[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                    OVERSIGHT OF THE SEC'S DIVISION
                         OF TRADING AND MARKETS

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 22, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-36
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


                               __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
53-202 PDF                    WASHINGTON : 2023                    
          
----------------------------------------------------------------------------------- 

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    Subcommittee on Capital Markets

                    ANN WAGNER, Missouri, Chairwoman

FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                DAVID SCOTT, Georgia
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania             SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice     WILEY NICKEL, North Carolina
    Chairman                         STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York                EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 22, 2023................................................     1
Appendix:
    June 22, 2023................................................    37

                               WITNESSES
                        Thursday, June 22, 2023

Wachter, Jessica, Chief Economist and Director, Division of 
  Economic and Risk Analysis, Securities and Exchange Commission 
  (SEC)..........................................................     4
Zhu, Haoxiang, Director, Division of Trading and Markets, 
  Securities and Exchange Commission (SEC).......................     6

                                APPENDIX

Prepared statements:
    Wachter, Jessica.............................................    38
    Zhu, Haoxiang................................................    40

              Additional Material Submitted for the Record

Wachter, Jessica; and Zhu, Haoxiang:
    Written responses to questions for the record from 
      Representatives Nickel, Nunn, and Wagner...................    43

 
                    OVERSIGHT OF THE SEC'S DIVISION.
                         OF TRADING AND MARKETS

                              ----------                              


                        Thursday, June 22, 2023

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:35 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Lucas, Sessions, 
Huizenga, Hill, Steil, Meuser, Garbarino, Lawler, Nunn; 
Sherman, Meeks, Scott, Vargas, Gottheimer, Casten, Nickel, 
Lynch, and Cleaver.
    Ex officio present: Representative Waters.
    Chairwoman Wagner. Good morning. The Subcommittee on 
Capital Markets will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Oversight of the SEC's 
Division of Trading and Markets.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    I want to thank you all for joining us this morning. 
Today's hearing represents the first in a long-overdue series 
of hearings where we will hear directly from Division Directors 
at the Securities and Exchange Commission. Given the historic 
and unprecedented volume of proposed rulemakings being advanced 
at the SEC under Chair Gensler, it is imperative that this 
committee hold public hearings featuring the SEC staff 
responsible for overseeing these rulemakings.
    Today's witnesses are important because the SEC's Division 
of Trading and Markets impacts a wide variety of stakeholders 
participating in our public markets, including millions of Main 
Street investors saving for retirement, a downpayment on a 
house, or their children's future. I would also like to note 
that it has been more than 4 years since this committee has had 
the SEC's Division of Trading and Markets testify, and I can 
assure you that will not be the case under our leadership.
    Just last December, the SEC advanced four proposed 
rulemakings that will dramatically overhaul our current market 
structure and how it functions. Typically, when agencies seek 
to make meaningful reforms, they do so by advancing one 
targeted proposal at a time and by presenting clear and 
convincing evidence of a problem or failure warranting such a 
drastic policy change. In the case of market structure reform 
proposals under Chair Gensler, the SEC has done neither. 
Instead of starting with one surgical proposal and observing 
its impacts after implementation to assess the need for 
additional proposals, Chair Gensler and Director Zhu have taken 
a wrecking ball to every corner of our current equity market 
structure in one fell swoop. And they have done so without any 
definitive explanation and without identifying any systemic 
market problems or failures.
    You might be saying to yourself, surely, the SEC can point 
to some economic effects of the proposals that justify such 
major reforms, but yet again, the SEC comes up short. 
Throughout its economic analysis of the proposals, the SEC 
explicitly concedes numerous times that the economic effects of 
the proposals are, ``unknowable.''
    And if that wasn't enough, the SEC's economic analyses are 
also improperly based on data that the SEC itself admits is 
outdated and inaccurate. For example, to justify 3 of the 4 
proposals, the SEC utilizes Rule 605 reports, which provide 
trade execution quality information monthly. At the same time, 
the SEC staff has acknowledged that these reports have 
limitations and need reform.
    These deficiencies are not limited to the market structure 
proposals put forward by the Division of Trading and Markets. 
The Division has authored additional proposals that 
inexplicably overlap and for which their impacts have been 
inadequately analyzed. It is vital the SEC only issue 
regulations that are absolutely necessary to avoid burdening 
Main Street investors.
    That is why I will be introducing the SEC Regulatory 
Accountability Act. This legislation, which has passed in 
previous Congresses with strong bipartisan support, will make 
sure the SEC does not arbitrarily implement unwarranted and 
complex rules. My bill would statutorily require the SEC to 
identify the problem a proposed regulation is seeking to 
address and conduct a thorough cost-benefit analysis before 
issuing any regulation.
    I would urge my colleagues to join me in protecting the 
capital markets that millions of Americans rely on for 
financial security and prosperity. I look forward to partnering 
with my colleagues on this subcommittee, on both sides of the 
aisle, to ensure that U.S. equity markets remain the envy of 
the world, and to continue to work on behalf of market 
participants of all sizes, as well as our constituents trying 
to save for the American Dream.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from California, Mr. Sherman, for 4 
minutes for an opening statement.
    Mr. Sherman. Thank you, Madam Chairwoman, for having this 
hearing, and I look forward to hearing from, hopefully, every 
Division Head at the SEC before this subcommittee in the weeks 
and months to come. I want to commend the SEC for working hard 
and doing their job, and I assure you that there is more than 
one problem for you to work on at the present time.
    One issue is payment for order flow. Many investors would 
be surprised to find out that often, their broker is getting 
paid by people on the other side of the transaction. We are 
told that this payment for order flow allows brokers to provide 
free commissions, free trading. Often, the most-expensive price 
you can pay for any service is, ``free,'' and in this case, the 
commission you save may be more than compensated for by the 
price spread.
    Current SEC regulations seem to say that any price 
improvement constitutes the very-best price. That is not fair, 
and it is not true. In fact, the SEC has estimated that the 
current system causes investors to lose $1.5 billion a year 
because they are not getting the very-most price improvement. 
The SEC is wrestling with this issue, and that makes sense.
    The witnesses here oversee securities exchanges. The 
securities exchanges with the biggest problem are the crypto 
exchanges, which the SEC has correctly determined are indeed 
securities exchanges. In this room last July, I had hearings 
with the head of enforcement, in which I urged them to go after 
the crypto exchanges. The SEC was a little slow, and FTX cost 
billions of dollars to investors around the world. Finally, we 
are going after the crypto exchanges.
    I am concerned about one SEC proposal, and that is swing 
pricing. There are those who say that we should just, at 
certain times, tell mutual fund investors that the markets are 
unsteady, we may have a disaster, therefore, please don't sell 
your stocks or your mutual fund shares, and if you do, you are 
going to be subject to an additional charge. That is like 
telling people on the Titanic that there will be an extra fee 
for getting on the lifeboats. That is not the way to get people 
to calmly get on the lifeboats. The idea that in a crowded 
theater, where people are yelling, ``fire,'' you are going to 
stabilize the situation by imposing a fee on anybody who goes 
to the exits is a good way to keep people out of the theater 
all the time.
    We need people to invest for their retirement and to build 
America by investing in mutual funds, and the swing pricing 
will do just the opposite. I am particularly concerned about 
the swing pricing rules because of its horrendously-
discriminatory effect on those of us who live by the Pacific 
Ocean. People would have to get their orders in by 10:00 a.m. 
Eastern Time, which is 7:00 a.m. in California, and 4:00 a.m. 
in Hawaii. Let's not adopt a rule that says that those of us 
who live by the Pacific Ocean will be treated worse.
    Finally, we have before us the Division Heads who deal with 
the credit rating agencies. Talking about those who rate bonds, 
these are the folks who gave AAA to Alt-A and gave us the new 
depression of 2008. We continue to have a situation in which 
the issuer selects the bond rating agency that will rate the 
quality of their bonds.
    Al Franken and I had a provision that the SEC has 
conveniently ignored and sidestepped to begin a system where 
the SEC will choose the bond rating agency. I assure you that 
if you let the Dodgers pick the umpires, we will be in first 
place. And the idea that the issuer can select the bond rating 
agency, and the bond rating agency cannot be sued under, they 
say, the First Amendment if they give too high a rating, is a 
recipe for what we experienced in 2008. We will probably 
experience something in a decade or two similar if the SEC 
doesn't act on this. I yield back.
    Chairwoman Wagner. The Chair now recognizes the ranking 
member of the full Financial Services Committee, Ms. Waters, 
for 1 minute.
    Ms. Waters. Thank you. Last Congress, Republicans 
threatened that SEC Chair Gensler would testify very 
frequently, but they seem reluctant, if not afraid, to hear 
what he thinks about their crypto markets bill, and I can 
understand why. Chair Gensler not only has expertise in 
securities markets, but he also served as the Chair of the 
Commodity Futures Trading Commission (CFTC) and taught courses 
on crypto at MIT.
    Instead, Republicans will discuss legislation to give Wall 
Street avenues to sue the SEC over any future rulemaking under 
the guise of, ``cost-benefit analysis.'' We know that for Wall 
Street, there is no benefit that justifies their costs. And 
apparently for Republicans, there is no benefit from hearing 
from the person who knows the cost of their crypto bill. I 
yield back.
    Chairwoman Wagner. Today, we welcome the testimony of 
first, Dr. Jessica Wachter, the Chief Economist and Director of 
Economic and Risk Analysis at the SEC. Previously, she was with 
the Wharton School at the University of Pennsylvania.
    And second, Dr. Haoxiang Zhu, the Director of the SEC's 
Division of Trading and Markets, and a professor of finance at 
the Massachusetts Institute of Technology.
    We thank each of you for taking the time to be here, and 
each of you will be recognized for 5 minutes to give an oral 
presentation of your testimony. And without objection, each of 
your written statements will be made a part of the record.
    Dr. Wachter, you are now recognized for 5 minutes to give 
your oral remarks.

  STATEMENT OF JESSICA WACHTER, CHIEF ECONOMIST AND DIRECTOR, 
DIVISION OF ECONOMIC AND RISK ANALYSIS, SECURITIES AND EXCHANGE 
                        COMMISSION (SEC)

    Ms. Wachter. Thank you, and good morning, Chairwoman 
Wagner, Ranking Member Sherman, and members of the 
subcommittee. It is my pleasure to be here today. I am the 
Commission's Chief Economist and the Director of the Division 
of Economic and Risk Analysis (DERA). Today, I am testifying in 
my official capacity as the Chief Economist and Director of 
DERA, but my testimony does not necessarily reflect the views 
of the Commission, the Commissioners, or other members of the 
staff.
    I know that many of you may not be familiar with my 
Division's work, so I wanted to give you a little bit of 
information about who we are and what we do. The DERA was 
established in 2009 from a merger of the Office of Risk 
Assessment and the Office of the Chief Economist. DERA is made 
up of over 170 economists, statisticians, engineers, attorneys, 
accountants, and other staff. These experts provide support to 
every aspect of the Commission's mission from rule writing to 
enforcement. As of May 31st, DERA had over 100 Ph.D. economists 
working on rule writing, litigation support, and risk analysis.
    High-quality economic analysis is an essential part of SEC 
rulemaking. It helps ensure, among other things, that decisions 
to propose and adopt rules are informed by the best-available 
information about a rule's likely economic consequences, and it 
allows the Commission to consider a rule's potential benefits 
and costs when determining if a rule is in the public interest. 
As a result, DERA is actively involved in the Commission's 
policy and rulemaking function.
    In Commission rulemakings, DERA's Office of Policy 
Economics conducts an economic analysis which examines the 
costs and benefits as well as effects on efficiency, 
competition, and capital formation of that rulemaking. As a 
general matter, the economic analysis contains a statement of 
the need for the proposed action, a baseline against which to 
measure the likely economic consequences, alternative 
approaches, and an evaluation of the benefits and costs of the 
proposed regulatory action.
    Finally, we also analyze the effects on efficiency, 
competition, and capital formation. In conducting the economic 
analysis, DERA staff works closely with staff from the policy 
divisions, including the Division of Trading and Markets, from 
the earliest stages of policy development through the 
finalization of a particular rule.
    In addition to working on rulemaking and policy matters, 
DERA economists also support the Commission's examination and 
enforcement functions by providing rigorous economic analysis 
and data analytics. We help identify securities law violations, 
quantify harm to investors, calculate ill-gotten gains, and 
assist the Division of Enforcement with returning funds to 
harmed investors. DERA's Office of Litigation Economics also 
provides expert testimony in enforcement matters. DERA staff 
perform risk analysis, in addition, of the capital formations 
to inform the Commission and those outside.
    High-quality data greatly facilitate our economic analysis. 
Indeed, data and data analytics are becoming increasingly 
important to the successful accomplishment of the SEC's 
mission. To meet the increased demand for data analytics, 
DERA's data scientists and engineers develop tools and perform 
analysis in support of the entire Commission. This includes 
working with SEC's other divisions and offices to ensure data-
structuring approaches for required disclosures, validation 
rules, and data quality assessments meet the needs for which 
they are designed, as well as advanced machine-learning 
algorithms, where necessary.
    In sum, DERA staff deliver high-quality, data-driven 
analysis that is critical to the SEC's mission of protecting 
investors, facilitating capital formation, and ensuring fair, 
orderly, and efficient markets.
    It is my great pleasure to serve at the SEC. I have been 
very privileged to study financial markets and to teach the 
next leaders of our financial industry for more than 20 years. 
Our markets are the deepest and most-liquid in the world, and I 
am honored that in this position, I am able to help them 
continue to grow and thrive. Thank you again for inviting me, 
and I look forward to answering your questions.
    [The prepared statement of Director Wachter can be found on 
page 38 of the appendix.]
    Chairwoman Wagner. Thank you. Director Zhu, you are now 
recognized for 5 minutes for your oral remarks.

 STATEMENT OF HAOXIANG ZHU, DIRECTOR, DIVISION OF TRADING AND 
       MARKETS, SECURITIES AND EXCHANGE COMMISSION (SEC)

    Mr. Zhu. Good morning, Chairwoman Wagner, Ranking Member 
Sherman, and members of the subcommittee. My name is Haoxiang 
Zhu, and I am the Director of the Division of Trading and 
Markets at the Securities and Exchange Commission. It is my 
honor and pleasure to appear in front of you today to discuss 
the Division's work. I am testifying in my official capacity as 
the Director of the Division of Trading and Markets, but my 
testimony does not necessarily reflect the views of the 
Commission, the Commissioners, or other members of the staff.
    The Division of Trading and Markets was one of the original 
divisions of the SEC when it was established in 1934. As the 
name implies, the primary task of the Division is to oversee 
the trading of securities. As technology and market practices 
evolve, the role of the Division evolves with it. Today there 
are, broadly speaking, three layers of market activities and 
intermediaries that come under the remit of the Division.
    The first layer is marketplaces. This broad category 
includes national securities exchanges, as well as alternative 
trading systems and security-based swap execution facilities. 
Generally, if a marketplace trades any security--stocks, bonds, 
options, and security-based swaps, among others--it is in the 
remit of Trading and Markets.
    The second layer is broker-dealers. Because broker-dealers 
are key intermediaries for investors to access the market, they 
are subject to rigorous regulatory requirements about net 
capital, customer protection, recordkeeping, sales practices, 
and investment recommendations, among other activities.
    The third and last layer is clearing agencies, including 
clearinghouses and central securities depositories. They are 
important for the efficient clearance and settlement of 
securities transactions. The Division also oversees transfer 
agents, which maintain the issuer's security holder records, 
among other functions.
    I should add that exchanges, FINRA, and clearing agencies 
are all self-regulatory organizations (SROs). Securities laws 
require that SROs file their proposed rules and rule changes 
with the Commission, and the filings are subject to Commission 
review and notice and comments.
    Based on the most-recent data, the Division of Trading and 
Markets oversees 24 national securities exchanges, about 100 
alternative trading systems, over 3,500 broker-dealers, 48 
security-based swap dealers, 7 registered clearing agencies, 
and over 300 transfer agents. In Fiscal Year 2022, the Division 
processed about 2,000 filings from SROs, including exchanges, 
FINRA, and clearing agencies. Behind these numbers are the 
approximately 270 staff members in the Division, who spend 
countless hours reviewing documents, writing Commission 
releases and orders, and meeting with registrants and market 
participants.
    Our day-to-day regulatory work produces another dividend, 
which is that Division staff identify market evolutions that 
are significant enough to warrant updates to our rulebooks. And 
of course, if Congress decides to update securities laws, we 
implement congressional mandates. Under Chair Gensler, over 60 
percent of rule proposals and adoptions recommended by the 
Division of Trading and Markets received unanimous votes from 
the Commission.
    Our current rulemaking work falls into four broad areas. 
The first area is to finish the mandates from the Dodd-Frank 
Act of 2010. The second area focuses on strengthening the U.S. 
Treasuries market. The third area is to update our rules on 
equity market structure, and the fourth area focuses on the 
interaction between financial regulation and technology 
infrastructure.
    In all areas of rulemaking, the staff in the Division 
thoroughly consider comment letters received and actively 
engage with market participants before making policy 
recommendations for the Commission to consider. We closely 
collaborate with colleagues in the Division of Economic and 
Risk Analysis, the Office of General Counsel, and other 
divisions and offices. We are working hard to fulfill the 
mission of the SEC: to protect investors; to promote fair, 
orderly, and efficient markets; and to facilitate capital 
formation.
    I would like to conclude with a personal note. Sixteen 
years ago, I set foot in this great country to pursue a better 
life. I am grateful that the United States took me in as one of 
its 330 million proud citizens. I had a good career as a 
financial economist before coming to public service. It has 
been my honor and privilege to serve at the Commission for the 
past 18 months. Our work is deeply-technical, but underneath 
it, is a far simpler and more-profound goal: To keep the U.S. 
capital markets--and indeed the United States--as the envy of 
the world. Thank you.
    [The prepared statement of Director Zhu can be found on 
page 40 of the appendix.]
    Chairwoman Wagner. Thank you, Dr. Zhu.
    We will now turn to Member questions, and I will recognize 
myself for 5 minutes for questioning.
    Dr. Wachter, you are the Director of the Division of 
Economic Risk and Analysis (DERA). While DERA's economic 
analysis in each of the individual equity market structure 
proposals is significantly flawed and deficient, the most-
noteworthy flaw across every proposal is the SEC's failure to 
reasonably attempt to quantify their costs and benefits. The 
SEC repeatedly admits that it is, ``unable to quantify, 
estimate, or know the economic effects,'' and it states nearly 
100 times that it is, again, uncertain of the impacts its 
proposals will have.
    As Chief Economist, you are willfully ignoring your duty to 
provide adequate economic analysis, ma'am. For example, nearly 
half of the data tables in the best execution proposal's 
economic analysis are virtually identical to tables presented 
in the order competition proposal. Is it standard practice for 
the SEC to copy and paste parts of its economic analysis for 
two separate proposals, ma'am?
    Ms. Wachter. Madam Chairwoman, thank you for your interest 
in our economic analysis on the equity market structure 
proposals, and----
    Chairwoman Wagner. I am asking about the copy-and-paste.
    Ms. Wachter. ----about the copy and paste. The economic 
analysis has several different parts, and one very important 
part is the baseline. The baseline is the world as it is, so we 
have to measure costs and benefits against some flat line, the 
world as it is. So for each of those four proposals, there is 
going to be some commonality, and that is why you will see some 
of the text repeated between them.
    Chairwoman Wagner. But, ma'am, you haven't quantified their 
costs and benefits. Nearly 100 times, you say you don't know, 
you are uncertain. And as I said, my question is specifically, 
is it standard practice for you to copy, cut, and paste parts 
of your economic analysis for two separate proposals? Yes or 
no?
    Ms. Wachter. When the baselines are----
    Chairwoman Wagner. Okay, ma'am, I need to reclaim my time. 
I would like you to answer the specific question, do you agree 
that these proposals could interact with each other? For 
example, the order competition rule needs to comply with the 
best execution rule, correct, yes or no?
    Ms. Wachter. The order competition rule and the best 
execution rule do solve different problems, and both the costs 
and benefits in each of those separate rules are going to be 
evaluated----
    Chairwoman Wagner. They interact with each other.
    Ms. Wachter. ----against the baseline, and they are----
    Chairwoman Wagner. Okay. I don't know what this, 
``baseline,'' is, but we are going to move on.
    Director Zhu, typically, significant market structure 
reforms have been carried out with comprehensive outreach to 
investors and businesses, broker-dealers, exchanges, and 
various other market participants before formal rulemaking. 
However, in this instance, the SEC appears to be moving at a 
breakneck speed, without giving the public an adequate 
opportunity to meaningfully comment on the proposed changes.
    In 2005, when the SEC adopted Regulation National Market 
System (Reg NMS), it held multiple public hearings and 
roundtables, convened an advisory committee, issued several 
concept releases, and gave adequate comment periods allowing 
for ample public input. Why hasn't the SEC done any of these 
things this time around or provided any justification for the 
pace and the breadth of these rulemakings?
    Mr. Zhu. Chair Wagner, thank you for the question. The 
public engagement part is extremely important for us in the 
rulemaking process. Before we proposed regulation, the equity 
market releases in December, there was extensive discussion 
with the market participants of all the years before. I would 
say ever since the adoption of Regulation NMS in 2005, the 
ongoing discussion has been really fruitful. And, in fact, some 
of the ideas that we eventually learn from the market come from 
the market itself, including lower access fee, including lower 
tick size, including reform to Rule 605. So my answer to you, 
ma'am, is that, indeed, we have engaged actively with the 
market.
    Chairwoman Wagner. Okay. Dr. Wachter, let's try again. Each 
of these four rules is significant and will have a material 
impact on trading outcomes for millions of investors. With the 
rules scheduled to go into effect simultaneously, how can you, 
as the Director of DERA, with a straight face, claim to measure 
to what degree each of the four rules contribute to or a better 
or worse outcome for investors? Wouldn't it make more sense to 
issue them incrementally so that each rule's efficacy could be 
measured distinctly?
    Ms. Wachter. You are concerned about the interaction of the 
rules, should the proposals be adopted? Right now, these are 
four proposals. They are proposed rules, and so we are 
measuring the economic effects against the baseline, which is 
actually our standard practice.
    Chairwoman Wagner. My time has expired, and I am backed up 
over it, so I will give you a little extra time.
    The Chair now recognizes the distinguished ranking member 
of the subcommittee, Mr. Sherman, for 5 minutes for questions.
    Mr. Sherman. I want to praise you and your colleagues at 
the SEC for your hard work, your dedication to solving many 
problems, and to do it at the same time, and especially, I want 
to commend you for going after the crypto exchanges.
    But in my time, I want to try to push you in the right 
direction on some areas, one area, in particular, where I think 
you are getting it wrong. People up here, me for example, are 
here because we understand people. I have won 13 elections in 
spite of my personality and my looks because I understand my 
district. And this swing pricing seems like the worst idea you 
could have in trying to achieve our objectives. We want people 
to save in an orderly way for their retirement, not their 
trading, not putting all their money in a single stock. We need 
people to invest in American equities, not foreign equities, 
and certainly not crypto. And the swing pricing seems to be 
designed not for the purpose, but with the effect of deterring 
investments, particularly in equity mutual funds.
    The Administration is absolutely dedicated to getting rid 
of junk fees, and yet, swing pricing looks like such a giant 
junk fee that it would make an airline CEO blush. I am old 
enough to remember when mutual funds had loads; you had to pay 
extra money to get out or to get in. Thank God, we don't have 
that anymore, but swing pricing imposes a load, right, when you 
might want to sell.
    Imagine trying to buy a ticket on an airline and they say, 
we will charge you extra if you use the life preserver. I 
wouldn't fly that airline. So, the idea that we are going to 
stabilize markets and cause people not to sell their mutual 
fund shares at a tough time--again, if I was dumb enough to buy 
a ticket on an airline that said that we charge extra for the 
life preservers, you can be sure that I would pay and use the 
life preservers if I thought they were needed. In fact, I would 
be more interested in putting on the life preserver before the 
plane even took off.
    Dr. Wachter, have you done a detailed, peer-reviewed 
economic analysis on how the swing fees would deter interest in 
investing in American mutual funds?
    Ms. Wachter. Ranking Member Sherman, thank you for your 
interest in the swing pricing.
    Mr. Sherman. Oh, please. Yes or no?
    Ms. Wachter. The swing pricing proposal, you say?
    Mr. Sherman. Yes or no?
    Ms. Wachter. Our economic analysis on the proposal----
    Mr. Sherman. Look, I am going to reclaim my time if you 
won't answer the question. Have you done the work, and has it 
been peer-reviewed?
    Ms. Wachter. We have done the work.
    Mr. Sherman. You have done the work. Has it been peer-
reviewed?
    Ms. Wachter. It has been put out for public comment.
    Mr. Sherman. It has been put out for public comment. And 
what analysis did you do to conclude that telling people that 
just when they want to sell the stock is when they are going to 
be deterred from selling the stock, and, oh, by the way, if you 
live near the Pacific Ocean, you are going to be particularly 
oppressed, and for some reason, that didn't deter people from 
investing in mutual funds? On what basis did you reach that 
conclusion?
    Ms. Wachter. We did do the analysis, and we share your 
concerns about those costs that you mentioned, and those costs 
are in our economic and----
    Mr. Sherman. I am not so concerned about the cost; I am 
concerned about the effect on investors. Junk fees. It is not 
the 20 bucks. It is the lack of simplicity. I want to buy an 
airplane ticket, pay so much, and get to my destination. I want 
to know what it is. I want to put my money into a mutual fund, 
pay a little fee for them to manage it, and get my money out at 
net asset value when I want it out. You complicate that, and 
investors, particularly, when they see something they don't 
understand, think they are getting ripped off. You are saying 
your economic analysis shows that this isn't going to deter 
investment?
    Ms. Wachter. Congressman, we do talk about that in our 
economic analysis in the swing pricing rule. The problem that 
this rule is designed to address is, given how the net asset 
value is calculated right now in some mutual funds, we have a 
situation where some investors may be subject to dilution.
    Mr. Sherman. That is not some mutual funds. Every single 
mutual fund in this country could use swing pricing, and I 
think 0.0 have decided to do it. So, we are dealing with all 
mutual funds. There is not a single mutual fund seeking 
investment that has thought that investors would choose them if 
they went to a swing pricing system, because then, investors 
would think it was fair.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Sherman. I yield back.
    Chairwoman Wagner. And before we move on, I would ask our 
witnesses to please answer the questions in an expeditious, 
clear, and direct fashion to our Members of Congress who have 
to perform oversight on both sides of the aisle. Thank you.
    The gentleman from Michigan, Mr. Huizenga, who is also the 
Chair of our Subcommittee on Oversight and Investigations, is 
now recognized for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman, and I was going 
to start by asking, please don't start your answer with, 
``Thank you for asking me this great question.'' I know it is a 
great question.
    Director Zhu, and Director Wachter, I am going to jump 
right in. I want to start by discussing SEC Proposed Rule 10B-
1, Position Reporting of Large Security-Based Swaps. Dr. Craig 
Lewis of Vanderbilt, who, interestingly, had your job, Dr. 
Wachter, under Chair Mary Schapiro, conducted a review of your 
economic analysis for proposed Rule 10B-1. And I would like to 
submit that report for the record, Madam Chairwoman.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Huizenga. In the course of this review, Dr. Lewis 
discovered that the Commission repeatedly mischaracterized the 
academic research it relied on to support public disclosure of 
positions. In one instance, the Commission quoted a paper 
asserting it was in support of public disclosure of positions, 
when, in fact, the paper did not discuss public disclosure at 
all.
    Director Zhu, have you conducted an internal investigation 
to determine how this mischaracterization occurred and who was 
responsible? Quickly, please.
    Mr. Zhu. Congressman, the objective of Rule 10B-1 is the 
Dodd-Frank Act.
    Mr. Huizenga. I don't want to know the objective. I want to 
know whether you have conducted an investigation to determine 
who is responsible for these mischaracterizations.
    Mr. Zhu. Congressman, I joined the SEC in December 2021. 
That is right at the moment.
    Mr. Huizenga. And I joined Congress in 2011. Would you 
please stop stalling? If not, then I would respectfully suggest 
that we have another hearing with you in front of us so we can 
get 10 minutes of you stalling instead of 5 minutes of 
stalling.
    Chairwoman Wagner. We are on the road to that, Mr. 
Huizenga. Please answer the Member of Congress' question.
    Mr. Huizenga. Okay. Have you retroactively examined other 
SEC releases to ensure that they do not contain similar 
misrepresentations? Yes or no, Dr. Zhu?
    Mr. Zhu. Congressman, we make sure that whatever we say in 
the release achieves the policy objective, the transparency, 
and the investor protection.
    Mr. Huizenga. Have you gone back to review that? Yes or no? 
I will take this as a, no. Okay. What steps has the Commission 
taken to correct the record to accurately convey the views of 
these distinguished academics?
    Mr. Zhu. I am not familiar with that particular letter you 
refer to, sir.
    Mr. Huizenga. It is a study, and we will get you a copy of 
that. And I will submit in writing the questions that I 
apparently can't get answers to today.
    Given that the Commission has heavily relied on the summary 
of the academic literature, have you notified the Commissioners 
that your summary is, in fact, unreliable? Yes or no?
    Mr. Zhu. Congressman, on 10B-1, it is a live rulemaking. In 
fact, earlier this----
    Mr. Huizenga. Okay. Reclaiming my time, I am concerned that 
you have just made the SEC legally vulnerable to challenges in 
court. Are you concerned about that?
    Mr. Zhu. We published a reopening of 10B-1 earlier this 
week, so that went into the public domain.
    Mr. Huizenga. Okay. I guess I will take that as an, I don't 
care. Moving on, I know people watching this hearing, and maybe 
even some of my friends on the other side of the aisle, believe 
that this is somehow partisan, when, in fact, that is simply 
not true. Last December, Congressman Gottheimer and I sent 
Chair Gensler a bipartisan letter on the SEC's market structure 
proposal. In response to our letter, Chair Gensler noted, ``As 
is the case in all rulemaking activities, these proposals were 
developed by experienced staff from across the Commission.'' 
That statement is particularly noteworthy given that just 
months prior, the SEC's own Inspector General released a report 
about their concerns surrounding the level of expertise used 
when crafting many of the proposed rules in question.
    So, Director Wachter, quickly please, the SEC has been very 
active and has issued a number of proposals over the last 2 
years. Yes or no, do you believe DERA has had the proper time 
to be able to provide robust economic analysis for each of the 
proposals, that sufficiently explores all impacts?
    Ms. Wachter. Congressman, as the Director of DERA, I concur 
on all the economic analysis and my belief----
    Mr. Huizenga. And you believe you have had sufficient time?
    Ms. Wachter. Sufficient time. We conduct a robust economic 
analysis.
    Mr. Huizenga. Okay. The Consolidated Appropriations Act of 
2023 instructed the Commission to re-conduct their economic 
analysis on the proposed rule for private fund advisors. Has 
your Division completed that directive from Congress?
    Ms. Wachter. Congressman, we are currently evaluating the 
comment file on that proposal, and we----
    Mr. Huizenga. So, you have not completed it. Okay. In my 
remaining 10 seconds, in February 2022, in a second letter to 
Chair Gensler, I asked whether or not the SEC had considered 
the economic impact of the climate disclosure rule on energy 
prices. The response I got was a repackaging of the rule 
itself. I will be following up, but please, pray tell me that 
somebody has done the analysis.
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Huizenga. And, Madam Chairwoman, again, to the 
objections, this is ridiculous. This is absolutely ridiculous, 
and whether we have to do----
    Chairwoman Wagner. The gentleman's time has expired.
    Mr. Huizenga. ----an investigation in closed questioning, 
we have to get to the bottom of these areas.
    Chairwoman Wagner. The gentleman's time has expired. I now 
recognize the gentleman from Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much. First, Dr. Wachter, I 
understand you are associated with the Wharton School of 
Finance at the University of Pennsylvania. I am a graduate of 
the Wharton School at the University of Pennsylvania, I got my 
MBA there, and served on the executive board of directors, so I 
want to give you a special welcome to the House Financial 
Services Committee.
    Now, Director Zhu, our capital markets are the world's gold 
standard. And in recent years, new investors who began trading 
and investing in markets have been younger and more racially-
diverse and have come from lower-income populations, more so 
than prior generations of investors, and I want to compliment 
you on that. These are welcome trends given the critical role 
of our capital markets in enabling individuals to obtain good 
solid financial security.
    And this is why I am pleased to see the SEC pursue updates 
to Rule 605 data through the Disclosure of Order Execution 
Information Proposal, particularly by expanding the scope and 
content of the information that is close.
    However, currently, only market centers, like national 
security exchanges, over-the-counter market makers, and 
alternative trading systems, are required to produce publicly-
available monthly execution quality reports.
    So what I want to ask you, Director Zhu, is, taking into 
account the changes in equity market conditions and the 
technological advancements which have eroded the effectiveness 
of Rule 605, does the SEC believe they have the most accurate, 
up-to-date data available to support adopting the other three 
equity market structure proposals?
    Mr. Zhu. Thank you, Congressman. First, I want to say that 
what you mentioned earlier about broader participation in the 
equity market, with a younger, more-diverse population, I think 
that is indeed a phenomenon to be celebrated. To your question 
about Rule 605, this data was, I guess, adapted in 2000, and 
for 20 years or so, it has been providing valuable information 
to the market. And currently, we are trying to expand the 
coverage of Rule 605, as well as adding to the granularity of 
this data set. So, this data has been used for rulemaking in 
the equity market structure releases. And we believe that while 
this data could be made more perfect, it is sufficient and 
informative enough for us to rely on it.
    Mr. Scott. Wouldn't you agree that if adopted, the proposal 
would significantly expand the data that is made available to 
the public about the execution quality of equity transactions? 
Yes or no?
    Mr. Zhu. If adopted, it will as to the granularity.
    Mr. Scott. Okay. So, you are saying, yes. Let me ask you 
this while I have a moment left. Would the Commission consider 
delaying the other three proposals until you can use the 
updated Rule 605 data?
    Mr. Zhu. Congressman, that is also a comment that was 
shared by many commenters in the comment file, and we will 
consider comments submitted in this manner, including this one.
    Mr. Scott. I believe that comprehensive and accurate data 
is critical to enabling regulators and market participants to 
make the most-informed decisions. So that is very important, 
using the latest, most available decisions. Many of these 
decisions, financially, are life-and-death decisions, moving up 
or moving down the economic ladder. Thank you to both our 
witnesses for being here today, and I yield back the balance of 
my time.
    Chairwoman Wagner. The gentleman yields back. The Chair now 
recognizes the gentleman from Arkansas, Mr. Hill, who is also 
the Chair of our Digital Assets Subcommittee, for 5 minutes.
    Mr. Hill. Thank you, Madam Chairwoman. The SEC has been 
working on the Consolidated Audit Trail (CAT) for a long time, 
almost a decade. And during my 9\1/2\ years in Congress, I have 
consistently opposed the idea of the CAT, under both Republican 
and Democratic leadership, because I think it is unnecessary, 
and I think it is a very, very costly intrusion to the 
marketplaces, and all of those costs will be borne mostly by 
retail investors, the way this is structured now.
    And the reason I oppose it, too, is because substantively 
every analytic surveillance tool that the Commission or FINRA 
needs, that might be contemplated in capturing every brokerage 
account and every trade for every American citizen, can be done 
under the rules now, under the surveillance policies now, of 
both the exchanges and FINRA in their broker-dealer work. So, I 
just view it as a catastrophically bad idea, and I think it 
outlines the risks of another giant Federal database that 
people can query without a real rationale.
    The SEC has spent a lot of time over the last year 
proposing rules intended to increase cyber defenses for every 
public company, broker-dealer, and fund. Mr. Zhu, what do you 
think the biggest cyber vulnerabilities are of the Consolidated 
Audit Trail? And are you concerned about cyber vulnerability in 
collecting that data in the CAT?
    Mr. Zhu. Congressman, I think you raised a really important 
issue that resonates with all of us. I think the protection of 
customer information, customer data, is of the utmost 
importance. That is why, I think in 2010, the Commission issued 
exempt relief so that the most-sensitive personally 
identifiable information (PII), such as Social Security 
Numbers, account numbers, and a full date of birth, will not be 
collected by the CAT.
    Mr. Hill. But don't you agree that you still have the 
ability in this kind of a database to expose that, and the 
Federal Government doesn't seem to have a very good track 
record in that? I will give you an example, geographically. In 
Little Rock, Arkansas, there is a huge trade in a couple of 
different stocks. It is identifiable who it is. And if that 
number was released to the public, it could be very damaging to 
somebody's privacy, even if you don't know their name or 
address.
    So, I think this policy has concerns. And what kind of 
screening would be required for anyone who has access to 
looking at the CAT? What qualifications would they have, and 
how many people is that? I read that it could be 3,000 people, 
is that true, to have the opportunity to look at this database?
    Mr. Zhu. Congressman, currently, the Commission is 
evaluating the comment file on the rule proposal issued under 
former Chair Clayton about the data security of CAT. I would 
also add that CAT is a system run by the self-regulatory 
organizations. It is not a system run by the SEC.
    Mr. Hill. Yes, but let's not hide behind the fact that it 
is done at the direction of the SEC. So, would you say that 
FINRA agrees with the CAT proposal from the Commission?
    Mr. Zhu. It is a proposed rule on which we received a lot 
of comments, and we evaluated them very carefully.
    Mr. Hill. Okay. Let me change subjects. I am not going to 
make much progress there. Let's turn to your Treasury dealer 
proposal. Here, you are trying to sweep up people who are 
Treasury buyers and suddenly rule them as dealers, and you have 
defined the quantitative threshold somebody buying or selling 
$25 billion in U.S. Treasuries for the past 6 months 
automatically makes somebody a dealer.
    Now, on a bipartisan basis, we have objected to that. We 
don't understand the rationale for it on a bicameral basis. 
Have you researched how many firms would be impacted by that 
definition? How many people now do you think are suddenly 
Treasury dealers because they buy Treasuries in that quantity, 
at that level? How many people are we talking about? How many 
firms?
    Mr. Zhu. In the proposal of the dealer rule----
    Mr. Hill. No, no. I know what it says. I am asking you, 
based on that quantification of the amount of Treasury 
securities, how many entities might be swept up in that 
definition?
    Mr. Zhu. Given the available data, as it says in the 
release, if I recall correctly, there are between 20 and 30 
entities. There are comments from the comment file suggesting 
that there are others who might be affected by that threshold, 
and we are currently evaluating the comment file.
    Mr. Hill. Okay. Thank you. Madam Chairwoman, I yield back, 
but I will submit these questions for the record, regretfully. 
Thank you.
    Chairwoman Wagner The gentleman from New York, Mr. Meeks, 
is now recognized for 5 minutes.
    Mr. Meeks. Thank you, Madam Chairwoman. Let me start with 
Dr. Zhu. The last time the SEC pursued major market structure 
reforms, it held public hearings to receive input from market 
participants before and after releasing the proposals, and, 
ultimately, the SEC reported Regulation NMS in response to 
extensive public comment.
    I have heard from a number of public stakeholders, 
particularly from New York, that the process for developing the 
four equity market structure proposals released last December 
was entirely different. So, what I am trying to understand is, 
why did you take a different approach on the equity market 
structure proposals than you did with the Regulation NMS 
proposals?
    Mr. Zhu. Congressman, thank you for that question. I think 
this is a really important topic that we do engage with the 
public extensively on throughout the rulemaking process, and 
that is what we did. Ever since the Regulation NMS adoption in 
2005, the Division staff have been engaged with the public and 
the market participants very extensively. And, in fact, some of 
the ideas that we eventually proposed were supported by the 
market participants, at least I would say, 5 or 10 years ago. 
We had extensive meetings with the industry and also with a 
broader set of market participants. Staff have attended 
industry conferences. We read industry-wide papers. So, there 
was an extensive period of discussion with the market 
participants.
    And also, after the proposal, we have received thousands 
and thousands of letters from individuals, from our trade 
associations, and from institutional investors. So, we do 
believe that the public does have the opportunity to weigh in 
as extensively as they wish in the rulemaking process.
    Mr. Meeks. I will go back and forth with you because having 
public proposals with one way--I think we can debate that 
issue. But let me jump to something, and I will go to Director 
Wachter on this because this is something that is important to 
me.
    Since I have been in Congress, my goal has been to ensure 
that people from all backgrounds have access to the opportunity 
to create wealth and establish financial well-being. I think 
that is tremendously important. And last week, I reintroduced 
the Improving Corporate Governance Through Diversity Act, with 
Senator Bob Menendez. It has received bipartisan support in the 
past, and I hope that we get it done now. But in addition to 
representation, I think that we must always look at policies 
and proposals through the lens of whether they are treating 
people equitably, and especially if there are negative economic 
impacts through unintended consequences.
    So, Dr. Wachter, last year's Omnibus Appropriations bill 
included language that strongly encourages the Commission to 
reconnect the economic analysis in the private funds advisor 
proposal to ensure that analysis adequately considers the 
disparate impact on emerging minority- and women-owned asset 
management firms, minority- and women-owned businesses, and 
historically-underserved communities. So, can you tell us what 
the status is of the re-conducted economic analysis?
    Ms. Wachter. Congressman, we are currently working on that 
economic analysis as part of the adoption of the private funds 
role.
    Mr. Meeks. You haven't finished it? The question then is, 
do you have any initial assessment on what the impact would on 
minority- and women-owned law firms? Is there any assessment 
that you can give us at this time?
    Ms. Wachter. The concern about women- and minority-owned 
law firms comes from the fact that the academic literature 
shows that those firms tend to be smaller, and it is possible 
that there may be a disproportionate impact on smaller 
entities. This is what the comment file says, so we are 
evaluating those comments at the moment, but it is an issue 
that is under consideration by my----
    Mr. Meeks. It is under consideration, but is it a priority?
    Ms. Wachter. We conduct an economic analysis for every 
proposal in rulemaking, including this one. We are carefully 
considering it----
    Mr. Meeks. There is considering it, and then, there is 
considering it when it is a priority. Is it a priority?
    Ms. Wachter. Congressman, we share your concern about these 
costs very much.
    Chairwoman Wagner. The gentleman's time has expired. The 
gentleman from Oklahoma, Mr. Lucas, is now recognized for 5 
minutes.
    Mr. Lucas. Thank you, Madam Chairwoman. I would like to 
begin by focusing on our proposed rule pertaining to security-
based swaps. The SEC's proposed Rule 10B-1 would require public 
dissemination of security-based swap positions. Market 
participants are concerned that this would deeply harm market 
liquidity. In November of last year, I sent a letter to the 
SEC, with several of my Republican and Democrat colleagues on 
this committee, regarding this proposal. We specifically asked 
if the Commission supported an approach that requires 
confidential reporting, noting the potential unintended 
consequences of public dissemination.
    I was pleased to see that the SEC reopened the comment 
period yesterday, and I am optimistic this will give the SEC 
more time to review existing data and appropriately consider 
bipartisan feedback.
    Dr. Zhu, has your Division considered a phased approach to 
implementation, first analyzing the confidential data before 
mass disseminating the information out to the market?
    Mr. Zhu. Congressman, thank you for that question, and also 
for recognizing that we indeed reopened a comment period for 
10B-1, accompanied by an economic analysis, and additional data 
analysis produced by colleagues in the Division of Economic 
Risk and Analysis. To your question about the phased 
implementation, including those reporting to the Commission 
before public dissemination, it is one of the comments in the 
comment file, and thank you for that letter, which I have read. 
This is something we are considering very carefully right now.
    Mr. Lucas. I am very concerned, I will acknowledge to you, 
about the major impact that this rule could potentially have on 
the credit default swap market, which is critical for banks to 
be able to manage risk, so harming liquidity in this market 
would have major implications for the safety and soundness of 
the banking system. So I ask, has the SEC discussed this 
rulemaking with the Treasury, the Federal Reserve, or, for that 
matter, the OCC?
    Mr. Zhu. Congressman, this is a Dodd-Frank rule, because 
this is the congressional mandate, so we implemented it this 
way. I can get back to you on the specifics of the discussion 
if there are any.
    Mr. Lucas. But you see where I am coming from. When we pass 
rules that can potentially have dramatic effects on financial 
institutions' ability to use the market system to protect 
themselves and their depositors, it would seem that it is only 
logical that the Securities and Exchange Commission would 
discuss that with Treasury, the Federal Reserve, and the Office 
of the Comptroller of the Currency because of the potential 
effect it would have on their responsibilities.
    Continuing with you, on March 9th of this year, the 
Division of Investment Management proposed a new rule to 
address how investment advisors safeguard client assets. The 
proposal would expand the scope of the Commission's custody 
rule to encompass all assets. And many industrial participants 
have expressed concerns that this rule could have a negative 
impact on several traditional financial markets in conflict 
with regulatory frameworks overseen by the Division of Trading 
and Markets, I think such things as prime brokerages and 
derivatives. More broadly, there has been widespread concern 
from the commenters that the proposal would result in worse 
outcomes for investors.
    Did the Division of Investment Management consult with you 
before issuing the proposal, and did your Division provide any 
feedback or raise any potential concerns?
    Ms. Wachter. Congressman, the Division of Investment 
Management did consult with us, and we provided our economic 
analysis as we always do on rule proposals.
    Mr. Lucas. Did it have any effect on their action?
    Ms. Wachter. These questions----
    Mr. Lucas. I ask these kinds of questions because that is 
what I am curious about.
    Ms. Wachter. Questions about this may be best directed to 
the Division of Investment Management.
    Mr. Lucas. With that, Madam Chairwoman, I think I have my 
answer. I yield back.
    Chairwoman Wagner. The gentleman yields back. The gentleman 
from California, Mr. Vargas, is now recognized for 5 minutes.
    Mr. Vargas. Thank you very much, Madam Chairwoman. I 
appreciate the opportunity. And thank you for holding this 
hearing, and I thank the ranking member.
    Dr. Zhu, first of all, I would like to thank you for 
sharing your love for America, for our country. It is always 
heartwarming to hear a new American say how much they love our 
country. We are that shining city on the hill. I still believe 
that, and thank you for that. I appreciate it.
    I have to say that this hearing has reminded me of a 
hearing that I was in about 20 years ago in the Assembly in 
California, Business and Professions. We decided that we 
weren't going to bring the usual people who would testify, we 
would bring world-class experts, and this was on podiatry 
versus orthopedics to find out how far the orthopedics could go 
up the ankle and up the leg. And when we brought them in, we 
asked them very complicated questions that we didn't know were 
complicated, and they gave us very complicated answers that we 
didn't understand. We got frustrated. They got frustrated.
    It was actually quite interesting to watch because, not 
that they were stalling or anything like that, but when we 
would ask a simple question about vascular circulation or bone 
structure, it wasn't a simple question. It turned out to be a 
very complicated question, and we wanted a simple answer. There 
was no simple answer, and I feel a little bit like that today, 
not frustrated, but just, it is fascinating. And it does take 
me back a few years.
    Climate change presents a direct threat to our nation's 
capital markets, critical infrastructure, and economic growth. 
The Office of the Comptroller of the Currency states that 
climate-related risks can affect the safety and soundness of 
banks through physical and transition risks, which affect 
various sectors of the economy and may affect access to 
financial services and fair treatment of customers.
    The Treasury's Climate-related Financial Risk Advisory 
Committee, ``identified climate change as the emerging and 
increasing threat to the U.S. financial stability.'' The 
International Monetary Fund's Office of Finance and Development 
stated that climate change will affect monetary policy by 
slowing productivity and growth, and increasing market 
uncertainty and inflation volatility.
    With that in mind, last March the SEC proposed rule changes 
that would require companies to disclose standardized 
information about material climate-related risks that will have 
an impact on business operations. And as Co-Chair of the 
Sustainable Investment Caucus, I applaud the SEC's listening to 
thousands of investors, fund managers, industry advocates, 
legal scholars, and market professionals. These standardized 
disclosures will provide market participants with clear 
information to protect themselves from risks and make the best 
financial decisions for themselves and their families.
    Dr. Wachter, thank you for lending your expertise and 
testifying today as Chief Economist and Director of the 
Division of Economic and Risk Analysis. You are tasked with 
integrating financial economics and rigorous data analytics 
into the SEC's policymaking rule, making enforcement 
examinations. Pertaining to the upcoming climate disclosure 
rule, I would like to ask you to discuss your understanding of 
our capital markets as it pertains to climate-related 
information.
    Ms. Wachter. Congressman, we have a situation with the 
climate disclosures in that many companies are voluntarily 
disclosing climate risks, but these disclosures are not 
necessarily entirely consistent because there is not some 
common regulatory framework. And because they are not as 
consistent, they are not as useful for investors. We can tell 
that there is investor demand for this information, because 
companies are providing this information, among other reasons, 
and yet, we don't have a consistent framework for disclosure, 
and I think that makes it more costly for everybody.
    Mr. Vargas. I agree with you, and it is, in fact, the case 
that many investors are asking for this information. They want 
to be good citizens. They want to be good stewards of the 
world. And so, they do ask for this information, don't they? 
Isn't that the reason the companies are putting it out there? I 
don't have anything against companies, I actually like big 
companies, but the reason they do that, I assume, is because 
investors are asking for it.
    Ms. Wachter. I would also assume that is why the companies 
put it out, because the investors want it, yes.
    Mr. Vargas. Yes. I think that is absolutely the case. A 
whole bunch of us want to know, is this company a good actor? 
Is it a good actor environmentally? Is it a good actor, and 
what is it doing to help climate change in a positive way and 
not in a negative way? But anyway, again, I thank you for being 
here. I don't feel the same frustration as some others, but it 
was certainly entertaining. Thank you very much, and I yield 
back.
    Chairwoman Wagner. The gentleman yields back, and the 
gentleman from Wisconsin, Mr. Steil, is now recognized for 5 
minutes.
    Mr. Steil. Thank you very much, Chairwoman Wagner. And to 
the witnesses, I appreciate you being here today. I have to say 
that some of the conversation is a bit disturbing when we look 
at the lack of analysis being presented to us. And I don't know 
how we don't take that into account when we go through the 
appropriations process with the work that is going on at the 
Securities and Exchange Commission, whose mission is to protect 
investors, maintain fair, orderly, and efficient markets, and 
facilitate capital formation. Do you agree with that, Mr. Zhu?
    Mr. Zhu. It is indeed our mission.
    Mr. Steil. Okay. So, that is the framework we are looking 
at, and where before us is a pretty radical overhaul of the 
U.S. equity markets. And I am concerned about the absence of 
stakeholder input in the rulemaking process, so let me dive in 
with a couple of questions maybe to provide some clarity to 
those of us who are trying to understand the rules that you are 
putting forward.
    Some of the narrative I am hearing, Mr. Zhu, is the 
narrative that is relating to the meme stock activity of 2021, 
justifying some of the rules that are being put in place. We 
have had multiple hearings on this, and previously, then-Chair 
Waters and Mr. Green published a report laying out the causes 
of the trading disruptions and making concrete recommendations. 
And as far as I can tell, nothing the SEC is proposing in the 
market structure package directly addresses any of the concerns 
raised by my colleagues or others who studied the issue. So, as 
we look at the order competition proposal, is that directly 
related to the meme stock events of 2021?
    Mr. Zhu. Congressman, you mentioned the order competition 
proposal, which is a proposal that aims at promoting 
competition for a segmented set of order flows from individual 
investors.
    Mr. Steil. Understood, but is it related to the meme stock 
issue of 2021, in your opinion? Yes or no?
    Mr. Zhu. The meme stock event certainly shows the surge of 
trading volume.
    Mr. Steil. No, I understand the meme stock. I understand 
the proposal. I am asking, in your opinion, are they connected? 
Are they related? Yes or no?
    Mr. Zhu. The lack of sufficient competition in retail order 
handling certainly got exacerbated by the event in the meme 
stock.
    Mr. Steil. So, do you believe that this rule is in 
connection to the meme stock?
    Mr. Zhu. The meme stock event, as I said, does make the 
insufficient competition issue in retail order handling.
    Mr. Steil. So, you can't say if they are related. I am just 
asking if they are related. I am not asking way-in-the-weeds 
questions here. Is it related to the meme stock event in 2021?
    Mr. Zhu. You could say they are related.
    Mr. Steil. I could say it, I understand, but you are the 
expert in the space. I am asking you if they are related. You 
are pretty good at this stuff. In your professional opinion, 
are they related?
    Mr. Zhu. I was trying to answer the question by saying that 
the meme stock event shows the tremendous surge in volume.
    Mr. Steil. I am not trying to be difficult here, sir. You 
are the expert in this space. I have seen a lot of proposal and 
rule regulation that say that this rule is because of the meme 
stock event. I am just asking, as we look at this rule, is it 
related? I will jump to the other: best execution. Is best 
execution related to the meme stock event of 2021?
    Mr. Zhu. With the best execution, I want to say that best 
execution is a rule that spans all asset classes, whereas meme 
stock is only about equities and options. So in that sense, it 
is partly related, but I wouldn't say that meme stock event is 
the only driver.
    Mr. Steil. Let me offer, since we are not getting what I 
think is a clear yes-or-no answer, if implemented, I think it 
could reduce liquidity in the markets, making the disruptions 
we saw more likely. Let me shift gears pretty significantly 
here in the limited time I have left to you, Dr. Wachter, if I 
can. Do you agree that the order competition rule conflicts 
with the best execution rule?
    Ms. Wachter. Congressman, I don't believe there is a 
conflict.
    Mr. Steil. You don't believe that there is a conflict? I 
would respectfully disagree with you on that. How do you 
respond to the criticisms that people do believe that there is 
a conflict there?
    Ms. Wachter. The criticisms of these proposed rules are 
part of the comment file, so we are going to respond. We are 
going to read those and evaluate those very, very carefully. We 
are concerned about all of these comments, and we are going to 
do a careful evaluation when we go to adopt these proposals.
    Mr. Steil. Let me just broadly, for the record, state my 
concern about the conflicts that exist, and the lack of 
transparency in the analysis that you are providing. The U.S. 
markets are preeminent in the globe. This is a radical overhaul 
of the markets. There needs to be significantly more 
transparency as to the actions the Securities and Exchange 
Commission is taking. Recognizing my time has expired, Madam 
Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman yields back, and the 
gentleman from Illinois, Mr. Casten, is now recognized for 5 
minutes.
    Mr. Casten. Thank you, Madam Chairwoman. Dr. Wachter, thank 
you for being here today, and I want to follow up on Mr. 
Vargas' questions about the climate disclosure rule. Do I 
understand that you were involved in the drafting of the 
economic analysis of the proposed climate disclosure rule? Is 
that true?
    Ms. Wachter. Yes, Congressman, that is true.
    Mr. Casten. Okay. And you had mentioned to Mr. Vargas that 
the current situation is a lot of voluntary and non-consistent 
disclosure regimes. Is it safe to say that a part of the 
motivation was to create a standard set of regimes?
    Ms. Wachter. The motivation was to bring more consistency 
to the current situation.
    Mr. Casten. Okay.
    Ms. Wachter. Yes.
    Mr. Casten. And is it also safe to say that investors 
currently struggle to compare apples and oranges across various 
10-Ks?
    Ms. Wachter. Yes, I think they do. They are currently in 
sustainability reports, many of the disclosures, which creates 
a situation where you have some disclosures in the 10-Ks and 
some in the sustainability reports in a manner that is 
sometimes inconsistent.
    Mr. Casten. Okay. And that may relate because I think you 
had mentioned in your testimony earlier that this creates an 
information asymmetry problem?
    Ms. Wachter. Yes, there is an information asymmetry problem 
here.
    Mr. Casten. And do you believe that the proposed rules will 
address that concern?
    Ms. Wachter. They are intended to address that and to help 
with the information asymmetry and thereby improve liquidity 
and ultimately benefit capital formation.
    Mr. Casten. To the benefit of investors?
    Ms. Wachter. Yes.
    Mr. Casten. Great. Some of my colleagues here have raised 
concerns that this rule would burden small businesses and 
farmers, and I just want to give you a chance to respond. 
Before releasing the draft proposal, can you talk about what 
you have done to look at the economic impact on smaller 
businesses and farmers, and specifically, how you have seen the 
tradeoff between, presumably, the gain from reducing 
information asymmetry to whatever burden might be imposed in 
additional reporting requirements?
    Ms. Wachter. Yes. Detailing those costs and benefits is one 
of the goals of the economic analysis, but this is a disclosure 
rule, and it is a disclosure rule for reporting companies, most 
of which are publicly traded. And so unless the small 
businesses and farmers are a reporting company, they wouldn't 
have to disclose under this rule. So, the concern may come from 
the reporting of Scope 3 emissions, if material, which doesn't 
apply under the proposal to smaller reporter and companies is 
my understanding. And also any company is allowed to use 
estimates.
    So, the costs for this proposal are borne by the reporting 
companies. Essentially, it is a cost-benefit tradeoff for the 
investors because they benefit, but companies they own, if 
there are compliance costs, would pay those costs, not 
necessarily the farmers.
    Mr. Casten. Then I guess, summing up, it is your belief 
that markets will operate more efficiently with comparable and 
standardized climate disclosures?
    Ms. Wachter. Yes, that is my belief.
    Mr. Casten. Okay. We have proposed climate disclosure 
rules. Obviously, we haven't seen them yet. They are squarely 
within your authority and your mission to protect investors. 
You have done the economic analysis. You have had goodness 
knows how many comments that have come through consistent with 
your obligation to maintain fair and orderly markets. That is 
terrific. As we know, the Europeans are ahead of us on all of 
these things. They are putting out a bunch of rules. Lots of 
the companies which we all represent or have constituents who 
work there are often coming to us and saying, my employer is a 
multinational, so they are being forced to comply with these 
European rules.
    As a regulator, do you think it is in our interest to have 
a seat at the table and lead, or are we better off just sitting 
down and letting other countries take the leadership because, 
after all, we don't have to work as hard if they do all the 
work for us.
    Ms. Wachter. Congressman, should any rules in Europe get 
developed prior to our rule, that will be part of the baseline, 
to use the technical term again. In terms of what our strategy 
is in terms of a seat at the table, I am afraid that is out of 
my lane, so I am not going to speak to that.
    Mr. Casten. I guess maybe I will just close with the 
observation that there is a strong push here for you all to do 
nothing on this, with the assumption that in a global vacuum, 
no one else is going to act. And I realize that it is easier to 
stay asleep, but I would like to thank you for staying awake. I 
yield back.
    Chairwoman Wagner. The gentleman yields back. The gentleman 
from Pennsylvania, Mr. Meuser, is now recognized for 5 minutes.
    Mr. Meuser. Thank you, Madam Chairwoman. And thank you, Dr. 
Zhu, and Dr. Wachter.
    In the SEC's 2023 regulatory agenda, the SEC listed 29 
items in the final rulemaking stage and 23 items in the 
proposed rulemaking stage, so that is 52 items which the 
Division of Trading and Markets feels impedes the economy as a 
whole. Don't you think it might take time to implement one rule 
at a time in sequence so the industry can respond back before 
the comment period ends? Is that something that has come to 
you, Mr. Zhu, that the industry feels that you are moving too 
rapidly with new regulations that they don't have time to 
comment on? If you would comment?
    Mr. Zhu. Congressman, you raised a really important issue. 
We take industry and market participant comments very 
seriously. Of the proposals, at least out of Trading and 
Markets, we received thousands of----
    Mr. Meuser. Those you claim to be serving don't feel that 
way. You must hear that from the industry as a whole, the 
securities industry, the stock market, right? They feel that 
the new rules are coming out far too rapidly.
    Mr. Zhu. Sir, with all due respect, what we are trying to 
do is keep our rule books updated so that they remain free for 
purpose, for investor protection, for fair, orderly, and 
efficient markets. The market evolved fast, and as a result, I 
think we need to also act expeditiously to update our rules.
    Mr. Meuser. Okay. Rule 605 has come up a couple of times. 
Why not let that be implemented, get some feedback, get an 
understanding, and build off of it, rather than just have so 
many new rules in what we know is a rattled economy?
    Mr. Zhu. You mentioned----
    Mr. Meuser. No? You're just going to keep moving at that 
pace?
    Mr. Zhu. Rule 605 is about the public disclosure of 
execution quality. Some of the other rules we propose solve a 
different purpose for transparency, for example, or for 
competition, so they solve different aspects of the market 
structure problems. We believe it is reasonable to think about 
them.
    Mr. Meuser. It makes sense to, I think, everybody that it 
would be, lay it out, get a feel for it, see how it works, and 
build from there. So, I am not sure what the goal is in just 
moving as rapidly as you are, but it is not making your 
industry pleased. It is making them very, very anxious 
actually, and it is making their lives more difficult.
    Let me just move on to something else. Dr. Wachter, last 
year, Commissioner Uyeda pointed out that for a long time, the 
SEC used a figure of $400-an-hour to estimate the cost on 
companies they paid outside counsel. It was updated to $600 or 
certain figures that the SEC quietly updated last year to $600 
only after he pointed out the absurdity of the low $400. Was 
this being done? What was the point of holding that back? Was 
it just to keep costs artificially low that were being 
estimated, or what was the thinking behind that?
    Ms. Wachter. I think you are talking about the cost 
estimates in the paperwork production section.
    Mr. Meuser. Right.
    Ms. Wachter. And we very much appreciated Commissioner 
Uyeda's bringing that to our attention. My understanding--this 
was in the Division of Corporation Finance--is that it was just 
a simple oversight.
    Mr. Meuser. Okay. Fair enough. That can happen. As Chief 
Economist for the SEC, do you inform the SEC that the economy 
is quite fragile, that monetizing of the heavy debt, the 
enormous, huge debt by the Fed, along with the escalated energy 
costs that are being borne, which have led to inflation, which, 
in turn, have led to higher interest rates which burden banks, 
families, small businesses, company performance, tax revenues, 
U.S. commerce in general, do you inform that under these 
circumstances, we should try to avoid other regulations that 
also rattle and impede the overall industry and businesses as a 
whole?
    Ms. Wachter. Congressman, we are very cognizant of the 
comments in the comment file about concerns of regulations that 
may increase regulatory uncertainty. We have seen those 
comments. And those comments, like other comments, are those 
that we would address upon adoption of the rules.
    Mr. Meuser. It just seems that it is more of an attempt to 
control than it is to allow them to run efficiently on their 
own. Is that a macro view of things? My time has expired, so I 
yield back, Madam Chairwoman.
    Chairwoman Wagner. Perhaps, Dr. Wachter could respond in 
writing? Thank you.
    The gentleman from North Carolina, Mr. Nickel, is now 
recognized for 5 minutes.
    Mr. Nickel. Thank you so much, and thanks to our witnesses 
for being with us today.
    North Carolina's 13th Congressional District is home to 
many exciting, early-stage biotech companies working on 
critical life-changing technologies. These companies frequently 
have just a few employees. They rely on our equity markets to 
raise capital, often at the early stages of the company's 
formation, and often to fund clinical trials or to conduct 
critical research on the next groundbreaking medical 
treatments.
    I am hearing from small R&D-focused companies in my 
district that they are concerned that the suite of equity 
market structure proposals, and the order competition rule, in 
particular, may have serious negative effects on their ability 
to raise capital. Without effective markets, it will be harder 
for the biotech industry to deliver critical drugs to patients.
    Director Wachter, do you agree that under the proposed 
rule, retail orders for smaller, less-liquid stock are going to 
receive worse execution quality compared to the current status 
quo if nobody shows up for an auction?
    Ms. Wachter. Congressman, evaluating the effects on capital 
formation, which is what you are describing, is part of what we 
do for every rulemaking, including the order competition 
proposal. And should this proposal add liquidity or lead to 
greater liquidity, we believe that it would improve price 
efficiency and could help capital formation. Our economic 
analysis shows that if you look at the companies that are not 
part of the S&P 500, for those companies, the stocks actually 
experience greater gains, under our analysis, from our proposal 
than the companies that are in the S&P 500. And in our economic 
analysis, we are carefully evaluating comments, but the 
proposal in the economic analysis would indicate that this 
might not be a concern.
    Mr. Nickel. Unfortunately, it doesn't seem that the SEC did 
a comprehensive analysis of the proposal's impact on capital 
formation and, particularly, on smaller public companies.
    Director Zhu, can you comment on why the Commission didn't 
do a deeper dive into the capital formation for these critical 
small companies? And, again, we are talking about very small 
companies, like the ones in my district.
    Mr. Zhu. Congressman, the way that Trading and Markets 
works is that we ensure that the trading of securities is well-
protected so that it is efficient, it is orderly, and that is a 
way for small companies to get incentive to get listed and 
eventually come to the market. About the capital formation, I 
would defer to my colleagues in the Division of Corporation 
Finance about their role.
    Mr. Nickel. Since the rules were proposed, several new 
academic studies have come out with the evidence that the 
proposed rules would do the opposite of what the SEC claims. 
That means increasing costs for everyday retail investors. I am 
especially concerned about reports that commission-free trading 
could cease to exist. Any increased costs on my constituents 
looking to save for retirement concerns me greatly.
    Director Wachter, has the SEC considered constituents like 
mine who are saving their hard-earned money for retirement and 
how these proposals may increase costs for them?
    Ms. Wachter. Absolutely, Congressman. We consider smaller 
investors and potential costs for smaller investors. In the 
economic analysis, we address concerns about the reduction in 
commission-free trading. That is something that we discuss. I, 
personally, always remember my grandfather, who didn't go to 
college or high school but he invested in the stocks, and he 
always told me, in America, nobody can erase your name from the 
list of stockholders. I always think about him when I think 
about investors, so absolutely, this is something that we talk 
about and we consider.
    Mr. Nickel. The National Association of Securities 
Professionals, which exists to support increased opportunities 
for securities professionals of color and fair access to 
investors of color, has expressed concerns that the SEC's 
proposals could, ``result in the lack of access to the stock 
market for underserved demographics, which could further widen 
the existing diversity gap in investing.''
    Director Wachter, will the SEC conduct an economic analysis 
available to the public that evaluates the potential 
disproportionate impacts of these reforms on low-income and 
minority investors like the ones that I represent in North 
Carolina's 13th District?
    Ms. Wachter. Congressman, I am afraid that is something I 
am going to have to get back to you on.
    We are following our time-tested proposal that is laid out 
in our policies and procedures on our website, that we 
developed based on best practices from Congress and from the 
courts and from the Executive Branch in terms of cost-benefit 
analysis.
    Mr. Nickel. My time has expired, so I yield back.
    Chairwoman Wagner. The gentleman yields back. The gentleman 
from Texas, Mr. Sessions, is now recognized for 5 minutes.
    Mr. Sessions. Madam Chairwoman, thank you very much. I have 
a sneaking suspicion that you have called this hearing with an 
understanding that members of this committee and subcommittee 
didn't beg you, but asked you for exactly what we are doing 
today. We are trying to provide feedback, and we are trying to 
listen. And one of my colleagues just stated that he believes 
that this committee sees things exactly the opposite as the SEC 
does, from feedback that we receive from people in our 
congressional districts.
    Job creators, investors, people who are trying to make a 
good idea work and to make this country better, that is part of 
capital formation. I don't have to ask you, I am going to tell 
you that we believe that what the SEC is doing is destroying 
capital formation. We believe that rulemaking, oversight, and 
legal authority that you many times call discretion has become 
weaponized. It is not helpful to capital formation. And I would 
intend to offer to Chairman Gensler and you--we heard from the 
General Counsel this morning--that you simply take off what you 
are not going to be supportive of, and that is that one of the 
things that the SEC sees about is capital formation. You are 
destroying new opportunities, IPOs, people who would wish to 
come into the marketplace.
    The big arm of government, which the SEC has, is 
unprofessional, and I think could care less about the capital 
formation. They view themselves as, they have a role to do, and 
by God, they are going to go do it, rather than effectively 
understanding the marketplace, understanding costs, 
understanding timeframes, and understanding how important the 
growth of America is.
    We have, since 2010, more than doubled the revenue that 
comes in to the Federal Government, so Uncle Sam is doing quite 
well. In 2010, we had about $2.4 trillion worth of revenue by 
the Federal Government. The free enterprise system, not the 
government, produced almost $5 trillion last year. It is 
growing. It keeps America the capitalist market that other 
countries want to emulate.
    That is your job. Your job is to review and look at things, 
not to get in the way, not to take all the time of hundreds of 
days before you respond back to someone who is in your sights. 
It is to listen to America, not the world. It is to come up 
with a firm definition and come back to this committee and a 
Senate committee, to talk to people who are in the marketplace, 
to hear their ideas about how we grow capitalism in the world. 
Over and over and over today, all I have heard Members do is 
say that you are out of touch. Those are not my words. That was 
almost every single person who has spoken today. It is not just 
a frustration; it is a reality.
    I would hope, Madam Chairwoman, as we thank our witnesses 
who have taken the time to be our guests today, that we would 
remind them in some summary form, because they will get a 
letter from me, and Mr. Lucas, and I know, Mr. Huizenga. We 
want to send them a letter and say, thank you so much for 
taking time to come see us. We would like to offer our 
feedback, which is that we believe that the SEC does not live 
up to the term of understanding capital formation to the 
positive benefit of capitalism to support the United States of 
America and small business to make it work in this country. 
Madam Chairwoman, I yield back.
    Chairwoman Wagner. The gentleman yields back. The gentleman 
from Massachusetts, Mr. Lynch, is now recognized for 5 minutes.
    Mr. Lynch. Thank you, Madam Chairwoman. First of all, I 
want to thank Dr. Zhu and Dr. Wachter. Thank you for your 
willingness to come before the committee and help us with our 
work. I, too, am concerned about capitalism, but I want to 
remind my colleagues that I was here in 2008, and Dodd-Frank, 
when it was passed, required about 300 rulemakings, many of 
those directed to the SEC. And the reason they were passed was 
because back in 2008 and years after that, Congress passed the 
Troubled Asset Relief Program (TARP), which gave $700 billion 
to the banks because they had so screwed up this economy. They 
took the economy down, so we reverted to socialism when we took 
$700 billion from the people, taxpayer money, and gave it to 
the banks. That is not capitalism; that is socialism.
    We didn't let the banks fail. We took $700 billion. Some of 
my constituents didn't even have a bank account, and yet they 
were held responsible to bail out the banks, many of whose CEOs 
took bonuses for actually putting America's economy in the 
toilet. And that is why we are here, because it wasn't 
capitalism. It was socialism that we were trying to address, 
and we don't want to revisi it. The United States capital 
markets are the envy of the world because of the work the SEC 
does, because you are there to protect investors with the rule 
of law, you are there to maintain fair and orderly markets, and 
you are there to make sure that everyone has a fair opportunity 
to engage in those markets.
    Director Wachter, at the beginning of this, we got off on 
the wrong foot, and I think you were shut down on some of your 
answers, but if you would take some time and just walk us 
through the rulemaking process. I know that the industry uses 
cost-benefit analysis as a weapon against rulemaking. They go 
into court and they challenge it. They also, in some cases, 
insert provisions in legislation requiring what I think are 
needless obstructions and additional burdens for the SEC. But 
if you could walk us through that, talk about setting a 
baseline, talk about the process for rulemaking and how that 
has worked in the normal operation of the SEC where you work?
    Ms. Wachter. I would be happy to talk about the process by 
which we do economic analysis. And I will just say to your 
point that the economic analysis is how we make sure that the 
rule has its desired effects and promotes the kind of outcomes 
that we want to avoid the kinds of situations that you 
describe, so a number of the rules that we are working on do 
have a resiliency measure. Our economic analysis has five 
components, generally speaking, and one of them is, why are we 
doing the rule? So, we do always have to answer that question, 
why, and communicate the why to the American public.
    The other part is the world as it is because you want to be 
measuring with a common yardstick, and that is what we call the 
baseline. Then, we talk about the costs and benefits of the 
rule, alternative approaches, including less-burdensome ones 
for industry, and finally, we have to talk about the effects on 
efficiency, competition, and, yes, capital formation. That is 
in the statute, so we have to consider those. So we do that, 
perform that economic analysis on every proposal. It goes out 
for public comments. Many of these questions are reflected in 
the comment file. That is how the process works, and then we 
incorporate the comments when we go, if we go to adopt the 
rule.
    Mr. Lynch. Thank you. It is ironic that when we passed 
Dodd-Frank and gave the SEC the responsibility for restoring 
trust in the markets, that the industry is pushing back. They 
are pushing back on the measures that Congress passed to make 
sure that type of disaster never happens again. And I just want 
to thank you for the work that you do each and every day and on 
behalf of the American people. Thank you, and I yield back.
    Chairwoman Wagner. The gentleman yields back. The gentleman 
from Iowa, Mr. Nunn, is now recognized for 5 minutes.
    Mr. Nunn. Thank you, Madam Chairwoman. I appreciate you 
convening this committee today. I want to also get right to the 
point here with my 5 minutes.
    I will be candid. I have some grave concerns right now 
about what is happening at the SEC under Chair Gensler, and on 
both of your watches. From my understanding, U.S. capital 
markets are the most liquid and cost-efficient of any in the 
world. They are highly competitive and traded across a variety 
of market centers, both public and private venues. Colleagues 
on both sides of the aisle today have talked about your best 
practices.
    Dr. Zhu, I want to begin with you. Is it best practice to 
hone regulations to improve the market?
    Mr. Zhu. We are trying to improve the market as much as we 
can.
    Mr. Nunn. So that is a, yes. Two, is it best practice to 
solicit feedback from the public?
    Mr. Zhu. We consider public feedback extremely seriously.
    Mr. Nunn. As do I. Three, is it best practice to improve 
capital formation?
    Mr. Zhu. It is part of our mission.
    Mr. Nunn. Good. Traditionally, when regulatory agencies 
introduce new regulations, they follow these best practices in 
response to the market failures or when directed by this body 
in Congress. However, there is a 1,600-page proposal in which 
the SEC does not clearly identify either a specific problem it 
aims to address or a compelling reason why such market changes 
are underway. This is a direct reflection of Chair Gensler's 
direction on where these proposals are going. Additionally, 
Congress has no way to mandate such sweeping reforms, but the 
SEC has taken it upon themselves.
    Director Zhu, this past February, the SEC's Investment 
Management Division proposed the Enhanced Safeguarding Rule for 
Registered Investment Advisers, under the guise of enhancing 
the protection of customer asset management by registered 
investment advisors. I think we all agree it is important to 
protect our customers' assets. In fact, it is essential. But 
this rule goes well beyond that stated intent, and in some 
instances would impose new rules that are impossible to comply 
with, thus potentially preventing the use of risk management 
tools, which are so essential by the end user and important to 
States like my own, Iowa, in everything from the agriculture 
industry to the energy industry.
    Are you aware that under the new SEC proposal, the 
registered investment advisors would be required to use 
qualified custodians for client assets, including their 
derivative contracts?
    Mr. Zhu. Sir, the rule you referred to is issued under the 
Investment Advisers Act. It is outside the remit of the 
Division of Trading and Markets, but we will be happy to----
    Mr. Nunn. Are you aware of it or not?
    Mr. Zhu. I am aware of that rulemaking.
    Mr. Nunn. Are you aware that there is no framework to allow 
for the custody of a derivative?
    Mr. Zhu. But again, sir, this is under the remit of 
Advisers Act, and I have to defer to my colleagues in the 
Division of U.S. Management.
    Mr. Nunn. Dr. Wachter, are you aware of it?
    Ms. Wachter. Aware of the rule of the custody proposal? 
Yes, I am aware of it.
    Mr. Nunn. And are you aware then of the derivative custody 
portion of it?
    Ms. Wachter. Yes, I am aware of the derivative portion of 
it.
    Mr. Nunn. Good. Perhaps, I will direct most of my questions 
to you going forward here. Given that this rule has a direct 
impact on the markets, were either of you consulted in this 
rulemaking?
    Ms. Wachter. We performed an economic analysis as we do in 
every rulemaking.
    Mr. Nunn. And you provided that back to the SEC?
    Ms. Wachter. Yes, we did.
    Mr. Nunn. Prior to the proposed rulemaking, did you consult 
with the CFTC about the potential impact on the future 
commissions, merchants, and their end-user clients, like my 
agriculture producers?
    Ms. Wachter. My understanding is that there were 
conversations with the CFTC prior to the proposal.
    Mr. Nunn. Do you know whom at the CFTC was consulted on 
that?
    Ms. Wachter. No, I don't.
    Mr. Nunn. Dr. Zhu, do you have any idea?
    Mr. Zhu. I don't.
    Mr. Nunn. Okay. With my remaining time, the Commission 
acknowledged that the best execution proposal, if adopted, this 
best execution regulation could actually result in increased 
costs and commissions for retail investors when, today, Iowan 
investors enjoy commission-free trading.
    Dr. Zhu, do you think it is in a retail customer's best 
interest to pay more for services that today, they are already 
getting for free?
    Mr. Zhu. Congressman, we consider the cost to retail 
investors very seriously, and the cost, of course, includes 
commission, but then there is also a component, which is the 
bid-offer spread.
    Mr. Nunn. Today, they are getting it for free. Under the 
new rules, they would be paying for it, right?
    Mr. Zhu. We have no reason to believe that a commission 
would come back under the new order.
    Mr. Nunn. For the record, Dr. Zhu, is it true the SEC 
acknowledges that orders are also more likely to receive price 
improvement and, with that, receive greater price improvement 
when routed to the wholesalers as compared to exchanges?
    Mr. Zhu. Currently, wholesalers have a first right of 
refusal to interact with retail orders. This segmentation is 
the main reason why investors currently are sending the orders 
there.
    Mr. Nunn. Madam Chairwoman, thank you. I yield back, and I 
will send my questions directly to Chair Gensler, since I am 
not getting what I need here.
    Chairwoman Wagner. The ranking member of the Full 
Committee, the gentlewoman from California, Ranking Member 
Waters, is now recognized for 5 minutes.
    Ms. Waters. Thank you very much. Director Wachter, the 
Division of Economic and Risk Analysis conducts cost-benefit 
analysis for the various rulemakings put forth by the 
Commission. However, critics have pointed out that such 
analysis can have substantial shortcomings and is used by 
opponents of a regulation to either dilute or strike down 
regulations. For example, critics have asserted that cost-
benefit analysis is inherently biased in favor of the regulated 
industry since costs of compliance are generally much easier to 
quantify in dollar terms than the benefits of regulations, such 
as improved investor confidence and market stability, which 
have a comparatively larger non-monetary component.
    What are your thoughts on the risk associated with biased 
data? Shouldn't regulators view the quantitative cost of 
underregulation just as highly as the quantitative costs of 
regulations, and qualitative just as highly as the quantitative 
cost of regulations?
    Ms. Wachter. Congresswoman, thank you for your question 
about the cost-benefit analysis and the qualitative versus the 
quantitative, and we are aware of that criticism of cost-
benefit analysis and of economic analysis. Let me just say that 
I am very proud to be leading the Division of Economic and Risk 
Analysis, and I am also very proud of the work that our staff 
does. You are referring to the problem of biased data. Data 
comes into us all the time. Data is just a measurement of 
something, and the data could be noisy, as we call it, so that 
is statistical noise. Bias is when the data all tends to be 
noisy in one way, and that is a problem if the data has bias, 
absolutely.
    Ms. Waters. Let me just stray for a moment from further 
asking you information about that issue. Let me just say that I 
appreciate your appearance here today. I also appreciate the 
appearance of your colleagues today in our Oversight and 
Investigations Subcommittee. You all have been taking a beating 
from our colleagues on the opposite side of the aisle. You are 
our cop on the block, and Chair Gensler is highly qualified and 
is doing an excellent job. I want you to continue to do the 
work that you are doing, the work that you are mandated to do, 
and I do not wish you to be intimidated at all by unreasonable 
requests or questions.
    I have heard the information today about the kind of 
documents and information that is being required, rings, 
millions of documents, et cetera, et cetera. And if you are 
expected to turn them around in a short period of time or to 
disregard your mandate and your responsibility, you have to 
resist that. So, on behalf of those on this side of the aisle 
who appreciate the enormity and the complications that you are 
dealing with, continue to do what you are doing. You are on the 
right track. Again, I can't say it enough, you are our cop on 
the block, and what we need to do is make sure that you have 
more resources with which to work.
    Members on the opposite side of the aisle have insisted on 
starving you to death and not giving you the resources that you 
need. You need more resources, you need more personnel, but you 
keep doing what you are doing. There are some of us who are 
very appreciative of your work, and we are going to always 
support you in every way that we can. And I yield back the 
balance of my time.
    Chairwoman Wagner. The gentleman from New York, Mr. 
Garbarino, is now recognized for 5 minutes.
    Mr. Garbarino. Thank you, Madam Chairwoman, and thank you 
so much for having this hearing and having these witnesses 
here. And witnesses, thank you so much for being here.
    Director Zhu, I would like to follow up on an issue that I 
raised with Chair Gensler in April related to an inconsistency 
between two rule proposals you have pending. The first is your 
proposal on short-sale disclosure, which, it seems to me, 
prudently excludes individual position reporting to avoid 
negative consequences such as copycatting and herd behavior. 
This disclosure contemplated here is only on a monthly basis. 
By contrast, the proposal on securities-based swaps disclosure, 
Rule 10B-1, explicitly requires individual position reporting 
at a relatively low threshold versus the market cap of many 
stocks and on a very aggressive timeline of one day after the 
trade is placed.
    I want to understand the distinction. Has the Commission 
made a determination that concerns related to front-running, 
copycatting, and herd behavior, which are clearly risks 
associated with the short-sale disclosure, do not exist in the 
case of security-based swaps disclosure? And if so, how did the 
Commission come to that conclusion, and what type of cost-
benefit analysis was performed in drawing that determination?
    Mr. Zhu. Thank you, Congressman, for that question. Both of 
the rules that you mentioned--one is about short-sale 
disclosure, and the other is about security-based swap 
disclosure--are authorized by different segments of the Dodd-
Frank Act, and we are working currently to evaluate the 
comments received. As you pointed out, in the short-sale 
disclosure proposed rule, we have the data come in, and they 
are anonymized and aggregated. So, that is sort of partly in 
the congressional mandate, sort of providing the data and 
transparency in an aggregated fashion.
    I think 10B-1 serves a slightly different purpose, which is 
to provide transparency of large concentrated positions, so 
they come from slightly different segments of the statute. And 
we are working very actively to evaluate the comments, 
including the one you mentioned today, which is also shared by 
some commenters.
    Mr. Garbarino. But I would think that copycatting and herd 
behavior would be consistent with both, and I don't think it is 
a very large position under the new 10B-1 proposal that is 
being considered, so I don't understand. Was there a cost-
benefit analysis done for the 10B-1 proposed rule?
    Ms. Wachter. Congressman, since it is my division that does 
the cost-benefit analysis, does the economic analysis, yes, 
there was an economic analysis for the proposed rule 10B.
    Mr. Garbarino. Okay. I would like to know how that cost-
benefit analysis could differ from the other proposal dealing 
with the short sales, because I would think if it is good for 
one, it is good for the other. And right now, I understand that 
under short sales, copycatting and herd behavior could be very 
dangerous, so I would think that would also apply to the 10B-1. 
So, I appreciate that.
    Director Zhu, I also have significant concerns about recent 
developments with the proposed Consolidated Audit Trail, a 
substantial database with personal information of millions of 
Americans to which only the SEC will have access. My concern 
specifically is about the costs associated with this database, 
which has gone way over budget. For instance, the current tab 
for work already done is estimated to be roughly $350 million, 
and annual operation costs are projected to be roughly $250 
million, more than 5 times what was originally projected, and 
this is all going to be paid for by everyday Americans. Why has 
the cost to build and maintain this government database 
spiraled out of control, and what is the SEC doing to rein in 
the costs?
    Mr. Zhu. Congressman, you mentioned about the data security 
there and also the funding. Let me just start by saying that we 
take the protection of customer data very seriously. The SEC 
has issued exempt relief so that the most-sensitive personal 
information, Social Security Numbers, full date of birth, and 
account numbers, do not come into CAT at all. Regarding 
funding, I guess SRO's have submitted a few rounds of funding 
proposals, and we are currently in the process evaluating the 
latest one.
    Mr. Garbarino. Can you describe what interaction you have 
already had to date with the committee responsible for 
implementing CAT? Can you provide the committee with your 
communications with the operating committee of CAT?
    Mr. Zhu. The Commission has regular discussions with the 
Operating Committee of CAT.
    Mr. Garbarino. Okay. I appreciate it. I have another 
question, but I don't think I have the time to get to it, so I 
yield back.
    Chairwoman Wagner. The gentleman can submit it in writing, 
if he would like.
    Mr. Garbarino. Thank you.
    Chairwoman Wagner. The gentleman yields back, and the 
gentleman from Missouri, Mr. Cleaver, is now recognized for 5 
minutes.
    Mr. Cleaver. Thank you. Thank you, Madam Chairwoman. And 
thank you for being with us, Dr. Wachter and Dr. Zhu. Thank you 
very kindly for showing up today.
    I believe unapologetically in diversity. Sam Brownback--
some of you may remember his name, he served in the Senate from 
the neighboring State of Kansas--delivered a speech once, and I 
remember his words. He said, ``A democracy thrives on diversity 
and tyranny oppresses it,'' and I thought, boy, that was 
powerful and very real. And in the words of the great Mahatma 
Gandhi, ``No culture can live if it attempts to be exclusive.''
    I was mayor in Kansas City, and we had six firefighters 
killed one morning. Long story, I won't go into it, but it was 
intentional. And as I was meeting with Local 42, the 
firefighters, weeks after the explosion, I asked them, what is 
the tool you need most? What do you need most? And they said, a 
working ladder. And I embraced what they told me because I 
think that is also the thing we need in society, a working 
ladder. And that is why I am very much concerned about and 
interested in inclusion, and the lack of inclusion in the 
financial services industry is prevalent at just about every 
level.
    Just one example: women- and minority-owned asset 
management firms in the U.S. currently control a whopping 1.4 
percent of the over $82 trillion, with a ``T,'' in managed 
assets in the United States, compared to the 98.6 percent of 
assets controlled by firms owned by men. And an increasing 
racial and gender representation in financial services is 
something that I have sought to address and continued to pursue 
since I have been elected.
    Today, for example, Senator Cory Booker and I are 
introducing a bill, the Endowment Transparency Act, which 
requires certain institutional investors receiving Federal 
subsidies to report on their businesses with diverse firms. 
Some college endowments to this day, to this day, are too 
embarrassed or scared to even disclose the fact that their 
billion-dollar endowments are doing very little business with 
women or minorities. In a word, pathetic. I would like to know, 
having wrangled with this issue, whether the SEC is doing the 
work necessary to come up with some better numbers in the 
future?
    Ms. Wachter. Congressman, I can try to answer the question. 
Competition is one of the elements of our statute, and what 
competition allows is, I think it really goes back to the quote 
that you said that we really need to bring the most-diverse set 
of talents to bear. And that is just really important for any 
business and any country to thrive, so I think competition is 
at the core of our mission. We consider it carefully in every 
rulemaking, including the private funds rulemaking, for 
example.
    Mr. Cleaver. Yes. Some of the most-prominent universities 
in this country are almost like barely an inch above progress 
in terms of this issue. Thank you, Madam Chairwoman.
    Chairwoman Wagner. The gentleman from New York, Mr. Lawler, 
is now recognized for 5 minutes.
    Mr. Lawler. Director Zhu, the Office of Interpretation and 
Guidance within the Commission's Division of Trading and 
Markets is responsible for determining Section 31 fee rates, 
correct?
    Mr. Zhu. Congressman, I believe Section 31 fee rates is 
joint work between TM and DERA. My colleagues should weigh in 
here.
    Ms. Wachter. That may be my division, Congressman.
    Mr. Lawler. Your division determines the fee rate?
    Ms. Wachter. 31-B. We may need to get----
    Mr. Lawler. The Section 31 fee rate.
    Ms. Wachter. Section 31-B fee rates.
    Mr. Lawler. You determine them?
    Ms. Wachter. We may need to get back to you on that.
    Mr. Lawler. I'm sorry. Neither of you knows who determines 
them?
    Ms. Wachter. Congressman, perhaps if you could say a little 
more about Section 31-B.
    Mr. Lawler. Okay. Section 31 fees are transaction fees paid 
to the SEC based on the volume of securities that are sold on 
various markets. These fees are intended to recover costs 
incurred while supervising and regulating the securities 
market. The SEC's Section 31 fee collections are used to offset 
the money appropriated annually to the SEC by Congress, and as 
collections are received, the appropriated authority is 
returned to the U.S. Treasury General fund. The intent behind 
using funds collected from Section 31 fees is to offset annual 
appropriations so the SEC's funding can be deficit neutral. Do 
you agree with that statement? Either of you? Both of you?
    Ms. Wachter. My understanding is that the SEC collects the 
fees from the industry for its costs, yes.
    Mr. Lawler. Right, to be deficit neutral, correct? Fiscal 
year 2022 appropriations established the SEC's budget authority 
at $2 billion. However, in the SEC's Fiscal Year 2022 Agency 
Financial Report released last November, the Commission 
reported that the SEC collected $1.586 billion in Section 31 
transaction fees in Fiscal Year 2022. That is $414 million shy 
of its budget authority, meaning that the SEC failed to repay 
$414 million of its appropriations back to the Treasury. And 
for clarity, that is more than the entire amount appropriated 
to the CFTC that same year.
    For either of you, since the SEC undercollected on Section 
31 fees and couldn't repay Treasury $414 million in Fiscal Year 
2022, have you done anything to evaluate or modify the Section 
31 fee rates since then?
    Ms. Wachter. Congressman, my understanding is that 
sometimes we overpay, sometimes we underpay, and that this 
calculation is determined through----
    Mr. Lawler. In Fiscal Year 2022, you underpaid. Are you 
doing anything to adjust based on the fact that you underpaid, 
or is the SEC going to under-collect from Section 31 fees again 
this year? What is the plan?
    Ms. Wachter. Congressman, I believe the long-run plan is 
what you expressed, which is that we collect the fees to fund 
our operations.
    Mr. Lawler. Right, but you undercollected, so what are you 
doing to compensate for that? Are you looking at the fee 
structure? Are you going to make any changes, or are we going 
to plan on under-collecting again so that when you submit a 
nonsense report to us that says, as the SEC's funding is 
deficit neutral, any amount appropriated to the agency will be 
offset by transaction fees. It was not offset, so what are you 
doing to deal with that?
    Ms. Wachter. Congressman, I don't believe that there is 
ever a plan for us to under-collect. I think that sometimes, 
there is under-collection, and sometimes, there is 
overcollection.
    Mr. Lawler. Right, but in this instance, you 
undercollected, so have you made any adjustments or even looked 
at it? It is a yes or no question. Have you even looked at how 
to deal with the fact that you undercollected last year? Yes or 
no?
    Mr. Zhu. We periodically adjust the fee. I believe there 
was a new adjustment earlier this year. We would be happy to 
send you the details.
    Mr. Lawler. That would be wonderful, if you could.
    By coming up $414 million short in paying back Treasury, 
the SEC is failing to be a good steward of U.S. tax dollars. 
The claim that the SEC's funding is deficit neutral is highly 
questionable when you under-collect by that much, so you need 
to come back to us with a plan for how you are going to rectify 
that.
    The SEC recently proposed amendments to expand and update 
Regulation Systems Compliance and Integrity (SCI). The proposal 
would expand the scope of SCI entities to include certain 
registered broker-dealers for the first time. Feedback from 
market participants on this proposal suggests that the actual 
costs for this proposal are in the billions of dollars as a 
result of the SEC's attempting to micromanage the technology 
set-up of individual firms. Yet, these enormous compliance 
costs are conveniently absent from the SEC's cost-benefit 
analysis. Why did the Commission fail to acknowledge these 
costs in its economic analysis?
    Chairwoman Wagner. I'm sorry, the gentleman's time has 
expired. I am going to ask the witnesses to respond in writing 
to the gentleman from New York.
    The Chair notes that some Members may have additional 
questions for this panel, 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.
    This is just the first of many hearings that we will be 
having with you and your colleagues from the other Divisions of 
the SEC, and I hope that they will be more transparent and 
forthcoming in their responses than what we experienced today.
    This hearing is now adjourned.
    [Whereupon, at 12:36 p.m., the hearing was adjourned.]

                            A P P E N D I X


                             June 22, 2023
                             
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