their 
views and begin to assess possible legislative and regulatory 
steps that may be necessary. We examined conflicts of interest 
in the market. We scrutinized payment for order flow, potential 
systemic risks to our financial system, the gamification of 
trading, the clearance and settlement process for trades, and 
the evolution of trading with the rising use of social media 
and new technologies.
    Today, we will focus on the regulatory response to the 
market volatility. Specifically, we will hear testimony from 
the U.S. Securities and Exchange Commission (SEC), the 
Financial Industry Regulatory Authority (FINRA), and the 
Deposit Trust and Clearing Corporation (DTCC) about their 
responses to events we are examining. It is critical for our 
cops on the block at the SEC to protect investors and ensure 
that our markets are transparent and fair. Unfortunately, the 
previous Administration's appointees to financial regulatory 
agencies were often more interested in helping out Wall Street 
than protecting Main Street.
    I am very pleased that, thanks to President Biden's strong 
leadership, we now have Gary Gensler at the helm of the SEC. 
Chair Gensler, I look forward to hearing your testimony and 
discussing your views on the short squeeze and surrounding 
events, as well as practices like payment for order flow.
    I am also interested in hearing from Mr. Cook and Mr. 
Bodson, the CEOs of private-sector corporation, FINRA, which 
oversees broker-dealers; and DTCC, which provides clearing and 
settlement services to our securities markets, respectively.
    Under my leadership, this committee is focused on ensuring 
accountability for Wall Street. I decided to convene this 
series of three hearings on this topic to ensure that Congress 
is well-informed on developments in and functioning of our 
capital markets, and to put Wall Street on notice that we are 
watching closely.
    I yield back the balance of my time, and I now recognize 
the ranking member of the committee, the gentleman from North 
Carolina, Mr. McHenry, for 4 minutes.
    Mr. McHenry. Thank you, Madam Chairwoman. I would like to 
talk about what was learned at our last hearing on GameStop, We 
learned that everyday Americans have a newfound interest in the 
markets, and that is positive. We learned that financial 
technology is here to stay, and it is providing more 
opportunities for retail investors to participate in our 
markets. That is positive. We learned that Reddit is powerful. 
And we learned that Roaring Kitty is indeed not a cat, and we 
know just as much as we did at the first hearing.
    And I continue to hear the same policy solutions from my 
Democrat colleagues, the repackaged, old, outdated, policy 
failures wrapped in whatever is in the news this week to sell 
the American people on the idea that this time is different. 
Well, it is not. Like so many other bad progressive ideas sold 
under the guise of investor protection, which I think is 
important, Democrats' proposals will ultimately reduce access 
to investment opportunities and charge D.C. bureaucrats and 
give them control of investing decisions of everyday Americans. 
If this committee is interested in responding to late January's 
events, we need to expand the credit investor regime, not 
restrict it.
    It is ridiculous that our securities laws force most 
everyday Americans to the sidelines of early-growth investment 
opportunities. We need to find innovative solutions that allow 
more people to invest in businesses they support, while 
retaining the flexibility our changing workforce needs and 
requires.
    This week I reintroduced my bill, the Gig Worker Equity 
Compensation Act, to expand the category of workers that can 
benefit from equity compensation to include nontraditional 
workers. If you want to see the juxtaposition of Democrat and 
Republican priorities right now, just yesterday, the Biden 
Administration moved to dismantle past efforts to provide gig 
workers with the flexibility they demand, that they need, that 
they require. If a State as liberal as California can recognize 
that a one-size-fits-all mandate on gig workers would be 
destructive, it should be obvious that the Biden Administration 
should not take those same actions that went down at the ballot 
box in California, actions that hurt nontraditional workers, 
not help them.
    I initially called for this hearing on GameStop to begin 
the process of fact finding to inform our policy discussions, 
and the bottom line is that we are still gathering a number of 
facts. That is why we have representatives from FINRA and DTCC 
testifying before us today. I think that is a good thing.
    Additionally, the SEC's review of the events is ongoing, as 
is the committee's work behind-the-scenes in terms of document 
review and interviews. Despite the ongoing investigations and 
the testimony we will receive today, many Democrats have their 
so-called solutions. A lot of these things have been kicked 
around for a long time.
    At our first GameStop hearing, I asked Democrats to side 
with everyday American investors. I will ask that same thing 
today. We should not punish everyday American investors with a 
Democrat agenda, a progressive agenda that results in fewer 
investment options or forces folks to start paying to make 
trades again. So, let's go off of what we have learned. Let's 
stand up for everyday investors and make it easier for them to 
invest, and let's tear down barriers keeping folks out of the 
market instead of throwing up new ones to impair their ability 
to be in the market. Let's stand up for equity--true equity--
and that is ownership of the American economy, and ownership in 
our capital markets so we can remain the center of the free 
world's economic policies.
    And with that, Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much, Mr. McHenry. I am 
pleased that you see something good about our hearing today.
    I now recognize the gentleman from California, Mr. Sherman, 
who is also the Chair of our Subcommittee on Investor 
Protection, Entrepreneurship, and Capital Markets, for 1 
minute.
    Mr. Sherman. I thank Chairman Gensler for being here, and I 
hope he joins us often. The ranking member is concerned about 
whether gig workers in my State have the protection that we 
accord employees. It is a little far from the mandate of our 
committee. But within our committee's jurisdiction is to make 
sure that when investors trade stocks, they get the best 
possible deal and are not told that there is zero transaction 
cost when the big transaction cost is the spread, and you are 
paying for the transaction unless you are getting the best 
possible price improvement. Price improvement may not be fully 
available if your broker is getting paid for order flow or if 
your broker is acting as a market-maker.
    We also need to look at short-sale disclosures. Right now, 
there are disclosures filed with the SEC quarterly. That is so 
1977. We would expect reports to be filed far more often, and 
we have to discuss what reports should be made public, and I 
look forward also to looking at margin selling.
    Chairwoman Waters. Thank you. I now recognize the ranking 
member of the subcommittee, the gentleman from Michigan, Mr. 
Huizenga, for 1 minute.
    Mr. Huizenga. Thanks, Madam Chairwoman. Advancements in 
technology have improved access to our capital markets and 
created new opportunities for countless Americans to 
participate in our markets who were previously excluded. App-
based interfaces, combined with zero commission trades, 
fractional share trading, and lowered account minimums, have 
ushered in a new generation of investors. However, instead of 
celebrating this new era of investment, how have my colleagues 
across the aisle responded for the most part? By falsely 
claiming that this increase in market participation has caused 
gamification in the experience, that markets are rigged, and 
some have even gone so far as to equating it to gambling in a 
casino.
    As Rahm Emanuel famously said, ``You never want a serious 
crisis to go to waste. It is an opportunity to do things that 
you think you could not do before.'' Well, that is exactly what 
my friends on the other side of the aisle are doing. They are 
exploiting a high-profile situation to push a radical 
progressive agenda of these proposed, small ``D,'' democratic 
solutions that will only further prevent everyday American 
investors from accessing our capital markets, and deny them the 
opportunity to further save and invest for a more prosperous 
future.
    I yield back.
    Chairwoman Waters. Thank you. I want to now welcome today's 
distinguished witnesses to the committee.
    First, we have the Honorable Gary Gensler, who is the 
recently-confirmed Chair of the U.S. Securities and Exchange 
Commission. This is Chair Gensler's first time appearing before 
the committee in his current capacity. He has previously served 
as Chair of the Commodity Futures Trading Commission, and in 
several senior roles at the Department of the Treasury.
    Second, we have Mr. Michael Bodson, who is the President 
and Chief Executive Officer of the Depository Trust & Clearing 
Corporation (DTCC).
    And finally, we have Mr. Robert Cook, who is the President 
and Chief Executive Officer of the Financial Industry 
Regulatory Authority (FINRA).
    Each of you will have 5 minutes to summarize your 
testimony. You should be able to see a timer on your screen 
that will indicate how much time you have left, and a chime 
will go off at the end of your time. I would ask you to be 
mindful of the timer, and quickly wrap up your testimony if you 
hear the chime. And without objection, your written statements 
will be made a part of the record.
    Chair Gensler, you are now recognized for 5 minutes to 
present your oral testimony.

    STATEMENT OF THE HONORABLE GARY GENSLER, CHAIRMAN, U.S. 
            SECURITIES AND EXCHANGE COMMISSION (SEC)

    Mr. Gensler. Good afternoon, Chairwoman Waters, Ranking 
Member McHenry, and members of the committee. I am honored to 
appear before you today for the first time as Chair of the 
Securities and Exchange Commission. I have been in front of 
this committee multiple times in multiple Administrations, and 
I will say this: I look forward to the day when we can meet in 
person in your beautiful hearing room again.
    Thank you for inviting me to testify about January's market 
volatility, and I am pleased to be here with Mike Bodson and 
Robert Cook, whom I have known for a number of years as well.
    I would like to note that my views are my own, and I am not 
speaking on behalf of my fellow Commissioners or of the SEC 
staff.
    These events are part of a larger story about the 
intersection of finance and technology, which have lived in a 
symbiotic relationship since antiquity. And one thing that I 
have come to believe is that technology can allow greater 
access to our capital markets. Our central question is this, 
though: When new technologies come along and change the face of 
finance, as they have done for decades, how do we continue to 
achieve our core public policy goals?
    In my role, I will always be animated by thinking about 
working families in the SEC's three-part mission: protecting 
investors; promoting fair, orderly, and efficient markets; and 
facilitating capital formation. I am pleased to submit written 
testimony that goes into detail on several factors at play 
during January's events. I will just highlight a few of those 
key issues in this opening statement.
    The first is gamification and user experience. I agree with 
the Members who have already said that these new user 
experiences have facilitated a lot of opportunity for 
investors. They have expanded access to capital, making it 
easier for investors to sign up, start trading, and learn about 
investing. These apps also use a host of features that have 
come to be familiar in our increasingly-online world such as 
gamification, behavioral props, and predictive data analytics. 
Many of these features, in essence, encourage investors to 
trade more frequently. This could have a substantial effect on 
a saver's financial position. Some academic studies suggest 
that the more actively you trade, the lower your returns, so 
while they are encouraging investing, they may also be 
encouraging active trading.
    I have asked the staff to prepare a request for public 
comment on these issues. The SEC must remain attuned to 
rapidly-changing technologies with an eye to freshening up our 
rule set, where appropriate, to continue to achieve our 
mission. If we don't address this now, the investing public, 
those saving for future retirement and education, may shoulder 
the burden later.
    The second topic I would like to discuss is this area 
around payment for order flow. This practice brings to mind a 
number of questions, including whether it creates inherent 
conflicts of interest between the broker-dealers on the one 
side, and their customers on the other, who want to achieve, 
under our rules, best execution. Now, it is important to 
consider this, I think, in the overall context of market 
structure. Currently, a significant amount of retail orders are 
routed to a small number of wholesalers. I detail this more in 
my written testimony, but I think it raises questions about 
whether the market structure best promotes fair, orderly, and 
efficient markets. Evolving market technologies, along with 
this payment for order flow, has also led to increasing market 
concentration, which we have found, and history and economics 
show, can lead to fragility in markets, deter healthy 
competition, and limit innovation.
    The next issue is short selling and market transparency, 
and, again, as outlined in my written testimony, under the 
Dodd-Frank Act reforms, the SEC received mandates and 
authorities to increase transparency in the markets. So, I have 
asked SEC staff to prepare recommendations on transparency and 
short selling, stock loan markets, and something called total 
return swaps, which was at the center of this Archegos event in 
March, for Commission consideration. And the five of us 
Commissioners can take a look to see what to do next.
    Next, today's social media tools have far greater reach, 
scale, and anonymity than previous technology. This raises the 
possibility that wrongdoers will attempt to use their powerful 
forums to hype certain stocks or manipulate markets. I am not 
concerned about regular investors exercising their free speech 
rights online; I am more concerned whether bad actors 
potentially take advantage of influential platforms.
    Further, the decisions by some broker-dealers to redirect 
customer trading raised several issues around clearance and 
settlement. In essence, they stopped investors from investing, 
and this raises questions of the market, what I will call, 
``plumbing.'' Sorry to Mike Bodson if I call infrastructure, 
``plumbing,'' but investors were shut out. I do believe we can 
lower costs and risk in our market by shortening the settlement 
cycle. For instance, I have asked SEC staff to put together a 
draft proposal for the Commission on the possibility of 
shortening the settlement cycles.
    Thank you. I look forward to your questions. It is good to 
be back with you, and, again, I look forward to doing this in 
person.
    [The prepared statement of Chairman Gensler can be found on 
page 89 of the appendix.]
    Chairwoman Waters. Thank you, Chair Gensler. Next, we will 
go to Mr. Bodson. You are now recognized for 5 minutes to 
present your oral testimony.

 STATEMENT OF MICHAEL C. BODSON, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, THE DEPOSITORY TRUST & CLEARING CORPORATION (DTCC)

    Mr. Bodson. Chairwoman Waters, Ranking Member McHenry, and 
members of the committee, my name is Michael Bodson, and I am 
the CEO of The Depository Trust & Clearing Corporation (DTCC), 
a holding company that operates three SEC-regulated clearing 
agencies, including the National Securities Clearing 
Corporation, or NSCC, of which I will speak to you today. I 
appreciate this opportunity to speak to the committee.
    In my line of work, the best days are those when nothing 
too exciting happens. That is because DTCC is, at its heart, a 
risk management organization enhancing efficiencies and 
reliability in the markets. On a normal day, we process about 
200 million buys and sells for a value of nearly $2 trillion. 
Through netting, that is reduced to about $1 million in 
securities movement and $35 billion in cash movement, creating 
significant efficiencies in the market.
    When you buy or sell a stock, it takes 2 days for the trade 
to be completed. This is called T+2 settlement: trade date plus 
2 days. A lot could happen during those 2 days that could 
create a risk that the buyer or seller fails to deliver money 
or shares. Because of clearing, investors don't have to worry 
about that. Clearing protects both firms and their customers 
against default risk. Default risk can destabilize markets, 
particularly in volatile times. People are reluctant to trade 
if they aren't sure they will get what they agreed to. And 
imagine how inefficient it would be for every market 
participant to have to assess the creditworthiness of everyone 
else in the market.
    That is where DTCC comes in. We are infrastructure. You can 
call us, ``plumbing.'' We are not insulted. We operate behind 
the scenes to guarantee completion of virtually all equity 
trades. We do not trade or take positions or bet on the 
direction in the market. We do not give investment advice. We 
do not know who the customers are behind the trades or their 
reasons for trading. We simply process and risk-manage trades.
    DTCC protects against default risk by collecting margin, 
which is money that clearing members post as collateral. If a 
declaring member defaults between trade date and settlement 
date, DTCC uses that collateral to complete the defaulting 
member's trades no matter how much prices may have changed.
    Margin requirements are calculated using statistical models 
and model-based calculations that are set forth in our rules, 
which must be approved by the SEC. Margin requirements increase 
the risk, and the member's portfolio increases. In other words, 
the greater the potential loss the default could produce, the 
greater the need for collateral.
    Volatility has a very large impact on margin requirements. 
We saw this play out during the week of January 25th. Both 
volume and volatility that week were extraordinary, exceeding 
the pandemic-related record volume from March 2020 by more than 
100 million trades. The concentration of trading in a small 
number of meme stocks that week was also extraordinary. 
Applying those statistical models of formulas, margin 
requirements increased substantially for firms with large 
volumes in these stocks.
    I appreciate that this committee is exploring ways to 
continue to improve our markets. I would like to describe one 
effort that DTCC has undertaken to date, which is shortening 
the settlement cycle for equities from 2 days to 1 day. That 
may sound like a small thing if it is just 1 day, but cutting 
the settlement period in half can make a difference. We believe 
that shortening the settlement cycle to T+1 would enhance 
market resilience, reduce margin requirements, and lower costs 
for investors. Following a multi-year, industry-wide effort, 
settlements were shortened in 2017 from T+3 to T+2, achieving 
margin savings estimated at 25 percent. DTCC estimates that the 
volatility component of margin requirement could potentially be 
reduced by 40 percent when it moves to T+1. This could save our 
clearing members upwards of $6 billion per day during periods 
of extreme volatility.
    While DTCC's technology can support T+1 today, changing the 
industry convention is a major undertaking that will require 
coordinated efforts across the whole industry. Over the past 
year, DTCC has engaged with a cross-section of the industry to 
assess readiness to further shorten the settlement cycle. In 
February, DTCC published a White Paper outlining the benefits 
associated with multiple changes to the settlement cycle, 
including a move to T+1. We are working with the Securities 
Industry and Financial Markets Association (SIFMA) and the 
Investment Company Institute (ICI) to accelerate this effort.
    Thank you again for the opportunity to testify today. I 
look forward to your questions.
    [The prepared statement of Mr. Bodson can be found on page 
70 of the appendix.]
    Chairwoman Waters. Thank you very much, Mr. Bodson. Mr. 
Cook, you are now recognized for 5 minutes to present your oral 
testimony.

  STATEMENT OF ROBERT W. COOK, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

    Mr. Cook. Thank you, Chairwoman Waters, Ranking Member 
McHenry, and members of the committee for this opportunity to 
testify today, together with Chair Gensler and Mr. Bodson, 
regarding the January market events related to trading in 
GameStop and in other stocks. We commend the committee's review 
of these events and related investor protection concerns.
    FINRA's mission is to protect investors and promote market 
integrity. We are a not-for-profit self-regulatory organization 
(SRO), and we support the SEC in overseeing one critical part 
of the securities industry: certain broker-dealers and the 
individuals they employ. To that end, we administer 
comprehensive regulatory programs, including surveillance, risk 
monitoring, examination, and enforcement. And we, in turn, are 
subject to comprehensive examination and oversight by the SEC.
    This committee has heard already about the events of 
January, including the significant price swings and trading 
volume in GameStop and a limited number of other stocks. In 
this context, some broker-dealers restricted trading in these 
securities on a short-term basis. This led to confusion and 
frustration among some investors and concerns about the 
fairness of the markets. The event also focused attention on 
the growth of popular new retail trading platforms and 
services, changes in investor behavior, and the influence of 
social media on the markets.
    Our markets are dynamic and are continually evolving. 
Market participants constantly innovate new technologies, 
methods of communication, and investment products and services. 
These innovations often benefit investors, such as by providing 
easier access to the markets, lower costs, and a wider range of 
investment products and services to choose from, but they can 
also present new and sometimes unanticipated risks, so 
regulators must constantly review whether the rules governing 
the road need to be updated in light of new developments to 
better protect investors, while still facilitating vibrant and 
innovative markets and the opportunities these create. At 
FINRA, we are committed to doing just that. One important 
resource we rely on in this process is the research of the 
FINRA Investor Education Foundation, including recent research 
on new, inexperienced investors, and how they approach 
investing.
    Since the events of January, FINRA has established an 
internal working group that is devoting significant resources 
to investigating whether its broker-dealer members comply with 
SEC and FINRA rules. We have also issued regulatory notices 
reminding firms of relevant duties and responsibilities in this 
area.
    Although I cannot comment on specific firms or ongoing 
investigations or enforcement matters, generally speaking, we 
are reviewing order routing practices, the circumstances under 
which trading restrictions were imposed, any potential 
manipulative conduct, and compliance with short-sale 
requirements, among other matters. I can assure the committee 
that we will take all appropriate disciplinary or other 
remedial action as warranted if the facts indicate a violation 
of SEC or FINRA rules.
    The upcoming SEC report on these market events will be 
critical in analyzing whether existing rules and standards 
should be updated. Many of the policy questions raised in your 
hearings to date involve areas in which the SEC has primary 
policymaking responsibilities such as market structure, payment 
for order flow, short sale regulation and disclosure, the 
settlement cycle, enhanced broker-dealer financial 
responsibility requirements, and whether certain communications 
with retail investors constitute recommendations that should be 
covered by the SEC's Regulation Best Interest. We will support 
the SEC in its review of these areas and then align FINRA's 
rules and oversight activities where necessary or appropriate.
    My written testimony offers some further perspectives on 
key topics under the SEC's jurisdiction and also describes some 
areas where we are considering whether updates to guidance 
regarding our own rules would be appropriate. For example, we 
intend to review short sale position reporting by broker-
dealers, as well as continue our review of the effects of 
gamification on retail investors. FINRA looks forward to 
working with this committee, the SEC, and our fellow regulators 
to review and learn from these recent market events so that we 
can strengthen investor protections and enhance confidence in 
our nation's capital markets.
    Thank you, and I would be happy to answer your questions.
    [The prepared statement of Mr. Cook can be found on page 76 
of the appendix.]
    Chairwoman Waters. Thank you very much, Mr. Cook.
    I now recognize myself for 5 minutes for questions, and my 
first question is for Chair Gensler. This committee has 
examined numerous issues that have arisen out of the GameStop 
short squeeze that took place earlier this year, including 
systemic risk arising from firms such as Citadel, who are 
executing close to 50 percent of all U.S.-listed retail volume. 
During the first hearing, I questioned whether Citadel poses a 
systemic risk to our financial markets. I am also concerned 
about what Citadel's outsized market impact means for pricing 
and best execution, another market structure issue that this 
committee has examined as part of these hearings.
    As the newly-confirmed Chair of the SEC, what will your 
approach be with respect to mitigating the risk associated with 
outsized market impact and understanding threats to our 
financial stability?
    Mr. Gensler. Thank you for that question. I think that at 
the heart of well-functioning markets and the mission of the 
SEC--fair, orderly, and efficient markets--is promoting 
competition in markets. It can be done through transparency, 
but it is also looking at our rule set to make sure that our 
rule set inspires more competition rather than concentration. 
And we have seen, as you noted in your hearing, an increasing 
concentration in market making, and also, separately, in 
brokerage, and particularly around retail order flow.
    And so I have asked the staff from the Divisions of 
Economic Risk and Analysis, and Trading and Markets, to sort of 
give us a view, give internally the Commission a view of what 
we should be thinking about in our market structure to address 
this.
    We have seen such concentration come in other markets. We 
know it is in search. When we all go online and search, there 
is really one dominant search engine. We know it is true in 
retail buying, retail products online. There is some dominance 
to that. And so, our modern 2020's economy does tend towards 
certain, what is called economics network effects. So, I have 
asked the staff just to think through that and to provide us 
with guidance as Commissioners on how do we promote competition 
in the face of these network economic effects that are leading 
to concentration.
    Chairwoman Waters. I want to thank you for that response, 
and I think what I am hearing from you is that there is real 
concern about concentration. And while you have instructed 
staff to do some additional research to determine the extent of 
it, it is something that we should be concerned about, is that 
correct?
    Mr. Gensler. Yes. I think that capital formation for 
issuers and for investors on the other side benefit from some 
broad competition amongst market actors. And as we get more 
concentration in the middle market, whether it is market making 
or brokerage, we could lose that concentration. It could lead 
to more fragile markets, meaning less orderly, and also more 
costly or less efficient markets. And that is what history and 
economics tell us when we get concentration.
    Chairwoman Waters. Thank you very much. I appreciate the 
concern that you are identifying as we talked about this 
concentration, and what could happen if, in fact, we are not 
aware of it and don't make an effort to deal with it.
    I now recognize the ranking member, Mr. McHenry, for his 
questions.
    Mr. McHenry. Thank you, Madam Chairwoman. Chairman Gensler, 
thank you for being here, and welcome back before the 
committee, and congratulations on your new role. I know that 
Acting Chair Lee, at the time of this GameStop trade, 
emphasized that the core market infrastructure is quite 
resilient. Does the Commission intend to release any additional 
findings?
    Mr. Gensler. Thank you. And thank you for our meeting 
earlier this week. I look forward to doing those on a regular 
basis with the Chair, and you, and the subcommittee, and other 
members. We are looking at putting together a report. I am only 
in my 3rd week on the job, but our economists, our Trading and 
Markets folks have come together, and I think we will be 
releasing a report sometime this summer that will detail the 
range of activities out of the January events.
    Mr. McHenry. Thank you for that. Small businesses right now 
are emerging from the pandemic just like everyone is, and these 
small businesses need access to capital. And, as you know, I 
have been focused on some of the burdensome requirements of the 
original Regulation Crowdfunding (Reg CF), which I helped 
legislate, and President Obama signed into law. There have been 
some helpful changes made to Reg CF to make it more efficient 
and to boost trading in Reg A and Reg CF securities, such as 
preemption under certain State regulations. Do you support 
these streamlining efforts for small businesses, and are you 
looking at additional steps?
    Mr. Gensler. I look forward to working with you and your 
staff to learn more about your initiatives and suggestions. But 
at the core, and maybe it is just a bit because my dad had a 
small business, never more than 30 employees, and didn't have 
access to the capital markets, but I think that small business, 
entrepreneur efforts are really kind of, if I might say, a bit 
of the backbone of American entrepreneurism and our economy. 
And so, access to the capital markets is a critical piece, 
whether it is accessing loans that might be securitized in the 
markets or accessing through equities. But I look forward to 
hearing more from you and your staff on ideas.
    Mr. McHenry. Okay. But no comment on Reg CF?
    Mr. Gensler. Again, I'm just 3 weeks on the job, so I 
haven't looked closely at Reg CF yet or, frankly, done a 
detailed enough briefing to see how we can, as you say, and I 
really do believe this, facilitate capital formation up and 
down the issue or spectrum.
    Mr. McHenry. Let's pivot to something that you spent some 
time out of government understanding. I think what we all have 
tried to seek is greater collaboration across agencies on the 
regulatory framework for digital assets, cryptocurrencies, 
notably. This includes more engagement from industry and 
appropriate regulators. In 2019, SEC staff produced the 
framework for investment contract analysis of digital assets. 
Since then, the staff has sought feedback on a number of 
issues, most recently on the evolving standards and the best 
practices for custody. This is progress, but I believe more 
concrete steps are necessary to further the crypto market. As 
you look at this issue, what steps can you outline to bring 
regulatory clarity so that we can have a vibrant digital asset 
marketplace with legitimate money and the rule of law?
    Mr. Gensler. Thank you for asking that. And I think that 
this market, which is close to $2 trillion, the crypto asset 
market, is one that could benefit from greater investor 
protection within the SEC's current authorities, our 
authorities around securities, and around asset managers and 
products that might invest in these cryptocurrencies. As you 
mentioned, we put out a comment, I think it was in October or 
November, asking for feedback on custody. I would hope that we 
would move forward and provide greater clarity around custody.
    I do think that working with Congress, and I think it is 
only Congress that could really address it, it would be good to 
consider, if you would ask my thoughts, to consider whether to 
bring greater investor protection to the crypto exchanges. And 
I think if that were the case, because right now the exchanges 
trading in these crypto assets do not have a regulatory 
framework either at the SEC, or our sister agency, the 
Commodity Futures Trading Commission, that could instill 
greater confidence. Right now, there is not a market regulator 
around these crypto exchanges, and, thus, there is really not a 
protection against fraud or manipulation or a--
    Mr. McHenry. I have time for one final question, Chairman 
Gensler. I am encouraged by your comments on crypto. Last year, 
the Commission proposed to allow certain gig workers to have 
access to equity compensation under the SEC's rules. Will you 
commit to finishing this important rulemaking?
    Mr. Gensler. Again, I'm in my 3rd week, so I need to get a 
briefing on it. I commit to work with the staff to understand 
what the comments were, because I don't know what comments came 
in, and to trying to understand the economics around that rule 
set.
    Mr. McHenry. Thank you, and I wish you great luck in your 
tenure, and thank you for your testimony. Thank you for your 
outreach.
    Mr. Gensler. Thank you.
    Chairwoman Waters. I now recognize the gentlewoman from New 
York, Mrs. Maloney, for 5 minutes.
    [No response.]
    Chairwoman Waters. We will go on to the gentlewoman from 
New York, Ms. Velazquez.
    [No response.]
    Chairwoman Waters. The gentleman from California, Mr. 
Sherman, who is also the Chair of our Subcommittee on Investor 
Protection, Entrepreneurship, and Capital Markets, is now 
recognized for 5 minutes.
    Mr. Sherman. Responding to the ranking member, who wants to 
instill confidence in those buying and selling 
cryptocurrencies, the only confidence I have is the U.S. dollar 
is an outstanding good currency, but cryptocurrencies, if they 
succeed, will have unique appeal to only two groups: narco-
terrorists; and tax evaders. And for us to channel the animal 
spirits that should be investing in the American economy into 
creating tools for those who want to evade U.S. taxes is a step 
toward a much weaker America.
    Mr. Gensler, you talked about Archegos and the total return 
swap. The image I have of 1929 is investors jumping out of 
buildings on Wall Street because they bought stock at 7, 8, 9 
times margin. And in the 1930s, we decided to protect the 
markets and say that if you want to buy stock, the most margin 
you could get was 1-time margins, sometimes a little more. But 
we then see that using a total return swap, the big guys, like 
Archegos, can get 7 times margin, can invest only one-seventh 
of the cash to control $100 million worth of this block of 
shares or that block of shares.
    This raises the question, is 7-to-1 margin fine for 
everybody, and is that good for the markets? Should 1-time 
margin either rule for everybody and we should plug the 
loopholes, or should we continue to have a system where, if you 
are a family office, you can have 7 times margin by calling it 
a total return slot, and if you are the regular Robinhood 
investor, you can only get 1 time? What should the market rule 
be?
    Mr. Gensler. I think you raise some very important 
questions that came out of the market events late in March, not 
the January ones but the March events around a family office, 
Archegos. Family offices are outside of much of the SEC's 
remit, but not all of it.
    Mr. Sherman. If I can clarify, this is not a question about 
family offices.
    Mr. Gensler. Oh, okay.
    Mr. Sherman. Just that one investment company that has $1 
billion and decides they want a 7-to-1 margin. The fact this 
was a family office, put that aside. Whether you disclose it or 
you don't, whether you are a family office or a hedge fund or a 
billionaire, should you be able to get 7-to-1 margin, and if 
so, why can't Robinhood?
    Mr. Gensler. I have asked staff to better understand--and, 
again, it is just the 3rd week--the rules that were adopted by 
the SEC that are yet to go into final implementation around the 
margin and for these securities-based swaps, and how they would 
have affected the circumstances.
    Mr. Sherman. I look forward--
    Mr. Gensler. But you are right, sir, that they are 
different than the retail investor, and this is true across our 
markets. And I have asked staff to better inform me as to what 
are we seeing there.
    Mr. Sherman. For Mr. Cook, when it comes to disclosing 
short selling, there are arguments on both sides as to whether 
to disclose what an individual investor is doing. Some say it 
is harmful, some say it is helpful, but there seems to be 
agreement that the aggregate information is helpful, but we 
ought to know in aggregate how many shares of GameStop are 
short. You generate that information, but you don't put it on 
your website. I am told that you provide it to the exchanges 
and they publish it if they want to, and, often behind a pay 
wall. Why doesn't FINRA disclose all this information to 
everybody for free as quickly as you can?
    Mr. Cook. Thank you, Mr. Sherman. That is a great question. 
As we look at disclosure around short selling, I think there 
are some good arguments that we can do more here. I have asked 
our staff to prepare a regulatory notice to solicit comment on 
changes to FINRA's disclosure here to make it more frequent and 
more granular. And certainly as part of that, we can look at 
the way in which that disclosure is disseminated.
    Mr. Sherman. Is there any justification for what is a 
regulatory agency generating this information and giving it to 
private companies for them to sell rather than disclosing it to 
the public?
    Mr. Cook. I appreciate the gist of your question, sir, and 
I am inclined to be biased towards making it publicly 
available. I don't understand all the history behind how this 
developed. I think that is something we need to look into, but 
I commit to you that we can certainly do that.
    Mr. Sherman. My time has expired, but I look forward to 
looking at not only payment for order flow, but how we get the 
best price improvement for every investor, whether it be an 
internalized transaction or when it goes to a market maker. I 
will just say, if Citadel can't pay Robinhood, would it be 
different if Citadel bought Robinhood? That is just for the 
record. I yield back.
    Chairwoman Waters. Thank you very much. The gentlewoman 
from Missouri, Mrs. Wagner, is now recognized for 5 minutes.
    Mrs. Wagner. Thank you, Madam Chairwoman. Chairman Gensler, 
welcome as the new SEC Chair. And I want to take this 
opportunity to veer off course a bit and mention that after 
years of thorough and proactive input and feedback from 
stakeholders, including Main Street investors, the SEC has 
finalized its Regulation Best Interest (Reg BI), which is now 
in effect. This rule raises the standard of care for broker-
dealers while preserving access and choices for Main Street 
investors.
    Chairman Gensler, under your leadership, does the SEC plan 
to make any amendments to Reg BI?
    Mr. Gensler. Thank you. It's good to see you here today. As 
I said in my confirmation hearing, when a similar question came 
up, I think that it is important that investors actually have 
brokers take their best interests to heart, and that is what we 
are going to do through examination and enforcement guidance, 
ensure that that rule is fully complied with as written.
    Mrs. Wagner. Great. Applied as written. I'm glad to hear 
it. Thank you. Chairman Gensler, as you begin your work at the 
SEC, I want to really urge you to ensure that the Commission 
and its staff, under your leadership, follow its very core 
mission, which is to protect investors, which I care deeply 
about here in Missouri's 2nd District; to maintain fair, 
orderly, and efficient markets; and to facilitate capital 
formation. I want to thank you for appearing before us today, 
and I hope that we can work together to provide investment 
choice, and access, and affordability, I would say, to 
America's Main Street investors. Thank you.
    Mr. Bodson, is it possible that a financial transaction tax 
(FTT) could increase financial market volatility?
    Mr. Bodson. Thank you, Congresswoman. FTT is not an area of 
my expertise. Obviously, there have been a lot of studies done 
in a lot of different markets with very, very mixed results, 
mostly focused on whether or not they are an effective tool for 
raising taxes. In some markets, like Hong Kong, they have been 
effective, but they have a very different income tax and 
capital gain structure, and no capital gains tax. In other 
markets, they have been shown to limit trading or subdue it, so 
they don't have the effect that is expected. I have not seen 
anything discussing FTTs and volatility, per se. My uneducated 
guess would be they would be somewhat separated, but, again, I 
have not seen any studies to indicate either way.
    Mrs. Wagner. Aren't there more effective ways to improve 
our financial market operations than the bills being proposed 
today? Can you describe any of those, Mr. Bodson?
    Mr. Bodson. Thank you, Congresswoman. The step from T+2 to 
T+1 will create a lot of efficiencies in the marketplace, both 
on the operational side as well as lowering the margin 
requirements that we imposed because of the 2-day settlement 
versus 1-day settlement. So, I think those would be steps in 
the right direction in terms of lowering cost, not just for our 
direct members, but for the end beneficiaries, be it mutual 
fund, pension funds, or the small retail investor. We look to 
decrease cost whichever way we can.
    Mrs. Wagner. Mr. Bodson, in your view, how would shortening 
the settlement cycle help prevent future trading restrictions 
similar to the ones imposed by Robinhood and other brokerages 
earlier this year?
    Mr. Bodson. I am not aware of the reasons for other firms, 
so I am not going to speculate about that. Robinhood did say 
that their decision was based on their ability to meet our 
margin charges. If we do lessen the time to settlement from T+2 
to T+1--time is risk, which I think has been well explained--
that by lowering the period, the amount of open transactions 
that we have to charge margin against would get smaller. And 
our estimation is that the volatility charge, which is a main 
component, will go down by 40 percent. So in that sense, the 
capital charge against Robinhood would have been smaller, but, 
again, it is a little bit of apples and oranges, because to say 
it would automatically happen without knowing the market 
circumstances obviously is hard to say. But there would be a 
benefit to firms in having lower capital charges.
    Mrs. Wagner. It sounds like, if proposed, going even 
further than T+1 and moving to real-time trade settlement. What 
sort of impact do you think this would have on the market 
liquidity?
    Mr. Bodson. We are not a proponent for a real-time gross 
settlement, as you articulate. You would lose all the benefits 
that our clearinghouse provides, all the netting inefficiencies 
I spoke about in terms of trillions of trades being netted down 
to millions of movements or 100 millions of trades going down 
to millions of movements, and trillions of dollars being netted 
down to billions of dollars. You would lose all that benefit. 
All transactions would have to be pre-funded and the securities 
would have to be on hand, so it would have a very large impact 
on institutional trading. It would cause some liquidity issues 
across the marketplace, so, a bridge too far, in my eyes.
    Mrs. Wagner. Thank you, Mr. Bodson. My time has expired, 
and, Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you. The gentleman from Georgia, 
Mr. Scott, who is also the Chair of the House Agriculture 
Committee, is now recognized for 5 minutes.
    Mr. Scott. Thank you, Chairwoman Waters, for this 
interesting and much-needed hearing. The question before us 
today is, how can we on the Financial Services Committee ensure 
that our investors can both have access to our markets, but 
also are able to participate in our markets by investing 
safely? You see, when erroneous and inaccurate information 
posted on social media sites has the ability to broadly 
influence investors and move the market, sometimes drastically, 
this poses a serious question for you, our regulators. There is 
now such a huge hole in our regulatory process because of 
GameStop with inexperienced investors relying on unverified 
information from unqualified social media.
    Mr. Cook, let me start with you. How can we effectively 
regulate the impact of new technology social media sites as 
they pertain to inexperienced investors, and also, how do we 
treat that investment advice they are getting from unqualified 
people on social media? And then the real question, who is held 
accountable when bad investment advice leads to market 
volatility like we have seen and massive losses for our 
investors? I would like for the three of you--Chair Gensler, 
Mr. Cook, and Mr. Bodson--to answer this important question and 
the three parts that I outlined. This is what the American 
people need answers to from you, the regulators. Mr. Cook, why 
don't you start?
    Mr. Cook. Thank you, Congressman, for that question. I 
think you raised some really profound questions about where 
technology and other aspects of investor behavior may be going, 
and how does that fit within the current regulatory regime. 
When we talk about statements by people on social media and 
other places, just to be clear, FINRA doesn't regulate that 
environment, and we would look to the SEC in sort of 
understanding whether existing authorities around concepts like 
manipulation or providing investment advice might apply. I do 
think that what we are also seeing, though, to your point about 
retail investors making decisions without an intermediary or a 
financial advisor, is an important one. As we see more of that 
happen, and we are seeing a lot of that happen, I think we need 
to ask whether the existing regime is adequate in that regard.
    Mr. Scott. Let me quickly get to Chair Gensler. I worked 
with him when he was Chair of the CFTC. Chair Gensler, how do 
we hold somebody accountable? Answer this for me. As Mr. Cook 
just said, the SEC is the one responsible. What do we do about 
this, Chair Gensler?
    Mr. Gensler. I think you raise a good point. I know, 
probably like me, it is not about somebody's free speech rights 
on social media, but if somebody is trying to manipulate a 
market, to defraud the market through social media, and in our 
rapidly-changing technology, it could be computers and not even 
humans, by the way. It could be computers communicating. So, 
the SEC is a cop on the beat. We are going to vigorously lean 
in against individuals and companies to try to assess, but we 
will have to update our resources, too, to be able to see that 
relationship.
    Mr. Scott. My time is counting down. How are you going to 
solve this? Do you feel that we can so we don't have any more 
of this GameStop?
    Mr. Gensler. Madam Chairwoman, I don't know what I am 
supposed to do, because the timer is beeping.
    Chairwoman Waters. Thank you. I would expect that you would 
respond in writing to that question as we move on.
    And I am now going to call on the gentleman from Oklahoma, 
Mr. Lucas, who is recognized for 5 minutes.
    Mr. Lucas. Thank you, Madam Chairwoman. First, 
congratulations, Chairman Gensler, on your confirmation. I have 
confidence that you will bring the same gusto and tenacity to 
your role as you did as Chairman of the CFTC, and I look 
forward to working with you. And for the benefit of our 
colleagues, perhaps who are not on the Agriculture Committee, 
of course, Chairman Scott, you and I spent a lot of time in a 
previous position, both of us, working on a variety of issues 
over there. So that said, this past February, Acting Chair Lee 
announced that the SEC would enhance its focus on climate-
related disclosure for public company filings and would begin 
to update climate disclosure guidance. As you can imagine, the 
industries that are vital to Oklahoma, meaning agriculture and 
energy, are following this topic very closely. I will put it 
that way.
    Chairman Gensler, could you shed some light on what this 
enhanced focus means? Does this represent a change from current 
SEC practices, or is this a continuation of current policy?
    Mr. Gensler. First, let me say thank you, I really do look 
forward to working with you and Chair Scott. I think we did 
some good work together on behalf of the American public, and 
on behalf of agricultural interests across the country as well.
    If I can broaden it out a little bit, I think that 
disclosure has been at the core of the securities laws for 90 
years. Investors get to take risk, but they want to understand 
their risk and have disclosures from the issuing companies, and 
technology has changed, markets have changed.
    So, what I have asked the staff to do is to prepare 
recommendations to the Commission on how we can, through notice 
and comment, hearing a lot of public input as to what are those 
disclosures in a climate-risked area, that investors want to 
take into consideration in their decisions and their investment 
decisions. Acting Chair Lee already put out a comment period. 
We are going to benefit from that, and I encourage the public 
to weigh in and tell us what is important to them and their 
investment decisions and their proxy decisions, and the like.
    And I think it actually can help an issuer to bring some 
consistency and comparability in this area because there are a 
lot of investors that are asking for things. We can try to 
maybe help bring some consistency and comparability, of course, 
through economic analysis and vital input from the public.
    Mr. Lucas. I promise you, Mr. Chairman, you have gotten the 
attention of my constituents, and, of course, how questions are 
asked and how the data is interpreted can have a dramatic 
effect. So with that in mind, give me a feel for what kind of a 
timeline we are looking at when we get to the review part of 
this process, where my folks can offer their insights?
    Mr. Gensler. If they wish, we could get some insight from 
them and input. There is an open comment period right now 
through June--we can tell you the exact date, but through 
June--that Acting Chair Lee had put up. But I think based on 
that and the economic analysis, we will try to put a proposal 
together. I don't want to commit to a certain month, since I 
have only been there for 3 weeks, but to try to put a proposal 
together and then put that out to public comment based on what 
we have already heard this summer. And then, that sort of 
starts a multi-month process after that.
    Mr. Lucas. Along that line, Mr. Chairman, the SEC has also 
created a climate and ESG task force within the Division of 
Enforcement to, I believe the phraseology is, develop 
initiatives to proactively identify ESG-related misconduct. Can 
you visit with us for a moment about that, and do you envision 
that there will be enforcement actions prompted by the task 
force based on this new guidance? This new standard, I guess, 
is the better way to put it.
    Mr. Gensler. The task force is looking at the guidance that 
is already in place. There is guidance that was put out on 
climate, I think in 2010. Two things: one, to see if companies 
are following that 2010 guidance and following the overall 
important disclosure regimes that are in place at this point in 
time; and two, it helps us and informs the Commission, all five 
of us, as we move forward to consider any future rules because 
we can sort of learn from what is happening right now in the 
Division of Corporation Finance, in the Division of 
Enforcement, and in the Division of Examinations, what is going 
on now. So one is just, are folks complying with the rules and 
laws that are in place, but two, it helps inform us about some 
of what is going on and how we can help bring more consistency 
and comparability in the future.
    Mr. Lucas. Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you. The gentleman from Texas, Mr. 
Green, who is also the Chair of our Subcommittee on Oversight 
and Investigations, is now recognized for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman, and I thank the 
witnesses for appearing as well.
    Madam Chairwoman, as you know, from the genesis of this 
process I have been concerned about trading ahead, and you 
called to our attention earlier that the one company, the 
largest market-maker, executes approximately 50 percent of all 
U.S. retail volume. That is quite an amount for one firm to 
manage, and that causes a good deal of consternation, 
especially when this firm finds itself engaged in trading 
ahead. There are penalties associated with trading ahead, but 
these penalties are primarily civil penalties. And as a result 
of a civil penalty, many times there is no acknowledgement of 
liability, just the penalty paid. For example, in one case, 
$700,000 was paid, but that $700,000, while it seems like a 
lot, really is not when we are dealing in billions of dollars.
    As a result, I have been very much concerned, and I see 
that there is one proposed piece of legislation that would 
amend the Securities and Exchange Act of 1934 to prohibit 
trading ahead by market makers and for other purposes as well.
    This is something that I think has reached a point where 
its time has come, and I'd like to ask Chair Gensler, are you 
of the opinion that we should not allow trading ahead, and also 
that we should not allow a major firm to simply build in a 
penalty as the cost of doing business?
    Mr. Gensler. I thank you for that question, and I look 
forward to working with you. I think that our current rules, 
you are correct, are civil, but our current rule is that if you 
take a customer order and then trade ahead of that, that is out 
of bounds, it's not allowed. And I think that is because the 
customer needs to come first, and in our market structure, that 
is what brokers are supposed to do.
    I look forward to working with you and your staff on any 
proposed legislation. I have not had a chance to look at that 
more carefully.
    Mr. Green. Thank you. The process, as Chair Gensler has 
indicated, is unfair to the persons who are making the purchase 
in the market, who would like to become a participant but they 
do not have the advantage of the market maker.
    Let me ask Mr. Bodson, do you agree that this is a 
circumstance that we have to take a look at because we don't 
want people to simply build into the cost of doing business, 
the cost of trading ahead?
    Mr. Bodson. Thank you, Congressman Green. DTCC is not a 
direct regulator of the market as the SEC and FINRA are, but I 
think the situation described obviously would not be something 
any company would endorse. Having similar criminal penalties 
viewed as a normal cost of business is not something that I 
think any individual should be supportive of, so your comments 
stand, but unfortunately, the part of the market you are 
talking about is the trading side. That is not what we are 
involved in. We are post-trade, and not being regulated there 
is not much I can do about that specific issue, but thank you 
for asking me.
    Mr. Green. Thank you, and that is one of the reasons why I 
think legislation similar to what is being proposed is 
necessary, because to penalize criminally requires some 
creative prosecution. We do not have a definitive law that 
makes it a crime to do this, literally. And I am concerned that 
if you can simply make it the cost of doing business, you can 
continue to do business and build in that cost. This 
legislation would require due diligence on the part of the CEO, 
would require the CEO to, on an annual basis, certify that the 
CEO has performed a reasonable due diligence in ensuring that 
the market maker has not traded ahead, and has some liability 
when this occurs.
    This is something that we cannot allow to continue as 
simply a pat on the back, to a certain extent--some would say a 
slap on the wrist--but we have to do something about it. I 
think this legislation addresses it, and I look forward to 
working with persons who are going to push this legislation to 
see if we can get it done.
    And I yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. The gentleman from 
Florida, Mr. Posey, is now recognized for 5 minutes.
    Mr. Posey. Thank you very much, Madam Chairwoman. Chairman 
Gensler, some people believe the current short-selling 
practices drag down share prices below fundamentals. What does 
your experience tell you, and what should we or could we do 
about it?
    Mr. Gensler. Thank you for asking that question. Short 
selling has been part of the market structure for many decades, 
in fact, even before the securities laws, and economists have 
many studies, and there have been many debates on short selling 
and long. Your question is, could it move something to 
something other than fundamentals. Long buying can also move 
something to something other than fundamentals.
    Our remit at the SEC is to ensure that the markets are 
fair, orderly, and efficient, and that they are free of fraud 
and manipulation, but there are some times that individual 
securities might be, in a personal opinion, not aligned with 
fundamentals. But it might be sentiment, is the other piece. 
So, I just want to be careful that we stick to our important 
piece of it.
    We do think that there is a need for greater transparency 
on the short-selling side, and I have asked staff to propose, 
under the authorities Congress has already vested, that we have 
greater transparency on the short-selling side. I am encouraged 
to hear that FINRA, under Robert Cook, is going to be doing 
some things in that area as well.
    Mr. Posey. Thank you. Mr. Bodson, please share with us how 
you are working to reduce the settlement cycle to 1 day while 
preserving the benefits of netting and [inaudible] what the 
savings proposed on margin funds might be?
    Mr. Bodson. Thank you, Congressman, for that question. 
Shortening the settlement cycle is the big concept of time 
equals risk. Reducing the period that trades are open and 
reducing the potential impact of the default of one of our 
members means that we simply have to collect lower levels of 
margin or collateral. One of the biggest components of our 
calculation of margin is volatility-driven, what is happening 
in the market, how are prices moving, and by shorting that 
period, we believe we can reduce that charge by 40 percent in a 
volatile period. That could be $6 billion less capital that 
firms have to post with us and can use elsewhere. So, it would 
be a significant amount for our members.
    Mr. Posey. Great. I am really glad to hear that.
    Chairman Gensler, tell us about what the SEC is doing to 
ensure that payment for order flow doesn't mean retail 
investors are subject to unfair trades?
    Mr. Gensler. I have asked the staff to take a close look at 
this in the context of the overall market structure, because 
payment for order flow, which some brokers use and some don't, 
is, in essence, a payment to the broker for that order flow, 
and it can be in conflict with the interests of that customer. 
And that inherent conflict--we found in a case that was settled 
in December, where there was actually communication between the 
wholesaler and broker saying, ``Look, I can give your customer 
more or I can give you more.'' There was a tradeoff between 
these two.
    I think that we need to take a closer look at that, but 
also in the context of the overall equity market structure, 
because there is also payment for order flow on exchanges, 
which is called rebates. So, there are other pieces of this 
puzzle, not just to wholesalers.
    Mr. Posey. Thank you, Mr. Chairman. Do you believe that 
cooperation among retail investors in chat rooms, for example, 
can be undesirable collusion in the equities market?
    Mr. Gensler. I think that we should always be vigorously 
enforcing our laws and ensuring that there is not fraud and 
manipulation. But again, we have a free speech right to go and 
say to a neighbor, whether it is online or in person, ``I like 
this investment,'' and thoughtfully say why I like this 
investment. Our laws are about if somebody is trying to defraud 
another person, mislead another person, manipulate the markets, 
and that we should root out and vigorously root that out, 
whether it is a big institution, or an individual. or, frankly, 
a computer that's controlled by a big institution.
    Mr. Posey. Okay. During your CFTC service, you once said 
that transparency isn't costly. Would you explain that concept 
in the context of financial markets?
    Mr. Gensler. Did you say that I had said transparency is 
a--
    Mr. Posey. Transparency isn't costly. It pays to be 
transparent.
    Mr. Gensler. I think transparency is at the heart of 
efficient markets. At dot-com, disclosure regimes are important 
for companies, and that is a form of transparency, but I think 
that is at the heart of investors being able to take risk and 
understanding their risks.
    Mr. Posey. Thank you, Mr. Chairman.
    Madam Chairwoman, my time is up, and I yield back.
    Chairwoman Waters. Thank you. The gentleman from Missouri, 
Mr. Cleaver, who is also the Chair of our Subcommittee on 
Housing, Community Development, and Insurance, is now 
recognized for 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman, and I thank all 
of our guests for being here. Chair Gensler, thank you for all 
the work you have done over the years, and I appreciate your 
presence here today.
    My great-grandpa, Reverend Noah Albert Cleaver, died in 
1980. He was 103. He used to say--some new invention would come 
out, whether it was a toaster or a microwave, and he would say, 
``What are they going to do next?'' And he was concerned. He 
thought that the people landing on the moon created a bunch of 
weather problems in Texas. I never could get that out of his 
head.
    But sometimes, I am tempted to join in with my Grandpa on 
stuff. Going back to Mr. Scott's discussion with you earlier, I 
have to tell you, I do have a lot of concerns, and maybe it is 
just something I am going to have to learn to live with. But 
let me give you an example. The shares in Metro Bank in the UK, 
back in May, their shares fell over 10 percent before Metro 
could get control of the fake news about their financial free 
fall, and they are fortunate that it didn't go further.
    I am extremely concerned about what is going on in 
regulations and what we need to do to ensure that social media 
doesn't take control of our lives and take it in a direction 
that could be detrimental to our democracy. Do you share that 
concern, and if so, what should we do, and how do we address 
the issue that was just experienced with Metro Bank?
    Mr. Gensler. I think that the best way is to be technology-
neutral but recognize that technologies in each generation 
provide us new ways to communicate, even as to when the 
telephone came along and there were debates about whether to 
allow the first telephone on the floor of the New York Stock 
Exchange. These are real debates that happened in the 1920s. I 
think technologies will come along in the 2020s, and we have to 
ensure we still stick to our principles of investor protection; 
fair, orderly, and efficient markets; and capital formation.
    So, we have to lean in at the SEC and learn how to 
basically be a cop on the beat so that free speech goes on but 
if somebody is trying to manipulate a market or spoof a market 
or put fraudulent information into a social media channel, that 
we protect investors against that. And particularly in this new 
computer age, that is more challenging. I think the SEC is up 
to the challenge, but it is definitely more challenging, and I 
have asked the folks at the SEC, how do we freshen up our rules 
in this new environment?
    Mr. Cleaver. Do you have a division that works on this, 
that thinks about this, that plans for this, that goes through 
all kinds of scenarios on what to do when this happens, 
anticipating an anticipatory department?
    Mr. Gensler. No. Again, I am only in my third week, but I 
think between our Trading and Markets Division, our Enforcement 
Division, and our Examinations Division, it is through those 
units. But I think we constantly have to be evaluating, and to 
an earlier question, even, about Regulation Best Interest, we 
are going to vigorously get the most out of regulation best 
interest, but we are also going to evaluate. If it is not 
serving the purpose of investors, then we will update and 
freshen that rule as well as other rules, because we always 
have to be evaluating that investors come first, aligned with 
our three-part mission.
    Mr. Cleaver. Let me congratulate you on your confirmation, 
and I do recognize that you just walked in the door, and I am 
asking you some questions that you probably need a little more 
time to deal with. But I am hoping that, on a night when you 
are about to get a peaceful night's rest, you will remember the 
questions raised by Congressman Cleaver about the markets and 
practice paranoia with the SEC, because I am really afraid of 
some bad stuff happening. I am hoping I am wrong, but I am glad 
you are there, and I look forward to you fixing some things.
    Mr. Gensler. Thank you, and I wish I had met your 
grandfather. My mother would say that out of a space journey, 
the best thing that came out of it was Velcro. Mrs. Gensler 
thought that was the best thing that came out, so there you go.
    Chairwoman Waters. Thank you. Thank you, gentlemen, very 
much.
    The gentleman from Missouri, Mr. Luetkemeyer, is now 
recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman, and welcome 
to our witnesses.
    Mr. Gensler, in September of 2018, the Federal Reserve, the 
FDIC, the NCUA, the OCC, and the CFPB all issued an interagency 
statement that clarified the differences between supervisory 
guidance and laws and regulations. Most notably, that 
supervisory guidance does not have the force and effect of law, 
and that the law and regulations does.
    In January of this year, the prudential regulators issued a 
final rule to confirm the difference of regulations and 
guidance by codifying the 2018 statement. While I understand 
the SEC operates differently from the regulators I just 
mentioned, in many key ways, it is still imperative that the 
SEC distinguishes between guidance and rule or law.
    Do you agree that distinguishing between guidance and rules 
is an essential proponent of sound regulation?
    Mr. Gensler. Thank you for that question, and I look 
forward to working with their Office of General Counsel to 
better understand what the bank regulators did in that 
circumstance. But there is a difference between rules that have 
gone through notice and comment and staff guidance, and that is 
something I am familiar with from my prior service in 
government as well.
    Mr. Luetkemeyer. I guess you maybe answered this question 
here, but will you commit to issuing a final rule similar to 
the prudential regulators that clarifies the role of guidance 
and ensures that enforcement actions will only be based on 
violations of rule or law?
    Mr. Gensler. Again, sir, I need to meet with staff, 
understand what the SEC has done in the past on this, and 
whether there is an appropriate need for such new rules, as you 
say. But I do understand rules as duly operating from Congress, 
delegated to the agencies, I understand are different than 
guidance. But I would look to work with you and understand your 
concerns better.
    Mr. Luetkemeyer. Very good. Thank you for that.
    Chairman Gensler, as you know, the Securities Act of 1933 
and the Securities Exchange Act of 1934 established the ability 
of the SEC to accept generally accepted accounting principles 
(GAAP) that have been established by a private entity. While I 
believe that private standard-setter can help facilitate the 
effective accounting principles that promote transparency for 
investors, recent actions by the Financial Accounting Standards 
Board (FASB), and an overall lack of oversight by any 
regulatory entity whatsoever, have raised serious concerns 
regarding the standard-setting process and FASB's ability to 
conduct proper analysis before finalizing a standard. In my 
opinion, since the SEC has given FASB the authority to operate 
as a private standard-setter, the SEC should ensure FASB is 
carrying out its duties in an appropriate manner.
    Can you broadly tell me what you think the relationship 
between the SEC and FASB is, and should be?
    Mr. Gensler. I think Congress has been clear, as I 
understand it, that the securities markets benefit by 
disclosure, and that includes accounting disclosure, and the 
SEC has that authority. And then through, I believe it was in 
the Sarbanes-Oxley Act, working with Senator Mike Oxley from 
your committee and Paul Sarbanes on the side, put in place 
exactly what you said, a provision that there could be reliance 
on a standard-setter meeting certain goals. But our Office of 
the Chief Accountant has an important role in communicating 
with FASB on these important accounting standards, and at the 
SEC, our congressional system is at the top of that chain.
    Mr. Luetkemeyer. My concern, quite frankly, is with their 
ability to implement something like current expected credit 
losses (CECL), which they did not do any standard-setting 
studies about. They just arbitrarily went out there and 
decided, in their own wisdom, that this was something that they 
should be doing.
    All of the other government agencies out there that affect 
what we do every day, how we administer the rules and 
regulations every day and the laws of this country, have to go 
through the Administrative Procedure Act. They do not.
    Would you support something along the line to rein them in, 
so to speak, so that maybe they would fall under the 
Administrative Procedure Act and have to do qualitative and 
quantitative studies before they can issue a rule or regulation 
that would protect the economy, protect the industry, protect 
the people, consumers, from a bad rule or regulation that they 
might implement?
    Mr. Gensler. Congressman, I would like to meet with you and 
your staff to better understand your concerns, because as I 
understand it, what Congress decided some 20 years ago in the 
Sarbanes-Oxley Act was that it is best to rely [inaudible] SEC 
to rely on an outside standard-setter, and that that helped 
sort of set them apart a bit.
    So, the concerns that you are speaking about, I would like 
to better understand, and see how we can address them as best 
we can.
    Mr. Luetkemeyer. I thank you for your answers, sir, and I 
look forward to working with you on this at length. I think it 
is a very serious concern there that I have with regards to 
these folks.
    With that, Madam Chairwoman, I yield back. Thank you very 
much.
    Chairwoman Waters. Thank you. The gentlewoman from New 
York, Mrs. Maloney, who is also the Chair of the House 
Committee on Oversight and Reform, is now recognized for 5 
minutes.
    Mrs. Maloney. Thank you, Chairwoman Waters.
    Chairman Gensler, it is great to have you before the 
committee once again, and to have you as the Chair of the SEC. 
I have a few questions. First, I want to ask you about a very 
important issue that I worked on for several years, and that is 
forced arbitration. A few years ago, some people were pushing 
public companies to include forced arbitration provisions in 
their corporate governance documents, which would prevent their 
own shareholders from suing them for securities fraud in 
Federal court. If the SEC allowed this, it would essentially be 
the end of all security fraud cases in Federal court, and 
shareholders wouldn't be able to hold companies accountable in 
court.
    So, I led a letter with Chairwoman Waters to then-SEC 
Chairman Clayton, which was signed by every Democrat on this 
committee, strongly opposing this move, which would reverse the 
Commission's longstanding position that such forced arbitration 
provisions violate Federal securities law. And because this 
effort came so close to succeeding, I think it is very 
important to get you on the record on this issue.
    So my first question is, do you believe it would violate 
Federal securities law if a public company inserted a forced 
arbitration provision into its bylaws and governance documents?
    Mr. Gensler. It is really good to see you, and to work with 
you again.
    Mrs. Maloney. Likewise.
    Mr. Gensler. I think, again, I need to get more fully 
briefed on the law, but let me say, on the spirit and where the 
SEC has been, the SEC has said consistently to issuers, as I 
understand it, that it would be best not to put this into these 
corporate charters. And I think that the American public needs 
to be able to have redress in their courts, and that is sort of 
a fundamental piece, to be able to go straight to the courts. 
And that has been true in terms of issuers for decades, and I 
think that has worked well.
    Mrs. Maloney. That is great to hear, and it is a very 
important signal to investors and the confidence in the U.S. 
capital markets, and I thank you for that position.
    Next, I want to talk to you about GameStop. In this 
committee's initial hearing on the GameStop frenzy, I 
questioned whether our capital markets were working for all 
investors or just for some investors, and I emphasized the need 
to have rules that are consistent, predictable, and, very 
importantly, enforceable.
    What struck me the most about Robinhood's behavior 
regarding the GameStop frenzy was the seemingly arbitrary 
nature of its trading faults and the lack of transparency on 
the front and back ends of how and why Robinhood and other 
broker-dealers imposed these restrictions.
    So, Chair Gensler, not speaking specifically to Robinhood's 
situation but broadly speaking, do you believe broker-dealers 
should improve their transparency with their customers about 
how and when they impose trading halts, and what role do you 
believe the SEC should play in improving these disclosures and 
ensuring trading halts are integrated into firms' risk 
management plans?
    Mr. Gensler. I think that probably what we could all agree 
on is that access to markets, whether you are an individual 
investor trading one share or a big institution, access to 
markets as they are moving up and down is a really critical 
piece of our capital markets. And what happened on January 27th 
and 28th was not good for millions of investors.
    So, the transparency you mentioned is important between 
broker-dealers and their customers, and we have asked, and I 
think Robert Cook has said already, that maybe they are looking 
at this too, is what is that transparency between, and under 
what circumstances? And do each of the broker-dealers have 
enough liquidity to meet their requirements with the 
clearinghouse, which Michael Bodson was talking about earlier.
    Mrs. Maloney. Thank you. And next, I would like to turn to 
the topic of corporate board diversity. Along with Chairman 
Meeks, I have made fighting for women a hallmark of my time in 
public service, fighting for equal pay, for equal work, to 
bring our family leave policies into the 21st Century, for 
Equal Right Administration, and I just left a hearing on 
maternal Black health. Mr. Meeks and I have also strongly 
advocated for measures to diversify the ethnic, racial, and 
gender composition of corporate boards and in executive ranks, 
because leaders set the tone and they set the priorities.
    From your perspective, does improving diversity on 
corporate boards bring a material benefit to companies?
    Mr. Gensler. I can speak just in terms of what we are doing 
at the agency, and I do believe that diverse points of view, 
diverse backgrounds help in decision-making, and we are leaning 
into that in terms of building a senior leadership at the SEC.
    Mrs. Maloney. Thank you. My time has expired.
    Chairwoman Waters. The gentlelady's time has expired. The 
gentleman from Michigan, Mr. Huizenga, is now recognized for 5 
minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman. And before I 
begin, I would like to submit for the record a letter from the 
Private Investor Coalition.
    Chairwoman Waters. Without objection, it is so ordered.
    Mr. Huizenga. Thank you. Mr. Cook, my colleague from New 
York was talking a little bit about arbitration and what that 
would mean. And I am curious if arbitration clauses were banned 
in customer contracts, do you perceive potentially negative 
consequences on that, and what would those potentially be?
    Mr. Cook. Thank you for that question, Congressman 
Huizenga. I believe that if the current status of these clauses 
requiring arbitration--I just want to be clear that is not 
something that FINRA currently imposes; that is something that 
happens as a matter of contract. And FINRA does not have 
authority right now to address that. That is something that the 
SEC has authority to address.
    Mr. Huizenga. No, I understand that. I understand that 
FINRA does provide faster, less expensive ways to resolve 
disputes, correct?
    Mr. Cook. I think we work hard to administer an arbitration 
program that is fair for investors, that is prompt, that is--
    Mr. Huizenga. I understand. So, you are not willing to say 
whether there would be a negative impact on that. Okay, I am 
going to move on.
    Mr. Gensler, it's good to have you back, and I appreciate 
this time. I am going to ask you a pretty quick, simple 
question: Is market participation akin to gambling in a casino?
    Mr. Gensler. It is good to see you, and thank you for the 
call earlier this week. I think market participation is 
investing and it takes risk, and material disclosure behind 
that risk is important, and the cop on the beat is there to 
protect against fraud and manipulation. So I would consider it 
part of that capital formation and part of risk taking.
    Mr. Huizenga. I do not want to put words in your mouth, but 
I do want to be clear. So, it is not like gambling in a casino?
    Mr. Gensler. It is risk taking, and risk taking can be in 
different forms, but I am trying to choose my words carefully. 
The risk in capital markets is something where Congress has 
said, let's ensure that there is no fraud and manipulation in 
those risk-taking markets.
    Mr. Huizenga. Reclaiming my time, I understand. We have 
some people who are trying to portray this as literally walking 
in and letting chance decide whether you are going to walk out 
a winner or a loser. That is very different than taking a 
calculated risk.
    Very quickly, I want to touch on BDCs, and how the acquired 
fund fees and expenses disclosure requirements distort the 
operating costs of those. And will the Commission prioritize 
trying to fix the acquired fund fees and expenses (AFFE) 
disclosure requirements here very shortly?
    Mr. Gensler. Again, maybe it is just because I am in my 
third week, and you used some letters with which I am not 
familiar--
    Mr. Huizenga. BDCs are business development companies.
    Mr. Gensler. Oh, I'm sorry. I still need to get a briefing, 
and I look forward to working with you and your staff to 
understand that better in terms of the fee disclosure that is 
important to our public markets.
    Mr. Huizenga. Okay. We are happy to get you that 
information, and I want to continue that conversation.
    Earlier in the hearing, you had talked about 
cryptocurrencies and crypto exchanges, and you said that, 
``Only Congress can bring greater regulatory protection to 
crypto exchanges.'' And I am curious, if Congress is needed for 
crypto exchanges, why would it not be necessary for Congress to 
be involved in specific regulations when we are talking about 
the environment and social issues and governance? It seems to 
me that those may not be appropriate just for the SEC to be 
doing on its own. Does it not need congressional involvement?
    Mr. Gensler. I think that at the heart of our securities 
laws are disclosures, and from the 1930s, the SEC has had 
robust authority to ensure that investors have the disclosures 
that investors wish to have to make their investments. So in 
that regard, I do think that there is the authority to move 
forward on climate and human capital and other--
    Mr. Huizenga. Reclaiming my last moments here, acting Chair 
Lee, at one point, implied that people attack companies that 
[inaudible] care about climate should not donate to Republicans 
and face securities liability and perhaps even SEC enforcement. 
I would hope that would not be the attitude of the SEC, moving 
forward.
    With that, I yield back, and I look forward to continuing 
the conversation.
    Mr. Gensler. Thank you.
    Chairwoman Waters. Thank you very much. The gentleman from 
Colorado, Mr. Perlmutter, who is also the Chair of our 
Subcommittee on Consumer Protection and Financial Institutions, 
is now recognized for 5 minutes.
    Mr. Perlmutter. Thanks, Madam Chairwoman. It's good to see 
all of you. I have two specific questions I want to start with. 
One involves delisting what would be penny stocks, if you will, 
and the second involves diversity and inclusion, and then I'll 
get into some general questions.
    So, Mr. Gensler, back in 2005, in response to changing 
market structure and then new technology, the SEC adopted 
amendments to the penny stock rule that, among other things, 
requires the stock to have a minimum bid price of $4 a share to 
initially be listed on a national exchange. And in addition, 
the SEC has classified penny stocks as securities trading with 
a value of less than $5.
    GameStop's stock traded under $4 back in 2019, and then 
hovered between $4 and $5 throughout 2020, until the end of 
2020, when it began to tick up and then went skyrocketing 
starting in mid-January.
    In Colorado, we used to be the penny stock capital of the 
world, and a lot of abuses occurred during that timeframe. 
Would you agree with my concerns about the potential to 
manipulate low-priced stocks?
    Mr. Gensler. Yes. There has been a long history. The lower 
the price, the lower the aggregate market value. Fraudsters 
find that more appealing. And, in fact, earlier this year the 
SEC took actions to delist, I think it was about 30 entities 
that fell into these various categories.
    Mr. Perlmutter. Okay. With so many more retail investors 
coming to the market through mass platforms like Reddit and 
other ways, do you think it would be timely for the Commission 
to examine whether the rules around penny stocks, including 
exchange listing standards for these stocks, need to be 
updated?
    Mr. Gensler. I think you raise a very good set of concerns, 
and now I have some more work to ask the staff to look at just 
what are the current roles, how did they affect what happened 
in the spring or late winter, and even how it relates to 
broader subjects in the markets.
    Mr. Perlmutter. Okay. Thanks. My second question primarily 
goes to you, Mr. Gensler, and it is a follow-up from Mrs. 
Maloney's diversity questions. It is a question that was raised 
to me by a friend of mine, so I am going to ask it, just as he 
presented it to me.
    When you were Chair of the CFTC, you did not have any Black 
division directors at that agency. Will you commit to doing 
better on this point in your current role at the SEC?
    Mr. Gensler. Well, not to fuss with your friend, but I 
actually hired the first Chief Operating Officer who is African 
American in the history of the CFTC. He has done just a 
terrific job, and he is still there, by the way.
    But yes, the answer is yes, sir.
    Mr. Perlmutter. Okay. Thank you. To all of you, I am 
perplexed by this whole GameStop thing. In 2019 and 2020, it 
was at $4. On January 7th, it was at $17, on January 27th, it 
was at $347, on February 9th, it was at $50, and now it is 
bouncing around at around $162.
    So, I am concerned about the mass platform and the 
potential for hyping a stock in that way. I am concerned about 
the unfair advantage in order flow. And I am concerned about 
the potential harm from short sales.
    Mr. Cook, I will start with you. If you were to look at 
those three things, which one bothers you the most, or do any 
of them?
    Mr. Cook. I think those are all important areas of concern. 
We are looking at all of those areas. The one that I think is 
most novel at the moment and requires our real attention, and 
we look forward to working with the SEC on this, is the 
expanded use of online trading platforms, which, again, can 
really create better access to our markets and be very good for 
investors. But how do we make sure that, at the same time, they 
are being protected and that we are making sure that, 
especially as they may go towards complex products, that that 
is being properly overseen.
    Mr. Perlmutter. I would like to talk about the dropping 
down to T1. Do you think that takes some of the potential for 
fraud out of the system?
    Mr. Cook. Yes. I think that while we fully support reducing 
the settlement cycle, I am not sure that, in and of itself, is 
going to address those types of concerns that you raised. I 
just think--
    Mr. Perlmutter. Okay. Thank you.
    Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you. The gentleman from Kentucky, 
Mr. Barr, is now recognized for 5 minutes.
    Mr. Barr. Thank you, Madam Chairwoman, and I appreciate 
this hearing, especially these witnesses, whom I think bring a 
great deal of expertise to the topic.
    Let me start with Mr. Bodson, on GameStop, specifically. As 
you noted in your testimony, the temporary restrictions on 
trading by Robinhood and others were due to the additional 
collateral required by the DTCC, but those were extraordinary 
circumstances in an exceptionally volatile market. For the sake 
of retail investors, of course, we do not want to see, and 
generally speaking, halts in trading to happen frequently or 
ever again.
    I do appreciate your testimony that moving to an 
accelerated settlement could reduce margin requirements, and 
specifically, value at risk (VaR) charges up to 40 percent if 
we go to T+1. But can you describe how DTCC communicates with 
brokers regarding their collateral requirements, and 
specifically, are there ways to improve that communication, and 
otherwise increase transparency to mitigate the risk of 
repeating this kind of surprise margin call and what happened 
in January?
    Mr. Bodson. Thank you, Congressman. Our process for 
computing the margin and communicating such are as laid out in 
our rules. We conclude the market formula itself--there are 
margin guides. We have a form that they can use to estimate 
their margin.
    The calculation works overnight. Every day, it is run at 
the end of the trading day. It takes into consideration market 
volatility. It looks at specific security volatility, 
concentration of activity in certain securities. So, what you 
saw in GameStop was almost the perfect storm of going through 
these retail platforms where a lot of buy activity, massive buy 
activity, 130 times normal buy, and we saw it weeks before, in 
stocks that were moving around anywhere from 100 to 300 percent 
a day, and just highly volatile over this period of time.
    So, the margin calculation reflects the risk that the firm 
is presenting to us. That calculation is done overnight, and it 
is communicated the next day, automatically, by email 
generation. In the case of Robinhood, there was an additional 
charge, a capital premium, which was as a result of the fact 
that their margin requirement was in excess of their net 
capital, indicating that they were taking on more financial 
risk than we felt would be prudent. That charge was later 
waived, but the core margin charge of a billion-four, again, it 
is articulated in our rules, we give the client the tools.
    Transparency is something that we will always try to get 
better at, but we do believe that we provide those tools.
    Mr. Barr. Thank you very much. Moving to Chairman Gensler, 
congratulations on your confirmation. I look forward to working 
with you, sir. Let me just, briefly, this is a question that 
Mr. Luetkemeyer and also Mr. Lucas asked, and kind of bring 
them together, the regulation by enforcement question from Mr. 
Luetkemeyer, and the ESG disclosure question from Mr. Lucas. We 
don't want to see regulation by enforcement. We want to see 
notice-and-comment rulemaking wherever possible.
    On March 4th, the SEC announced its new Enforcement Task 
Force focused on climate, as was discussed earlier, in ESG 
issues. But it wasn't until March 15th that it issued a request 
for public comment, and the SEC has not completed its recently-
announced review of the 2010 guidance.
    Chairman Gensler, can you explain the sequence? In other 
words, why is the announcement of a new focus on enforcement 
coming before market participants know the rules, and will you 
commit to adhering to requirements under the Administrative 
Procedures Act in completing a notice-and-comment rulemaking 
prior to engagement in any enforcement actions?
    Mr. Gensler. I am committed to complying with the 
Administrative Procedure Act on rulemaking, and I said, in this 
hearing and in my confirmation process, I think the market 
investors do want to bring some consistency and comparability 
to climate disclosure, human capital disclosure, and moving out 
and getting that comment.
    But there are rules of the road that are already in place--
the guidance from 2010, our overall securities laws--and we are 
going to be vigorously enforcing the laws and rules that are in 
place, as they are in place. But yes, I am committed to using 
notice and comment for new rules, but we still have to enforce 
the old guidance and old rules as vigorously as you would want 
us to.
    Mr. Barr. Thank you, and I don't have time for this 
question, but I am going to be talking to you about horse 
racing, Chairman Gensler. I represent the horse industry in 
Kentucky, and we have a Reg A problem. We want to democratize 
ownership of securities in racehorses, and I look forward to 
working with you and the Commission on that issue.
    Mr. Gensler. I look forward to that, a different issue than 
GameStop.
    Mr. Barr. That is right, and we just finished the Kentucky 
Derby, so it is a timely issue.
    I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
Connecticut, Mr. Himes, who is also the Chair of our 
Subcommittee on National Security, International Development 
and Monetary Policy, is now recognized for 5 minutes.
    Mr. Himes. Thank you, Madam Chairwoman, and thank you to 
our witnesses. It is a real pleasure for me to see all three of 
you before the committee.
    Chair Gensler and Mr. Cook, I am glad you are our cops on 
the beat. You have, in your careers and today, distinguished 
yourselves for your balanced approach and really intelligent 
approach to the issues.
    And Mr. Bodson, it is great to see you. Kudos to you. When 
the chant from both ends of the political spectrum was, ``Let 
them trade,'' kudos to you for pointing out that the trading 
stops were actually part of the system architecture designed to 
keep disaster and catastrophe from happening. We do not let 
airplanes fly in horrible thunderstorms, and there will be 
times when we need to just stop and pause the markets for 
prudential reasons.
    I want to reflect on a lot of thoughts on GameStop. There 
has been a lot said. And, as usual, we have sort of devolved 
into a little of a silly, partisan conversation on the topic. 
We ought to be able to agree, as I think we do, that investing 
is a critical part of asset accumulation for American families. 
We ought to be able to agree--I have a little problem with my 
good friend, Mr. Huizenga, on this--that investing done 
irresponsibly--that is to say, without research, without 
thought, around companies that you didn't know about--will, in 
fact, result in a return that begins to look a little bit like 
the return you will assuredly receive in a casino or on the 
horse track.
    So, I think our objective is how do we maximize the 
former--good, smart investing--and maybe discourage the latter, 
that is to say, investing that actually ends up hurting retail 
investors. And the facts are pretty clear on what behavior 
leads to them being hurt.
    This is a question for Mr. Gensler and Mr. Cook. Having 
really looked at what happened with GameStop, I am satisfied 
that the market will fix itself in the sense that when we do 
return to a bear market, some people are going to learn some 
fairly expensive lessons about the fact that the stock market 
is a risky place to put your money. And that will all be good.
    Where I get concerned, though, is when you start talking 
about a lot of complexity, and, in particular, leverage, 
margin, option strategies that I am really pretty certain that 
most of us, much less the average retail investors, don't 
understand.
    My question, I guess for Mr. Cook and Mr. Gensler, is, is 
there a point where you are employing leverage or synthetic 
leverage through margin or through derivatives that we should 
begin to think about restricting the ability of retail 
investors to employ those strategies? I do not need to remind 
the committee that we all know the story of Mr. Alex Kearns, 
who took his own life because he traded in some fairly 
complicated option strategies and discovered that he had 
created a liability for himself that he had not anticipated.
    So my question is, is there a line around leverage or 
complexity, where we ought to not let the market teach touch 
lessons?
    Mr. Gensler. I will go first, and I am sure Robert will 
want to add something. I do think that our core mission is 
protecting investors, and for a long time we have said to open 
an options account, there is more discussion between a broker 
and that customer. Suitability used to be the word, and if I 
have the word wrong, I apologize, in my third week. But 
basically, they are taking more risk.
    I would also add, in terms of these apps, these 
applications that have made it easier to open accounts, and 
making it easier, we have lost that human in the middle saying, 
``Is this appropriate? Is this risk appropriate?'' The thing 
that is like those buildings in Las Vegas and Atlantic City is 
that through gamification, you are using psychological prompts 
and behavioral prompts to get investors to trade more, and 
trading more, economic studies show, doesn't necessarily mean 
getting better returns.
    I wanted to add that, if I could, Congressman Himes, but I 
know Robert wants to--
    Mr. Himes. Yes, thank you. Mr. Cook, do you have anything 
to add to that?
    Mr. Cook. Thank you for that question. I do think it is a 
matter of striking the right balance, because, as you say, 
there are lots of risks that people may be taking on, it is two 
complex products, margin, and we do have rules around some of 
that. There are limits on how much margin you can take. There 
are special requirements to open up an options account.
    But I think many of these rules were developed at a time 
when the only way you would do that was if you had a broker or 
an investment advisor, someone advising you and understanding 
the risks that might be appropriate for you. And so in light of 
that, in light of the fact that many of these same products are 
now available directly, without some intermediation, we need to 
think about whether the existing rules should reflect the 
change in the technology.
    Mr. Himes. Thank you very much. I yield back the balance of 
my time.
    Chairwoman Waters. Thank you very much. The gentleman from 
Texas, Mr. Williams, is now recognized for 5 minutes.
    Mr. Williams of Texas. Thank you, Madam Chairwoman. This is 
the third hearing on the GameStop saga, and one of the 
overarching themes has been protecting retail investors. I am 
completely in agreement with the need to do this and to ensure 
that everyone, no matter how much money they have invested, is 
competing on an equal playing field.
    However, one of the positive proposals that is being 
discussed to pay for some of the Democrats' progressive 
priorities would be detrimental to the investors we are trying 
to protect. Of course, I am speaking of the financial 
transaction tax (FTT). Contrary to what some on the left may 
want you to think, implementing this new tax would not only 
affect hedge funds and wealthy individuals, but rather anyone 
with a 401(k) or who opened their own brokerage account to 
trade stocks in their free time.
    So, Mr. Bodson, can you give us your thoughts on the most 
likely changes we will see if a financial transaction tax is 
imposed?
    Mr. Bodson. Thank you, Congressman. Again, I am not going 
to claim expertise in FTT, but the studies we have seen show 
mixed results. In some instances, they did slow down trading 
and it did dampen levels of market activity. Hong Kong is the 
contrary one, but again, Hong Kong has no income tax,and no 
capital gains tax, so it's a very different set of 
circumstances.
    And the question you raised is exactly how does the tax get 
paid, who ends up paying it? And in many cases it will flow, as 
you said, right back to the end investor, so the retail 
investor, the pension fund, the mutual funds, and if that is 
the case, then that would obviously impact returns natively, it 
would impact the wealth creation that you would want to see in 
the stock market.
    Mr. Williams of Texas. Okay. Raising taxes does not help, I 
will tell you.
    Chairman Gensler, first of all, congratulations to you, and 
I want to welcome you to your first hearing before this 
committee as the Chair of the SEC. I hope we will have a 
productive working relationship as you take on this important 
role. And I wanted to start by asking you about transparency, 
we have used that today, during the rulemaking process. For 
market participants, certainty is the key, and there needs to 
be a clear roadmap on what the SEC is focusing their attention 
on.
    So, Mr. Chairman, what steps do you plan on taking to 
ensure the public is informed about the priorities and 
regulatory agenda that the SEC is undertaking during your 
tenure?
    Mr. Gensler. I look forward to working with you, 
Congressman Williams, as well. I think that the transparency of 
our regulatory agenda, along with the rest of the 
Administration--we would be publishing, I think it is twice a 
year, a unified agenda that is required under the law to 
publish our agenda.
    But it is through hearings like this and talking with the 
public more broadly about the agenda, about disclosure, market 
structure, and ensuring that the markets work for working 
families.
    Mr. Williams of Texas. Thank you for that. Our capital 
markets are extremely regulated, and no single entity, whether 
it be exchange or broker-dealer or SRO, acts unilaterally 
without any oversight. As we are discussing broad changes to 
our capital markets we must first ensure we all have an 
understanding about how all of the different players interact 
within the ecosystem.
    So, Mr. Bodson, can you discuss quickly how the DTCC 
communicates and it is overseen by the SEC as you are setting 
margin requirements, as well as how you give notice to your 
clearinghouse members?
    Mr. Bodson. Thank you, Congressman. All of our margin 
requirements are reviewed and approved by the SEC. They are 
subject to public commentary. So if we are introducing any 
change to the margin rules, there will be a period of time 
where other members, or anybody else who is interested, can 
make a comment, and then the SEC approves it. The models are 
subject to very vigorous reviews internally by our risk 
department, and our audit department. They are reviewed by the 
board. So, we have a very rigorous governance and regulatory 
oversight of all of our models.
    Mr. Williams of Texas. I want to thank all of you for 
participating, and Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
New York, Mr. Meeks, who is also the Chair of the House 
Committee on Foreign Affairs, is now recognized for 5 minutes.
    Mr. Meeks. Thank you, Madam Chairwoman. Thank you very much 
for this timely hearing, and I want to thank our witnesses 
today.
    Chair Gensler, during these market volatility hearings, 
ensuring that markets are fair and transparent so that 
investors are well-informed has been a focus. Transparency is 
particularly important where investors are seeking information 
on the demographic makeup of company boards. In 2009, the SEC 
adopted its current board diversity rule to shine light on the 
demographics of corporate boards. However, the results of the 
current rule have been vague and abstract disclosures, as 
indicated by former Commissioner Luis Aguilar and former Chair 
Mary Jo White.
    In fact, an advisory committee at the SEC recommended, in 
2017, more specific disclosures around race, gender, and 
ethnicity, because of the current rule's deficiencies. Those 
recommendations were not adopted by your predecessor. So my 
question to you is, first, can you commit today to revisiting 
the SEC's board diversity rule and requiring more specific 
disclosures around race, gender, and ethnicity, as recommended 
by the SEC's Advisory Committee on Small and Emerging Companies 
in 2017?
    Mr. Gensler. Thank you, Congressman, and I look forward to 
working with you, or should I call you Mr. Chairman? And I have 
asked staff to make recommendations on how we can do what you 
have suggested, in terms of that investors increasingly want to 
understand these particular issues around diversity, and more 
broadly, human capital, both. And it is driven by what 
investors want to see, and I have asked staff to try to serve 
up some suggestions on this.
    Mr. Meeks. Thank you. I would hope that you could also 
think of maybe other initiatives that you can consider or 
encourage others within the department to have greater 
diversity in both corporate America and at the SEC itself. I do 
not know if you have any additional thoughts on that?
    Mr. Gensler. We have 4,400 people at the agency, but we 
also have a number of outside advisory groups, and as those 
terms roll, they are on rolling terms and everything, we have 
also asked the staff to look to ensure that those committees 
reflect the great diversity in our nation.
    Mr. Meeks. Thank you. Thank you for that, and I look 
forward to working with you on this particular issue.
    Let me go to Mr. Cook quickly with the time I have left. 
Mr. Cook, this committee has examined inherent conflicts of 
interest with payment for order flows that can be difficult to 
mitigate and adequately protect investors. For example, brokers 
can often be incentivized to route customer orders to a higher 
submitter instead of to another training venue or other better 
prices.
    Despite disclosures, investors may not entirely be aware of 
how payment for order flow affect their pricing, or whether 
they are getting the best execution. FINRA requires that any 
transaction should be bought and sold in a market in which the 
resulting price to the customer is as favorable as possible 
under the market conditions.
    So, Mr. Cook, how can FINRA ensure that firms are always 
meeting their best-execution obligations to their customers 
when the firm uses payment for order flow?
    Mr. Cook. Thank you for that question, Congressman. You are 
absolutely right. Our rules do require fast execution by both 
the firm that is routing the order and by the firm that is 
executing the order, and payment for order flow does create a 
conflict that does complicate that, because, of course, we have 
to evaluate, is the order flow being routed because of the 
payment or because that is where the best execution is 
available?
    And that is an analysis that we work on every day, through 
our oversight and surveillance, through our examinations, and 
through guidance. We look forward to working with Chair 
Gensler, who has indicated he is going to be asking his staff 
to take a fresh look at this, because I think fundamentally the 
question is, is that conflict that you are describing 
adequately addressed through disclosure? And also, what 
disclosures are retail investors really getting, and it is 
something that they understand? I think many investors really 
don't understand these aspects of the market. We need to think 
about, are there better ways we can help make sure they 
understand how their orders are being routed?
    Mr. Meeks. Thank you very much. I see my time is about to 
expire. Thank you, Madam Chairwoman, for holding this hearing.
    Chairwoman Waters. You are so welcome. The gentleman from 
Arkansas, Mr. Hill, is now recognized for 5 minutes.
    [No response.]
    Chairwoman Waters. Mr. Hill? If Mr. Hill is not on the 
platform--
    Mr. Hill. I'm sorry, Madam Chairwoman.
    Chairwoman Waters. Are you there?
    Mr. Hill. Yes, I am. Thank you.
    Chairwoman Waters. You are recognized for 5 minutes.
    Mr. Hill. Thank you so much. This is a good hearing. I like 
part three as much as I liked parts one and two. Thank you, 
Madam Chairwoman. Thank you for our panelists. And let me start 
with Robert Cook.
    Mr. Cook, in the first two hearings we talked a lot about 
Robinhood and other app-based broker-dealers versus a 
traditional retail-facing broker-dealer, and it was clear to me 
that customer service access for clients of Robinhood seemed to 
be lacking. I talked a little bit about sales practices in the 
area of small-dollar stocks or options. Have you looked into 
this, and what are your views here, Mr. Cook?
    Mr. Cook. Thank you, Congressman Hill, for that question. 
Without speaking about any particular firm, it is an area that 
we are taking a look at. You mentioned customer service. We do 
expect firms to have sufficient infrastructure to comply with 
our obligation that they capture knowledge and respond to 
customer complaints. We do not particularly require, for 
example, a live customer service agent. We provide flexibility 
for how that is done.
    But, basically, traditionally it wasn't thought necessary 
to regulate how firms provide customer service, and the 
expectation was that they knew how to be responsive to their 
customers without regulators telling them how to do so. But the 
financial services sector is evolving, as you know, just like 
the rest of the world, and commerce online, and lots of 
businesses do not have 800 numbers.
    So as we work with the SEC to review these events, that is 
one of the things we will consider, whether there might be 
additional guidance moving forward about kind of what the 
minimum levels of support customers might need.
    Mr. Hill. Thank you for that. Chairman Gensler, 
congratulations. We are delighted to have you back in the 
regulatory leadership space. My question for you, sir, is, are 
you familiar with the Task Force on Climate-Related Disclosures 
that was led by former Mayor Mike Bloomberg?
    Mr. Gensler. Yes, sir, I am. It is good to see you again.
    Mr. Hill. My pleasure. Have you read that yet or had a 
chance to study the sort of executive summary of it?
    Mr. Gensler. I had an opportunity to take a look at it 
during my confirmation process, but I have yet to sort of dig 
into it with the career staff at the SEC.
    Mr. Hill. Right. I noted in your comments in your 
confirmation hearing before the Senate Banking Committee that 
you believe that companies obviously should be required to 
disclose material things, and you made a statement that 
companies have a legal obligation to determine what is 
material. Do you think companies have any obligation to 
disclosure nonmaterial risks, regarding any topic?
    Mr. Gensler. I think that the heart of our disclosure 
regimes, over multiple decades, is that which investors are 
looking for, investors to make their decisions. And we have 
regimes from accounting regimes, management discussion and 
analysis, employment compensation, that those regimes are that 
which investors needs to pick up on and make their decisions 
on.
    Mr. Hill. But you believe that public companies should be 
based on materiality in their disclosures?
    Mr. Gensler. There is a materiality component of 
disclosures, but there are also individual disclosures that are 
often very small but still can have a really meaningful part in 
investment decisions.
    Mr. Hill. Do you think that the principles for effective, 
meaningful disclosures are that they are reliable, verifiable, 
and objective?
    Mr. Gensler. You have picked very specific words, sir.
    Mr. Hill. Because Mike Bloomberg picked the words. I am 
going by what Mike Bloomberg is suggesting. He says that 
disclosures have to be reliable, verifiable, and objective. I 
wondered if you agreed with that?
    Mr. Gensler. I think what we are going to be trying to do 
is to go out for public comment, get the best thoughts from the 
public on climate risk disclosure, human capital, diversity 
that we talked about here, and get that which the investing 
public wants for their decision-making to bring consistency and 
comparability in these various regimes as they make their 
decisions.
    So, I don't want to get caught up in Mike Bloomberg's 
words. I think the public will have a chance to comment, and I 
think you would probably not want me to just pick one person's 
words.
    Mr. Hill. In a cost-benefit analysis, do you believe that 
anything that is required, required disclosures, should be 
subject to the Commission's cost-benefit analysis?
    Mr. Gensler. I am very proud this week that we hired a 
world-class financial economist, Jessica Wachter, to lead our 
Division of Economic and Risk Analysis. Those 160 people are 
going to be integrated from the design phase all along in terms 
of doing rigorous economic analysis.
    Mr. Hill. Thank you, Madam Chairwoman. I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
Illinois, Mr. Foster, is now recognized for 5 minutes.
    Mr. Foster. Thank you, Madam Chairwoman, and to our 
witnesses. You are now going to be subject to yet another 
question on horse racing, for Mr. Cook and Chair Gensler, but 
this one will be about transparency in retail trade execution 
quality in payment for order flow.
    Retail investors don't care directly about payment for 
order flow. What they really care about are their total trading 
costs, how the price that they got for the trades that they 
completed on their trading app compares to a fair price that 
they--
    Mr. Hill. No. My--
    Mr. Foster. Careful, French. Anyway, so what they really 
care about is how the price they got compares to the price they 
should have gotten, or should have gotten on some competing 
end. The big players, and some retail investors, analyze this 
by holding horse races between different order execution firms, 
and small players, retail traders, can't do this. They are 
simply told that they paid no fees but they can't really 
compare the execution quality. To do that, they need some sort 
of reference price to know how the trades that they completed 
compared to some reference price that presumably could be based 
on the National Best Bid and Offer (NBBO) or the Consolidated 
Audit Trail (CAT), or something similar.
    Could you comment on the feasibility of providing retail 
investors some estimate of the quality of their order 
execution, so that they can use that to choose the app that 
works best for them in the items that they actually trade?
    Mr. Gensler. I look forward to working with you, and it is 
good to see you again, Congressman.
    I think that you have put your finger on it. There is an 
inherent conflict. If a broker has arrangements and has two or 
three sole-source arrangements on payment for order flow as to 
whether that payment for order flow is really getting best 
execution, or as you say, a horse race. Competition is a really 
good thing in markets and bringing market efficiency. And these 
are not free apps. They are just zero-commission apps. The cost 
is inside the order execution. And that is what I have asked 
staff to really take a look at and think about our overall 
market structure, because it is not just payment for order 
flow. It is a lot of other pieces--wholesalers have about 37, 
38 percent of the market now, which means that 38 percent of 
the market is not going to the markets like the New York Stock 
Exchange or NASDAQ, and not even going to regulated markets 
like alternative trading systems. So, looking at the overall--
    Mr. Foster. All of that information, I believe, is present 
on the Consolidated Audit Trail, correct? So what I am thinking 
about is just some algorithm that runs on the record of 
completed trades, and some time window around when the app 
claimed to have executed the trade, and then say what would a 
fair price have been, and report that back to the user, 
compared to the price that they got on the trade they executed, 
none of all fees and everything else.
    Mr. Gensler. I look forward to working with you and your 
staff to understand the specifics of what you are asking. There 
is some disclosure on a quarterly basis under SEC rules 
already, but you are talking about more like maybe daily or 
trade by trade. I look forward to understanding--
    Mr. Foster. Trade by trade--they could collect those 
statistics over the course of months or years, on the timescale 
that they could realistically transition to a better app, and 
they may find out what the institutional investors find out, 
that one order execution firm works well for very liquid, high-
volume securities, and another one is best for options, and so 
on. And so, they could have access to that sort of information.
    Mr. Gensler. I think the question you raised at the center 
of it is disclosure, even if it is more specific disclosure, 
how does that work in the market structure, and do we somehow 
get best execution for a customer on one app, and it is even 
one app that is sort of promoting more activity through 
gamification, and so forth.
    Mr. Foster. Or not even that. Actually, Mr. Cook, do you 
have any comments on the feasibility of this?
    Mr. Cook. Yes, I think it is a very interesting idea. I 
think what you are raising is the point that would require us 
to think about what is the right benchmark, how do we ensure 
consistency in measurement against that benchmark, and then, 
how do we get that information to the customer?
    I think a lot of the data is there. There are the Rule 606 
reports that Chair Gensler just mentioned. But I think to get 
to what you are talking about would probably require some more 
reporting, maybe even more reporting of information into CAT if 
that was to be done by a regulator. You could imagine this 
process being done either by the firms themselves or through a 
centralized process.
    But I think it is a very interesting idea, and we welcome 
the chance to talk further with you about it.
    Mr. Foster. Although it would be necessary as an agreement 
on what the algorithm you are running in the time window to 
establish the reference price, and it doesn't have to be the 
best algorithm. It has to be a standard one that pretty well 
reflects the price that they should have gotten and allows an 
apples-to-apples comparison of the apps.
    Chairwoman Waters. Thank you. The gentleman's time has 
expired. The gentleman from Georgia, Mr. Loudermilk, is now 
recognized for 5 minutes.
    Mr. Loudermilk. Thank you, Madam Chairwoman. Chairman 
Gensler, I would like to switch topics a little bit with you 
and discuss the SEC's Consolidated Audit Trail. When I was in 
the military, I was in a position in Intelligence where I was 
responsible for protecting a lot of highly-sensitive data. And 
we had one principle that we lived by, and that principle was 
that you don't have to protect what you don't have. And if you 
don't absolutely need something, especially if you have access 
to get it by other means, do not keep it. Now, that is a basic 
rule of cybersecurity that you can't disclose something if you 
don't actually have it.
    As you know, the Consolidated Audit Trail is expected to 
collect 60 billion records every day of trading in the equities 
and options market. In July of next year, brokers will be 
required to report the personal identifiable information (PII) 
of every retail investor to the Consolidated Audit Trail.
    While there are certainly times when the SEC needs to 
access investor data, this massive database will be a major 
target for cyber criminals. That is why I proposed legislation 
that would require the SEC to instead obtain this data by 
requesting it from the broker, and make sure the SEC is able to 
quickly access the data it needs. Brokers would have to provide 
that data to the SEC within 24 hours.
    So, Chairman Gensler, a 2018 poll indicate that 89 
percent--89 percent--of retail investors opposed having their 
personal data collected in the Consolidated Audit Trail, and 
that is why I proposed decentralizing this data across 
thousands of different brokerage firms instead of just one 
giant database, which, when it is all consolidated, it is a 
primary target.
    My question is, will you take action to protect the 
investors' sensitive personal data?
    Mr. Gensler. Congressman, I thank you for asking that, and 
the SEC is committed to protecting data. I think also, just as 
an update, and I believe this was late last year under Chairman 
Clayton's leadership at the SEC, the SEC passed some updates to 
the Consolidated Audit Trail provision that a lot of that 
personal information that was going to be collected no longer 
will--people's birthdays, people's Social Security numbers, and 
the like. And it might be that Mr. Cook has more details, 
because it is really under FINRA that the Consolidated Audit 
Trail project is being put together.
    But I concur. I think a lot of that personal information is 
now not going to be collected, sir.
    Mr. Loudermilk. That is a good start, but again, the basics 
of cybersecurity and protecting data is, if you have access to 
get that data somewhere--and data is always more secure when it 
is dispersed in multiple locations. That is why a lot of 
companies are going to new technologies, the blockchain 
technology, which disperses that data. It is much more 
protected than when it is centralized. And if you don't have 
PII, if you have a certain amount of information that can close 
the loop from other information, it puts a lot of people at 
risk.
    And so, I think it is vitally important that we protect 
investors' data from unnecessary risk, and I hope that you will 
make an effort to address this, to make sure that people's 
information is protected, because, as we know, the Federal 
Government has been shown to be one of the targets, and has 
disclosed a lot of information in the past.
    On another topic, as I stated in the first hearing on the 
GameStop issue of February, it is unfortunate that some of my 
colleagues are using this issue to call for a laundry list of 
new regulations. But beyond just calling for the new 
regulations, they are actually proposing them in this hearing. 
Many of these proposals are actually solutions in search of a 
problem.
    So, Mr. Cook, if Congress was to ban payment for order 
flow, what effect would that have on the availability of 
commission-free trading for the everyday investor?
    Mr. Cook. Thank you for that question, sir. I think a ban 
on payment for order flow--the impact would vary significantly 
across different firms, based on their business models. There 
are some firms who don't accept payment for order flow now and 
still charge zero commissions. But there are others who rely 
heavily on it, and one of the things to think about, if you are 
thinking about banning payment for order flow, would be what 
would be the pass-through effects on investors?
    Payment for order flow also does have some advantages that 
have been identified by the SEC in the past, including the 
potential for guaranteed execution with some price improvement, 
or prompt execution. But I think this is a very complicated 
area. I think if the Congress and the SEC were to think about 
banning it, we would have to think about all of the knock-on 
effects throughout the market structure system.
    Mr. Loudermilk. Thank you for that.
    Chairwoman Waters. Thank you very much. The gentleman from 
California, Mr. Vargas, is now recognized for 5 minutes.
    Mr. Vargas. Thank you very much, Madam Chairwoman. I want 
to thank you again for holding not only this hearing but the 
two previous hearings. I think it was very important for us to 
really take a look at what happened at GameStop. The only thing 
I would ask, Madam Chairwoman, is please don't scare Mr. Hill 
again. He seemed to be very frightened at some point, and I 
would just ask you to be a little more delicate with him.
    Chairwoman Waters. I assure you it was not me. Thank you.
    [laughter]
    Mr. Vargas. He is a good friend to many of us, so please--I 
know; I am just teasing.
    I do want to thank the witnesses for being here. Again, I 
appreciate it very much. I was going to ask about two things, 
the shortening of the settlement cycle, the T1, and really if 
their savings are 40 percent, and also about market 
concentration. However, Mr. Lucas first opened the door to ESG, 
and then Mr. Huizenga kind of kicked it open, and then, of 
course, Mr. Hill smashed it open. I have to say that I am very 
interested in ESG myself, and I want to ask a few questions 
about that.
    Chair Gensler, I don't want to put words in your mouth. I 
noticed that others tried and they weren't very successful, so 
I am not going to do that. But I do want to say this: A very 
wise man once said, ``Transparency is at the heart of efficient 
markets.'' And the same very wise man said, ``At the heart of 
our laws are disclosures.'' Even though you have only been 
there for 3 weeks, Chair Gensler, I think you know the man who 
said that. Of course, you just did, a little while ago.
    I have a bill, H.R. 1187, which passed out of the 
committee, and among other things, it would establish a 
sustainable financial advisory committee to communicate with 
interest groups and individuals regarding sustainable finance, 
and ultimately provide the SEC with a report identifying policy 
changes that could facilitate sustainable investments. In 
addition, the bill requires this committee to submit 
recommendations to the SEC regarding what ESG metrics the SEC 
should require to be disclosed.
    Because many companies already disclose ESG metrics, and I 
think it is very unfair that some do and some don't, I am 
curious to know, in your own words, without putting words in 
your mouth, what do you have to say about that, Mr. Chairman?
    Mr. Gensler. I look forward to looking closely at your bill 
and talking to your staff about that. But I think that to the 
extent the broad public is listening to this, please give us 
comments. Even now, in an open comment period, it would be 
really helpful to understand, as investors, what you think you 
need and which, in making your investment decision, your proxy 
votes and the like, on climate, on human capital, on diversity, 
and the issues that we have been talking about here in this 
hearing, or other disclosures. And it is really helpful for the 
agency as we are doing this.
    I think consistency and comparability are helpful as well, 
and right now, a lot of issuers are dealing with varying needs 
around this issue, and around the globe, because our companies 
here have to look after U.S. investors, but our companies are 
also trying to raise money overseas, or operate overseas, and 
there is a bit of an alphabet soup of different approaches to 
that.
    So, I think it is important. It is within the authority and 
mission of the SEC to enhance this disclosure and bring some 
consistency and comparability to it.
    Mr. Vargas. That is music to my ears. What I would also 
add, and I think you have already discussed this, is 
materiality. When we take a look at materiality, it is the 
investor who gets to decide that, not the company. I think it 
is very, very important that the investors know this 
information. But again, I will put that aside.
    And I know my time is running out, but I did want to ask 
you about the T+1, Chair Gensler, what do you think? Is there 
really all that savings, 40 percent savings there? And if that 
is the case, why not real-time settlement? We heard that is 
probably impossible to do.
    Mr. Gensler. I think the technology exists to come to same-
day settlement. There are real savings, lower costs, and lower 
risk. The question about same-day settlement is it is still 
netted, as Mr. Bodson pointed out. Netting is a really 
important piece of the economics. But you could have same-day 
evening, so to speak, and have it all netted. But there are 
obviously transition costs. Moving from T+5 to 3 to 2 took 
time. I noted that in the 1920s, we were at T+1, so getting 
back to T+1 100 years later, in modern technology--Mike Bodson 
is writing this down, and he is saying, ``Oh no.'' But I want 
to say that we can get to T+1, we can get to T+evening, but it 
will take some time.
    Mr. Vargas. Thank you. I yield back.
    Chairwoman Waters. Thank you. The gentleman from Ohio, Mr. 
Davidson, is now recognized for 5 minutes.
    Mr. Davidson. Thank you, Madam Chairwoman, and I thank our 
witnesses for their lengthy testimony today. It certainly adds 
value, Each of our three witnesses contributes important roles 
in ensuring that our capital markets operate efficiently and 
effectively, and I thank each of you for taking such important 
responsibility.
    The market volatility we saw in January has more people 
talking about the clearing and settlement cycle, and during the 
first GameStop hearing, I highlighted some projects that the 
DTCC was working on regarding use of distributed ledger 
technology to shorten the settlement cycle and enhance our 
capital market structure. Mr. Bodson, I want to personally 
thank you and your team for sending me an update on those 
projects, and I look forward to monitoring their progress.
    Speaking of distributed ledger technology, or blockchain, 
more broadly, I would like to hear Mr. Gensler's thoughts. It 
is well-known that you are a blockchain expert, as evidenced by 
your time as a professor at MIT. There are some fascinating 
videos on YouTube where you are teaching on that subject. If 
anyone has time and wants to learn more about blockchain 
technology, I highly recommend they take a look at these 
videos.
    Chairman Gensler, I would like to follow up on our 
conversation from 2 years ago at the Facebook Libra hearing. I 
want to get your views on regulation of digital assets. Since 
2017, this topic has been a passion of mine, and I have set out 
a legislative goal of creating a bipartisan and clear, light-
touch regulatory framework for digital assets that promotes 
innovation while protecting consumers.
    The final product was the Token Taxonomy Act, first 
introduced in 2018, and reintroduced last Congress, and now 
this Congress. It has bipartisan support; it always has. The 
bill has had input from academics at Wharton School of 
Business, trade groups like the U.S. Chamber of Commerce, 
specialized groups such as the Blockchain Association, various 
State regulators, and plenty of market participants.
    In 2019, you told me, Chairman Gensler, that the SEC has 
been, ``slower than I think we want,'' in terms of creating a 
regulatory framework for digital assets. Just 2 days ago, 
Secretary Yellen publicly stated that we do not have adequate 
framework to deal with cryptocurrencies from a regulatory 
standpoint.
    Now with you at the helm of this agency, I think it is an 
opportune time for the SEC to work with Congress on creating 
this regulatory framework that is bipartisan and clear. 
Chairman Gensler, have your views changed since 2019 on the 
SEC's approach to digital asset regulation?
    Mr. Gensler. Congressman, thank you for that personal 
shout-out. It is a free course, by the way. It is free, online.
    But I think that there are things that we can do better and 
get done at the Securities and Exchange Commission, and we have 
the authority, but I also look forward to working with 
Congress, if it is a desire of Congress to try to fill some 
gaps. As I said earlier, I think crypto changes. Particularly 
if one trades bitcoin in America today, there is not an 
investor protection regime that really protects as I think 
would be appropriate around these exchanges.
    So I look forward to working with you and this committee, 
if the Chair wishes, on anything you would do in this area.
    Mr. Davidson. Thank you so much, and I look forward to 
working with you, and, frankly, our bipartisan group will 
certainly as well.
    Regulation by enforcement has been characteristic of this 
space. Obviously, XRP is a key case. But it would be great to 
have a bright-line test so that we wouldn't be dependent on so 
many enforcement actions or no-action letters. So, I greatly 
appreciate it.
    Lastly, I do want to talk about the SEC's authority to 
suspend trading. I look forward to working with you on a bill 
that would provide additional transparency about why the 
trading was suspended, and more specifics there. Some of that 
has already been commented on by others, but I would leave you 
the opportunity, sir, for any closing comments on that kind of 
transparency.
    Mr. Gensler. I look forward to hearing more about the 
issue, as you said. I haven't looked at your bill, and whether 
you are talking about suspending penny stocks or was it 
suspending others, because sometimes they're small, market-
capped companies that in some cases have no products and no 
employees even, but that just are ripe for fraud and 
manipulation. There has been a regime for decades around penny 
stocks and trying to protect the public from what are easily-
manipulated circumstances.
    Mr. Davidson. Just like that clarity that you had there, 
that is the piece that when you put the disclosure out for 
information flowing, what information triggered the halt. But I 
look forward to it. Madam Chairwoman, thanks again for the 
hearing. I yield back.
    Chairwoman Waters. Thank you. The gentleman from New 
Jersey, Mr. Gottheimer, is now recognized for 5 minutes.
    Mr. Gottheimer. Thank you, Madam Chairwoman, and thank you 
to our witnesses for being here today. Chairman Gensler, 
congratulations on your confirmation to lead the SEC, and 
welcome to the House Financial Services Committee. It is good 
to see you, and I know we are all looking forward to working 
with you in the coming years.
    I am helping to lead a bipartisan effort to reinstate the 
State and Local Tax (SALT) deduction that was eliminated in the 
tax hike bill of 2017. Capping the SALT deduction has 
enormously increased the tax burden on hard-working, middle-
class families in New Jersey's 5th District. To make matters 
worse, some legislators now want to impose a financial 
transaction tax (FTT) on stock and bond transactions, including 
in my State.
    Chairman Gensler, according to a study by Vanguard, an FTT 
would cost retirement savers $36,000, more than 3\1/2\ years of 
savings over their lifetime, and would send jobs and markets 
overseas. Mr. Chairman, first, do you support a financial 
transaction tax?
    Mr. Gensler. First, let me say it is good to see you. Full 
disclosure, we first knew each other maybe 20-some years ago, 
working in an Administration.
    I really think that I alluded to Congress and the Executive 
Branch to sort through taxes, and our remit at the SEC is about 
ensuring that working families are protected, we protect them, 
and we have fair, orderly, efficient markets and capital 
formation. And the tax questions are really outside our 
jurisdiction, if that is okay, Congressman.
    Mr. Gottheimer. No, I appreciate that, and yes, I am 
excited to work together again.
    Can I maybe just ask it in a slightly different way? Maybe 
that will let you answer on the remit of the SEC. Are you 
concerned about an impact it would have on the markets, on 
pushing markets overseas, if we did any kind of new levy? There 
is a lot of concern that it is so easy, given technology, to 
move the back end of these processes overseas, which is kind of 
what we are facing in New Jersey. From a market perspective, 
would you be concerned about that, or would you prefer to--
    Mr. Gensler. Again, what you are raising is that there are 
tradeoffs, I think more appropriately made by Congress and the 
Executive Branch, in terms of those tradeoffs. We do have a 
modest fee. It funds the agency. It is about $2 billion a year 
that we have had. So but whatever tradeoffs beyond that, I 
think I would leave it to the appropriate--the White House, 
Treasury, and Congress.
    Mr. Gottheimer. Thank you, sir. Separately, if I can ask 
you about investment, broker-dealers are, as you know, legally 
required to offer best execution for their clients and to 
provide the most advantageous order execution for their 
customers, given the prevailing market environment. However, as 
you know, there is a perception that the practice of payment 
for order flow creates a conflict of interest between brokers 
and the investors they serve. Do you believe that payment for 
order flow presents a conflict of interest too significant to 
be adequately addressed by regulations such as enhanced 
disclosures or strengthening best-execution obligations?
    Mr. Gensler. You raised a good question, because we have 
found conflicts in various enforcement cases, like one that we 
filed in September, where the wholesaler was literally saying, 
``Well, you tell me. I can pay more to the broker or I can pay 
the customer more.''
    We know, at least from that case, this inherent conflict is 
there, and whether we can address it enough through disclosures 
or it sort of implicates the broader market structure. And I 
have asked staff to think about that broader market structure, 
and not just the wholesaler payment order flow but also the 
exchanges through rebates, and just how is this market 
structure that has led to concentration--right now, we have a 
pretty highly concentrated and growing concentration in the 
retail order flow. Economics tells us that competition lowers 
costs to investors.
    Mr. Gottheimer. I appreciate that, and I really appreciate 
that you are hopefully going to have input from stakeholders 
before taking any action, and I like that you are asking the 
SEC to do so.
    Lastly, as Warren was saying, and building on your 
professorial acuity in the cryptocurrency space--and, by the 
way, I really enjoyed our conversations on this, because I 
think it is wonderful to have somebody with your level of 
expertise at the SEC, given the competitive marketplace, and I 
think it is really important that we take the lead here and 
cede the lead to others in the world on Fintech and 
cryptocurrency.
    As markets continue to grow and innovate, I would hope--and 
I think I know the answer to this, but commit to providing 
clarity for market participants in the crypto space and working 
with stakeholders to ensure that we do not lose our nation's 
place as the country for innovation and technology. Just making 
sure [audio interruption].
    Mr. Gensler. Congressman, I can't--our capital markets, for 
decades, have been part of our economic success story, and 
technology comes along, markets change, but we want to make 
sure we enhance our rules and get ahead of this, in the crypto 
space as well as in the traditional securities space, and 
always refresh our rules.
    Mr. Gottheimer. Thank you. I yield back. Thank you so much. 
It's good to see you.
    Chairwoman Waters. Thank you. The gentleman from North 
Carolina, Mr. Budd, is now recognized for 5 minutes.
    Mr. Budd. Thank you, Madam Chairwoman, and Chairman 
Gensler, welcome and congratulations on your new role.
    Following up on the crypto conversation, in all of my 
conversations about crypto, industry leaders mention a lot of 
the same priorities--the need for a coherent, clear, regulatory 
framework. Clarity from the legacy institutions to offer 
decentralized finance (DeFi) products and even regulatory steps 
to offer a bitcoin [inaudible]. But the U.S.'s lack of clear 
guidance is both a competitive disadvantage and it is a 
national security concern. As you know, this is a complex 
issue, but I hope you are going to be willing to work with 
Congress as we talk about some of the steps to be taken.
    There is a strong group of bipartisan lawmakers and 
regulators who want to help solve the issue, but I would just 
like to turn it back over to you and see what would you like to 
work with in this area in regards to blockchain and 
cryptocurrencies? I appreciate the other Members coming before 
me, who have mentioned cryptocurrencies and blockchain.
    Mr. Gensler. Thank you. I look forward to working with you 
and any member of this committee and your staffs. I think that 
there is a lot of authority that the SEC currently has in the 
securities space, and there a number of cryptocurrencies that 
fall within that jurisdiction. But there are some areas, 
particularly bitcoin trades in large exchanges, where the 
public is not currently really protected on these crypto 
exchanges, trading just bitcoin. And so, that would be one area 
I would highlight.
    Mr. Budd. Very good. Second question, the GameStop 
episode--switching back after talking about GameStop--it 
highlighted the need to revisit settlement times. So, it is 
understandable that any move away from T+2 will need full and 
strict support, but the struggle of moving from T+2 to T+0 
settlement time is not lost on me.
    So, Mr. Chairman, with today's state of technology, 
including blockchain technology, what is the SEC and the DTCC, 
and I also want to include Mr. Bodson in this, what are you all 
doing to evaluate the potential use of blockchain to help speed 
up settlements?
    Mr. Gensler. You are right that technology exists today to 
shorten settlement cycles, even maybe to the same day. I think 
there is a business model issue as to whether it is still 
netted, which has a lot of economic advantages.
    In terms of the underlying ledger technology itself, I 
would defer to Mr. Bodson as to whether they find it is helpful 
to have a distributed shared ledger or a sort of single-party 
ledger, and then what role the SEC would have is to ensure that 
whatever rules they are proposing have the resiliency and the 
important safety of a clearinghouse, because this is a 
systemically important clearinghouse. It is the largest, 
really, the sole clearinghouse for [inaudible]. But I would 
turn to Mr. Bodson.
    Mr. Budd. Thank you. Mr. Bodson?
    Mr. Bodson. Thank you, Congressman. Distributed ledgers are 
a very exciting technology. As was pointed out before, we have 
two projects underway that we are publicly discussing, Project 
Ion, which is using distributed ledger technology (DLT) for 
settlement purposes and digitizing securities, and Project 
Whitney, which is more concentrated on the private security 
market and bringing some standardization in record-keeping over 
those markets.
    What we are going to do, working with SIFMA and ICI and the 
entire industry, over the next few months, is look at those 
business processes, look at those conventions that are out 
there, and see how best to deal with the impact of shortening 
time.
    As I said before, time is risk. If you shorten it, your 
credit risk goes down, but if you shorten it without really 
understanding it, operational risk goes up, and all of a 
sudden, you have a market in disarray.
    DLTs, smart contracts, all of these are exciting 
developments. The question is, what is the right time to use 
it? They are new technologies. We have 45 years of resiliency--
I am going to jinx our company--but we have a great track 
record. So anything we do, we want to maintain that reputation 
for the DTCC. But new technology is something obviously we are 
looking at, and it is very, very exciting for the industry, 
longer term, that it could revolutionize what we do.
    Mr. Budd. Very good. Thank you both. Madam Chairwoman, I 
yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
Florida, Mr. Lawson, is now recognized for 5 minutes.
    Mr. Lawson. Thank you, Madam Chairwoman, and I welcome our 
guests to the committee today. One of the things that I have 
been actually concerned about, more so than anything else, is 
safety for the investor ever since the pandemic hit, and we 
have seen a lot of things happen within the marketplace.
    So, Mr. Bodson, are current brokers of capital investments 
sufficient to prevent harm to the investor and to the financial 
system?
    Mr. Bodson. Thank you, Congressman. It is a difficult 
question. What we saw during this period of time is obviously 
our requirements went up tremendously as a result of the market 
conditions, which were unseen. I have to be truthful that I 
have been in this business for 40 years, and I have never seen 
this sort of concentrated activity in a series of stocks, and 
the impact that it had on the market, and therefore on the 
clearinghouse.
    What we want to make sure that people understand is that 
our collection of the margin protects everybody from almost 
everybody. We talk a lot about what happened with Robinhood and 
their meeting the margin charge, which they did and they 
remained in good standing. But if somebody else had gone into 
default during that period of time, neither Robinhood nor 
Robinhood's clients would have had to worry about trades being 
consummated. That is the story that I think is getting lost 
somewhere in this somehow, is that the system worked. There was 
incredible volume. The system processed that volume. There were 
big changes in margin. Firms met that margin. Nobody was 
defaulting. Nobody was pushed into that situation, from a firm 
basis. And the impact on the retail client, obviously, is 
something that both the SEC and this committee hopefully will 
come back with recommendations of [inaudible].
    But from our aspect, the post-trading aspect, it was an 
incredible period of stress. We didn't see the circumstances, 
but we were prepared for volume surges. We were prepared for 
market stresses, and that part of the process worked very well.
    Mr. Lawson. Okay. Thank you. And this is to the whole 
panel, do you believe that gamification has a place in 
investing, and if so, what guardrails should be in place to 
ensure investors are protected?
    Mr. Gensler. Congressman, I thank you for asking that. This 
term, ``gamification,'' which means embedding game-like 
features into applications, does not just relate to finance; it 
relates to our whole online existence. And if I might say, the 
streaming apps figured out some time ago that I am kind of a 
rom-com guy. Here, I admitted it, on open air, and I see a 
number of the Members are looking up. You thought I was a 
thriller guy, but I'm a rom-com guy.
    If I watch a rom-com that they recommend. and I lose an 
hour-and-a-half and it was a lousy rom-com, it is okay. But if 
you use gamification features and folks are trading more 
actively, and day trading, then all of a sudden, that is their 
investment future. That is their challenge for their future and 
for their security.
    So, I think we really have to take a look at this. We have 
asked the staff to put together something, a request for public 
comment, about all of these features that are getting imported 
into finance. Investing, good, but if it is sort of churning 
folks or getting them to trade a lot, what does that mean and 
what protections should we have in those communications?
    Mr. Lawson. That is a great answer, Mr. Chairman. Would 
anyone else like to comment on that?
    Mr. Cook. I would just add that I applaud the decision by 
Chair Gensler to solicit comment on this topic, because I do 
think we want to make sure we understand it, the different 
features, what they are used for and why. We need to make sure 
we understand the benefits, and I believe there are some really 
important benefits for investors. We also want to make sure we 
understand the risks, and I believe there are some important 
risks. And I think the benefits and risks may change in 
different contexts. We also need to understand that.
    So, I think we need to move forward in this area by really 
getting a process where all of the stakeholders can share their 
views, and the regulators can be even better-educated. We fully 
support the concept of soliciting more comment in this space.
    Mr. Lawson. Okay. Mr. Chairman, do you think that the SEC 
broker-dealer capital and liquidity framework needs to be 
strengthened for the larger retail broker-dealers? If so, how?
    Mr. Gensler. You have raised a great question, because what 
we found in January is a number of brokers then denied access 
or shut out access, and it was about liquidity to the 
clearinghouse or for margin to the clearinghouse. So, we are 
taking a close look at that. But you raised a good question, 
whether it also relates to their capital or liquidity needs.
    Mr. Lawson. Okay. Thank you. Madam Chairwoman, I yield 
back, but that is very important.
    Chairwoman Waters. Thank you. Thank you very much. The 
gentleman from Indiana, Mr. Hollingsworth, is now recognized 
for 5 minutes.
    Mr. Hollingsworth. Good afternoon. I appreciate the 
opportunity to participate in this hearing, and I know a lot of 
very important topics have been talked about.
    Chair Gensler, I wanted to speak directly with you for a 
few minutes. I was so encouraged to hear, during your Senate 
confirmation hearing, of your willingness to work on transition 
to an eDelivery system. Given the significant increase in 
communications via electronic means, it seems like a common-
sense solution, where consumers would win, ultimately firms 
would win, and everyone would be better off on account of this. 
So, I certainly hope that this will continue to be a priority. 
Do you expect it to be a priority as you are getting started 
and spinning up in your new role?
    Mr. Gensler. Thank you. Yes, I was honored, in the late 
1990s, to work with Senator McCain on what was the eSignature 
bill that President Clinton signed. I think these are ways to 
bring efficiency. And look, the last 14 months we have been 
working through this pandemic largely because of some of those 
earlier reforms. It has been a very, very hard time, and too 
many of us have lost loved ones. But electronic delivery is 
something that I hope that we can continue to look to do, while 
still protecting investors and ensuring they get the proper 
disclosures.
    Mr. Hollingsworth. Wonderful. I certainly appreciate that, 
Mr. Chairman. I think this is an important area where we could 
ring a win both for consumers and their information, as well as 
for those that are providing it.
    I wanted to switch topics and talk about minimum tick 
sizes, though. I have mentioned, in previous hearings, that we 
have seen a dramatic increase over the last decade in off-
exchange trading, with this year, at some point, frankly, more 
exchanges happening, off-exchanges than on-exchanges. And look, 
the reality is, I don't want this to be a matter of preference. 
I don't want it to be a matter of party. But I do want it to be 
a matter of parity, where we have a regulatory regime that is 
equal across both types of trading, and I don't think we have 
that right now, because of the minimum tick size requirements 
for lit or exchange trading.
    I wanted to reach out to you about this and help understand 
if there was any rationale for that discrepancy between on-
exchange trading [audio interruption].
    Mr. Gensler. I don't know if we just lost the Congressman, 
but I think I got enough of the question to answer it. Should I 
go ahead, Madam Chairwoman?
    Chairwoman Waters. Go right ahead.
    Mr. Gensler. Okay. Thank you. One feature of our stock 
exchanges is there is a minimum price size of a penny, if I 
understand the question, or minimum tick size. I have asked 
staff to consider that in terms of market structure. Should 
that change? Should that address some of this segmentation that 
the wholesalers can trade within the penny, but on the 
exchanges we currently are not able to. And is that just a 
legacy of an earlier time?
    Chairwoman Waters. The gentleman from Illinois, Mr. Casten, 
is now recognized for 5 minutes.
    Mr. Casten. Thank you, Madam Chairwoman. You caught me by 
surprise with a technical glitch there. I really appreciate you 
all coming.
    Chair Gensler, I would like to dive into some of the weeds 
here on payment for order flow, and I want to frame this in the 
context of Robinhood, because it is top of mind in this 
hearing, but I think it is more illustrative of some challenges 
than the specifics.
    Number one, I would just point out that last year, 
Robinhood paid $65 million in fines for failing to disclose 
their reliance on payment for order flow as a revenue stream, 
$65 million. By comparison, they earned $91 million in payment 
for order flow revenue in the first quarter of 2020, $180 
million in the second quarter of 2020, and $331 million, 5 
times the fund, in the first quarter of this year.
    You were not at the SEC, so I am not going to ask you to 
comment on that, but I would just make the observation that if 
the pain of the fine is so much lower than the benefit of the 
crime, I am not sure it has the kind of deterrent property we 
would like.
    In our hearing with Mr. Tenev, he noted that their payment 
for order flow agreements are structured where their revenue is 
earned as a percent of the spread earned by the wholesalers. 
Now, leaving the question of payment for order flow broadly 
aside, that seems to me like a total conflict of interest. The 
structure of that agreement puts the interest of the 
wholesalers and the brokers directly at odds with the 
investors, does it not?
    Mr. Gensler. I think you highlight two really important 
points, if I may. One is that an enforcement regime, I believe, 
without fear or favor, lean into individuals and corporations 
and holds them accountable, and that what you are highlighting 
is sometimes just a dollar payment doesn't fully address 
holding companies or individuals accountable and change the 
behavior in the market.
    As to the behavior itself, what that finding in that case 
in December showed is that there was an inherent conflict, that 
there was the wholesaler saying, ``Which way do you want me to 
go on this? It is either you or the investor.''
    That is why I have asked staff--I think that we have to 
take a holistic look at the market structure and see not only 
whether customers are really getting best execution but how the 
market structure can be addressed to get that, and also address 
some of the increasing concentration in the markets.
    Mr. Casten. I appreciate that, because again, it is the 
structure. It is one thing to be paid 10 cents a trade. It is 
something else to say, I am going to get a percent of the 
spread.
    The second point that Mr. Tenev made in those hearings was 
that, at least for their options orders, they only route trades 
to the four firms listed on their 606s that they have payment 
for order flow contracts with. To my mind, I don't understand 
how that is consistent with a best-execution obligation, if you 
are consciously not even talking to firms who might be able to 
do this, but don't pay you a fee on it. Would you agree--again, 
I am talking about the structure of how you implement your 
payment for order flow, not the concept, generally?
    Mr. Gensler. I think that you highlight a very good point, 
that in circumstances where you don't have that, then a broker 
sort of says, ``Okay, I have to institute best execution,'' and 
goes out and surveys, I think it was earlier, a Member said it 
was a horse race, but you can go out and you can kind of say, 
okay, now--I think it was Congressman Foster, but I want to 
make sure--can I go out and sort of find the best execution, 
rather than a limited two or three or, in this case, four firms 
that are sending money back to the broker.
    Mr. Casten. Okay. I would like to then just tie this all to 
the gamification question, because I think all of us on this 
committee, regardless of party, want to see U.S. investors 
create as much wealth as possible, and I don't think any of us 
have evidence to suggest that retail investors with high 
trading frequency come out better than retail investors who 
just invest in index funds, and are long hold, other than a 
couple of lucky casino winners. And yet that is precisely what 
gamification is designed to do.
    And so, if you couple gamification with an incentive based 
on the spread, and you couple that with only funneling money to 
people who run the spread, I cannot conceive of a world where 
you are also fulfilling your best-execution obligations.
    So in the time we have left, what tools do you have to 
enforce compliance with folks who are violating that best 
execution, and can you commit to making sure that the fines are 
commensurate with the gains from the crime?
    Mr. Gensler. That is certainly what we are going to lean in 
to do. I think that without fear and favor--and it is not just 
about the firms but individuals and about sanctions and bars--
you need to have orders that make sure of that.
    Mr. Casten. Thank you. I yield back.
    Chairwoman Waters. Thank you. The committee will be in 
recess for 5 minutes.
    [recess]
    Chairwoman Waters. The committee will come to order.
    The gentleman from Ohio, Mr. Gonzalez, is now recognized 
for 5 minutes.
    Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, and 
thank you to our esteemed panel. Mr. Gensler, I want to start 
with you, and thank you for your testimony and your 
thoughtfulness in today's hearing. It is our first time 
interacting, and it is great to meet you.
    I want to start with the Archegos situation. As you know, 
under SEC rules, any person or firm who acquires greater than 5 
percent ownership of a company must publicly disclose, and then 
greater than 10 percent, additional disclosures. Archegos, via 
swaps, had exposure, although not ownership, in excess of those 
triggers, and, therefore, they didn't have to disclose. 
Obviously, once the underlying shares started to tank, there 
were margin calls which they couldn't make, and then we had a 
disorderly liquidation. So my question around this is, from 
your view, how do we solve this going forward, and should the 
disclosures be triggered instead by exposure as opposed to 
outright ownership? Would that solve it? And if not, what are 
some ideas for that?
    Mr. Gensler. I think you raise a good point, and Congress 
anticipated this in reforms passed 12 years ago in the Dodd-
Frank Act, and gave authority to the SEC with certain 
conditions, but authority to bring what is called securities-
based swaps into these regimes, this 5- and 10-percent 
disclosure. I have asked staff to try to prepare 
recommendations for the full Commission. I think this Archegos 
circumstance, where this family office had well in excess of 
those numbers, shows some of the market-based and systemic-
based reasons why, even if they didn't have the vote, it was an 
important set of exposures.
    Mr. Gonzalez of Ohio. Right. And then with respect to this 
situation, from a systemic risk standpoint, do you think that 
Archegos was close to a long-term capital management-style 
dislocation, or was it more a blip in the radar? Where are you 
on that?
    Mr. Gensler. It is a very good question. I guess I have 
been around finance law enough that I was asked by then-
Secretary Rubin to visit long-term capital management in 1997. 
I don't know all the figures, but this was smaller, and it is 
24 years later. That circumstance had over $1 trillion of 
derivatives contracts and about $4 billion of capital, so I 
would say highly, highly levered. This was levered, as earlier 
members of this committee have said, pretty levered up, but I 
don't think it was quite at that level, but you raise a good 
point. There are systemic implications that we have to take the 
lessons even when the system holds, take those lessons and 
adjust our rules.
    Mr. Gonzalez of Ohio. Okay. Thank you. And then, with all 
the volatility that we have seen in the last year, whether it 
is GameStop or Archegos, I would be curious what your thoughts 
are on the effect of the zero interest rate environment and 
sort of the messaging around it, basically saying, hey, look, 
we are going to keep it low for as long as humanly possible, 
and what effect that has to risk taking, in general, and 
leverage, in particular. Just sort of your thoughts on that.
    Mr. Gensler. I am going to leave monetary policy to the 
Central Bank, and I think their remit under the securities laws 
is large enough. Regardless of where the markets are, up or 
down, interest rates high or low, I think our core mission of 
ensuring that we root out fraud and manipulation is a really 
critical piece. And what we found in the GameStop circumstances 
is that volatile markets, this is the time also to be 
protecting the retail public.
    Mr. Gonzalez of Ohio. Great. I tried to get you to wade in 
there, but I appreciate the dodge. This isn't your first rodeo 
clearly. So, on the payment for order flow (PFOF) situation, 
sort of following up on that, when I look at GameStop, I see 
PFOF as sort of a bit player, but not the primary driver, 
right? It happens to be how Robinhood executes trades, but, to 
me, it was a short squeeze of a handful of companies, but, in 
particular, GameStop, driven by social media and then traded on 
zero commission platforms. Do you agree with that perspective? 
I want to make sure we are not adding payment for order flow as 
the primary driver of the GameStop situation, when payment for 
order flow was around long before GameStop, and hopefully long 
after. But I would love to just hear you kind of put a bow on 
that, if you could.
    Mr. Gensler. Yes, thank you, and it is in our remit, so I 
will address it. I think that the GameStop events raised a 
handful of issues, and payment for order flow and the inherent 
conflicts that they present for brokers and their customers, we 
need to take a closer look at.
    Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, and I 
yield back.
    Chairwoman Waters. Thank you very much. The gentlewoman 
from Iowa, Mrs. Axne, is now recognized for 5 minutes.
    Mrs. Axne. Thank you, Madam Chairwoman, and thank you to 
the witnesses for being here. Chair Gensler, it is great to 
have you confirmed and have the SEC back at full strength.
    Mr. Gensler. Thank you.
    Mrs. Axne. It is obvious to everyone that people trade 
differently and invest, and it has changed a lot over the last 
10 years. And you know what? Contrary to what my colleagues on 
the other side of the aisle are saying, we believe in that. 
That is okay. But I do worry about some of the standards and 
protections for investors so that we can keep up with those 
changes. And recently, I have been very focused throughout this 
process on how new digital platforms have gamified trading and 
can be designed to influence behaviors within those users.
    My husband and I own a digital design firm, so I am pretty 
familiar with this, and one of the things I have heard along 
the way is that we shouldn't take away from some of those fun 
features of the apps. I don't disagree with that in general.
    However, at our last hearing, I asked Dr. Vicki Bogan, who 
is an expert in this area, about this, and she said that app 
design can absolutely influence the decisions people make while 
they are using that app. And in this case, that app design can 
encourage riskier trading, which is literally the last thing 
investors with limited knowledge need.
    So, Chair Gensler, what I am wondering is if that is 
something that the SEC will look at in evaluating whether the 
current regulatory structures are doing enough to protect 
investors against gamification, towards riskier behavior?
    Mr. Gensler. Yes, Congresswoman, and I look forward to 
working with you. I think what we have found in our modern 
internet age is that service providers outside of finance 
figured out how to basically engage us in a more fun app and 
make the user experience more enjoyable. Bringing that to 
finance can be good because it is easier to use the app, but it 
also can lead to high trading activity, and that high trading 
activity is really important. Tie that app with predictive data 
analytics, some fancy words like, ``deep learning,'' and 
``machine learning,'' tie that to predictive data analytics, 
then they can say to Gary Gensler, ``This is the prompt you are 
going to get,'' and they can say to Chairwoman Waters, ``This 
is the prompt you are going to get.'' And the computers figure 
out how to market to us differently, and all of a sudden it 
becomes somewhat, potentially, behaviorally addictive, and you 
start to find that your returns go down. So, I think it is a 
very important thing. We are putting it out for public comment 
to find out from the public more about this area. I think it is 
best to get ahead of it, rather than 5 years from now to look 
back and say, some problems have occurred.
    Mrs. Axne. Listen, that is music to my ears, and thank you 
so much. We will continue to work on this. Also, in this 
committee, we have looked a lot at the industries which have a 
business model where people aren't actually the customer of the 
service that they count on. From student loans to credit 
reporting servicers, we consistently hear about those 
businesses where we have gotten a lot of complaints from 
consumers.
    Chair Gensler, it is pretty clear that this is a similar 
situation where Robinhood is selling to the marketplace, the 
vendor, so not the consumer. We have a clear conflict of 
interest here when it comes to payment for order flow, and one 
of the things that is pretty clear from both news coverage and 
from these hearings is that this business, with as much of a 
conflict here, we don't have enough transparency around the 
PFOF, both for the public and for policymakers to even 
understand. And I have had back and forth with Robinhood's CEO 
on this, and he said he would send us that information for the 
PFOF. We are still, of course, waiting to see that, since those 
currently aren't covered by Rule 606.
    So, Chair Gensler, I am wondering if that is something that 
you would consider including in updating those rules, and what 
are some other options that we can look at to address this 
conflict?
    Mr. Gensler. I have asked staff to consider what we should 
do in terms of broad market structure, payment for order flow, 
and I would add that data is very valuable. What we find in our 
online life, if we are not paying, if it is a free commission, 
it is often that somebody else is getting data. In this case, 
the data is the actual transaction flow. That data is very 
valuable to the wholesaler, the internalizer who is taking that 
order flow, and then, as we heard, maybe 50 percent of the 
retail flow, then they have a data advantage against all the 
other market makers, like a search engine that has data 
advantages against all other online platforms.
    Mrs. Axne. Listen, I can't wait to work with you on this, 
and I will tell you what, I am worried. While we all want 
people, of course, to be able to save and invest equitably, 
what we have right now could exacerbate inequity, so I am 
grateful to hear what you have to say. Thank you.
    Mr. Gensler. Thank you.
    Chairwoman Waters. Thank you very much. The gentleman from 
West Virginia, Mr. Mooney, is now recognized for 5 minutes.
    Mr. Mooney. Thank you, Madam Chairwoman. In the last few 
years, a record number of retail investors have opened 
brokerage accounts. Last year, individual investors' estimated 
share of equities trade volume reached a decade high. Although 
financial outcomes for individual investors will vary, I see 
increased participation in our capital markets as a positive 
development for wealth creation. Investors who bought shares of 
an ETF that tracks the S&P 500 on January 1, 2020, would see 
roughly a 29-percent return on their investment today. That 
kind of return can make it easier to buy a house or save for a 
child's education.
    So, Chairman Gensler, do you consider increased 
participation by retail investors to be a positive development, 
and, if so, how will market access factor into your decision-
making at the SEC?
    Mr. Gensler. I think, Congressman, that market access is 
important, market access and an informed public making their 
own risk decisions and participating in markets, and that these 
new financial technology apps have helped facilitate that. What 
we are also doing, though, is ensuring that investors are 
protected and that we look at these gamification features and 
other prompts to see that they are still protected and they are 
not just encouraging a method to trade more and trade more, 
chasing after something that behavioral prompts are encouraging 
them to do.
    Mr. Mooney. Thank you. Aas a good Republican, we always 
say, whenever possible, to quote Ronald Reagan. As President 
Ronald Reagan once said: ``Government can and must provide 
opportunity, not smother it; foster productivity, not stifle 
it.'' So my fear is that overregulation could stifle the trend 
of greater participation from retail investors. Bad or just 
simply misguided legislation could have negative effects as 
well.
    Specifically, banning payment for order flow is not the 
right approach. If we ban payment for order flow, a practice 
that has been around for decades, I fear we may see the end of 
commission-free trading, and commission-free trading has been a 
driving force behind increased retail participation, and a 
return to commissions would make it harder for new retail 
investors to participate in our markets. The consequences of 
that could be devastating. As we discussed earlier, 
participating in our markets is a fantastic way for everybody 
in America, every person, to build wealth.
    So, I urge my Democrat colleagues to not get in the way of 
a good thing. Increased participation by retail is a positive 
development. Let's not regulate or legislate that progress 
away. Thank you, Madam Chairwoman, and I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
New York, Mr. Torres, is now recognized for 5 minutes.
    Mr. Torres. Thank you, Madam Chairwoman. My first question 
is to Chair Gensler. Mr. Chairman, do you believe there is an 
inherent conflict between payment for order flow and best 
execution?
    Mr. Gensler. Thank you, Congressman. I look forward to 
working with you. We have found, as highlighted earlier in the 
hearing, that there have been times where there is an inherent 
conflict, even when a wholesaler paying for that order flow 
said, ``Look, you tell me I can pay you more, or can sell the 
customer more.'' There are firms that have zero commission that 
don't have payment for order flow. And also to the earlier 
question, there are countries--the United Kingdom banned 
payment for order flow. Canada has banned payment for order 
flow. So I have just asked staff, let's look at this 
holistically as to what promotes fair, orderly, and efficient 
markets, and protects investors the best.
    Mr. Torres. I would ask you, payment for order flow is 
clearly a tradeoff. It has benefits. It has costs. Do you have 
a position on whether the costs outweigh the benefit at this 
moment?
    Mr. Gensler. I still want to hear from staff and work with 
my fellow Commissioners, but to your earlier question, there is 
this tension. There is a conflict there, and it has also led to 
a handful, really one or two wholesalers to have a dominant 
share in the retail market. And that concentration also raises 
issues of fragility, the data that they have. Do they get a 
competitive advantage on the rest of the market? Concentration 
usually leads to less efficient markets.
    Mr. Torres. It is often said that zero commission trading 
is free, but there is a sense in which it is deceptively free. 
It has no cost at the front end, but it certainly has a hidden 
cost at the back end. Do you agree with that assessment, and 
how can we make that hidden cost more visible to retail 
investors?
    Mr. Gensler. It is a very good question, because there are 
costs. It is sort of like an iceberg, but most of the iceberg 
is below the surface. The costs are below the surface. Payment 
for order flow is one of the costs. Someone else in the market 
gets enough data to trade that market better for them and a 
little less well for everybody else.
    Mr. Torres. Two concerns I have are market concentration 
and systemic risk. It has been reported that Citadel controls 
47 percent of the retail order flow market. It has also been 
reported that Melvin Capital, which sustained, what, 51 percent 
losses in January 2021, was heavily leveraged. How are we going 
to address market concentration and systemic risk in this 
market?
    Mr. Gensler. I think by thinking through, as best we can, 
how to instill, through market rules and transparency, vibrant 
competition, and vibrant competition so that one firm doesn't 
necessarily, through economics, get to that center and get to 
dominate. We see concentration also on the brokerage side, 
increasing concentration on the brokerage side, so it is not 
just on the market-making side. And that is what I have asked 
staff, and our Division of Economic and Risk Analysis, and 
others to work out.
    Mr. Torres. And as you know, there was controversy around 
Robinhood's decision to restrict trading. I have heard the 
arguments. I, for one, actually find the arguments to be 
reasonable. It seems like Robinhood would have had the 
inability to meet margin call, but it raises a larger question 
for me. It seems to me the ability of a broker to restrict 
trading appears to be absolute. I am wondering, should there be 
any limits on the ability of a broker to restrict trading to 
ensure that it is done reasonably, and that there is no abuse 
of power?
    Mr. Gensler. I think what happened there was to protect the 
clearinghouse, and because this firm didn't have enough 
liquidity and they scrambled around to raise a little over $1 
billion that fateful day, they and some others restricted 
trading. I think access to the markets is a fundamental part of 
the markets, and so the folks who took it on the chin, so to 
speak, were the people who wanted that access at that critical 
time. And so, we are looking at that very closely.
    Mr. Torres. But should there be limits on the ability of a 
broker to restrict trading?
    Mr. Gensler. Again, it is only my 3rd week on the job, so--
    Mr. Torres. You have been thinking about these topics for a 
long time.
    Mr. Gensler. I understand.
    Mr. Torres. Okay.
    Mr. Gensler. I would have to say, whether you are the 
smallest investor or the largest investor, one of the hallmarks 
of our markets is access to trading. And so, it does concern me 
that retail investors were shut out during a fateful time, but 
again, it is a balance. They had to protect the clearinghouses 
as well.
    Mr. Torres. Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. The gentleman from 
Tennessee, Mr. Rose, is now recognized for 5 minutes.
    Mr. Rose. Thank you, Madam Chairwoman and Ranking Member 
McHenry, and thank you to our witnesses for your testimony and 
participation in today's hearing. Chairman Gensler, I want to 
welcome you as well to your first appearance before the 
committee in your new role.
    Historically, the SEC has administered the Federal 
securities laws in a bipartisan fashion. Chairman Gensler, I 
hope you continue that tradition, as I believe discussions 
about securities laws are not where we should be holding 
debates about climate change, or racial inequalities, or other 
extraneous issues. As the American economy continues to recover 
from the government-imposed shutdowns due to COVID-19, I also 
urge you to avoid placing overly burdensome regulations through 
backdoor regulating that could lead to limited consumer access 
to credit or stifle job growth.
    As we analyze the events surrounding GameStop, we, again, 
are discussing payment for order flow, a conversation that has 
been ongoing since the 1980s. I am not in favor of banning 
payment for order flow like the legislation my Democratic 
colleagues have introduced to this hearing, especially without 
the proper due diligence of studying its benefits and costs. 
The updated reporting requirements released in 2018 were a good 
step forward, but I think we should continue to investigate if 
those changes are providing the necessary transparency for 
investors.
    Chairman Gensler, in the previous hearing, I asked one of 
our witnesses what reforms he thought the SEC should implement 
or could implement with respect to payment for order flow to 
increase transparency for retail investors. And he suggested 
more granular 606 reports, specifically doing more to provide 
better public transparency of best execution. Are you looking 
into additional changes to those reports, and, if so, what 
changes?
    Mr. Gensler. I thank you for that, and I look forward to 
working with you and your staff in a bipartisan way with your 
advice. I want to turn to your question. I think transparency 
is very helpful, and transparency around these potential 
conflicts, I don't know if it will get us all the way there, 
and that is what I have asked the staff as to market structure, 
and, more broadly, not just about wholesalers and brokerage 
shops like Robinhood, but also exchanges and brokerage shops 
which pay rebates. In that whole market structure, what is 
going to promote the most competition, the most efficiency, so 
when a company goes to raise money, they have the most 
efficient markets, and when working families save, they can 
save best for retirement? And at the middle, if we have 
concentration, often economic shows leads to higher economic 
rents and higher costs. So, competition in that middle of the 
market is what would serve as my question to the staff.
    Mr. Rose. What is the timeframe and prioritization for your 
examination of payment for order flow?
    Mr. Gensler. Again, just 3 weeks on the job, so I don't 
know which month. But just because the chairwoman asked to have 
this hearing, you can imagine we have spent a lot of time just 
in the last 2 weeks. We are looking to probably publish a 
GameStop report this summer, but that won't be the only piece 
of it. It is really looking at what should we be doing in terms 
of overall market structure and whatever rules we can do, 
whether it be, as you said, updating our transparency around 
this Rule 606 or going further.
    Mr. Rose. Thank you. Mr. Cook, in your written testimony, 
you said that the SEC's 2018 disclosure requirement updates 
that took effect in 2020 have increased the public transparency 
of payment for order flow, but that FINRA believes that 
additional updates to order routing disclosure are necessary. 
Could you describe what updates you are planning to recommend?
    Mr. Cook. Thank you for that question, sir. I think we 
would like to explore that with the SEC to build on it. I think 
it was a very positive development. The 2018 disclosure you are 
referring to just became effective in 2020. A lot of the debate 
around payment for order flow now is informed by that 
additional disclosure, so I think that has been very helpful. 
The question is whether there might be more granular 
information about payment for order flow. We might think about 
some of that being imported to regulators to help them 
investigate how orders are being routed, but also more 
disclosure to investors, and that might be enhanced 606 reports 
considering disclosures at the point of sale.
    Mr. Rose. Thank you, and I yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you. The gentlewoman from North 
Carolina, Ms. Adams, is now recognized for 5 minutes.
    Ms. Adams. Thank you, Madam Chairwoman. Thank you for 
holding this hearing, and thank you to our guests today.
    Chair Gensler, first of all, congratulations on your 
confirmation. I want to focus my questions on increasing 
transparency within the markets. As you know, on a quarterly 
basis, some of our largest institutional investors must 
disclose their equity holdings via Form 13F. However, both the 
GameStop and Archegos controversies have highlighted some 
serious weak points and loopholes in Form 13F. For example, 
Archegos, which caused billions in losses for some of the 
world's largest financial institutions, like Credit Suisse, was 
able to skirt disclosing its sizable derivatives positions 
because Form 13F doesn't require covered filers to disclose.
    As Chairman of the SEC, what reforms to 13F do you believe 
need to be made to provide more transparency to the markets and 
investors, and do you believe that 13F filings should be 
expanded to include derivatives?
    Mr. Gensler. Thank you for that question. I do think, and 
Congress anticipated this by giving authority to the SEC to do 
that. I think these derivatives, or what is known in this case 
as total return swaps, being included in those filings would be 
positive. I can't speak on behalf of the Commission. I am just 
speaking on my behalf. But I have asked staff to prepare 
recommendations to the five-member Commission to use that 
authority that the SEC has. I also think that there might be 
other updates that we should do beyond just derivatives as 
well.
    Ms. Adams. Thank you. Mr. Bodson, Robinhood's CEO blamed 
the trade settlement cycle on Robinhood's inability to meet the 
National Securities Clearing Corporation's (NSCC's) margin 
demands, which he said forced Robinhood to restrict trading in 
GameStop and other stocks so it could reduce its risk profile, 
therefore, reducing the amount that it would have to pay into 
NSCC's margin fund.
    So, Mr. Bodson, can you please describe generally what 
factors NSCC uses to determine a member firm's risk profile, 
and estimate how often it is that a member firm is surprised at 
the amount it has to pay into a clearinghouse's margin fund?
    Mr. Bodson. Thank you, Congresswoman. Our formulas, our 
models are all SEC-approved and subject to public commentary. 
The model is commonly known as a value-at-risk model. It is a 
widely-accepted and supported model to estimate the potential 
loss in the portfolio of open trades that a firm has, what is 
the loss over the 2-day period to settlement. In the case of 
Robinhood and others, because they were not the only firm that 
was facing these situations, the model saw that they had a 
large concentration of transactions in buy, so instead of 
portfolio buys and sells, they were all buy trades and stocks 
that were moving around 100 to 200 to 300 percent a day, which 
is incredible volatility, and with volumes that were over 100 
times above what would be normal. All of these factors led the 
model to say that this is a very risky situation. If a firm 
defaults, there is a possibility of those stocks losing all 
their value in an equal period of time. So, that is what drove 
the margin charge from Robinhood and some other firms where you 
saw this heavy retail flow.
    We provide our members the model itself in our rules. We 
have model guides to help them understand it. We have APIs 
which send information to the firms. We have a customer portal 
where they can see what we are seeing. Now, the model itself 
runs overnight, so one can understand a firm may not know the 
exact, precise amount that may come out the next day, 
especially in this type of marketplace. But they can anticipate 
that there will be a significant increase overnight as a result 
of seeing their customers' activity coming through them.
    Ms. Adams. Okay. So We know that it was an unprecedented 
week, but do you believe that it was the settlement cycle that 
is to blame for Robinhood's margin issues, or is this just a 
case of poor risk management?
    Mr. Bodson. I think it is more a question of, if there was 
a shorter settlement cycle, yes, the margin charge would be 
reduced, because that period of time would go from 2 days to 1 
day. Therefore, the portfolio of open trades would be lower. 
The volatility would not have to be over 2 days, but over 1 
day. I am not sure that, ``blame,'' is the right term for any 
settlement cycle. That simply is an industry convention.
    Ms. Adams. Okay. Thank you. Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
Wisconsin, Mr. Steil, is now recognized for 5 minutes.
    Mr. Steil. Thank you very much, Madam Chairwoman. I don't 
know about everybody else on these virtual hearings, but, man, 
I look forward to the Majority allowing us to be back in person 
in the not-too-distant future. I think it would be really nice 
just to actually see people instead of doing this virtually on 
some pretty important topics. But, away we go.
    Chairman Gensler, I really appreciate you being here today. 
At the hearing last month, I asked Acting Director Coates about 
some statements he made regarding the SPAC market in his then-
temporary capacity as the head of the Division of Corporation 
Finance. As you know, in my opinion, his comments had some 
pretty impactful effects on the SPAC markets. Acting Director 
Coates was hired by Commissioner Lee when she was the Acting 
Chair, but has remained in that role under your chairmanship. 
In fact, several of the Commissioners that Lee hired remain in 
prominent roles, including your Chief of Staff. Do you intend 
to retain Acting Director Coates as the permanent head of the 
Division of Corporation Finance?
    Mr. Gensler. Thank you for that, and I look forward to 
working with you. John Coates is a valued member of the senior 
staff of the SEC, and while I only met him recently, he is 
contributing and working really well.
    Mr. Steil. Did you provide any consultation with 
Commissioner Lee about or exert influence over staff hiring, 
both in the roles in the Chairman's office and for the SEC 
divisions prior to being sworn in as Chairman?
    Mr. Gensler. No.
    Mr. Steil. Okay. That is helpful. Did you have any input 
into the hiring of Acting Director Coates then? No?
    Mr. Gensler. As I just said, no.
    Mr. Steil. Okay. I will shift gears. Let's jump into a 
favorite topic of mine, ESG disclosures. I have been concerned 
that our securities laws are going to be misused to push social 
policy agendas that are, at best, tangentially related to 
investor protection and capital formation.
    And with that in mind, I want to ask you about Commissioner 
Lee's recent remarks at the Center for American Progress. In 
her speech, Commissioner Lee suggested the SEC should focus its 
attention on political disclosures. She said, ``Many companies 
that have made carbon-neutral pledges or otherwise state they 
support climate-friendly initiatives have donated substantial 
sums to candidates with climate voting records inconsistent 
with such assertions.'' And I am concerned that pursuing 
policies like this with the SEC is going to lead to mandatory 
disclosures of information that aren't material to your average 
investor, and that is, instead, really an attempt to leverage 
the SEC to engage in naming and shaming. Did you by chance 
discuss Commissioner Lee's remarks before she made them?
    Mr. Gensler. Congressman, I was a private citizen at MIT.
    Mr. Steil. Completely fair. So, you were not engaged in 
providing advice on those comments or in consultation?
    Mr. Gensler. Until I was honored by the U.S. Senate and 
appointed by the President, I was at MIT as a professor.
    Mr. Steil. Totally fine. I just wanted to confirm that that 
was the case. With all of the critical challenges we are facing 
today and, in particular, in front of the SEC, do you feel, at 
this time, that you intend to prioritize that issue?
    Mr. Gensler. I am, sir, and let me explain why. I think 
that a quarter of our market structure is disclosure, and 
investors being able to decide what risks they take based upon 
the disclosure from issuers. And in this decade, the 2020s, 
climate risk is something that an increasing number of 
investors, measured in the trillions of dollars, have really 
said that this is something they want to better understand as 
they make their investment choices, and I think we can help 
bring consistency and comparability. I think we can do it 
through notice and comment. There is a comment period that 
Acting Chair Lee actually started. I wasn't a part of that; she 
started it, Acting Chair Lee.
    We are going to get a lot of comments from the public come 
June, and I encourage anybody to weigh in for or against. The 
details--it is really helpful to learn from the public their 
views on this, but it is about the investors and disclosure 
that investors want in making their investment and proxy 
choices.
    Mr. Steil. I appreciate you answering. With the limited 
time, I would say I look forward to the discussion. I look 
forward to working with you, and I appreciate you attending 
today's virtual hearing.
    Mr. Gensler. Thank you.
    Mr. Steil. And with that, Madam Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
Illinois, Mr. Garcia, is now recognized for 5 minutes.
    Mr. Garcia of Illinois. Thank you, Chairwoman Waters and 
Ranking Member McHenry, for holding this hearing today, and 
thanks to all the witnesses for your informative testimony. 
This is the third hearing we have had about GameStop, and 
people joke about Congress having a short attention span, but 
unfortunatelyz, this is not old news. Every week, there is a 
stock price going up and down for no real reason. Every month, 
there is a new financial trend to get rich quick. GameStop 
[inaudible], and it is pretty much always the same people who 
are getting rich. People in working-class communities like mine 
don't know how they will retire. They are worried about whether 
their parents are going to live. But they are the ones who come 
out ahead.
    Mr. Gensler, as you mentioned in your written testimony, 
one firm, Citadel, apparently handles almost half of all retail 
trading volume. There are a lot of reasons why that is 
troubling, but retail traders talk all the time about 
democratizing finance and letting in the little guy. I think 
that is like saying Amazon democratized reading, because big 
players like Citadel, the only companies large enough to handle 
all these trades, are getting way bigger.
    Mr. Gensler, do you think that the payment for order flow 
arrangements that companies like Robinhood use simply entrench 
big players like Citadel?
    Mr. Gensler. You raise a very good question, and I think it 
is an interrelated question which I have asked staff to help 
our five-member Commission on, is the market structure right 
now has some concentration in the retail space that you just 
mentioned, that there are dominant market makers buying this 
payment for order flow. I think there are also some conflicts 
that arise between are we, the public, getting best execution?
    I no longer can do this because I am at the SEC, but before 
I got there, when I would put in an order to my broker that is 
a market order, about 90, 98 percent or something of those 
market orders, depending upon the month, are going to a handful 
of wholesalers. They don't go to the New York Stock Exchange or 
Nasdaq. They don't even go to dark markets, called ATSes. The 
retail order flows that are market orders to go to those, and 
so it raises questions. Is this the most efficient market? Is 
this the fair, orderly, efficient market that Congress has 
mandated the SEC to do? And does it lead to some fragility in 
markets from the market concentration? That is what I am going 
to look at, to make sure. And I think it matters to companies 
and issuers, too, that the capital formation is better when 
there is intense competition in the middle of the market.
    Mr. Garcia of Illinois. I am glad that you are looking at 
it, and that we will be hearing from you in the near future. Do 
you see a potential problem with one firm, like Citadel, having 
so much concentrated power in a single market?
    Mr. Gensler. It does raise questions of, does it leave the 
market potentially more fragile, potentially less innovative, 
and whether the pricing in that marketplace is not benefiting 
from as much robust competition? We know economics tells us 
that when there is a lot of competition in a market with 
multiple parties, it tends to lead to better pricing for the 
users of that market.
    Mr. Garcia of Illinois. Yes. And do you think that a firm 
like Citadel could potentially pose a systemic risk to the U.S. 
financial system, and should FSI review the risks associated 
with such a large market maker?
    Mr. Gensler. Again, sir, I haven't focused on just that 
firm, but I think that market concentration and market making 
can lead to issues that that player has data advantages like we 
have seen. There is one online search engine in America that 
most of us go to, and that has data advantages. Now, in the 
middle of our capital markets, one firm may be in the retail 
order flow. So it is in the retail order flow that you 
mentioned, it may have growing data advantages over other 
market participants.
    Mr. Garcia of Illinois. Thank you very much. Madam 
Chairwoman, I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
South Carolina, Mr. Timmons, is now recognized for 5 minutes.
    Mr. Timmons. Good afternoon. Thank you, Madam Chairwoman. 
And before I begin with my questions, I want to reiterate what 
my friend from Wisconsin, Congressman Steil, said. I really 
look forward to getting back in person. I hope that we can do 
that as soon as possible.
    Mr. Bodson, it is easy to be a Monday morning quarterback, 
but, in your opinion, did Robinhood act appropriately in 
restricting trading in certain stocks based on current 
regulations they and the DTCC are subject to?
    Mr. Bodson. I really can't comment on Robinhood's decision. 
Only Robinhood can do that. I would be speculating, and it 
really would not be appropriate. What we know is there was a 
large margin charge that they were subject to. The premium 
component was waived. They met their requirement and remain a 
member in good standing. What happened next, the decision to 
restrict trading ,really was internal to Robinhood. We did not 
have discussions about that.
    Mr. Timmons. Understood. Thank you. Chairman Gensler, do 
you believe that payment for order flow improves overall market 
liquidity and order execution for retail investors?
    Mr. Gensler. I am going to have to study it a little bit 
more with our Division of Economic Research and Trading and 
Markets in terms of this very important question that you just 
raised. Does it increase liquidity, is it neutral, or is it 
negative to liquidity? I haven't formed a view on that yet, 
sir.
    Mr. Timmons. Sure. Thank you. Also, Commissioner Gensler, 
Germany's financial regulator ran into trouble when it banned 
short selling in wire cardstock and filed criminal complaints 
against two journalists reporting whistleblower allegations 
against the company. Do you believe that it is necessary for 
short sellers to disclose their short positions in 13F filings, 
and could this additional disclosure lead to a similar 
situation of regulatory overreach in the United States?
    Mr. Gensler. I am not familiar with the circumstances you 
are mentioning, but let me say that Congress anticipated and 
gave authorities to the SEC to, on a monthly basis, require 
aggregate information in the short selling market. FINRA, and 
Mr. Cook could speak to it, already publishes some information 
on a biweekly basis. I think that transparency is positive to 
markets, and I have asked staff to put forward recommendations 
to our five-member Commission. It was actually a mandate from 
Congress. It wasn't a, ``may.'' It was a, ``shall.'' So we are 
going to lean in and follow Congress' mandate from 12 years 
ago.
    Mr. Timmons. Sure. Thank you. Last question for you, do you 
believe that short sellers play a role in maintaining fair, 
orderly, and efficient capital markets?
    Mr. Gensler. I think that short selling, which is probably 
as old as capital markets, several hundred years or more old, 
does play a role in capital markets and price formation. The 
important tenant for the SEC is to ensure that the markets are 
free of fraud manipulation, and so those participants in the 
market, whether they are on the buy side, or the long side, or 
on the short side, are doing so without defrauding and 
manipulating the markets and that there is the appropriate 
transparency.
    Mr. Timmons. Sure. Thank you. Mr. Cook, do you believe that 
Know Your Customer rules and current policies can continue to 
protect retail investors regardless of their broker-dealer?
    Mr. Cook. Could you repeat that question, sir? There was 
some interference.
    Mr. Timmons. Sure. Sorry. I said, do you believe that Know 
Your Customer rules and current policies can continue to 
protect retail investors regardless of their broker-dealer?
    Mr. Cook. Oh, thank you for that question, sir. I think it 
is important to note that there are existing rules, along the 
lines that you described, that include Know Your Customer and 
for certain more complex products, like options, a requirement 
that additional information be acquired, and also that the firm 
make a determination about whether the account would be 
appropriate. That said, I think as sort of the theme of the 
hearing and some of the conversations around these events, 
technology has changed the world and some of those rules are 
quite old. And I think it is worth at least looking at whether 
they should be updated, but while taking into account the need 
to avoid unintended consequences or unduly limiting access to 
the markets.
    Mr. Timmons. Sure. I appreciate that answer, and I am going 
to finish how I started. Madam Chairwoman, we really need to 
get back to work in person. I am getting very tired of ring 
lights and cameras on the computer, so I hope we can get back 
to work soon. And with that, I yield back. Thank you, Madam 
Chairwoman.
    Chairwoman Waters. The gentlewoman from Michigan, Ms. 
Tlaib, is now recognized for 5 minutes.
    Ms. Tlaib. Thank you, Madam Chairwoman. I appreciate it. 
Thank you for the panelists. I know that many of you know that 
high-frequency trading conducted by market makers, like Citadel 
Securities, drive market volatility, and working people pay the 
price through their 401(k) and pension funds. That is what I am 
most concerned about. Prior to 2008 and the financial crisis in 
2008, Citadel sought to leverage its status as a hedge fund to 
compete with U.S. investment banks. It didn't work, but Citadel 
has since used this regulatory blind spot to establish 
themselves as a dominant market maker for retail investors.
    So, Chairman Gensler, as a hedge fund, is Citadel 
Securities supervised by the Federal Reserve?
    Mr. Gensler. It's good to see you again, by the way, 
Congresswoman, and I was just thinking that, are they 
supervised by the Federal Reserve, is a question for them. 
Citadel Securities is registered at the SEC.
    Ms. Tlaib. Is this helpful? Are they designated as a 
systemically important financial institution by FSOC?
    Mr. Gensler. I do not believe that the Financial Stability 
Oversight Council (FSOC) has made such a designation.
    Ms. Tlaib. Yes. According to its own website, Mr. Chairman, 
Citadel Securities says they execute about 40 percent of all 
U.S. listed retail value and reportedly handles almost as much 
trading volume as Nasdaq. As market makers, like Citadel, 
conduct these high-frequency trades, it is estimated that 
pension and retirement accounts already pay an annual $5 
billion ``tax,'' which is extremely alarming. And even though 
50 percent of American families don't own stock at all, it is 
working people who pay the price when Wall Street gambles with 
our money.
    And so, Chairman Gensler, in your testimony today, you did 
acknowledge that, ``Issues of concentration may increase 
potential system-wide risks should any single incumbent with 
significant size or market value fail.'' Sorry if I misquoted 
you, but I think what I am more concerned about is, do you 
think Citadel, or a firm like it, currently poses systemic risk 
to our financial system?
    Mr. Gensler. Yes. I do think that what we are seeing inside 
the financial markets is concentration growth. We see this 
outside of finance as well. We see it in search engines and 
online retailing.
    Ms. Tlaib. Do you not think this is an extreme version of 
that, when they are doing this much trading and they are not 
considered a systemic risk?
    Mr. Gensler. I don't know how to compare it to other parts 
of the economy, but we are seeing similar economics about the 
network effects that a firm gets with an increased advantage of 
data, then they are growing concentration. So, I have asked 
staff to really take a look at this because there are issues 
not just of fragility or resiliency, which you have raised, but 
also, is this the most efficient capital market? Now, this is 
just in the retail space, but players that are so concentrated 
in the space, and is the pricing in the market the best.
    Ms. Tlaib. Yes. And, what is concerning is, as you know, 
with Citadel's own pricing and liquidity, they failed the 
pensions. There is going to be direct impact. But, Mr. 
Chairman, does the SEC have any contingencies in place in the 
event of a failure of a large market maker like Citadel right 
now if they fail?
    Mr. Gensler. Part of that is also our oversight of the 
clearinghouses and ensuring that there is appropriate oversight 
of their counterparties, and this would be true of any large 
market player. But I would like to work with you and your staff 
a little bit more, because in my 3rd week, I haven't yet sat 
down and sort of found out all those by rigorous oversight, of 
all the brokerage firms and the significant brokerage firms and 
clearinghouse.
    Ms. Tlaib. Yes. As a market maker, like Citadel, has grown 
larger and consolidated their market position, they have used 
their status as a hedge fund to evade regulatory scrutiny, and 
it is very clear. So, I hope that the SEC doesn't turn a blind 
eye to this regulatory loophole or the systemic risk that hedge 
funds like Citadel pose. And so, again, I really appreciate the 
chairwoman bringing this to light because we will not have a 
healthy, transparent market so long as retail orders are 
directed towards a shrinking handful of wholesale traders. And 
it is really important. Thank you, and I yield back.
    Chairwoman Waters. Thank you. The gentleman from Texas, Mr. 
Taylor, is now recognized for 5 minutes.
    Mr. Taylor. Thank you, Madam Chairwoman. And I appreciate 
our witnesses being here. I think this is an important hearing. 
I am Van Taylor. I represent Texas. I am the junior-most 
Republican, which means the end of the hearing is near, so you 
can celebrate that.
    I wanted to, Mr. Gensler, just talk to you about something 
that happened in the previous Administration. President Trump 
signed an Executive Order prohibiting investors from trading in 
dozens of Chinese securities. However, those primarily U.S. 
investors investing in ADRs are now unable to divest those 
Chinese securities, and so it is really unclear what the plan 
is for those U.S. investors to get out of those Chinese 
securities. I realize this didn't happen on your watch, but I 
am wondering what the plan is. And some of those investors, 
there are some big ones and some small ones. I, of course, hear 
from the small ones. They are concerned about, hey, how am I 
going to get out of this? What is the SEC's view on that?
    Mr. Gensler. First, I congratulate you on your first term, 
and it is great to get to know you. This is a terrific 
committee. I have worked with this committee in three 
Administrations. There are many other great committees, too, 
though, but I would like to work with you and your staff to 
understand the issue better. I have to say I haven't yet been 
briefed on what you are saying, for investors to basically sell 
out of investments that they are kind of locked in.
    Mr. Taylor. Right. The problem is that these investors got 
frozen into these investments, and as you said, and certainly 
it is something I heard in my time at Harvard Business School. 
I mean, hey, we have great capital markets in this country, and 
it is a major competitive advantage for our nation to have 
those great capital markets for the formation and allocation of 
capital. Chinese companies are taking advantage of that, and we 
said, okay, you are not going to take advantage of us anymore, 
but we ended up freezing investors into them, and so now 
investors have their capital stuck in investments, and I am 
trying to figure out how are we going to get them out? Again, 
we don't want people to play in that market, but how are we 
going to get them out of it?
    Mr. Gensler. One of the wonderful things for the public 
listening as a representative democracy, is if a Member raises 
a question like this to somebody in the administrative state, 
like me, I will now go back and try to learn about this issue, 
and I look forward to chatting more about it with you.
    Mr. Taylor. I appreciate that. Thank you for letting me 
flag this one for you. Obviously, it is important for those 
people, and I think it also could perhaps create a roadmap for 
this kind of action in the future instead of just locking it up 
and then everybody going, okay, what now, that there is 
actually an exit ramp.
    Mr. Bodson, the DTCC released a White Paper, ``Advancing 
Together: Leaving the Industry to Accelerate Settlement.'' 
Obviously, the last iteration of this GameStop hearing focused 
a lot on accelerated settlement, T+1 versus T+2. I think you 
have done a good job of explaining some of the benefits of 
going from a T+1 to a T+2, and I think it would have certainly 
helped in this particular scenario that we are having this 
hearing under if you had had a T+1 instead of a T+2. But one of 
the things that I wanted to understand a little bit more from 
your point of view is, could you talk about distributed ledger 
technology, and what that would actually mean, and how it would 
work in this particular circumstance?
    Mr. Bodson. Thank you, Congressman, for the question. The 
move to T+1 really will be based upon existing technology, 
looking to see if we could apply DLT and other technologies to 
help solve the problem. As I said, speeding up the process 
lowers credit risk, but it increases operational risk, so there 
are a whole series of processes that have to be done before a 
trade is settled. The easy parts, in some ways, are the trading 
part and the settlement part, but they are somewhat just 
bilateral transactions. But in between, as an example, any 
institutional asset manager has to take the trade it has done 
throughout the day, aggregate that trade, break it up amongst 
all the funds, et cetera, et cetera. I don't want to go into 
too much nuance. All of these steps could require 
communication, reconciliation, passing of information. So, 
there are instances where something like DLT, where you do have 
that advantage of a golden source being distributed, where it 
could be very much applicable. DLT smart contracts--
    Mr. Taylor. I am sorry to interrupt you, Mr. Bodson.
    Mr. Bodson. Sure.
    Mr. Taylor. I just need to ask one quick question. Do you 
need any statutory authority to go from T+2 to T+1? Do you need 
us to pass a law, or do you have the authority you need?
    Mr. Bodson. No. Thank you, Congressman. If I do, I will 
definitely reach out to the committee, but at this point, the 
industry is coalescing around the move to T+1. As you heard 
from Chairman Gensler and Mr. Cook, we are all moving in the 
right direction, so I think at this point, the industry itself 
will get there.
    Mr. Taylor. Okay. Thank you. I yield back.
    Chairwoman Waters. Thank you very much. The gentleman from 
Massachusetts, Mr. Auchincloss, is now recognized for 5 
minutes.
    Mr. Auchincloss. Thank you to our witnesses for their 
patience and persistence in this hearing, and to the chairwoman 
for organizing this. In the first of these hearings, I focused 
on the tension between using technology to democratize access 
to assets and to wealth-building opportunities, and I believe 
that is critical and potentially a way for us to narrow the 
wealth gap in this country, but, on the other hand, the 
increasing gamification of finance for non-accredited investors 
or investors who don't have the wherewithal or the 
sophistication to be making the kind of bets that they are 
making.
    And I think, in particular, where the rubber hits the road 
on this tension is with options and with the gamification of 
options, which are a very fast way to make money, but a very 
fast way to lose money as well, and that they have binary 
outcomes and a very narrow time window.
    I would appreciate hearing from, first, Mr. Cook, and then, 
Mr. Gensler, on where FINRA and the SEC feels like they draw 
the line between creating a good user experience, which 
obviously is in the best interest of any business, without 
inappropriately inducing behavior that actually is not in the 
fiduciary interest of the user.
    Mr. Cook. Thank you for that question, sir. I think you 
touch on the issue and characterize it exactly. There is a 
tension. There is a balance here and we need to try to strike 
the right balance. With respect to options, we have issued 
guidance recently reminding firms of their obligations here, 
but I appreciate your raising options because I think there is 
a way in which all these issues kind of come together--options, 
payment for order flow, gamification--because options tend to 
provide greater payment for order flow.
    And so, one of the things we often think about with 
conflicts in payment for order flow is, which firm do I wrap my 
orders to, right? But there is a second level of conflict that 
options is one example of--I think there are others--where 
there is a question about which product and which orders do I 
want to route because some may give me more payment than 
others. And combined with the gamification, I think it becomes 
a package that we really need to look at all pieces of this 
together.
    So, I really appreciate Chair Gensler's leadership on this, 
and talking about getting his staff to think through all these 
issues, and we welcome the opportunity to engage with them.
    Mr. Auchincloss. Because, Mr. Cook, the spread is wider on 
options, and so they are more attractive for the payment for 
order flow?
    Mr. Cook. Yes, the amounts of payment for order flow in the 
options world, which tend to come from exchanges, not from the 
wholesalers, is generally higher, yes.
    Mr. Auchincloss. Thank you. Mr. Gensler?
    Mr. Gensler. I think that, as Mr. Cook said, it is taking 
somewhat of a holistic approach in a variety of places, but 
options raised a couple of other issues. There is more risk 
because of the inherent, what is called leverage. I can say I 
want to make an investment, that something is going to go up or 
down, but I could lose all my money very easily in an option.
    Mr. Auchincloss. No, I know what options are, and what 
leverage is. My question, Mr. Gensler, is, do you think the SEC 
standards for de-marketing where gamification, and a good user 
experience, and a fiduciary responsibility begin are clear 
enough and being followed in the industry?
    Mr. Gensler. I think that we need to look very seriously at 
freshening up our rules because behavioral prompts, the 
gamification, is inspiring people to trade more. And economic 
research shows that more trading doesn't necessarily lead to 
better results, particularly in the field of options. I was 
just mentioning the leverage because it is potentially more 
pernicious than options.
    Mr. Auchincloss. Absolutely, Chairman Gensler, and I 
appreciate that, and what I would encourage you and your staff 
to focus on is the reality that this trend of gamification is 
actually going to accelerate. It is a common maxim, for 
example, in the consumer technology industry that the frontier 
of tight feedback loops in user experience are actually in 
video games. Video games have always been on the leading edge 
of how to create captivating online experiences. And the time 
between when video games put something out there that works, 
and when other kinds of consumer technology adopt it, like 
brokers, is getting shorter and shorter and shorter.
    Mr. Gensler. And if I could add, it is also the use of 
predictive data analytics, or what is called deep learning and 
machine learning, which was part of my research at MIT. You 
combine that and then differentiate how you would market it to 
you differently than the chairwoman, and you would find a way 
to get the chairwoman to trade one way and you to trade another 
way. I am not saying that either of you are doing this, but I 
am just saying that is the sophistication of what is happening 
now.
    Mr. Auchincloss. It is an excellent point, sir, and I do 
hope that you will tell this committee if you feel like you 
need more statutory authority or more funding to fully draw 
that line and enforce it because it is critically important.
    Mr. Gensler. Thank you.
    Chairwoman Waters. Thank you very much. Before we close the 
hearing, I would like to just share information in relationship 
to a question we have been getting about a financial 
transaction tax (FTT). That was not a part of any proposal in 
this committee hearing, and we don't have jurisdiction over 
that anyway. So for those people who have been contacting us 
about an FTT, that was not a part of this hearing.
    And with that, I would like to thank our distinguished 
witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for these witnesses, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    Again, I certainly would like to thank all of our witnesses 
today, and this hearing is now adjourned. Thank you very much.
    Mr. Gensler. Thank you, Madam Chairwoman.
    Chairwoman Waters. You are welcome.
    [Whereupon, at 4:02 p.m., the hearing was adjourned.]

                            A P P E N D I X


                              May 6, 2021


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